Part two
The electric power industry has been restructured since 2001 to consist of four separate sectors—the Generation, Transmission, Retail, and Distribution sectors. These sectors used to be vertically integrated and the functions were performed by only one government entity—the National Power Corp. With the restructuring, the responsibilities were transferred to the four different sectors where generation and retail are considered unregulated or competitive and transmission and distribution are considered regulated by the Energy Regulatory Commission (ERC).
The rates charged by generators and the retailers are supposed to be competitive and are, therefore, not regulated by ERC. While considered not regulated, ERC’s regulatory supervision and monitoring ensures that generators and retailers do not exercise abuse of market power and that fair competition exists.
The rates charged by the transmission provider and the distribution utilities (DUs) are regulated by the ERC and, for this purpose has adopted the Performance-Based Regulations (PBR) for setting prices to be charged to customers starting in 2004. Prior to this methodology, the Return on Rate Base was the pricing methodology used.
In adopting the PBR, a regulatory lag of four years has been approved (one regulatory period consists of four years) for all the 20 franchised private DUs nationwide. During each of the regulatory periods, a set of Rules for Setting Distribution and Transmission Rates are issued, which mandate the rules to be observed in the determination of transmission and distribution rates. There are also 120 rural electric cooperatives that have been issued a franchise by the National Electrification Authority. The rates charged by these electric cooperatives are also regulated by the ERC and are covered by a different set of rules (Rules for Setting Electric Cooperative Wheeling Rate) to determine the prices to be charged by these electric cooperatives to their consumers.
In this energy power sector, there are areas with differences between the statutory and regulatory accounting rules that govern this industry. The more important differences are the following:
The Regulatory Assets Base
The RAB consists of the assets employed by a Regulated entity to provide efficient Regulated Distribution Services. It covers the Regulated Distribution System assets as well as the non-system assets required for the delivery of Regulated Distribution Services. For all intents and purposes, this is the same as the Utilities and Equipment that are indicated in the entity’s balance sheet. However, because of some differences in the treatment of some assets, the balance of the two is not necessarily the same.
For statutory accounting purposes, Utility plant and equipment are generally stated at cost, net of accumulated depreciation, amortization, and impairment losses, if any. In the case of a large DU, the utility plant and equipment acquired before January 1, 2004 are stated at deemed cost. The revalued amount recorded as of January 1, 2004 was adopted as deemed cost as allowed by the transition provisions of Philippine Financial Reporting Standard 1. The balance of revaluation increment was closed to the retained earnings account, but is restricted for dividend declaration.
When a DU elects to revalue its assets for regulatory purposes, the acceptable methodology is the Optimized Depreciated Replacement cost. Here, the replacement value of the asset is obtained using the Modern Equivalent Value rather than calculating the cost to replace the asset. Also, there are certain limitations imposed in the calculation of the replacement value as discussed in more detail in the Rules for Setting Distribution and Wheeling Rates. After the replacement cost is obtained using the RDWR approach, an optimization is performed to adjust the value of the asset to eliminate excess or non-performing assets before computing for depreciation.
The DU is required to reconcile the regulatory rolled forward asset register with the statutory asset accounting net book values. The external auditor is expected to review this roll forward, optimization, and reconciliation process to ascertain the reasonableness of the RAB values used in the pricing methodology and that the values used have a direct relationship with the statutory account assets.
When an appraisal is made for both statutory and regulatory accounting, the impact on assets, income and dividends differs even if revaluation was made at the same time for both statutory and regulatory purposes. The depreciation on the appraisal is definitely recovered as revenue since the additional depreciation forms part of the Building Blocks of the DU. On the other hand, a non-utility company is not assured that the impact of the additional depreciation on appraisal can be recovered from additional revenue because of the competitive nature of its market. Therefore, the accountant and the auditors should discuss how the appraisal increase and the timing difference would be accounted for in the retained earnings and dividends.
To be continued
Alfredo J. Non is a CPA by profession and a former Partner at SGV & Co. He served as Commissioner of the Energy Regulatory Commission till he completed his term in 2018. He also served as Director and Executive Officer of several private companies and a former professor in Financial Management at the Ateneo Graduate School of Business.
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