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Letters to the Editor

Fortnightly Magazine - December 2007

this, so be unaware that the related income is imaginary.

Additional ratepayer benefits from paying for financing costs over the period of construction are: 1) a reduction in risk that decreases the entity’s cost of capital; and 2) an inherent mitigation of the potential for the rate shock when a new generating unit is placed in service. When AFUDC is capitalized, placing a unit in service causes the revenue requirement components for return and related income taxes and for depreciation expenses to increase from zero. When AFUDC is paid over the period of construction, placing a unit in service has little or no impact on the revenue requirement component for return and related income taxes and causes the component for depreciation expenses to increase from zero, but to a lower amount than if AFUDC had been capitalized. For Iatan 2, my guess is that the capitalized financing costs would increase the depreciable investment and ratebase by about 15 percent, which is less than would occur without KCPL’s agreement to decrease the AFUDC rate.

An alternative to paying over the period of construction through including CWIP in ratebase is the utilization of a forecast test period. I understand that Missouri does not allow forecast test periods, even though there is no legislated prohibition from doing so. I view the aspect of the Iatan 2 Regulatory Plan that concerns additional depreciation to maintain an investment-grade bond rating as merely addressing symptoms, and view allowing CWIP in ratebase or forecast test periods as addressing the illness.

I have been following Missouri regulation because of my observation that the commission is making an effort to deal with the “challenging regulatory environment” that has been attributed to it by Standard & Poor’s (S&P). One of the owners of Iatan 2 (Empire District Electric Co.) introduced an S&P document in its 2004 rate case that mentions low allowed equity returns and depreciation rates and no fuel-adjustment clause and CWIP recovery as considerations when putting Empire on a credit watch with negative implications. Missouri had addressed an aspect of depreciation prior to this Empire proceeding through a decision to abandon a practice of deferring through cash treatment the recording and recovery of the salvage and cost of removal components of depreciation and to revert back to accrual accounting, and affirmed this change in practice in the Empire case. Missouri addressed the equity-return issue in the 2004 Empire case by abandoning its past practice of adopting the equity rate of return proposed by the staff. As noted in the Fortnightly’s interview of Missouri PSC chairman Jeff David (“ Regulator’s Forum: Restructuring Rollback ,” November 2007), 2005 legislation allows authorization of fuel-adjustment clauses, and the commission has started to do so. As noted above, the CWIP issue remains. In addition, some Missouri power-plant depreciation deferral mechanisms deserve attention but are beyond the scope of these comments.

Missouri is to be commended for making an effort to improve the fairness of its regulation through moving from pay-me-later to pay-me-now. Such an effort is not easily accomplished. I have seen some state regulators