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55 Notre Dame Law. 333 (1979-1980)
Regulated Industries' Automatic Cost of Service Adjustment Clauses: Do They Increase or Decrease Cost to the Consumer

handle is hein.journals/tndl55 and id is 325 raw text is: Regulated Industries' Automatic Cost of Service
Adjustment Clauses: Do They Increase or Decrease
Cost to the Consumer?
Elizabeth Warren*
I. Introduction
Inflation in the past decade has affected both the overall financial condi-
tion of public utilities and the rates they charge. Utility bills have risen
sharply,' stimulating public interest in ratemaking. Both the utilities, who
want increased earnings, and the consuming public, who want low utility bills,
have exerted substantial pressure on regulatory commissions2 and on
legislatures.  Utility   commissions     have   proposed    numerous     regulatory
changes.3 In attempting to provide quick, visible solutions, the commissions
and the courts have accepted a patchwork of pricing techniques without con-
sistently considering their impact on total customer costs.
Among the hundreds of regulatory changes proposed, the automatic cost
of service adjustment clause has been the primary one used to offset the impact
of inflation on production costs. Individual proposals differ markedly,4 but in
general the clauses propose to pass through to the customer the utility's costs as
they are incurred. The amount a customer pays for the utility service would
vary directly with the amount the utility expended to produce the service.
The automatic cost adjustment clause has been debated in popular5 and
professional6 literature as well as in the courts, commissions, and legislatures.
Much of the debate has been characterized by the unquestioned acceptance of
rubrics of what would cost or save consumers money. A number of varying cost
pass-through clauses were rapidly accepted during the utilities' collective finan-
cial crisis of 1974.7 More recently, however, many courts have begun to
reevaluate the cost adjustment clauses and to review their initial acceptance of
them.8 Regulatory commissions are beginning to exhibit ambivalence regard-
* Assistant Professor of Law, Bates College of Law, University of Houston. The University of
Houston generously supported research for this article with a Research Initiation Grant.
1 In 1977 the average annual electric bill rose by almost 14%, and in 1978 it rose 8.8% to just over
$3.57 annually. 1979 Statistical Report, ELECTRICAL WORLD, Mar. 15, 1979, at 51, 75. See also tables on
1976-78 increase in utility rates in Electric Rates Keep Climbing, Bus. WEEK, May 22, 1978, at 183.
2 See note 87 infra.
3 Among the new proposals or the suddenly revitalized proposals of earlier decades are interim rate
relief, expedited rate-case procedures, future test periods, pro forma adjustments, end-of-period rate bases,
attrition allowances, tax pass-on provisions, annual rate adjustments, and monthly fuel adjustments.
Latimer, The Cost and Efficiency Revenue Adjustment Clause, PuB. UTIL. FORT., Aug. 15, 1974, at 19, 20.
4 E.g., Sarikas, What Is New in FuelAdjustment Clauses, PuB. UTIL. FORT., June 19, 1975, at 32, 35.
5 E.g., The FuelAdjustment Caper, 39 CONSUMER REPORTS 836, 839 (Nov. 1974) [hereinafter cited as Fuel
Adjustment Caper].
6 For a thorough discussion of the positions taken by various identified consumer and utility groups,
see Carver, Developments in Regulations: Adjustment Clauses, 53 DENVER L.J. 663, 665-68 (1976).
7 See note 85 infra and accompanying text.
8 Typical of courts' position is that taken in Wisconsin's Environmental Decade, Inc. v. Public Serv.
Comm'n, 81 Wis. 2d 344, 260 N.W.2d 712 (1978). Here the court recognized that cost adjustment clauses
had been used in Wisconsin since 1918, but that the typical adjustment clause is the more limited fuel
adjustment clause. Id. at 714. The court ruled that expanded adjustment clauses violate statutory re-


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