The Impact of the Automatic Adjustment Clause on Fuel Purchase and Utilization Practices in the U. S. Electric Utility Industry

The purpose of this paper is to examine the combined influence of the search and switching effects of the automatic fuel-adjustment clause on the prices paid by utilities for the aggregate-fuel input. Then, given this combined effect, an attempt is made to separate the individual influences of the two-component effects. Findings indicate that the presence of an automatic fuel-adjustment clause leads the regulated firm to pay a higher price for the aggregate-fuel input than would be paid in the absence of the clause. The severity of this aggregate-fuel input than would be paid in the absence of the clause. The severity of this aggregate-fuel price differential is estimated to be on the order of 6 cents/10/sup 6/ Btu, or approximately 10% of the average fossil-fuel price. Moreover, this aggregate effect is found to result from the induced disincentive to switch to less-expensive fuels rather than the payment of higher prices for the individual-component fuels. 21 references, 5 tables.