Where You Classify Electric Assets Directly Impacts Rates
The FERC and RUS Charts of Accounts drives electric fixed assets accounting
The FERC Chart of Accounts sets the standard for electric fixed assets accounting. Here’s one utility’s experience. This case study presents an electric utility seeking to strengthen its work order fixed asset processes. The solution took time, but the outcome was spot-on. This article is a bit technical, but if your electric co-op or utility is considering addressing deficiencies in its fixed assets, this is a detailed approach that will be a winner.
Article Summary
1. Many electric co-ops and utilities wrestle with inaccurate fixed asset or continuing property records.
2. The case study discussed in this article details a 9 step approach to using fewer fixed assets and continuing property record units, leading to more accurate general ledger balances.
3. Business processes for electric construction should be examined for completeness and any bottlenecks removed to keep the flow of information from the field to the office and back smooth, uninterrupted, and accurate. Improving processes involves training staff, documenting procedures, and revisiting strategies to maintain their integrity.
Electric pole construction - Multiple fixed assets for the accounting department
The Situation
This western US electric utility paid a payment in lieu of taxes (aka a property tax) to the local municipality based on the value of its fixed asset plant balances in its general ledger. Utility financial management knew that the processes for retiring fixed-assets were not working well.
Fixed assets are retired at their historical installed costs for the year they were placed into service. The utility’s financial management team knew that several issues were contributing to the fact that there were assets on the books that were not serving customers. Their preliminary analysis of business processes showed that information on assets retired on projects was not always provided to the accounting department, so the retirement of the fixed assets from the general ledger and fixed asset records was not made. Also, the utility had thousands of fixed asset and continuing property record types, so, at times, there was confusion with field crews and accounting staff as to what unit types were actually being retired. So, fixed assets and general ledger balances were overstated, leading to a higher tax than was appropriate.
In addition, the utility included depreciation expense in its electric rates. The cash collected in electric rates for depreciation expense is used to replace the assets that are being depreciated. If fixed assets are overstated, utility financial management realized that depreciation was overstated and that electric rates were higher than needed.
The utility's financial management philosophy towards electric rates was that customers should pay fair rates based on the cost to serve them. Equitable rates means fair rates, not rates that subsidize other non-related (aka non-electric) business activities, customer classes, or city departments. Utility management felt that the utility should not have to "take one for the team" and pay a higher tax to the City than was appropriate, given the utility’s fixed assets serving electric customers.
The workplan the utility developed consisted of these steps:
Define fixed asset record types. Fixed asset record types are called continuing property records. Each record is assigned to a FERC general ledger account.
Perform a physical inventory of the utility infrastructure serving their customers. The inventory was based on the newly defined fixed asset record types.
Summarize the inventoried units by FERC Account and by estimated year they were installed.
Work with engineering to determine the current cost to construct each unit.
Use the Handi-Whitman index to determine the cost to construct the assets by each year (using the current year's construction cost as the base)
Extend the number of units times construction cost, sum, and total.
Compare the computed totals to the current general ledger balance.
Prepare journal entries to adjust the current general ledger balance to the newly computed balance of fixed assets for each FERC account.
Review and improve business processes over electric construction accounting.
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Sounds easy? Maybe on paper, but this was a multi-year effort to complete the project. Here's how the utility went about it.
Define fixed asset and continuing property record types.
Accounting and engineering staff worked together to define the fixed asset and continuing property record types. These asset types should not be confused with Compatible Units, which are units that engineering departments use to design electric projects. For accounting purposes, the key pieces of information are "what was retired and how much did it cost when we put it in?" There can be
Perform a physical inventory of the utility infrastructure serving their customers. The physical inventory was based on the newly defined fixed asset record types.
The utility performed the physical inventory over a year, using mainly hired interns. Utility line crews trained the interns to identify each type of fixed asset. The line crews then divided the utility's service territory into grids. The interns counted by grid, taking pictures of each fixed asset unit while summarizing the units by type and map location.
Summarize the inventoried units by FERC Account and by estimated year they were installed.
The interns then transferred the fixed asset data to spreadsheets. =SUMIF formulas work well for this as well as pivot tables. It helped that some of the interns were "modelers," aka Hot spreadsheet artists.
Work with engineering to determine the current cost to construct each fixed asset unit.
Accounting and engineering staff worked together to price the current construction cost for each fixed asset unit, i.e. what it cost in today's dollars to construct one of each fixed asset unit. The pricing included the major cost types:
Labor
Materials
Overheads - labor, materials management, equipment, allowance for funds used during construction, and general and administrative costs
Use the Handi-Whitman index to determine the cost to construct the assets by each year (using the current year's construction cost as the base)
The Handi-Whitman index is the consumer price index for electric construction. For example, the first step in the process is to determine the costs to construct "one" of a fixed asset. Let's use a 50' pole for our discussion. After the cost to construct a 50' pole in the current year is determined based on current year costs, using the Handi-Whitman index will allow a reasonable estimation to be made of the cost to construct a 50' pole for any year in the past. If it costs $1,000 today to build a 50' pole and the Handi-Whitman index shows it cost 60% of today's cost 20 years ago to construct a 50' pole, the cost 20 years ago would be $1,000 x 60% = $600.
Extend the number of units times construction cost, sum, and total.
Using the units summarized in #3, the total costs inventoried are calculated and summarized by the historical year of installation.
Compare the computed totals to the current general ledger balance.
The computed totals of units will now become the new general ledger balances. The computed totals are compared to the current general ledger balances to determine the differences. The new balances should be lower than the old ones, as the assumption is that units of property have been taken out of service. Still, due to a lack of efficiencies in work order processes, the information was not made available to record the retirement. If the new balances are higher, check the computations.
Prepare journal entries to adjust the current general ledger balance to the newly computed fixed-assets balance for each FERC account.
The difference between the old and new balances is recorded as an adjustment to accumulated depreciation (for the unrecorded retirements). As an example, here are facts for FERC Account 364 Poles, Towers, and Fixtures:
a. New computed balance - $10,000,000
b. Current computed balance - $12,000,000
c. Difference - $2,000,000
d. Journal entry:
Debit - FERC Account - 108.364 Accumulated Depreciation-Poles, Towers, & Fixtures $2,000,000
Credit - FERC Account - 101.364-Poles, Towers, & Fixtures $2,000,000
9. Review and improve business processes over electric construction accounting.
Improving business processes includes identifying deficiencies and bottlenecks, obtaining input from process users, redesigning new processes, training staff in new processes, documenting procedures, and revisiting processes to maintain their integrity.
The key to making all of this work pay off is to keep it accurate in the future. The utility put a plan in place to regularly review its business processes for completeness and any bottlenecks to keep the flow of information from the field to the office and office to the field smooth, uninterrupted, and accurate.
What is the impact of the journal entries for the new balances?
The journal entry itself is revenue neutral, i.e. does not impact revenues, expenses, or operating income. In the longer-term, depreciation expenses will be reduced, as the plant in service balance has been reduced. The impact on the ratebase is zero, as the declines in FERC 101.364 Poles, Towers, & Fixtures and 108.364 Accumulated Depreciation Poles, Towers & Fixtures offset each other.
While this was a fair amount of technical detail, the approach to remedying inaccurate fixed asset records is Steps 1 - 8, but Step 9 is needed regularly to be vigilant in keeping the success and benefits of the project.
Is this a do-it yourself project?
The utility did use an outside consultant to oversee the project, help determine project steps, analyze business processes, and facilitate developing new processes, but the majority of the work was done with in-house resources.
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.