Mutiple-owner power plants mitigate financing and power supply cost risk

A common arrangement in the power supply process is joint ownership of power plants. Joint ownership arrangements involve two or more owners of a power plant, with one of the owners called the operator owner, who operates the power plant, bills the owners for operating costs, and all owners partake of the power supply. The joint ownership is governed by an overall power supply agreement, which designates various committees (management, operating, and finance) that are charged with the governance and management of the contract. The contracts generally have audit provisions that allow any owner to audit billings under the contract, using their own personnel or through an independent party such as an accounting firm

Key takeaways on joint power supply contract audits

1. Joint ownership of generating units is common in the power industry due to the need for base load power supply and the cost of going it alone for power plant construction.

   2. The common ownership agreement has governance structures in place for contract oversight and audit provisions.

   3. Even with the best of intentions, the contract billing process can yield errors in billings to all owners.

   4. A contract audit is a way to review the contract for billing accuracy and greater efficiencies in the billing process.

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In our experience we have seen contract relationships where the audit process was avoided and contentious when done, to other relationships where all owners agreed to do a contract audit every year or biennially as part of the committee oversight process and share in the cost of the audit.

If you’re reading this article and have such a power supply arrangement, you know that even with the best of intentions, billing errors can occur. Also, audit provisions provide an opportunity to review aspects of the contract and make amendments that make contract arrangements and processes better, more efficient, and more equitable, if necessary.

Main areas of focus for a power contract audit

Having performed many contract audits, we find that areas for auditing fall into several main categories. These categories are areas that are open to interpretation, or can become complicated as different power plant operator software platforms and processes may be used.

The anchor points for any contract audit is the contract. It sounds redundant, but an effective workplan for a contract audit, is to line up the points on the contract and design process tests and inquiries to test each point. Source data should be readily available as outlined in the contract (invoices, timesheets, billing records, and calculations), so that testing can be thorough and conclusive.

The main areas in which we focus our efforts in joint contract audits include:

1. Cost allocations

As the owner operator of the power plant may also own and operate other power plants, there are overhead costs that are allocated among all of the operator’s units. These costs include common support costs, such as administrative and general, information technology, and Human Resources. There are various industry standard formulas that are used to allocate those costs and the costs are generally allocated based on percentages of employees, plant in service, and operating expenses.

The inputs into those formulas are areas that should be reviewed annually, as the cost and input mix of these allocations will change annually.

2. Capital projects

Annual capital project expenditures are approved by a management committee established by the contract. An audit test is to review capital expenditures to ensure they are either included in the budget, or were part of follow-up committee documentation of their agreement. Any impairment losses that are part of capex are shared by the owners in proportion to their ownership.

3. Fuel allocations

If the joint power plant units use gas or coal as fuel, the fuel used is charged directly to the unit’s operating costs. The charges for fuel should be straight-forward . If there are multiple power plants at a site, there can be joint operations for handling fuel, sharing personnel for operation and maintenance activities, and other joint facilities costs. The joint costs will go through an allocation process, which should be reviewed as part of the audit process.

4. Billing errors

Even with the best of intentions, billing errors can occur. If the billing process includes a combination of system data retrieval, manual calculation of allocated costs (with spreadsheets), and billings on spreadsheets, there is an opportunity for errors to enter the process. Contract testing should include a review of the operation of the billing error correction process and including amounts for billing errors that weren’t resolved in the audit’s findings and questioned costs.

Report of findings and questioned costs

While this report title sounds stiff and ominous, a formal report should be prepared and submitted to the owner and appropriate oversight committee. The report should outline and discuss these areas:

1. The scope of the audit

2. Areas reviewed that are working well

3. Business process recommendations for areas reviewed

4. Specific instances found in testing that can be tabulated as billing errors under the joint ownership contract either for or against the joint owner

a. There should be sufficient detail included in the report so that the issue can be discussed and recreated

5. Recommended resolution of disputed items

The owner should have the opportunity to respond with a written rebuttal report and the matters discussed at the oversight committee meeting.

Mutual resolution of the issues

We have seen the gamut of issue resolution, from checks being issued for differences, to arbitration and court cases over contested items. A tightly written joint ownership contract will lead to easier resolution of any contract billing issues and better overall relations between all of the power plant owners. All owners should have the same goals in keeping operating costs in line with budgets and meeting the terms of joint ownership agreements.

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, improving business processes and implementing strategy. Russ is passionate about the Power and Utilities Industry. As a partner in a national accounting and consulting firm for 20 years, he worked with hundreds of 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.