Opinion ID: 2391090
Heading Depth: 1
Heading Rank: 5

Heading: Fuel Adjustment Clauses in General

Text: A fuel adjustment clause (FAC), once authorized by the commission as a part of the utility's rate structure, enables the utility to pass on to the consumer any increase (or decrease) in the cost of fuel automatically and without any need for further consideration of compensatory decreases (or increases) in other operating expenses. As such, it is a radical departure from the usual practice of approval or disapproval of filed rates, in the context of a general rate case. Even under the file and suspend method, by which a utility's rates may be increased without requirement of a public hearing, the commission must of course consider all relevant factors including all operating expenses and the utility's rate of return, in determining that no hearing is required and that the filed rate should not be suspended. See State ex rel. Missouri Water Co. v. Public Service Comm'n, 308 S.W.2d 704, 718-19, 720 (Mo.1957). However, a preference exists for the rate case method, at which those opposed to as well as those in sympathy with a proposed rate can present their views. See State ex rel. Laclede Gas Co. v. Public Service Comm'n, 535 S.W.2d at 574. Numerous objections have been raised to the use of fuel adjustment clauses. Even those states which approve them have required numerous safeguards surrounding their use, as has the commission in this case. The principal objections have been that to permit such automatic adjustments would be an abdication of the commission's rate making function; that it would violate the spirit and purpose of regulatory law; that it allows an increase in rates without consideration of all factors, thus overweighing the effect of one factor, and ignoring compensating economies; that it shifts the burden of proving reasonableness or unreasonableness from the utility to the consumer; that it violates the principle that utility rates should be definite and published in order to insure stability and notice of rates to consumers and in order that consumers understand their rates and thus have the knowledge necessary to determine if complaint is warranted; that utilities would lose any incentive to keep down fuel costs where they know such costs can be fully and automatically passed on to the consumer; and that presence of a fuel adjustment clause may bias selection of fuels or production methods so that the utility will chose the method which allows it to pass on the most cost and is thus cheapest to it, rather than the method which is cheapest overall. See e. g. discussion and cases cited in Foy, Cost Adjustment in Utility Rate Schedules, 13 Vanderbilt L.Rev. 663, 664 (1959-60); Trigg, Escalator Clauses in Public Utility Rate Schedules, 106 U.Pa.L.Rev. 964, 969-973 (1957-58); Martin, The Fuel Adjustment Clause and Its Role in the Regulatory Process, 47 Miss.L.J. 302, 309 (1976). [2] Conversely, traditional ratemaking methods have been subjected to severe criticism in that they are expensive and time consuming to the detriment of both the utility and consumers. The fuel adjustment clause is considered a more efficient and effective substitute because, among other reasons, it reduces regulatory lag and thus permits a utility to recover increased fuel costs in times of inflation without undue delay that could be harmful to its economic structure and thus reduce investors' incentives to invest in the utility. Permitting such automatic adjustment would also reduce the expense of the regulatory process by decreasing both the magnitude and frequency of rate cases. Administrative safeguards could prevent most possible abuses mentioned by opponents of FAC's. The factors combine to justify an FAC as a means of integrating public utility rates, which are generally of a rigid nature, into a flexible national economy. Re Central Maine Power Co., 22 P.U.R.3d 466, 469 (Maine 1958). See Foy, 13 Vanderbilt L.Rev. at 668-69; Trigg, 106 Pa.L.Rev. at 969-73; Martin, 47 Miss.L.J. at 310. Numerous public service commissions have approved fuel adjustment clauses in the face of the above arguments principally because of a fear of inflation. Fewer courts have addressed the legal basis for the use of an automatic adjustment clause. The two leading cases approving such clauses, generally relied on in other cases, are Norfolk v. Virginia Electric and Power Co., 197 Va. 505, 90 S.E.2d 140 (1955), and Chicago v. Illinois Commerce Comm'n, 13 Ill.2d 607, 150 N.E.2d 776 (1958). [3] However, as the supreme court of Wisconsin noted in Wisconsin's Environmental Decade, Inc. v. Public Service Comm'n, 81 Wis.2d 344, 260 N.W.2d 712, 715 (1978), in disapproving an expanded adjustment clause allowing automatic adjustment of costs of power, labor, supplies, steam, and electrical expenses and supervision as well as fuel: [I]t is not up to this court to strike the appropriate balance between public participation and simplicity in rate proceedings. That determination is for the legislature. The determinative issue in this case is whether, giving sec. 196.20(2), Stats., a fair construction, the legislature has authorized the PSC to permit the use of expanded adjustment clauses. So here, our determination is limited to whether or not a fuel adjustment clause has been authorized by the legislature. We conclude not, and thus need not go on to consider whether the commission's order was reasonable and supported by substantial and competent evidence.