Regulatory Asset Defined
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. 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 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. 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. 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.
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.
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.
Related terms:
Balance Sheet : Formula & Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more
Capitalize
To capitalize is to record a cost/expense on the balance sheet for the purposes of delaying full recognition of the expense. In general, capitalizing expenses is beneficial as companies acquiring new assets with long-term lifespans can amortize the costs. read more
Capitalized Interest
Capitalized interest is the cost of borrowing to acquire or construct a long-term asset, which is added to the cost basis of the asset on the balance sheet. read more
Comprehensive Income
Comprehensive income is the change in a company's net assets from non-owner sources. read more
Contingent Asset
A contingent asset is a potential economic benefit that is dependent on future events out of a company’s control. read more
Dow Jones Utility Average (DJUA)
The Dow Jones Utility Average (DJUA) is a price-weighted average of 15 utility stocks traded in the U.S. Read how the DJUA acts as a market indicator. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
Government Accounting Standards Board (GASB)
The Government Accounting Standards Board is a private organization creating generally accepted accounting principles for state and local governments. read more
Income Statement : Uses & Examples
An income statement is one of the three major financial statements that reports a company's financial performance over a specific accounting period. read more