As an alternative to capitalizing AFUDC during the construction period, a regulator may permit a regulated utility’s construction work in progress (CWIP) balance to be included in rate base before the plant is completed and placed in service. This provides the regulated utility with a return on a portion of its investment during the construction period. In such cases, no AFUDC is provided because the regulated utility is receiving a current return on its carrying costs.

Another recovery alternative is to allow a current return on a regulated utility’s capital investment during construction through a rate rider mechanism. Under this alternative, a regulated utility bills and recovers an approved return from customers while the plant is being constructed. As a result, the regulated utility would record no AFUDC because the utility is currently recovering the cost of financing. This approach may be adopted for infrastructure replacement programs or environmental expenditures.

A third, but less common, approach to recovery of carrying costs is referred to as “mirror CWIP.” Under this approach, a portion of construction work in progress is allowed in rate base during the construction period. After the utility plant is placed in service, a decreasing amount of construction work in progress is excluded from rate base each year, “mirroring” the pattern in which the construction was included in rate base. As a result, rates are increased during the construction period, thus reducing the rate increase necessary when the plant is placed in service. In effect, the utility collects a return on and of a portion of the construction cost before the utility plant is placed in service.

With mirror CWIP, the ratemaking differs from the accounting. The guidance on mirror CWIP is included in ASC 980-340-55-4 through 55-8. Although AFUDC may not be allowed during the construction period for ratemaking, it should be capitalized on the total cumulative construction cost in each financial reporting period. In accordance with ASC 980-340-55-7, the utility should record revenue collected as a result of including construction work in progress currently in rate base as a liability to customers, with disclosure of the expected period of repayment to customers.