ML19308B805
| ML19308B805 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 08/17/1979 |
| From: | Duree S ELMER FOX, WESTHEIMER & CO. |
| To: | Vandenburg R NRC OFFICE OF MANAGEMENT AND PROGRAM ANALYSIS (MPA) |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001170330 | |
| Download: ML19308B805 (6) | |
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ELM ER Fox, WESTHEIM ER & CO.
'"@oct=tln s %no 4
r, Denven, Col.onaco soas4 CERTirico Pueuc ACCOUNTANTS 303 861 d 55 i
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August 17, 1979 j
Mr. Larry Vandenberg U.S. Nuclear Regulatory Commission AR 400 f
Washington D.C. 20555 i
Dear Mr. Vandenberg:
This letter is in response to our August 14, 1979 conversation concerning l
accounting for the transfer of plant from construction work in progress (CWIP) to plant in service.
You have researched the standards for transfer for income tax purposes.
The criteria set forth in Revenue Rulings76-256 and 76-428 define the procedural considerations necessary to declare a unit (fossil or nuclear) as "in service" for tax purposes. From our experience these same standards
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j are generally used by utility regulators in their evaluation of plant
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assets with respect to the concept of "used and useful"; a concept which often underlies the inclusion of an asset in rate base.
We discussed the importance of regulatory treatment, in a broad sense, on financial accounting. As a general condition, financial accounting is to reflect economic reality; a significant portion of a utility's " economic reality" is' established through the rate orders of the related regulatory authorities.
In some cases, accounting for economic reality in a public utility requires an extension of generally accepted accounting principals (CAAP) from those that would be applied in a nonregulated industry. The.
Addendum to Accounting Principles Board Opinion No. 2 generally provides.
for such an extension af GAAP to include the effects of regulation and rate
-making in public utilities. The appropriateness of the Addendum has been recently restudied; enclosed is a copy of a document entitled " Discussion Memorandum--Effect of Rate Regulation on Accounting to be Applied to Regulated Industries".- The Discussion Memorandum was prepared by a task force of the~ Financial Accounting Standards Board-and is scheduled for 4
official distribution, with possibic revision, in late 1979. The significance
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of the Addendum is also discussed in FPC Order No. 505B; a copy.is enclosed.
You inquired if AFUDC is included in the base on which ITC may be claimed.
1TC may be claimed on the depreciable tax basis of utility property which may, but generally does not, include the interest portion of-AFUDC..That.
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.portioniof AFUDC which relates to equity-funds is' definitely not eligible i
for ITC.
The interest portion of AFUDC relating to " borrowed funds" is generally not eligible for ITC because nearly all utilities elect to deduct all interest, including that portion embedded in AFUDC, as a current deduction; therefore, j
the capitalized tax basis of the property eligible for ITC does not normally,
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include any portion of AFUDC. LIf you-desire a further definition!of the two.
components of'AFUDC, you should refer.to;18 CFR Part-101, page 298 of the-
-April'1, 1978 edition.
l 800129,,33o
August 16, 1979 Mr. Larry Vandenberg page two i
Please do not hesitate to contact either Jim Wilson or me at (303) 861-5555 if we may be of additional assistance.
Very truly ours, Steph'en A. Durce SAD /gs
r set 9-u-77 6200 Federal Power Commission 1
[g 5642]
SUPPLEMENTAL ORDER CLARIFYING AND AFFIRMING COMMISFION ORDER NO. 505 l'
CONCERNING TIInT PORTION OF
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DOCKET NO. R-424 RELATING TO
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iy ACCOUNTING FOR PREMIUM, 7
DISCOUNT AND EXPENSE
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OF ISSUE GAINS, AND LOSSES ON REFUND-3.J nv ING AND REACQUI-SITION OF LONG-
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L' TERM DEBT
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FPC Order No. 505-B [42 F. R. 37970]
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(Issued July 8,1977)
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FPC ItEATFIIt.itS POLICY ON IA)NG TEint DElsT ACCOUNTING t
This rulemaking was instituted to promulgate the proper accounting for (1) premium, discount and expense of issue of long term debt; (2) gains and losses on reacquired debt, e
when no refunding is involved, and (3) gains and losses on reacquisition of long-term debt when a refunding is involved. The earlier orders in this docket have been remanded by the Ciicuit Court of Appeals for the District of Columbia with instructions "to prepare a new opinion if the Commission continues to adhere to the regulation contested in this avpcal." 7'exas Eastern l'ransmission Corporation v. FPC, No. 74-1781 (D. C. Cir. Sept.18, 1975), slip at 1. For the reasons stated herein, the Commission shall reaffirm its pre lous orders, concerning the proper accounting for these items.
Ordcr No. 505, 51 FI'C 714 (1974), and Order No. 305-/f,51 FPC M2 (1974), required jurisdictional utilities and natural gas companies to use accounting procedures which would track the Commission rate treatment for gains and losses for reacquired debt, first t
stated in 3/anufacturcrs light and llrat Company,41 FPC 311 (1970). The accounting pr&-
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,j cedures adopted in this rulemaking provide for, in cases where no refunding is involved (-
l amortization of the net gain or loss on an equal monthly basis over the remaining life of the respective security issues (i. c., the old original debt). Where refunding is involved and the redemption of one issue or series of long-term debt securities is financed by a new issue or series, the utility or natural gas company may elect to account for the net gain or loss from the reacquisition of the old original debt in one of three ways: (1) write off immediately the amounts if they are insignificant; (2) amortize the amounts on v equal monthly basis over the life of the old original debt being retired; or (3) amortize the amounts on an equal monthly basis over the life of the new issue. In those cases where the regulatory authority having primary jur:sdiction over a utility or natural gas company 4
does not follow the Commiasion's rate treatment for amortizing gains or losses on re-acquisition of long term delit, this rulemaking allows a utility to use an alternative account-ing method under which these amounts would be recognized in the year of reacquisition as income. When this alternative method used, it would be explained in footnotes to the utihty or natural gas company's financial statements.
Rclationship of l]niform Systems of /fccounts to the Determination of Just and Reasonable Rates.
f Section 301(a) of the Federal Power Act and Section 8(a) of th Natural Gas Act l
state in part that:
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- The Commission may prescribe a system of acc<nmts to be kept by licensees and public utilitics (natural-gas companies) and may classify such licensees and public f.%
utilities (natural-gas companies) and prescribe a system of accounts for cach class.
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'rhe Commission, after notice and opportunity for hearing, nury determine by order the
.ceunts in schich tarticular outlays or reccitts shall be entered, chargcd, or credited. * *
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.Fmphasis added)
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'I nc Commission established the Uniform System of Accounts for Public Utilities and [
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Licensees,18 CFR, Parts 101 and 106 (1976), and the Uniform System of Accounts for \\
Natural Gas Companies,18 CFR, Parts 201 and 204 (1976), which apply to all utilities and n.itural gas companics under the Commission's jurisdiction. From the inception of 1SG42
@ l977, Commerce Clearing IIouse, Inc.
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i 184 7-25-77 Orders 6201 these systems, the Commission has required that the system of accounts be used to support all tariff fdings because consistently developed information provides a framework within which filings can be consistently evaluated. Use of a uniform system facilitates f _~' 7,
comparability which not only aids analysis in rate proceedings, but also assists the Cora-4 g
V mission in making accurate cost of service determinations and helps to assure that juris-
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dictional utilities will state plant, income, expense and various other accounts in a
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similar ruanner.
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Consequently, the Commission evaluates the need for accounting 3anges when changes
' f/g in ratemaking policies or procedures are considered, and considers the rate implications
,q before making official changes to the systems of accounts. Various public interest factors, tf such as, effect on the consumer, benefit and convenience to the utilities, and assistance
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7 to the investor, are considered before any changes are tr.ade. This process alknvs the systems of accotmts to be structured in support of the ratemaking concepts with whicts they are interrelated.
The Commission generally maintains its Uniform Systems of Accounts in conformity l
with the standards announced by the Financial Accounting Standards Board (FASil)'.
llowever, in cases where there are material conflicts between FASil standards and rate making realities, the Uniform Systems of Accounts ditTer from such standards.
The fact that accounting for regulated industries may properly differ from the account-ing for non-regulated industries was formally recogn ted by the Accounting Principles lloard (APH), now FASI", in December 1962 with the issuance of its Opinion No. 2, which included this statement as an Addendum:
- 2. Ilowever, differences may arise in the application of generally accepted accounting principles as between the regulated and nonregulated business, because of the effect in regulated business of the rate-making process, a pheromenon not present in nonregidated busine ss. Such differences usually concern mainly the time at which various items enter into the determination of net income in accordance with the prir.ciple of matching costs and revenues. For example, if a cost incurred by a regulated business during a given
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period is treated for rate-making purposes by the regulatory authority having jurisdictiort as applicable to future revenues, it may be deferred in the balance sheet at the end of the current period and written off in the future period or periods in which the related revenue accrues, esen though the cost is of a kind which in a nonregulated business would be w ritten off currently. Ilowever; this is appropriate only whcn it is clear that the cost will be recoverable out of future revenues, and it is not appropriate when there is doubt, because of ecemomic conditions or for other reasons, that the cost will be so recoverable.
When A PH issued Opinion No. 26, Early E.rtingrdshment of Dcht (Opinion of Account-ing Principics Hoard, October,1972), it recognized the continuing validity and necessity of the principle of the Addendum in the matter before it.
e This Opinion applies to regulated companies in accordance
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with the provisions of the Addendum to APil Opinion No. 2. Accounting for the " Invest-ment Credit," 1962.
The Addendum recognizes an economic reality, accounting and reporting principles he the same in every instance for regulated and nonregulated business, which
cars (through reductions or increases in the debt costs entering into rate of return determinations) does not justify reporting them as current gains (losses) for the account of the stockholders.
Petitione rs claim that the accounting proposed by this rulemaking places an undue and discriminatory burden on regulated utilities in competing for capital and artificially and unnecessarily limit (s) the amount of debt securities the regulated utility could issue under standard indenture restrictions thereby creating a situation whereby a utility may be forced to resort to higher cost equity fmancing.'
In support of this contention, Petitioners attached a one-page summary to the Supple-ment showing what they claim are the additional net income and additional indebtedness g
available under generally accepted accounting principles as opposed to what is available under this rulemaking. This summary shows that 11 of the largest gas pipline com-panies would have had reported a total additional net income of $29 million in 1974 and
$26 million in 1975. This summary shows also an increase in borrowing capacity in total for the 11 companics of $106 million in 1974 and $118 million in 1975.
We agree that our adherence to accounting for gains (losses) in a manner consistent with the economic realities of the ratemaking process lowers the total borrowing capacity of some companies and could conceivably cause a company to resort to equity fmancing.
Ilowever, we note thM, although our accounting rule was issued February 11, 1974, Petitioners have not shown or even alleged that the rule has, in fact, caused such a result. The fact that the effect of our rule on reported net income is significant lends support to enr position that accounting and financial reporting needs to reflect the economic efTects of the ratemaking processes.
The Commission is well aware of the critical needs of utilities for capital at a reasonable cost and, in recent years, has taken many actions to help utilities improve their financial viability, llowever, we cannot in good conscience attempt to meet such needs by permitting accounting and reporting which is inconsistent with the economic realities of the ratemaking process and, therefore, contrary to the interests of investors g
anl others relying on published financial statements.
L The Commission orkrs:
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t (A) The accounting procedures adopted originally in Order No. 505 are hereby P
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affirmed.
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y (B) Petitioners' Requests for Settlement or vacation are hereby denied.
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(C) The Secretary shall cause prompt publication of this order to be made in the 3
Federal Itegister.
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' Petitioners have not averred that this the-crettcat situation has, in fact, occurred.
1 5642 Utilitias Law Reports-Federal
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