Pre-Approval Commitments: When And Under What Conditions Should Regulators Commit Ratepayer Dollars to Utility-Proposed Capital Projects?

Utilities face growing demand, aging infrastructure, environmental requirements, an increasing call for the construction of renewable projects, and shrinking credit markets.  These pressures are causing changes in the source of capital funds. Until 30 years ago, utility regulators decided cost recovery for capital projects only after construction was completed.  This approach meant that (1) cost recovery did not begin until the utility sought and obtained a rate increase; and (2) during construction, the utility had to finance the project with non-ratepayer funds.

Some state legislatures and commissions are breaking from this traditional approach.  Statutes and orders today often provide some form of cost recovery assurance prior to commercial operation (and sometimes prior to commencement of construction). These new approaches shift risks -- from investors to consumers.  This shift has implications for accountability, prudence, regulatory process and the cost of capital.

This paper, published by the National Regulatory Research Institute and co-authored with Scott Strauss, addresses the many and conflicting considerations.