A Marginal-Cost Pricing Model for Gas Distribution Utilities

We develop a natural gas distribution utility pricing model that includes optimization of supply mix and capacity expansion, financial analysis of revenue requirements, and design of either average-cost- or marginal-cost-based rates, and apply it using data from the East Ohio Gas Company. The results clearly point to the superiority of marginal-cost over average-cost pricing policies in terms of lesser capital requirements, better capacity utilization and higher end-use economic efficiency.