Misunderstandings about regulatory accounting (and the counter)
If you don’t use regulatory accounting you may misunderstand the intent
Quite the ominous title, but this article addresses some common misunderstandings when it comes to regulatory accounting under ASC 980 and GASB 62 - Regulated Operations.
The misunderstandings can impact how a cooperative or utility wishes to use reg- ulatory accounting, what the purpose and goals of its application is. It is equally im- portant to present the goals of its use to regulatory oversight bodies at the board, lo- cal, state, and federal level.
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Misunderstanding #1 - Using ASC 980/GASB 62 regulatory accounting changes the characteristic of the underlying transaction
Regulatory accounting changes the timing of recognition of a transaction and its recovery in customer rates, but not the underlying transaction. For example, regulatory accounting can be used to defer operating revenues in the current period. Those revenues can be recognized in later periods should the need arise to increase operating revenues to meet debt covenant requirements for bond coverage. The revenues are still revenues, the regulatory approach is the timing of the revenue recognition.
Another example is in the recognition of depreciation expense over the life of an asset vs. its recovery in rates. This is a common occurrence in the case of joint ownership of power plants, where a contract term may seek to recover the power plant asset’s cost over the life of the contract, which may be shorter than the life of the asset. In this case, the difference between the recovery in customer contract and the depreciation recognized is deferred, then recognized in future years by the asset owner after the expiration of the contract.
Misunderstanding #2 - The co-op or utility does not need to specify a recovery period for the regulatory item.
ASC 980 and GASB 62 are explicit that the oversight body of the organization must approve a recovery or recognition period for a regulatory asset or liability. The oversight body can be an independent Board, city council, or state or federal regula- tor.
Ice storm damage
Misunderstanding #3 - ASC 980/GASB 62 can only be used for storm damage or major maintenance.
While using ASC 980/GASB 62 for storm damage or major maintenance is a fre-quent use, these accounting standards can be used to recognize the difference be- tween almost any transaction and its recognition in customer rates. This ebook dis- cusses dozens of potential applications.
Misunderstanding #4 - Shifting revenues, i.e. deferring revenues is not an allow- able use for ASC 980/GASB 62.
As discussed under Misunderstanding #1, deferring revenues is one of most ben- eficial uses of ASC 980/GASB 62. Saving revenues for a “rainy day” benefits the orga- nization and ratepayers. One key to successful use of revenue deferral is to ensure that cash reserves have been deposited in an amount at least equal to the amount of revenue deferral.
Misunderstanding #5 - ASC 980/GASB 62 can only be used by investor-owned utilities or utilities whose rates are approved by the Federal Energy Regulatory Commission (FERC) or state commissions.
These standards can be used by any organization whose rates are approved by an independent oversight body.
ASC 980/GASB 62 - A foundation of utility financial reporting and ratemaking
The use of these standards is at the essence of power and utilities accounting. Their use should be an integral part of evaluating the financial performance of a utility or coop for potential applications. It should also be used as a key part of the budget process to apply deferrals in customer rates.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power 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.