Understanding Memorandum and Balancing Accounts

Introduction – Why This Series Matters

In early 2026, two of California’s three major electric utilities reported rate decreases. On its face, that sounds like good news. But it doesn’t tell the full story.

Utilities continuously incur costs that are not yet reflected in rates. These costs may be included in requests pending before the California Public Utilities Commission (CPUC) or tracked in regulatory accounts that the utilities have not yet requested for recovery. In this latter category alone, the three largest investor-owned electric utilities have more than $2 billion in costs that have not yet been requested for recovery and are thereby not reflected in rates.¹

These costs are recorded in memorandum and balancing accounts – tools that allow utilities to track certain costs over time and incorporate them into rates later.

In this three-part blog series, we’ll walk through how these accounts were originally designed and what they were intended to do, how they are being used today, and how their use has expanded over time. We’ll also examine what that means for utility rates and why the growing use of these accounts raises concerns about cost discipline, oversight, and how costs are ultimately recovered from customers.

While many of the examples and references are drawn from energy utilities, the concepts discussed in this series also apply to water utilities and communications companies.

To start, it helps to understand how utility rates are typically set – and how these accounts came to exist in the first place.

How Utility Rates Are Typically Set

Traditionally, most utility costs are established through a budget-setting process called a General Rate Case (GRC). This is where utilities forecast and justify their expected costs – things like infrastructure, operations and maintenance, and programs – and regulators review those forecasts to set rates.

At a high level, this budget-setting process determines how much revenue a utility is authorized to collect. It allows regulators to evaluate utility estimates of future operations and capital investments, and the costs associated with those activities, to determine what is reasonable.

That amount – often referred to as the “revenue requirement” – is then allocated across different groups of customers (e.g. residential, commercial, and industrial customers). Rates are then calculated to ensure the revenue is collected from all customers.

The revenue requirement is essentially a budget that the utility must operate within. If a utility spends less than authorized, this will provide additional profit to shareholders – and if costs are higher than forecast, utility shareholders bear that risk.²

Memorandum and balancing accounts can shift how that risk is allocated between shareholders and customers.

Actual Costs Don’t Always Match Utility Forecasts

Of course, not everything can be predicted in advance.

Utilities may face unexpected events outside of the utility’s control (e.g. changes in tax code), or costs that are impossible to forecast accurately (e.g. damages caused by a wildfire).

At the same time, once rates are set, they generally should not be adjusted after the fact to reflect new or higher costs. This principle – often referred to as the prohibition on retroactive ratemaking – is a core part of the regulatory framework.

That unpredictability creates a challenge: how do you deal with costs that arise after rates are already set?

This issue became especially clear in the 1970s, when fuel prices increased rapidly during the OPEC oil embargo. Energy utilities faced costs that changed faster than rates could be updated through the GRC process. These costs were also outside of the energy utilities’ control.

To address this, regulators developed mechanisms that allowed certain costs to be tracked over time and addressed later – rather than forcing everything into a forward-looking forecast.

Those mechanisms evolved into what we now call memorandum and balancing accounts, which allow for retroactive ratemaking under specific circumstances. Utilities must receive authorization from the CPUC (or direction from the Legislature) to establish these accounts.

When Costs Can’t Be Predicted: Memorandum Accounts

When a major catastrophe such as a wildfire occurs, energy utilities can incur significant costs – from emergency repairs to rebuilding infrastructure.

Memorandum accounts were designed for situations exactly like this.

They allow utilities to track costs that are unforecastable and are outside of the utility’s control.

Utilities record these costs as they occur. But recording a cost in a memorandum account does not mean it will automatically be recovered from customers.

To recover those costs, utilities must later seek CPUC approval and demonstrate that the costs were appropriate and that recovery is justified.

A common example is the energy utilities’ Catastrophic Event Memorandum Account (CEMA), which tracks costs associated with repairing utility infrastructure after disasters such as wildfires, storms, and earthquakes – events that cannot reasonably be forecast in advance.

Reconciling Forecast vs. Actual Costs: Balancing Accounts

Balancing accounts serve a different function.

While memorandum accounts are used to track unforecastable costs, balancing accounts are used to track costs that are already included in rates but may change over time.

Balancing accounts track the costs a utility incurs against amounts the CPUC has approved for those activities in rates.

Balancing accounts provide a mechanism to account for those differences and are intended to have the utility “only collect from customers what is spent.”

Balancing accounts come in two forms: “one-way” and “two-way.”

One-way accounts set a budget cap, and if the utility spends less than the cap, the excess revenue is refunded. However, utility shareholders are at risk for costs that exceed the cap.³

Two-way accounts are designed to allow the utility to recover what is spent, but do not impose any budget discipline because these accounts allow for the “true up” of differences over time:

• if actual costs exceed what was forecast, utilities may recover the difference from customers
• if actual costs are lower than forecast, customers receive a refund

These accounts are typically used for costs that are difficult to predict precisely or that fluctuate over time.

From Limited Use to a Much Larger Role

Memorandum and balancing accounts were originally designed to address unforeseen events and costs that are difficult to predict.

Over time, however, both the number of these accounts and the types of costs tracked within them have expanded to include routine costs of basic utility operations – costs that should be predictable and relatively easy to forecast and require strong incentives for utility cost management.

Today, these accounts play a much larger role in how utility costs are tracked – and ultimately how those costs are recovered through customer rates.

In the next blog, we’ll take a closer look at how the use of these accounts has evolved, how they are used today, and what that means for customer bills, risk allocation, and regulatory oversight.