Advanced Payment of Construction and Investments

Traditionally, utility rates do not include the cost of a utility’s major capital investment until that investment is put into service. This means investors (and not customers) take on the risk of investing in capital projects and capacity. Regulators set rates to allow investors to recover the cost of prudent investments over time, along with a reasonable profit. 

Increasingly, customers are on providing advanced payment for multibillion-dollar investments. These prepayments increase rates immediately. They are often used to finance nuclear and coal plants, as well as other high-dollar infrastructure upgrades. For example, a mechanism called Construction Work in Progress (CWIP) allows utilities to charge ratepayers for the cost of financing new power plants during construction. This results in rate increases before the power plant is completed and has begun providing electricity. This mechanism is being used more and more. Proponents claim prepayment saves ratepayers money by spreading payments out over more time. Opponents argue that advanced payment allows projects to be approved that otherwise would be too risky for investors to fund. Experience has shown the risks to ratepayers are real. Nuclear and clean coal plants financed through advanced payment have run many billions of dollars over budget. Some even have been abandoned. Yet, ratepayers have had to continue to pay for these projects on their monthly utility bills. 

Advanced payments thus shift risk to ratepayers while still allowing investors to earn a return. For example, a report by the National Regulatory Research Institute states that CWIP “involves some up-front shifting, from regulated utilities to ratepayers, of the economic and timing risks associated with implementing a major capital project.” Further, advanced payment alters a utility’s incentive to be efficient and complete the plant on time. Because the utility will receive financing payments up front, it reduces the pressure to put the plant in service on schedule. Longer delays result in higher construction costs. Ratepayers ultimately bear these costs.