A marginalist approach to pricing US natural gas

The current method of retail pricing for natural gas in the USA introduces serious distortions in the allocation of this scarce commodity. The cost to the consumer is, in some instances, less than half of the marginal cost of producing the gas. In this paper the author presents an alternative to the antiquated gas pricing system in use in nearly every utility in the USA. Basing rates on marginal costs would be difficult, and these difficulties are explored. The analysis results in a recommendation that there should be a gradual move from average embedded cost pricing to marginal cost pricing.