Encouraging solar power can lead to electric budget blues

Distributed energy resources (DERs) are electric power from solar and other renewable sources - wind, and bio-mass. DERs can throw a wrench into your electric co-op or utility budget if they are they are not planned for in your electric budget. FERC Order 2222 details the rate structures that should be used to pay and charge DER customers, but that will not negate the impact of gaps between budgets that do not have a solid handle on actual DER impacts and actual revenues received by the utility. These gaps, if not collected in customer rates, will need to be funded by utility reserves. This means that non-DER customers will be subsidizing DER customers, which in industry jargon does not lead to fair and reasonable ratemaking.

Accounting standards ASC 980 and GASB 62 (Regulated Operations) are the gift that keeps on giving, in that these accounting standards can allow you to separate the impact of DERs on the budget, book those “losses” from DERs, and determine a strategy to collect the amounts in future rates. Here’s an example of this approach in practice.

At the start of the latest fiscal operating year, you, your management team and oversight body approve an annual revenue and expense budget. Now, as you review year to date revenues compared to the budget, a sinking feeling surrounds you as you ask "how did we miss our revenue forecast by so much?"

You do a little digging into the numbers. With analytical trend tools at our disposal, budgets are more realistic and numbers are tighter than prior. However, trends that do not show up yet in historical sales data will not work their way into our forecasting methods. For example, the growth in distributed generation is a relatively new trend. Microgrids are even more recent. Both are forecasted to grow exponentially in the next decade. Both reduce kWh sales from the utility or cooperative where they are located.

The cost map for electric utilities

Costs for utilities, like any business, are a combination of fixed and variable costs. Fixed costs are the infrastructure to size the electric system and connect customers, while variable costs are the cost of fuel or purchased power and system maintenance. These are shown in the following image:

How are these costs recovered?

How do we recover electric utility "available for use" costs?

"Available for use" costs are those fixed costs to connect customers to the utility's electric system. Whether or not these customers use their connection, the cost of the connection must be recovered in utility rates. While distributed generation or microgrid customers may not always need this connection to the utility due to their ability to self-generate, the connection is there and available when needed. Many DER customers question why they need to pay these costs. But, they must pay for that connection to the electric system, or, non-DER customers will need to pay for those connection costs in their rates. Fair? Not at all.

Those connection costs should be recovered in the utility's fixed monthly customer or demand charge. However, these customers will be consuming less kWh's from the utility's native system (due to their alternative use of distributed generation), so if the reductions in kWh are not considered in the revenue budget forecast for the year, a revenue budget "miss" results.

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Rewriting revenue history for lost kWh sales

While kWh sales are variable revenues generated by variable costs (fuel, purchased power), there is a profit margin built into the rate for each kWh and declining kWh sales will erode the utility's gross profit margin from the planned budget.

Allowing those lost revenues to slip away inflicts a permanent detriment on the utility's financial results and cash flows. Accounting methods such as "decoupling" exist to capture these "lost" revenues in order to collect them in the future. 

Decouple lost revenues for future recovery

Decoupling is a form of regulatory accounting used to record these lost revenues for recovery in future years. If your utility is regulated by a state public regulatory commission that this process may or may not be allowable for rate recovery in your rates. For utilities regulated at the local level (such as municipal utilities and electric cooperatives), decoupling should be a consideration and is definitely allowable using accounting standards.

The mechanics of decoupling actual from budgeted revenues is shown in the following image:

For example, if the utility budgets $10 million of revenues but sales are $9 million, that $1 million of “missing revenue” can be treated in one of two ways:

Accepted and thus the margin on this amount is not available for use in the business, or

Deferred as an asset with attempted recovery in the next rate case or as a cost adjustment recovery clause

Decoupling mechanics using ASC 980 or GASB 62

Accounting standards ASC 980 and GASB 62 - Regulated Operations, are the standards used to defer the $1 million for future recovery in rates. The entry to record the deferral is:

FERC 182.3 Other regulatory assets $1,000,000

FERC 400 Revenues (by customer class) $1,000,000

This entry allows putting the $1 million of under collected revenues, identified as caused by DER customers, “back on the board” with the stipulation that the under collection will be included in the next rate change or collected through levying a surcharge on current rates.

While some consider this an unconventional accounting approach, it can be used when the desire is present to match budgeted and actual revenues (and backing up that desire with action on rates).

Consider how “decoupling” might fit with your cooperative or utility revenue strategy

If your utility is missing revenue targets and budgets and the cause can be identified as a faulty forecast due to unexpected occurrences such as distributed generation kWh losses, these accounting treatments provide options. As you move into a new budget season, decoupling may be a tool that fits your utility’s revenue strategy. 

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.