Allowance for Funds Used During Construction
- Allowance for Funds Used During Construction
(AFUDC)
Construction activities may be financed from internally generated funds (primarily earnings retained in the business), or from funds provided by other external sources (short- and long-term debt). The allowance for funds used during construction is intended to recognize the cost of these funds dedicated to construction activities during the construction period. To arrive at the "allowance", a common procedural method makes use of a formula that is based on the assumption that short-term debt is the first source of construction funds. The cost rate for short-term debt is based on current costs. Since a utility plant is subject to depreciation, the allowance for funds used during construction is recovered in the form of depreciation from ratepayers over the service life of the plant to which it applies.
Energy terms .
2014.
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