7. Treatment of AFUDC
The cost estimates in the Petitions do not include AFUDC. As explained in SCE's Amendment, AFUDC represents the estimated cost of debt and equity funds that finance utility plant construction. AFUDC is capitalized as part of the overall cost of plant. Thus, when new plant goes into service, the total capital-related costs, including capitalized finance charges, are included in rate base.15
A utility may apply to FERC for Construction Work In Progress (CWIP) incentive rate treatment to recover financing charges in current rates while plant is under construction, in lieu of later collecting AFUDC. SCE requests that AFUDC not be included in the maximum cost, and SCE states in its Petitions and Amendment that "to the extent SCE recovers its cost of capital through CWIP in Rate Base, such cost of capital will not be accrued through AFUDC. Recovering SCE's construction financing charges through CWIP in Rate Base replaces the actual AFUDC that otherwise would be accrued to the project"16
FERC has jurisdiction to determine the collection of AFUDC and CWIP. On November 15, 2007, FERC authorized SCE to collect CWIP for ATP Segments 1, 2, and 3.17 Since that ruling, SCE has applied for and is collecting CWIP for these projects. SCE's Amendment makes clear that "[b]ecause only a few project elements within the entire scope of TRTP Segments 1-3 would likely incur AFUDC, the vast majority of financing costs [will] be recovered through the CWIP Ratemaking Mechanism assuming the FERC approves the costs to include in Transmission rates. The actual AFUDC anticipated to be collected through CPUC and FERC rates for Segments 1 through 3 is approximately four percent of the total financing estimate."18 We understand that this "four percent" may not be allowed by FERC because FERC rules do not allow CWIP recovery for transmission-related communications systems. Consequently, with regard to the four percent estimate, SCE states in footnote 10 of the Amendment that "[i]f the FERC does not approve the eligible Project costs, then SCE will request recovery through CPUC rates under California Public Utilities Code § 399.2.5, and the actual AFUDC amount would be higher."19 Hence, even though SCE prefers to recover its construction financing costs through CWIP, SCE states that it may eventually seek recovery of a small amount of unrecovered costs directly from ratepayers at a later date, based upon decisions made by FERC.
SCE has provided estimates for AFUDC in both the Petitions and the Amendment. The Amendment modified the initial estimates for AFUDC presented in the Petitions, with the most recent estimate being $77.3 million. No party has contested this estimate. Consequently, we find that $77.3 million is a reasonable current estimate for AFUDC, and is an appropriate proxy for financing costs here. Pursuant to FERC order, SCE is already receiving CWIP incentive rate treatment for Segments 1, 2, and 3 in lieu of collecting the $77.3 million in AFUDC, and will seek retail rate recovery from the Commission for those costs - anticipated to be small - that FERC does not allow to be included in CWIP.
Based upon SCE's explanations in the Petitions and the Amendment, we do not include this AFUDC estimate in the maximum cost. However, because the cost of financing is a significant portion of the costs of a transmission project which is ultimately recovered from ratepayers, we find that such financing costs, either in the form of CWIP or AFUDC, should be fully disclosed in Commission proceedings prior to project approval.
15 Amendment at 5.
16 Amendment at 4. Emphasis in the original.
17 121 FERC ¶ 61,168 (November 16, 2007) at 2.
18 Amendment at 4.
19 Amendment at 4, note 10.
