The Reagan administration is promoting a major change in the way new power plants are financed that consumer groups contend could add an average of $50 a year to residential electric bills across the country.
The proposal endorsed by the Department of Energy and the chairman of the Federal Energy Regulatory Commission would allow electric utilities to charge customers for power plants still under construction, reversing a policy of requiring customers to pay only for plants that provide them with electricity.
The issue, to be decided by FERC, presents a classic choice: pay me now, or pay me later.
Pay me now, urges the Edison Electric Institute, lobbying arm of the investor-owned utilities. EEI heads a phalanx of power producers that includes Potomac Electric Power Co., Virginia Electric & Power Co., Baltimore Gas & Electric and most of the rest of the industry.
Pay later, argues an eclectic coalition of electric customers ranging from General Motors to Consumers Union. Among the opponents are the American Public Power Association (made up of government-owned utilities), the National Association of State Utility Consumer Advocates, and the Electricity Consumers Resource Council, a group that includes GM, U.S. Steel, DuPont and 14 other industrial giants that collectively consume almost 5 percent of all electricity.
Advance payments are necessary because "the electric utility industry is in great financial distress," EEI spokesman Sherwood Smith Jr. testified at a December FERC hearing. Battered by soaring fuel costs, high interest rates and delays in the completion of nuclear power plants, the industry is waging a campaign to collect power plant construction costs up front.
Consumer groups claim the industry is crying wolf about its financial problems, citing Wall Street reports like one issued this month by Bache Halsey Stuart Shields Inc. that forecast a "bright outlook" for electric utilities.
The opponents also argue it is unfair to force customers to pay for power plants before they are in use. And consumers fear they will get stuck with the bill for plants that are never finished, an increasingly frequent occurrence with nuclear power plants.
FERC, which is expected to act on the matter later this year, has authority only over wholesale electricity sales, but its policies frequently are followed by state utility commissions.
If the principle advocated by the utility industry and the Energy Department were applied across the board, "consumers' electric bills would go up by about $12 billion a year," the APPA estimates.
Those who support the change in policy dispute that claim.
"At issue is not a choice between higher electric rates and lower electric rates," says FERC Chairman C. Michael Butler III, "but a choice between substantial increases in current electric rates and generally even more substantial increases in the future."
Butler has all but argued the industry's case in two recent speeches. His statements so ired the public power association that it demanded he not vote when the issue comes before FERC, contending he has violated FERC's standards of objectivity.
Butler insists there is no legal basis for the APPA complaint, but says if the other FERC comissioners think he ought to abstain, he will.
The Department of Energy, which presumably reflects administration views, has officially endorsed the idea by filing a brief with FERC supporting the industry position. Since Butler helped write the energy plan of the 1980 Republican platform and served on President Reagan's energy transition team, his views are considered congruent with the official administration position.
The buzzword in the bickering is "CWIP" -- pronounced "quip" -- short for Construction Work in Progress.
The question is whether construction work in progress (the money being spent on power plants while they are being built) should be included in the rate base upon which a utility's prices are figured.
Under state and federal regulation, electric rates are set to give the utility a specified rate of return on its investment in facilities, known as the rate base.
For years a basic principle of regulation has been that utilities are authorized to make a profit only on money invested in generating plants, power lines and other equipment that are "used and useful" in providing service to customers.
To build a new power plant, an electric company borrows money to pay construction bills. When the plant is completed the cost is added to the rate base. Included in the rate base are not only the price of bricks, mortar and labor, but also the interest the company pays to borrow money to finance the project.
The funds used during construction are repaid over the life of a power plant. Because of the soaring cost of building new power plants and borrowing to pay for them, the amount of money utilities have tied up in plants under construction has skyrocketed.
Utility companies can claim an accounting credit for the money invested in plants under construction and include the credit in their profits. A decade ago that credit amounted to 5 percent to 10 percent of utility profits; now it is more than half the earnings of companies that have big construction programs.
In 1980, 61 percent of Virginia Electric & Power profits came from the credit for plants under construction, because Vepco had billions tied up in partially-built nuclear and pumped storage plants. Even after one of the nuclear plants was completed last year, Vepco still got 44 percent of its reported earnings from the accounting credit.
Because of its extensive construction program, Vepco is one of the leading advocates of up-front financing of power plants.
The Energy Department's brief in the FERC case says the change to up-front financing of new plants is "fundamental to the financial condition of this industry."
The industry has filled dozens of documents detailing its fiscal woes in the case. "Rather than engage in a long discussion about such financial arcana," FERC Chairman Butler said in a speech sponsored by EEI last fall, "I shall accept for the purposes of these remarks that the electric utility industry is, indeed, in poor financial shape."
But when Bache Halsey Stuart Shields Inc. surveyed the industry's prospects this month it concluded that "as the year 1982 unfolds, we are optimistic that a favorable market climate for electric utilities will evolve." Bache said investors in utility stocks can expect to earn a profit from dividends and growth "of close to 18 percent per annum over the next five years."
The utility industry argues that it is in the best interest of customers to pay for power plants while they are being built. Pay-as-you-go financing avoids the sudden jump in rates that occurs when a billion-dollar power plant is added to the rate base, Vepco pointed out in its comments on the case.
Pepco argues that with CWIP, consumers are signaled in advance that electric rates are going up, and therefore can better adjust the consumption of power to offset the rate increases.
The utilities admit the change will produce an immediate jump in electric bills, but have filed elaborate calculations designed to show that consumers would pay lower electric bills over the life of a power plant if a switch were made to CWIP.
The savings result because consumers do not have to pay interest on the interest that accrues while the plant is being built.
"Consumers do not want higher current retail rates in return for somewhat lower future rates," responds D.C. People's Counsel Brian Lederer, who is representing the association of state utility consumer advocates in the case.
"They are requesting that the commission please not 'benefit' them in this way," said Lederer. "Consumers are telling the commission they prefer to invest their money in other ways."
Lederer says some elderly consumers won't live long enough to use power plants they would have to pay for and maintains the issue is "the inequity of requiring present consumers to pay for facilities that can only provide future service."
Consumers Union contends that forcing customers to invest for future needs is exactly the opposite of what would happen if the electric utility business were an unregulated free market. "Any competitive firm that attempts to raise the price of its product to pay for new facilities under construction finds that the quantity demanded rapidly declines," the group argued.
DOE maintained in its brief in the FERC case that the nation might run short of electricity because power companies are reluctant to build new power plants under present financial rules.
"Undue and unnecessary financial constraints could be leading us toward a future of insufficient electricity supply and the attendant problems of unnecessarily high electricity prices, unnecessarily high oil consumption and reduced economic growth," DOE said.
The DOE projections of energy shortages, however, were based on a growth in demand for electricity four to eight times greater than what actually occurred last year. The Energy Department's scenarios say reserve-generating capacity could drop to the dangerous level by the end of the decade if power use grows 4 percent a year, sometime after that if the growth rate is 2 percent. But the actual growth rate last year was only 1/2 of 1 percent, pushing any threatened shortages several generations into the future.
The Electricity Consumers Resources Council, whose business members stand to pay the most if rates go up, complains that FERC has decided to use CWIP "as a technique to cure all utility ills."
Butler acknowledges that complaint is accurate. "The point that seems to me to emerge," he said in his October speech to EEI, "is that inclusion of CWIP in the rate base may be useful principally as a means of correcting other defects in the regulatory process."