Suppose a utility firm produces 100,000 MWh of electricity per year. The total investment (rate base) is $60 million, and the variable cost of electricity production is $40/MWh. The utility gains revenue by selling electricity to the local market to cover its capital cost and production cost. (20 points for this question)

A- If you are the regulator and apply the rate of return regulation. You allow a rate of return of 10%. How much should the price of electricity be (ignoring depreciation and tax in Eq 5.1)?

B- The utility develops a technology upgrade plan that will reduce its variable cost of electricity by $8/MWh, but the upgrade will cost $1.5 million. If you do not agree with the request of the utility to include the cost of the upgrade in the rate base, will the utility install the upgrade?

C- If you are the regulator and apply price cap regulation, and the utility needs to pay interest each year for the debt of investment with an interest rate of 8%. What is the minimal price to keep the utility firm running?

D- You set the X factor to 1% for five years, so the electricity price will decrease by 1% each year in the foreseeable future (ignoring inflation), for example, the price next year will be 99% of the price you obtain in the previous question. The utility is offered an interest-free loan to pay for the previous upgrade and needs to pay back in five years. The upgrade will be in effect from next year. Will the utility install the upgrade?

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