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Home My WebLink About03.d. Review draft Position Paper and conduct biennial review of Board Policy BP 046 - Regulatory AccountingPage 1 of 5 Item 3.d. DCENTRALSAN MEETING DATE: OCTOBER 1, 2024 BOARD OF DIRECTORS POSITION PAPER DRAFT SUBJECT: REVIEW DRAFT POSITION PAPER AND CONDUCT BIENNIAL REVIEW OF BOARD POLICY BP 046 — REGULATORYACCOUNTING SUBMITTED BY: INITIATING DEPARTMENT: KATIE YOUNG, SECRETARY OF THE SECRETARYOF THE DISTRICT DISTRICT REVIEWED BY: KEVIN MIZUNO, FINANCE MANAGER PHILIPLEIBER, DEPUTYGM -ADMINISTRATION ROGER S. BAILEY, GENERAL MANAGER ISSUE Revisions to Board policies require approval of the Board of Directors (Board). BACKGROUND As part of the biennial review of Board Policy BP 046 - Regulatory Accounting consider the proposed revisions: • Section 1.6 was revised to clearly reflect that management is responsible for enforcing and monitoring compliance with this policy and that the internal and independent auditors assess management's implementation of policies, accounting principles, and internal controls through their audits. Attachment 1 includes the proposed red -lined revisions. ALTERNATIVES/CONSIDERATIONS The Board may choose not to consider the proposed revisions or direct staff to make additional revisions to the policy. FINANCIAL IMPACTS None. October 1, 2024 Regular ADM IN Committee Meeting Agenda Packet - Page 75 of 182 Page 2 of 5 COMMITTEE RECOMMENDATION The Administration Committee reviewed this matter at its meeting on October 1, 2024 and recommended RECOMMENDED BOARD ACTION Approve updated Board Policy BP 046 — Regulatory Accounting. Strategic Plan Tie -In GOAL FOUR: Governance and Fiscal Responsibility Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability and sustainability GOAL FIVE: Safety and Security Strategy 2 - Protect personnel and assets from threats and emergencies ATTACHMENTS: 1. Updated Board Policy BP 046 - Regulatory Accounting (Redlines) October 1, 2024 Regular ADM IN Committee Meeting Agenda Packet - Page 76 of 182 Page 3 of 5 Number: BP 046 Authority: Board of Directors Adopted: April 15, 2021 Revised: October 17, 2024 Reviewed: October 1, 2024 Initiating Dept./Div.: Administration/Finance BOARD POLICY REGULATORY ACCOUNTING PURPOSE The maintenance, replacement and expansion of Central San's wastewater collection and treatment infrastructure assets is critical to achieving its mission to protect public health and the environment. Funding for such capital investments is provided for substantially through annual budgets, and rates established in periodic rate cases. Rate stability is a key goal of Central San's rate making, which has become a more challenging goal in light of increasing capital infrastructure investment needs. Regulatory accounting provides the opportunity to account for revenues, expenditures, assets and liabilities in a manner consistent with ratemaking goals. Accordingly, the purpose of this policy is to provide a framework for the creation of regulatory assets, liabilities, revenues and expenditures, and establish the process for approval of individual items to be subject to regulatory accounting treatment. BACKGROUND As a municipal business -type utility reporting as an enterprise fund, Central San is subject to accounting pronouncements issued by the Governmental Accounting Standards Board (GASB). In 2010, GASB adopted Statement No. 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre -November 30, 1989 FASB and AICPA Pronouncements. One section of GASB 62 addresses "Regulated Operations" and provides that certain costs or credits may be included in rates for recovery or refund over a future period and consequentially are recorded as regulatory assets or liabilities in the financial statements. As long as Central San continues to meet the following criteria, the Board, in their role as rate regulator, has the ability to create regulatory assets or liabilities through the budgeting and rate setting process: • Rates are subject to approval by an independent, third -party regulator or by a governing board empowered by statute to establish rates that bind customers. • The rates are designed to recover the costs of regulated services. October 1, 2024 Regular ADM IN Committee Meeting Agenda Packet - Page 77 of 182 Page 4 of 5 Number: BP 046 REGULATORY ACCOUNTING Page 2 of 3 • It is reasonable to assume that the rates are set at levels that can be charged to and collected from customers. Title 6 of the Central San District Code contains the provisions permitting the Board of Directors to set rates, including capacity fees, sewer service charges and other fees. POLICY 1.1 Overall Framework Expenditures or revenues to be subject to regulatory accounting will typically be identified by staff through the formal budgeting or ratemaking process, although provision for such treatment may occur outside such processes. In either case, the Board shall be provided with a listing of items for proposed regulatory accounting treatment for adoption, along with analysis of the rate impact of such treatment. Upon adoption of regulatory accounting for such items, appropriate regulatory accounting through the establishment of regulatory assets and liabilities shall be effectuated, with appropriate amortization over time recorded. Staff will assess whether the agency is continuing to meet the requirements to apply the "Regulated Operations" provisions of GASB 62 and report regulatory assets and liabilities. If the District no longer meets the requirements to apply regulatory accounting, all such regulatory assets and liabilities will be written off to expense or revenue. 1.2 Applicability This policy is applicable to District Financial Statements prepared annually as part of the Comprehensive Annual Comprehensive Financial Report ACFR ,the annual budget, financial plan and development of fees, rates and charges in accordance with the District Code. 1.3 Terms & Definitions 1. Regulatory asset: A regulatory asset is an incurred expense that the Board, in their role as rate regulator, intends to recover from customers through rates in a future period and/or through the capital budget. 2. Regulatory liability: A regulatory liability is an obligation resulting from the Board's decision, in their role as rate regulator, to return current receipts or revenues to customers through rates in a future period. 3. Amortization: The process of systematically allocating a regulatory asset to expense or a regulatory liability to revenue over time. 1.4 Responsibilities The authority for making policy is vested in the Board, and implementation and ongoing compliance with such policy is delegated to the General Manager. October 1, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 78 of 182 Page 5 of 5 Number: BP 046 REGULATORY ACCOUNTING Page 3 of 3 1.5 Standards & Procedures Prior to pursuing a new regulatory asset or liability in either a budget or rate case proceeding or between such events, relevant staff will assess whether the costs or revenues are eligible, deligible and communicate such items to the Board regarding proposed regulatory accounting treatment. An Administrative Procedure will outline categories of Eligible Costs or Revenues, Ineligible Costs, and provide for consideration of appropriate Amortization/Recovery Periods. 1.6 Performance & Monitoring Compliance with this policy may -shall be enforced and monitored by the DistriGt's external fiRaRGial a ilditerrnaRa emonje andmanagement and may be periodically assessed by the Internal Auditor, through the annual risk assessment process. Additionally, the District's GeRtFal -independent auditors will assess conformance with GASB 62, including the provisions of this policy, in all material respects, through their audit of the ACFR. [Original retained by the Secretary of the District] October 1, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 79 of 182