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Capacity Cost Allocation in the Provision of Urban Public Services: The Case of Gas Distribution
Author(s) -
GULDMANN JEANMICHEL
Publication year - 1989
Publication title -
growth and change
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.657
H-Index - 55
eISSN - 1468-2257
pISSN - 0017-4815
DOI - 10.1111/j.1468-2257.1989.tb00761.x
Subject(s) - subsidy , distribution (mathematics) , cost allocation , marginal cost , capital cost , economics , capital (architecture) , competition (biology) , microeconomics , estimation , business , econometrics , macroeconomics , history , mathematical analysis , ecology , mathematics , accounting , archaeology , management , biology , market economy
This paper analyzes the pattern of price discrimination and cross‐subsidization that result from traditional gas distribution cost allocation procedures. A gas distribution capital cost function is developed, using the Box‐Cox transformation and estimation procedure applied to a cross‐section of 65 communities, and is used to assess the deviations between distribution marginal costs and actual cost allocations. The major conclusions are that current pricing practices produce an aggregate net subsidy to all combined customer classes, that both intra‐ and inter‐class cross‐subsidizations are occurring, with the commercial and small industrial markets as the major losers, and that the smaller communities tend to subsidize the larger ones. These results support a move away from current, company‐level pricing practices towards locally differentiated pricing.