Fuel Cost-Sharing and Utility Returns

Research examining whether fuel cost-sharing mechanisms justify higher allowed returns on equity for regulated electric utilities in the United States

Research & Analysis — U.S. Regulatory policy · utility economics · energy transition finance

June 2026

Key Takeaway

Fuel cost-sharing mechanisms do not alter utility risk profiles in a manner that justifies higher allowed returns on equity. While fuel cost-sharing may introduce earnings variability, it does not increase the systematic risk that underpins the cost of equity and does not warrant adjustments to authorized ROEs.

Overview

This research examines a key regulatory question facing regulated electric utilities in the United States: when utilities are required to share a portion of fuel cost risks and rewards with customers, should regulators increase their allowed returns on equity?

Utilities often oppose fuel cost-sharing (FCS) mechanisms on two grounds: that greater exposure to fuel cost fluctuations increases financial risk and warrants higher investor returns, and that utilities should not bear financial responsibility for factors outside their operational control, such as fuel prices.

Drawing on financial theory, regulatory precedent, and utility finance principles, this analysis evaluates both claims and finds that FCS mechanisms do not justify changes to authorized returns on equity.

Analytical Approach

The analysis draws on regulatory commission decisions across multiple U.S. jurisdictions, precedent cases involving fuel cost adjustment mechanisms, and utility risk frameworks used in ROE determination. A central distinction throughout is the difference between short-term earnings volatility and long-term systematic risk, the latter being what regulators should price in authorized ROEs.

Output

Prepared as an independent research report for RMI, an independent nonprofit working to accelerate the transition to a clean energy economy.