Develop KPI’s using FERC Accounting Practices
What are KPI’s?
Developing and implementing strategy initiatives includes setting goals, measuring progress, making mid-course adjustments, and evaluating success.
Key Performance Indicators (KPI’s) are measures used to set baseline performance implement improved performance strategies on those baselines. The measurement ability makes KPIs a management tool for setting priorities and measuring progress in implementing strategy.
KPIs drive the electric utility and cooperative business model
What should be measured with KPI’s?
KPI’s fall into two general categories - financial and activity based. In both of these categories, a KPI should meet the following parameters to be effective. A KPI should be:
Meaningful – assist with managerial decision making
Material – concentrate on the most material issues to the organization (financial and non-financial)
Assist external assessment of the organization's strategic positioning in the industry
Align with the organization's strategic direction
Electric utility industry applications for KPIs
A benefit of the electric utility industry is the wealth of measure available for comparison. This comes from the uniformity of the financial chart of accounts used by many electric utilities (based on the Federal Energy Regulatory Commission Uniform System of Accounts), the number of regulatory reports filed by utilities and the availability of utility financial statements due to publication on their own or city websites for public power utilities or SEC filings for investor-owned utilities.
While the first line of measurement and setting a KPI baseline should be your own utility’s current levels, there are many sources of information for industry-wide KPIs. Some of these sources include industry associations and the financial statements of peer sized utilities. In the electric industry, organizations such as the American Public Power Association and Edison Electric Institute have robust databases of KPI information for their members to use.
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Common KPI measures
KPIs are ideally suited to measure short and long-term financial results, trends and impacts; as well as activity based measures. The following section discusses some common measures.
Current operations
Current operations cover the budget cycle or a maximum of three-five years of future operations. KPI’s that are effective in measuring current operations include those that measure financial strength, such as:
KPIs that are effective in measuring customer service and operational financial areas include:
KPIs that measure operational, safety and reliability areas include:
Others can drill down into specific areas for measuring effectiveness, in this example materials management:
The above KPIs in Tables 1 – 4 are a small sample of standard measures and possibilities. A practical approach to determining those meaningful for your utility is to assemble department heads, line managers, and employees in a group discussion that focuses on areas that should be measured, slated for improvements where KPIs can assist in the process improvement, and those that could be considered for impact on compensation plans.
The use of KPIs should also be integrated into the business planning process. For example, your utility’s current KPI for customer service[1] is the “Customer Cost per Customer”. Here is an analysis of this area:
Situation
The Customer Cost per Customer KPI for the latest year is $100 per customer. Surveys indicate customer dissatisfaction with their current level of service.
Analysis
Your analysis of the surveys show comments of incorrect meter readings and customer bills, long wait-times for in-person customer service, and lack of online options for customers. KPI analysis in trade association publications of peer-sized utilities shows a range in the Customer Cost per Customer KPI of $110 - $150 per customer.
Business planning implications
Based on your report, the budget for the next fiscal year includes additional budget items for these areas:
· Hiring 3 additional customer service representatives
· Training for all billing personnel on the billing software
· Initiation of a program for automated meter reading
· Website costs to build out more customer self-help and payment options
The budget for Customer Costs per Customer for the budget year is $140 per customer. The year’s activities also will include another customer survey to obtain feedback once these changes have been implemented to assess the results of these initiatives.
KPIs are another strategy tool that can be used to manage finances and operations
KPIs are more than just measures of past activities. Using KPIs as part of the business planning process are effective tools in making changes in operations to achieve desired improvements in the use of utility resources. Our listing of KPIs just scratches the surface, but if your utility does not now utilize KPIs as measuring and planning tools, that list is a good starting point.
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.