Marginal-cost pricing for gas distribution utilities: further analyses and models

The effects of gas marginal-cost pricing on the demand for natural gas and on changes in the capital and operating costs of gas distribution utilities are important issues in the Public Utility Regulatory Policies Act of 1978 (see PURPA: Section 306-Gas Utility Rate Design Proposals). However, to base rates on marginal costs, it is first necessary to confidently calculate these marginal costs. It is the purpose of this study to provide data and methods for such cost calculations and for designing rates based on these costs. Several empirical statistical investigations of the structure of various cost categories of gas distribution utilities, at the exclusion of gas supply costs, are first presented. One stream of analyses focuses on distribution plant (investment) costs at the community/local level, using data gathered from six different distribution utilities. A new specification for the cost model is used, significantly improving the regression fits obtained in previous research. All the results confirm the joint character of gas distribution plant costs and provide ready means to estimate the corresponding marginal costs for the different sectoral markets at the community/local level. The other stream of analyses, in contract, provides cost models based on data characterizing the whole utility, andmore » gathered from 119 US gas distribution companies. Computerized and simplified approaches to the calculation of gas marginal costs and to the formulation of marginal cost pricing policies are then developed, with, as a major emphasis, the calculation of gas supply marginal costs, accounting for usual pipeline rate schedules that involve demand charges and take-or-pay clauses in addition to commodity charges.« less