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30 2 • PRODUCERS OR DISTRIBUTORS OF FILMS in June 2000, effective for fiscal years beginning after December 15, 2000, and the FASB simultaneously rescinded its Statement No. 53 in its Statement No. 139, “Rescission of FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89, and 121.” This chapter presents the accounting guidance in SOP 00-2. 30.2 REVENUE REPORTING (a) BASIC REVENUE REPORTING PRINCIPLES. A film producer or distributor obtains revenue from sale or licensing of its films. An arrangement to license a single film or multiple films transfers a single right or a group of rights to distributors, theaters, exhibitors, or others exclusively or nonexclusively in a particular market and territory under terms that may vary significantly among different contracts. License fees are commonly fixed in amount or based on a percentage of the customer’s revenue, which may include a nonrefundable minimum guarantee payable in advance or over the license period. Direct control over the distribution of a film may remain with the producer or may be transferred to a distributor, exhibitor, or other licensee. A producer or distributor should report revenue from a sale or licensing arrangement of a film when all of the following five conditions are met: 1. There is persuasive evidence of a sale or licensing arrangement. 2. The film is complete and has been delivered or is available for immediate and unconditional delivery in accordance with the terms of the arrangement. 3. The license period has begun and the customer can begin its exploitation, exhibition, or sale. 4. The arrangement fee is fixed or determinable. 5. Collection of the fee is reasonably assured. Reporting revenue should be deferred until all of the conditions have been met. A producer or distributor that reports a receivable for advances currently due before the date revenue is to be reported or that receives cash payments before that date should also report an equivalent liability for deferred revenue until all of the conditions have been met. Even a producer or distributor that sells or otherwise transfers such a receivable to a third party should not report revenue before that date. Amounts scheduled to be received in the future based on an arrangement for any form of distribution, exploitation, or exhibition should be reported as a receivable only when they are currently due or the above conditions have been met, if earlier. (b) DETAILED REVENUE REPORTING PRINCIPLES (i) Persuasive Evidence of an Arrangement. The persuasive evidence of a licensing arrangement needed to report revenue is provided solely by legally enforceable documentation that states, at a minimum, the license period, the film or films covered, the rights transferred, and the consideration to be exchanged. Revenue should nevertheless not be reported if there is significant doubt about the obligation or ability of either party to perform under the terms of the arrangement. Verifiable evidence required is, for example, a purchase order or an online authorization. It should include correspondence from the customer that details the mutual understanding of the arrangement or evidence that the customer has acted in accordance with the arrangement. (ii) Delivery. Revenue should be reported no sooner than delivery is complete if the licensing arrangement requires physical delivery of a product to the customer or if the arrangement is silent about delivery. In contrast, a licensing arrangement may not require immediate or direct physical delivery of a film to the customer but instead provide the customer with immediate and unconditional access to a 30.2 REVENUE REPORTING 30 3 • film print held by the producer or distributor or authorization for the customer to order a film laboratory to make the film immediately and unconditionally available for the customer’s use—known as a “lab access letter.” If the film is complete and available for immediate delivery, the requirement for delivery has been met. A licensing arrangement may require a producer or distributor to change the film significantly after it is first available to a customer. If so, revenue should be reported only after those changes are made. Significant changes are additive to the film, that is, the producer or distributor is required to create new or additional content, for example, by reshooting a scene or creating additional special effects. Insertion or addition of preexisting film footage, adding dubbing or subtitles, removing offensive language, reformatting to fit a broadcaster’s screen dimensions, and adjustments to allow for the insertion of commercials are examples of insignificant changes in this sense. Costs incurred for significant changes should be added to film costs (discussed below) and later reported as expense when the related revenue is reported. Costs expected to be incurred for insignificant changes should be accrued and reported as expense if revenue is reported before those costs are incurred. (iii) Availability. The imposition of a street date, the initial date on which home video products may be sold or rented, defines the date on which a customer’s exploitation rights begin. The producer or distributor should report revenue no sooner than that date. If conflicting agreements place restrictions on the initial exploitation, exhibition, or sale of a film by a customer in a particular territory or market, the producer or distributor should report revenue no sooner than the date the restrictions lapse. (iv) Fixed or Determinable Fee. A fee based on a licensing arrangement for a single film that provides for a flat fee is considered fixed and determinable, and the producer or distributor should report it as revenue when the other conditions for reporting revenue have been met. A flat fee payable on multiple films, including films not yet completed, should be allocated to each individual film, by market and territory, based on relative fair values of the rights to exploit each film under the arrangement. Allocations to films not yet completed should be based on the amounts refundable if the producer or distributor does not complete and deliver the films. The allocations should not be adjusted later. The producer or distributor should report as revenue the amount allocated to an individual film when all of the conditions for reporting revenue have been met for the film by market and territory. If the producer or distributor cannot determine the relative fair values, the fee is not fixed or determinable and the producer or distributor should report revenue no sooner than it can determine them. Quoted market prices are usually not available to determine fair value for this purpose. The producer should estimate the fair value of a film by using the best information available in the circumstances, with the objective to arrive at an amount it believes it would have received had the arrangement granted the same rights to the film separately. A discounted cash flow model may be used, in conformity with paragraphs 39 to 71 of FASB Statement of Concepts No. 7, which provide guidance on the traditional and expected cash flow approaches. The rights granted for the film under the arrangement, such as the length of the license period and limitations on the method, timing, or frequency of exploitation, should be observed. The fee may be based on a percentage of the customer’s revenue from exhibition or other exploitation of a film—variable fee. The producer or distributor should report revenue as the customer exhibits or exploits the film if the other conditions for reporting revenue have been met. If the customer guarantees and pays or agrees to pay the producer or distributor a nonrefundable minimum amount applied against a variable fee on films that are not cross-collateralized—part of an arrangement in which the exploitation results for multiple films are aggregated—the producer or distributor should report the minimum guaranteed amount as revenue when all the other conditions for revenue reporting have been met. If they are cross-collateralized, the minimum guarantee for each film cannot be objectively determined and should be reported as revenue as the customer exhibits or exploits the film if all the other conditions for reporting revenue have been met. 30 4 • PRODUCERS OR DISTRIBUTORS OF FILMS (v) Barter Revenue. Some licensing arrangements with television station customers provide that the stations may exhibit films in exchange for advertising time for the producers or distributors. The exchanges should be reported in conformity with APB Opinion No. 29 as interpreted by EITF No. 93-11. (vi) Modifications of Arrangements. If all of the conditions for reporting revenue are met by an existing arrangement and the parties agree to extend the time for the arrangement, reporting revenue depends on whether a flat fee or a variable fee is involved. The fee should be reported as revenue in conformity with the principles stated above for flat fees or variable fees. Any other kind of change to a licensing arrangement, for example, the arrangement is changed from a fixed fee to a smaller fixed fee with a variable component, should be reported on as a new licensing arrangement, in conformity with the guidance in this section. The producer or distributor should consider the original arrangement terminated and accrue and expense associated costs and reverse previously reported revenue for refunds and concessions, such as a provision to accept a license fee rate below market. (vii) Returns and Price Concessions. A producer or distributor should report revenue on an arrangement that includes a right of return or if its past practices allow for returns in conformity with FASB Statement No. 48, which includes the necessity for the producer or distributor to be able to reasonably estimate the future returns. Contractual provisions or the producer’s or distributor’s customary practices may involve price concessions, for example, “price protection,” in which the producer or distributor lowers the prices to the customer on product it previously bought based on lowering of its wholesale prices. If so, the producer or distributor should provide related allowances when it reports revenue. If it cannot reasonably and reliably estimate future concessions or if there are significant uncertainties about whether it can maintain its prices, the fee is not fixed or determinable, and it should report revenue no sooner than it can estimate concessions reasonably and reliably. (viii) Licensing of Film-Related Products. A producer or distributor should report revenue from licensing arrangements to market film-related products no sooner than the film is released. (ix) Present Value. Revenue should be calculated based on the present value of the license fee as of the date it is first reported in conformity with APB Opinion No. 21. 30.3 COSTS AND EXPENSES Costs incurred by producers and distributors to produce a film and bring it to market include film costs, participation costs, exploitation costs, and manufacturing costs. (a) FILM COSTS—CAPITALIZATION. A separate asset should be reported at cost for films in development or in inventory. Interest costs should be reported in conformity with FASB Statement No. 34. The production overhead component of film costs includes allocable costs of persons or departments with exclusive or significant responsibility for the production of films. It should not include administrative and general expenses, charges for losses on properties sold or abandoned (no full-cost method for films), or the costs of certain overall deals as follows. In an overall deal, a producer or distributor compensates a producer or other creative individual for the exclusive or preferential use of that party’s creative services. It should report as expense the costs of overall deals it cannot identify with specific projects over the period they are incurred. It should report a reasonable proportion of costs of overall deals as specific project film costs to the extent that they are directly related to the acquisition, adaptation, or development of specific projects. It should not allocate to specific project 30.3 COSTS AND EXPENSES 30 5 • film costs amounts it had previously reported as expense. The costs to prepare for the production of a particular film of adaptation or development of a book, stage play, or original screenplay to which a producer or distributor has film rights should be added to the cost of the rights. Properties in development should be periodically reviewed to determine whether they will likely ultimately be used in the production of films. When a producer or distributor determines that a property will be disposed of, it should report any loss involved, including allocable amounts from overall deals, as discussed above. A property should be presumed to be subject to disposal if these have not all occurred within three years of the time of the first capitalized transaction: management has implicitly or explicitly authorized and committed to funding the production of a film, active preproduction has begun, and principal photography is expected to begin within six months. The loss is the excess of the fair value of the project over the carrying amount. If management has not committed to a plan to sell the property, the rebuttable presumption is that the fair value of the property is zero. Ultimate revenue for an episodic television series can include estimates from the initial market and secondary markets, as discussed below. Costs for a single episode in excess of the amount of revenue contracted for the episode should not be capitalized until the producer or distributor can establish estimates of secondary market revenue, as discussed below. Costs over this limit should be reported as expense and not subsequently restored as capitalized costs. Costs capitalized for an episode should be reported as expense as it reports revenue for the episode. When the producer or distributor can estimate secondary market revenue, as discussed below, it should capitalize subsequent film costs as discussed below and should evaluate the carrying amount for impairment as discussed below. (b) FILM COSTS––AMORTIZATION AND PARTICIPATION COST ACCRUALS. A producer or distributor should amortize film costs and accrue expense for participation costs using the individual-film-forecast-computation method. That method amortizes costs or accrues expenses in this ratio: the current period actual revenue divided by estimated remaining unreported ultimate revenue as of the beginning of the current fiscal year. Unamortized film costs as of the beginning of the current fiscal year and ultimate participation costs not yet reported as expense are each multiplied by that fraction. Without changes in estimates, this method yields a constant rate of profit over the ultimate period for each film before exploitation costs, manufacturing costs, and other period expenses, thus contributing to stable income reporting (see Chapter 4). A producer or distributor should report a liability for participation costs only if it is probable that it will have to pay to settle its obligation under the terms of the participation agreement. At each reporting date, accrued participation costs should be at least the amounts the producer or distributor has to pay as of that date. Amortization of capitalized film costs and reporting of participation costs as expenses should begin when the film is released and revenue reporting on it begins. With no revenue from third parties directly related to the exhibition or exploitation of a film, the producer or distributor should make a reasonably reliable estimate of the portion of unamortized film costs that is representative of the utilization of the film in its exhibition or exploitation. It should report those amounts as expense as it exhibits or exploits the film. Consistent with the smoothing objective of the individual film-forecast-computation methods, all revenue should bear a representative amount of the amortization of film costs during the ultimate period. Results may vary from estimates, of course. A producer or distributor should revise estimates of ultimate revenue and participation costs as of each reporting date to reflect the most current information available. It should determine a new fraction that reflects only ultimate revenue from the beginning of the fiscal year of change. The revised fraction should be applied to the net carrying amount of unamortized film costs and to the film’s ultimate participation costs not reported as expense as of the beginning of the fiscal year. The difference between expenses determined using the new estimates and amounts previously reported as expense during the fiscal year should be reported in the income statement in the period such as the quarter in which the estimates are revised. 30 6 • PRODUCERS OR DISTRIBUTORS OF FILMS The individual film-forecast-computation method should be applied to multiple seasons of an episodic television series that meet the conditions stated below to include estimated secondary market revenue in ultimate revenue by treating them as a single product. (c) ULTIMATE REVENUE. Ultimate revenue for the denominator of the individual-film-forecast-computation method fraction should include estimates of revenue expected to be reported by the producer or distributor from the exploitation, exhibition, and sale of the film in all markets and territories, subject to these limitations: • • • • • • • • For other than episodic television series, the period covered by the estimate should not exceed 10 years following the film’s initial release. For episodic television series, the period should not exceed 10 years from the date of delivery of the first episode or, if still in production, five years from the date of delivery of the most recent episode, if later. For previously released films acquired as part of a film library (individual films whose initial release dates were at least three years before the acquisition date), the period should not exceed 20 years from the date of acquisition. For episodic television series, estimates of secondary market revenue for produced episodes only if the producer or distributor can show by its experience or industry norms that the episodes already produced plus those for which a firm commitment exists and the entity expects to deliver can be licensed successfully in the secondary market. Estimates from a particular market or territory only if there is persuasive evidence that there will be revenue or if the producer or distributor can show a history of earning revenue there. Estimates from newly developing territories only if an existing arrangement provides persuasive evidence that the producer or distributor will obtain revenue there. Estimates from licensing arrangements with third parties to market film-related products only if there is persuasive evidence that an arrangement for the particular film exists, for example, a signed contract with a nonrefundable minimum guarantee or a nonrefundable advance, or if the producer or distributor can show a history of earning revenue from that kind of arrangement. Estimates of the portion of the wholesale or retail revenue from sale by the producer or distributor or peripheral items such as toys and apparel attributable to the exploitation of themes, characters, or other contents related to a film only if the producer or distributor can show a history of earning revenue from that kind of exploitation in similar kinds of films, such as the portion of such revenue that it would earn by having rights granted under licensing arrangements with third parties. Estimates should not include the entire amount of wholesale or retail revenue from its sale of peripheral items. Estimates should not include revenue from unproven or undeveloped technologies. Estimates should not include wholesale promotion or advertising reimbursements; such amounts should be offset against exploitation costs. Estimates should not include amounts related to the sale of film rights for periods after those stated in the first bullet. Ultimate revenue should be discounted to present value to the date that the producer or distributor first reports the revenue and should not include projections for inflation. Foreign currency estimates should be based on current rates. (d) ULTIMATE PARTICIPATION COSTS. Estimates of ultimate participation costs not yet reported as expense for the individual-film-forecast-computation method to arrive at current period participation cost expense should be determined using assumptions consistent with the producer’s or distributor’s estimates of film costs, exploitation costs, and ultimate revenue, limited 30.3 COSTS AND EXPENSES 30 7 • as discussed in Section 30.3(c). If the reported participation costs liability exceeds the estimated unpaid ultimate participation costs for an individual film at a reporting date, the excess should be reduced with an offsetting credit to unamortized film costs. If an excess liability exceeds unamortized film costs for that film, it should be reported in income. A producer or distributor should accrue associated participation costs as revenue is reported after its film costs are fully amortized. (e) FILM COSTS VALUATION. A producer or distributor should assess whether the fair value of a complete or incomplete film is less than its unamortized film costs, for example, if the following occur: • • • • • • An adverse change in the expected performance of the film before it is released. Actual costs are substantially more than budgeted costs. The completion or release schedule is substantially delayed. The release plans change; for example, the initial release pattern is reduced. Resources to complete the film and market it effectively become insufficient. Performance after release does not meet expectations before release. If the producer or distributor concludes that the fair value of a film is less than its unamortized film costs plus estimated future exploitation costs determined as discussed below, it should report the difference as a loss in income. The write-off should not subsequently be restored. In determining the current fair value of a film, discounted cash flows may be used based on existing contractual arrangements without consideration of the limitations discussed in Section 30.3(c), considering these factors: • • • • • The film’s performance in prior markets The public’s perception of the film’s story, cost, director, or producer Historical results of similar films Historical results of the cast, director, or producer on prior films The running time of the film The determination should incorporate estimates of necessary future cash outflows such as costs to complete and exploitation and participation costs. The most likely cash flows should be used, probability weighted by period using the mean or average by period. The discount rate should reflect the risks associated with the film, and therefore these rates should not be used: the producer’s or distributor’s incremental borrowing rate, liability settlement rates, and weighted cost of capital. In addition to the time value of money, expectations should be incorporated about possible variations in the amount or timing of the most likely cash flows and an element to reflect the price market participants would seek for bearing the uncertainty in such an asset, and other factors, sometimes unidentifiable, including illiquidity and market imperfections. (f) SUBSEQUENT EVENTS. Evidence that becomes available after the reporting date but before the financial statements are issued of a need for a write-down of unamortized film costs of a film should be assumed to bear on conditions at the reporting date. The assumption can be overcome if the producer or distributor can show that the conditions did not exist then. (g) EXPLOITATION COSTS. Advertising costs should be reported in conformity with SOP 93-7. All other exploitation costs, including marketing costs, should be reported as expense when incurred. 30 8 • PRODUCERS OR DISTRIBUTORS OF FILMS (h) MANUFACTURING COSTS. Manufacturing or duplication costs of products for sale, such as videocassettes and digital video discs, should be reported as expense on a unit-specific basis when the related revenue is reported. At each reporting date, inventories of such products should be evaluated for net realizable value and obsolescence and needed adjustments reported as expense. The cost of theatrical film prints should be reported as expense over the period benefited. 30.4 PRESENTATION AND DISCLOSURE If the reporting entity presents a classified balance sheet, it should list unamortized film costs as noncurrent. In any event, it should disclose the following in its notes: • • • • • • • The portion of the costs of its completed films expected to be amortized in the upcoming operating cycle, presumed to be 12 months. The operating cycle if other than 12 months. The components of costs of films released, completed and not released, in production, or in development or preproduction, separately for theatrical films and direct-to-television product. The percentage of unamortized film costs for released films other than acquired film libraries expected to be amortized within three years of the reporting date. If less than 80%, additional information should be provided, including the period over which 80% will be reached. The amount of remaining unamortized costs, the method of amortization, and the remaining amortization period for acquired film libraries. The amount of accrued participation liabilities expected to be paid during the upcoming operating cycle. The methods of reporting revenue, film costs, participation costs, and exploitation costs. Cash outflows for film costs, participation costs, exploitation costs, and manufacturing costs should be reported as operating activities in the statement of cash flows. Amortization of film costs should be included in the reconciliation of net income to net cash flows from operating activities. CHAPTER 31 REGULATED UTILITIES Benjamin A. McKnight III, CPA Arthur Andersen LLP, Retired 31.1 THE NATURE AND CHARACTERISTICS OF REGULATED UTILITIES (a) Introduction to Regulated Utilities (b) Descriptive Characteristics of Utilities 31.2 HISTORY OF REGULATION (a) Munn v. Illinois (b) Chicago, Milwaukee & St. Paul Ry. Co. v. Minnesota (c) Smyth v. Ames 31.3 31.4 2 2 3 4 4 4 5 (a) Federal Regulatory Commissions (b) State Regulatory Commissions 5 6 (a) (b) (c) (d) How Commissions Set Rates The Rate-Making Formula Rate Base Rate Base Valuation (i) Original Cost (ii) Fair Value (iii) Weighted Cost (iv) Judicial Precedents— Rate Base (e) Rate of Return and Judicial Precedents (f) Operating Income (g) Alternative Forms of Regulation 31.5 3 REGULATORY COMMISSION JURISDICTIONS THE TRADITIONAL RATE-MAKING PROCESS (i) (ii) (iii) (iv) 6 6 6 7 7 7 7 8 8 8 9 10 31.6 Price Ceilings or Caps Rate Moratoriums Sharing Formulas Regulated Transition to Competition INTERRELATIONSHIP OF REGULATORY REPORTING AND FINANCIAL REPORTING 11 12 12 12 13 (a) Accounting Authority of Regulatory Agencies (b) SEC and FASB (c) Relationship Between Rate Regulation and GAAP (i) Historical Perspective (ii) The Addendum to APB Opinion No. 2 14 SFAS NO. 71: “ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION” 15 (a) (b) (c) (d) Scope of SFAS No. 71 Amendments to SFAS No. 71 Overview of SFAS No. 71 General Standards (i) Regulatory Assets (ii) Regulatory Liabilities (e) Specific Standards (i) AFUDC (ii) Intercompany Profit (iii) Accounting for Income Taxes (iv) Refunds (v) Deferred Costs Not Earning a Return (vi) Examples of Application 13 13 14 14 15 15 16 16 16 17 17 17 19 19 19 19 19 Mr. McKnight wishes to acknowledge the assistance provided by Alan D. Felsenthal and Robert W. Hriszko, both formerly of Arthur Andersen LLP. 31 1 • 31 2 • 31.7 REGULATED UTILITIES SFAS NO. 90: “REGULATED ENTERPRISES—ACCOUNTING FOR ABANDONMENTS AND DISALLOWANCE OF PLANT COSTS” (a) Significant Provisions of SFAS No. 90 (i) Accounting for Regulatory Disallowances of Newly Completed Plant (ii) Accounting for Plant Abandonments (iii) Income Statement Presentation 31.8 SFAS NO. 92: “REGULATED ENTERPRISES—ACCOUNTING FOR PHASE-IN PLANS” (a) Significant Provisions of SFAS No. 92 (i) Accounting for Phase-In Plans (ii) Financial Statement Classification (iii) AFUDC (iv) Interrelationship of PhaseIn Plans and Disallowances (v) Financial Statement Disclosure 31.9 SFAS NO. 101: “REGULATED ENTERPRISES—ACCOUNTING FOR THE DISCONTINUATION OF APPLICATION OF FASB STATEMENT NO. 71” (a) Factors Leading to Discontinuing Application of SFAS No. 71 (b) Regulatory Assets and Liabilities (c) Fixed Assets and Inventory (d) Income Taxes (e) Investment Tax Credits (f) Income Statement Presentation (g) Reapplication of SFAS No. 71 25 25 31.10 ISSUE NO. 97-4 25 31.11 OTHER SPECIALIZED UTILITY ACCOUNTING PRACTICES 26 20 20 20 20 20 21 21 21 22 22 22 22 22 23 24 24 24 24 (a) Utility Income Taxes and Income Tax Credits (i) Interperiod Income Tax Allocation (ii) Flow-Through (iii) Provisions of the Internal Revenue Code (iv) The Concept of Tax Incentives (v) Tax Legislation (vi) “Accounting for Income Taxes”—SFAS No.109 (vii) Investment Tax Credit (b) Revenue Recognition— Alternative Revenue Programs (c) Accounting for Postretirement Benefits Other Than Pensions (d) Other Financial Statement Disclosures (i) Purchase Power Contracts (ii) Financing Through Construction Intermediaries (iii) Jointly Owned Plants (iv) Decommissioning Costs and Nuclear Fuel (v) Securitization of Stranded Costs, Including Regulatory Assets (vi) SFAS Nos. 71 and 101— Expanded Footnote Disclosure 31.12 SOURCES AND SUGGESTED REFERENCES 26 27 28 29 29 31 32 34 35 36 37 37 38 38 38 39 40 41 31.1 THE NATURE AND CHARACTERISTICS OF REGULATED UTILITIES (a) INTRODUCTION TO REGULATED UTILITIES. Many types of business have their rates for providing services set by the government or other regulatory bodies, for example, utilities, insurance companies, transportation companies, hospitals, and shippers. The enterprises addressed in this chapter are limited to electric, gas, telephone, and water (and sewer) utilities that are primarily regulated on an individual cost-of-service basis. Effective business and financial involvement with the utility industry requires an understanding of what a utility is, the regulatory compact under which 31.2 HISTORY OF REGULATION 31 3 • utilities operate, and the interrelationship between the rate decisions of regulators and the resultant accounting effects. (b) DESCRIPTIVE CHARACTERISTICS OF UTILITIES. Regulated utilities are similar to other businesses in that there is a need for capital and, for private sector utilities, a demand for investor profit. Utilities are different in that they are dedicated to public use—they are obligated to furnish customers service on demand—and the services are considered to be necessities. Many utilities operate under monopolistic conditions. A regulator sets their prices and grants an exclusive service area, which probably serves a relatively large number of customers. Consequently, a high level of public interest typically exists regarding the utility’s rates and quality of service. Only a utility that has a monopoly of supply of service can operate at maximum economy and, therefore, provide service at the lowest cost. Duplicate plant facilities would result in higher costs. This is particularly true because of the capital-intensive nature of utility operations, that is, a large capital investment is required for each dollar of revenue. Because there is an absence of free market competitive forces such as those found in most business enterprises, regulation is a substitute for these missing competitive forces. The goal of regulation is to provide a balance between investor and consumer interests by substituting regulatory principles for competition. This means regulation is to: • • • • • Provide consumers with adequate service at the lowest price Provide the utility the opportunity, not a guarantee, to earn an adequate return so that it can attract new capital for development and expansion of plant to meet customer demand Prevent unreasonable prices and excessive earnings Prevent unjust discrimination among customers, commodities, and locations Insure public safety To meet the goals of regulation, regulated activities of utilities typically include these six: 1. 2. 3. 4. 5. 6. Service area Rates Accounting and reporting Issuance of debt and equity securities Construction, sale, lease, purchase, and exchange of operating facilities Standards of service and operation This chapter covers the historical development of regulated utilities as a monopoly service provider and the regulation of their rates as a substitute for competition. Although many of the historical practices continue, regulated utilities are increasingly operating in a deregulated, competitive environment. Certain industry segments have been more affected than others by the judicial, legislative, and regulatory actions, as well as technological changes, that have produced this shift. These industry segments include long distance telecommunications services, natural gas production and transmission, and electric generation. 31.2 HISTORY OF REGULATION Some knowledge of the history of regulation is essential to understanding utilities. Companies that are now regulated utilities find themselves in that position because of a long sequence of political events, legislative acts, and judicial interpretations. Rate regulation of privately owned business was not an accepted practice during the early history of the United States. This concept has evolved because important legal precedents have established not only the right of government to regulate but also the process that government bodies