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The Continuing Rationale for Full and Timely Recovery of Fuel Price Levels in Fuel Adjustment Clauses
31 July 2008
Eugene Meehan, Kurt Strunk, et al.
Electricity rates need to accomplish two basic goals: (1) impart information that helps customers and investors make economic decisions about consumption and investment; and (2) ensure that regulated utilities have a reasonable opportunity to recover the cost of meeting their obligation to serve the public in a timely manner. Today's electricity rates often fall short on the first count: they do not show the economically-correct price signal to customers. In some states, current cost recovery mechanisms do not do well on the second count. This article from The Electricity Journal examines the benefits of rate mechanisms that allow for frequent automatic changes to rates to reflect changing fuel and purchased power costs. They explain that such costs constitute a large portion of utility expenditures, are more volatile than physical plant costs, and are beyond the control of the utility. Adjustment clauses therefore provide a fair and efficient means of reflecting these costs in the price of electricity.