State PUCs should recognize a refundable regulatory liability for past charges to ratepayers.
The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 143 (SFAS No.143) identifies an immediate need for state public utilities commissions (PUCs) to recognize a refundable regulatory liability for past charges to ratepayers for non-legal asset retirement costs.
Although these prior charges resulted in billions of dollars of regulatory liabilities on utilities' generally accepted accounting principles (GAAP) financial statements, they are almost invisible on the regulatory financial statements of the utilities. This is because of the deference shown to state PUCs by the Federal Energy Regulatory Commission (FERC) when dealing with these liabilities. Unless the state PUCs specifically recognize the liabilities, the utilities will have the opportunity to institute a rate-base "cleansing" by transferring ratepayer-fronted money into income.
Regulated public utilities rely on ratemaking hearings rather than a competitive market to establish their prices. A utility's "revenue requirement" quantifies several components summing up to the allowed revenues it will have the opportunity to collect. The "rate base" is the shareholders' investment in utility operations. A "rate of return" applied to rate base yields the "return on investment" component of the revenue requirement. Hence the phrase "rate-base, rate-of-return regulation."