Legal Definitions - automatic-adjustment clause

An automatic-adjustment clause is a specific provision included in the approved rate schedules of public utility companies. This clause allows the utility to increase the prices it charges its customers without first undergoing a lengthy public hearing or obtaining direct approval from state regulatory bodies. This automatic rate increase is triggered when certain predefined operating costs, which are typically beyond the utility's direct control, rise above a specified level. The purpose is often to enable utilities to quickly recover unavoidable cost increases and maintain financial stability.

Here are some examples of how an automatic-adjustment clause might apply:

• Electricity Company and Fuel Costs: Imagine a large electric utility that generates a significant portion of its power using natural gas. If the wholesale market price for natural gas experiences a sudden and substantial increase, an automatic-adjustment clause in the utility's approved rate schedule would permit it to add a temporary surcharge to customer electricity bills. This surcharge would help cover the higher fuel costs without the utility needing to file a new rate case and go through a public hearing process for each fluctuation in gas prices.

  This illustrates the term because the rate increase is directly linked to a specific, fluctuating operating cost (natural gas fuel) and occurs without the usual regulatory review and public hearing for that particular adjustment.

• Water Utility and Chemical Treatment Expenses: A municipal water utility relies on specialized chemicals to purify and treat drinking water before it reaches homes and businesses. If there's a global shortage or a significant price hike in these essential water treatment chemicals, an automatic-adjustment clause could allow the water utility to implement a temporary increase in water rates. This adjustment would help offset the increased cost of purchasing the necessary chemicals, ensuring the continued safe supply of water without immediate, extensive regulatory proceedings.

  This demonstrates the clause by showing how a utility can quickly respond to an unforeseen increase in a critical operational expense (treatment chemicals) by adjusting rates without the typical regulatory delays.

• Waste Management and Environmental Fees: Consider a private waste management company that provides residential and commercial trash collection services. If new state or federal environmental regulations are enacted that impose significant, unavoidable fees or taxes on the disposal of waste at landfills, an automatic-adjustment clause in the company's service agreements could allow it to slightly increase its collection fees. This adjustment would cover the new regulatory compliance costs, enabling the company to continue operations without needing to renegotiate every contract or undergo a full rate review for each new fee.

  This example highlights how the clause can be used to pass on increases in government-mandated costs (taxes or fees) that are outside the utility's direct control, again bypassing a full public hearing for each such adjustment.