Accounting for Infrastructure Regulation: An Introduction

by Eric Ian Groom, Richard Schlirf Rapti, Martin Rodriguez Pardina

Overview

Developing effective regulation for utilities has always depended on getting good accounting information on finances and operations. But reforms within the utility sector—such as promoting competition and encouraging private participation—make accurate regulatory accounting even more important. As sector and corporate structures become more complex, with utilities operating in both competitive and regulated markets or across several jurisdictions, cost allocations have become both more critical and complex. Clear requirements for regulatory accounts are an essential element in the transparent, consistent, and credible regulation of utilities and reporting of their performance. 'Accounting for Infrastructure Regulation: An Introduction' provides a practical guide for regulators, policy makers and utility managers to establishing regulatory accounts that can be the cornerstone for better, more complete, and more reliable accounting information. Drawing upon a number of case studies to illustrate key issues and choices, the book sets out the essential accounting features of regulatory accounts and provides practical guidance on controversial areas such as the allocation of costs, the valuation of assets, and depreciation. The book emphasizes the need for consistency with Generally Accepted Accounting Principles (GAAP), but highlights the specific role and requirements of regulatory accounts from the perspective of sector reform and best-practice regulation.

Product Details

ISBN-13:	9780821371794
Publisher:	World Bank Publications
Publication date:	04/25/2008
Series:	Stand Alones Series
Pages:	238
Product dimensions:	7.40(w) x 9.10(h) x 0.60(d)

Table of Contents

Foreword     ix
Acknowledgments     xi
Abbreviations     xiii
Why Accounting Information Matters     1
Objectives of public service regulation     3
External and internal regulatory information     5
Limitations of traditional accounting information for regulatory purposes     8
Information exchange and participation: The need for processes and mechanisms     12
Case Studies     15
Case study 1: Privatization of an electricity and water operator in Africa-Initial contract not sufficiently specific     15
Case study 2: Regulating operators in Latin America-Manual deficiencies led to inconsistent cost accounting by different utilities     18
Case study 3: Efficient model company regulation in a Latin American country-Deficiencies of benchmarking information and the need for regulatory accounting information     21
Corporate Information and Financial Accounting     27
Corporate information systems     27
Statutory financial statements     29
Additional reading and resources     41
Management and Cost Accounting     43
Objectives of management and cost accounting     43
Cost classifications     45
Cost allocation     53
Additional reading andresources     61
Why Do Regulatory Accounting?     63
Regulatory accounting and its objectives     64
General presentation of information needs     65
Limitations of traditional and management accounting of the regulated company     68
Consistency between statutory accounts and regulatory accounts     69
Regulators' behavior and principles to follow     70
Using accounting costs in tariff determination     71
Regulatory accounting and auditing of regulated companies     77
Additional reading and resources     80
Core Issues in Regulatory Accounting     83
Separation of activities     84
Regulatory asset base determination     92
Depreciation policies of the regulatory asset base     98
Related-party transactions and transfer pricing     102
Additional reading and resources     108
Scope of a Regulatory Accounting System     111
Contents of regulatory accounting guidelines     111
Information exchange processes     121
Need for competencies, tools, and time and methodology     128
Legitimizing the regulatory methodology     131
Additional reading and resources     132
Understanding Financial Statements: Ratio Analysis     135
Liquidity ratio analysis     136
Activity ratios     137
Capital structure (leverage ratios)     138
Profits and profitability     139
Regulatory Model     141
What are regulatory models?     142
Matching regulatory objectives and instruments     146
What regulators need to know about the operator's finances     150
Conclusion     151
Examples of Guidelines and Templates     155
Australia: Electricity Industry Guideline     155
Australia: Regulatory Accounting Statements-Templates     156
United Kingdom: Ofwat Regulatory Accounting Guideline     167
United Kingdom: Ofwat Regulatory Accounting Statements-Templates     167
Impacts of Alternative Depreciation Profiles     175
Perspectives on depreciation     175
Regulatory approaches to depreciation     176
Alternative approaches to depreciation     177
Estimation of asset lives     178
Impact of different approaches to calculating depreciation     179
Data requirements     184
Principles for depreciation     184
List of Sample Performance Indicators      187
Cost Allocation: Illustration of a Step-by-Step Approach     189
Identify cost objectives     189
Identify direct costs     189
Classify indirect costs and allocate cost pools to cost objectives     189
Regulatory Asset Base Valuation     193
Valuation approach     196
Regulatory asset base and accounting     198
Bibliography     205
Index     211