Question: A utility currently providing service to customers finances a specific plant construction project, such as pollution control facilities, with proceeds from an issue of long-term debt (bonds) which are restricted in their use to paying for construction expenditures. The proceeds of the debt are required to be retained in a trust or other special fund and invested until so used. Earnings of the trust or other special fund are available for paying project expenditures, debt interest, or reacquiring the bonds.
How should the long-term debt, the related interest cost and earnings on the trust or other special funds be accounted for during construction of the project facilities?
Answer: Electric (Gas) Plant Instruction no. 3(17) provides a formula for computing rates used to capitalize allowances for funds used during construction rates used to capitalize allowances for funds used during construction (AFUDC). The formula includes a component for the weighted average cost of long-term debt. The entire issue of the use-restricted long-term debt should be included with other long-term debt used in calculating AFUDC rates. Average balances of the trust or other special funds should be included in the computation of the average balance of construction work in progress (AW@) used in the formula.
AFUDC assigned to the project should be determined by applying AFUDC rates to the eligible project expenditures and also balances in the trust or special funds. Fund earnings during construction should be credited to the cost of construction of the project facilities.
Russell E. Faudree, Jr.
Effective: May 1, 1983