I do have one class where doing well on the final project can get a failing student a passing grade though. But the project requires they apply what they've learned.
Had he just been asking us to recite implementations of quicksort and whatnot I might agree with you, but I think that your premise is flawed. Not all final exams are what you have described.
Perhaps I'm overly pessimistic from my experiences, but I'd bet the tests'll be multiple-choice, just like the UW entrance exams are.
Because it's easier for a machine to grade them.
EDIT: the article does say the faculty will be creating the tests. That does give me hope.
I see no reason why this UW initiative can't work the same way. I hope that it can work this way and attract credibility, since it would make it easier for people like myself who find the spiraling cost of college tuition hard to manage.
Thus I'm not hopeful.
And to be honest, they're gonna get their money from you one way or another. :)
On a related note of "credit based on knowledge", I am always fond of college professors who have the policy "If you make an 'A' on the final, you make an 'A' in the class", the premise being that you clearly have learned the material, and their job is to make sure you know the material.