This book aims to make recent developments in public utility pricing theory accessible to the non-technical reader and to show how they can be usefully applied to major policy issues in ratemaking. Several policy issues have arisen within the last fifteen years or so which cannot be analyzed correctly without these developments. The classic treatise of Kahn [1970], although offering a wealth of institutional detail and breadth which we cannot match, summarizes the relevant economic theory at a point in time just short of a series of major advances which began to take place shortly after the appearance of Kahn's book. It is useful to sketch the policy issues and the research advances to which they led.

One policy question has to do with the rationale for declining block tariffs. Traditionally, such tariffs have been justified on two grounds. In the first place, utilities must cover large fixed costs of operation. In electricity, for example, the maintenance of a line from a pole to a customer's meter is a fixed cost that may be attributed to that customer. In addition, there are costs that may not be so readily attributed to a particular customer such as the cost of maintaining storage facilities and a portion of the reticulation system in the case of a gas utility. Some of these costs are covered by fixed charges that a customer must pay regardless of usage.