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The Impact of a Fuel Adjustment Clause on the Regulated Firm's Value and Cost of Capital

Published online by Cambridge University Press:  06 April 2009

Roger G. Clarke
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Extract

In recent years the cost of fuel to operate power plants for electric utilities has increased much faster than many utility executives and regulators have anticipated. In the presence of substantial regulatory lag in adjusting rates, stockholders have had to absorb the difference between revenues and unanticipated increases in fuel expenses. In an effort to shorten the time required for increased costs to be reflected in increased prices to consumers, many firms have been allowed to use an automatic fuel adjustment clause (FAC) to pass on increased costs to consumers as they occur. The FAC usually allows the firm to adjust the price of electricity when the price of fuel deviates from some fixed base price. Presently more than 40 of the 50 state regulatory commissions allow some type of FAC.

Type
VI. Trefftzs' Award
Information
Journal of Financial and Quantitative Analysis , Volume 13 , Issue 4 , November 1978 , pp. 745 - 757
Copyright
Copyright © School of Business Administration, University of Washington 1978

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References

REFERENCES

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