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The Effect of a Fuel Adjustment Clause on a Regulated Firm's Selection of Inputs

When input prices are changing rapidly, the delays inherent in rate-of-return regulation can result in rate decisions that are outdated before they can be implemented. Many regulatory commissions have adopted fuel adjustment clauses to remedy this problem. Fuel clauses adjust output price for changes in fuel costs so that the utility's profit remains relatively unaffected. Fuel adjustment clauses are now used in almost all the 50 states and the District of Columbia; a survey by the National Association of Regulatory Utility Commissioners (NARUC) (1978, p. 6) revealed that only 7 states did not permit fuel clauses.

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Energy Specializations: Energy Investment and Finance – Corporate Strategy; Energy Modeling – Other

JEL Codes:
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
C59 - Econometric Modeling: Other

Keywords: Rate of return regulation, fuel adjustment clause, Input selection, Utilities

DOI: 10.5547/ISSN0195-6574-EJ-Vol6-No2-9

Published in Volume 6, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.