REGULATED UTILITY PARAMETERS

Regulated Utility Parameters



Regulated Utility Parameters

The revenue requirement (cost of service)

Dollars

Net Rate Base $25,000

Rate of Return 11%

Income Requirement$ 2,750

Income Available (9,500)

Additional Income Required$12,250

Income Tax Required 1,500

Revenue Requirement$ 13,750

Rate base of the utility

Dollars

Plant in Service$250,000

Less: Accumulated Depreciation 100,000

Net Plant in Service$150,000

Less:

CIAC 100,000

Customer Advance 10,000

Customer Deposits 5,000

Deferred Income Tax 10,000

Rate Base$ 25,000

The tricky part of calculating revenue requirements is to determine how much money the utility will spend from its operating revenue in a given year on capital outlays. Capital costs tend to dominate the total cost structure of a water or sewer utility, so this final component is critically important. Financing for capital needs comes from debt, development fees, operating revenue, cash reserves and, in some cases, taxes. In order to figure out how much cash is required to meet the capital expenditure plan, one need to spend some time evaluating the financing alternatives. In short though, if after deducting all other funding sources there remains an amount to be funded by operating revenue, then there is a revenue requirement.

Source of Financing

Florida Power and light (FPL) should employ a proper financing mix in order to minimize the cost of investment. It should keep a balance between the investment through equity and debt financing. If 1 source is to be chosen, I would choose debt financing as a source financing in this scenario. The strategy of the debt financing involves the acquisition of funds from the investor or lender with the agreement and understanding that the complete amount will be re-paid in the future by Florida Power and light (FPL) on predefined terms. The interest rate charged by the lender is the return for the lender in this case. There are different ways of obtaining funds through debt financing such as by issuing convertible bonds, ...