Regulatory Assets: Definition, How They Work, and Examples

A regulatory asset is a financial term primarily used in the context of public utilities, notably in the energy sector, within the United States. It represents costs that a regulatory agency permits a utility company to defer to its balance sheet, rather than recognizing them as immediate expenses on the income statement. This deferral enables companies to capitalize certain costs and depreciate them over time.

Regulatory assets serve as a mechanism for utilities to recover specific costs associated with providing services. These costs, if not deferred, would typically impact the company’s financial statements as immediate expenses. Government Accounting Standards Board (GASB) Statement No. 62 outlines the guidelines for recording regulatory assets. These assets are created when certain expenses are recognized as deferrals instead of being expensed immediately.

Expenses that may be included as regulatory assets encompass a wide range of items, including environmental and decommissioning costs, deferred power costs, losses on asset retirements, extraordinary repair and maintenance costs, unrealized derivative losses, advance refunding costs, storm damage costs, and debt issuance costs.

The discretion to include expenses as regulatory assets lies with the regulatory authority overseeing the utility. The regulator determines which expenses are eligible for recovery from ratepayers and mandates the treatment of expenses accordingly. Amounts recognized as regulatory assets must be amortized over an expected period through rates, ensuring a balanced approach to cost recovery.

For instance, let’s consider Edison International, the parent company of Southern California Edison (SCE). In its financial statements as of December 31, 2020, SCE disclosed $1,314 million in short-term regulatory assets and $7,120 million in long-term regulatory assets on its balance sheet. These regulatory assets were detailed and discussed in the accompanying notes to the financial statements under the term “SCE Regulatory Assets.”

Expenses that can be included as regulatory assets vary but commonly encompass environmental and decommissioning costs, deferred power costs, losses on asset retirements, extraordinary repair and maintenance costs, unrealized derivative losses, advance refunding costs, storm damage costs, and debt issuance costs.

Regulatory assets are typically amortized over an expected period through rates. The amortization process allows utilities to recover the capitalized costs gradually, ensuring a balanced approach to cost recovery.

The regulatory authority overseeing the utility holds discretion over which expenses can be included as regulatory assets and their recoverability from ratepayers. The authority ensures that expenses eligible for recovery are managed appropriately within regulatory frameworks.

Regulatory assets enable public utilities to manage costs effectively by deferring certain expenses to the balance sheet. By capitalizing costs and amortizing them over time, utilities can ensure financial stability and smoother rate recoveries, ultimately benefiting both the company and its stakeholders.