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Fuel Cost Adjustment Mechanisms and the Regulated Utility Facing Uncertain Fuel Prices

R. Mark Isaac
The Bell Journal of Economics
Vol. 13, No. 1 (Spring, 1982), pp. 158-169
Published by: RAND Corporation
DOI: 10.2307/3003437
Stable URL: http://www.jstor.org/stable/3003437
Page Count: 12
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Fuel Cost Adjustment Mechanisms and the Regulated Utility Facing Uncertain Fuel Prices
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Abstract

Increases in the cost of fossil fuels helped make automatic fuel cost adjustment mechanisms popular institutions for regulating electric utilities. Economic intuition suggests that these clauses could distort incentives for input choice. The purpose of this article is to explore the theoretical basis for such potential distortions in a world of uncertain fuel prices. Two different models of the regulatory environment are considered. For each, it is shown that input choice incentives are altered in the presence of a fuel adjustment mechanism. Finally, some suggested benefits of such clauses to the financial position of the utility are examined.

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