Download Using regulatory accounting in developing utility rate

Using Regulatory Accounting in
Developing Rate Structures
Presented by:
Russ Hissom, CPA Partner
Baker Tilly Energy and Utilities Group
© Baker Tilly Virchow Krause, LLP
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,
an independently owned and managed member of Baker Tilly International.
1
Goals for this session
> Discuss the background of regulatory accounting
and its use in utility accounting
> Discuss its role in the ratemaking process
> Demonstrate its application in a number of utility
transactional areas
2
Instructor Information
Russell Hissom, CPA, Partner, in the Energy and Utilities Group since 1983. Russ has extensive
experience with contract compliance audits under jointly owned electric generation contracts,
overhead cost allocation studies, enterprise risk management implementation projects,
benchmarking studies, work order asset management implementation projects, management
audits, financial and compliance audits of electric utilities, and specialized risk management and
operational and financial training for utilities. He has spoken nationally on a variety of utility topics
for organizations such as APPA, the Society of Corporate Compliance and Ethics and NERC
Regional Audit Organizations.
Contact [email protected] or call 608 240 2361
– Check out our Energy and Utilities Finance, Accounting and Consulting Issues
Forum on LinkedIn at:
http://www.linkedin.com/groups?mostPopular=&gid=2546046
3
About Baker Tilly
Nationwide energy practice
Company Overview
Firm established in 1931—an 80 year
history of focusing on client needs and
providing outstanding service
16th largest Public Accounting and
Consulting Firm in USA (Public
Accounting Report’s ―Top 100 2008‖)
Nationwide energy practice with
more than 100 electric utility clients
across North America – our Energy
and Utilities Group is focused just on
utilities
Proud supporter of Industry
Associations
Over 170 partners and more than 1,300
professionals = Depth of Resources
Seamless global services through
Baker Tilly International (BTI)
Industry Awards for Outstanding
Service and Employee Satisfaction
4
Agenda
> Introduction
> GASB 62 Codification of Accounting and Financial Reporting
Guidance Contained in Pre-November 30, 1989 FASB and
AICPA Pronouncements
5
GASB 62 – Regulated Operations
•GASB No. 62 outlines the concept of regulatory accounting for
entities or operations that are rate regulated
•Under GASB 62 a utility matches the regulated rate recover of
deferred costs if two key criteria are met (a) future recovery is
probable and (b) it is clear that future recovery is based on
prior costs and not similar future costs.
6
GASB 62 – Regulated Operations
• GASB 62 (Regulated Operations) is the accounting tool
used by public utilities where strictly following GASB does
not necessarily meet their business model and the intent of
certain accounting transactions that will benefit future
periods or be charged against future periods.
• All utilities are regulated through approval authority over
rates by their governance bodies (Boards, Commissions) or
State Regulators
• This standard deals with the matching concept of the intent
of rate recovery to expenses incurred or revenues collected
7
GASB 62 – Regulated Assets
• The rules to create a regulatory asset
• It is probable that future revenue in an amount at least
equal to the capitalized cost will result from inclusion of
that cost in allowable costs for rate-making purposes.
• It is reasonable to assume that rates set at levels that
will recover the regulated business-type activity's costs
can be charged to and collected from customers.
8
GASB 62 – Regulated Operations - Why do I want to
do this?
• Matching
• Manage earnings and bond coverage
• Smooth rate recovery
• Fund now for future expenditures
• Stash earnings for future cost increases and customer
rate mitigation
9
GASB 62 – Regulated Liabilities
The rules to create a regulatory liability
• A regulator can require that a gain or other reduction of net allowable
costs be given to customers over future periods. That would be
accomplished, for rate-making purposes, by amortizing the gain or
other reduction of net allowable costs over those future periods and
reducing rates to reduce revenues in approximately the amount of
the amortization.
• If a gain or other reduction of net allowable costs is to be amortized
over future periods for rate-making purposes, the regulated
business-type activity should not recognize that gain or other
reduction of net allowable costs in the current period. Instead, it
should be deferred for future reductions of charges to customers that
are expected to result.”
10
GASB 62 – Impairments
A regulator can cause immediate “impairment” of
the asset
> In future rate adjustments, if the cost recovery is not allowed, it is
considered impaired and should immediately be adjusted through
earnings
11
GASB 62 – Timing is Everything
Deferral of cost should identify a time-certain
recovery period
> Indefinite or unknown recovery periods tend to not meet the
definitions of regulatory accounting
> What’s the exit strategy for your regulated items?
12
GASB 62 – Timing is Everything
Booking a transaction under GASB 62 without
board approval does not meet the GASB 62
standard requirements
13
GASB 62 – Regulated Assets
Transaction
Classification
Extraordinary maintenance
Regulatory asset
Loss on asset retirement
Regulatory asset
Future recoverable costs
Regulatory asset
Deferred power costs
Regulatory asset
Unrealized derivative losses
Regulatory asset
Advance refunding losses
Deferred outflow
Pollution remediation
Regulatory asset
Decommissioning expenses
Regulatory asset
Storm costs
Regulatory asset
Other post employment benefits
Regulatory asset
Debt issuance costs
Regulatory asset
14
GASB 62 – Regulated Liabilities
Transaction
Classification
Rate stabilization
Deferred inflow
Contributions in aid of construction
Deferred inflow
Unrealized derivative gains
Regulatory liability
Refunds
Regulatory liability
15
Regulatory accounting - IOUs
16
Regulatory accounting - IOUs
17
Regulatory accounting – Public Power
18
Regulatory accounting – Public Power
19
Regulatory accounting – Public Power
20
Regulatory accounting –
Future Recoverable Costs
•Difference between bond principal and depreciation on assets
•Proper matching
•Smoothes earnings
•This is GASB 62 Regulated Operations accounting treatment
21
Regulatory accounting –
Future Recoverable Costs
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Depreciation Bond Principal
1,000,000
671,600
1,000,000
698,464
1,000,000
726,403
1,000,000
755,459
1,000,000
785,677
1,000,000
817,104
1,000,000
849,788
1,000,000
883,780
1,000,000
919,131
1,000,000
955,896
1,000,000
994,132
1,000,000
1,033,897
1,000,000
1,075,253
1,000,000
1,118,263
1,000,000
1,162,994
1,000,000
1,209,514
1,000,000
1,257,894
1,000,000
1,308,210
1,000,000
1,360,538
1,000,000
1,416,002
Difference
Cumulative
(328,400)
(328,400)
(301,536)
(629,936)
(273,597)
(903,533)
(244,541)
(1,148,075)
(214,323)
(1,362,398)
(182,896)
(1,545,294)
(150,212)
(1,695,505)
(116,220)
(1,811,726)
(80,869)
(1,892,595)
(44,104)
(1,936,698)
(5,868)
(1,942,566)
33,897
(1,908,669)
75,253
(1,833,416)
118,263
(1,715,152)
162,994
(1,552,159)
209,514
(1,342,645)
257,894
(1,084,751)
308,210
(776,541)
360,538
(416,002)
416,002
(0)
22
Regulatory accounting –
Future Recoverable Costs
Future Recoverable Costs
2,000,000
1,500,000
1,000,000
500,000
0
-500,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-1,000,000
-1,500,000
-2,000,000
-2,500,000
Depreciation
Bond Principal
Cumulative
23
Regulatory accounting –
Future Recoverable Costs
Bond Coverage
2.50
2.00
1.50
1.00
0.50
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
(0.50)
Coverage w/o FRC
Coverage w FRC
Difference
24
GASB 62 – Contributions in Aid of
Construction
• GASB 33 treatment (non-exchange) of CIAC is a fit for
general fund accounting – not utilities
• Required accounting is a violation of the matching
principal
• Earnings are skewed
• What about replacement?
• GASB 62 Regulated Operations accounting fixes this
25
GASB 62 – Contributions in Aid of
Construction - Example Problem
• Utility receives contributed plant of $3 million of
infrastructure
• What does GASB 33 require?
Debit
Plant in Service
Revenues
Depreciation Expense (Annual)
Accumulated Depreciation
$ 3,000,000
$
100,000
Credit
$ 3,000,000
$
100,000
26
GASB 62 – Contributions in Aid of
Construction - Example Problem
• What does GASB 62 allow?
Debit
Plant in Service
$
3,000,000
Deferred Inflow of Resources - CIAC Revenues
Deferred Inflow of Resources - CIAC Revenues
Depreciation Expense
$
Credit
$
3,000,000
$
100,000
100,000
27
GASB 62 – Contributions in Aid of
Construction - Example Problem
Statement of Revenues, Expenses and Changes in Net Position
Regulatory Accounting and Contributions - Impact on Earnings
Using GASB 33 Treatment
Description
Operating revenues
Year 1
Year 2
Year 3
Year 4
Year 5
$ 50,000,000
$ 50,000,000
$ 50,000,000
$ 50,000,000
$ 50,000,000
35,000,000
100,000
-
35,000,000
100,000
-
35,000,000
100,000
-
35,000,000
100,000
-
35,000,000
100,000
-
35,100,000
35,100,000
35,100,000
35,100,000
35,100,000
$ 14,900,000
$ 14,900,000
$ 14,900,000
$ 14,900,000
$ 14,900,000
Operating expenses:
Operation and maintenance expenses
Depreciation
CIAC amortization
Total Operating Expenses
Operating Income
Non-Operating Revenues/(Expenses)
All items
Income before Contributions
Contributions in Aid of Construction
Change in Net Position
Net Position Beginning of Year
Net Position End of Year
(1,000,000)
$ 13,900,000
3,000,000
16,900,000
0
$ 16,900,000
(1,000,000)
$ 13,900,000
-
(1,000,000)
$ 13,900,000
-
(1,000,000)
$ 13,900,000
-
(1,000,000)
$ 13,900,000
-
13,900,000
13,900,000
13,900,000
13,900,000
16,900,000
30,800,000
44,700,000
58,600,000
$ 30,800,000
$ 44,700,000
$ 58,600,000
$ 72,500,000
28
GASB 62 – Contributions in Aid of
Construction - Example Problem
Statement of Revenues, Expenses and Changes in Net Position
Regulatory Accounting and Contributions - Impact on Earnings
Using GASB 62 Treatment
Description
Operating revenues
Year 1
Year 2
Year 3
Year 4
Year 5
$ 50,000,000
$ 50,000,000
$ 50,000,000
$ 50,000,000
$ 50,000,000
Operating expenses:
Operation and maintenance expenses
Depreciation
CIAC amortization
Total Operating Expenses
Operating Income
35,000,000
100,000
(100,000)
35,000,000
100,000
(100,000)
35,000,000
100,000
(100,000)
35,000,000
100,000
(100,000)
35,000,000
100,000
(100,000)
35,000,000
35,000,000
35,000,000
35,000,000
35,000,000
$ 15,000,000
$ 15,000,000
$ 15,000,000
$ 15,000,000
$ 15,000,000
Non-Operating Revenues/(Expenses)
All items
Income before Contributions
Contributions in Aid of Construction
Change in Net Position
Net Position Beginning of Year
Net Position End of Year
(1,000,000)
$ 14,000,000
-
(1,000,000)
$ 14,000,000
-
14,000,000
0
$ 14,000,000
(1,000,000)
$ 14,000,000
-
(1,000,000)
$ 14,000,000
-
(1,000,000)
$ 14,000,000
-
14,000,000
14,000,000
14,000,000
14,000,000
14,000,000
28,000,000
42,000,000
56,000,000
$ 28,000,000
$ 42,000,000
$ 56,000,000
$ 70,000,000
29
Regulatory accounting – Unrealized
Gains/Losses on Ineffective
Derivatives
• Effective derivative contracts are deferred inflows or
outflows
• Ineffective derivative contracts lose their eligibility to live
on the Statement of Net Position and are banished to the
income statement
• Regulatory accounting allows ineffective contracts to
stay on the SONP as Regulatory Assets or Regulatory
Credits
• Here’s a comparison
30
Regulatory accounting – Unrealized
Gains/Losses on Ineffective
Derivatives
NON-OPERATING REVENUES (EXPENSES)
Investment income
Interest expense
Capitalized interest
Amortization of debt discount and issuance costs
Amortization of premium
Amortization of loss on refunding
Gains/(losses) on ineffective hedges
Total Non-Operating Expenses
6,370
(37,747)
3,102
(808)
892
(1,909)
(3,154)
5,358
(32,388)
1,207
(725)
905
(2,043)
3,166
(33,254)
(24,520)
31
GASB 62 – Decommissioning Example Problem
• Plant decommissioning in 30 years
• Collecting $100,000/year now in rates
• What does GAAP require?
Debit
Cash
Revenues
$
100,000
Credit
$
100,000
32
GASB 62 – Decommissioning Example Problem
• What does GASB 62 allow?
Debit
Cash
Deferred Inflow of Resources - Decommissioning Expense
$
100,000
Decommissioning Expense
Cash/Accounts Payable
$
3,000,000
Deferred Inflow of Resources - Decommissioning Expense
Revenues
$
3,000,000
Credit
$
100,000
$
3,000,000
$
3,000,000
What is the exit strategy?
33
GASB 65 - Items Previously
Reported as Assets and Liabilities
Effective for periods beginning after December 15, 2012.
Defines deferred outflows of resources and deferred inflows of resources as
established by GASB 63.
• Deferred outflows of resources exist when the utility uses resources in the
current period for the benefit of a future reporting period. They have a
positive effect on net position – similar to assets.
• Deferred inflows of resources are the result of transactions in the current
period that will be earned in a future period and have a negative effect on
net position – similar to liabilities.
34
GASB 65 - Items Previously
Reported as Assets and Liabilities
Some Key items to be reported as deferred inflows or outflows:
• Unamortized loss on advanced refunding
• Regulated Operation Credits (FAS 71/ASC 980/GASB 62) with
the exception of refunds imposed by a regulator
• Contributions (voluntary non-exchange transactions) when
resources have been received before timing requirements
have been met, but all eligibility requirements have been met
• Change in fair value of effective derivatives
(GASB 53)
35
GASB 65 - Items Previously
Reported as Assets and Liabilities
Other Changes:
• Debt issuance costs, except those related to prepaid insurance
costs, should be expensed when incurred
• The use of the term deferred should be limited to items
reported as deferred outflows of resources or deferred inflows
of resources
Accounting changes related to GASB 65 should be applied
retroactively.
36
GASB 65 – Impact on rates
•Under GASB 62 a utility matches the regulated rate recover of
deferred costs if two key criteria are met (a) future recovery is
probable and (b) it is clear that future recovery is based on
prior costs and not similar future costs.
•The question then is "Are the debt issuance costs recovered
through rates?"
37
GASB 65 – Are debt issuance costs recovered
through rates?
•If rates are designed on the cash basis and amount borrowed for
debt issuance costs is included in the revenue requirement on a
systematic basis over the life of the debt similar to interest
expense then the answer is yes.
Revenue Requirement Component
Operation and maintenance expenses
Amount
$10,000,000
Routine capital improvements
1,000,000
Debt service (A)
2,000,000
Total Revenue Requirement
$13,000,000
(A) Debt service principal payments include debt issuance costs
38
GASB 65 – Are debt issuance costs recovered
through rates?
•If the utility designs rates on the utility basis and the return on
rate-base is designed to recover the cost of financing including
debt service and borrowed issuance costs then the answer is
also yes.
Revenue Requirement Component
Operation and maintenance expenses
Amount
$10,000,000
Depreciation
1,000,000
Return on ratebase (A)
2,000,000
Total Revenue Requirement
$13,000,000
(A) Designed to recover full costs of debt service including issuance costs
39
GASB 65 – Are debt issuance costs recovered
through rates?
•If the utility has specifically excluded the recovery of debt
issuance costs from its revenue requirement then the answer is
no.
40
GASB 65 – Recording Debt
Issuance Costs
•If the utility’s rate methodology provides recovery for debt
issuance costs the utility can choose to follow GASB No. 62 and
record the costs as a regulatory asset and amortize them over
the life of the related debt – assuming that is the recovery period.
•As with any application of regulatory accounting this should be
approved by the governing body along with the recovery period
and if material the policy should be disclosed in the notes to the
financial statements.
41
GASB 65 – Recording Debt
Issuance Costs
•If the utility’s revenue requirement does not provide for recovery
of the debt issuance costs future costs should be reported as a
non-operating expense in the year incurred.
•The financial statements should be restated to eliminate the
deferral of any prior issuance costs from the statement of net
assets and recognize them as an expense either in the year
incurred if that year is presented or as an adjustment to the net
position for the first year presented.
•If a restatement is required the details of this should be
disclosed in the footnotes.
42
GASB 65 – Recording Debt
Issuance Costs
Sample application:
•Debt issue - $50,000,000
•Debt issuance costs - $500,000
•Cash received - $49,500,000
Are debt issuance costs included in utility rates charged to
customers?
- No
43
GASB 65 – Recording Debt
Issuance Costs
Journal entries – Debt issuance costs are recovered through
utility rates
1. Record bond issue and bond issuance costs
Account
Cash
Regulatory assets
20xx bond issue
Debt
Credit
$49,500,000
$500,000
$50,000,000
44
GASB 65 – Recording Debt
Issuance Costs
Journal entries – Debt issuance costs are recovered through
utility rates
2. Record amortization of regulatory deferred outflow for bond issuance
costs recovered in utility rates over 20 years
Account
Non-operating expenses – Amortization
of regulatory assets
Regulatory assets
Debt
Credit
$25,000
$25,000
45
GASB 65 – Financial Statement Presentation
119. The Board believes that Statement 62 indicates there is a
relationship between the distinction of current and noncurrent
elements and the order of liquidity. Deferred outflows of resources
and deferred inflows of resources are defined as the consumption or
acquisition of net assets, respectively, that relate to a future period.
The Board believes as the consumption of net assets or
acquisition of net assets has occurred and there is no further
relationship to cash, a distinction between current and
noncurrent is not applicable.
46
Impact on Rates
•Revenue requirement is prepared using one of two methods:
Method
Components
Utility method
O&M + Depreciation + Return on
Ratebase
Cash basis
O&M + Debt Service + Routine
Capital
•In theory both methods get you to the same place
47
GASB 62 – Potential Rate Impacts
Statement of Revenues, Expenses and Changes in Net Position
Regulatory Accounting - Overall Impact
Description
Year 1
Year 2
Year 3
Year 4
Year 5
Operating revenues
Rate stabilization
Decommissioning revenues
$ 50,000,000 $ 50,000,000 $ 50,000,000 $ 50,000,000 $ 50,000,000
1,000,000
1,000,000
(1,000,000)
1,000,000
(100,000)
(100,000)
(100,000)
(100,000)
(100,000)
Tota Operating Revenues
$ 50,900,000
$ 50,900,000
$ 49,900,000
$ 48,900,000
$ 50,900,000
Operating expenses:
Operation and maintenance expenses
Depreciation
CIAC amortization
Total Operating Expenses
Operating Income
35,000,000
100,000
(100,000)
35,000,000
100,000
(100,000)
34,000,000
100,000
(100,000)
33,000,000
100,000
(100,000)
35,000,000
100,000
(100,000)
35,000,000
35,000,000
34,000,000
33,000,000
35,000,000
$ 15,900,000
$ 15,900,000
$ 15,900,000
$ 15,900,000
$ 15,900,000
Non-Operating Revenues/(Expenses)
Investment income
Interest expense
Unrealized gains/losses on ineffective derivatives
Regulatory treatment of unrealized gains/losses
on ineffective derivatives
Total Non-Operating
500,000
(1,000,000)
400,000
(400,000)
(500,000)
500,000
(1,000,000)
(1,000,000)
1,000,000
(500,000)
500,000
(1,000,000)
300,000
500,000
(1,000,000)
200,000
500,000
(1,000,000)
(250,000)
(300,000)
(200,000)
250,000
(500,000)
(500,000)
(500,000)
48
GASB 62 – Potential Rate Impacts
Statement of Revenues, Expenses and Changes in Net Position
Regulatory Accounting - Overall Impact
Description
Income before Contributions
Year 1
Year 2
Year 3
Year 4
Year 5
$ 15,400,000 $ 15,400,000 $ 15,400,000 $ 15,400,000 $ 15,400,000
Contributions in Aid of Construction
-
Change in Net Position
-
15,400,000
Net Position Beginning of Year
0
-
-
-
15,400,000
15,400,000
15,400,000
15,400,000
15,400,000
30,800,000
46,200,000
61,600,000
Net Position End of Year
$ 15,400,000 $ 30,800,000 $ 46,200,000 $ 61,600,000 $ 77,000,000
Regulatory accounting items
$
Rate impact of regulatory accounting (based
on unadjusted customer revenues)
400,000 $ 1,800,000 $
0.80%
3.60%
(500,000) $ (1,400,000) $ 1,050,000
-1.00%
-2.80%
2.10%
49
GASB 62 – Regulated Operations
Summary
• Utilities that previously followed FAS 71/ASC 980 now follow
GASB 62 – Regulated Operations
• Utilities are not required to follow Regulated Operations in
GASB 62 – Transactions must be governing body approved
• Following regulated accounting helps to more accurately
reflect the intent of the accounting treatment of revenues and
expenses in customer rates
• This helps to mitigate and smooth rate impacts to customers
• Following regulated accounting rules makes a public power
utility more comparable to its peer investor owned
counterpart
50
Discussion and Comments
Thank you!
Contact [email protected] (608 240 2361)
for more information
51