Once a set of decisions about projects and investments, kinds and levels of expenses, and their booked costs are accepted, regulators allow utilities to recover operating expenses in full, as well as capital costs plus an opportunity to earn a commission approved "rate of return" on invested equity.
The rate of return is made up of a return on debt (bonds) and a return on equity (stocks), weighted to reflect the proportional shares of total capital each type of security provides.
This system of compensation is predicated on the assumption that nearly all, if not all, utilities are creating investor value every time they make capital investments. That may have been appropriate when the primary social goal of the utility sector was to grow enough to provide universal service, and economies of scale were clear.
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