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In the utility and power industry, it is established practice that joint plant is accounted for using proportionate consolidation. SAB Topic 10.C, Jointly Owned Electric Utility Plants (SAB Topic 10.C), discusses the accounting for typical utility joint plant arrangements and requires certain related disclosures (see UP 21). In general, utilities have followed proportionate consolidation for joint plant based on historical industry practice and reference to SAB Topic 10.C (codified in ASC 980-360-S99-1), as well as consideration of the guidance in ASC 970-810-45-1 and in an AICPA Issues Paper, Joint Venture Accounting. General information on proportionate consolidation is included in FSP 18.6.
In evaluating the accounting for new joint plant arrangements, reporting entities should consider the description of joint plant arrangements in SAB Topic 10.C and the guidance on accounting for undivided interests in ASC 970-810-45-1. Figure 15-1 highlights key accounting considerations.
Figure 15-1
Evaluating the application of proportionate consolidation
Key considerations
Ownership should be in the form of undivided interests in the underlying assets (UP 15.2.1)
• If the plant is held in a legal entity, joint plant guidance is not applicable; entity should be evaluated under other applicable U.S. GAAP, such as consolidation (ASC 810) or the equity method of accounting (ASC 323).
Each owner should be able to independently approve decisions on financing, development, sales or operations relating to its undivided interest without approval by other owners (UP 15.2.2)
• Owners of joint plant in the utility and power industry are typically individually responsible for financing their share of construction and operations and managing their own sales.
• The physical nature of power plants (i.e., portions are not separable) results in some necessary sharing of decision making, as discussed in SAB Topic 10.C.
Each investor should only be entitled to its share of income and responsible for its share of expenses from the joint operations (UP 15.2.3)
• Interests in income and responsibility for expenses should be specified in the operating agreement(s).
Each investor is only severally liable for debts or liabilities that it incurs in connection with its interest (UP 15.2.4)
• Several liability should be specified in the operating agreement(s).
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Considerations in assessing whether the proportionate consolidation method is appropriate are discussed in the following sections.

15.2.1 Ownership of the plant by undivided interests

The first criterion requires that the investors in the plant or other utility assets own undivided interests in the underlying assets.

ASC 970-810-45-1(a)

The real property is owned by undivided interests.

Each owner should have title to its undivided interest in the property as tenant in common with the other owners. An undivided interest is an ownership arrangement in which two or more parties jointly own property, and title is held individually to the extent of each party’s interest. To meet this criterion, ownership through undivided interests should be specified in the operating agreement and other related legal agreements.
If the plant or other utility assets are held in a separate legal entity (such as a limited liability company, limited partnership, or other special purpose entity), the owners typically do not have undivided interests in the underlying assets, but rather debt or equity interests in a legal entity. In such cases, the arrangement does not qualify for application of proportionate consolidation accounting. See UP 9 for information on accounting for investments in power plant entities.

15.2.2 Approvals by owners

The second criterion addresses how decisions are made regarding the financing, development, sale, or operations of the property.

ASC 970-810-45-1(b)

The approval of two or more of the owners is not required for decisions regarding the financing, development, sale, or operations of real estate owned.

In assessing whether proportionate consolidation is appropriate, SAB Topic 10.C provides additional context for public companies regarding the financing and operations of typical joint plant projects.

Excerpt from SAB Topic 10.C

During the construction period a participating utility finances its own share of a utility plant using its financial resources and not the combined resources of the group. . . . When a joint-owned plant becomes operational, one of the participant utilities acts as operator and bills the other participants for their proportionate share of the direct expenses incurred.

Within this context, the industry considers certain factors in evaluating whether proportionate consolidation is appropriate for a joint plant arrangement:
•  Financing
Each party should be responsible for providing its own financing.
•  Sale
Autonomy in making sale decisions about an ownership interest is another important factor. Joint plant arrangements may include provisions to protect the rights of other owners such as a right of first offer or a limitation on sale of partial interests. Reporting entities should assess whether individual owners can act independently to sell their interests. Restrictions on the ability of an owner to sell or encumber its interest may result in this criterion not being met.
•  Development and operations
The components of a power plant cannot be physically separated and operated independently. Power plants with multiple units also have common facilities, which are integral to the overall operation. Due to the physical nature of joint plant, it is necessary for the parties to agree on certain development and operational matters, such as significant budget decisions, maintenance, and contracting. As a result, joint plant arrangements generally establish a management committee comprising the owners (or owner representatives) that has oversight of the plant and is responsible for key development and operating decisions.
Application of the proportionate consolidation guidance for joint plant arrangements as described is common practice in the utility and power industry and should not be analogized to other scenarios. Utilities and power companies entering into new joint plant arrangements should evaluate the relevant guidance to determine whether proportionate consolidation is appropriate.

15.2.3 Responsibility for pro rata share of income and expenses

The third and fourth criteria pertain to how income and expenses are allocated to the different owners.

Excerpt from ASC 970-810-45-1

c. Each investor is entitled to only its pro rata share of income.
d. Each investor is responsible to pay only its pro rata share of expenses.

To meet these criteria, each investor can only be entitled to its share of income generated from the output of the plant and its share of expenses. Often, such amounts are based on the relative shares and/or the dispatch decisions of the parties.

15.2.4 Responsibility for liabilities

To meet this criterion, each investor should be severally liable only for debt or liabilities that it incurs in connection with its proportionate interest in the plant.

ASC 970-810-45-1(e)

Each investor is severally liable only for indebtedness it incurs in connection with its interest in the property.

An arrangement that makes owners pay for a proportionate share of costs in the event the other owners fail to pay would not meet this criterion.
1Guidance originally issued in paragraph 11 of AICPA Statement of Position No. 78-9, Accounting for Investments in Real Estate Ventures
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