What Is Rate of Return Regulation?

A rate of return regulation is a type of governmental regulation that helps to identify a range of return that is considered equitable for monopolies, as it relates to the setting of prices for goods and services provided. The idea is to make sure that consumers are not charged what is considered an exorbitant amount for those products, simply because there are not multiple providers who can offer competition for those same goods and services. At the same time, a rate of return regulation also protects the monopolies from the potential of failing and depriving consumers of a necessary good or service. This is because the range of pricing allowed within the regulation is sufficient to cover all expenses associated with the production of the goods and services and still allow the business to make a decent level of return in the form of net profit.

The actual provisions found in a rate of return regulation will vary, based on the circumstances surrounding the industries that are the subject of the regulation. In many cases, the rate of return allowed by this type of governmental provision is based on a percentage that the monopoly can realize above and beyond the costs of production and operation. This means that the company which has a monopoly on a certain type of good or service may not have a great deal of incentive to curtail costs, since the percentage identified in the rate of return regulation will limit the amount of net profit that can be generated.

While detractors of the rate of return regulation do note that companies don’t have any real motivation to curtail operational costs and thus be able to increase profits past a certain point, there may still be some motivation for businesses to operate as efficiently as possible and keep the costs low. One of the motivations has to do with the public’s perception of the monopoly. If consumers believe the business is acting responsibly, there is much less potential for grievances to be filed with various regulatory agencies, which means the monopoly is less likely to face costly fines or possibly be ordered to supply some sort of rebate to customers. By being able to demonstrate that the business is making a reasonable effort to operate efficiently and that the costs and the prices charged for the goods and services are within reason, there is much less potential for damage to the corporate reputation. In addition, there is less need to divert company profits to cover legal costs and other related expenses.