Title
A Resolution to increase the amount of the regulatory asset associated with Martin Drake power plant’s decommissioning costs
Presenter:
Tristan Gearhart, Chief Financial Officer, Colorado Springs Utilities
Body
Summary:
A Resolution to increase the amount of the regulatory asset associated with Martin Drake power plant’s decommissioning costs. Colorado Springs Utilities seeks approval from City Council to increase the amount of the Martin Drake Power Plant regulatory asset that was established under Resolution 137-23 due to additional estimated costs for pollution remediation. These additional costs will be expensed over a 10-year period as they are incurred to help smooth the rate impact. With City Council approval, the proposed increase to the regulatory asset is $3,000,000, for costs incurred in 2024 and continuing through 2025.
Background:
Typically, expenses are recorded in the period incurred. However, due to Utilities’ regulatory operations, there is additional accounting guidance that allows regulatory accounting and the creation of a regulatory asset pursuant to Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements (incorporating ASC 980/FAS 71 - Accounting for the Effects of Certain Types of Regulation.) Accounting Standards Codification (ASC 980) is the accounting guidance used by public utilities to recover costs through rates charged to their ratepayers, make their operating benchmarks comparable to their investor-owned peer utilities, and also match their accounting to utility industry standards.
Recognition of a regulatory asset is allowed by Colorado Springs Utilities so long as:
- our rates for regulated services are established by, or are subject to approval by its own governing board empowered by statute to establish rates
-regulated rates are designed to recover the specific regulated business-type activity’s
costs of providing the regulated services, and
- it is reasonable to assume that rates can be charged to and collected from customers
With City Council approval of the $3,000,000 increase, Martin Drake Power Plant’s regulatory asset will have a total value of $23,525,070 and would increase the amortization period by one year to a total of 12 years.
Previous Council Action:
City Council approved Resolution 137-23 on October 10, 2023 establishing a regulatory asset value of $20,525,070 associated with the Martin Drake Power Plant’s obsolete inventory and decommissioning costs in order to levelized the rate impact.
Financial Implications:
A regulatory asset is recorded to the balance sheet. In effect, costs are capitalized and then amortized over time. These amounts would otherwise be required to appear on Colorado Springs Utilities’ income statement as a current period expense. The recording of a regulatory asset allows Colorado Springs Utilities to match revenues to expenses and to smooth rate impact over a set period of time.
City Council Appointed Board/Commission/Committee Recommendation:
N/A
Stakeholder Process:
N/A
Alternatives:
Without the increase to the existing regulatory asset, the annual expenses would be recorded against income in the year incurred and potentially drive short-term rate increases.
Recommended Action
Proposed Motion:
Move approval of the proposed resolution.
Summary of Ordinance Language
N/A