Rate base is the value of the plant a regulated utility has devoted to public service, less accumulated depreciation, plus working capital and certain other allowances. The utility is permitted to recover its operating cost and, on top of that, to earn an authorised rate of return on the rate base.
Why it does not exist in a municipal utility
A city-owned utility has no rate base, because it earns no return. Its revenue requirement is a cash requirement: operating cost, debt service, coverage, and rate-funded capital. This is the single largest structural difference between a municipal rate and an investor-owned one, and it is why a bill comparison between the two is not a comparison of efficiency.
Why it becomes the central number in a sale
When an investor-owned utility acquires a municipal system, what enters rate base determines what customers pay for the rest of the asset’s life. Historically the acquirer could add only the depreciated original cost of the plant, which meant a well-depreciated municipal system was worth little to a buyer. Several states have since enacted fair market value statutes allowing the acquisition price, up to an appraised fair market value, into rate base.
That change is what created the market for municipal system sales, and it is also the mechanism by which a sale price paid to the city today becomes a rate increase paid by the same households afterwards.
Sources
Pennsylvania Public Utility Code, 66 Pa.C.S. section 1329, added by Act 12 of 2016, on fair market valuation and the rate base treatment of acquired municipal water and wastewater systems. American Water Works Association, Manual M1, 7th ed. (2017), on the utility basis and return on rate base.