Minimum Bill Contracts: Theory and Policy

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This paper examines the efficiency implications of minimum bill contracts and concludes that minimum bill provisions promote rather than impede efficient adaptation to changing circumstances. In particular, minimum bills provide a simple mechanism by which parties faced with uncertain demand and rising marginal cost can approximate joint-profit maximizing payment schedules in transaction-specific relationships governed by long-term contracts. The paper also questions the merit of proposals for legislative or regulatory invention to reduce minimum bill obligations in natural gas contracts and considers the appropriate legal status of these provisions in the event of contractual failure.