Open Access Journal Article

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

by Kenneth W. Costello a,* orcid
Regulatory economist/independent consultant, the National Regulatory Research Institute, USA
Author to whom correspondence should be addressed.
Received: 16 February 2023 / Accepted: 9 May 2023 / Published: 12 May 2023


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.

Copyright: © 2023 by W. Costello. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

Share and Cite

ACS Style
W. Costello, K. A Decision-Making Framework for Assessing New Rate Mechanisms: The Case of US Gas Distributors. Journal of Economic Analysis, 2023, 2, 32.
AMA Style
W. Costello K. A Decision-Making Framework for Assessing New Rate Mechanisms: The Case of US Gas Distributors. Journal of Economic Analysis; 2023, 2(3):32.
Chicago/Turabian Style
W. Costello, Kenneth 2023. "A Decision-Making Framework for Assessing New Rate Mechanisms: The Case of US Gas Distributors" Journal of Economic Analysis 2, no.3: 32.
APA style
W. Costello, K. (2023). A Decision-Making Framework for Assessing New Rate Mechanisms: The Case of US Gas Distributors. Journal of Economic Analysis, 2(3), 32.

Article Metrics

Article Access Statistics


  1. Bonbright, James C., et al. (1988). Principles of Public Utility Rates, 2nd Edition, Public Utilities Reports, Inc.; the first edition, authored solely by Bonbright, was published in 1961.
  2. Borenstein, Severin and James Bushnell (2015). The U.S. Electricity Industry after 20 Years of Restructuring. NBER Working Paper Series, Working Paper 21113, April.
  3. Burger, Scott P. et al. (2019). The Efficiency and Distributional Effects of Alternative Residential Electricity Rate Design. NBER Working Paper Series, Working Paper 25570, February.
  4. Colman, Andrew M. (2008). A Dictionary of Psychology (Oxford: Oxford University Press).;jsessionid=0776CD0F2E171EA731479913A1CABBE2
  5. Costello, Ken (2004). An Observation on Real-Time Pricing: Why Practice Lags Theory. The Electricity Journal, Vol. 17, Issue 1 (January-February): 21-25.
  6. Costello, Ken (2006). Revenue Decoupling for Natural Gas Utilities. NRRI 06-06, April.
  7. Costello, Ken (2009). How Should Regulators View Cost Trackers? The Electricity Journal, Vol. 22, Issue 10 (December): 20-33.
  8. Costello, Ken (2013). Future Test Years: Challenges Posed for State Utility Commissions. NRRI 13-08, July.
  9. Costello, Ken (2014). Alternative Rate Mechanisms and Their Compatibility with State Utility Commission Objectives. NRRI 14-3, April.
  10. Costello, Kenneth W. and Douglas N. Jones (1995). Lessons Learned in State Electric Utility Regulation, in Reinventing Electric Utility Regulation, eds. Gregory B. Enholm and J. Robert Malko (Vienna, VA: Public Utilities Report): 69-92.
  11. Costello, Kenneth W. and Ross C. Hemphill (2022). It’s High Time to Transition Away from Volumetric Distribution Rates: Why Not a 3-Part Tariff? The Electricity Journal, Vol. 35, Issue 9 (November): 107205.
  12. Department for Communities and Local Government: London (2009). Multi-Criteria Analysis: A Manual. January.
  13. Einhorn, Michael (1989-1990). Incentive Mechanisms for Cost Revelation with Intermodal Competition. Information, Economics and Policy, Vol. 4, Issue 4: 281-90.
  14. Feingold, Russell A. (2016). Regulatory and Ratemaking Responses to a Changing Gas Utility Industry. At
  15. Filipink, Eric (2009). Serving the ‘Public Interest’ Traditional vs Expansive Utility Regulation. NRRI 10-02, December.
  16. Grether, David and Louis Wilde (1984). An Analysis of Conjunctive Choice: Theory and Experiments. Journal of Consumer Research, Vol. 10, Issue 4 (March): 373-85.
  17. Gunatilake, Herath et al. (2008). Utility Tariff Setting for Economic Efficiency and Financial Sustainability – A Review. Paper prepared by the Asian Development Bank, August.
  18. Hanser, Philip Q (2012). Rate Design by Objective: A Purposeful Approach to Setting Energy Prices. Public Utilities Fortnightly, September.
  19. Hempling, Scott (2013). Preside or Lead: The Attributes and Actions of Effective Regulators, 2nd Edition.
  20. Joskow, Paul (1974). Inflation and Environmental Concern: Structural Changes in the Process of Public Utility Regulation. Journal of Law and Economics, Vol. 17: 291-327.
  21. Joskow, Paul L. and Richard Schmalensee (1986). "Incentive Regulation for Electric Utilities." Yale Journal on Regulation, Vol. 4, No.1 (Fall): 1-49.
  22. Kahn, Alfred E (1971). Economics of Regulation, Vol. 2 (New York: John Wiley & Sons).
  23. Kahneman, Daniel (2003). Maps of Bounded Rationality: Psychology for Behavioral Economics. American Economic Review, Vol. 93, No. 5 (December): 1449-75.
  24. Kahneman, Daniel (2011). Thinking Fast and Slow (New York (New York: Farrar, Straus and Giroux).
  25. Keeney, Ralph H. and Howard Raiffa (1976). Decisions with Multiple Objectives: Preferences and Value Trade-Offs (New York: Wiley).
  26. Kihm, Steve, Janice Beecher and Ronald Lehr (2017). Regulatory Incentives and Disincentives for Utility Investments in Grid Modernization. Report prepared for the Lawrence Berkley National Laboratory, May.
  27. Kind, Peter (2013). Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business. Prepared for the Edison Electric Institute, January.
  28. Larkin & Associates, PLLC (2012). Increasing Use of Surcharges on Consumer Utility Bills. Prepared for the American Association of Retired Persons, May.
  29. Lazar, Jim and Wilson Gonzalez (2015). Smart Rate Design for a Smart Future, Appendix D. Report by RAP, July 15.
  30. Lindblom, Charles E. (1979). Still Muddling, Not Yet Through. Public Administration Review, Vol. 39, No. 6 (November-December): 517-26.
  31. Loken, Espen (2007). Use of Multicriteria Decision Analysis Methods for Energy Planning Problems. Renewable and Sustainable Energy Reviews, Vol. 11, Issue 7 (September): 1584-95.
  32. McDermott, Karl (2012). Cost of Service Regulation in the Investor-Owned Electric Utility Industry: A History of Adaptation (Washington D.C.: Edison Electric Institute, June).;jsessionid=916E3E00CA202E964CE6E694997549A6?doi=
  33. Morgan, Pamela (2013). A Decade of Decoupling for U.S. Energy Utilities: Rate Impacts, Designs, and Observations. Revised report prepared for Regulatory Assistance Project, February.
  34. Mullet, Etlenne (1992). A Model of Selection by Aspects. Acta Psychologica, Vol. 78 (February): 1-19.
  35. Pacific Economics Group Research (2013). Alternative Regulation for Evolving Utility Challenges: An Updated Survey. Prepared for the Edison Electric Institute, January.
  36. Peltzman, Sam (1976). Toward a More General Theory of Regulation. Journal of Law and Economics, Vol. 19 (August).
  37. Philips, Charles (1988). The Regulation of Public Utilities: Theory and Practice (Arlington, VA: Public Utilities Reports).
  38. Pint, Ellen M. (1992) Price-Cap versus Rate-of-Return Regulation in a Stochastic-Cost Model. RAND Journal of Economics, Vol. 23, No. 4 (Winter): 564-578.
  39. Posner, Richard A. (1969). Natural Monopoly and Its Regulation." Stanford Law Review, Vol. 21 (1969): 548-643.
  40. Reber, Tim et al. (2018). Tariff Considerations for Micro-Grids in Sub-Saharan Africa. Paper prepared for USAID and Power Africa, February.
  41. Rossi, Jim (2009). The Political Economy of Energy and Its Implications for Climate Change Legislation. Tulane Law Review, Vol. 84, No. 2: 379-428.
  42. Sahabuddin, Md. and Imran Khan (2021). Multicriteria Decision Analysis Methods for Energy Sector’s Sustainability Assessment: Robustness Analysis Through Criteria Weight Change. Sustainable Energy Technologies and Assessments, Vol. 47, October: 101380.
  43. Schittekatte, Tim et al. (2023). Economy-Wide Decarbonization Requires Fixing Retail Electricity Rates. CEEPR RC 2023-001, January.
  44. Simon, Herbert A. (1955). A Behavioral Model of Rational Choice. The Quarterly Journal of Economics, Vol. 69, No.1 (February): 99-118.
  45. Stewart, T.J. (1992) A Critical Survey on the Status of Multiple Criteria Decision-Making Theory and Practice. OMEGA, Vol. 2, Nos. 5-6: 569-86.
  46. Thaler, Richard H. (2015). Misbehaving: The Making of Behavioral Economics (New York: W.W. Norton & Company).
  47. The Brattle Group (2013). Alternative Regulation and Ratemaking Approaches for Water Companies: Supporting the Capital Investment Needs of 21st Century, prepared for the National Association of Water Companies, September 23.
  48. Trabish, Herman K. (2022). 2022 Outlook: A New Recognition Is Coming of Rate Design’s Critical Role in the Energy Transition. Utility Dive, January 19.
  49. Wang, Jiang-Jiang et al (2009). Review on Multicriteria Decision Analysis Aid in Sustainable Energy Decision-Making. Renewable and Sustainable Energy Reviews, Vol.13, Issue 9 (December): 2263-78.
  50. Zaki, Dina A and Mohamed Hamdy (2022). A Review of Electricity Tariffs and Enabling Solutions for Optimal Energy Management. Energies,15, 8527.