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A Decision-Making Framework for Assessing New Rate Mechanisms: The Case of US Gas Distributors

Author

Listed:
  • Kenneth W. Costello

    (Regulatory economist/independent consultant, the National Regulatory Research Institute, USA)

Abstract

To make an assessment of ratemaking proposals, this article proposes that regulators should consider applying a logical decision-making process, such as multi-criteria decision analysis (MCDA), that selects or modifies those rate mechanisms that come closest to achieving the public interest, as defined by regulators. MCDA seems like an fitting tool to improve regulatory decisions by making more explicit the relationship between different rate mechanisms and the public interest. This article provides a simplified version of MCDA to demonstrate how regulators can apply this tool to evaluate new rate mechanisms in terms of the public interest. As far as the author knows, the MCDA methodology applied to utility ratemaking has not appeared in the literature. While regulators may not want to or lack the resources to execute all the steps presented in this article, MCDA can provide direction to regulators in evaluating different rate mechanisms and ultimately reaching decisions that are more rational and aligned with the public interest. After all, evaluating rate mechanisms is one of the major functions of utility regulators. Doing it wrongly can have a consequential effect on society’s welfare.

Suggested Citation

  • Kenneth W. Costello, 2023. "A Decision-Making Framework for Assessing New Rate Mechanisms: The Case of US Gas Distributors," Journal of Economic Analysis, Anser Press, vol. 2(3), pages 43-65, May.
    • Handle: RePEc:bba:j00001:v:2:y:2023:i:3:p:43-65:d:44
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    References listed on IDEAS

    as
    1. Costello, Ken, 2009. "How Should Regulators View Cost Trackers?," The Electricity Journal, Elsevier, vol. 22(10), pages 20-33, December.
    2. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
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    Cited by:

    1. Hao, Xiaoli & Wen, Shufang & Li, Ke & Wu, Junwei & Wu, Haitao & Hao, Yu, 2023. "Environmental governance, executive incentive, and enterprise performance: Evidence from Chinese mineral enterprises," Resources Policy, Elsevier, vol. 85(PA).

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