What the charge does
The Kentucky Public Service Commission describes its fuel adjustment clause as a mechanism that permits utilities to regularly adjust the price of electricity, so that rates can reflect the fluctuation of fuel and purchased power costs without a request to change base rates. Natural gas, coal and wholesale power prices can move quickly, and a rate case takes months.
EIA makes the same point from the supply side: the generation portion of a retail bill depends on fuel prices, and natural gas prices and weather strongly influence it. A fuel clause is the tool that carries those swings onto the bill.
How it is worked out
- Base rates include a baseline cost of fuel and purchased power per kWh.
- Each period, the utility compares what it actually spent with that baseline.
- If it spent more, a charge per kWh is added to bills. If it spent less, a credit is applied.
- The regulator reviews the filings for accuracy, and may reset the baseline in a later rate case.
In Kentucky, the clause changes monthly and reflects fuel costs from two months earlier, and the commission says utilities do not earn a profit on the amounts. Other states differ in how often it changes, how much of the change the utility can pass on and what counts as a fuel cost.
An example with made-up numbers
Say the baseline is 3 cents per kWh and the utility's actual fuel and purchased power cost is 3.6 cents. The gap is 0.6 cents. A home that used 900 kWh would see an added charge of 0.6 cents times 900 kWh, or $5.40. If the actual cost were below the baseline, the same math gives a credit.
Source: The baseline and the actual cost are invented to show the method. They are not from a real utility.
Finding it on your bill
Look in the charges section for lines called fuel adjustment, fuel cost recovery, power cost adjustment, energy cost adjustment or purchased power adjustment. Some bills show it as a per-kWh rate. Some fold it into one energy rate. If you cannot find it, ask the utility which line carries it.
Because it changes, two bills with the same kWh can differ even when base rates have not moved. Our guide to why a bill is high lists this among the common causes.
What it is not
- It is not a base rate increase. Base rates change only in a rate case.
- It does not apply everywhere. Some states and some utilities use other mechanisms, and in retail choice markets the supplier's price replaces it.
- It is not always fuel only. Regulators in some states have questioned whether other costs belong in these clauses, so the rules differ.
How to track the charge on your own bills
Write down the fuel adjustment rate from each bill for a year. Compare it with the same month last year, and with the energy rate on the same bill. If the adjustment is large compared with the base rate, fuel costs are a big part of your bill, and a conservation habit will pay off more because the adjustment is billed on every kWh. Gas utilities use similar clauses, billed per therm or per CCF.
Why regulators allow it
Fuel and purchased power prices can change much faster than a rate case can be decided, and a rate case can take most of a year. Without an adjustment clause, a utility would either carry the swings on its own books or file for rate changes far more often. A clause lets the price follow cost more closely, in both directions. The trade-off is that bills can move without a full review, which is why commissions audit the filings.
Sources and further reading
Frequently asked questions
What is a fuel adjustment charge?
A line on some electric bills that passes changes in the utility’s fuel and purchased power costs to customers between full rate cases. It can add a charge or give a credit.
Why did my fuel adjustment charge go up?
Usually because the utility spent more on fuel or purchased power than the baseline in base rates. Weather, natural gas prices and wholesale power prices are common reasons.
Does the utility make a profit on the fuel adjustment?
In Kentucky, the commission says utilities do not earn a profit on these amounts, which are passed through dollar for dollar. Rules differ by state, so check yours.
Can I avoid a fuel adjustment charge?
Not directly. You can lower its effect by using less energy, since it is billed per kWh. In retail choice states, your supplier’s price takes the place of it.