How to implement path loss in wireless communications?
A good text is by WIlliam Y. C. Lee. He did alot of the original work on 
propagation models. There are many others, just google "path loss model".
This  equation you selected is a very basic one for a cellular network. It doesn't take into account many of the fActors like environment(urban, suburban, rural), clutter or morphology, line of sight propagation or non line of sight, statistical factors and others. There are empirical models for various environments that have been used and modified (Hata, Okumura cost 231 etc) and can be iteritively adjusted with real field data. 

With regard to your question about the reference distance. I'm sure you can find the answer in the references I mentioned above and the Goldsmith reference mentioned by ...

There might be a relationship to that distance and the far field or it may be justa standard reference, I'm not sure. In any case you could use a different model if the user is too close if necessary.

The path loss exponent is also a very important parameter(alpha in your equation)

Hope this helps