Rate adjustment clauses, which practitioners also call trackers or riders, are a mechanism that lets utilities reflect changes in their costs in rates between rate cases. These rate mechanisms have proliferated over the last several decades. Utility ratemaking structures like adjustment clauses sit at the intersection of current concerns about affordability and utility business models.
While the link between rates and customer bills is straightforward, the relationship between rate structures like adjustment clauses and utility behavior over time is sometimes hidden beneath the surface. The biggest issue with adjustment clauses is their tendency to make utilities indifferent to managing a cost that ratepayers are rightly concerned about.
This past week I, along with colleagues from Align Energy Advisors, the Future of Heat Initiative and PPL Electric, unpacked the pros and costs of adjustment clauses as part of the “Easy Rider(s): Friend or Foe to Affordability?” panel at the NARUC 2026 Summer Policy Summit. Credit for the clever title goes to my colleague Sarah Freeman!
Commissioner Kristy Nieto from Wisconsin opened with an explanation of utility ratemaking, where the regulator examines all costs and sets a just and reasonable rate. Traditionally, utility commissions do not allow utilities to modify only one category of costs, a restriction that regulators call the prohibition on single-issue ratemaking. Examination of only a part of a utility’s costs can be unrepresentative and unfair. For example, a utility may only bring forward a category of costs that is increasing, while leaving decreasing cost categories unexamined. This would bias rates upwards compared to the true underlying costs.
Adjustment clauses operate as an exception to the prohibition on single-issue ratemaking. Most prominently, commissions instituted fuel adjustment clauses for electric utilities after international energy crises in the 1970s. This reform allowed utilities to cover the costs of higher fuel prices more quickly without the delay of a rate case, which ensured ongoing safe and reliable service and avoided bankruptcies. Since that time, utility commissions have allowed adjustment clauses to cover a wide variety of other cost categories, spanning from pensions to ongoing capital investments.
In my view, some states have gone too far, allowing too many adjustment clauses. Individually, some adjustment clauses are unnecessary, and commissions can fold them back into base rates. Collectively, having a plethora of adjustment clauses undermines ratepayer protections and utility cost containment incentives, and can administratively burden utility commissions and stakeholders. State commissions would do well to return to a more limited set of adjustment clauses, screening each against three criteria:
- Significance: an adjustment clause is only important if the magnitude of costs is a noticeably important portion of the revenue requirement.
- Volatility: an adjustment clause is only necessary if the cost category can change quickly and unexpectedly.
- Independence: an adjustment clause is only fair if the utility cannot take prudent steps to manage the cost, and it is uncorrelated to other categories of costs.
During the event, Jamie Van Nostrand from the Future of Heat Initiative joked that this should be called the “LeBel Test”!
Fuel adjustment clauses satisfy the first two criteria but require further examination under the third. These trackers pass through vertically integrated electric utilities’ fuel costs directly to ratepayers. If fuel costs are lower than expected, customers can benefit, but they are equally exposed to fuel cost increases. By the same token, the electric utility is fully shielded from fuel price risk. This leads to the business model problem, where the utility is indifferent to managing a cost that ratepayers are rightly concerned about.
This likely means utilities over rely on fuels with volatile prices like natural gas. Instead, we want to encourage utilities to manage these costs through several different means, including contracting, hedging, and changing their generation investment mix over time. Several states have introduced fuel cost sharing mechanisms to help address this business model challenge, but over twenty states still have automatic pass-through of all fuel and purchased power costs.
Reform to adjustment clauses is a part of a broader set of necessary reforms to utility business models. Streamlining the number of adjustment clauses and creating smarter incentives – like fuel cost sharing – are important steps for many jurisdictions. These should come along with other reforms like fair multi-year rate plans and smarter performance incentives, which encourage utilities to control costs and act in the public interest. A fairer and more efficient overall ratemaking model is foundational for our 21st century regulatory system.
