Projected operating expenses, including depreciation and taxes, are also a part of the approval undertaken during rate-case proceedings. Therefore, the revenue requirement for realizing the gross income objective equals the sum of an approved level of projected operating expenses, depreciation, and taxes plus the percentage return on rate-base investment, as shown in Figure 2. Utilities set rates based upon projected unit energy sales to yield the approved amount of revenue.2 Profitability traditionally is evaluated only at the corporate level. There are no profit centers below this level, and there is little need for rigorous cost accounting practices beyond monitoring cumulative spending by responsibility center and expense and capital account. Instead, financial success is predicated most of all on regulatory approval of and adherence to the utility revenue, investment, and expense budgets.
Utilities are essentially indifferent to unit sales levels.
If sales and therefore revenue are below or above planned amounts, utilities increase or decrease tariff prices to attain the authorized revenue amount. Only spending beyond the authorized levels presents a significant risk to earnings. In the postrestructuring competitive environment, utilities that retain old accounting practices likely will face financial difficulties. Their assets will be purchased by other entities that focus on the profitability and cash flow of the cost objects such as customers, distribution infrastructure, and franchise territories. Other service providers who more efficiently perform the maintenance and operation activities needed to deliver energy to the end-user will contract with asset owners and customers directly.