A regulatory deferral account is an accounting mechanism for public utilities to defer costs and revenues for collection or recovery in future years. These accounts are also called “regulatory accounts” or “deferral accounts.”
Generally, companies record costs and revenues in the year in which they’re earned. This is referred to as the matching principle, and is intended to ensure that companies provide an accurate figure of their profitability each year.
Public utilities, however, may defer some costs and / or revenues if approved to do so by their regulator. The accounting standard IFRS rule 14, which applies to some BC utilities, permits the creation of regulatory deferral accounts for costs and revenues that otherwise would be recorded in the year they are incurred.
The BCUC recognizes four specific types of regulatory deferral account:
- Forecast variance account;
- Rate smoothing account;
- Benefit matching account; and
- Retroactive expense account.
The BCUC must approve a regulatory deferral account before a public utility creates it. But more than that, the BCUC must apply its “regulatory framework” when it provides that approval; that is, the BCUC must be making an independent decision based on regulatory principles. If the government were to direct the BCUC to approve a regulatory deferral account, this would remove the BCUC’s independence over the approval. The Auditor General of BC provided a “modified conclusion” when it reviewed BC Hydro’s quarterly report for the period ending December 31, 2022, stating that BC Hydro had overstated its net income by $265 million in the quarter because some of its regulatory deferral accounts were directed by the provincial government and not independently approved by the BCUC.
Generally the BCUC specifies conditions when it approves the creation of a regulatory deferral account, such as the type of costs and / or revenues may be deferred, and over what time period.
Two issues generally arise with regulatory deferral accounts: when should the balance be collected from or returned to customers, and what return, if any, should the public utility receive on the outstanding balance in the account.
The BCUC has filing guidelines for utilities to assist with an application for a regulatory deferral account.