Earnings deficits in the regulatory process

Improper and inadequate management of the allowance for funds used during construction (AFC) of utilities is blamed for the discrepancy between the authorized percentage rate of return and the lower realized rate of return. Samples of financial statements illustrate three situations with different strategies for excluding and including income tax reduction with cost of service and including or omitting additional capital or capital reinvestment to provide returns. Accounting procedures for each strategy are explained. Part of the solution to energy supply needs is felt to depend on resolving the financial restrictions which have led to a shortage of facilities and energy development. Possible solutions include: (1) Set an adequate rate of return during construction and use reduced income tax on AFC interest to pay some of the capital costs. (2) Accrue AFC until revenues from the new construction are able to cover incremental cost increases. (3) Arrange to cover increasing incremental costs with revenues by setting a future test year in rate cases. (4) Include costs for construction work in progress (CWIP) in the flat rate base to allow rates to increase gradually and revenues to accrue during the construction period. (DCK)