Electric utilities and co-ops of all sizes wrestle with inaccurate fixed asset records

Many utilities have this underlying problem: the balance of utility continuing property records (CPRs) does not equal the units of plant in service on the utility's system that is serving customers.

In most cases, the amount and value of plant serving customers is LESS than the amount recorded in the utility general ledger.

Why does this matter? Depreciation expense is recovered in utility rates and is calculated based on the balance of utility plant in service. An inaccurate ledger leads to an inaccurate calculation of depreciation expense and under-recovery (or, in reality, mainly over-recovery) of depreciation expense. Accurate fixed asset records are more conducive to equitable electric rates. The cause of the inaccuracy between the general ledger and CPRs is generally due to:

1. The flow of information from the crews in the field installing utility plant in service to accounting personnel updating the financial records is not timely or does not always detail plant in service that is replaced or taken out of service. That lack of information results in unrecorded retirements of utility plant and/or:

2. The utility has a large number of detailed CPRs and organizational confusion over what should be retired as a fixed asset (e.g., Does the finance staff know the difference between #4/0 Triplex and #6 Triplex conductor? Should they? No. But they need to know a dollar value of the retired plant in service to record in the general ledger).

Different utility departments have different informational needs

 The three main departments involved in the construction process are Finance and Accounting, Engineering, and Construction.  Each has its roles and informational needs: 

The finance and accounting department is responsible for:

• Proper accumulation of costs

• Project analysis to determine costs recorded are correct

• Closing work orders to the proper Federal Energy Regulatory Commission (FERC) account based on predefined standards set by compatible units

• Ensuring CPR retirements meet the identification of retired units as defined by engineering

  
  
  

The engineering department focuses on:

• Efficient project design

• Ensuring proper resources (materials and labor) are available for construction

• Managing project budgets

• "As-builts" meet the project design

• Projects identified as completed can be "closed" for proper accounting and recording of fixed assets

 The construction crew’s focus is:

• Constructing assets based on engineering design

• Recording inventory costs and crew time

• Managing project budgets

• Making sure project construction meets safety standard specifications

• Timely reporting of completed projects to engineering

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 The solution - Shrink the units

 An elegant solution that meets the needs of each department should focus on:

1. The engineering department using as many units as it needs to design and build physical units

2. Finance and accounting using as few CPRs as it needs to keep accuracy between the assets in the field and those recorded on the books 

For example, utilities with as many as 25,000 CPRs make their fixed asset accounting work well, while other utilities with CPRs in the thousands can struggle with accuracy. If your utility's experience isn’t meeting your accounting and engineering needs, consider shrinking CPR units into the hundreds. Some utilities that implement this “shrink the units” solution end up with as little as 200 CPR units. 

Here is an example of a "shrink the units" approach.

 Situation: The utility currently has six individual CPRs for wood poles and another six individual CPRs for steel poles. Each CPR represents a different pole height, class, and dollar amount. Using the "shrink the units" approach, the utility reduces its CPRs from 12 to two – wood poles and steel poles.

Whether there are 12 CPRs or two CPRs, the same amount ($9,500 + $17,000 = $26,500) is recorded in the general ledger in FERC Account 364 – Poles, Towers and Fixtures for these units. 

 The information that flows from the field crews that perform replacement projects to the finance and accounting department would now be that a "wood pole" was replaced versus a "45' wood pole – Class 4." The work for both the crew and finance and accounting is easier, as there is less opportunity for confusion or interpretation of the actual work (“was that 45’ or 55’ pole”? Class 4 or Class 3?). The “shrunk” CPRs would reflect all wood poles' average cost for that year and the amount to be retired. The individual searching for the CPR units and retirement dollars to record in the financial records just has to know that a “wood pole” was retired and the year it was originally installed. The unit count of the CPRs will be accurate, as will the dollars recorded in FERC 364. 

CPR conversion plan

 Shrinking and consolidating the CPRs involves performing a physical inventory of the utility's plant in service and analyzing the underlying CPR data to match the two. The process is a multi-year investment due to the volume of information that must be analyzed and the physical work involved with the inventory. But, your field crews, engineering, and accounting personnel will reap the benefits of these efforts.  

You can’t be in a hurry to make these changes

 A CPR conversion plan will take time, but once the units are shrunk and a more efficient CPR process is created, the accuracy of financial information will increase. This leads to more accurate rates and time savings for all departments involved in utility construction. 

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.