Regulatory Systems of Accounts

Core References

The role of regulatory accounts in regulated industries: A final proposals paper
by Chief Executive of Ofgem; Director General of telecommunications; Director General of water services; Director General of electricity and gas supply (Northern Ireland); U.K. Rail Regulator; U.K. Civil Aviation Authority; and U.K. Postal Services Commission. April 2001.

Describes a set of common regulatory accounting principles for regulators in the U.K. Principles applied include: (1) “regulatory accounts will be prepared and audited using the common regulatory accounting framework;” (2) consistency in formatting where practicable; (3) clarity in audit requirements; and (4) deadlines for publishing regulatory accounts.

Rate Case and Audit Manual
Washington, D.C.: National Association of Regulatory Utility Commissioners, 2003.
NARUC Staff Subcommittee on Accounting and Finance

Describes auditing purposes and procedures. Includes studying the operator’s accounting system, analyzing historical data, focusing the audit, reviewing past decisions of the regulatory agency, reviewing working papers, using external and internal audit reports, contacting other jurisdictions, managing the audit process, confidentiality procedures, and identifying records to be reviewed.

Accounting for Infrastructure Regulation: An Introduction
Washington, D.C.: The World Bank, 2008, Chapters 5 and 7.
Rodriguez Pardina, Martin, Richard Schlirf Rapti, and Eric Groom

Explains why regulators need accounting information and describes approaches for establishing regulatory accounting guidelines.

Sectoral References

ELECTRICITY AND GAS

Decision: Statement of principles for the regulation of transmission revenues: Information requirements guidelines
5 June 2002.
Australian Competition and Consumer Commission

Details information filing requirements for electricity transmission operators. Describes information needs of the regulatory instruments used by the regulator. Describes policies for information disclosure and future information policy issues.

Regulatory Accounting Guidelines: Report to Ofgem
March 2001.
Deloitte & Touche

Provides an assessment of Ofgem’s accounting guidelines at the time. Focuses on overhead allocations, transfer pricing (internal recharges), and capitalization policies. Also considers historical cost accounting, use of generally accepted accounting principles, need for regulatory accounts, asset valuation, reconciliation, and activity accounting.

Regulatory Accounts: Final Proposals
November 2000.
Ofgem

Describes Ofgem’s accounting requirements. Explains reasons and responsibilities for regulatory accounts. Describes regulatory accounts, monitoring procedures, enforcement procedures, and auditing policies.

TELECOMMUNICATIONS

Chart of Accounts and Cost Allocation Manual: Detailed Requirements for Fixed-Line Telephone Operators
September 19, 1999.
South African Telecommunications Regulatory Authority

Explains that the regulator imposes accounting rules to obtain information to evaluate regulated prices and to monitor compliance with public policy objectives. In the case of South Africa, the rules are designed with the intent of using the “lightest” regulatory approach consistent with the regulator’s responsibilities. The accounting manual describes the structure of the Chart of Accounts, “the contents of each account, the segments for which revenue and cost information is required, the wholesale services for which fixed landlines Operators are to provide cost visibility, the methodologies used for cost allocation and the requirement for reporting financial details and results.”

TRANSPORTATION

Regulation and Deregulation of the Motor Carrier Industry
Ames, Iowa: Iowa State University Press, 1989.
Felton, John Richard and Dale G. Anderson

Explains how firms regulated by means of the operating ratio have a clear incentive to inflate the numerators of their operating ratios to justify a rate increase.

WATER

RAG 1: Guideline for Accounting for Current Costs and Regulatory Capital Values: (Regulatory Accounting Guideline version 1.03)
May 1992 (Revised January 2003).
OFWAT

Ofwat’s accounting guidelines regarding current costs and regulatory capital values. Considers infrastructure, operational assets, and other tangible assets; third party contributions, reserves, adjustments to historical cost operating profit, financing adjustments, exceptional and extraordinary items, content of accounts, and regulatory capital value.

RAG 2: Guideline for Classification of Expenditure: (Regulatory Accounting Guideline version 2.03)
November 1996 (Revised January 2003).
OFWAT

Ofwat’s accounting guidelines for classifying expenditures. Considers asset and expense categories and allocations.

RAG 3: Guideline for the Contents of Regulatory Accounting: (Regulatory Accounting Guideline version 3.05)
May 1992 (Revised January 2003).
OFWAT

Ofwat’s rules for content of regulatory accounts. Defines historical and current cost accounting for balance sheets, income statements, and cash flow statements (current cost only). Provides guidelines for accounting statements, profit analysis, transactions with affiliated businesses, and other items.

RAG 4: Guideline for the Analysis of Operating Costs and Assets: (Regulatory Accounting Guideline version 4.02)
May 1992 (Revised January 2003).
OFWAT

Ofwat’s rules for analysis of operating costs and assets. Considers analyses of individual activities (for example, water supply), direct costs, general support costs, capital costs, service costs, tangible fixed assets, and allocations and apportionments.

RAG 5: Transfer Pricing in the Water Industry: (Regulatory Accounting Guideline version 5.03)
April 1997 (Revised March 2000).
OFWAT

Ofwat’s accounting guidelines for transfer pricing. Describes basic principles, principles for transfers and market testing, cost allocations, and reporting requirements.

Case Studies