Empirical investigation of allowance for funds used during construction in the electric-utility industry

Thesis/Dissertation · Fri Jan 01 04:00:00 EST 1982

OSTI ID:5454710

Ifflander, A J

Allowance for Funds used during construction (AFUDC) represents capitalized interest on funds devoted to construction projects. This capitalized interest flows through to the income statement and is considered other utility income in the year of capitalization. The problem relates to whether the allowance for funds is the same quality as the operating earnings of the utility. A major controversy has arisen among followers of the electric-utility industry about AFUDC, whether it is really representing lower-quality earnings and whether the declines in market valuation over the last fifteen years are the result of increasing percentages of AFUDC. The major findings of the study may be summarized as follows remembering that method I companies exclude while method II companies include construction work in the rate base. First, there is no significant difference in monthly stock returns between portfolios of method I companies when AFUDC is used as the information variable. Second, there is no significant difference in monthly stock returns for portfolios of method I firms compared to portfolios of method II firms. The conclusion is that all information is known previous to the disclosure date, allowing perfect forecasts of AFUDC in relation to operating earnings. Therefore, no significant information is contained in AFUDC disclosure that may be used by investors to assess stock returns.

• OSTI ID: 5454710
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
296000* -- Energy Planning & Policy-- Electric Power
AFUDC
ECONOMIC ANALYSIS
ECONOMICS
ELECTRIC UTILITIES
PUBLIC UTILITIES