Typically, utility rates do not include the cost of a utility’s major capital investment until that investment is put into service. The risk of investing in capital projects and capacity was assumed by utility investors. Regulators set rates to allow recovery of investments, plus a reasonable profit. But they did so only after determining that those investments were prudently incurred. However, a mechanism called Construction Work in Progress (CWIP) allows utilities to charge ratepayers for the cost of financing new power plants during construction, resulting in rate increases before the power plant, or another investment, is completed and providing electricity.
Increasingly advanced payment is requested for multibillion-dollar investments. These advance payments, also called prepayments, increase rates immediately. They are often used to finance nuclear and coal plants, and other high-dollar infrastructure upgrades. Proponents of advanced payment claim it will save money for ratepayers by spreading payments out over more time. Opponents argue that advanced payment attracts investors who are reluctant to finance the construction because of the risk involved. 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 continue to pay for these projects on their monthly utility bills.
Advanced payment shifts 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 upfront 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 upfront, it reduces the pressure to put the plant in service on schedule. Longer delays result in higher construction costs. These costs are ultimately borne by ratepayers.
ADVANCED PAYMENT OF POWER PLANTS AND OTHER INVESTMENTS: Policy
Compensation only for prudent investments in assets that are “used and useful” for the utilities’ current customers
Policymakers should not allow or approve advanced or upfront payment for major capital construction projects, including nuclear and coal plants.