Our purpose in this book is to provide a normative basis for public utility pricing and investment decisions. Accordingly we begin with a discussion of the welfare economic foundations of public policy decisions. A vast literature1 in welfare economics and cost-benefit analysis underlies these issues, but we aspire here only to a brief overview of the traditional welfare analysis of public utility problems. This traditional view holds that the net social worth of a particular policy may be represented as the sum of consumers’ and producers’ surpluses generated by the policy in question — i.e. the excess of consumers’ total ‘willingness to pay’, net of the actual price paid, plus producers’ profits.