Regulatory Accounting | ASC 980 | GASB 62
How Can You Use Regulatory Accounting to Manage Financial Results and Customer Rates?
ASC 980 and GASB 62 Are Your Friend
ASC 980 and GASB 62? That may sound like something dull and/or imposed on an organization — something you would not do unless you had to. Not so! ASC 980 and GASB 62 are your friend when it comes to events that cannot be recovered in customer rates in the current period.
Events like unexpected major storms, increases in power costs, contributed assets, long-term pension obligations, and commodity mark-to-market gains or losses can all impact current cash flows — but may not be collectible from customers until a future rate change. The standards for using regulatory accounting — FASB ASC 980 (for IOUs and cooperatives), GASB 62 (for municipal utilities, joint action agencies, and CCAs), and FERC Account 182.3 — allow deferring these events and adding them to customer rates when approved by your oversight body.
The bottom line: Regulatory accounting under ASC 980 or GASB 62 matches the timing of rate recovery from customers with the underlying expense or revenue event — giving utilities powerful tools to manage financial results and protect ratepayers from sharp rate swings.
5 Reasons to Use Regulatory Accounting
"We are in the middle of a budget year — we can't raise rates."
Regulatory accounting is the tool to use to avoid damage to this year's income statement. Take a major storm as an example: those costs should be expensed, but deferring them for future rate recovery provides options instead of suffering through a year of financial statement losses or failing to meet bond coverage requirements.
"Our budget for next year is full — but we might be able to raise rates the year after."
Regulatory accounting is perfect for deferring costs for recovery in future rates. Putting costs "on the bench" until next year is a great tool — but the correct application requires a "date certain" for future rate recovery. The plan must be "we will include these storm damage costs in customer rates the year after next," not just "someday." ASC 980 and GASB 62 are also good tools to use to defer expenses and hold off rate increases in high interest rate and inflationary environments.
Your organization has impaired assets with outstanding revenue bonds.
Those revenue bonds still need to be paid even if the asset has been written down. Should ratepayers pay those bonds? Absolutely — electric customers share in the risk of the business. When things go well, they get the benefits; when they don't, customers share in the risk through their rates. Using regulatory accounting allows deferral of the impairment loss and recognition over the rate recovery period, matching debt payments.
"Our long-term pension obligation is increasing 8% per year, but we can only pass 4% through in rates."
Regulatory accounting allows deferral of the 4% differential, recognizing it when collected in electric customer rates. This prevents a sudden pension obligation from overwhelming current-year financials and forcing a rate spike.
"It is hard to convince our oversight Board to increase rates."
In the short term, costs can be deferred on the financial statements — but a date must be set for rate recovery. This is a temporary fix to budget and rate issues, not a permanent solution. That said, it buys time for management to build the case for a rate change and for the Board to get comfortable with the need.
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Regulatory accounting under ASC 980 or GASB 62 matches the timing of rate recovery from customers with the underlying expense or revenue event. Unexpected weather events, impaired assets, capital contributions, long-term obligations, commodity pricing swings — almost any event that fits this description can benefit from deferring the impact over the rate recovery period.
The use of these standards is at the essence of power and utilities accounting. Their application should be an integral part of evaluating financial performance and should be a key part of the budget process for any utility or cooperative.
About the Author
Russ Hissom, CPA is a principal of UtilityEducation.com , providing on-demand professional education classes in FERC, RUS, FASB, and GASB accounting, finance, ratemaking, artificial intelligence, and management for electric, gas, wastewater, and water utilities and electric cooperatives.
Contact Russ at [email protected]
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided b