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

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  • R. Mark Isaac

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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  • R. Mark Isaac, 1982. "Fuel Cost Adjustment Mechanisms and the Regulated Utility Facing Uncertain Fuel Prices," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 158-169, Spring.
    • Handle: RePEc:rje:bellje:v:13:y:1982:i:spring:p:158-169
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    Cited by:

    1. Aouam, Tarik & Muthuraman, Kumar & Rardin, Ronal L., 2016. "Robust optimization policy benchmarks and modeling errors in natural gas," European Journal of Operational Research, Elsevier, vol. 250(3), pages 807-815.
    2. Matisoff, Daniel C. & Noonan, Douglas S. & Cui, Jinshu, 2014. "Electric utilities, fuel use, and responsiveness to fuel prices," Energy Economics, Elsevier, vol. 46(C), pages 445-452.
    3. Emeka T. Nwaeze, 2000. "Positive and Negative Earnings Surprises, Regulatory Climate, and Stock Returns," Contemporary Accounting Research, John Wiley & Sons, vol. 17(1), pages 107-134, March.
    4. Hahn, Robert W., 1995. "Government markets and the theory of the Nth best," Journal of Public Economics, Elsevier, vol. 57(2), pages 219-234, June.
    5. Kumar Muthuraman & Tarik Aouam & Ronald Rardin, 2008. "Regulation of Natural Gas Distribution Using Policy Benchmarks," Operations Research, INFORMS, vol. 56(5), pages 1131-1145, October.

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