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Report | 2023

Strategies for Encouraging Good Fuel-Cost Management

A Handbook for Utility Regulators

By Joe DanielRachel Gold, Jeremy Kalin (Avisen Legal), Albert Lin (Pearl Street Station Finance Lab), Kaja Rebane
Download the report below

Fuel costs have been hazardously high for families across the United States for years, and they have recently gotten worse. From extreme weather events that cause natural gas shortages to global geopolitical catastrophes like Putin’s War in Ukraine, fuel costs have been on a rollercoaster; and they typically hit hardest when folks can least afford it. But the burden is not shared equally.

Utilities typically handle fuel costs through fuel adjustment clauses. Under these policies, 100 percent of the cost of fuel is passed onto customers. When fuel costs spike, only utility customers take the hit. If a utility company is frugal with its fuel, it’s never rewarded for its efficiency; and when it burns more than it should, customers are stuck with the bill.

This creates two problems: 1) It creates no financial incentive for utilities to manage their fuel costs carefully, and 2) It offers regulators little visibility into how efficiently the utility is running. At a time when utilities have abundant opportunities to innovate in ways that can streamline how they produce electricity and reduce costs for customers, business as usual is creating hardship for homes and a crisis for our climate. In this report, we explore six ways that regulators can act to relieve fuel-cost burdens across America:

  • Fuel-cost sharing: Companies bear part of the risk of fuel-cost volatility
  • Fuel-cost true-up removal: The risk of fuel-price volatility is shifted back to utilities
  • Fuel-risk reduction tariffs: Rate designs encourage utilities to better manage fuel costs and limit the risk to customers
  • Planning and procurement: Process changes help reduce future fuel costs (e.g., all-source solicitation and procurement, fuel management plans, etc.)
  • Strategies to increase access to information: Processes help inform regulator decisions about fuel costs (e.g., regular audits, enhanced prudence reviews, etc.)
  • Efficiency ratio: A performance incentive mechanism rewards the utility for how efficiently it generates a megawatt-hour of power

There is no one-size-fits-all policy that will resolve fuel-cost burdens everywhere and for all communities. The variety of strategies found in this report offer a number of ways that regulators can incentivize utilities to keep costs down while keeping the lights on.