A balancing account is an accounting mechanism used by regulated utilities to keep track of the difference between projected expenses and actual expenses or projected revenues and actual revenues. When allowed by regulation (this varies greatly from state-to-state and even sometimes for utilities in the same state), any differences covered by the balancing account are added to or subtracted from future revenue requirements, thus insulating the utility and its customers from risks of revenue or expense deviations. Typical portions of the revenue requirement covered by balancing accounts may include fuel costs and revenue fluctuations due to energy use that differs from the forecast for utilities with revenue decoupling. The use of balancing accounts to stabilize revenues associated with weather conditions is called weather normalization.
Balancing accounts can be either one-way or two-way. In a two-way balancing account, both overcollections and undercollections are tracked, and ultimately returned to or collected from ratepayers. But in a one-way balancing account, costs that fall short of the spending target are returned to ratepayers. If spending exceeds the target, the overage is not recoverable and is borne by shareholders. If the one-way balancing account is tracking revenues, those that fall short of the target are not recoverable and again borne by shareholders. However, revenues in excess of the target are tracked and returned to ratepayers in a future rate cycle.
Note that a balancing account can be positive (the utility owes ratepayers) or negative (the ratepayers owe the utility). At the beginning of a rate setting period, rates are set such that the balance is zeroed out, with balances amortized over a certain period of time. Amounts in a balancing account (either positive or negative) typically accrue interest.