Fortnightly Magazine - April 2008

Depreciation Shell Game

Accounting reforms might force regulators to abandon their live-now, pay-later practices.

When an advisory committee of the SEC voted recently to phase out special accounting treatment for various industries, it signaled the end may be near for power plant depreciation deferral mechanisms. Such mechanisms are a mainstay of regulatory accounting in many states, and their discontinuation could send plant owners and regulators back to the drawing board to find a new, GAAP-compliant way to recognize asset depreciation in financial reports.

Flying Through Turbulence

Volatile markets are causing delays, but most deals are moving forward.

Although problems in the power business grabbed the headlines early this decade, the industry now seems fundamentally strong. In contrast to their ratings of banks, rating agencies appear to have recently upgraded more of the electric sector than they have downgraded. It remains a strong investment grade, usually BB or BBB. For an index of 68 electric utilities, the debt-to-equity ratio averaged only 55:45 and return on equity exceeded over 13 percent through January.

Storage Surge

New gas projects help globalize the U.S. market.

Underground storage allows gas users and traders to hedge against price volatility. Building more capacity will help North America fully integrate into global gas markets.

Facing Compliance Risks

Enforcement trends call for a proactive approach to complying with market rules.

Federal regulators have penalized wholesale energy market participants with fines ranging from $300 thousand to $300 million over the past two years. The magnitude of the penalties, along with uncertainty over how to effectively mitigate the risk of any civil action by regulators, has raised concern about how companies are approaching their regulatory obligations.

V