ASC

ASC 340-980

Regulated Operations

340 Other Assets and Deferred Costs

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In brief

AdvancedRecognitionSubsequent measurementIndustry-specificDisclosure

This subtopic governs when a rate-regulated entity may capitalize incurred costs as regulatory assets (deferred costs) and, in particular, how to account for phase-in plans — rate-making arrangements that defer part of the rate increase caused by placing a newly completed plant in service in order to avoid a "rate spike." A cost is capitalized only if it is probable that future revenue at least equal to the cost will result from including it in allowable costs and that revenue is intended to recover the previously incurred cost rather than fund similar future costs (980-340-25-1). Amounts deferred under a phase-in plan may be capitalized only for plants completed or substantially constructed before January 1, 1988, and only if the plan meets four strict criteria (980-340-25-3).

Key points (7)
  • An incurred cost that would otherwise be expensed is capitalized as a regulatory asset only if (a) it is probable (Topic 450) that future revenue at least equal to the cost will result from its inclusion in allowable costs and (b) the revenue is provided to recover the previously incurred cost rather than to fund expected similar future costs (980-340-25-1); a cost failing these criteria is recognized later when they are met, and is charged to earnings if it ceases to meet them (980-340-40-1).
  • For a phase-in plan on a plant with no substantial physical construction before January 1, 1988, none of the allowable costs deferred by the regulator may be capitalized for financial reporting (980-340-25-2).
  • For plants completed or substantially constructed before January 1, 1988, all deferred allowable costs are capitalized as a separate deferred charge only if all four criteria are met: a formal plan agreed to by the regulator, specified timing of recovery, recovery of all deferrals within 10 years of when deferrals begin, and scheduled percentage rate increases that do not grow year over year (980-340-25-3); failing any one criterion, none may be capitalized.
  • An allowance for earnings on shareholders' investment is not an incurred cost that would otherwise be charged to expense and cannot be capitalized under 980-340-25-1; it may be capitalized only during construction or as part of a qualifying phase-in plan (980-340-25-5 through 25-6).
  • A regulator's exclusion of a cost from allowable costs reduces the carrying amount of the related regulatory asset by the excluded amount, other assets being tested under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 (980-340-35-1); later allowance of previously excluded costs creates a new asset (980-340-35-2), and an indirect disallowance embedded in a phase-in plan is accounted for under Section 980-360-35 (980-340-35-4).
  • Cumulative amounts capitalized under phase-in plans are reported as a separate balance sheet asset, and the net amount capitalized or recovered each period is reported as a separate item of other income or expense, not as a reduction of other expenses (980-340-45-1).
  • Disclosure is required of the terms of all phase-in plans (including net amounts deferred for rate-making purposes under nonqualifying plans), of major costs recovered without a return on investment during the recovery period, and of any allowance for earnings on shareholders' investment capitalized for rate-making but not for financial reporting (980-340-50-1 through 50-3).

For students. Regulated utilities are the classic exception to the rule that costs are expensed when incurred — a regulator's rate action can itself create an asset. The most common misunderstanding is assuming any regulator-ordered deferral can be capitalized: deferrals under phase-in plans for post-1988 plants are never capitalized for GAAP (only disclosed), and an allowance for earnings on shareholders' investment is never capitalized outside construction or a qualifying phase-in plan.

regulatory assetphase-in planallowable costsrate spikeallowance for earnings on shareholders' investmentdisallowance of plant costsregulatory lagmirror construction work in progress

Machine-generated study aid for ASC 340-980. Check the source paragraphs below.

340-980-00Status

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340-980-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
980-340-25-4 Amended Accounting Standards Update No. 2016-02 02/25/2016
980-340-55-9 through 55-11
 Amended Accounting Standards Update No. 2016-02 02/25/2016
980-340-55-13 through 55-17
 Amended Accounting Standards Update No. 2016-02 02/25/2016

340-980-05Overview and Background

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340-980-05-1
This Subtopic provides guidance for deferred costs for entities with regulated operations, including phase-in plans.

Phase-In Plans

340-980-05-2
When a utility places a newly completed plant in service, traditional rate-making procedures establish rates to recover the allowable costs of that plant. A combination of circumstances can cause traditional rate-making procedures to result in a phenomenon called rate spike, which is a major, one-time increase in rates that can result from the inclusion of the cost of new plants in rates under traditional rate-making procedures.
340-980-05-3
Phase-in plans were developed to alleviate the problem of rate spike. Those plans are intended to moderate the initial increase in rates that would otherwise result from placing newly completed plants in service by deferring some of that rate increase to future years and providing the utility with return on investment for those deferred amounts. Instead of the traditional pattern of an increase in allowable costs followed by decreasing allowable costs for utility plants after the plants are placed in service, phase-in plans create a pattern of gradually increasing allowable costs for the initial years of the plant's service life.

340-980-15Scope and Scope Exceptions

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Overall Guidance

340-980-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 980-10-15.

340-980-25Recognition

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Effects of Regulation

340-980-25-1
Rate actions of a regulator can provide reasonable assurance of the existence of an asset. An entity shall capitalize all or part of an incurred cost that would otherwise be charged to expense if both of the following criteria are met:
  1. a
    It is probable (as defined in Topic 450) that future revenue in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for rate-making purposes.
  2. b
    Based on available evidence, the future revenue will be provided to permit recovery of the previously incurred cost rather than to provide for expected levels of similar future costs. If the revenue will be provided through an automatic rate-adjustment clause, this criterion requires that the regulator's intent clearly be to permit recovery of the previously incurred cost.
A cost that does not meet these asset recognition criteria at the date the cost is incurred shall be recognized as a regulatory asset when it does meet those criteria at a later date.
340-980-25-2
If a phase-in plan is ordered by a regulator in connection with a plant on which no substantial physical construction had been performed before January 1, 1988, none of the allowable costs that are deferred for future recovery by the regulator under the plan for rate-making purposes shall be capitalized for general-purpose financial reporting purposes (hereinafter referred to as financial reporting). Allowable costs that are deferred for future recovery by the regulator under the plan consist of all allowable costs deferred for rate-making purposes under the plan beyond the period in which those allowable costs would be charged to expense under generally accepted accounting principles (GAAP) applicable to entities in general.
340-980-25-3
If a phase-in plan is ordered by a regulator in connection with a plant completed before January 1, 1988, or a plant on which substantial physical construction had been performed before January 1, 1988, the following criteria shall be applied to that plan. If the phase-in plan meets all of those criteria, all allowable costs that are deferred for future recovery by the regulator under the plan shall be capitalized for financial reporting as a separate asset (a deferred charge). If any one of those criteria is not met, none of the allowable costs that are deferred for future recovery by the regulator under the plan shall be capitalized for financial reporting. The criteria to determine whether capitalization is appropriate are:
  1. a
    The allowable costs in question are deferred pursuant to a formal plan that has been agreed to by the regulator.
  2. b
    The plan specifies the timing of recovery of all allowable costs that will be deferred under the plan.
  3. c
    All allowable costs deferred under the plan are scheduled for recovery within 10 years of the date when deferrals begin.
  4. d
    The percentage increase in rates scheduled under the plan for each future year is no greater than the percentage increase in rates scheduled under the plan for each immediately preceding year. That is, the scheduled percentage increase in Year 2 is no greater than the percentage increase granted in Year 1, the scheduled percentage increase in Year 3 is no greater than the scheduled percentage increase in Year 2, and so forth.
340-980-25-4
The following Examples illustrate various circumstances that may or may not constitute phase-in plans:
  1. a
    Example 1 (see paragraph 980-340-55-9) illustrates a sale with leaseback as a finance lease.
  2. b
    Example 2 (see paragraph 980-340-55-12) illustrates a sale with leaseback as an operating lease.
  3. c
    Example 3 (see paragraph 980-340-55-15) illustrates a sale with leaseback with profit recognition accelerated.
  4. d
    Example 4 (see paragraph 980-340-55-18) illustrates the modified depreciation method.
  5. e
    Example 5 (see paragraph 980-340-55-21) illustrates deferred costs before a rate order is issued.
  6. f
    Example 7 (see paragraph 980-340-55-39) illustrates a phase-in plan for two plants completed at different times that share common facilities.
340-980-25-5
If specified criteria are met, paragraph 980-340-25-1 requires capitalization of an incurred cost that would otherwise be charged to expense. An allowance for earnings on shareholders' investment is not an incurred cost that would otherwise be charged to expense. Accordingly, such an allowance shall not be capitalized pursuant to that paragraph. The phrase an allowance for earnings on shareholders' investment, as used in this Subtopic, is intended to have the same meaning as the phrase a designated cost of equity funds, used in paragraph 980-835-30-1 , which, in specified circumstances, requires capitalization of an allowance for earnings on shareholders' investment (a designated cost of equity funds) during construction.
340-980-25-6
Paragraphs
980-340-25-2 through 25-3
require capitalization of an allowance for earnings on shareholders' investment for qualifying phase-in plans. If an allowance for earnings on shareholders' investment is capitalized for rate-making purposes other than during construction or as part of a phase-in plan, the amount capitalized for rate-making purposes shall not be capitalized for financial reporting. For the requirement to accrue a carrying charge related to the expected recovery of the investment in abandoned assets, see paragraph 980-360-35-7.

340-980-35Subsequent Measurement

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Effect of Rate Action on Asset Value

340-980-35-1
Rate actions of a regulator can reduce or eliminate the value of an asset. If a regulator excludes all or part of a cost from allowable costs, the carrying amount of any asset recognized pursuant to paragraph 980-340-25-1 shall be reduced to the extent of the excluded cost. Whether other assets have been impaired shall be judged the same as for entities in general and the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 shall apply.
340-980-35-2
If a regulator allows recovery through rates of costs previously excluded from allowable costs, that action shall result in recognition of a new asset. The classification of that asset shall be consistent with the classification that would have resulted had those costs been initially included in allowable costs.

Phase-In Plans

340-980-35-3
When an existing phase-in plan is modified or a new plan is ordered to replace or supplement an existing plan, the criteria in paragraph 980-340-25-3 shall be applied to the combination of the original plan and the new plan. The date when deferrals begin, used in applying the criterion in paragraph 980-340-25-3(c), would be the date of the earliest deferral under either the new or the old plan, and the final recovery date would be the date of the last recovery of all amounts deferred under the plans.
340-980-35-4
A phase-in plan is a method of rate-making intended to moderate a sudden increase in rates while providing the regulated entity with recovery of its investment and a return on that investment during the recovery period. A disallowance is a rate-making action that prevents the regulated entity from recovering either some amount of its investment or some amount of return on its investment. Section 980-360-35 specifies the accounting for disallowances of plant costs. If a method of rate-making that meets the criteria of this Subtopic for a phase-in plan includes an indirect disallowance of plant costs, that disallowance shall be accounted for in accordance with that Section. Example 6 (see paragraph 980-340-55-33) illustrates a phase-in plan with an indirect disallowance.

340-980-40Derecognition

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340-980-40-1
If at any time an entity's incurred cost no longer meets the criteria for the capitalization of an incurred cost (see paragraph 980-340-25-1), that cost shall be charged to earnings.

340-980-45Other Presentation Matters

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Phase-In Plans

340-980-45-1
Cumulative amounts capitalized under phase-in plans shall be reported as a separate asset in the balance sheet. The net amount capitalized in each period or the net amount of previously capitalized allowable costs recovered during each period shall be reported as a separate item of other income or expense in the income statement. Allowable costs capitalized shall not be reported as reductions of other expenses.

340-980-50Disclosure

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Recovery of Cost Without Return on Investment

340-980-50-1
In some cases, a regulator may permit an entity to include a cost that would be charged to expense by an unregulated entity as an allowable cost over a period of time by amortizing that cost for rate-making purposes, but the regulator does not include the unrecovered amount in the rate base. That procedure does not provide a return on investment during the recovery period. If recovery of such major costs is provided without a return on investment during the recovery period, the entity shall disclose the remaining amounts of such assets and the remaining recovery period applicable to them.

Phase-In Plans

340-980-50-2
The terms of any phase-in plans in effect during the year or ordered for future years shall be disclosed. This Subtopic does not permit capitalization for financial reporting of allowable costs deferred for future recovery by the regulator pursuant to a phase-in plan that does not meet the criteria of paragraph 980-340-25-3 or a phase-in plan related to a plant on which substantial physical construction was not completed before January 1, 1988. Nevertheless, the financial statements shall include disclosure of the net amount deferred at the balance sheet date for rate-making purposes and the net change in deferrals for rate-making purposes during the year for those plans.

Allowance for Earnings on Shareholders' Investment Capitalized for Rate-Making Purposes

340-980-50-3
The nature and amounts of any allowance for earnings on shareholders' investment capitalized for rate-making purposes but not capitalized for financial reporting shall be disclosed.

340-980-55Implementation Guidance and Illustrations

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340-980-55-1
This Section provides guidance for application of this Subtopic to some specific situations, but does not address all possible applications of this Subtopic. All of the implementation guidance and illustrations assume that the entity meets the criteria in paragraph 980-10-15-2; thus, recovery of any cost is probable if that cost is designated for future recovery by the regulator.

Implementation Guidance

340-980-55-2
In some cases, a regulator may approve rates that are intended to recover an incurred cost over an extended period without a return on the unrecovered cost during the recovery period.
340-980-55-3
The regulator's action provides reasonable assurance of the existence of an asset (see paragraph 980-340-25-1). Accordingly, the regulated entity would capitalize the cost and amortize it over the period during which it will be allowed for rate-making purposes. That cost would not be recorded at discounted present value. An exception to this general rule is provided for costs of abandoned plants. See Example 1 (paragraph 980-360-55-2) for an illustration of accounting for future revenues expected to result from the cost of an abandoned plant. If the amounts are material, the disclosures specified in paragraph 980-340-50-1 would be furnished.
340-980-55-4
Mirror construction work in progress is one means of moderating the sudden, one-time increase in rates that would otherwise result from placing a newly completed utility plant in service. Under mirror construction work in progress, increasing amounts of construction work in progress are included in the current rate base in the periods before the plant goes into service, providing the utility with a current return on a portion of its investment in construction while the construction proceeds. After the plant is placed in service, a decreasing amount of plant-in-service is excluded from the rate base each year, mirroring the pattern in which the construction was included in the rate base. The result of this procedure is to increase rates while the plant is under construction and to reduce the increase in rates in the initial years of the plant's service life.
340-980-55-5
For rate-making purposes, no allowance for funds used during construction is recognized on the portion of the construction that is included in the rate base while the asset is under construction, and an allowance for funds used during construction is recognized on the portion of the plant-in-service that is subsequently excluded from the rate base after the plant is placed in service. The same total amount is capitalized as if no construction had been included in the current rate base.
340-980-55-6
The mirror construction work in progress arrangement described is not a phase-in plan under the definition used in this Subtopic because it does not defer recovery of costs that would not have been deferred under the methods of rate making used prior to 1982. Rather, it effectively provides a temporary loan from customers to the utility during construction and requires repayment of that loan after the plant is placed in service.
340-980-55-7
If the arrangement is known to be a mirror construction work in progress arrangement at the time of the construction (for example, if that arrangement is required by law or has been specifically ordered by the regulator), an allowance for funds used during construction should be accrued on the total cumulative construction cost in each period for financial reporting. The revenue collected as a result of inclusion of construction in the current rate base should be recorded as a liability to customers, with disclosure of the approximate timing of the repayment that will be required under the mirror construction work in progress arrangement.
340-980-55-8
If the arrangement is not known to be a mirror construction work in progress arrangement when the construction is included in the rate base but the regulator later orders a mirror construction work in progress arrangement, the accounting described in the preceding paragraph should be implemented as soon as the nature of the arrangement becomes known. That will require an adjustment for the cumulative effect of the arrangement to date. An amount should be capitalized, with a corresponding accrual of an allowance for funds used during construction, when the mirror construction work in progress arrangement becomes known. Current revenues should be reduced by an equal amount, and a corresponding liability to customers should be recognized. That amount should be the amount that would have been capitalized if the arrangement had been known to be a mirror construction work in progress arrangement when the revenue was collected during construction. That capitalized amount should be reported in the year in which the mirror construction work in progress arrangement becomes known in the same manner as if it had been capitalized during construction.

Illustrations

340-980-55-9
This Example illustrates the guidance in paragraphs
980-340-25-2 through 25-3
.
340-980-55-10
Utility B sells its interest in a newly completed electric generating plant for an amount equal to its cost and leases that interest back under a lease that requires equal annual payments. The arrangement would not qualify for sale and leaseback accounting in accordance with Subtopic 842-40 because the leaseback would be classified as a finance lease. However, the arrangement previously qualified as a sale and a capital leaseback in accordance with Subtopic 840-40 before the effective date of Topic 842. Therefore, Utility B continues to account for the arrangement as a sale and a leaseback. Utility B's regulator includes the lease rentals in allowable cost as they accrue. In the past, Utility B's regulator has treated other leases entered into by Utility B in the same manner, but those leases were for much less significant items of equipment—not for an interest in an electric generating plant.
340-980-55-11
The rate-making method described is a phase-in plan under the definition in this Subtopic. Generally accepted accounting principles (GAAP) applicable to entities in general require a finance lease to be accounted for much like a purchase of the underlying asset. The resulting expense related to the lease consists of interest on the remaining lease obligation and depreciation based on the method used for similar owned assets. In the early years of a lease, the lease rentals included in allowable cost as they accrue are significantly less than the sum of interest on the lease obligation and depreciation on the leased asset. Thus, significant deferrals will result. The method also defers recognition of expenses compared with the methods of expense recognition used by Utility B's regulator for similar assets of Utility B prior to 1982 because Utility B's interests in electric generating plants were included in allowable costs in the past based on current provisions for depreciation and for the cost of capital invested in the plants. The use of this rate-making method in the past for leases of equipment does not change this conclusion. The definition is based on the method of rate-making used prior to 1982 for similar allowable costs. Similar allowable costs would be those resulting from electric generating plants.
340-980-55-12
This Example illustrates the guidance in paragraphs
980-340-25-2 through 25-3
.
340-980-55-13
Utility C sells its interest in a newly completed electric generating plant for an amount equal to its cost and leases that interest back under a lease that requires equal annual payments. The arrangement qualifies as a sale and a leaseback in accordance with Subtopic 842-20. The leaseback is classified as an operating lease. Utility C's regulator includes the lease payments in allowable cost as they accrue. In the past, Utility C's regulator has treated other leases entered into by Utility C in the same manner, but those leases were not for an interest in an electric generating plant.
340-980-55-14
The rate-making method applied to Utility C is not a phase-in plan under the definition in this Subtopic because it recognizes lease expense for rate-making purposes in the same way as that expense would be recognized for entities in general for this type of lease.
340-980-55-15
This Example illustrates the guidance in paragraphs
980-340-25-2 through 25-3
.
340-980-55-16
Utility D sells its interest in a 5-year-old electric generating plant for an amount that exceeds its undepreciated cost by $500,000 and leases that interest back. The leaseback term is 20 years, and there are no renewal options. The arrangement would not qualify for sale and leaseback accounting in accordance with Subtopic 842-40 because the leaseback would be classified as a finance lease. However, the arrangement previously qualified as a sale and a capital leaseback in accordance with Subtopic 840-40 before the effective date of Topic 842. Therefore, Utility D continues to account for the arrangement as a sale and a leaseback. Utility D's regulator includes the lease payments in allowable cost as they accrue and orders Utility D to amortize the profit, for rate-making purposes, over 10 years. The sale occurred at a time when Utility D was about to place a newly completed plant in service. Utility D has not had any similar transactions in the past.
340-980-55-17
The rate-making method described is a phase-in plan under the definition in this Subtopic. GAAP applicable to entities in general at the time of entering into this arrangement required a profit on a sale and leaseback transaction to be amortized over the term of the leaseback. Amortization of that profit, for rate-making purposes, over 10 years when GAAP applicable to entities in general at that time required amortization over the 20-year leaseback term is equivalent to a deferral of allowable costs. In view of the timing of the rate order on the sale and leaseback transaction, the presumption is that the order was issued in connection with the newly completed plant. The method cannot be compared with methods in use prior to 1982 because Utility D has had no previous transactions of this type.
340-980-55-18
This Example illustrates the guidance in paragraphs
980-340-25-2 through 25-3
.
340-980-55-19
Utility E's regulator orders it to depreciate its new electric generating plant, for rate-making purposes, by using an annuity method. Under the method ordered, depreciation increases each year so that the total of depreciation and return on investment stays approximately level over the life of the plant. In the past, Utility E's regulator required the use of straight-line depreciation for electric generating plants.
340-980-55-20
The rate-making method applied to Utility E is a phase-in plan under the definition in this Subtopic because it meets both of the following conditions:
  1. a
    It defers depreciation expense compared with the depreciation methods that are acceptable under GAAP applicable to entities in general (as indicated in paragraph 360-10-35-10, annuity methods of depreciation are not acceptable under GAAP applicable to entities in general).
  2. b
    It defers depreciation expense compared with the method of depreciation used by Utility E's regulator for Utility E's electric generating plants prior to 1982.
340-980-55-21
This Example illustrates the guidance in paragraphs
980-340-25-2 through 25-3
and
980-340-35-3 through 35-4
related to the deferral of costs before a rate order is issued when:
  1. a
    Utility F has deferred costs before a rate order is issued (Case A).
  2. b
    Utility F has deferred costs before a rate order is issued and has subsequent interaction with a disallowance (Case B).
  3. c
    Utility G has deferred costs before a rate order is issued and has interaction with a subsequent phase-in plan (Case C).
340-980-55-22
Cases A, B, and C share all of the assumptions described in the following paragraph.
340-980-55-23
Utility F completes construction of a nuclear generating plant and places that plant in service. Utility F's regulator decides that it will complete its examination of the prudence of Utility F's construction cost before rates are adjusted to reflect the cost of operating the plant. During the examination and until rates are adjusted, the regulator orders Utility F to capitalize its net cost of operating the plant (operating costs, depreciation, allocable interest cost, and an allowance for earnings on shareholders' investment, all net of savings that result from operation of the new plant).
340-980-55-24
The resulting deferral is not a phase-in plan under the definition in this Subtopic. The regulator's order to capitalize an amount pending completion of a rate hearing is designed to protect the utility from the effects of regulatory lag in the absence of a rate order—a routine procedure on the part of regulators. Regulatory lag is the delay between a change in a regulated entity's costs and a change in rates ordered by a regulator as a result of that change in costs. A shortfall in a utility's net income can occur when regulators set rates prospectively and the estimated or test-period costs on which those rates were based are less than the actual costs that are incurred during the period covered by those rates. Regulators' actions that are designed to protect a utility from the effects of regulatory lag can occur during a rate case but before a rate order is issued, as in this Case, and when no rate case is under active consideration. An accounting order to a utility to capitalize the cost of repairing storm damage would be an example of the latter situation. Those actions can also be a part of a rate order. An example of that type of action would be a fuel adjustment clause that is intended to protect the utility from the effects of unanticipated changes in fuel costs.
340-980-55-25
The definition of a phase-in plan in this Subtopic is not intended to encompass actions of a regulator that are designed to protect a utility from the effects of regulatory lag in the absence of a rate order, nor is it intended to encompass the regulator's subsequent treatment of any allowable costs that result from those actions.
340-980-55-26
Under paragraph 980-340-25-1, Utility F should capitalize that portion of the amount capitalized for rate-making purposes that represents incurred costs that would otherwise be charged to expense, provided that it is probable that future revenue in an amount at least equal to the capitalized cost will result from inclusion of those costs in allowable costs for rate-making purposes. Otherwise, Utility F should not capitalize those costs.
340-980-55-27
Since the situation in this Case is neither during construction nor a phase-in plan, this Topic does not permit capitalization of an allowance for earnings on shareholders' investment. Accordingly, Utility F should not capitalize, for financial reporting, the portion of the amount capitalized for rate-making purposes that represents an allowance for earnings on shareholders' investment. If recovery of that allowance subsequently occurs, increased earnings during the recovery period will result.
340-980-55-28
Six months after the accounting order referred to in Case A, Utility F's regulator approves part of the cost of the new plant but disallows $600,000,000—consisting of construction expenditures of $570,000,000 and amounts capitalized for rate-making purposes during this 6-month operating period prior to the rate order of $30,000,000. The recorded cost of the plant before consideration of the disallowance is $4,500,000,000. During this 6-month period, Utility F has capitalized $500,000,000 of net cost for rate-making purposes. This $500,000,000 consists of an allowance for earnings on shareholders' investment of $200,000,000 and incurred costs that would otherwise be charged to expense of $300,000,000. For rate-making purposes, the balance sheet accounts, before and after the disallowance, are as follows.
  • Balance before Disallowance Disallowance (in thousands) Balance after Disallowance Plant in service " $4,500,000 " " $(570,000)" " $3,930,000 " Amounts capitalized pending rate order " 500,000 " " (30,000)" " 470,000 " Combined totals " $5,000,000 " " $(600,000)" " $4,400,000 "
340-980-55-29
Section 980-360-35 requires a disallowance of plant costs to be recognized as a loss. Utility F should perform the following analysis to determine the loss that should be recognized and how it will be allocated:
  1. a
    Assuming that $300,000,000 of the $500,000,000 capitalized for rate-making purposes during the 6-month period was also capitalized for financial reporting (the $200,000,000 allowance for earnings on shareholders' investment would not be capitalized), the total loss recognized by Utility F for financial reporting should be the amount that reduces the combined total of plant in service and amounts capitalized pending rate order ($4,800,000,000) to the combined total that will be honored for rate-making purposes ($4,400,000,000). The recognizable loss is $400,000,000.
  2. b
    Utility F should allocate to plant in service the lesser of the amount of the disallowance that was allocated to plant in service by the regulator ($570,000,000) or the total disallowance recognized for financial reporting ($400,000,000), or $400,000,000.
  3. c
    Utility F should allocate the rest of the disallowance recognized for financial reporting, if any, to amounts capitalized pending rate order. In this case, no amount is allocated to that asset.
340-980-55-30
The recognition of the disallowance and the effect of that recognition on the financial reporting balance sheet accounts are as follows.
  • Balance before Disallowance Recognition of Disallowance (in thousands) Balance after Disallowance Plant in service " $4,500,000 " " $(400,000)" " $4,100,000 " Amounts capitalized pending rate order " 300,000 " " 300,000 " Combined totals " $5,000,000 " " $(400,000)" " $4,400,000 "
340-980-55-31
Utility G's fact situation is identical to that of Utility F, described in Cases A and B, except that Utility G's regulator approves all of the costs related to the newly completed plant. Utility G's regulator adopts a formal phase-in plan intended to provide recovery of amounts deferred under the plan and amounts capitalized, for rate-making purposes, during the six-month period from the plant's in-service date to the date of the rate order.
340-980-55-32
The phase-in plan does not affect the financial reporting of those previously deferred costs described in paragraphs
980-340-55-26 through 55-27
, nor does the existence of those previously deferred costs affect the financial reporting of the phase-in plan. Accordingly, the allowance for earnings on shareholders' investment that was not capitalized previously during the period preceding issuance of the rate order may not be capitalized upon adoption of the phase-in plan.
340-980-55-33
This Example illustrates the guidance in paragraph 980-340-35-4.
340-980-55-34
Utility A is an electric utility that operates solely in a single-state jurisdiction. On January 1, 19X1, Utility A's new electric generating plant becomes operational. The cost of that plant is $1 billion.
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Utility A's regulator orders that the costs of the newly completed plant be phased in over a three-year period, as follows:
  1. a
    19X1—A portion of the return (interest and an allowance for earnings on shareholders' investment) on unrecovered investment is deferred by excluding 25 percent of the cost of the plant from the rate base.
  2. b
    19X2—All of the remaining cost of the plant is to be included in the rate base with no recovery of previously deferred amounts.
  3. c
    19X3—All of the remaining cost of the plant is to be included in the rate base. Also, additional revenue is to be provided equal to the return on unrecovered investment excluded from rates in Year 1.
The order does not provide for recovery in any year of a return on Utility A's investment in the deferred amounts. Utility A's weighted-average cost of capital in its latest rate case was 11 percent.
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The phase-in plan is partially a disallowance of plant costs because no return on investment is provided for the deferred amounts. That disallowance should be recognized in accordance with Section 980-360-35 when it became probable. The amount of equivalent cost disallowed should be determined as shown in Schedule 1. The recorded cost of the plant should be reduced by that amount, and a corresponding loss should be reported in 19X1.
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The disallowance will reduce revenues only in Years 1 through 3, so the depreciation charge that would otherwise be recognized for that plant in Years 1 through 3 should be reduced by the amount of the effective disallowance attributable to those years (the amount in column 4 of Schedule 1). Amounts deferred under the plan (the amount for months 1-12 in column 1 of Schedule 1) should be capitalized as a separate asset, and that asset should be amortized as recovery occurs (in months 25-36), using the amounts in column 1 of Schedule 1.
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The following table illustrates the determination of effective disallowance.
  • Schedule 1 Utility A Determination of Effective Disallowance Return on Investment Disallowed for Amounts Deferred under Phase-in Plan (in thousands) (1) (2) (3) (4) Month Cost Deferral (Recovery) Cumulative Amount Deferred Return on Investment on Cumulative Deferral Effective Disallowance 1 " $2,292 " " $2,292 " $21 $- 2 " 2,291 " " 4,583 " 42 21 3 " 2,292 " " 6,875 " 63 41 4 " 2,292 " " 9,167 " 84 61 5 " 2,291 " " 11,458 " 105 80 6 " 2,292 " " 13,750 " 126 99 7 " 2,292 " " 16,042 " 147 118 8 " 2,291 " " 18,333 " 168 137 9 " 2,292 " " 20,625 " 189 155 10 " 2,292 " " 22,917 " 210 173 11 " 2,291 " " 25,208 " 231 190 12 " 2,292 " " 27,500 " 252 207 13 - " 27,500 " 252 224 14 - " 27,500 " 252 222 15 - " 27,500 " 252 220 16 - " 27,500 " 252 218 17 - " 27,500 " 252 216 18 - " 27,500 " 252 214 19 - " 27,500 " 252 212 20 - " 27,500 " 252 210 21 - " 27,500 " 252 208 22 - " 27,500 " 252 206 23 - " 27,500 " 252 204 24 - " 27,500 " 252 202 25 " (2,292)" " 25,208 " 231 201 26 " (2,291)" " 22,917 " 210 182 27 " (2,292)" " 20,625 " 189 164 28 " (2,292)" " 18,333 " 168 146 29 " (2,291)" " 16,042 " 147 129 30 " (2,292)" " 13,750 " 126 112 31 " (2,292)" " 11,458 " 105 95 32 " (2,291)" " 9,167 " 84 78 33 " (2,292)" " 6,875 " 63 62 34 " (2,292)" " 4,583 " 42 46 35 " (2,291)" " 2,292 " 21 31 36 " (2,292)" - - 15 Total loss to be recognized in 19X1 " $5,099 " Computations: Column (1)—Cost of plant ($1 billion) × .25 × 11% ÷ 12 Column (2)—Column (2) for prior month + Column (1) for current month Column (3)—Column (2) × 11% ÷ 12 Column (4)—Present value (at beginning of month 1) at 11% (.9167 per month) of amount in Column (3) for prior month
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This Example illustrates the guidance in paragraph 980-340-25-2 and the application of the definition of a phase-in plan.
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A utility that meets the criteria of paragraph 980-10-15-2 for application of this Topic constructs two generating plants on a common site and those plants share certain facilities (primarily coal handling equipment, transmission facilities, and an administrative building). One plant (Unit 1) is completed January 31, 19X1, and the other plant (Unit 2) is completed December 31, 19X1. The coal handling equipment, transmission facilities, and administrative building are completed by January 31, 19X1, and are used by Unit 1 during 19X1.
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New rates are placed in effect on February 1, 19X1, that include the effect on revenue requirements of Unit 1 and one-half of the coal handling equipment, transmission facilities, and administrative building. New rates are again placed in effect on January 1, 19X2, to include the effect on revenue requirements of Unit 2 and the other half of the coal handling equipment, transmission facilities, and administrative building.
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Consistent with the above rate treatment, the utility capitalizes interest on and does not depreciate one-half of the coal handling equipment, transmission facilities, and administrative building from January 31 to December 31, 19X1. The question is whether deferral of depreciation and continued capitalization of interest on one-half of the coal handling equipment, transmission facilities, and administrative building is a phase-in plan under Subtopic 980-340.
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This deferral represents a phase-in plan unless that rate treatment was routinely used before 1982 by that regulator for similar allowable costs of that regulated entity. The definition of a phase-in plan provides that a phase-in plan defers the rates intended to recover allowable costs beyond the period in which those allowable costs would be charged to expense under generally accepted accounting principles (GAAP) applicable to entities in general. The interest capitalization period should end and depreciation for the common facilities should begin on February 1, 19X1. Assuming the depreciation pattern for those facilities that results from the above rate-making treatment is not a rational and systematic method of depreciation that would be acceptable for an entity in general, that deferral of depreciation and interest is a phase-in plan. If the depreciation pattern for those facilities that results from the above treatment is a rational and systematic method of depreciation that would be acceptable for an entity in general, only the deferral of the interest is a phase-in plan.
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Subtopic 980-340 provides an exception to the definition of a phase-in plan for the effects of regulatory lag. However, regulatory lag ends for a utility's newly completed plant with the first rate order that both:
  1. a
    Is effective after the in-service date of that plant
  2. b
    Addresses the costs of that plant.
Therefore, even if different portions of the cost of a unit of property (for example, transmission facilities) are considered for rate treatment in successive rate filings under the notion of regulatory lag, it creates a phase-in plan.

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