Rate Stabilization with GASB 62 and ASC 980 Will Match Electric Revenues to Rates
What is ASC 980 and GASB 62 electric rate stabilization (aka Rainy Day Fund)?
ASC 980 and GASB 62 are best practices in setting up a “rainy day fund” for use when funds are needed on the rainy day. This is an excerpt from our publication – “The Practical Guidebook to Utility Regulatory Accounting” that shows the detailed approach for a rainy day fund (aka, rate stabilization). It contains valuable information to use in recording transactions to ensure rate recovery from your customers for revenues that should be tied to a corresponding event or to be recognized over a longer time-frame than that allowed under regular generally accepted accounting principles.
The use of regulatory accounting under both ASC 980 and GASB 62 is used for deferring revenues and matching revenue recognition to the related impact on customer rates. Here is an example of a common application for rate stabilization.
Check out the full publication more examples that can be used in your utility’s approach to ratemaking through regulatory accounting under GASB 62 or ASC 980! Session 1 of our course on regulatory accounting explains this approach in detail. Or, if you’d like the cliff notes version, this shorter course will get you started.
The electric business has up and down profit years, just like any business. And, like any business, setting funds aside in good years can help in the years that aren’t as good financially. Accounting standards under ASC 980 and GSAB 62 can be used to defer revenues in a good year and use those revenues in future years when needed. The examples in this article show you how to apply the standards.
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Situation
The utility manages its budget to yield a net cash flow for bond coverage purposes (operating income + depreciation expense) of 2 times its bond coverage ((2 x (bond principal + bond interest payments). The current year’s net cash flow is $3 million over that target. The utility follows a practice of deferring amounts over this bond coverage target as part of its rate stabilization policy.
The exit strategy
The utility presents its oversight Board with a resolution for approval to record a regulatory deferral of $3 million as a rate stabilization deferral. The Board approves the resolution.
The following journal entries are made to record the series of events that now unfold.
There is not a FERC designated account for rate stabilization revenues. The FERC account 400.1 Rate Stabilization Revenues used above is suggested, but other existing operating revenue accounts could be used.
The accounting standards (ASC 980 and GASB 62) allow the journal entry to be made to defer revenues as rate stabilization. However, the standards do not require the funding for the amount of the deferral. To avoid cash flow issues regarding unfunded rate stabilization deferrals, when deferring the revenue portion an equal amount of cash should be deposited in a restricted rate stabilization asset account. The journal entry above reflects a transfer of funds to a designated rate stabilization account.
Entry for the rate recovery period of this regulatory item
The utility experiences an increase in power costs of $2 million over its budget in a future year. It chooses not to raise rates to recover this amount. Still, it is concerned about the additional $2 million expense lowering its operating income and its bond coverage. Utility management asks the Board to authorize the transfer of $2 million of rate stabilization to revenues to offset the shortfall. The Board approves the transfer of revenues.
Rate stabilization revenues and cash of $2 million are approved for use by the Board to pay the additional power costs and to be recorded as revenues to offset the power expense.
Impact on rates
The use of rate stabilization is intended to forestall any rate increases or use revenues from current rates in future periods.
Financial statement presentation
Other regulatory liabilities - Rate stabilization is shown as a deferred credit under the FASB presentation and as a deferred inflows of resources under the GASB presentation. Any amounts designated for use in the current year are shown in the current liability section of the financial statements.
What does this do for your utility or cooperative?
Using a rate stabilization revenue deferral provides options in years where earnings may not be as robust as planned in your budget. Depressed earnings can cause issues with bond coverage, leading to bond rating concerns. Depressed earnings may also point out the need for a rate increase when your oversight Board may not be receptive to a change in rates.
In short, rate stabilization provides options for financial management. Options are always good.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.