Duke Energy Corporation's 2014 annual report to shareholders contains the following note disclosure (edited for brevity):

Regulatory Accounting A substantial majority of Duke Energy's regulated operations meet the criteria for regulatory accounting treatment. As a result, Duke Energy records assets and liabilities that would not be recorded for nonregulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds or reduce rates to customers for previous collections or for costs that have yet to be incurred.

Allowance for Funds Used During Construction (AFUDC) and Interest Capitalized

For regulated operations, the debt and equity costs of financing the construction of property, plant and equipment are reflected as AFUDC and capitalized as a component of the cost of property, plant and equipment. After construction is completed, these costs are recovered through their inclusion in rate base and the corresponding subsequent depreciation or amortization of those regulated assets.

Required: 1. Explain why Duke Energy alerts investors and other readers of its GAAP financial statements to the fact that it "records assets and liabilities that would not be recorded for nonregulated entities."

2. As you will learn in Chapter 10, GAAP does not allow firms to capitalize as a cost of construction the "equity costs" of funds needed to finance construction projects. GAAP does allow debt interest costs to be capitalized under certain circumstances. Explain why Duke Energy alerts investors and other readers of its GAAP financial statements to the "capitalization of AFUDC.

3. Briefly describe the unique accounting-related conflicts of interest that arise in regulated electric utility companies such as Duke Energy.