Guidance Note on Accounting for Rate Regulated Activities (Second Edition : February, 2015). Regulation of different economic activities through bodies established under statute or otherwise can be found in many countries. The object of regulation is typically to promote the orderly growth and development of the regulated industry, protect the interests of consumers, regulate competition, monitor social and environmental issues within the industry etc. Regulation of utilities like telecommunication, electricity and water often aims to control prices, ensure service quality, protect the environment and establish an investment environment capable of attracting capital at reasonable cost. In India we have different bodies such as the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Central Electricity Regulatory Commission, State Electricity Regulatory Commissions, Directorate General of Hydrocarbons (DGH), Telecom Regulatory Authority of India etc., for regulating different sectors.
2. Regulation can take many forms depending upon the industry and objectives to be achieved. Rate regulation is one of the main forms of regulation often found in the utility sector or in sectors dealing with ‘public goods’ or other important goods and services. For example, in India, electricity prices are regulated by the CERC/ SERCs, fertilizer prices and highway tolls are regulated by the Government.
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Content of Guidance Note on Accounting for Rate Regulated Activities
| Paragraphs | |
| Introduction | 1-11 |
| Background | 1-2 |
| Framework for Rate Regulation | 3-4 |
| Methods and Process of Rate Regulation | 5-11 |
| Objectives | 12-13 |
| Scope | 14-20 |
| Definitions | 21 |
| Accounting issues arising from Rate Regulation | 22-23 |
| Regulatory assets | 24-26 |
| Regulatory liabilities | 27 |
| Nature of regulatory assets and regulatory liabilities | 28-29 |
| Recognition | 30-36 |
| Measurement | 37-38 |
| Impairment | 39 |
| De-recognition | 40-41 |
| Presentation | 42-44 |
| Disclosures | 45-51 |
| Effective date | 52 |
| Transition | 53 |
| Appendix I, Illustrative Examples |
Framework for Rate Regulation
A key aspect of rate regulation is that the regulator is empowered to determine prices that bind the entity’s customers under a statute or otherwise. Regulatory authorities are usually set up under a legislation which stipulates their constitution, functions, powers etc. While such legislation may provide the general guidelines and considerations for determination of tariffs, the regulatory authority decides the particular methodology to be adopted for tariff setting Compendium of Guidance Notes – Accounting
which is notified through regulations or rules. The regulator from time to time issues orders for tariff setting in individual cases which provide further guidance on the implementation of the notified regulations and rules. The legislation, regulations, rules and tariff orders provide the entity with the framework for charging the customers for the regulated goods and services.
4. Entities subject to price regulation are not allowed to charge prices for regulated goods or services other than those approved by the regulatory authority. In those circumstances, the regulator acts on behalf of the customers who individually would have no bargaining power with the entity. The regulator also acts on behalf of the entity. Agreements between a rate-regulated entity and its customers cannot be understood without reference to the regulation in place. Therefore, it can be said that such agreements are different from the agreements between an entity and its customers in a non-regulated environment.
