Most states with traditional retail electric markets (i.e., states in which retail service is provided by a regulated electric utility with an exclusive franchise service area), regulate the price of electric utility services using mechanisms that separate the review, approval, and recovery of certain frequently changing costs, such as fuel and purchased power costs, from the corresponding scrutiny of the more fixed and predictable capital and operating costs associated with financing and maintaining the assets of the utility. The more variable, unpredictable costs are recovered in rate components that are allowed to change periodically—at least every year and in many cases more frequently—without the need for a full rate case that reviews all of a utility’s cost of service. Instead, these rate components are allowed to change roughly contemporaneously with changes in the utility’s underlying related costs. (The remaining fixed or more predictable costs are recovered in “base rates” that are typically modified only every few years in formal rate cases.) These cost recovery mechanisms go by different names, but here we discuss them under the general appellation of “Automatic Adjustment Clauses” or AACs.

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