Summary of Statement No. 92

Regulated Enterprises—Accounting for Phase-in Plans—an amendment of FASB Statement No. 71 (Issued 8/87)


This Statement amends FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation, to specify the accounting for phase-in plans.

When a utility completes a new plant, conventional rate-making methods establish rates to recover the allowable costs of the plant. Those allowable costs include current operating costs, depreciation, interest on borrowed funds invested in the plant, and an allowance for earnings for the utility (an amount intended to represent a fair return on shareholders' investment in the plant).

The cost of electric utilities' plants constructed in recent years has been much greater than the cost of those completed in earlier years, so that, for some utilities, conventional rate-making methods would result in significantly increased rates when a newly completed plant goes into service. In such cases, some regulators have adopted phase-in plans to moderate the initial rate increase. The objective of those plans is to increase rates more gradually than would be the case under conventional rate making, while providing the utility eventual recovery of all of its allowable costs and a return on investment.

This Statement requires allowable costs deferred for future recovery under a phase-in plan related to plants completed before January 1, 1988 and plants on which substantial physical construction has been performed before January 1, 1988 to be capitalized if each of four criteria is met. Those criteria are (a)the plan has been agreed to by the regulator, (b) the plan specifies when recovery will occur, (c) all allowable costs deferred under the plan are scheduled for recovery within 10 years of the date when deferrals begin, and (d) the percentage increase in rates scheduled for each future year under the plan is not greater than the percentage increase in rates scheduled for each immediately preceding year. If any of those criteria is not met, allowable costs deferred under the plan would not be capitalized. Instead, those costs would be recognized in the same manner as if there were no phase-in plan.

This Statement also reiterates that Statement 71 does not permit an allowance for earnings on shareholders' investment to be capitalized in general-purpose financial statements when it is capitalized for rate-making purposes other than during construction and, with this Statement, as part of a phase-in plan.

This Statement is effective for fiscal years beginning after December 15, 1987, and it applies to existing and future phase-in plans. Application of this Statement to phase-in plans that do not meet the criteria of this Statement will be delayed if the regulated enterprise has filed a rate application to have those phase-in plans modified to meet the criteria of this Statement or intends to do so as soon as practicable and it is reasonably possible that the rate application will be successful. In that case, this Statement will be applied to those phase-in plans when the regulator amends or refuses to amend those plans.