Under Wisconsin law, it is well established that a municipality, in owning and operating a water public utility, is not performing a governmental function, but rather the municipality is conducting a public service in its proprietary capacity. The entire concept of regulation of municipal water utilities as expressed by statutory requirements places municipal utilities in the position of business enterprises. As such, business concepts with respect to operating expenses, depreciation, taxes, and return on investment are followed in the determination of revenue requirement and rates for water utility service. The utility is provided with an opportunity to earn revenues sufficient to support its operation over the long term by basing the components of the revenue requirement on a forward looking test year, typically the first calendar year for which the rates are expected to be in effect.
The major components of the forecast revenue requirement are:
• Operation and maintenance expenses,
• Depreciation as a recovery of capital investment,
• Taxes; and,
• Return on average net investment rate base.