Opinion ID: 376668
Heading Depth: 3
Heading Rank: 1

Heading: Computation of the AFDC Figure.

Text: 25 Although Detroit Edison had no discretion regarding the computation of AFDC, appellant challenges that figure as a predicate for her claim that a better definitional section was necessary. The attack is based upon the notion that the inclusion of the equity component was contrary to sound accounting principles; specifically, it is claimed that the use of internally generated funds is not a capital expenditure in the same sense as the payment of ordinary interest, that the correct figure is incapable of ascertainment since it represents only a theoretical loss on the income which might have been derived therefrom had such funds not been diverted for new plant construction, and that such value as is ascribed to the application of internal funds to construction should be discounted in view of the fact that its recovery will not commence for a lengthy period of time. 26 While the capitalization of the equity component of construction financing costs may not be countenanced in ordinary businesses, the unique economics of regulated industries justifies specialized accounting conventions. Unlike ordinary commercial enterprises, utilities are subject to a rate-making process that virtually guarantees the recovery of capital costs, including the imputed cost of diverting internal funds to a construction project. Moreover, utilities are capital-intense ventures, whose allure to investors is not the possibility of dramatic growth or sharply enhanced earnings, but the ability to pay dividends. The diversion of equity funds diminishes a utility's ability to provide an attractive rate of return to a degree not known to other commercial enterprises and thus potentially hampers its access to capital. The AFDC mechanism takes these factors into account; it has been in use for many years and its propriety was confirmed as recently as 1977 when the FPC issued Order No. 561 (Feb. 2, 1977), amending the Uniform System of Accounts to require that the equity component of AFDC continue to be included under its present other income heading, although the debt component was returned to the separate account used prior to 1969. 27 Furthermore, although appellant characterizes the value placed upon the equity component as theoretical, implying that this figure is exaggerated, such is not the case. As is explained in the definitional note, the amount ascribed to the equity component is based upon the actual rates applying to the debt component. Thus, the figure reached is neither fanciful nor overblown. 28 Finally, the notion that the AFDC figure, as to both its debt and equity elements, should be discounted to reflect the current value of money which will be recouped only in future periods, is nonsensical since it would result in precisely the distortion which the AFDC accounting device is meant to alleviate. Such a practice would decrease the utility's immediate income, thereby resulting in higher rate charges, and subsequently, through a diminishment in the basis of depreciation, tend to increase income in future years, thereby lowering rates in that period. The net effect would be to burden present customers with the cost of future facilities. No commercial enterprise discounts current capital costs, and indeed, appellant's own expert accounting witness did not suggest that such a practice was warranted. 29