Such companies, if not regulated, could easily charge far higher rates since consumers would pay any price for essential goods such as electricity or water.
Rate-of-return regulation is considered fair because it gives the company the opportunity to recover the costs of serving their customers while protecting consumers from paying exorbitant prices.
Rate-of-Return regulation was mainly used due to its ability to be sustainable in the long-term and resistant to changes in the company's conditions as well as its popularity among investors.
While regulation of this type prevents monopolies with the potential to make large profits from doing so, such as electricity companies, it provides stability.
Furthermore, regulation of this sort protects the firm from negative public opinion while providing the consumer with ease of mind.
Throughout history, due to their large profits, public opinion has turned against monopolies, which eventually resulted in severe anti-trust laws in the early 20th century.
This case generally allowed states to regulate certain businesses and practices within their borders, including railroads, which had risen to substantial power at the time.
While the political sentiment of the early 20th century was increasingly anti-monopoly and anti-trust, government officials recognized the need for some goods and services to be provided by monopolies.
In a competitive market, numerous firms would be required to spend large sums on the necessary capital only to produce a small quantity of output, thereby sacrificing economic efficiency.
In this so-called "Maximum Freight Case", the Supreme Court defined the constitutional limits of governmental power to set railroad utility rates.
As the concept of rate-of-return regulation spread throughout the anti-trust leaning America, the question of "what profit should investors receive?"