AFUDC and Short-term Debt

On April 1 and 10, 2020 in AC20-81, San Diego Gas and Electric (SDG&E) asked FERC for a waiver related to short-term debt in the AFUDC calculation.  SDG&E requested to modify its existing AFUDC rate calculation in response to the Coronavirus (COVID-19) emergency, beginning on March 1, 2020.  SDG&E stated that it may significantly increase the amount of short-term debt and cash reserves it carries in response to the COVID-19 emergency.  FERC approved the request and told SDG&E that it must disclose its application of this waiver and calculation of AFUDC in its FERC Form No. 1, Annual Report of Major Electric Utilities, Licensees and Others (Form 1). 
SDG&E proposed to use a methodology for calculating its AFUDC that will enable it to exclude certain portions of its short-term debt from its AFUDC rate calculation, limited to a specific floor.  Specifically, SDG&E proposed to first apply existing waivers previously granted by the Commission to its average short-term debt balances to arrive at a net average short-term debt balance.[1]  Next, SDG&E proposed to compare the net average short-term debt balance to an established floor of $15.2 million.[2]  If the net average short-term debt balance is less than $15.2 million, SDG&E proposed to include the net average short-term debt balance in the calculation of its AFUDC rate.  If the net average short-term debt balance exceeds the $15.2 million floor and SDG&E is also holding cash and cash equivalents equal to or greater than that excess, SDG&E proposed to include the established floor of $15.2 million of short-term debt balance in the calculation of its AFUDC rate. 
FERC’s accounting regulations and precedent requires the maximum AFUDC rate to be computed by considering short-term debt as the first source of construction financing.  This is based on the premise that short-term debt is not used elsewhere in the development of rates.[3]  Historically, the Commission has only provided exceptions to this AFUDC requirement in unique situations where certain amounts of short-term debt were a defined cost in the setting of rates.  However, SDG&E’s need to maintain liquidity and protect against financial market uncertainty during this unique state of emergency also warrants exception. 

[1] See Docket Nos. AC16-194-000 (granting SDG&E exclusion from its AFUDC calculation short-term debt used to finance net revenue under-collections recorded in SDG&E’s regulatory balancing and memo accounts); AC15-58-000 (granting SDG&E exclusion for short-term debt associated with the San Onofre Nuclear Generating Station); and AC13-96-000 (granting SDG&E exclusion from its AFUDC calculation short-term debt used to finance nuclear fuel inventors and customer hedging requirements).

[2] SDG&E represents that it calculated a floor of $15.2 million by taking a three-year average (2017, 2018, and 2019) of the short-term debt included in its AFUDC calculation.

[3] See Order Adopting Amendment to Uniform System of Accounts for Public Utilities and Licensees and for Natural Gas Companies, Order No. 561, 57 F.P.C. 608 (1977) at p. 1.