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

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  • Clarke, Roger G.

Abstract

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.

Suggested Citation

  • Clarke, Roger G., 1978. "The Impact of a Fuel Adjustment Clause on the Regulated Firm's Value and Cost of Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(4), pages 745-757, November.
    • Handle: RePEc:cup:jfinqa:v:13:y:1978:i:04:p:745-757_00
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    Cited by:

    1. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    2. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 18946, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. repec:vuw:vuwscr:18946 is not listed on IDEAS

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