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Rate-regulated activities

Date recorded:

Rate-regulated Activities – summary of information received from the Consultative Group - Agenda paper 9A

Background

The purpose of this session was to inform the Board of the feedback received from members of the Consultative Group for Rate Regulation (CGRR) at a meeting held on 26 October 2017.

Feedback from the CGRR

Scope of the model

Subject to certain clarifications, the CGRR generally believed that the Board’s description of defined rate regulation captures arrangements that they would expect to be included within the scope of the proposed model.

Rights and obligations giving rise to regulatory assets and liabilities

With respect to how entities identify rate-adjustment amounts and how individual adjustments are tracked through to amounts billed to customers, the CGRR stated that the terms of the regulatory agreements are typically clear enough to identify most temporary differences that qualify to be included in the rate-adjustment mechanism. Furthermore, the detailed record-keeping requirements that rate-regulated entities have to fulfil enable identification and tracking of individual adjustments from origination to unwinding through billing to customers.

Uncertainty

The CGRR noted that the main source of uncertainty arises from whether the rate regulator will approve rate adjustments for amounts that an entity did not include in previous budgets and variances that are not mentioned explicitly in the rate-adjustment mechanism. Nevertheless, the CGRR emphasised that there is typically frequent communication between the entity and the rate regulator which usually allows an entity to obtain non-binding views from the regulator to help them assess the probability of approval of the rate adjustments. The entity’s experience and those of others with the regulator in the past also helps in this assessment. The CGRR further noted that the short-term nature of many regulatory assets and liabilities reduce the level of uncertainty.

Identifying interest rate or return rate

The CGRR observed that entities are typically compensated or charged for the time-lag between the origination and ultimate reversal of a rate adjustment. Rate regulators also typically have established policies to update the interest rates used for this calculation regularly. Accordingly, the CGRR believed that requiring entities to discount regulatory assets and liabilities using a rate that differs from the one established by the regulator would cause operational complexities and would not be cost beneficial.

Presentation and disclosure

The CGRR observed that because of the level of detail needed to comply with record-keeping requirements, it is typically feasible to (a) disaggregate material individual rate-adjustment account balances, and (b) identify the timing of when regulatory assets and liabilities will be reversed, enabling disaggregation between current and non-current amounts.

Next steps

Based on feedback received from the CGRR meeting, the Staff are encouraged to develop an exposure draft as the next consultative document (although the final form will still have to be discussed by the Board) which they expect to publish in 2019.

Discussion

There was no discussion on this paper.

A Board member who attended the CGRR meeting relayed the message that it would be important for the Board to consider how a regulatory asset and liability would meet the revised definitions of an asset and a liability in the forthcoming Conceptual Framework, given that this project would be amongst the first consultative documents to be published after the publication of the revised Conceptual Framework.

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