What Is a Regulatory Asset?
A regulatory asset is a specific cost of service recovery that a regulatory agency permits a U.S. 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. These amounts would otherwise be required to appear on the company's income statement as current period expenses. The booking of regulatory assets (as well as regulatory liabilities) is the purpose of regulatory accounting for the utilities sector to match revenues and expenses, and to smooth out rate recoveries.
- A regulatory asset is a way to capitalize cash flows for public utilities so that they appear on the balance sheet instead of the income statement.
- These apply chiefly to public utilities such as power companies.
- Regulatory assets must be treated appropriately on financial statements under appropriate accounting standards.
- Regulatory assets may 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 governs the recording of regulatory assets. According to the statement, regulatory assets are created when certain expenses are recognized as deferrals instead of period expenses. These expenses may include environmental and decommissioning costs, deferred power costs, losses on asset retirements, extraordinary repair and maintenance costs, unrealized derivative losses, advance refunding costs, storm damage costs and debt issuance costs.
The regulator has discretion over which expenses (and their amounts) can be included in rates for recovery for a public utility. If it deems an expense item as not eligible to recover from ratepayers, it will require the utility to expense it instead of recording it as a regulatory asset. Amounts allowed as regulatory assets must be amortized over an expected period through rates. GASB rules entail detailed tracking of expenses and their associated estimated recovery periods. Each regulatory asset must also be disclosed in detail in a utility's financial statements.
Example of a Regulatory Asset
As an example, the electric utility Edison International carried $350 million in short-term regulatory assets and $7,455 million in long-term regulatory assets on its balance sheet as of December 31, 2016. The breakdown of the regulatory assets is disclosed and discussed in the notes to the financial statements. Additional information regarding these assets is provided to investors and other users of the financial statements in the management discussion and analysis (MD&A) sections.