nity cost or market-based influence into account (Verizon, 535 U.S. at 484, citing Kahn 1988). Fortified by this background, regulators charged with implementing access regimes have tended to follow their traditional patterns and base access rates solely on either historical or replacement cost. In failing to incorporate some dimension that reflects the earning potential of the regulated input, approaches based on direct cost, whether historical or replacement cost, fail to reflect the basic insight that has guided economics for the last century (Hovenkamp 1993; Yoo 2003a). Rate regulation has inevitably raised additional implementation problems. State regulators have traditionally used a cost-of-service approach according to the formula R=0+Br, 15 It should be noted that in basing the legal outcome on reasonable expectations, the approach taken by the Court in Hope Natural Gas is itself circular, because the legality of any particular rate depends on the expectations of the regulated firm. Those expectations in turn are shaped in large part by whether or not a court would uphold the rate as legal. The ratemaking methodology need not have been part of the original "regulatory contract" between the regulated firm and the regulatory authority. This contrasts with expectations damages in contract law, which reflect expectations under the contractual agreement. Network Regulation Basics where R is the total revenue the carrier is allowed to generate, O is the carrier's oper- ating expenses, on which the carrier is not allowed to earn a rate of return (such as taxes, wages, energy costs, and depreciation), B is the rate base of capital invest- ment, on which the carrier is allowed to earn a rate of return, and is the appropriate rate of return. The rates are then determined by dividing the total revenue that the carrier is allowed to earn by the number of units consumers are expected to demand. Although this formula is easy to state, regulators and courts have long recog- nized that it is exceedingly difficult to appl