Average Cost Pricing of Natural Gas

A Problem and Three Policy Options

by Frank Camm

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Current regulation of wholesale and retail natural gas encourages overconsumption of gas and discourages desirable entry of solar heaters, heat pumps, and other "new" residential and commercial energy technologies. This report uses the tools of public finance to compare the desirability of three alternative policies with that of current regulation. The alternatives include marginal cost pricing with consumer compensation, average cost pricing with taxes and/or subsidies, and utility ownership of new energy technologies.

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