Abstract
Depreciation allowances directly affect the economic returns of regulated firms yet are frequently based on inappropriate accounting concepts of value and obsolescence. Regulated rates are correctly set only under economic (Hotelling) depreciation which turns out to be an accelerated recovery schedule for assets with high rates of technological progress. Nonetheless, regulators widely use straight-line or even back-loaded schedules for fear that accelerated recovery will raise rates paid by consumers. Using a multiasset model it is shown that, contrary to widely held beliefs, accelerated depreciation leads to lower regulated rates for mature firms in the steady state.
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