---
title: "Ratemaking"
type: Legal Term
source: https://casebriefly.com/legal-terms/ratemaking
---

# Ratemaking

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.

## Related Terms

- adjudication
- agency-discretion
- arbitrary-and-capricious-review
- apa-administrative-procedure-act

## Related Cases

- chevron-usa-inc-v-natural-resources-defense-council

## 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.

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Source: [Ratemaking — CaseBriefly](https://casebriefly.com/legal-terms/ratemaking)