This is a continuation of my discussion of the major differences between the statutory and regulatory accounting rules that govern the energy power industry
4. The two Aspects of the Regulatory Asset Base (RAB)
While RAB is the general term used to refer to the regulatory assets used in the delivery of efficient regulated energy services, it may also be referred to based on two aspects as:
The Physical Aspect—which is the tangible aspect or the actual physical assets itself; and
The Investment or Financing Aspect—refers to the funds used to finance the acquisition of the property and equipment, which could be a combination of debt and capital.
The above can be illustrated by using the statutory accounting equation of:
ASSETS = DEBT + CAPITAL
A more refined illustration would be:
UTILITIES + WORKING CAPITAL = DEBT + CAPITAL (including Retained Earnings)
It is preferable to view the RAB based on these two aspects to eliminate certain confusions that result with the use of only one—the physical aspect of the RAB. Currently, the Optimized RAB is used in the roll forward balances and in the computation of Depreciation or return of capital. Under the Performance Based Regulation, Return On Capital (ROC) also uses the RAB as the base upon which to apply the WACC to arrive at the OC.
It is expected that the total debit and total credit in the above equation will always be equal. However, for regulatory accounting purposes, this will not be the same. Therefore, it will be better that the ROC will be obtained by using the physical assets aspect as the basis and, that the ROC will use the Financial or Investment Capital concept as the basis. This way, the gearing ratio, applicable interest rates and, other adjustments will be properly recognized. In this regard the Commission, the Distribution Utility (DU) and the external auditor should agree to the use of a common template to consider the different adjustments to be made to arrive at the two different RAB balances, which should be periodically reconciled.
For a better understanding of the reconciliation, explanations should be provided for each of the items that appear in the reconciliation template. For example, while donated assets may be excluded from the RAB in computing ROC, it may be included in the RAB in computing depreciation so that depreciation funds may be accumulated if the condition of donation puts the DU as responsible for replacement.
Financial and regulatory accounting would be appreciated better if there is proper coordination between the auditors and the regulator to ensure that the different practices between the two are properly recognized and, if significant, should be disclosed in the financial statements for a better understanding of the affairs of the Distribution Utility. After all, there is commonality in objectives between the regulator and the auditor with respect to communications and proper reporting to the public.
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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