In 1961, James C. Bonbright first published his book Principles of Public Utility Rates. Included, on page 291, were eight “criteria of a desirable rate structure.” The book was revised in March 1988 to include, on page 383, ten attributes. These have become known as the Bonbright Principles.
The ten 1988 principles are summarized as follows:
- Effectiveness at yielding total revenue requirements under the fair return standard.
- Revenue stability and predictability, with a minimum of unexpected changes seriously adverse to utility companies.
- Rate stability and predictability, with a minimum of unexpected changes seriously adverse to ratepayers.
- Discouraging wasteful use of services while promoting all justified types and amounts of use.
- Reflection of all present and future private and social costs and benefits due to a service’s provision.
- Fairness of apportionment of total costs of service between rate classes.
- Avoidance of undue discrimination in rates.
- Dynamic efficiency promoting innovation and responding economically to changing demand and supply patterns.
- Practicality (simplicity, certainty, convenience of payment, economy in collection, understandability, public acceptability, feasibility of application).
- Freedom from controversies of interpretation.
The Bonbright Principles are commonly used to evaluate proposed rate designs.
It is important to note that there are commonly conflicts between the principles. For example, a rate that was constantly changing to meet principle 6 (fair apportionment of costs) might not score so well against principle 3 (rate stability). An economic regulator deciding between competing rate designs must use their judgement when deciding which principles are given the highest priority in the evaluation.