Assessing the effect of fuel adjustment clauses on electric utility efficiency

Thesis/Dissertation · Sun Jan 01 04:00:00 EST 1984

OSTI ID:5787691

Mahrenholz, G J

Fuel adjustment clauses (FACs) have been adopted by state and federal regulatory authorities on a widespread basis to help preserve electric utility revenues during times of rapid, unexpected fuel price inflation. Economic theory suggests, however, that FAC use may generate several inefficiencies. These include a factor bias where fuel is favored relative to other productive inputs, managerial inefficiency, and a disincentive to bargain or search effectively for the lowest price fuel of a given quality. This analysis employs an econometric model of electric utility production cost. Using observations of 70 privately owned electric utilities for the year 1978, an index of FAC value to each firm is constructed for both retail and wholesale clauses. The results suggest retail FAC use encourages a fuel factor bias. The major finding is the sensitivity of this assessment to a change in the regulatory lag component of the FAC index. Regulatory lag measures the time it takes to process a rate case. If this measure is adjusted to consider the type of test a regulatory commission uses, greater inefficiency from FAC use may be inferred. Moreover, a move to this test period adjusted measure suggests both wholesale and retail FACs generate managerial inefficiency in addition to the fuel factor bias linked to retail FAC use.

• OSTI ID: 5787691
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
296000* -- Energy Planning & Policy-- Electric Power
ECONOMIC IMPACT
EFFICIENCY
ELECTRIC UTILITIES
FUEL ADJUSTMENT MECHANISMS
INCOME
PUBLIC UTILITIES
RATE STRUCTURE
REGULATIONS