Use ASC 980 or GASB 62 to Bridge the Gap Between Solar Power and Electric Budgets

Encouraging Solar Power Can Lead to Electric Budget Blues

Distributed energy resources (DERs) — electric power from solar panels, wind, and biomass — can throw a wrench into your electric co-op or utility budget if they are not planned for in your revenue forecast. These gaps, if not collected in customer rates, will need to be funded by utility reserves — meaning non-DER customers end up subsidizing DER customers. In industry terms, this does not lead to fair and reasonable ratemaking.

Accounting standards ASC 980 and GASB 62 (Regulated Operations) are the gift that keeps on giving: these standards allow you to separate the impact of DERs on the budget, book those "losses," and determine a strategy to collect the amounts in future rates. Here's an example of this approach in practice.

The core problem: Growth in distributed generation is a relatively new trend — and microgrids are even more recent. Both are forecasted to grow exponentially in the next decade. Both reduce kWh sales from the utility where they are located. Trends that do not yet show up in historical sales data will not work their way into your forecasting methods — leaving a budget gap when actual results come in.

The Cost Map for Electric Utilities

Costs for utilities, like any business, are a combination of fixed and variable costs. Fixed costs are the infrastructure to size the electric system and connect customers, while variable costs are the cost of fuel or purchased power and system maintenance. The challenge with distributed generation is that it erodes variable revenue — kWh sales — without reducing fixed infrastructure costs that must still be recovered.

How Do We Recover "Available for Use" Costs?

"Available for use" costs are those fixed costs to connect customers to the utility's electric system. Whether or not these customers use their connection, the cost of the connection must be recovered in utility rates. While DER or microgrid customers may not always need this connection due to their ability to self-generate, the connection is there and available when needed.

Many DER customers question why they need to pay these costs. But they must pay for that connection to the electric system — or non-DER customers will need to pay for those connection costs in their rates. From a cost of service perspective, that is not equitable.

Those connection costs should be recovered in the utility's fixed monthly customer or demand charge. However, these customers will be consuming fewer kWh from the utility's native system, so if the reductions in kWh are not considered in the revenue budget forecast for the year, a revenue budget shortfall results.

Rewriting Revenue History for Lost kWh Sales

While kWh sales are variable revenues generated by variable costs (fuel, purchased power), there is a profit margin built into the rate for each kWh. Declining kWh sales erode the utility's gross profit margin from the planned budget.

Allowing those lost revenues to slip away inflicts a permanent detriment on the utility's financial results and cash flows. Accounting methods such as decoupling exist to capture these "lost" revenues in order to collect them in the future.

Decouple Lost Revenues for Future Recovery

Decoupling is a form of regulatory accounting used to record lost revenues for recovery in future years. For utilities regulated by a state public regulatory commission, this process may or may not be allowable for rate recovery. For utilities regulated at the local level — such as municipal utilities and electric cooperatives — decoupling should be a consideration and is definitely allowable using accounting standards.

Decoupling Mechanics Using ASC 980 or GASB 62

If the utility budgets $10 million of revenues but actual sales are $9 million, that $1 million of "missing revenue" can be treated in one of two ways:

Accounting standards ASC 980 and GASB 62 — Regulated Operations — are the standards used to defer the $1 million for future recovery in rates. The journal entry to record the deferral is:

What this entry accomplishes: The $1 million of under-collected revenues — identified as caused by DER customers — is "put back on the board" with the stipulation that the under-collection will be included in the next rate change or collected through a surcharge on current rates. The utility's income statement is protected, and the obligation to recover the amount is clearly documented on the balance sheet.

Consider How Decoupling Fits Your Revenue Strategy

If your utility is missing revenue targets and the cause can be identified as a faulty forecast due to unexpected occurrences — such as distributed generation kWh losses — these accounting treatments provide options. As you move into a new budget season, decoupling may be a tool that fits your utility's revenue strategy.

Key questions to evaluate:

• Has DER growth created a measurable gap between budgeted and actual revenues?
• Does your oversight body (Board, city council, or state regulator) have the authority to approve a deferral and recovery period?
• Is there a clear path to include deferred amounts in the next rate case or through a cost adjustment clause?
• Is the utility regulated at the local level — where decoupling is most clearly allowable under GAAP?

If the answers are yes, decoupling under ASC 980 or GASB 62 is worth a serious look as part of your rate management strategy.