Survey and Expert Report on Capital Financing Cost Recovery Among Canadian Utilities

Categories: Cost of Capital

April 14, 2026 - Nicholas Crowley and Corey Goodrich

CA Energy Consulting authored a report filed before the Newfoundland and Labrador Board of Commissioners of Public Utilities containing expert evidence on methods for recovering the costs of capital financing among utilities in North America (Application to the Board of Commissioners). The report contained survey responses from eleven Canadian utilities and found that most Canadian utilities recover capital financing costs through an Allowance for Funds Used During Construction (AFUDC) account set according to the utility’s weighted average cost of capital (WACC).

Regulators have adopted two approaches to providing utilities with the ability to recover capital financing costs: (1) the rate base, or, “Construction Work in Progress” (CWIP) method; and (2) a set of approaches that accrue financing costs during construction, such as AFUDC or “Interest During Construction” (IDC). Under the CWIP method, the utility places the cost of unfinished projects directly into rate base to begin earning a rate of return. This approach is less common, as most regulators require that capital is “used and useful” before it can earn a rate of return. Under the AFUDC or IDC approaches, assets are only placed into rate base when they are deemed used and useful, but financing costs are capitalized and included in the value of the asset once the asset is placed into rate base. Responses to our survey indicate that most Canadian utilities recover financing costs through this second method.

NL Hydro’s current methodology for recovering the costs of capital financing, IDC, compensates the utility for capital financing at a rate equal to the utility’s cost of debt. This approach aligns with “International Financial Reporting Standards” (IFRS) accounting practice but does not align with the principles of financial economics, which require returns on invested capital equal to a utility’s WACC. NL Hydro has requested to recover its capital financing costs according to AFUDC in lieu of IDC to align the company’s cost recovery methods with standard regulatory practice.

The report, available here, finds that even utilities that follow IFRS for reporting purposes may adopt AFUDC for the purposes of establishing a revenue requirement and setting rates.