Incremental and average cost methods in rate design

Debate continues over the practicality of integrating incremental and average costs in water rate design. State regulatory commissions and local agencies having jurisdiction over municipalities have traditionally used average or embedded costing in water rate design. Although employing marginal or incremental cost in water rate design is far from perfect, incremental cost results can be used both as the basis for determining rate differentials ans standard for setting specific rates. Rate designers should give serious consideration to integrating incremental and average costs in rate design.