Accountants' Handbook Volume Two: Special Industries and Special Topics, Eleventh Edition

Chapter 33. REGULATED UTILITIES

Benjamin A. McKnight III, CPA

Arthur Andersen LLP, Retired

THE NATURE AND CHARACTERISTICS OF REGULATED UTILITIES

(a) INTRODUCTION TO REGULATED UTILITIES.

Many types of business have their rates for providing services set by the government or other regulatory bodies, for example, utilities, insurance companies, transportation companies, hospitals, and shippers. The enterprises addressed in this chapter are limited to electric, gas, telephone, and water (and sewer) utilities that are primarily regulated on an individual cost-of-service basis. Effective business and financial involvement with the utility industry requires an understanding of what a utility is, the regulatory compact under which utilities operate, and the interrelationship between the rate decisions of regulators and the resultant accounting effects.

(b) DESCRIPTIVE CHARACTERISTICS OF UTILITIES.

Regulated utilities are similar to other businesses in that there is a need for capital and, for private sector utilities, a demand for investor profit. Utilities are different in that they are dedicated to public use—they are obligated to furnish customers service on demand—and the services are considered to be necessities. Many utilities operate under monopolistic conditions. A regulator sets their prices and grants an exclusive service area, which probably serves a relatively large number of customers. Consequently, a high level of public interest typically exists regarding the utility's rates and ...