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Rate-Base Cleansings: Rolling Over Ratepayers

State PUCs should recognize a refundable regulatory liability for past charges to ratepayers.

Fortnightly Magazine - November 2005

ominous that EEI and the American Gas Association (AGA), along with individual utilities, fought so hard to avoid having either the FASB or FERC recognize or report the non-legal removal cost as regulatory liabilities.

If the utility industry is deregulated, or even if alternative forms of regulation are adopted, history suggests that billions of dollars of regulatory liabilities will be transferred into utility income. The amounts will disappear from the scene unless the state PUCs protect them on behalf of ratepayers.

The De-Reg Debacle

Setting history aside, the industry will transfer the regulatory liabilities into income because that is what GAAP requires. If deregulated, the provisions of SFAS No. 71 no longer will apply, and the regulatory liabilities will flow explicitly to GAAP income under the provisions of SFAS No. 143. If there is any doubt, consider what certain electric utilities did when their production plants were deregulated. TEP stated that:

TEP had accrued $113 million for final decommissioning of its generating facilities. … This amount was reversed for 2002 and included as part of the cumulative effect adjustment of accounting adjustment when FAS 143 was adopted on Jan. 1, 2003. 17

TEP already has transferred non-legal AROs into income, and if the transmission and distribution business is deregulated or if alternative regulation is adopted, TEP very well may get the rest of the money. 18

Several American Electric Power (AEP) production plants were deregulated. AEP immediately transferred $473 million of non-legal dismantlement cost from accumulated depreciation into its income. 19

The public utility industries will write off these amounts as soon as they are able. Recognition of the regulatory liabilities for regulatory purposes provides a certain level of protection to ratepayers.

In sum, state PUCs specifically should recognize, as refundable regulatory liabilities, all accruals for non-legal cost of removal and dismantlement. Although FERC Order No. 631 provides a new transparency, it did not establish a regulatory liability for non-legal asset retirement obligations. While it is common knowledge that ratepayers provided these prepayments, there is no regulatory recognition of the liability, and there is no provision for a refund if the utilities do not spend the amounts on their intended purpose.

Consequently, the utilities are not directly accountable for the excess collections. This is unreasonable. Inflation aspects of the TIFCA formula make it highly unlikely that utilities will incur removal costs of the magnitude collected. Nevertheless, even if this money were to be spent for cost of removal, state PUCs specifically should recognize the ratepayers' security interest in these monies until they are spent on their intended purpose. Unless they are explicitly identified as "subject to refund," they are merely hidden potential income to the public utilities, and a large potential loss to ratepayers.


Endnotes

  1. Statement of Financial Accounting Standards No. 71 (SFAS No. 71) - Accounting for the Effects of Certain Types of Regulation, paragraph 11.
  2. Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations, paragraph 2.
  3. Federal Energy Regulatory Commission, , RM02-7-000, Order No. 631, Issued April 9, 2003 (Order No. 631), paragraph 36.
  4. SFAS