DPL, Inc.
1065 Woodman Drive
Dayton, OH 45432
937-259-7310
November 20, 2009
Project Manager
International Accounting Standards Board (IASB)
30 Cannon Street
London EC4M 6XH
United Kingdom
(submitted via IASB website’s comment page)
Dear Sir or Madam:
Exposure Draft of Proposed Guidance for Rate Regulated Activities
In preparing for the transition to International Financial Reporting Standards (IFRS), we have
been following the discussion on issuing a standard for regulated entities and we appreciate the
Board adding this topic to their agenda and issuing an exposure draft for comments.
The Dayton Power and Light Company is an investor-owned electric utility company located in
Dayton, Ohio, USA. We are regulated by the Public Utility Commission of Ohio (PUCO) and
the Federal Energy Regulatory Commission (FERC) and currently follow the guidance under
FASB Accounting Standards Codification 980 – Regulated Operations (FASC 980) under
Generally Accepted Accounting Principles in the United States (US GAAP).
Question 1: Is the scope definition appropriate? Why or why not? (Paragraphs 3-7)
We believe that the scope definition is appropriate in that it involves a regulator that sets prices
that customers must pay and that price is based on specific costs and an opportunity to earn a
specified return. These are the principles that undergird the regulatory compact between a utility
and its regulators.
Question 2: Is the “no additional recognition” approach appropriate? Why or Why not?
We agree that there needs to be no additional recognition criteria. If the utility meets the
recognition criteria, it will set up a regulatory asset.
We would suggest that the new standard include a specific statement that if the enterprise does
not initially meet the criteria established in this standard for establishing a regulatory asset or
liability, but meets those criteria in a subsequent period, then the regulatory asset or liability
should be recognized prospectively in the period when those criteria are met.
Question 3: Is the measurement approach of recording the asset or liability at its estimated
probability-weighted average of the present value of the expected cash flows appropriate? Why
or Why not?
We do not agree with the measurement approach as we believe it to be overly complex and
creates illusory preciseness. We believe that the regulatory asset or liability should be
established if it is probable of recovery per the scope and the amount to be established should be
the most likely outcome.
In the first case, we do not agree with the concept of a discount to determine the present value of
a regulatory asset or liability. We believe that the asset should be recorded at the amount that is
being recovered, and the use of an economic discount criterion is unnecessary. The “loss” on the
carrying cost of the asset is a period cost that when deferred should only reduce income in future
years. We also believe that the use of a discount when the interest rates increase and decrease, as
has occurred many times historically, will produce a widely changing asset value with the offset
going to earnings. We do not see the benefit of this variation in asset value when it will cause
temporary increases and decreases in earnings that do not represent the economic reality of the
transaction. We believe that the permanence criterion is important for financial statement users
and the discount rate should be ignored to reflect a consistent, instead of a varying asset value.
We think that the sum of the undiscounted cash flows effectively measures the value of the
regulatory asset to be recovered in the context of a particular entity. As an example, deferred
federal income tax assets that were established related to a prior flow-through ratemaking
treatment will be fully recovered over time through the subsequent ratemaking process. We see
no benefit to record them at a present value with a substantial loss (caused by discounting) upon
the adoption of this standard when their value will be recovered over the many years that the
temporary tax differences reverse. This discount will force a nonexistent “loss” in year one that
will be fully offset by interest accretion in the subsequent years.
We also do not see the benefit of the cost involved in running a range of possible outcomes with
a probability of each outcome occurring or with the concept of an additional factor taking into
account the inherent uncertainty of collection. We believe these should be part of the criteria as
to whether the asset or liability should be established in the first place and not in its valuation.
However, if the Board requires a discount rate, we do not agree with the need for using a riskfree interest discount rate if there is a regulator-authorized rate of return that is reasonable or if
the asset is collected in a relatively short period of time, such as three years or less. The
relatively minor difference that would be recorded would produce no meaningful improvement
in financial reporting and would not be worth the cost of measuring the difference.
In a similar manner, we believe that a quarterly adjustment of the regulatory asset or liability for
changes in the market interest rate produces neither a degree of precision that is needed nor is it
worth the cost involved, unless there is a substantial deviation that would arise from the
difference between the market rate and the rate permitted by the regulator.
Question 4: Is the exception to include costs in regulated assets which would be excluded by
other IFRSs justified? Why or why not?
We strongly support the exception recommended by the Board on self-constructed property. We
believe that the cost of tracking the differences in these fixed asset costs is not worth the benefit
that would arise.
However, we are confused about the disclosure requirement in Paragraph 27 (c) that requires the
footnote disclosure of the difference between the financing cost allowed by the regulator for selfconstructed property and what would have been capitalized in accordance with IAS 23. If the
capitalization cost is part of the property, we do not think it needs separate disclosure. We are
not sure that this disclosure will add any additional benefit compared to the cost of accumulating
the information.
Question 5: Is the impairment approach to recoverability appropriate? Why or why not?
While we agree with the general concept that an entity should evaluate the reasonableness of
collecting its net regulatory assets each reporting period, we do not know how relevant it would
be to most of the utilities in the United States. For utility ratemaking in the majority of the
United States, regulatory assets are collected from the remaining customers if other customers go
out of business or move to other locations. Therefore, the test, while theoretically sound, is
probably not all that significant to the majority of the utilities.
Question 6: Do the proposed disclosure requirements provide decision-useful information?
Why or why not? Please indentify any disclosure requirements that you think should be removed
from, or added to, the draft IFRS.
We agree with the disclosures with the exception of the disclosure of the difference between the
interest capitalization permitted by the regulator and the interest capitalization per IAS 23. As
previously stated, we believe the gathering of this data is not cost-beneficial.
Question 7: Is the transition approach appropriate? Why or why not?
Yes, we believe that the impact of the adoption of this standard should be presented in the
earliest statement presented, as that makes all the periods consistent with the exception of fixed
assets that were previously regulated being transferred at the book value and prospectively
applying the concepts in this proposed statement. (See Comment 3 under Question 8.)
Question 8: Do you have any other comments on the proposals in the exposure draft?
Comment 1:
Paragraph 7 indicates that this draft IFRS does not apply to financial assets and financial
liabilities. We think this should be modified to indicate that it does not apply to financial assets
and liabilities unless the income statement impacts of these assets or liabilities could be deferred
for recognition in a future period as a result of the actions of the regulator. For example, the
purchase of electricity for future delivery may be included by the regulator in a fuel clause in the
period the actual delivery occurs. The impact of the derivative market gain or loss would be
calculated and recorded related to the balance sheet asset, but the income statement impact
should be deferred, if highly probable of recovery, on the balance sheet to match the ratemaking
treatment established by the regulator. When the actual energy delivery occurs, all the income
statement impacts will be recognized, unless they are probable of recovery under a regulator
allowed fuel clause.
Comment 2:
On a property-related issue, most utilities in the United States record depreciation expense in a
systematic and rational manner using a composite life or group life depreciation method. This
composite life method groups similar assets, such as power poles, together and arrives at an
average life for the group of assets comparing the historical asset retirements to a set of “Iowa
Curves” that have a longstanding study of the average lives of utility property. The systematic
and rational depreciation rates produced by this methodology are approved by the utility’s
regulatory commission for reasonableness before they are implemented. We believe that
composite depreciation is a systematic and rational depreciation method that should be added, at
a minimum, as an exception to this standard. We believe that it would not be cost beneficial to
show this difference as a regulatory asset or liability since it is so directly related to the property
involved, similar to the cost of the property in our example under Question 4. We therefore
recommend that this be permitted as depreciation expense and a provision for accumulated
depreciation.
We would further suggest that IAS 16 should be modified to include the use of the composite
depreciation method for either regulated or non-regulated companies since it produces a result
that records the diminution of the property’s value over time using a systematic and rational
method.
Comment 3:
We request an exception to IFRS 1 – First Time Adoption to allow the adoption of this IFRS on
a prospective basis. Prior to our generation assets being de-regulated in 2000, carrying costs,
including equity capitalization during construction, and administrative and general (A&G)
overheads were capitalized with the generation plant assets that were constructed. In 2000, in
accordance with the new legislation de-regulating the generation portion of DP&L’s business,
accounting policies changed to include capitalized interest without equity during construction
instead of carrying costs, including equity capitalization during construction. Also, in accordance
with FERC accounting guidelines, A&G overheads continued to be capitalized after the
generation assets were no longer subject to rate regulation by our state regulator. We were not
required to retrospectively change the amount capitalized. The difference between the amount
capitalized using capitalized interest versus carrying costs, including equity capitalization during
construction, is immaterial. The amount of A&G overheads capitalized to these assets is also not
significant. Reconstructing the costs for these assets would be costly and time-consuming.
Therefore, since the costs were originally allowed by a regulator and the differences are
immaterial and costly to recalculate, we are requesting that this Statement be adopted on a
prospective basis, allowing the costs of capitalized assets to remain the same and following the
guidelines in this and other IFRS Statements for all new capital projects.
Comment 4:
We would also ask the IASB to consider expanding the definition of a regulatory asset to include
recovery for Demand-Side Management (DSM) programs similar to those permitted by the
Financial Accounting Standards Board in its Codification (FASC 980-605-25). Some state
regulatory commissions permit a utility to recover its lost revenues through a regulatory asset for
DSM programs, such as assisting customers in the installation of energy-efficient light bulbs, etc.
To qualify, these amounts must be automatically collected in the rate process, highly probable of
recovery and expected to be collected in the next 24 months.
We would like to thank you for the opportunity to provide comments on this document and
strongly support the principle that regulatory assets have real value.
Sincerely,
Dayton Power and Light Company
Joseph W. Mulpas
Controller, VP and CAO