Legal and regulatory accounting in the electrical energy sector


part six

I have discussed accounting issues in the Energy Regulatory Commission (ERC) electricity rate setting process over the past few weeks. I continue this discussion in this continuation of my series.

6. On the issue of asset disposals

Under statutory accounting, disposals are adjusted in the asset register by deducting from the current balance the net book value of the item(s) given up and the difference between the net book value of the asset given up and any sale proceeds is recognised. as income or loss in the income statement.

For regulatory accounting, it is the net receipts from the sale that are adjusted for the roll forward. Of course, the impact of this approach is that the gain or loss on disposal is reflected in the regulatory asset base, not in the income statement. Thus, if the disposal results in a gain, the value of the RAB decreases. If the assignment results in a loss, it remains within the scope of the RAB and becomes part of the pricing in future rate adjustments. From an accounting point of view, the most conservative approach would then be to include the gain or loss in the current income statement.

Assets financed by the client

In accordance with the Distribution Services and Open Access Rule, the costs of non-standard connection facilities to connect customers to the distribution network of the Distribution Unit and to provide customers with continuous access to the electricity supply are funded by customers. The DU assesses whether non-standard connecting facilities constructed or acquired meet the definition of an asset in accordance with Philippine Accounting Standard 16. If the definition of an asset is met, the DU recognizes that asset at its acquisition cost. or construction with an equivalent. credit to the liability account. This debt to customers is included in the “Other non-current liabilities” account in the consolidated statement of financial position and is recognized as income over the average duration of the relationship with the customer. Assets funded by customers do not form part of the DU’s regulatory asset base until the amounts are repaid.

For regulatory purposes, customer-funded assets should generally be excluded from RAB unless the responsibility for replacing them rests with the DU. In this case, the asset is included in the RAB so that appropriate depreciation can be accumulated in the fund for the future replacement of the asset.

Good will

For statutory accounting purposes, goodwill may be recognized as an asset. However, for regulatory purposes, goodwill is excluded from the RAB value. There may be compelling reasons why the value of the assets acquired in the acquisition should be adjusted upwards, but there is no existing justification for doing so for regulatory purposes. Even if the accounting rules allow it, care should be taken to capitalize the goodwill within the framework of the RAB, because this additional cost will be part of the tariff to be invoiced to the consumers.

Construction in progress and interest capitalized during construction

For financial or statutory accounting purposes, projects under construction are capitalized and reflected as such: assets under construction. If significant, project financing costs during the construction period may also be capitalized as part of the asset account.

For regulatory purposes, the cumulative costs of projects under construction are generally not included as part of the RAB because these do not fall under the criteria of used and usable assets. These will normally be considered part of the RAB after its completion or at the time of its commissioning. However, opinions differ as to the interest incurred during the construction period. Some regulators would allow capitalized interest to be part of the RAB during construction, while others would include it in the RAB only upon completion.

Pricing mechanism and revenue recognition

Pricing under the ERC’s Performance Base Regulation is governed by the Rules for Distribution Wheeling Rate. The RDWR only applies to private DUs that have entered the regulatory reset process and are therefore defined as regulated entities within the meaning of the RDWR. It determines how the maximum electricity distribution tariffs for the provision of regulated distribution services may be charged by regulated entities and the performance incentive program to be implemented under the PBR.

The PBR regime sets tariffs once per regulatory period based on the regulated asset base of each DU, and the operating and capital expenditures necessary to meet operational performance and service level requirements meeting the need for adequate, reliable and quality power, efficient service and growth of all categories of customers in the franchise area, as approved by the ERC. PBR also uses a mechanism that penalizes or rewards a DU based on the performance of its network and service.

To be continued

Alfredo J. Non is a CPA by profession and a former partner of SGV & Co. He served as commissioner of the Energy Regulatory Commission until the end of his term in 2018. He has also served as a director and managing director of several private companies and former professor of financial management at the Ateneo Graduate School of Business.

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