The City Electric Utility (CEU), which a city accounts for in its enterprise fund, provides cash rebates to customers who install insulation, storm windows, or energy-saving appliances. The payments are intended to reduce the demand for electricity and thereby enable the CEU to avoid having to add generating capacity.
Like many government-operated utilities, the CEU establishes rates based on a number of factors, of which cost is only one. It is the policy of the city, for example, to make substantial transfers each year from the CEU to its general fund. Utility fees are thereby a form of taxation, and the revenue requirements of the general fund are taken into account in setting the rates.
The CEU comptroller has raised the question of whether the rebates should be charged as an expense as paid, or be capitalized and charged as an expense over time (i.e., be amortized). Moreover, he then asks what the basis should be for determining the length of the amortization period.
Required: Write a brief memo in which you recommend to the CEU comptroller how the rebates should be accounted for. Be sure to support your position.