FERC's Notice of Proposed Rulemaking on Transmission Planning, officially known as Building for the Future Through Electric Regional Transmission Planning and Cost Allocation and Generator Interconnection, contains some pretty questionable proposals. But the one that is making the most people scratch their heads is the proposal that new "long-term" transmission plan projects be prohibited from asking for and receiving FERC's current CWIP in ratebase incentive. Instead, these new projects planned to be used and useful 20 years in the future must instead use AFUDC. Sounds like complete gibberish, doesn't it? Pull up a chair... you're going to understand this when we're done.
FERC proclaims that using AFUDC will "protect" ratepayers. But, is that really true? No, it's not. Ratepayers will end up paying more for these transmission projects, even when they are subsequently cancelled and never provide any service whatsoever.
When a utility builds new infrastructure, it must front up the full cost of constructing the project before it goes into service. There are two different rate methods to account for the use of this money to build things that end up being useful for the consumer.
CWIP, which stands for Construction Work in Progress, is a method whereby a utility collects its capital construction costs for a new project into a special account, which is then added to the ratebase. The utility earns its awarded return on the amount in ratebase each year, and in the case of CWIP in ratebase, it earns a return on the money it has invested in the project before the project goes into service. The benefits of this is that it creates cash flow for the utility to pay interest on the money it borrows for the project. Having that cash flow also bolsters the utility's credit rating and lowers the utility's cost of capital, allowing it to borrow at reduced rates. Lower interest costs to the utility flow through to customers, who always end up paying the utility's borrowing costs. In addition, CWIP in ratebase has the benefit of increasing the rates due to the new addition gradually, in real time, instead of all at once when the new infrastructure goes into service. The consumer will see their bill go up gradually, and will notice these increases over time and may plan accordingly.
AFUDC, which stands for Allowance of Funds Used During Construction, is a method whereby the utility still collects its construction costs into a special account, but it is not added to the ratebase until the project goes in service. The project costs keep building in this account, plus interest, and the utility collects nothing until the project goes in service. There is no cash flow for the utility during planning and construction, therefore it must find money elsewhere to pay interest on the money it has borrowed. This can affect the financial health of the utility with a large AFUDC burden, and increase its cost of borrowing, which is flowed through to customers. Customers will pay more to finance a project using AFUDC. When a project using AFUDC goes into service, the customer will see a huge spike in their rates to pay for the total cost of the project, plus all the accumulated interest. The consumer will be completely flummoxed (and ticked off) about this huge spike it his electric bill. He won't see it coming and has no opportunity to plan his usage accordingly.
But there can be advantages to AFUDC, if a proposed project is cancelled before it is put into service because the utility will have not collected any of its costs from ratepayers before then. In that instance, the utility absorbs the loss and ratepayers are off the hook.
HOWEVER (because here's where the real rub comes in) FERC has also routinely granted an abandonment incentive to all regionally planned projects, like the future long-term planning projects. The thinking is that the utility is being "forced" to attempt to construct the project by regional planners and therefore has no fault if the planner subsequently cancels the project after the utility has spent money on it. FERC wants to make these utilities whole by giving them back all the money they have spent, plus interest, if the project is cancelled through no fault of the utility. Ratepayers are the bank here and are required to shoulder all the risk and cost of planned projects that end up being cancelled before being completed.
So, it wouldn't matter if the project used CWIP in ratebase or AFUDC to account for its costs if the project was subsequently abandoned. Ratepayers would still be on the hook to cover the costs, and the AFUDC project would end up costing them more.
AFUDC does not protect consumers as long as FERC continues to use its abandonment incentive to place all risk for project abandonment on consumers. Consumers have asked FERC several times to take a deep dive into its abandonment incentive to collect the data necessary to evaluate the wisdom of continuing it. How many regionally planned projects with this incentive have been abandoned? How much have ratepayers paid for projects that have never become used and useful to them? (Hint: It's easily more than a billion dollars.) How can FERC take action to ameliorate this burden on consumers? Can it place some burden on the utilities where abandoned project costs are shared between utilities and consumers? Should it place stricter requirements on regional planners to engage in more due diligence when planning projects, such as more effort to evaluate the likeliness that the project will not be delayed or denied important permits because of opposition in affected communities? What surety can FERC impose on regional planners to discourage the wasting of ratepayer funds on pipe dream projects that have no realistic expectation to ever be built? You know, that sort of sounds like these long-term planning projects of which FERC is so enamored.
As Commissioner Christie said in his concurrence:
FERC proclaims that using AFUDC will "protect" ratepayers. But, is that really true? No, it's not. Ratepayers will end up paying more for these transmission projects, even when they are subsequently cancelled and never provide any service whatsoever.
When a utility builds new infrastructure, it must front up the full cost of constructing the project before it goes into service. There are two different rate methods to account for the use of this money to build things that end up being useful for the consumer.
CWIP, which stands for Construction Work in Progress, is a method whereby a utility collects its capital construction costs for a new project into a special account, which is then added to the ratebase. The utility earns its awarded return on the amount in ratebase each year, and in the case of CWIP in ratebase, it earns a return on the money it has invested in the project before the project goes into service. The benefits of this is that it creates cash flow for the utility to pay interest on the money it borrows for the project. Having that cash flow also bolsters the utility's credit rating and lowers the utility's cost of capital, allowing it to borrow at reduced rates. Lower interest costs to the utility flow through to customers, who always end up paying the utility's borrowing costs. In addition, CWIP in ratebase has the benefit of increasing the rates due to the new addition gradually, in real time, instead of all at once when the new infrastructure goes into service. The consumer will see their bill go up gradually, and will notice these increases over time and may plan accordingly.
AFUDC, which stands for Allowance of Funds Used During Construction, is a method whereby the utility still collects its construction costs into a special account, but it is not added to the ratebase until the project goes in service. The project costs keep building in this account, plus interest, and the utility collects nothing until the project goes in service. There is no cash flow for the utility during planning and construction, therefore it must find money elsewhere to pay interest on the money it has borrowed. This can affect the financial health of the utility with a large AFUDC burden, and increase its cost of borrowing, which is flowed through to customers. Customers will pay more to finance a project using AFUDC. When a project using AFUDC goes into service, the customer will see a huge spike in their rates to pay for the total cost of the project, plus all the accumulated interest. The consumer will be completely flummoxed (and ticked off) about this huge spike it his electric bill. He won't see it coming and has no opportunity to plan his usage accordingly.
But there can be advantages to AFUDC, if a proposed project is cancelled before it is put into service because the utility will have not collected any of its costs from ratepayers before then. In that instance, the utility absorbs the loss and ratepayers are off the hook.
HOWEVER (because here's where the real rub comes in) FERC has also routinely granted an abandonment incentive to all regionally planned projects, like the future long-term planning projects. The thinking is that the utility is being "forced" to attempt to construct the project by regional planners and therefore has no fault if the planner subsequently cancels the project after the utility has spent money on it. FERC wants to make these utilities whole by giving them back all the money they have spent, plus interest, if the project is cancelled through no fault of the utility. Ratepayers are the bank here and are required to shoulder all the risk and cost of planned projects that end up being cancelled before being completed.
So, it wouldn't matter if the project used CWIP in ratebase or AFUDC to account for its costs if the project was subsequently abandoned. Ratepayers would still be on the hook to cover the costs, and the AFUDC project would end up costing them more.
AFUDC does not protect consumers as long as FERC continues to use its abandonment incentive to place all risk for project abandonment on consumers. Consumers have asked FERC several times to take a deep dive into its abandonment incentive to collect the data necessary to evaluate the wisdom of continuing it. How many regionally planned projects with this incentive have been abandoned? How much have ratepayers paid for projects that have never become used and useful to them? (Hint: It's easily more than a billion dollars.) How can FERC take action to ameliorate this burden on consumers? Can it place some burden on the utilities where abandoned project costs are shared between utilities and consumers? Should it place stricter requirements on regional planners to engage in more due diligence when planning projects, such as more effort to evaluate the likeliness that the project will not be delayed or denied important permits because of opposition in affected communities? What surety can FERC impose on regional planners to discourage the wasting of ratepayer funds on pipe dream projects that have no realistic expectation to ever be built? You know, that sort of sounds like these long-term planning projects of which FERC is so enamored.
As Commissioner Christie said in his concurrence:
Based on my experience as a state regulator with IRPs and computer models purporting to predict the future two or more decades down the road, I regard 20-year projections of this sort as, at best, occasionally interesting, but they certainly provide no basis whatsoever for saddling consumers with the costs of a billion-dollar transmission line.
But yet he thinks AFUDC will fix everything.
AFUDC is booked during the pre-service phases, but cannot be recovered from customers until the project is completed and actually serving customers, i.e., “used and useful.” The NOPR proposal is simply in keeping with traditional good utility ratemaking principles. Booking these costs as AFUDC also recognizes the reality that just because an LTRT project is selected for a regional plan, it still has to obtain all state siting, certificate of public convenience and necessity and other, including environmental, approvals, and survive what may be the subsequent litigation, before it is actually built.
But it can still collect its costs from customers using FERC's abandonment incentive. It's like locking the barn door after the horse escapes!
I'm not fooled by this, and you shouldn't be either. AFUDC only works if the abandonment incentive is... well... abandoned, and it doesn't look like FERC has any intention of doing so.
And here's the second big fool for consumers... using AFUDC actually hides the huge electric rate increases consumers will face due to the euphemistic "changes in the resource mix" (read more wind and solar and less coal, gas and nukes) until it's way too late to do something about it. If the costs of the trillions of dollars of new transmission the Commission is trying to encourage with this action don't find their way into your bill until they have either been built or abandoned, you will have no chance to adjust your power consumption behavior, or even to speak out, before the damage is done and your power bill ends up doubling (or more). The money will have already been spent, and consumers are already on the hook.
If FERC gets away with this... heads utilities win, tails you lose.
I'm not fooled by this, and you shouldn't be either. AFUDC only works if the abandonment incentive is... well... abandoned, and it doesn't look like FERC has any intention of doing so.
And here's the second big fool for consumers... using AFUDC actually hides the huge electric rate increases consumers will face due to the euphemistic "changes in the resource mix" (read more wind and solar and less coal, gas and nukes) until it's way too late to do something about it. If the costs of the trillions of dollars of new transmission the Commission is trying to encourage with this action don't find their way into your bill until they have either been built or abandoned, you will have no chance to adjust your power consumption behavior, or even to speak out, before the damage is done and your power bill ends up doubling (or more). The money will have already been spent, and consumers are already on the hook.
If FERC gets away with this... heads utilities win, tails you lose.
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