Fair-return regulation tends to decrease the motivation for public utilities to reduce costs, because they can attain essentially the same profits irrespective of their cost-reducing efforts.

Question

Quizplus · Accepted Answer

Fair-return regulation allows public utilities to earn a specified rate of return on their investments. This means that if they reduce costs, their rates to consumers are adjusted downward to maintain the allowed rate of return, thus not incentivizing cost reduction since it does not lead to higher profits.

Fair-Return Regulation Tends to Decrease the Motivation for Public Utilities