Fixed Charges in Rates: 1938 Classic on Rate Design


Havlik’s timeless analysis: Justification for fixed charges in rates, their just level relative to variable charges.

Today in Fortnightly

I found this book at the Library of Congress and had to have it. Fortunately AbeBooks, that has just about anything old and obscure, did have for sale this 1938 classic on rate design. And that's how I came to own a copy of "Service Charges in Gas and Electric Rates" by Dr. Hubert Havlik.

Professor James Bonbright himself, the father of ratemaking theory, suggested Havlik study the role of fixed charges in ratemaking and monitored the study and the book's development.Bonbright was already famous. He was chairman of the New York Power Authority, aside from being on the faculty of the Columbia University School of Business.

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That same year, Bonbright's book "Valuation of Property" won the Ames Prize of Harvard Law School.Later winners of that prestigious award include Supreme Court associate justice Benjamin Cardozo, judge Richard Posner, and John Rawls, author of the landmark "A Theory of Justice."

This 78 year old book by Havlik is a timeless analysis of the justification for fixed charges in rates and their just level relative to variable charges:

"Few utility companies have been able to collect service charges that cover the full amount of customer costs broadly determined. They have generally found that the 'value of service' to a small customer, or what he is willing to pay without any great protest, is not as high as the broad customer cost.

Accordingly, utility companies have moderated the service charge or have tried other charges that are more acceptable to the mass of customers. If, with the moderated service charge in force, small customers still pay less than directly traceable customers costs, they must be subsidized by the larger customers, or else the company must tale less than a 'fair return.'"

Chapter III lists and discusses "The Case for the Service Charge," including: 

  • Elimination of discrimination between customers
  • Assurance of sufficient utility revenues
  • Reduction of seasonal variations in monthly bills
  • Simplicity in rate structure. 

Just part of the wealth of theory, analysis and data in the Havlik classic.

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Enamored by a classic on rate design? You would expect no less from the Editor-in-Chief of Public Utilities Fortnightly.

Steve Mitnick, Editor-in-Chief, Public Utilities Fortnightly

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