A COMPARISON OF COST-BASED PRICING RULES FOR NATURAL-GAS DISTRIBUTIONUTILITIES

Partial-equilibrium social welfare deadweight losses under uniform Ram sey pricing, a cost allocation pricing method, and the actual average revenues by customer class for two natural gas distribution utilities are calculated and compared. Marginal cost estimates are derived from a multiple-output translog variable cost function and used, along with three sets of demand elasticities, to generate the Ramsey prices and welfare losses. The actual and cost-allocation prices are taken direct ly from rate case files. The largest social welfare losses are associa ted with the cost-allocation rule, as high as 10-25% of revenue, despi te suggestions in the literature to the contrary.