The energy market is always changing, and fuel prices can swing wildly, ultimately affecting your utility bills. To control your operational costs, you need to understand the fuel adjustment clause (FAC). This adjustment is tied to monthly variable fuel costs that affect utility rates for commercial customers across all industries. In this article, we’ll explain the FAC, how it’s calculated, and how you can manage fuel-driven price fluctuations to keep your commercial energy bills stable.
What Is The Fuel Adjustment Clause (FAC)?
The fuel adjustment clause (FAC) is a charge on your utility bill that accounts for the fluctuating fuel costs of energy generation. This adjustment allows the utility or retail energy supplier to pass on variable fuel costs to the customer without changing the underlying rate structure of their service. Typically, this charge is monthly and varies based on market fuel prices, energy supply contract terms, demand changes, and power generation costs.
While fuel adjustment charges are itemized on the bill, it can be hard to fully understand the impact without knowing how to accurately assess the charges. Since the FAC is so volatile, you may see changes in your bill even if your usage is the same. Read on to learn more about how this charge is calculated and displayed on your bills
How Is The FAC Rate Calculated?
The FAC rate is based on the utility’s actual cost to buy fuel or electricity from external suppliers or the wholesale energy market. That cost is then spread across all customers based on their usage for that period. So, if fuel prices go up due to a natural disaster or supply chain issues, the FAC rate will reflect that. Utilities calculate the FAC rate by tracking fuel costs over a period and then adjusting the charge to ratepayers. There are several components that directly impact how this expense is calculated.
Energy Costs
As fuel prices go up or down, the FAC rate is adjusted to match. The rate calculation includes the cost of coal, natural gas, or renewable sources used in power generation. In utilities located in deregulated energy states, the FAC rate directly impacts the price to compare and causes it to change monthly, quarterly, or semi-annually.
Consumption Levels
The FAC is also based on how much energy a customer uses, so higher energy users pay a bigger share of the fuel costs. Understanding the components of a business electricity bill can help you see how much of your costs are fuel-related and not just energy usage. Review your bills for demand charges and other variable costs to see where you can save.
Does The FAC Rate Change?
Yes, the FAC rate changes regularly as fuel and energy demand prices change. Unlike fixed charges, the FAC is directly tied to fuel price changes, so businesses can experience price spikes based on market volatility. Some of the factors influencing the change in fuel costs include:
Energy Market Trends
Many things can cause FAC fluctuations, including international energy market trends, seasonal demand spikes, and geopolitical issues affecting fuel prices. For example, unexpected weather, changes in energy policies, or wars like the Russia-Ukraine conflict can disrupt supply chains and drive up fuel prices.
Commodity Pricing
Market trends for energy pricing and fuel costs can also impact how often the FAC rate changes. Utilities often pre-purchase energy futures to meet the needs of their ratepayers. When commodity futures are high, this can impact the FAC, causing increases in the price to compare. In the PPL Electric utility territory, the electric price to compare went from roughly 6.5¢ per kWh to 14.5¢ per kWh in just eighteen months due to electric market price increases. Businesses can benefit from staying current on energy industry trends and forecasts to get insight into future FAC trends. Hiring an energy broker to watch the market or reading about commodity price trends will help you prepare for future changes in cost.
Do All Utilities Calculate FAC The Same?
No, the calculation of the FAC can vary greatly between utility providers and their energy-sourcing methods. Some utilities calculate the FAC based on a fixed formula, while others adjust their calculation to include more factors, such as fuel procurement contracts and changes in energy transmission and capacity costs.
That means businesses in different regions can have very different FAC rates even if they use the same amount of electricity. The lack of standardization makes it hard for commercial customers to predict or compare FAC rates, especially if they have multiple facilities in different states or municipalities.
For businesses looking for consistent rates, choosing a retail energy supplier can sometimes offer a more stable pricing model. Energy suppliers are often willing to assume the risk of fluctuating FAC and offer fixed energy rates to their customers. Energy brokers can also help companies find suppliers with manageable FAC rates by looking across multiple suppliers and taking into account the fuel adjustment clause and contract terms.
How Does The FAC Affect Your Bill?
For commercial energy customers, the FAC affects monthly operating expenses, especially for energy-intensive industries such as industrial manufacturing. Since the FAC is a variable cost, a small increase in fuel prices can mean a big jump in total utility costs. Some of the biggest impacts on your bill include:
Higher Costs During Peak Demand
Since FAC rates increase with energy demand, businesses may see bigger bills during peak demand seasons like summer or winter when fuel prices and energy usage peak at the same time.
Surprise Charges
Since fuel prices are unpredictable, FAC adjustments can mean surprise charges, which can impact budgeting and financial forecasting. Businesses looking to manage this volatility can consider fully-bundled fixed-rate energy contracts, which can protect them from fluctuations in market prices.
Higher Total Energy Costs
Ultimately, the FAC adds another layer to the base energy cost so commercial customers see higher rates, especially during market volatility. A utility bill audit can help businesses identify where the FAC is costing them the most so they can better understand and potentially negotiate FAC terms in their energy contracts.
What Can You Do?
Managing the FAC on your bill requires being proactive and informed. Here are a few things commercial energy customers can do to control their FAC costs:
Monitor Market Trends
Stay informed about fuel market trends so you can anticipate FAC rate changes. Diversegy’s 2025 energy price forecasts and energy industry insights are great resources to understand potential future fuel cost changes.
Review Contract Terms
Review the fine print of your energy contracts, especially the material change clause and FAC terms to see how flexible your rates are to changes. Working with an energy broker can help you get contracts that have the best FAC structure for your business.
Energy Efficiency Investments
Reducing energy consumption through energy efficiency measures can lower the base on which the FAC is calculated. Check out Diversegy’s energy efficiency incentives and rebates to reduce fuel-dependent energy demand.
Evaluate Supplier Options
In some deregulated markets, switching suppliers or renegotiating contract terms with a retail energy supplier can get you a better FAC structure. This is especially useful if you find other suppliers have more predictable or transparent FAC rates. Knowing how to switch energy suppliers can make a big difference in overall cost management.
Utility Bill Audits
Regular utility bill audits can uncover discrepancies and potential cost savings in FAC and other charges. Diversegy offers full audits to help commercial customers optimize their energy spend and eliminate unnecessary costs.
Manage Your FAC with Diversegy
The fuel adjustment clause may be a small line item on your bill, but it can have a big impact on overall utility costs. For commercial customers, understanding and managing the FAC is key to keeping energy costs under control. Stay informed about FAC calculations, monitor market trends, and explore alternative energy contracts so you can better control your energy costs. If you are looking for ways to reduce your commercial energy bills, get in touch with us to find out how we can help.
