Construction Cost Overruns in Electric Utilities: Some Trends and Implications

FOREWORD The bylaws of the National Regulatory Research Institute state that among the purposes of the Institute is: ... to carry out research and related activities directed to the needs of state regulatory commissioners, to assist the state commissions with developing innovative solutions to state regulatory problems, and to address regulatory issues of national concern. This study· the third in our series of Occasional Papers· helps meet that purpose. The existence of substantial and persisting cost overruns in the construction of utility plants is a problem for utility companies, ratepayers, and regulators alike. How much of these overruns is properly attributable to "inflation" and how much to other causes and what might be done about it are questions of very real currency. j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j j I j When the Shoreham 1 Nuclear Plant comes into service on Long Island it will have cost at least five times as much as first estimated. The cost of nuclear plants generally have increased an average of nearly 18 percent per year in the last decade, in an upward spiral that is o'he reason for diminished interest in this power source. However, the cost of coal-generating plant has risen as well, with new plants costing almost double what they did eight years ago, and further boosts already in view. Cost increases at these rates create special problems for state utility regulators, who must weigh the benefits of constructing new plants according to a number of considerations. If early estimates are unreliable, the basis for reasoned decisions evaporates. Plants might be built whether or not they eventually make sense either to utilities or their regulators. The purpose of this report is to sort through the record of increases and overruns and clarify their meaning. Essentially. we are interested in two questions: Why have plant costs been going up so much, and what can be done about it? We have attempted to answer the first question by recognizing all relevant influences: the incentives of utilities, the common problems of inflation and cost estimation, and regulatory developments that have affected major power sources. The second question we have attempted to answer from the viewpoint of both utilities and regulators. Our findings are summarized below: …