5 compelling reasons your electric cooperative or electric utility should use regulatory accounting (ASC 980 or GASB 62)
- Jul 5, 2021 1:08 am GMT
Regulatory accounting? That sounds like something dull and/or imposed on an organization, i.e., something you would not do unless you had to.
Not so! Regulatory accounting is your friend when it comes to events that cannot be recovered in customer rates. Events like unexpected major storms, increases in power costs, contributed assets, long-term pension obligations, and commodity mark-to-market gains or losses can impact current cash flows but not be collected from customers until a future rate change. The “rules” for using regulatory accounting - FASB ASC 980 (IOUs and cooperatives), GASB 62 (municipal utilities, joint action agencies, CCAs), and FERC (Account 182.3) allow deferring these events and adding them to customer rates when approved by the organization’s oversight body.
Top 5 reasons for implementing ASC 980/GASB 62 regulatory accounting
There are many reasons for using regulatory accounting, but here we’ll talk about the “Top 5” reasons. This list is not scientific, and your “Top 5” might be different than mine, but let’s get the discussion going.
1. “We are in the middle of a budget year; we can’t raise rates.” Regulatory accounting is the tool you should use to avoid damage to this year’s income statement. Take a cost from a significant event such as a storm. The costs should be expensed, and deferring them for future rate recovery provides options to use instead of suffering through a year of the financial statement loss or not meeting your organization’s bond coverage.
2. “Our budget for next year is full, but we might be able to raise rates the year after that for this event.” Regulatory accounting is perfect for deferring costs for recovery in future rates. So, putting costs “on the bench” until next year is a great tool to use. The correct application of regulatory accounting, though, requires a “date certain” for future rate recovery. So, the plan can’t be “someday we’ll include the costs with this storm damage in rates”; the plan must be “we will include these storm damage costs in customer rates the year after next.”
3. Your organization has impaired assets (such as a power plant) and has outstanding revenue bonds and debt service on those same assets. Those revenue bonds still need to be paid. Should ratepayers pay those bonds, even though the assets are no longer in service? Absolutely. Electric customers should share in the risk of the business. If things go well, they obtain the benefits. When things don’t go so well, customers share in the risk in their rates.. Using regulatory accounting will allow deferral of the loss on the asset impairment and recognition of the loss over the rate recovery period.
4. “Our long-term pension and other post-employment benefit obligation is increasing 8% per year, but we can only pass through 4% of that in our customer’s rates.” Regulatory accounting will allow deferral of the 4% differential, recognizing that difference when it is collected in electric customer rates.
5. “It is hard to convince our oversight Board to increase rates.” In the short term, costs can be deferred on the financial statements, but there needs to be a date set for rate recovery.” So, while this is an important use of regulatory accounting under ASC 980 and GASB 62, it is a temporary fix to budget and rate issues.
Regulatory accounting under ASC 980 or GASB 62 (and following FERC) matches the timing of rate recovery from customers with the underlying expense or revenue event. So unexpected weather events, impaired assets, capital contributions, long-term obligations, commodity pricing swings, and almost any other event that fits this description can benefit from deferring the impact over the rate recovery period.
Russ Hissom is the owner of Utility Accounting Education Specialists (UAES), a company that offers online, on-demand, and custom power industry accounting and finance business process courses and thought leadership. You can reach him at email@example.com. The UAES website has a wealth of classes, articles, and other online resources that will benefit your utility or electric cooperatives’ accounting and customer ratemaking strategies.
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