"When Electric Utilities Are Regulated Using an Average Cost Pricing

question 116

Essay

"When electric utilities are regulated using an average cost pricing rule,they will earn zero economic profit." Is the previous statement correct or incorrect? Why?

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Definitions:

Support Department Allocation Rate

A rate used to allocate the costs of support departments to producing departments or directly to products based on relevant factors or usage measures.

Cost Drivers

Factors that cause the cost of an activity or product to change, such as production volume or raw material prices.

Support Department Cost

Expenses related to the functions that assist the direct operations or production departments of a business, such as human resources or maintenance.

Return on Investment

A metric for assessing the effectiveness or gains of an investment, determined by dividing the net earnings by the investment's expense.