Public Utilities

Public Utilities

Management Challenges for the 21st Century

David E. McNabb

An introduction to the current issues and challenges facing managers and administrators in the investor and publicly owned utility industry, this engaging volume addresses management concerns in three sectors of the utility industry: electric power, natural gas, and water and wastewater systems. Beginning with a brief overview of the historical development of the industry, the author looks at policy issues and discusses management ethics. He then examines a number of the major challenges in these organizational functions: management and leadership, planning, marketing, accounting and finance, information technology, governance, and human resources. In the final section of the volume he looks at issues specific to each of the three industry sectors.

Chapter 7: The Challenges of Utility Pricing and Rate Setting

David E. McNabb

Subjects: economics and finance, industrial organisation


In market-based economies, prices charged for most goods and services generally are a reflection of supply and demand. When supply exceeds demand, prices fall. When demand exceeds supply, scarcity appears and prices rise. This is referred to as the general model of pricing. The model does not work in exactly this way when pricing the products and services of public utilities. External forces in the form of government regulations and political considerations often intervene in the price-setting process. Furthermore, federally mandated restructuring of the utility industry has introduced a new complexity into the practice of setting prices at all levels of the utility industry. The fundamentals of rate setting, price-setting practices, and such special pricing considerations as social pricing are discussed in the following paragraphs. Throughout the chapter the terms prices and rates are used synonymously, although in the industry, prices are sometimes (but not always) used to describe the wholesale cost of a utility product, with rates used to mean the retail price of the product. Managers in most businesses approach the price-setting process from two interrelated positions. The first begins with the revenue requirements of the organization: income must meet the firm’s needs for each. These include cash for debt service, operating costs, providing an appropriate return to investors, and more. The second begins at the opposite end of the chain: determining what specific combination of prices, rate structures, and rate schedules will bring in the revenue required. This model is more complicated when the organization...

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