What is a regulatory asset?
A regulatory asset is a specific cost of service recovery that a regulatory agency allows a US public utility (usually an energy company) to defer to its balance sheet. In effect, these costs or revenues are capitalized and then depreciated over time. Otherwise, these amounts would be required to appear in the company’s income statement as expenses for the current period. Booking of Regulatory Assets (as well as Regulatory Liabilities) is the purpose of regulatory accounting for the utilities sector to reconcile revenues and expenses and streamline rate recovery.
- A regulatory asset is a way for public utilities to capitalize cash flows so that they appear on the balance sheet rather than the income statement.
- These mainly apply to public utilities such as power companies.
- Regulatory assets must be treated fairly on the financial statements within the appropriate accounting standards.
- Regulatory assets can include costs related to energy efficiency programs and low-income energy assistance programs and deferred fuel costs.
Understanding regulatory assets
Government Accounting Standards Board (GASB) Statement No. 62 regulates the recording of regulatory assets. According to the statement, regulatory assets are created when certain expenses are recognized as deferred rather than period expenses. These expenses can include environmental and decommissioning costs, deferred electricity costs, losses upon asset retirement, exceptional repair and maintenance costs, unrecovered derivative losses, upfront withdrawal costs, storm damage costs and debt issuance costs.
The regulator has discretion as to what expenses (and their amount) may be included in the rates for recovery to public utilities. If it deems an expense item not eligible to be recovered from ratepayers, it will require the utility to spend it instead of recording it as a regulatory asset. The amount accepted as a regulatory asset should be amortized over an expected period through rates. GASB rules include detailed tracking of expenses and the estimated recovery period associated with them. Each regulatory asset must also be disclosed in detail in the utility’s financial statements.
example of a regulatory asset
Electric utility Edison International is the parent company of Southern California Edison (SCE). SCE had $1,314 million in short-term regulatory assets and $7,120 million in long-term regulatory assets on its balance sheet as of December 31, 2020. The breakdown of regulatory assets is disclosed and discussed in the notes to the financial statements. The words “SCE regulatory assets.”