In Canada, electric, natural gas and telephone companies are considered to be public utilities. A public utility is characterized by a number of different aspects including; a franchise (or service area), an obligation to serve all customers in its service area, the essential nature of the service (to the public) and the fact that the service can be supplied most economically by a single company (natural monopoly).
To prevent monopoly abuses, most public utility companies are regulated. Utility regulation ensures that customers receive safe, reliable service at a reasonable price while also making sure that the utility company has an opportunity to earn a reasonable return on its investment.
Types of Utility Regulation
There are several different types of regulation that can be used to oversee the activities of utility companies. Historically, the most common form of regulation for utility companies in North America has been the rate base/rate of return method, which has developed over 80 years. This is the form of regulation used by the PUB to regulate the NWT utility companies under its jurisdiction. Further information on other forms of regulation can be found on our Fact Sheets
Rate Base / Rate of Return Method
Under this form of regulation, the prices (or rates) a utility company is allowed to charge customers for its service are determined in a two-phase process.
The first phase involves an application and hearing process to determine how much money the utility needs in a year to provide service to its customers. This annual figure, referred to as the utility company's "revenue requirement" is comprised of several components such as operating costs, debt servicing, a return on the equity invested and depreciation expenses.
Once the PUB has issued a decision setting the annual revenue requirement, the utility company then files an application describing how it proposes to collect its annual revenue requirement from its customers. There are many different options available to do this, ranging from setting one rate for all customers to setting many different rates depending on the type of customer, the type of service provided and the cost to provide a particular type of service.
Once the PUB issues a decision fixing the rates that a utility company can charge its customers, the company cannot charge different rates to its customers without first returning to the PUB to obtain its approval to change the rates. Utility companies typically only change their rates every few years to reflect changes in the cost of providing service (i.e. fuel price changes, large capital investments, changes in the customer base etc).