Ratemaking
What does "Ratemaking" mean in law?
An administrative function in which an agency sets the prices that regulated entities, typically public utilities or common carriers, may charge for their services. Ratemaking is considered a quasi-legislative function and is subject to constitutional constraints: under the Due Process Clause, rates must be set high enough to allow the regulated entity a reasonable return on investment (Federal Power Commission v. Hope Natural Gas Co., 1944), but not so high as to exploit consumers. Agencies typically use either cost-of-service ratemaking (setting rates to cover costs plus a fair return) or incentive-based ratemaking (rewarding efficiency). Judicial review of ratemaking decisions applies the arbitrary and capricious standard, and courts examine whether the agency considered the relevant statutory factors.
Definition
An administrative function in which an agency sets the prices that regulated entities, typically public utilities or common carriers, may charge for their services. Ratemaking is considered a quasi-legislative function and is subject to constitutional constraints: under the Due Process Clause, rates must be set high enough to allow the regulated entity a reasonable return on investment (Federal Power Commission v. Hope Natural Gas Co., 1944), but not so high as to exploit consumers. Agencies typically use either cost-of-service ratemaking (setting rates to cover costs plus a fair return) or incentive-based ratemaking (rewarding efficiency). Judicial review of ratemaking decisions applies the arbitrary and capricious standard, and courts examine whether the agency considered the relevant statutory factors.
Example
The Federal Energy Regulatory Commission conducted a ratemaking proceeding to set the maximum rates that a natural gas pipeline company could charge its customers, balancing the company's need for a reasonable return against consumer protection.