III. Definition of Gain on Sale

We initiated this rulemaking to develop standardized guidelines for the allocation of the gains (and losses) from sales of utility assets. A utility receives a gain on sale when it sells an asset such as land, buildings or other tangible or intangible assets at a price higher than the acquisition cost of the non-depreciable asset or the depreciated book value of the depreciable asset. Thus, non-depreciable assets (such as land, water rights and goodwill), and depreciable assets and (such as machinery, buildings, equipment, materials or vehicles) are treated differently when determining whether there is a monetary gain from the sale of these assets.

Buildings, machinery, equipment, materials and vehicles may be depreciated on the utility's regulatory financial statements. Depreciation is a cost of owning the asset that appears on the utility's books each year, and ratepayers reimburse the utility for this depreciation cost. When a utility sells the depreciable asset, its gain is the difference between the depreciated value of the assets at the time of sale and the sales price. Taxes figure into the equation, since they reduce the sales proceeds, or gain, allocable to the utility.

Land, water rights and goodwill, on the other hand, are not depreciable because they need not be replaced, unlike buildings, machinery or other depreciable assets. Thus, ratepayers do not pay the utility its depreciation costs. However, ratepayers still bear costs associated with a non-depreciable asset because the entire cost of the asset is put into rate base and the shareholders receive a return on that amount for as long as the asset is in rate base. Ratepayers also pay for carrying costs such as maintenance, taxes, insurance, administrative costs and interest expense for the asset.