Capitalized Interest and the Cost of Money to Electric Utilities

The theoretical and empirical analysis of this paper finds no consistent support for a risk effect of allowance for funds used during construction (AFUDC). Unlike the literature in this area, a tax effect is sometimes present, and some empirical support for it is shown. The authors conclude that AFUDC matters, and that AFUDC earnings are more valuable than other earnings in these cases. Since the study finds AFUDC to have little or no effect on the cost of equity capital for electric utilities, the policy implications are that the inclusion of construction costs in the rate base will have no beneficial effect on the cost of equity capital, but there will be an effect on rates due to intergenerational shifting of rate base. 19 references, 1 figure, 6 tables.