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Public Utilities, Second Edition

Old Problems, New Challenges

David E. McNabb

A thoroughly updated 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 five sectors of the utility industry: electric power, natural gas, water, wastewater systems and public transit.
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Chapter 10: Public utility pricing and rate setting

David E. McNabb


This chapter focuses of the rate-setting function in public utilities. The process of setting rates (prices for services) in public utilities involves four steps: (1) determining operating costs, (2) distributing costs among different customer classes, (3) considering relevant load and use factors, and (4) designing the pricing structures that reflect the influences of the first three considerations. Rate setting in regulated utilities is further complicated by the legislative and social requirement that the final rates be “just and reasonable” (fair and equitable). Determining costs involves analysis of four categories of operations: customer service, operations, demand, and overhead. Typically, prices are lowest for large users, such as factories or commercial centers, and highest for residential customers. However, prices will tend to vary more during any period for industrial and commercial users than they will for residential customers.

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