Best practices in accounting for electric utilities and gas utilities

Even though your electric coop or utility is not Federal Energy Regulatory Commission (FERC) regulated, FERC compliance audit provide insights into areas to consider for general accounting and ratemaking. This article provides an overview of the latest FERC compliance audit findings. It is a good read to review the entire report.

If FERC regulates your organization, you definitely should read on.

 Key Points on the FERC 2021 Compliance Report

 1. The 2022 FERC Report on Enforcement details areas examined for electric and gas accounting and rate filings compliance with FERC directives and orders.

2. The audit database was developed based on greater use of statistical analysis of reports filed with FERC.

3. The Report includes valuable information for consideration by any electric or gas co-op or utility in its general accounting and developing cost of service studies and customer rates.

The FERC 2022 Report on Enforcement

FERC audit staff regularly audits utilities under its jurisdiction to test for compliance with FERC directives. The audits are using more sophisticated tools to identify areas for further analysis. The FERC audit team had a heavier reliance on statistical analysis of FERC filings in determining areas for further review.

FERC and electric and gas rates, why should this matter to you?

FERC regulates interstate rates for electric transmission and wholesale power rates, and interstate natural gas rates. While this may not impact your electric or gas co-op or utility, it is worth noting what items FERC questions in its review and approval of electric rate and other compliance proceedings. FERC’s approach defines the best practices allowable in developing electric cost of service studies and designing electric rates. Issues with allocating labor and overheads to construction projects

Major findings in the 2022 compliance report

Highlights of areas of findings in the 2022 report include:

• FERC urges companies to develop internal compliance programs that includes staying current on industry issues and FERC orders.

• Labor allocations are not supported by processes that properly follow the activity being performed, i.e. maintenance vs. capital projects.

• The Allowance for Funds Used During Construction (AFUDC) allocated to construction projects is not always computed using the FERC formula.

• Some improper costs are included in formula rate filings. Some of these costs, such as Asset Retirement Obligations (ARO), regulatory items, administrative and general allocations; require FERC approval for inclusion.

• More robust processes are needed to apply transmission credits in some utilities.

• Some natural gas providers do not properly apply FERC accounting for transactions, such as netting transactions, accounting for gas losses, and gas storage accounting.

• Accounting for non-regulated affiliate transactions do not always follow FERC directives.

Our comments

Whether or not your utility is regulated by FERC, reviewing the list of areas the Report mentions is a good practice when preparing your next cost of service study. Including supporting documentation for items included in the cost of service studies will make it easier to discuss why an item was not included with management, oversight Boards, and ratepayers.

What should you do with this information?

This information includes insights into best practices in accounting and electric and gas rate development from the regulator point of view. While we advocate innovation in electric accounting, it is helpful to consider the regulator view when considering transactions to include in cost of service studies or accounting approaches.

About Russ Hissom - Article Author

Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and 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.