Will the real net income please stand up?;

              WILL THE REAL NET INCOME PLEASE STAND UP?
John F. Utley
Partner, Executive Office
Presented before the American Gas Association-Edison Electric Institute Conference, San Francisco—May 1973
In the current economic, political and social environment of this country, the electric and gas industries face monumental problems. These problems relate to a wide range of factors from environmental matters and their costs to shortages of basic fuels and the cost of alternatives. While the industries grapple mightily with the solutions to these problems, it seems fair to say that the impact of the problems and their solutions will inexorably be translated into dollars and, just as inexorably, reflected in the financial statements of electric and gas companies.
For regulated industries, the portrayal of the dollar impact of solutions to the many problems now extant and that may appear in the future will be influenced by the accounting requirements of the regulatory agencies having jurisdiction. If these agencies are blind to changing situations requiring special recognition, then reported net income will fail to measure the realities behind operations, and I shudder to envision the consequences.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Let me begin my examination of the real net income question by focusing on a current problem. For the last several years a group of observers of the regulated industries has, in ever-increasing crescendos, questioned the quality of earnings of utilities because of the impact, they say, of the credit in the income statement of the Allowance for Funds Used During Construction (AFC). The growing cacophony from this group has created uncertainty among investors as to whether utility earnings that appear to result from AFC are, in fact, of lower quality than that net income shown as being from opera­tions.
Inevitably, the crescendos reached such heights that the Securities and Exchange Commission began, in 1972, to require the disclosure of informa­tion
about the AFC credit which may be confusing the issue further and lend­ing
support to the notion that the AFC credit does produce a lower quality of earnings. Such disclosure information as is now required appears counter-