Locked into a Municipal Chart of Accounts, an Electric Utility Needed Some Changes to Make it Work for Financial Management
How can we use the utility financial model in a municipal chart of accounts?
Many municipal utilities share software platforms with the city general fund operations. It’s cost effective to share software and information technology staff, but the system output options may not always fit the needs of the business.
Sharing can work, we’ve seen it many times. Here’s one utility’s approach.
Please add additional points and ideas in the comments section.
Key points on a utility working within a municipal chart of accounts
The industry standard charts of accounts (FERC and NARUC) use three digits for each account.
Securing a three digit field in the municipal account string is often possible.
When it isn’t possible to secure three digits, adding another three digits involves custom programming and an additional data table.
The extra effort for custom programming is worth it to obtain accounting and reporting that better matches the utility business model.
Wow, that’s a lot of digits!
A common chart of accounts for a city general fund usually has a breakdown of 5 major fields:
XXX - Fund
XXXX - Department
XXXX - Business
XXXX - Element
XXX - Object
Utilities find that the standard chart of accounts for a municipal general fund (shown above) doesn’t meet their needs. General fund accounting is based on a flow of funds basis, while utilities use the accrual basis of accounting like a private sector business. The general fund chart of accounts is not a good fit.
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The industry standard for a chart of accounts for an electric utility is the Federal Energy Regulatory Commission Uniform System of Accounts (FERC USOA). The FERC USOA has 3 digits. The industry standard chart of accounts for water, wastewater, and gas utilities comes from the National Association of Regulatory Utility Commissioners (NARUC). The NARUC chart of accounts has up to 4 digits.
As shown in the example municipal chart of accounts above, there isn’t room for either FERC or NARUC in the account string. In many software platforms, adding another 3 or 4 digit string field can be done with custom programming. Other utilities resort to using the general fund chart of accounts, but download the account activity into another platform, aka Excel, then convert the activity to FERC or NARUC so the information can better be used in evaluating financial results, forecasting, and making decisions.
There is no ideal solution short of the utility maintaining its own software, so let’s review one utility’s approach to developing financial systems and accounting that better fit the utility operating model.
All we need is 3 digits!!
A municipal electric utility struggled to properly measure its financial results and set customer rates as it was using a city-wide general fund chart of accounts. The utility wanted to implement the FERC Uniform Chart of Accounts to meet best-practices in the business. Several approaches were tried:
1. Using the municipal chart of accounts and setting up as many activity accounts as possible to mirror electric operations.
2. Downloading the monthly general fund chart of accounts detail into an excel spreadsheet, analyzing the activity and mapping it to a detailed FERC income statement set up in the excel spreadsheet.
3. Using the spreadsheet for financial analysis, budget to actual reporting, presentations to the oversight body, and business planning.
Running a business from a spreadsheet is not ideal, plus there are internal control weakness issues that are inherent with downloading core financial data into a spreadsheet, then manipulating the data into a useable format.
The solution
The electric utility was able to secure custom programming time to add a 3-digit field to the general fund’s account string. The utility used this field for the FERC account number. The general fund did not use this field, so the utility was able to build on the activity numbers that led the string, and run custom reports sorted on the 3 digit field FERC number.
Electric team members received training on using the FERC chart of accounts and developed process changes for a smoother transition to the new formats.
With the new format, the electric utility was even able to utilize the system to run a work order process for electric construction projects using FERC accounting practices. The result was accounting for costs in a manner that matches the model of the electric business. With the accounting now in place, the electric utility is able to conduct an electric cost of service study more in line with industry standards, leading to better rate design.
The outcome
An approach as was done by this utility shows that electric industry standards for accounting and business reporting can still be made within the framework of a municipal-related chart of accounts string. The efforts to make this happen lead to benefits for both the electric utility and its ratepayers.
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.