n 20X1, 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 rate-making 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:

1. What difference will the commission's decision make to the allowed rate in 20X1?

2. What difference will the commission's decision make to the allowed rate in 20X2?