Regulatory and financial aspects of the utility industry rate treatment of construction work in progress

Thesis/Dissertation · Thu Jan 01 04:00:00 EST 1981

OSTI ID:6756013

Sarikas, R H

Growth in utility-construction programs has focused attention on the methods used by utilities to obtain the earnings needed to pay investors for the use of funds for construction expenditures. One method is to add an amount to net income, called Allowance for Funds Used During Construction. (AFUDC). The contra account is capitalized interest which is added to the cost of plant and depreciated over the useful life of the asset. A return is allowed on the unamortized portion of such capitalized interest. The alternative is to include construction work in the rate base and permit the utility to earn a financial return on such amounts. Regulatory objection to this alternative is that existing rate payers are asked to pay rates based upon plant intended to serve the requirements of future customers. The literature generally suggests that the market treats AFUDC earnings as less valuable than operating earnings. Four hypotheses were tested dealing with the impact of AFUDC upon the market value of common stock, the extent to which any adverse valuation is influenced by the size of the construction program, and by the level of the AFUDC rate. Empirical testing results confirmed that AFUDC adversely affects the value of common stock. Tests of the influence of the level of the AFUDC rate upon stock valuation were inconclusive. Other testing shows a partial inclusion of construction work in the rate base will greatly limit any adverse market treatment of construction earnings.

• OSTI ID: 6756013
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
290200* -- Energy Planning & Policy-- Economics & Sociology
296000 -- Energy Planning & Policy-- Electric Power
AFUDC
CONSTRUCTION
CWIP
ECONOMIC IMPACT
ELECTRIC UTILITIES
INCOME
PUBLIC UTILITIES
RATE STRUCTURE
REGULATIONS