08-19-11 BPU RPT 12 - Laserfiche WebLink

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RIVERSIDE PUBLIC UTILITIES L als , { _ , Board Memorandum BOARD OF PUBLIC UTILITIES DATE: August 19, 2011 ITEM NO: 12 SUBJECT: REGULATORY ACCOUNTING FOR UNEXPECTED TRANSACTIONS NOT IN CURRENT RATE STRUCTURES ISSUE: Approval is requested for the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification 980(ASC 980)"Regulated Operations"as an accounting methodology to be used for specific accounting transactions. RECOMMENDATIONS: That the Board of Public Utilities recommend that the City Council: 1. Approve the application of ASC 980 for transactions discussed in the report; and 2. Adopt a Resolution authorizing the application of ASC 980. BACKGROUND: As authorized in the City Charter, the Board of Public Utilities (Board) establishes, and the City Council (Council) approves, electric and water rates. Utility rates are designed to recover the costs of providing services. The City has covenanted in bond resolutions that the City will charge retail rates sufficient to recover costs and maintain certain debt service coverage ratios(DSCR)to provide assurance to bondholders that future rates will be sufficient to make principal and interest payments. Unexpected significant costs or revenue reductions can impact the DSCR. Violating its DSCR can result in an Event of Default under the Master Resolution, and will impact the utilities' credit rating, market access, and/or amount of interest the Utility pays on its outstanding bonds. Regulatory Accounting ASC 980 permits an entity with rates that are: a) cost-based; b) set by a governing body; and c) set at levels such that it's reasonable to assume recovery of such costs, to defer certain expenses and revenues that would otherwise be recognized when incurred in its Statement of Revenues, Expenses and Changes in Net Assets (SRECNA), provided that the entity is recovering or expects to recover or refund such amounts in rates charged to its customers. These expenses and revenues are capitalized as regulatory assets and liabilities when it is probable that future rates (or rate reductions) will permit recovery of such costs. Any transactions subject to ASC 980 would be fully disclosed in the utilities' annual financial report. RPU's utility rates are set to recover normal costs of operations, maintenance, pay debt service,fund certain capital expenditures,and maintain legally required coverage for bondholders. Costs may be incurred that are not contemplated, or revenues may be significantly below expectations such that minimum coverage is not maintained. Examples could be: emergency water purchases above the Utility's costs due to loss of a transmission main,excess power purchase costs due to unexpected generator ortransmission outage,items mandated by state or federal regulators not included in normal operations,ortransactions meeting the criteria of a new accounting standard issued by Governmental Accounting Standards Board (GASB).