"Water Rates: A Second Look"
As one who has worked in the regulatory environment for the last 23 years, certain accounting treatments deserve a second look to bring us back to basics. I raise the point because of an article I recently read by Dr. Janice A. Beecher and Dr. Patrick C. Mann, "Real Water Rates," published in the July 15, 1997 Public Utility Fortnightly (p. 42). At the outset, allow me to say that the opinion expressed is my own and does not represent the official position of the Delaware Public Service Commission.
In the portion of Dr. Beecher's and Dr. Mann's article headed, "Utility Spending and Historical Underpricing," they point to the causes for the historical underpricing for water services. According to the authors, one of those causes may be attributed to "failure to create depreciation reserves adequate to finance inevitable system replacement." This is an issue contested often both here in the Delaware regulatory jurisdiction and in other jurisdictions. The booking of depreciation does not have as its basis the formation of a reserve of cash or other liquid assets necessary to replace a capital asset.
According to Section 6.03, "Purpose of Book Depreciation Accounting" of the publication Accounting for Public Utilities: "In simple terms, book depreciation is merely the recognition in financial statements that physical assets are consumed while providing a service or a product. Remember that book depreciation is provided for recovering the original investment in the assets concerned, and not for providing for their replacement."