Rapid growth in power electronic equipment (PEEs) implies that in about 10 years, more than 50% of electric utility output will be consumed by PEEs. While PEEs yield benefits of large energy savings and product reliability, they cause the problem of harmonics. Harmonics deteriorate power quality, produce metering errors, increase reactive power, and exacerbate line losses and heat in transmission cables and power equipment. Thus, harmonics directly affect electric utility revenue and costs. Our objectives are: (i) to characterize harmonics, (ii) to describe the effects of harmonics on utility revenue and costs, and (iii) to propose alternative strategies for pricing harmonics. We show that pricing harmonics efficiently by using the marginal cost principle is implementable with current metering technology and existing utility billing systems. Copyright © 1995 Published by Elsevier Ltd.