Effect of a fuel-adjustment clause on a regulated firm's selection of inputs
Many regulatory commissions have adopted fuel-adjustment clauses, which affect both profit risk and profit level. The author uses a model of regulation which oversimplifies the regulatory environment, which makes it possible to show that a fuel-adjustment clause enables a firm to alter the risk-return package it offers to investors through its input choices. If demand is inelastic, market value can be increased by using relatively more fuel in the production process. Regulators monitor fuel purchase negotiations, fuel-use decisions, plant maintenance practices, etc., and the extent of intervention affects the ability of the firm to change inputs and alter its risk-return position. Regulators can also use fixed-heat-rate versus variable-heat-rate clauses and alterations in the percentage of fuel costs passed on to customers. 18 references.
- Research Organization:
- Univ. of Kentucky, Lexington
- OSTI ID:
- 5744255
- Journal Information:
- Energy J.; (United States), Journal Name: Energy J.; (United States) Vol. 6:2; ISSN ENJOD
- Country of Publication:
- United States
- Language:
- English
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