Gasb 62 Asc 980 Rate Stabilization
Russ Hissom, CPA
What Is ASC 980 / GASB 62 Electric Rate Stabilization?
ASC 980 and GASB 62 are best practices for setting up a "rainy day fund" — deferring revenues in good financial years and using those revenues when needed in years that are not as financially strong. This is an excerpt from the UARS publication "The Practical Guidebook to Utility Regulatory Accounting."
The electric business has up and down profit years, just like any business. Setting funds aside in good years can help in the years that aren't as good financially. Accounting standards under ASC 980 and GASB 62 allow deferring revenues in a good year and using those revenues in future years when needed. The examples in this article show you how to apply the standards.
Important caveat: The accounting standards (ASC 980 and GASB 62) allow the journal entry to be made to defer revenues as rate stabilization. However, the standards do not require the funding for the amount of the deferral. To avoid cash flow issues from unfunded deferrals, when deferring the revenue portion, an equal amount of cash should be deposited in a restricted rate stabilization asset account.
Example Situation — Deferring Revenues
The Facts
The utility manages its budget to yield a net cash flow for bond coverage purposes of 2.0x (operating income + depreciation expense ÷ bond principal + bond interest payments).
The current year's net cash flow is $3 million over that target. The utility follows a practice of deferring amounts over this bond coverage target as part of its rate stabilization policy.
Step 1 — Board Resolution
The utility presents its oversight Board with a resolution for approval to record a regulatory deferral of $3 million as a rate stabilization deferral. The Board approves the resolution. Board approval is required under both ASC 980 and GASB 62.
Step 2 — Deferral Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Cash — Restricted Rate Stabilization Account | $3,000,000 | |
| Cash — Operating | $3,000,000 | |
| Revenue — Rate Stabilization (FERC Acct. 400.1 suggested) | $3,000,000 | |
| Regulatory Liability — Rate Stabilization | $3,000,000 |
Note: There is not a FERC-designated account for rate stabilization revenues. FERC Account 400.1 Rate Stabilization Revenues is suggested, but other existing operating revenue accounts could be used.
Example — Using the Fund in a Poor Earnings Year
The Future Event
The utility experiences an increase in power costs of $2 million over budget in a future year. It chooses not to raise rates to recover this amount, but is concerned about the additional expense lowering operating income and bond coverage.
Utility management asks the Board to authorize the transfer of $2 million of rate stabilization revenues to offset the shortfall. The Board approves.
Rate Stabilization Recognition Entry
| Account | Debit | Credit |
|---|---|---|
| Regulatory Liability — Rate Stabilization | $2,000,000 | |
| Revenue — Rate Stabilization (FERC Acct. 400.1) | $2,000,000 | |
| Cash — Operating | $2,000,000 | |
| Cash — Restricted Rate Stabilization Account | $2,000,000 |
Impact on Rates
The use of rate stabilization is intended to forestall rate increases or use revenues from current rates in future periods. The mechanism provides a buffer against volatile power costs, unusual maintenance events, or other budget surprises — without requiring an immediate rate change.
Financial Statement Presentation
Rate stabilization is presented as:
- FASB (ASC 980): A deferred credit in the regulatory liabilities section of the balance sheet. Amounts designated for use in the current year are shown as a current liability.
- GASB (GASB 62): A deferred inflow of resources on the statement of net position. Amounts to be recognized in the current period are reclassified to current.
What Does Rate Stabilization Do for Your Utility?
A rate stabilization revenue deferral provides options in years where earnings may not be as robust as planned. Depressed earnings can cause issues with bond coverage, leading to bond rating concerns. Depressed earnings may also create pressure for a rate increase when your oversight Board may not be receptive to one. Rate stabilization provides options for financial management — and options are always good.
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Disclaimer: 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, LLC. You should seek formal advice on this topic from your accounting or legal advisor.