Rate formula
The traditional rate formula is intended to produce a utility's revenue requirement:
R = O + (V − D)r
The elements of the traditional rate formula are defined as:
R is the utility's total revenue requirement or rate level. This is the total amount of money a regulator allows a utility to earn.
O is the utility's operating expenses.
V is the gross value of the utility's tangible and intangible property.
D is the utility's accrued depreciation. Combined (V − D) constitute the utility's
rate base, also known as its capital investment.
r is the rate of return a utility is allowed to earn on its capital investment or on its rate base.
The traditional rate formula encourages capital investment because it provides a rate of return on the rate base. The more a utility invests, the more money it earns.