Rate base is the value of property, on which a public utility

Public utility

A public utility is an organization that maintains the infrastructure for a public service . Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies...

 is permitted to earn a specified rate of return

Rate of return

In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...

, in accordance with rules set by a regulatory agency.

In general, the rate base consists of the value of property, as used by the utility in providing service.

It may be calculated by any one or a combination of accounting methods, such as fair value

Fair value

Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...

, prudent investment, reproduction cost, or original cost.

The rate base can include: cash, working capital

Working capital

Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...

, materials and supplies, deductions for accumulated provisions for depreciation

Depreciation

Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

, contributions in aid of construction, customer advances for construction, accumulated deferred income taxes, and accumulated deferred investment tax credits, all dependent on the method that is used in the calculation.

The utility's rate of return

Rate of return

In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...

 (a ratio of net operating income earned) is calculated as a percentage of its rate base.