This interesting survey by Wisconsin, courtesy of National Association of Regulatory Utility Commissioners (NARUC), says Illinois, Montana, New Hampshire, Ohio, and Oregon ban CWIP (except in certain cases for some of those states) and North Carolina and Washington in practice do not use it.
Appended below is the first question from the survey and the answers. The entire survey is on the LAKE website.
The Wisconsin Commission is relooking at its current practice for allowing a current return on construction work in progress (CWIP). We would appreciate it if you or someone else from your agency could respond to the following questions.
CURRENT RETURN ON CWIP
VERSUS AFUDC [Allowance for Funds Used During Construction]
REGULATORY SURVEY RESULTS
AGENCY RESPONSE Question #1: Does your agency allow a current return on CWIP? AL CWIP is included in Rate Base while AFUDC income is included as a deduction from interest expense and a credit to Other Income. Theoretically, the two items nearly offset one another. CA Regulated water utilities receive a current return on CWIP of projects that are one-year or less in duration. For CWIP of greater than one year, the utility earns AFUDC (this long-term CWIP and associated AFUDC are not part of rate base until in-service).i FL See attached rulemaking.ii ID CWIP is not included in rate base. We use an historical test year or a 6 month historical and 6 month forecast where the forecast is know before the hearing. We also have known and measurable changes that can include plant provided it is an unusual or extensive addition such as a water treatment plant or generating facility. The adjustment must also reflect additional revenues and reduced expenses (maintenance) associated with the addition. IL No – except for certain conditions noted below. KY The Kentucky Commission routinely includes CWIP in the determination of the utility’s rate base. We normally determine the revenue requirements based on capitalization rather than rate base, but are required by statute to consider the return on rate base approach as well. While we generally determine the revenue requirements using an overall rate of return on capitalization, the equivalent rate of return on rate base is usually stated in the rate Order. Therefore, we do allow a current return on CWIP. MI Yes, but it is offset by inclusion of the AFUDC in operating income. MN Minnesota generally includes CWIP in the rate base where it will earn the allowed rate of return, but the return is offset by bringing the related AFUDC earnings above the line and capitalized. There have been isolated circumstances where a current return was allowed in cases where the investment was so substantial as to potentially impair the financial integrity of the utility while the project was under construction. Also, Xcel’s Emissions Reduction Program is allowed to pass return on CWIP through the special rate rider. MT Montana does not allow CWIP in rates. It has been a very long time since AFUDC has been an issue, we just have not been seeing utility construction. NV A current return on CWIP is dependent on if the project is designated as a critical facility or not. If not, the utility will accrue AFUDC. I will mention that Nevada will allow CWIP into rate base if the utility is suffering from financial stress. But this provision has had limited application. NH CWIP is prohibited from inclusion in rates until the asset is completed and providing service to customers. RSA 378:30-a. NY Yes. NC The allowance of CWIP in rate base is governed by the provisions of North Carolina General Statute 62-133(b)(1), which states, in relevant part, “[R]easonable and prudent expenditures for construction work in progress … may be included [in rate base], to the extent the [North Carolina Utilities] Commission considers such inclusion in the public interest and necessary to the financial stability of the utility in question[.]”
No CWIP has been included in rate base of any electric utility regulated by the Commission since at least the early 1990s. No natural gas local distribution company (LDC) has requested that CWIP be included as a component of rate base since at least the late 1980s.
ND We typically use a projected test year where plant-in-service includes long-term CWIP projects expected to be completed during the test year. Short-term CWIP not eligible for AFUDC is also included in rate base. OH No return on CWIP used in Ohio. There has never been a situation where an Ohio company recovered the cost of constructing an asset before it was placed in service. OR No, except for water utilities. This is mandated by Oregon statute. ORS 757.355 states:iii
If the utility is able to demonstrate that the plant will be in service by the effective date of revised rates, Staff will allow the plant in rates. Additionally, many utilities are using a future test year and if a utility has a major project coming online shortly after rates are scheduled to go into effect, then the Commission may allow the company to track the investment into rates. As shown above, we have a "used and useful" law that doesn’t allow any investment into rates that is not being used. For water utilities, we will allow CWIP during a rate review if the utility can demonstrate that the plant will be in service within a reasonable amount of time after approval of its rates, approximately 6 months.
SC This is looked at on a case by case basis but normally yes. TN Yes. VA Yes. VT During a rate proceeding, a return is allowed for that portion of CWIP that will be placed into service during the "rate year" and is accomplished by including that portion of CWIP in the rate base. Those amounts that are not be placed into service (and which are not included in rate base) during the rate year and where the construction period is estimated to be greater than one year accrue an AFUDC charge that is calculated based on the FERC formula that includes short and long term cost of capital. WA No, not recently. It had been included on a case-by-case basis in rate base sometimes in some 1980’s cases during the heavy nuclear/coal construction and high interest rate periods as a means to provide additional cash flow. In addition, we have recently "pro formed" large transmission/production plant that would be in service in the rate year into rate base, with savings offsets. WI Generally, the Commission’s current practice has been to allow a current return on 50 percent of CWIP. For major projects, a current return on 100 percent of CWIP has sometimes been allowed. WY No. We do, however, update Plant in Service to incorporate plant that is expected to be in service at the time rates are to go into effect.
This is an adjustment that is made to recognize as much plant as possible, without going to a future test year.