Basics of rate design — pricing principles and self - selecting two-part tariffs

This overview of the basics of rate design in network industries should be read in conjunction with Mark Jamison’s, 1997, more comprehensive write-up on rate structure. After describing some of the key concepts, we will examine in some detail the rationale behind rate structures that can reflect incremental costs, while still facilitating the recovery of fixed (often joint or common) costs. In competitive industries, overhead or joint costs cannot be ‘allocated’, they must be ‘recovered where they can’ based on a rate-making philosophy that recognises this fact. The second part of this paper describes the basic issues and problems of recovering these costs, with special reference to electric utilities in an increasingly competitive environment.