Recovery of Financing Costs During Construction

What are the differences between traditional cost recovery and recovery of financing costs during construction?

• Traditionally, utilities are allowed to recover the cost of investments, such as power plants, after the plants begin to operate and serve customers.
  • During the construction period, utilities incur construction ("brick and mortar" and labor) costs - and related financing costs.
  • Because of the tremendous cost of investments such as power plants, utilities also incur additional financing costs to pay the financing costs incurred during the construction period.
  • Traditionally, recovery of these financing costs is deferred during the construction period, added to the ultimate cost of the plant and recovered from customers over the useful life of the plant (40 - 60 years in the case of a nuclear generating plant).
• As an alternative, rates can be set to allow for recovery of financing costs during the construction period - and therefore avoid "interest on interest" expenses.
  • Recovery of financing costs during the construction period can be allowed by including the on-going financing costs related to the new units in rate base.
  • When financing costs are included in the rate base, customers avoid paying "interest on interest" and reduce the total return required over the life of the asset.
  • Utility credit rating agencies view recovery of financing costs during construction positively, which can result in lower financing costs for all utility projects. Better credit ratings can lower the interest costs the company - and therefore customers — must incur to finance the cost of new power plants — and all other utility investments.

• The cost of the plant will be phased-in over 7 years, versus phased in over only two years. (Approx. 1.3%/yr over 7 years for total of 9%, versus approx. 12% total over two years.)
• Customers will avoid paying $300 million in "interest on interest."
• The in-service cost of the plant will be reduced by nearly $2 billion (30 percent).
• Total rate increases required to cover the cost of the plant when it goes into service will be nearly 3 percent lower.
• Because customers avoid paying financing costs on financing costs, they would save money over the life of the plant.
• Preserving utility credit ratings reduces costs for other projects which helps keep customer rates lower.