FEDERAL ENERGY REGULATORY COMMISSION

Washington, D.C. 20426

In Reply Refer To:

Office of Enforcement

Docket No. AI11-1-000

February 16, 2011

TO ALL JURISDICTIONAL NATURAL GAS PIPELINE COMPANIES AND 

PUBLIC UTILITIES AND LICENSEES

Subject: Revision to Accounting Release No. 5, Capitalization of Allowance for Funds 

Used During Construction

The Commission has historically relied on the guidance issued by the 

Commission’s Chief Accountant in Accounting Release No. 5 (Revised) (AR-5),1

Capitalization of Interest During Construction, to address when a company may begin to 

accrue an allowance for funds used during construction (AFUDC).2

 Under this guidance,

a natural gas pipeline company was allowed to accrue AFUDC beginning with the date it 

filed an application for a certificate of public convenience and necessity (certificate) with 

the Commission, provided that it incurred construction costs on a continuous, planned 

progressive basis. 

The natural gas industry has undergone substantial changes since the issuance of 

AR-5 in 1968. Today, many natural gas pipeline companies seeking to construct pipeline 

facilities participate in the pre-filing process instituted by the Commission in 2001.3

 For 

 1 Accounting Release No. 5 (Revised), Capitalization of Interest During 

Construction, effective January 1, 1968, FERC Stats. & Regs. ¶ 40,005.

2 AR-5 uses the term “interest during construction” which is now referred to as 

AFUDC and as such we will use the term AFUDC in place of “interest during 

construction” in the revised AR-5.

3 In 2001, the Commission instituted an optional pre-filing process and encouraged 

entities seeking authorization to construct new facilities to prepare and submit to the 

Commission conceptual design and engineering features of the proposed project, as well 

as extensive information about potential environmental, security and safety impacts prior

to filing a certificate application. See Office of Energy Projects Gas Outreach Team, 

Ideas for Better Stakeholder Involvement in the Interstate Natural Gas Pipeline Planning 

Pre-Filing Process, December 2001, available at http://www.ferc.gov/legal/maj-ordreg/land-docs/stakeholder.pdf. 

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Docket No. AI11-1-000 - 2 - 

the past ten years, natural gas pipeline companies participating in the pre-filing process 

have typically incurred significant project-related costs prior to filing a certificate 

application with the Commission. These changes required the Commission to reconsider 

its longstanding policy of limiting AFUDC accruals generally to those costs incurred on 

the date a certificate application was filed with the Commission.

On March 18, 2010, the Commission revised its policy for accruing AFUDC in 

Southern Natural and Florida Gas.4 In these orders, the Commission concluded that the 

certificate application date was no longer an appropriate milestone for determining when 

to begin the accrual of AFUDC since many natural gas pipeline companies have been 

participating in the pre-filing process and have incurred significant project-related costs 

prior to filing a certificate application with the Commission. 

The Commission found that it is important that the revised AFUDC policy achieve 

the following objectives: (a) be in harmony with the recent developments in the natural 

gas industry; (b) allow AFUDC capitalization on all prudent construction costs; (c) serve 

to promote infrastructure development by allowing for recovery of all monies invested in 

the construction of facilities; and (d) be directly correlated to the occurrence of 

construction project-related costs incurred to prepare the construction project for its 

intended use. 

Based on the above objectives, the Commission revised its AFUDC accrual policy 

to allow natural gas pipeline companies to begin accruing AFUDC on construction 

projects when the following two conditions are met: (1) capital expenditures for the 

project have been incurred; and (2) activities that are necessary to get the construction 

project ready for its intended use are in progress (AFUDC policy conditions). The 

Commission explained that the term “activities” is to be construed broadly and includes 

all the actions, excluding preliminary survey and investigation activities, required to 

prepare the construction project for its intended use. In addition, the Commission found 

that the date that the Commission approves the request to initiate the pre-filing process is 

a strong indicator of the initiation of construction project-related activities.5

The Commission also directed applicants seeking a certificate for authorization to 

construct pipeline facilities to make a representation in their filing that AFUDC accruals 

included in the cost of the facilities are calculated in accordance with the Commission’s 

 4 Southern Natural Gas Co., 130 FERC ¶ 61,193 (2010) (Southern Natural); 

Florida Gas Transmission Co. LLC, 130 FERC ¶ 61,194 (2010) (Florida Gas).

5 To accrue AFUDC prior or subsequent to the initiation of pre-filing, natural gas 

pipelines must be prepared to demonstrate that the AFUDC policy conditions have been 

met. E.g., Southern Natural, 130 FERC ¶ 61,193 at P 36, 39; Florida Gas 130 FERC ¶ 

61,194 at P 25, 28.

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Docket No. AI11-1-000 - 3 - 

rules and regulations and pursuant to and consistent with the AFUDC policy conditions. 

Finally, the Commission emphasized that natural gas pipeline companies must retain 

records supporting the commencement of AFUDC accruals, and such AFUDC accruals 

will be subject to scrutiny through Commission audit or rate review, just as any other cost 

would.

Although the Commission established the revised AFUDC accrual policy in the 

context of when natural gas pipeline companies may begin AFUDC accruals, the revised 

policy is comparable with that currently used by public utilities and licensees. As a 

result, this revised AR-5 shall apply to all entities under the Commission’s jurisdiction to 

which AFUDC is applicable. This revision will provide for consistency and uniformity 

in determining AFUDC.

Natural gas pipeline companies and public utilities and licensees may continue to 

accrue AFUDC for as long as the two conditions in the revised AFUDC policy continue 

to be met. However, AFUDC accruals must cease once the facility being constructed has 

been tested and is ready for, or placed in, service. This includes those portions of 

construction projects completed and put into service although the project is not fully 

completed. Finally, if construction is interrupted or suspended, AFUDC accruals must 

cease unless the company can justify the interruption as being reasonable under the 

circumstances.

The Commission delegated authority to act on this matter to the Director of the 

Office of Enforcement or his designee under 18 C.F.R. § 375.311 (2010). The Director 

has designated this authority to the Chief Accountant. This letter constitutes final agency 

action. Your company may file a request for rehearing with the Commission within 30 

days of the date of this order under 18 C.F.R. § 385.713 (2010). 

Sincerely, 

Bryan K. Craig

Director and Chief Accountant

Division of Audits

Office of Enforcement

Enclosure

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FEDERAL ENERGY REGULATORY COMMISSION

ACCOUNTING RELEASE NUMBER 5 (AR-5) (Revised)

Capitalization of Allowance for Funds Used During Construction 

Question:

What is the proper period for capitalization of Allowance for Funds Used During 

Construction (AFUDC)? 

Answer:

The capitalization period for AFUDC shall begin when two conditions are present: 

(1) capital expenditures for the project have been incurred; and (2) activities that are 

necessary to get the construction project ready for its intended use are in progress. 

AFUDC capitalization shall continue as long as these two conditions are present.

The term “activities” is to be construed broadly and includes all the actions required to 

prepare the construction project for its intended use, including activities prior to physical 

construction, such as the development of plans or the process of obtaining permits from 

governmental authorities. However, the term “activities” does not include preliminary 

survey and investigation activities. Activities occurring prior to the above two conditions 

being met would be considered preliminary in nature for the purpose of determining 

feasibility of projects under contemplation and would be included in Accounts 183, 

Preliminary Survey and Investigation Charges, or 183.2, Other Preliminary Survey and 

Investigation Charges, as appropriate. These preliminary activities would not be subject 

to AFUDC accruals until such a time as the two conditions are met and the amounts 

included in Account 183 or Account 183.2 are transferred to Account 107, Construction 

Work in Progress. 

No AFUDC should be accrued during periods of interrupted construction unless the 

company can justify the interruption as being reasonable under the circumstances. 

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2

Capitalization of AFUDC stops when the facilities have been tested and are placed in, or 

ready for, service. This would include those portions of construction projects completed 

and put into service although the project is not fully completed. Should the test period 

exceed the allowable 30, 90, or 120 days, the company must submit full particulars and 

justification for an extension of such period to the Commission in accordance with 

Electric and Gas Plant Instruction 9(D) in the Uniform System of Accounts.

 

Bryan K. Craig

Director and Chief Accountant

Division of Audits

Office of Enforcement

Effective: March 18, 2010

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Document Content(s)

AI11-1-000.DOC........................................................1-5

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