What is FERC Accounting?
The FERC Chart of Accounts is cool
FERC accounting is the industry best-practice for utility accounting (electric co-ops use the RUS Uniform System of Accounts, which is very similar). And, with a puffed-up title like that, how could you not read this article? Seriously, the Federal Energy Regulatory Commission (FERC) Chart of Accounts is the bedrock of utility accounting. It can be difficult for new employees to get their arms around it at first. Many employees learn on the job or take industry classes to learn the ins and outs of FERC accounting. This article talks about why the FERC Uniform System of Accounts is necessary in some key areas. It’s called the FERC Uniform System of Accounts (FERC USOA), FERC Chart of Accounts, or just FERC Accounting. Take your pick, we’ll switch back and forth in this article.
Key Points on the FERC Uniform System of Accounts
1. It’s required for Investor-owned utilities - Using the FERC USOA is required for electric investor-owned utilities. Many large and mid-sized municipal utilities and electric joint action agencies use it also.
2. New employees should be trained as soon as possible in using the FERC USOA- New finance, engineering, and operations employees should be trained in the FERC Chart of Accounts soon after they start employment. The employees should learn the why of the FERC Chart of Accounts, not just the what.
3. Metrics and KPIs are a benefit of using the FERC USOA - It is built for determining operating and financial metrics and key performance indicators.
4. Running your electric utility or co-op on metrics and KPIs will improve performance - Key performance indicators and metrics can be used to measure results, impact short and long-term strategies, and be part of the inputs into electric rates.
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Tell me a nightime story with a great ending
In any accounting, the chart of accounts tells a business's story, i.e., operating and capital spending, focusing on priorities strategies, workforce management, how the business is financed, where it's been, and where it's going. Think of the FERC Uniform System of Accounts as used in a manufacturing business. In this case, electricity is being manufactured and delivered.
The beauty of the FERC Chart of Accounts is simplicity and consistency. Get a copy and see how. The simplicity is shown in these areas:
1. The FERC USOA uses a simple 3-digit account number
2. It comes in a book! There are general instructions on accounting for assets, liabilities, revenues, and expenses
3. There are more detailed instructions in that same book for electric construction accounting
4. The account distribution divides utilities into major business units - generation, transmission, distribution, customer service, and finance activities
5. There are detailed explanations for accounting for more complex transactions
The hidden usefulness of the FERC Chart of Accounts
The other beauty of the FERC USOA is that is required to be used by investor-owned electric utilities. Many municipal electric utilities also use the FERC USOA. The common use opens up a host of opportunities:
1. The FERC USOA is the industry-wide accepted best practice for electric utility accounting
2. The FERC USOA is used to file a public regulatory report by electric investor-owned utilities – the FERC Form 1
3. The common filing of the FERC Form 1 regulatory report allows publicly available information on all utility sizes. What can be done with that data?
Using metrics and key performance indicators to run an electric cooperative or utility
The electric business is a combination of uniqueness and uniformity. While each electric cooperative or utility is unique, the business mainly delivers a uniform set of products and services (i.e., electricity) to end-users. Electric rates are the center of the utility universe and are centered around classifying transactions and fixed assets in the FERC Chart of Accounts categories.
Likewise, the FERC Chart of Accounts and RUS Chart of Accounts lends itself to developing metrics key performance indicators (KPIs), which are used for:
Analyzing cost structures
Developing and implementing long-term strategies
Comparisons to peer organizations in the areas of expense components
What is the meaningfulness of a metric that measures the cost to serve a customer? The utility or co-op can use this metric as:
A comparison to its budget
Comparison to recent internal trends
A measure of productivity
A comparison to peer organizations
A baseline amount to measure future strategy implementation
For example, the utility compares its $100 cost per customer to a nearby peer utility's cost per customer of $80. It raises several questions that could result in action:
What services does our utility provide that the peer utility does not (for example, more customer services representatives are employed to enhance the customer's experience)
Is our cost structure higher than the peer organization? If so, why?
The analysis leads to actionable steps. For example, the utility or co-op may decide on a long-term strategy of reducing customer service representatives and moving towards more online payments or self-service kiosks. Or it might choose to increase the number of customer service representatives and retrain them to provide a more hands-on counselor-type customer service experience. In either case, the use of the FERC USOA/RUS USOA allows the future expense of the strategy to be recognized and analyzed systematically and comparably. This approach can be used and played out in all operational areas.
Train your employees
This article is only a brief discussion on the FERC USOA. The use of the FERC USOA is an industry best practice and one you should consider if you're not using it. The process is much more involved, and the benefits to your utility are more extensive than discussed here. Also, to maximize the contribution of new finance, engineering, and operations employees, they should be trained in the why of the FERC Chart of Accounts and RUS Chart of Accounts, not just the what. If you're looking for a FERC 101 Training Course - click here to get the training started!
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.