Question

Alliant Energy just received regulatory approval for its 2014 electricity rate. The company has been authorized to charge customers $0.10 per kilowatt-hour (kwh), a rate lower than other utilities in the state charge. Details of the rate calculation follow:


Shortly after the 2014 rate was set, the company’s financial reporting staff circulated an internal memo recommending the following accounting changes:
1. Extend plant depreciation life by five years to reflect current utilization forecasts. This would add $175 million to the asset base and reduce annual depreciation (an operating cost) by $5 million.
2. Increase estimated bad debt expense from 1% to 1.5% of sales to reflect current forecasts of customer defaults. This would add $7 million to operating costs and reduce total assets by the same amount.
3. Amortize 2013 hostile takeover defense costs of $4.5 million over three years rather than take the entire expense in 2013. This would increase 2014 operating costs by $1.5 million and add $3 million to the asset base.
4. Write up fuel and materials inventories to their current replacement value. This would add $60 million to the asset base, but it would have no impact on 2014 operating costs.

Required:
1. Assess the impact of each proposed change on the company’s 2014 revenue requirement and rate per kilowatt-hour, assuming that regulators will approve the accounting changes and adjust the allowed rate accordingly.
2. As a member of the state utility commission, comment on the merits of each proposed accountingchange.


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  • CreatedSeptember 10, 2014
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