Pragmatic approach to construction work in progress

A number of factors are involved when a decision is made to include costs of construction work in progress (CWIP) in a public utility's rate base, with primary consideration given to the regulated industry's net cost of money and the ratepayer's alternative opportunities for investment. Relative benefits to the parties vary, but present conditions are shown to benefit both. An allowance for funds used during construction (AFUDC) can be claimed by companies not permitted to include CWIP in their rate base, with reimbursement on either a current or life-time basis. Either way is beneficial so long as construction is completed in one year. Beyond that point costs must be compounded at a net cost-of-money rate. AFUDC costs are beneficial only if the ratepayers can invest their funds elsewhere at a higher return. If CWIP is included in the rates there can be a more gradual increase in rates rather than a less-desirable drastic jump after construction is completed. Other advantages include improvement in cash flow, quality of earnings, coverages, and bond ratings, as well as lower financing requirements and the possibility of reduced property taxes. (DCK)