CWIP and Economic Justice

On Tuesday, February 15, the Utilities committee of the Missouri House of Representatives conducted a hearing on Representative Jeanie Riddle’s HB 124, a bill to allow an electrical corporation to recover from ratepayers the costs associated with early site development for certain electrical generation facilities. This is a good bill but it does not go far enough. It is a pared down version of what has been introduced in the Missouri Legislature during the past two years, a bill that would permit an electrical corporation to recover the cost of “construction work in progress,” or “CWIP,” in rates prior to the commercial operation of the an electric plant. It is a good idea to permit electric companies to recover CWIP in their rates. HB 124 should be amended to permit the recovery of CWIP and passed into law.

Perhaps a little history is in order. In 1976, the voters of Missouri passed an initiative petition that prohibited the Missouri Public Service Commission from permitting electrical companies to recover CWIP in rates. Ameren Missouri, previously Union Electric Company, proceeded to construct its Callaway I plant by borrowing the funds necessary to construct the plant. The construction of the plant took approximately a decade.

Whatever the motivations in 1976 to passing the so called anti-CWIP law, circumstances have clearly changed. During the hearing on Tuesday, all parties recognized the need for the development of nuclear power. They recognized the need for new generation facilities to provide the necessary expansion to an aging fleet of generating facilities. Concern for the devastation that cap and trade regulations will bring on the state clearly also encourages Ameren Missouri to investigate a return to nuclear power.

The primary arguments for passage of the bill were the need for new generation and the economic development the construction of a new nuclear plant will bring to the state of Missouri. HB 124 would eliminate a disincentive for an electrical corporation to build a nuclear plant. The primary argument against passage of the bill was a consumer protection concern. Permitting an electrical corporation to put costs in rates would permit the utility to obtain recovery before it had proven the project was prudent in concept and execution and prior to a point in time when completion was assured.

None of these arguments has a bearing on whether the Missouri Legislature should pass HB 124. All agree that there is a need for new electric generation. All agree that there is a need to explore nuclear generation as an option. However, electrical corporations have an obligation to construct adequate generation facilities to provide for the requirements of their customers. HB 124 would not significantly add to this incentive. Economic development claims are also of little impact on the debate. What drives the economy is the exchange of money for goods and services desired by customers. If I spend a hundred dollars on a new television or on a new camera, the transaction drives the economy to a greater or lesser extent, but both drive the economy. Ameren may spend billions on a nuclear plant or some other form of generation. Either of these expenditures will impact the economy of Missouri. An incentive toward one particular form of spending does not necessarily increase economic development. It simply dictates the winners and losers in any such economic development. About the only expenditure that does not expand the economy is a tax payment to a government, for a government does not produce goods and services. The consumer protection concern is likewise of very little consequence to this discussion. The state of Missouri already has a structure in place in the form of the Public Service Commission which is designed to guard against the consequences of a utility’s imprudence and abuse of its customers. The Public Service Commission is fully capable of disallowing imprudent costs as it did in setting rates after Ameren put its Callaway I unit in service. Finally, all of these arguments fail in that they are mercantile in their most basic philosophy. The focus on the government and what the government’s interest is misses the point entirely. Rather, the question should be how the state should execute justice in the marketplace in Missouri.

Electric companies were and are what have been referred to as natural monopolies. No one wants a dozen sets of wires running down the street to permit a dozen different companies to compete to provide electric service. Since the electric utility infrastructure is so capital intensive, common wisdom suggests that competition be limited. This common wisdom has lead over the last century to what has become known as the “regulatory compact.” Utilities submit to regulation of their service by the state in exchange for a defined exclusive service territory and the right to a regulated return on their investments. With the regulatory compact comes a subsidiary theory that regulation should be designed to take the place of competition. It is the regulation’s substitution for competition that should drive the conclusion on HB 124 and CWIP.

In a free market, the forces of supply and demand prompt the setting of prices. As supply decreases or demand increases, the value of a commodity and its uses increases. As the price increases, the price sends a signal to potential suppliers inducing them to risk additional investment in producing the commodity. The Federal Energy Regulatory Commission has recognized this principle in recent orders directing operators of wholesale electric markets to increase the caps on what suppliers can charge in the wholesale market to permit the price signals of electricity to incent additional construction.

The Missouri Public Service Commission should be permitted to take these same issues into consideration when determining the rates for an electrical utility that sells at retail. It should not be foreclosed from considering how competitive forces would impact rates. All interested parties recognize that there is a growing need for electric generation. As a result, prices should go up. In a free market place, the forces of supply and demand would permit a seller to increase its prices in order to expand its business so as to increase its production. How rates should be set to reflect the change in the market place should be left to the Public Service Commission. The Commission may do this in one of several ways, including allowing the recovery of CWIP or increasing the rate of return granted to the electrical corporation to reflect the increasing supply demand risk in the market place.

To arbitrarily deny the recovery of CWIP produces a distortion in the attempt to mirror a free marketplace. Denying an electrical corporation the option of recovering CWIP in rates forces the company to borrow the money necessary to construct the facility, causing a “pay me later” consequence. The electrical corporation is forced to incur a significant amount of debt to accomplish the construction. Not only is there a significant amount of debt, the debt is expensive due to the fact that it is extended over a significant period of time. This makes the investment more costly. The Missouri Public Service Commission, the agency designed to function as a surrogate for competition, should not be arbitrarily denied the ability to function in its proper role in setting prices as the free marketplace would do.

The comments contained in this editorial are the views of David Linton and do not necessarily reflect the views of his clients.