How can you use regulatory accounting to manage financial results and customer rates?
Regulatory accounting should be the go-to tool when considering the impact on customer rates
In the first part of this series, we explored how inadequate work order processes can hinder the financial health and asset replacement of electric co-ops or utilities. Now, our focus shifts to the strategic advantage of "regulatory accounting" in enhancing financial outcomes and benefiting ratepayers.
Regulatory accounting is specifically tailored for electric co-ops and utilities to manage financial outcomes and customer rates effectively. Neglecting this tool can place these organizations in unnecessary financial constraints.
It's common for many smaller and mid-sized utilities and co-ops to view regulatory accounting as exclusively beneficial to larger organizations, or to believe they operate without significant regulation. However, it's crucial to recognize that every co-op and utility is subject to regulation if their rates are sanctioned by oversight bodies at the national, state, or local levels. Local councils and boards often impose even stricter oversight than state or federal entities.
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We maintain an extensive library covering the intricacies of applying regulatory accounting. Key events eligible for such treatment include
decommissioning expenses for power plants
significant fluctuations in power costs
unrealized gains and losses in commodity derivatives
major maintenance projects
contributions for construction purposes
grants recognition for construction projects
Although this list isn't exhaustive, regulatory accounting offers flexibility for any transaction intended for recovery through customer rates.
Approval from the board and inclusion of costs or revenues in customer rates are prerequisites for leveraging regulatory accounting.
The takeaway is clear: the utilization of accounting standards shouldn't be dictated by organizational size. Instead, these standards are applicable across the board, regardless of scale.
For a deeper understanding of qualifying and handling regulatory accounting for specific events, consulting an accounting advisor is recommended. Avoid unnecessary financial strain or adverse impacts on cash flows and ratepayers by leveraging regulatory accounting effectively.
Next up: Exploring the repercussions of delaying rate increases, touching upon financial and cash flow challenges, as well as political ramifications.
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.