THE IMPACT OF THE AUTOMATIC FUEL ADJUSTMENT CLAUSE ON PRODUCTION EFFICIENCY FOR ELECTRIC UTILITIES

This study examines the impact of the automatic fuel adjustment clause on industry performance. The opening chapter contains an introduction to this regulatory tool. A brief history of the implementation of the automatic fuel adjustment clause, as well as a discussion of its costs and benefits to society, is contained therein. The introduction is followed by a review of both theoretical and empirical evidence on the relationship between the presence of an automatic fuel clause and firm performance.;Chapter four contains an empirical analysis of the impact of the automatic fuel adjustment clause on cost efficiency. Cost frontiers are estimated for firms subject to automatic fuel adjustment clauses as well as for firms not subject to this form of regulation. Efficiency measures are computed and compared based on the positions of the frontiers as well as the positions of the firms relative to those frontiers. Both long run and short run efficiency estimates are presented.;The concluding chapter contains a brief outline of the study's contributions. Suggested areas for further research are also discussed.;A simple theoretical analysis of the impact of the automatic fuel adjustment clause on firm behavior is presented in chapter three. Using a three factor model, the firm's profit maximizing input combinations are derived under several scenarios. First, the impact of the automatic fuel adjustment clause on input usage is examined when the adjustment clause is the only form of regulation. Next, input usage is analyzed in the presence of an automatic fuel adjustment clause and rate of return regulation. Finally the assumption of perfectly variable inputs is dropped and the impact of the automatic fuel adjustment clause on input usage is examined in the presence of a fixed capital input. The basic model is extended to examine the relationship between factor utilization and the various components of the automatic adjustment clause. The question of the impact of the automatic fuel adjustment clause on technical efficiency is briefly addressed.