June 1 , 2002
Rate-Base Cleansings: Rolling Over Ratepayers
State PUCs should recognize a refundable regulatory liability for past charges to ratepayers.
the regulatory liability to state PUCs. It stated that pursuant to commission Order No. 552, "Regulatory assets and liabilities are defined as assets and liabilities that result from ratemaking actions of regulators." 14 Although FERC did not make the policy calls for FERC jurisdictional purposes, it recognized that state PUCs are able to make the calls for state jurisdictional purposes.
Therefore, the most important new issue is the need for the state PUCs specifically to recognize a refundable regulatory liability for regulatory reporting, analysis, and ratemaking purposes. While FERC's treatment provides a new transparency, it is not good enough to secure the ratepayers' interests in these amounts.
In recent rate cases, with test years subsequent to the implementation of both SFAS No. 143 and FERC Order No. 631, the existence of these regulatory liabilities has not been disclosed in the filing, notwithstanding that they were reported to the SEC. Such omissions limit the state PUCs' ability to submit these regulatory liabilities to regulatory analysis and address the rate-setting implications.
Whose Money Is It?
Since accumulated depreciation theoretically measures a return of investor-supplied capital, utilities may assent that anything recorded in accumulated depreciation is "their money" because it merely represents a return of "their capital."
However, since ratepayers fronted this money for doubtful future removal expenditures, it is reasonable that they consider it as ratepayer-provided capital, not investor-supplied capital. From the ratepayers' perspective, it should be classified in account 254-Regulatory Liabilities, and recognized as a regulatory liability by regulators. Otherwise, it is at risk of loss to ratepayers.
Even classification as an "other deferred credit," as some utilities have done, is not sufficient on the ratepayers' perspective. Utilities easily can claim a deferred credit belongs to shareholders. Deferred credits defeat the purpose. This is why it must be reiterated that state PUC regulators specifically must recognize the regulatory liabilities resulting from non-legal AROs, and the utilities should report them as such.
For example, 2004 Form 10K from the Tucson Electric Power Co. (TEP) demonstrates why explicit recognition is necessary. TEP applies SFAS No. 71-Accounting for the Effects of Certain Types of Regulation-to its regulated operations. Therefore, it recorded its non-legal AROs as a regulatory liability in its Form 10K.
As of Dec. 31, 2004, TEP had accrued $67 million for the net cost of removal of the interim retirements from its transmission, distribution, and general plant. As of Dec. 31, 2003, TEP had accrued $60 million for these removal costs. The amount is recorded as a regulatory liability. 15
However, TEP also states, "If TEP stopped applying FAS 71 to its remaining regulated operations, it would write off the related balances of its regulatory assets as an expense and its regulatory liabilities as income on its income statement." 16
These words are hauntingly similar to the warnings uttered in Bell Company annual reports before their most recent rate-base cleansing. In 2003, the Bell Operating Companies transferred $11.5 billion of non-legal AROs from their accumulated depreciation accounts into corporate retained earnings as a result of alternative regulation and SFAS No. 143.
It also is