Utility customers often bear the cost of fuel price volatility — paying more when gas prices spike and seeing little protection when markets are turbulent. Additionally, utility companies rarely have incentives to mitigate those price increases. This is because under traditional policies, utilities in North Carolina pass 100% of fuel costs directly to customers. But what if utilities shared in that risk?

RMI analyzed how a fuel cost-sharing policy could reduce bill volatility for North Carolina utility customers. Our analysis shows that fuel cost-sharing could have mitigated the risks of fuel price volatility and delivered major financial benefits to utility customers in North Carolina over the past five years. Between 2020 and 2024, customers would have seen $89 million in cumulative bill savings over the 5-year period.

These results do not account for changes in utility behavior that could have created even greater benefits for both customers and investors. Our analysis assumed a 0.5% cap on the amount of sharing (as a percentage of the prior year’s total retail electric revenue), which was hit in one year (2022, a year when gas prices were particularly volatile). By shielding customers from some of the risks of fuel price volatility and incentivizing good utility fuel-cost management, fuel cost-sharing can deliver significant financial relief for customers, especially in years of volatility.

Exhibit 1

In most jurisdictions, utilities pass 100% of fuel costs through to ratepayers using what is often referred to as a Fuel Adjustment Clause (FAC) and in North Carolina is called the Fuel Charge Adjustment Rider (FCAR).[1] This mechanism allows utilities in North Carolina to pass on variations in fuel costs to customers without bearing financial responsibility for deviations between forecasted and actual expenses.

While FCARs ensure timely recovery of fuel and power costs, they also insulate utilities from the financial consequences of fuel procurement decisions; if North Carolina utilities manage to reduce their fuel costs, they retain none of the savings, and if they spend more than is budgeted, their customers pick up the bill. This reduces the incentive for utilities to optimize fuel procurement or explore alternatives that could reduce exposure to volatile fuel markets, and it gives regulators limited visibility into whether the utility spent more than was necessary. As a result, utilities lack a financial incentive to reduce how much money they spend on fuel and have no financial stake in mitigating fuel price volatility.[2]

Fuel and power supply pass-through costs can represent a substantial portion of customers’ monthly bills and are subject to significant volatility. The use of 100% pass-through mechanisms contributes to this volatility borne by customers, creating particular challenges for low-income and fixed-income households and contributing to overall bill instability.[3]

 The long-standing justification for traditional fuel pass-through mechanisms like FCARs has been that fuel prices are outside of utility control and therefore should not affect earnings. However, this rationale is increasingly outdated. In reality, utilities have considerable influence over their fuel-related costs because they decide how much gas-fired generation to build, negotiate fuel supply contracts and delivery terms, choose dispatch strategies that determine fuel burn, and have access to a growing array of low-cost and cost-stable alternatives such as wind, solar, battery storage, energy efficiency, and demand response.

FCARs create a situation that economists refer to as “moral hazard,” which exists when one party makes the decisions while another bears the risk of those decisions. By shifting some of the financial risk of fuel price volatility from ratepayers to utilities, fuel cost-sharing mechanisms address this moral hazard by giving utilities “skin in the game.” In doing so, fuel cost-sharing creates an incentive for utilities to lower fuel costs, such as through hedging or by deploying more low- or no-fuel resources like solar, wind, energy efficiency, and energy storage.

Under a fuel cost-sharing policy, the utility sets a “fuel budget” at the beginning of the year based on expected fuel costs. At the end of the term, if actual costs are greater than expected, the utility pays a percentage of that difference, saving customers money by reducing the amount they would have paid otherwise. If actual costs are lower than expected, the utility retains that difference as a reward, and customers save money from the reductions in fuel costs overall.

Recent price spikes and the volatility of natural gas have given rise to increased consideration of fuel cost-sharing mechanisms. Fuel cost-sharing policies have been implemented in nine states, including Missouri, Wisconsin, Washington, Montana, Idaho, and Wyoming.[4] In 2025, Nevada passed legislation authorizing the public utilities commission to investigate fuel cost-sharing.

Exhibit 2

RMI’s fuel cost-sharing calculator uses historical fuel price data to simulate how different sharing mechanisms would affect customer bills and utility costs. Our analysis models:

• A 10% sharing rate (meaning that the utility investors and customers share 10% of the difference between expected and actual fuel costs)
• A sharing cap that limits the total amount of sharing to 0.5% of the prior year’s total retail electric sales.

Exhibit 3

 Illustrative policy design as used in the calculator

Exhibit 4

According to our analysis, in years when actual fuel costs were higher than expected, customers would have seen lower overall bills, ranging from roughly $14 million in savings in 2021 and jumping to $69.4 million (in 2025 constant dollars) in 2022, a year when fossil fuel prices skyrocketed as a result of Russia’s invasion of Ukraine. In those years, the utilities would have borne some of the risks of fuel price volatility. In 2020 and 2024, when actual fuel costs were lower than expected, not only would customers have benefited from direct bill savings, but utilities would have received rewards as well, creating an incentive to seek out further cost efficiencies in order to lower overall fuel costs in the future.[5]

While these savings are modest, they are meaningful to retail residential customers while not jeopardizing the utilities’ bottom lines. The amount of ratepayer savings seen in 2021, 2022, and 2023 represent 0.10%, 0.50%, and 0.12%, respectively, of the prior year’s total electric retail revenues in North Carolina. To put those figures into context, total electric retail revenues fluctuated between 2.59% and 5.96% annually across those same years. The natural fluctuation of utility revenues is a full order of magnitude greater than what would be induced by fuel cost-sharing.

It is important to note that these results do not account for changes in utility behavior that could have created even greater benefits for both customers and investors. The intent of this policy is to create “win-win” scenarios where both the utility and customers benefit. In a real-life scenario where this policy is implemented, a rationally acting utility should respond to the fuel cost-sharing policy by pursuing strategies to reduce fuel expenditures, resulting in a situation where the utility lowers costs for customers and is able to keep some of the resulting savings.

Our analysis shows that fuel cost-sharing could have delivered savings for ratepayers in North Carolina by creating incentives for utilities to pursue cost efficiencies. In evaluating fuel cost-sharing, policymakers would need to consider a number of policy design options. This includes how expected fuel costs should be determined (e.g., using forecasted vs. historical baselines), what the level of sharing should be, and other considerations. Expanding cost-sharing to include purchased power and integrating complementary tools — such as fuel management plans, hedging strategies, independent audits, and clean energy investments — can further reduce fuel cost volatility and improve accountability. Today, most utility customers bear all the fuel cost risk, but there are many options to better shield them from it that can be implemented right now.

RMI’s analysis:

• Does not adjust for electricity imports/exports or power purchase agreements, which could lead to results being under- or overestimates.
• Includes a retrospective analysis and does not model potential changes in utility investments and operations that may result from a fuel cost-sharing policy (e.g., greater investment in fuel-free resources like solar or energy efficiency).
• Uses deterministic load assumptions. Uncertainty around load could lead to results being under- or overestimates.
• Excludes redispatch and makes conservative assumptions about a changing generation mix over time.

[1] FCARs are rate riders that true up the revenues collected from customers to match the utility’s actual fuel expenditures.

[2] For additional discussion of this dynamic, see Joe Daniel et al., Strategies for Encouraging Good Fuel-Cost Management: A Handbook for Utility Regulators, RMI, 2023, https://rmi.org/insight/strategies-for-encouraging-good-fuel-cost-management/.

[3] See EQ Research LLC (prepared for the Environmental Defense Fund), The Role of Fuel Costs in Duke Energy’s North Carolina’s Retail Rates From 2017 Through March 2024, April 18, 2024 (Updated April 22, 2024). https://www.edf.org/sites/default/files/documents/Issue_Brief_Narrative_4_22_24.pdf

[4] In addition, in 2025, Colorado established a fuel price volatility performance incentive mechanism (PIM).

[5] For more information see https://www.eia.gov/todayinenergy/detail.php?id=62203.