Rate of Return vs Cost of Service Regulation

CFA Level II
#1

Can someone please explain the concept of these to me, I just don’t get it.

#2

RoR = must establish a fair, conservative price Cost of Service MC = make monopolist produce at marginal cost; must provide subsisidy so they don’t go out of business Cost of Service AC = make monopolist produce at average cost; you’ll have more deadwight loss than you would under Cost of Service MC but at least no subsisidy is needed

#3

RoR = provide fair return to company (say 10-15% ROE) and determine customer rates based on this return. Work backwards up the income statement to determine revenue needed to provide such a return and base customer rates on this number. think electric utility regulation

#4

thanks guys