Rate of return regulation adjusts overall price levels according to the operator’s accounting costs
and cost of capital. In most cases, the regulator reviews the operator’s overall price level in
response to a claim by the operator that the rate of return that it is receiving is less than its cost of
capital, or in response to a suspicion of the regulator or claim by a consumer group that the actual
rate of return is greater than the cost of capital. Critical issues for the regulator include how to
value the base, whether to add investments to the rate base as they are made or when the facilities
go into service, the amount of depreciation, and whether expenditures have been prudently made
and whether they relate to items that are used and useful for providing the utility service.