Construction Work In Progress
Within the traditional regulatory framework, utilities can request that the cost of capital (financing costs and return) for a new asset be added into rate base before construction is complete and the asset is in service. Once considered a somewhat far-fetched idea, inclusion of construction work in progress (CWIP) in rate base is becoming more commonly accepted among regulatory commissions, especially for assets that are near final completion.
CWIP was necessary in the 1970s when big-ticket nuclear plants were being built. It allows the utility to collect financing costs for a project prior to the plant’s completion, and before it can pass the standard “used and useful” test. This eliminates regulatory lag (the lapse of time between project completion and cost recovery), and decreases regulatory uncertainty (the potential for a commission to deny cost recovery once a project is complete). By allowing return on the cost of capital during construction, CWIP reduces the overall amount needed to finance a project, thus reducing total project costs eventually included in cost of service rates.
CWIP sometimes is allowed by a state utility commission for projects incorporating specific technologies the commission wishes to promote, such as renewable or nuclear generating facilities.
Utilities as a whole are supportive of the concurrent cost recovery of CWIP. Commissions are becoming more amenable to the concept although they sometimes have concerns about their ability to monitor cost prudency once CWIP is granted. However, CWIP typically comes with a review process that includes true-up, which should preserve commission authority to review costs concurrently until the project is placed into full service.
AEP is a strong supporter of concurrent CWIP cost recovery. It removes both regulatory lag and regulatory uncertainty from costly capital projects. Either of those elements can delay or kill a project.
CWIP addresses some financial challenges for utilities, while not requiring a complete overhaul of the traditional regulatory framework.