AWWA ACE92004

This is one of five papers from a seminar about rate making for water wholesalers. The purpose of the seminar is present the principal factors that one should consider in developing charges for wholesale service and to discuss and illustrate those factors in some detail. Thus, the seminar as a whole serves as an overview of the topic. This, the third paper in the series, discusses the rate of return to be earned on the rate base allocated to wholesale service. Risk is a fundamental factor because it determines the cost of money in capital markets. Differences between investor-owned and government-owned utilities also come into play. The three most commonly used rate setting formulas are cost of service, operating ratio, and debt service coverage. When a government owned utility provides service to an out-of- district wholesale customer, the risks and hence the rate of return calculations must treat the government owned utility as an investor owned utility; this is discussed in detail. Other topics discussed include measurement of a government owned utility's cost of equity and cost of capital.