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 . However, for regulatory purposes, straight-line is the predominant methodology and there is the concept of regulatory compact being observed.
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 or by using a nominal WACC on the historical value of the asset , which means higher return on investmentA difference in practice, therefore, can give rise to a difference in income recognition, deferred income tax and difference in amount and treatment of depreciation.
In the past years, many Distribution Utilities 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.