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Power Plant Impairments - How do we figure out the amount and include it in customer electric rates?

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Russ Hissom's picture
Owner, Utility Accounting Education Specialists -

Russ is the owner of Utility Accounting Education Specialists a firm that provides power utilities consulting services and online/on-demand courses on accounting, finance, FERC best-practices,...

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  • Jun 24, 2021

Evaluating impaired power supply assets

The realities of today’s power markets

The over all energy industry power supply mix is slowly (?) changing, from traditional fossil fuels to renewables and more “clean” fuels. Recent declines in power cost projections and auctions lead to the conclusion that some traditional power supply resources are “out of the money” in projected pricing for the next few years. The Energy Information Administration forecasts a steady decline in power costs over the next 30 years, through 2050. If you have some of these resources in your power supply portfolio, you might have impaired assets.

Impaired assets impact your power organization’s Statement of Net Position and Income Statement. It is also a complex exercise, as generally, an impaired asset may also have outstanding revenue bonds that were issued for the asset’s construction. Those bonds still need to be repaid.

What does addressing impairments involve? Here’s a snapshot look.

What determines if an asset is impaired?

For municipal utilities and other public sector organizations that follow Governmental Accounting Standards Board Standards (GASB), GASB Statement No. 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries , provides the rules for determining asset impairment. Private sector utilities and electric cooperatives will find impairment guidance in ASC 360 - Property, Plant and Equipment. The rules are similar.

Assets are considered impaired if they have a significant, unexpected decline in their service utility. “Significant” would refer to the cost-benefit of continued use.  “Unexpected” refers to an event that would not have been foreseen by management.


What makes an impairment of power supply assets?

Here are five areas to review for potential impairment accounting treatment.

1.   Market conditions - are our power supply resource pricing competitive in our power market? If not, can they made to be so?

2.   Technology - is our power supply resource meeting environmental standards? If not, will the cost of meeting the standards be more than the market pricing and benefit received through the effort?

3.   Fuel pricing - what is the potential future pricing for our generating fuel?

4.   Have local economic conditions deteriorated or have we lost a major customer that was a big part of our load?

5.   Has a recent storm damaged the asset so that it will only be usable with a sizable investment?

Answering “yes” to any of these questions should trigger an evaluation of potential impairment.

What is the valuation process for an impairment?

The approach to be used to value the impairment can be found in the GASB/FASB accounting standards and can be fairly complex. In the simplest example, the difference between the current book value of the asset and a valuation of the asset based on the current market value, after evaluating the impact of items #1 - #5 above, would equal the impaired value of the asset.

An impairment should be recognized as a loss in the period the impairment is determined, and it will impact that period’s net income. After recognizing the impairment loss, the impaired asset is technically “off the books” and removed from the balance sheet. But, often, the impaired asset has been financed with debt and a portion of that debt may still be owed to bondholders. In that situation, the impairment loss should be deferred for rate recovery from customers, using the guidance of regulatory accounting - GASB 62/ASC 980. Customer rates should still include debt service on the impaired asset, and the loss will be recognized over the same period as the debt service until the revenue bonds financing the impaired asset are paid off.


Evaluate assets now for potential impairment - use this in financial, budget, and rate strategies for your next fiscal year

The process to determine an impairment can take some time, so it is not too early to begin consideration of impairments for this year’s budget. This article was designed to outline the high-level concerns to help your thought process.


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 The website has a wealth of classes, articles, and other online resources that will benefit your utility or electric cooperatives’ accounting and customer ratemaking strategies.


Jim Stack's picture
Jim Stack on Jun 26, 2021

Very interesting points. I have seen the utilities in Arizona pass on all sorts of cost a recent one was refueling costs for nuclear. It was high because the maintenance delayed refueling adding a long outage to the plants. 

   Another was  the last coal plant added. To beat the high clean air standards they rushed the finish date by months. It doubled the cost and they past it on to rate payers. 

Michael Keller's picture
Michael Keller on Jun 28, 2021

The nuclear plant runs for several years before refueling with little maintenance. Seem kind of obvious that maintenance occurs during refueling as such work cannot be accomplished when the units are running.

Michael Keller's picture
Michael Keller on Jun 28, 2021

An interesting angle is associated with financial impairments caused by green resources being subsidized by direct payments as well as mandates for use by state and local governments. Impaired generator debt service as well as profitability are directly impacted by such favoritism that is outside the confines of a traditional marketplace and associated accounting methodologies.

On a broader scale, the true cost of energy does balloon up when the hidden accounting baggage from green energy is actually considered.

Russ Hissom's picture
Thank Russ for the Post!
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