This paper analyzes the accounting effects of the proposed standard Accounting for Obligations Associated with the Retirement of Long‐Lived Assets, and considers the economic effects of accounting data in electric utility rate‐making. Specifically, we model the financial statement with respect to nuclear decommissioning costs and posit several likely scenarios for the economic implications for the affected firms, their electric consumers, and the rate regulators. The model reveals that the sign of the equity adjustment at adoption and the change in ongoing expense will depend on (1) the age of the plant, and (2) the ratio of the current cost estimate used to compute depreciation under the current practice and the estimated future decommissioning cost. When the model is applied to firms with nuclear plants, we find that the financial statement effects at adoption will be substantial for many firms, and that the ongoing effects of the standard will be to increase the reported expenses of decommissioning substantially.
These findings are of interest for three reasons: first, contrary to our data, many of the firms analyzed have stated in their annual reports that the adoption effects of the proposed standard will be immaterial; second, the standard may have a deleterious effect on established regulatory rate‐making relationships by changing the basis for consumer rates; and third, the analysis suggests that some firms will be faced with either requesting rate increases or jeopardizing their eligibility for special regulatory accounting treatment. Any of these outcomes create potentially severe problems in an industry on the brink of monumental economic and structural change, that is, the transition from a regulated monopoly to competition.