Opinion ID: 2237187
Heading Depth: 1
Heading Rank: 7

Heading: AFUDC Methodology

Text: Intervenors dispute the Commission's method of quantifying the costs related to the 15.9 months of unreasonable delay which were disallowed from Edison's rate base in the Commission's Rate Order II. In particular, intervenors argue that the Commission failed to disallow $80.6 million in time-related indirect costs. In order to address this issue, we first set forth some basic concepts related to the quantification of unreasonable delay costs incurred by Edison in the construction of its facility. Unreasonable costs which are disallowed from a utility's rate base are classified into two basic categories: (1) direct costs and (2) delay costs. Direct costs are costs which are activity related: they are costs which are directly related, indirectly related or a consequence of specific activities or issues, the expenditure of which was determined to be unreasonable. Direct costs are static and easily calculable. Delay costs, on the other hand, are costs which are time-related and would not have been incurred in the absence of unreasonable delay in the operation of the facility. Delay costs increase with the passage of time and their calculation involves time-value-of-money concepts. Both direct and delay costs also incur related Allowance for Funds Used During Construction (AFUDC) costs. AFUDC represents the cost of carrying an expenditure once it is incurred until it is included in the utility's rate base. AFUDC represents the time-value or the cost of money. In the instant case, the Commission's finding of unreasonable direct costs and their corresponding AFUDC is not in issue. However, the Commission's calculation of the unreasonable delay costs related to the 15.9 months of unreasonable delay is in issue. Therefore, we will focus only on delay costs. Delay costs are divided into several subcategories: (1) escalation costs, which include the increased cost of labor and materials resulting from the fact that the expenditure occurs later in time than it would have occurred in the mitigated schedule; (2) time-related indirect costs, which include costs that are dependent upon the project's duration rather than any particular construction activity or the general level of construction such as home-office overhead charged to a project; and (3) AFUDC related to these delay costs. In determining how to quantify the unreasonable costs related to the 15.9 months of delay, the parties presented several different methodologies of quantification to the Commission. The auditor presented a methodology known as the Present Value Revenue Requirements (PVRR) method. The Commission, however, rejected the PVRR method because it included several subjective assumptions related to time-value-of-money concepts which the Commission found to be unsupported by the evidence. No party has appealed the Commission determination to reject the PVRR method and, therefore, we will not discuss this method further. Intervenors also offered a method to quantify unreasonable delay costs known as the end-of-period AFUDC method. Under this method, the AFUDC which accrued beyond the point of delay is used as a reasonable approximation or proxy for the rate of escalation or the rate costs increased because of the unreasonable delay. Intervenors argued before the Commission and before this court that, in using the end-of-period AFUDC method to quantify unreasonable delay costs, the Commission must disallow not only the AFUDC which accrued after the July 7, 1983, mitigated fuel-load date, but also $80.6 million in time-related indirect costs. The $80.6 million figure is derived from the auditor's finding of $4.8 million per month of unreasonable time-related indirect costs. Intervenors maintain that $80.6 million should be added to the Commission's determination to disallow $291.1 million for a total disallowance of $371.7 million in unreasonable costs. Intervenors contend that failure to disallow time-related indirect costs over and above the disallowed AFUDC violates section 9-213 of the Act by including unreasonable costs in Edison's rate base. The Commission, however, rejected intervenors' end-of-period methodology because: (1) it involved some of the same subjective assumptions related to time-value-of-money concepts as the auditor's PVRR method and (2) to include a separate disallowance for time-related indirect costs would constitute double counting of these costs in the disallowance. Instead, the Commission adopted a different version of the end-of-period AFUDC methodology in which it disallowed from the rate base the AFUDC which accrued beyond the mitigated fuel-load date but did not include a separate disallowance for the time-related indirect costs. The appellate court correctly discussed the end-of-period AFUDC methodology and we quote from its opinion: The parties do not contend that the end-of-period AFUDC method measures the actual cost of time-related delay. Rather, AFUDC is one way of assessing the impact of schedule delay on a project without engaging in a complex analysis. Concededly, end-of-period AFUDC does not distinguish between AFUDC on reasonable or unreasonable expense, but merely measures the AFUDC for the last stage of construction regardless of the time in which the delay or cost occurred. In a conventional application of end-of-period AFUDC analysis, as explained by the auditor and a Joint Intervenors' witness, the rate of escalation, or increased expense, is considered to be equivalent to the rate of AFUDC, or cost of money. Up to the point of delay, escalation and AFUDC are considered to be a trade off. The AFUDC which accrues after the point of delay is used to represent increased costs to the consumer, as the rate at which AFUDC increases is considered to be the same rate by which expenses escalate. According to the audit report, if the ratepayer is called upon to meet expenses incurred due to delay without any traded benefit due to the cost of money, he is harmed. If in fact escalation rates are below AFUDC rates, employing the end-of-period AFUDC method overstates the harm to the rate-payer because he is experiencing some benefit from not having to pay for the increased expenses until a later date. The controversy seems to boil down to whether one considers the actual rate of escalation to be lower than the rate of AFUDC. If that is the case, then the difference between the rates acts to absorb the delay costs, including time-related indirect costs, without having to actually calculate them. If one considers actual escalation rates to be equivalent to or greater than AFUDC rates, then using AFUDC to represent the delay costs falls short of accounting for all the costs associated with delay. (Emphasis added.) ( Hartigan II, 202 Ill. App.3d at 952, 149 Ill.Dec. 341, 561 N.E.2d 711.) The appellate court also properly determined that the appropriate rate of escalation and the classification of time-related indirect costs are questions of fact for the Commission to determine. Hartigan II, 202 Ill.App.3d at 952, 149 Ill.Dec. 341, 561 N.E.2d 711. However, in Business & Professional People for the Public Interest v. Illinois Commerce Comm'n (1991), 146 Ill.2d 175, 166 Ill.Dec. 10, 585 N.E.2d 1032) ( Business & Professional People II), we remanded to the Commission the issue of whether its end-of-period AFUDC methodology subsumes time-related indirect costs, stating: The Commission never made a specific finding regarding the amount of escalation or time-related indirect expense. Thus it is unclear how much of the amount disallowed is attributable to each component of delay expense.    Because we are presented with only a summary finding that all unreasonable delay costs are subsumed by AFUDC, we are unable to make an informed judicial review of the Commission's finding that AFUDC subsumes all the time-related indirect costs.    Therefore, with respect to a separate disallowance for time-related indirect costs, we hold that the Commission's findings of fact are insufficient to allow informed judicial review [citation], and we remand the cause to the Commission for more specific findings on this issue. ( Business & Professional People II, 146 Ill.2d at 218, 166 Ill.Dec. 10, 585 N.E.2d 1032.) In accord with our decision in Business & Professional People II, we remand this issue in the instant case to the Commission and direct it to make more specific findings related to the escalation rate during the relevant period of time, the rate of AFUDC, and time-related indirect expense. If the rate of AFUDC exceeds the escalation rate and the calculable time-related indirect expenses (see Business & Professional People II, 146 Ill.2d at 218, 166 then we find the Commission's end-of-period AFUDC methodology to be a recognized form of quantification analysis ( Hartigan II, 202 Ill.App.3d at 953, 149 Ill.Dec. 341, 561 and to be supported by substantial evidence in the record.