The Financial Effects of Fuel Adjustment Clauses on Electric Utilities

Joseph Golec

The Journal of Business, 1990, vol. 63, issue 2, 165-86

Abstract: During the 1970s, fuel adjustment clauses (FACs) were adopted by many electric utilities as a means of adjusting electricity prices when per-unit fuel costs changed. Recently, many state regulators have questioned the need for FACs since fuel costs have become more stable. Some have been reluctant to abolish FACs because of fear that an electric utility's financial risk will increase and with it the cost of capital for the utility. This article shows empirically that the risk effects of FACs may be quite small, and that risk could actually decline if an FAC is removed. However, a wealth effect may exist that should be considered before an FAC is abolished. Copyright 1990 by the University of Chicago.

Date: 1990
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