A regulated utility may be eligible to recover the cost of its RPS compliance through an energy balancing account or similar regulatory mechanism allowed by its regulator. Because the RPS requirements do not impact net income, some may believe that it is appropriate to record the cost of the RECs as purchased power expense when incurred instead of recognizing a compliance obligation.

However, similar to other expenses subject to regulatory treatment, a reporting entity should not substitute regulatory accounting for appropriate recognition under U.S. GAAP applicable to entities in general. As discussed in Question 17-13, a regulator’s actions cannot eliminate a liability that it did not create. Therefore, all reporting entities, including regulated utilities, should appropriately measure and record RPS compliance liabilities. Any potential recovery by a regulated utility should be separately assessed and recorded in accordance with ASC 980.

Some states require regulated utilities to obtain a specified amount of renewable energy (e.g., Iowa requires its two investor-owned utilities to obtain a combined total of 105 megawatts of renewable power). Under this type of program, the amount of renewable energy required to be provided by retail providers is not dependent on the amount of energy they deliver to customers. Therefore, the compliance liability is often known at the start of the compliance year.

In these cases, we believe there are alternative methods a reporting entity could use to accrue its RPS compliance liability. For example, a proportionate, time-based accrual method (similar to straight-line) could be used when the retail sales volume has no bearing on the amount of the compliance requirement. Alternatively, a reporting entity may consider that it has incurred a liability at the start of the reporting period because the level of renewable energy it needs to provide is known, in which case a liability would be recorded. Different states will have different requirements and the specifics of the program should be carefully considered prior to adopting a method of accrual. Once a methodology is selected, it should be consistently applied.