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Statutory and regulatory accounting in the electric power industry

Part three

I continue my discussion of the major differences between the statutory and regulatory accounting rules that govern the energy power industry.


IN both cases, depreciation represents the systematic allocation of costs over the life of the asset. For statutory accounting purposes, several methodologies are generally accepted (straight-line, accelerated, etc.). However, for regulatory purposes, straight-line is the predominant methodology and there is the concept of regulatory compact being observed.

Under this concept, the investor is given an additional benefit in return for his commitment to invest. The investor is guaranteed a return of his investment. With inflation, the value of the asset over time decreases. The depreciation fund—the accumulated cash generated by depreciation will not be at the same original value of the asset because it will be eaten up by inflation.

Because the investor is given the benefit of recovering his investment in the asset in full, any effect of inflation on the value of the asset is allowed to be recovered  either through a revaluation of the asset base upward (resulting in higher depreciation) or by using a nominal WACC on the historical value of the asset (where inflation is built in to the WACC), which means higher return on investment.

A difference in practice, therefore, can  give rise to a difference in income recognition, deferred income tax and difference in amount and treatment of depreciation.

Creation of a Depreciation Fund

Commonwealth Act 146 and subsequent laws affecting the industry (as well as certain ERC pronouncements) require the investor to set up a depreciation fund in a separate bank account. The funds accumulated, including the earnings of the fund, are to be used onlyfor asset replacement or acquisition.

Some players object to this requirement because they claim it is an inefficient way of managing available funds. It may be so, but the objective of the law is for the protection of the consumers against the ills of having more than enough funds—mismanagement of funds, which can lead to disruption of utility operations because of unavailability of the necessary funds for replacement.

In the past years, many Distribution Utilities (DU) are in violation of this law and have been fined for it. They do not mind because the benefit to the owners can be much more than the fine to be paid. On an asset fund balance running in millions of pesos, a maximum fine of only P200,000 encourages non-compliance. Non-compliance means the depreciation fund is co-mingled with other investible funds. As such, the total income of the fund is reflected in the income statement as regular income  and, under the rules, may be shared 50-50 between the owners and consumers.  But why comply if complying would mean 100 percent of the depreciation fund income goes to the fund and towards asset replacement and no share for the investors.

Unless the law is amended and/or the penalties increased, compliance is difficult to attain. If this continues, there is a continuous transfer of benefits from the consumers to the owners because  the ultimate effect is to lower replacement cost. And, because of the fund income, this ultimately means lower DU rates. Any DUs that violates the law should be audited in more detail because with the co-mingling of funds, what should have been used to lower the cost of replacement is included in operating income. This unnecessarily inflates the amount available for dividends.

To be continued

Alfredo J. Non is a CPA by profession and a former Partner at SGV & Co.   He served as Commissioner of the Energy Regulatory Commission till he completed his term in 2018.   He also served as Director and Executive Officer of several private companies and a former professor in Financial Management at the Ateneo Graduate School of Business.

This column accepts articles from the business and academic community for consideration for publication.  Articles not exceeding 600 words can be e-mailed to

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