RAB Risks

The RAB model shifts construction risk from developers to ratepayers. That is the point. It is also the problem.

Under Regulated Asset Base financing, ratepayers begin paying for a project during construction through additions to the utility's rate base. If the project comes in on time and on budget, ratepayers benefit from lower total costs (because cheap regulated debt replaced expensive merchant financing). If the project runs over budget, ratepayers absorb the overrun through higher rates, because the cost additions flow into the rate base automatically. The developer faces no penalty for cost growth as long as the regulator allows the additions.

This creates a moral hazard: the party making construction decisions (the developer/utility) does not bear the financial consequences of poor decisions. The party bearing the consequences (ratepayers) has no influence over construction management.

Plant Vogtle. Georgia's two new reactors were budgeted at $14 billion and finished at roughly $35 billion, seven years late. Because Georgia allowed rate-base recovery during construction (CWIP, the American cousin of RAB), ratepayers began paying in 2011, a decade before the first unit delivered a kilowatt-hour, and they absorb most of the overrun through their bills.

If the developer bears no cost overrun risk, what discipline prevents budgets from ballooning?

Regulatory oversight is the only check. In theory, regulators can disallow "imprudent" costs from the rate base. In practice, disallowance is rare because regulators face political pressure to avoid stranding partially built projects. Once construction begins, the sunk cost dynamic favors completion at any price.

The UK's Sizewell C project adopted a modified RAB with cost-sharing provisions, explicitly designed to cap how much of any overrun ratepayers absorb.

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