Using the Electric Fuel Adjustment Clause

The Purpose of the Fuel Adjustment Clause

Electric utility rates are set in advance through a rate case that establishes base rates for months or years into the future. But power supply costs — typically 60–75% of a distribution utility's total costs — are inherently variable. Fuel prices fluctuate with commodity markets, and wholesale electricity prices respond to weather, demand, and generation availability. The fuel adjustment clause (FAC) solves this problem. It provides a mechanism for passing actual power supply costs to customers in near-real-time, ensuring that the utility neither profits from high power costs nor absorbs losses from cost spikes that its rates did not anticipate.

The FAC Formula

Most FAC mechanisms use a formula that compares actual power supply costs per kilowatt-hour to the base rate power cost component. The difference — positive or negative — becomes the FAC adjustment applied to customer bills. A simplified formula: FAC = (Actual Power Cost per kWh) − (Base Rate Power Cost per kWh). If actual costs are $0.070 per kWh and the base rate includes $0.065 per kWh for power, the FAC surcharge is $0.005 per kWh. If actual costs drop to $0.060, customers receive a $0.005 credit. The specific formula varies by utility and regulatory jurisdiction, and the regulatory filing that establishes the FAC defines the specific formula and application methodology.

Accounting Treatment

Under the FERC Uniform System of Accounts, over- or under-collected power costs subject to FAC treatment may be recorded in regulatory asset or liability accounts. Account 182.3 (Other Regulatory Assets) or a similar account captures under-recovered power costs to be collected in future periods. Account 254 (Other Regulatory Liabilities) captures over-recovered costs to be refunded. The amortization period matches the regulatory recovery period established in the FAC mechanism and should be documented in board-approved accounting policies.

Regulatory Approval Requirements and Administration

The fuel adjustment clause must be approved by the entity with authority over the utility's rates — the board of directors for an electric cooperative, the city council for a municipal utility, or a state public utility commission for investor-owned utilities. The approval establishes the formula, the applicable billing periods, the frequency of adjustment, and the audit rights that allow regulators or board members to verify correct application. Many utilities commission periodic FAC audits to confirm that power cost allocations are accurate and that the clause is operating as designed. Transparent administration of the FAC — with clear documentation and regular reporting to the board — builds the confidence of customers and regulators that the mechanism is being used as intended.