Construction Work in Progress Issue Needs Improved Regulatory Response for Utilities and Consumers

EMD-80-75: Published: Jun 23, 1980. Publicly Released: Jul 17, 1980.

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Federal and state policies on allowing privately owned electric utilities to include construction work in progress (CWIP) in their rate bases were reviewed. GAO was specifically asked to address the following: total CWIP nationwide and the amount allowed in the rate base; estimated effect on utility bills of CWIP in the rate base during the past 3 and next 5 years; conditions under which the Federal Energy Regulatory Commission (FERC) allows CWIP in the rate base; number of utilities seeking permission at the federal and state levels to put CWIP in the rate base; and whether allowing CWIP in the rate base shifts the burden of paying for new construction from investors to customers.

As of late 1979, 33 state public utility commissions and FERC were allowing privately owned electric companies to include CWIP in the rate base for establishing utility rates. Critics contend that the inclusion of CWIP in the rate base unfairly makes current customers pay higher utility bills and provides investors a return on capital invested in projects that provide no service to current customers. If CWIP is not allowed in the rate base, utility companies are usually permitted to add the costs of capital invested in CWIP to the direct construction expenditures that go into the rate base after completion of construction. As part of the larger issue, the determination by regulators that electric utility companies need rate relief, CWIP must be viewed in the context of the effects that other alternatives for providing rate relief would have on utility bills. Most decisions by regulators affecting rates are made at the state level. Intrastate sales of electricity to consumers constitute about 84 percent of the sales by privately owned electric utility companies. The remainder of their sales, made to other utilities for resale, are regulated by FERC. In April 1980, FERC restricted CWIP in the rate base to capital invested in pollution control and fuel conversion projects. FERC regulations defining financial hardship are too vague and general. The Department of Energy (DOE) has neither analyzed the CWIP issue, nor adopted a departmental policy on the issue.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Chairman, FERC, should propose a generic rulemaking to more specifically define criteria of guidelines concerning the financial conditions which would justify including investments in electric plant CWIP, other than for pollution control and fuel conversion, in the portion of the rate base under the Commission's jurisdiction. The Chairman should institute the rulemaking either immediately after the Commission issues final decisions in the three currently pending financial hardship CWIP cases or by January 1, 1981, whichever occurs first. As part ot the rulemaking process, the Commission should request comments, analyses, and the latest information available from all interested parties, including comsumer groups, the utility industry, the financial community, state public utility commissions, and federal agencies. Further, the Chairman should encourage state commissions to adopt, to the extent practicable, the cirteria and guidelines resulting from the rulemaking proceeding in order to provide as much uniformity as possible in the treatment of CWIP. The Secretary, DOE, should provide timely input to the Commission's rulemaking process by analyzing how the regulatory treatment of CWIP affects: (1) the electric utilities' cost of capital; (2) the long-term, life cycle costs of new electric facilities; and (3) continuity of construction programs needed to meet legitimate future electric energy demand.

    Agency Affected:


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