Revenue requirement explainer
Preview Version 0.1.0Where a utility's requested revenue comes from, and what one point of return on equity is worth on a home's bill.
Revenue requirement
783,333,333$ a year
The revenue requirement is $783,333,333. Each point of return on equity is worth $13,333,333 a year, about $0.89 a month per home.
Regulatory Assistance Project · FERC Form 1Self-checked · The spec's 7.5% cost of capital, $150,000,000 return, $33,333,333 income tax, and $13,333,333 and $0.89 one-point sensitivity pass. What this means
An explainer, not a rate case: a commission's order sets the actual figures. · Self-checked only: no independent check has been run yet · Example values · Review pending Report a problem
Start from your utility's own figures
How we got this
Method
Revenue requirement = O&M + depreciation + taxes other than income + income tax + rate base × weighted cost of capital, where the weighted cost of capital is equity share × return on equity + debt share × cost of debt, and income tax on the equity return is that return × t ÷ (1 − t).
Steps
- Weighted cost of capital: 50% equity × 10% + 50% debt × 5% = 7.5%.
- Return on rate base: $2,000,000,000 × 7.5% = $150,000,000.
- Income tax on the equity return: $100,000,000 × 25% ÷ (1 − 25%) = $33,333,333.
- Revenue requirement: O&M $400,000,000 + depreciation $150,000,000 + other taxes $50,000,000 + income tax $33,333,333 + return $150,000,000 = $783,333,333.
- One point less return on equity (10% to 9%) lowers it by $13,333,333: $10,000,000 of return and $3,333,333 of income tax.
- Per home: $13,333,333 × 40% residential share ÷ 500,000 residential customers ÷ 12 = $0.89 a month. This is an approximation: rates are not set by revenue share alone.
Assumptions
- Income tax is grossed up on the equity return only, at one combined rate; deferred taxes and tax credits are left out.
- The per-home figure spreads a change in proportion to the residential share of revenue; a rate case's cost allocation can differ.
Sources
- Regulatory Assistance Project, Electricity Regulation in the US: A Guide, Second edition, 2016, Chapter 9, the revenue requirement and its components
- FERC Form 1, through Catalyst Cooperative's PUDL (CC BY 4.0), PUDL v2026.10.0, report year 2025, Income statement (schedule 114) and PUDL's rate-base derivation; see docs/derivations/rate-base.md
Known limits
- A simplified cost-of-service formula: no deferred taxes, tax credits, or riders.
- Figures from FERC Form 1 are total-company and may cover more than one state or service.