The Equity and Efficiency of Two-Part Tariffs in U.S. Natural Gas Markets

Residential natural gas customers in the United States face volumetric charges that average about 30 percent more than the marginal cost of gas. This inefficient departure from marginal cost pricing allows gas utilities to cover their fixed infrastructure and operating costs. Proposals for recovering these costs instead through fixed monthly fees are often opposed because of a widespread belief that current rate schedules have desirable distributional consequences. Using nationally representative household-level data, we show that the correlation between household income and natural gas consumption is indeed positive but surprisingly weak, so current rate schedules are only mildly progressive. In part, we argue that this is because poor households tend to have larger families and less energy-efficient homes. We calculate bill impacts under a variety of scenarios and show that even a modest energy assistance program would more than offset the distributional impact of tariff rebalancing for most low-income households.