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Main Street Gold Mine

Funds collected for cost-of-removal liabilities could finance capital spending.

Fortnightly Magazine - October 2010

it but as yet haven’t incurred the underlying cost.

The SEC’s impending move from GAAP to International Financial Reporting Standards (IFRS) poses a question regarding the disposition of the utilities’ cost-of-removal liability, as confirmed by two Fortnightly articles. ( John Ferguson, “ Fixing Depreciation Accounting ,” October 2008, pp. 16-20 and Scott Hartman, “ Ready for IFRS? ” January 2009, pp. 10-16. ) In November 2008, Ferguson proposed that when these companies move to IFRS, they should transfer the regulatory liabilities to their equity accounts. In January 2009, Hartman reiterated Ferguson’s proposal.

As originally contemplated, IFRS would have sanctioned this treatment. However, on July 23, 2009, the International Accounting Standards Board (IASB) published for public comment an exposure draft on rate-regulated activities. This exposure draft proposes requiring utilities to report legal and non-legal ARO liabilities “at the expected present value of the cash flows to be recovered or refunded as a result of regulation, both on initial recognition and at the end of each subsequent reporting period” 3 and to take into income all amounts collected above those present values.

Utility rate regulators must decide whether they intend to adhere to traditional ratemaking principles or alternatively require Main Street financing of environmental improvements and smart-grid technologies. That decision should be transparent and obvious. Assuming that such expenditures yield positive benefits to Main Street, it might be feasible to use the huge pot of gold that already exists in cost-of-removal liability accounts.

 

Endnotes:

1. Under the ARRA, the Department of Energy has awarded $4.5 billion dollars to utilities, municipalities, cooperatives, and states. Of this, $3.5 billion has been awarded through the smart-grid investment grant program, and $700 million in grants were awarded through the smart-grid regional and energy storage demonstration project. The remaining $300 million have been awarded for workforce development, interconnection, transmission planning and analysis, state/local governments energy assurance, state assistance on electricity policies, program direction, and interoperability standards and framework.

2. The commission stated in its decision on BGE’s filing, “As an initial matter we disagree with BGE that surcharge recovery is appropriate here. The proposed project is in our view, classic utility infrastructure investment that should be recovered through distribution rates, not in a supplemental surcharge that begins long before customers could realize any benefits from the project. Just as we have declined other companies’ efforts to move a broader range of expenses out of rate base and base-rate cases, we decline here to depart from the core principle that utilities recover the cost of infrastructure investments through distribution rates.” Maryland Public Service Commission, Case No. 9208, Order No. 83410, pp. 4-5.

3. IASB July 2009 Exposure Draft–Rate-regulated Activities, p. 9.

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