MOVotes Conservation

Construction Work in Progress (CWIP)
Missouri Legislative Scorecard  2010 Legislative Wrap-Up

Update 4/24/09

CWIP bills SB 228 and HB 554 appear dead.  Opponents and supporters of the controversial measures couldn’t reach agreement. As a result, AmerenUE announced on April 23 that it has asked the sponsors of the measures to withdraw them from consideration by the General Assembly. If that’s truly the case, then it would effectively scuttle plans to build its second nuclear reactor in Callaway County, at least for the moment.  MVC and our partners are keeping close watch until the end of the session.
Read Ameren's press release


CWIP IS UNFAIR TO RATEPAYERS
AmerenUE, along with other Missouri utilities, is asking the Missouri General Assembly to repeal an important consumer protection law referred to as the No-CWIP law.

What is CWIP?
CWIP stands for “construction work in progress.” It is a financing mechanism that gives a utility the right to earn a profit on funds spent on a new power plant before it is built and able to deliver any power. Ordinarily customers can only be charged after a plant starts generating power — after it becomes "fully operational and used for service" or “used and useful” in utility jargon. CWIP allows a utility to include planning, permitting and construction costs for a power plant into their ratebase long before ratepayers receive even a single watt of electricity. CWIP allows customers to be charged even if the plant is never built or operational.

What is the No-CWIP law?
In 1976 Missouri voters by a 2–1 margin passed a ballot initiative banning CWIP financing. This initiative overturned the Missouri Public Service Commission's (PSC) decision, in December 1975, to allow CWIP. The No Construction Work In Progress (No-CWIP) law, in place for more than 30 years, is a consumer protection statute that prevents utilities from charging rate-payers for power plants before they are “fully operational and used for service” and keeps utilities from building excess, unnecessary, or excessively expensive generating capacity at customer expense (useful).

Why is CWIP unfair to ratepayers?
1. CWIP would allow electric utilities to charge current customers for future projects that are not yet providing any service.

2. CWIP shifts the risk of building power plants from the shareholders to the ratepayers. Essentially, CWIP gives the utility a no-bid, cost-plus contract to build whatever they like. It requires that ratepayers pay for 100% of an investment for which they have no ownership stake, and if the project fails ratepayers absorb 100% of the loss.

CWIP unfairly shifts the risk to ratepayers without adjusting the guaranteed rate of return a utility already receives for bearing the risk. (See "Who should bear the risk" below) If utilities prefer to have ratepayers bear all of its big risks, then their guaranteed rate of return should be eliminated or reduced significantly.

When risk is shifted from the utility to the ratepayer - imprudent decisions generally follow because the same caution utilities exercise to protect their shareholders, they do not exercise for their captive customers: the ratepayers. For example, AmerenUE has admitted publicly that the risk of building a huge new nuclear power plant is not prudent for the company's shareholders "We just couldn't do it. The risk would be too great. We don't think people would lend us the money. We don't think our board of directors would approve it. And we don't think our stockholders would think it's prudent."

3. CWIP encourages overbuilding by offering an incentive for utilities to build more capacity than ratepayers need, which grows the ratebase for which a utility gets a fixed rate of return. In addition, the excess capacity that ratepayers finance can then be used to increase the utility's sales on the open market.

4. CWIP passes on the risk and cost to ratepayers of high cost, high risk, large energy supply projects when ratepayers might benefit more from investments in lower cost, lower risk alternatives like energy efficiency and clean renewable energy. These low cost, low risk energy solutions can be implemented incrementally as needed, eliminating the risk of overbuilding.

5. CWIP removes the opportunity for scrutiny and oversight of utility decisions and expenses. Under No-CWIP utility expenditures are carefully examined before an expense is added to the utility's rate-base and there is opportunity for PSC staff, the public counsel and consumer groups to challenge the legitimacy of expenditures or the prudency of a planned investment. Under CWIP oversight happens after the expenditure, not before.

What will be the impact of CWIP on rates?
CWIP will, by definition, raise rates (immediately in Ameren's case) while removing any incentive the utility might have to control costs or choose the lowest cost option for providing for electrical needs. It essentially gives utilities a blank check to build whatever they want - requiring that ratepayers pay in advance for something they are not currently getting, may never get, don't necessarily need, and for which the utility cannot provide the ultimate cost.

Beyond that, paying in advance is inequitable because some people and businesses that later relocate out of a utility's service territory will be paying for something in advance that they will never receive. Given the time value of money, paying in advance with incremental rate increases over the next ten years will actually cost ratepayers more over the long run. In any case, ratepayers would be better off holding onto their money now. They could even be investing the money to make their home or business more energy efficient, (more insulation, better lighting, more efficient appliances, etc.), not only lowering present utility bills, but reducing future demand for additional power. And finally, investing the same dollars in efficiency allows us to look forward to smaller electric bills. CWIP guarantees larger bills.

WHO SHOULD BEAR THE RISK?

How do utilities pay for power plants now?
Utilities have historically sold stocks and bonds to private investors to pay for the construction of new power plants. The finance charges incurred for the use of this money were included in the cost of the project and added to the ratebase after the plant was producing electricity. CWIP would require ratepayers to pay the finance charges with increases to their monthly bill while the plant is being built — and get nothing, not one kilowatt of electricity in return.

Who should bear the risk of building new power sources?
Missourians for Fair Electric rates believes that the risks should be borne as they always have been by those that collect the profits. Investor-owned utilities are for-profit corporations with a special status. They are regulated monopolies, operating without competition. AmerenUE and other investor owned utilities have an exclusive franchise to provide electrical service in their defined service territory. In exchange for that privilege, they submit to regulation by the Missouri Public Service Commission (PSC). The PSC grants the utilities a generous guaranteed rate of return (currently 10.76% for AmerenUE) for prudent investments necessary to provide electrical service within specified performance parameters. The generous rate of return compensates the utility for bearing the risk of planning and financing their operations and service.

Even without CWIP, don't customers still end up paying for new power plants?
Yes, but if the risk is on ratepayers, utilities will be less concerned about overbuilding, cost overruns and holding down costs generally. In fact, Missouri utilities have a financial incentive to increase electric demand (increase their sales) and build to meet the demand rather than to decrease demand and avoid building expensive new supply sources. With CWIP, if they overbuild supply or choose the highest cost energy option (For example: nuclear vs. energy efficiency), customers still have to pay. If the cost of the project soars, or if the project is abandoned after billions are invested, ratepayers would end up paying the bill, while utility investors still get their guaranteed monopoly profits.

Doesn't the PSC regulate the process to make sure costs are prudent?
Investor owned utilities are required to justify the need and cost of a power plant before the cost can be included in the rates they charge customers. This process is regulated by the Missouri Public Utility Commission (PSC). The PSC reviews utility expenditures and allows them to go into the rate base only if they were "prudent." Full-scale audits after the fact are more exacting than periodic and limited reviews, and it is not likely that the utility would be required to unbuild a plant if it turns out to not be in the interest of the ratepayer. In addition, for various reasons, the PSC may lack the will to earnestly regulate utilities in the public interest. They may also lack the staff and expertise to evaluate utility proposals and data appropriately. The PSC may also operate under an old energy paradigm that favors building big supply sources to meet projected demand rather than reducing demand growth and other strategies that are in the public interest but not necessarily aligned with the utility's interest.

NO-CWIP SERVES THE PUBLIC INTEREST

Has the current No-CWIP law served the public interest?
Yes! When the voters passed Proposition One in 1976, Ameren's predecessor, Union Electric, had already commenced construction on two huge 1150 megawatt reactors in Callaway County. CWIP financing allowed UE to build these two very costly reactors simultaneously.

When the new No-CWIP law pulled the plug on ratepayer financing, UE first announced a delayed construction schedule for Callaway 2, and then, several years later, canceled the "imprudent" multi-billion dollar project. History has revealed that UE was in fact overbuilding capacity. Callaway 1 was completed in 1984 at a cost of more than $3 billion, and UE went to the PSC to request a 70 percent rate hike. Ameren's ratepayers would have been saddled with hundreds of millions of dollars in higher rates if CWIP financing had remained in place and construction on the unneeded plant continued.

More recently (Jan 09) Ameren's request to include a $50 million expenditure associated with planning for the new Callaway 2 into their rate-base was denied due to the No-CWIP law.

Are there alternatives to CWIP financing available to utilities?
Yes. The Missouri Public Counsel recently petitioned the PSC to open a case to examine financing options for Callaway 2. Their filing includes an October 6, 2008 study by Russell Trippensee, which demonstrates that ratepayers would save nearly $6 billion over the projected life of the plant if Cash Metric Regulation, the non-CWIP sort of regulatory regime used in recent KCP&L and Empire District cases, was applied to a new AmerenUE plant at Callaway. The PSC, on Jan 27th, voted to not open the requested case choosing not to investigate AmerenUE's financing options and their respective impact on ratepayers.

CWIP, CALLAWAY 2, AND OTHER ENERGY OPTIONS

How is the CWIP controversy related to nuclear power?
CWIP is an unfair ratemaking scheme that represents a massive give-away to corporate interests, regardless of a particular project a utility wants to invest in. Driving this current push to allow CWIP is AmerenUE's desire to build a second nuclear reactor at its Callaway plant - and the refusal of Wall Street investors to take on the risk of mistakes, delays, strikes, and shortages of materials and trained employees. The cost of Callaway 2 is expected to be $9-$12 billion. Of the handful of new nuclear plants under construction today, all of them are behind schedule and over-budget. Ameren's Chief Executive, Thomas Voss told the St. Louis Post-Dispatch that they would not build the new nuclear reactor at Callaway 2 without CWIP.

Why are nuclear power plants considered risky investments?
New nuclear power plants are among the most expensive energy options available. They are neither clean nor renewable and they have many externalized costs associated with the mining, transportation and storage of their radioactive fuel. Clean, renewable alternative energy technology is rapidly advancing that costs less, takes less time to deploy and has other public benefits like distributed energy and lower green house gas emissions associated with their lifecycle. Given nuclear power's track record of marketplace failure, including massive cost overruns and serious construction problems resulting in long and expensive delays, it's not surprising that Wall Street sees new nukes as unacceptably risky.

Past failures aren't easily forgotten. In the 1970s and 1980s more than 100 planned nuclear reactors were scuttled when demand projections didn't materialize. Some were just on the drawing boards, but others were in various stages of construction, with hundreds of millions, or in some cases billions of dollars that had to be written off. Forbes Magazine, in 1985, called it "the largest managerial disaster in business history, a disaster on a monumental scale."

Are there options other than nuclear for meeting future energy demand?
Amory Lovins of the renowned Rocky Mountain Institute tell us that nuclear buys less solution per dollar than any other alternative to fossil fuels. $9 - $12 billion would be better invested in wind turbines, solar panels, and energy efficiency improvements.

Accepting Ameren's plan to build a nuclear power plant assumes without examination that Ameren's demand projections are accurate, that no lower cost alternatives are available and that the plant itself is prudent and necessary. Recent trends in demand and advances in technology suggest these assumptions are false. In Ameren's case, the PSC has shirked its responsibilities by refusing a request to study the rate impacts of Ameren's plan to build a new 1600MW nuclear power plant.

Energy efficiency is the lowest cost energy source and the least utilized in Missouri. According to the American Council for an Energy-Efficient Economy (ACEEE) "energy efficiency and demand response are the lowest-cost resources available to meet this growing demand and the quickest to deploy for near-term impacts" indicating a huge economic opportunity for our state. And conservative Department of Energy (DOE) studies show that 80% of projected growth in electric demand could be offset by efficiency improvements alone.



The graph above, taken from a study on Virginia by the American Council for an Energy Efficient Economy, shows that efficiency, at 3 cents per kilowatt hour for electricity, is cheaper than any new supply-side resource. ACEEE ranks Missouri 45th among the 50 states and DC in what it is accomplishing through energy efficiency policy.

Can CWIP be used to help finance clean renewable energy projects?
CWIP is an unfair ratemaking scheme for any technology. Renewable power projects or energy efficiency programs don't need CWIP because they are modular and don't take decades long to build/implement. Wind farms, for example, can be built as needed in increments as small as 1 megawatt. For commercial purposes 100-150 megawatt wind projects are common.

If Ameren doesn't provide my electricity, why should I be concerned about all this?
Any change in regulatory status applies to all investor-owned utilities and their future projects. Many Missouri utilities (investor-owned, municipal and COOPs) have expressed interest in purchasing power from the new Callaway 2 nuclear plant which would put their ratepayers at risk.

WHO SUPPORTS RETAINING NO-CWIP CONSUMER PROTECTION?

Organizations supporting No-CWIP include AARP, Consumers Council of Missouri, Sisters of the Most Precious Blood, Butterfly Energy Works, Midwest Coalition for Responsible Investments, Missouri Association for Social Welfare, Missouri Sierra Club, Missouri Coalition for the Environment, GRO - Grass Roots Organizing. See updated list at NoCWIP.org.

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