Exercise $8-8$ Equipment repairs and rate regulation $($LO $8-2)$

In $20$X$1,$ Illinois Power & Heat spent $$5$ million repairing one of its electrical generating stations that was damaged by a tornado. The loss was uninsured. Management has asked the public service commission for approval to treat the $$5$ million as an asset for ratemaking purposes rather than as an allowed expense.

Additional information:

Allowed operating costs $($before loss$)$: $$600$ million per year.

Allowed return on assets: $8\%$ of beginning$-$of$-$period assets.

Assets in service: $$1,600$ million.

Depreciation method if loss is capitalized: Straight$-$line over five years.

Estimated demand: $14,000$ million KWH per year.

Rates are set annually.

Required:

What difference will the commission's decision make to the allowed rate in $20$X$1?$

What difference will the commission's decision make to the allowed rate in $202?$