Principles of Public Utility Rates

James Bonbright wrote the standard treatment of how regulated utility rates should be set, and it remains cited in rate cases six decades later. Its subject is the economic and practical criteria that a rate structure must satisfy and the unavoidable conflicts among them.

Bonbright's contribution is his list of criteria, which he states as attributes of a sound rate structure: the revenue requirement must be met; rates must be simple, understandable and free from controversy; they must avoid undue discrimination; they must promote efficient use; they must be stable for both the utility and the customer; they must be fair in apportioning cost among customers; and they must yield revenue that is stable and predictable. He is explicit that these conflict, that no rate structure satisfies all of them, and that ratemaking is therefore a matter of judgement rather than of calculation.

The analytical chapters address the underlying economics: the difference between marginal cost pricing, which is efficient, and embedded cost pricing, which is what regulators generally use because it recovers the actual revenue requirement; the treatment of joint and common costs in a multi-service utility, where allocation is inherently arbitrary; the demand and energy components of electricity cost and the tariff structures that reflect them; and the rate base and rate of return determination. The book predates deregulation, competitive generation markets, distributed generation and time-varying pricing technology, so the institutional context is dated. The criteria and the treatment of cost allocation remain the framework used in the field.