EnergyBiz - November/December 2007 - (Page 78)

» LeGAL eAGLe chasing construction costs gAining rEgulAtory ConCESSionS by riChArd korMAn eCoNomIsts estImate the Cost A surge in construction costs since 2004 has added significance to discussions of CWIP. In a report prepared for the Edison Foundation, researchers with the Brattle Group note sharply higher prices for metals, concrete, factory-made components and contractor fees. From January 2004 to January, 2007, costs for steam generation plants, transmission projects and distribution equipment rose by 25 to 35 percent, and the cost of a gas turbine, “which was fairly steady in the early part of the decade,” rose by 17 percent in 2006 alone, according to the report. Shocked regulators and utilities have cancelled or postponed a handful of projects, the report notes. In the 1990s, the controversies over CWIP died down partly because utilities mostly built small, combined-cycle peaking plants, says Marc W. Chupka, one of the Brattle study’s authors. Some utilities may have financed capital projects with cash flow, and merchant power companies built many other plants. The federal government has embraced the utilities’ call for early recovery as a way to spur investment. Last year, the Federal Energy Regulatory Commission adopted rules for grid improvements that include incentive rates of return for investment, full recovery of prudently incurred construction work in progress and pre-operations, accelerated depreciation and deferred cost recovery in the case of retail rate freezes. At the state level, recovery for CWIP “is a murky picture,” says Chupka. Wisconsin, for example, has allowed recovery of CWIP in the rate based for years. In other states utilities are asking for recovery on different terms on a project-by-project basis. In one example, OG&E Electric Services, based in Oklahoma City, tried to get CWIP and a rate-based rider, but the commissioners killed the plan for the plant altogether, says Chupka. For a plant in Colorado, a unit of Xcel Energy went for partial capital recovery and settled for an interesting formula where recovery is granted if the utility’s bond rating deteriorates, he says. “There will be lots of capital cost pressures and it’s too early to tell where regulators will go,” says Chupka. North Carolina lawmakers, in a revision of state law heavily focused on encouraging renewable energy sources, changed existing provisions stating that construction work can’t be put in the rate base unless state commissioners believe it’s needed to stabilize a utility’s finances. Under the new energy law, utilities may be granted the right to recover project financing costs, but not construction costs, prior to construction of new base load plants. Critics suggest the change clears away obstacles to new base load plants, but that’s not true, says Paige Sheehan, a spokeswoman for Duke Energy, in Charlotte, N.C. “It only makes it easier to finance,” she says. of rebuilding the electrical infrastructure to be at least $400 billion over the next 25 years, or about three of every four dollars worth of publicly held utility stock at today’s prices. Although the spending will be spread over a long time, many wonder if stock and debt investors will put up that kind of money. Only if ratepayers share the heavy costs of rebuilding the electrical infrastructure during the years while the work is being done, utilities say, and rates include recovery for financing or construction work in progress or CWIP. “No matter how large a utility is, it cannot afford to provide a loan of that size to its customers and not see any cash for four or five years or more,” Dominion Power CEO Thomas Farrell III told public utility commissioners at a convention early this year in Washington. Utilities on most big projects in most states wait for rate cases to determine what recovery they will enjoy. Until then, the utility treats as a capital cost the allowance for funds used during construction. Recovery begins when a plant goes into service and begins depreciating. Farrell calls on regulators to allow utilities an adequate return on equity. If there is a lag in recovery, utility finances will be stressed and consumers will be shocked when finally rates do go up, he claims. The last time recovery of construction costs escalated to a national drama was the early 1980s, and, as is true today, major expenditures for nuclear plants were at the center. Charles Gray, executive director of the National Association of Regulatory Utility Commissioners, refers to that period as the “CWIP wars.” “Will the CWIP wars return?” he muses, “That’s a good question.” At that time, opponents of nuclear power focused on the cost recovery partly as a way to try to choke off construction. Now all the sensitive issues associated with putting CWIP costs into rates are complicated by the need to eliminate greenhouse gasses, meet reliability standards amid gradually growing demand and shore up the grid. no mAtteR how LARGe A utILIty Is, It CAnnot AFFoRD to PRovIDe A LoAn oF thAt sIze to Its CustomeRs AnD not see Any CAsh FoR FouR oR FIve yeARs oR moRe. 78 E n E rgyB i z November/December 2007

Table of Contents Feed for the Digital Edition of EnergyBiz - November/December 2007

EnergyBiz - November/December 2007 Contents Continental Grid Vision Needed Readers’ Views and Opinions Next for National Grid Clearing the Air The Need for Nuclear Energy Trade Status Report The Innovators California On The Leading Edge FERC Sparks Change Getting Coal Right Leadership in Times of Turmoil Innovation Delivers Return A Tale of Two IPOs LNGs Bright Prospects Generation Techologies The Age of Superconductors Leaders with Vision Get Ready for Plug-in Hybrids Betting on Batteries Cost of Decarbonizing Nuclear Helmsman – A chat with Dale Klein, Chairman of the U.S. Nuclear Regulatory Commission Global Energy Snapshot; Low-Income Energy Help; IT Spending Robust; The Greening of State Regulators; Generating Support Simplifying Offshore Wind Regs Chasing Construction Costs Energy Agency Sets New Course Deregulation Means Higher Rates Go-To Staffer Nightmare in Manhatten

EnergyBiz - November/December 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.