AFUDC represents a method used to compensate the Utility for the estimated cost of debt and equity used to finance regulated plant additions and is recorded as part of the cost of construction projects.

AFUDC is recoverable from customers through rates over the life of the related property once the property is placed in service. The Utility recorded AFUDC of approximately $70 million and $44 million during 2008, $64 million and $32 million during 2007, and $47 million and $20 million during 2006, related to equity and debt, respectively.

Required

a. Describe AFUDC as used by PG&E.

b. How does capitalizing interest on borrowed funds affect income in the year of capitalization versus not capitalizing this interest? Explain.

c. Would net income tend to be higher than cash flow if there is substantial capitalization of interest on the borrowed funds during the current period?

d. How does capitalizing the allowance for equity funds used during construction affect income in the year of capitalization versus not capitalizing these charges?

e. Would net income tend to be higher than cash flow if there is substantial capitalization of the allowance for equity funds during construction for the current year?

f. Compute the following for the years 2008 and 2007:

1. Operating ratio

2. Funded debt to operating property

3. Percent earned on operating property

4. Operating revenue to operating property