Great Fixed Asset Records - Developing Electric Standard Units Following FERC and RUS
The "standard unit" and electric utility continuing property records
This article topic sounds like a snoozer, and it could be, but I ask you to hear me out. My goal is to point out the advantages of using "standard units" in utility construction and accounting for construction cost processes.
The "standard unit" is what it costs to build "one" of an asset, for example, a 45' pole, a span of conductor, a utility service to a customer, or another identifiable asset. This "one" of an asset type includes all the inventory, nuts, bolts, labor, equipment, office, and overhead costs needed to bring the asset into service.
Depending on the utility, standard units can also go by other names, i.e., compatible unit, construction unit, retirement unit, assembly unit, big unit, are some common ones. These all mean the same thing – "one" of an asset.
What is the use and importance of an electric standard unit?
The standard unit is an integral part of the utility accounting process, although it has benefits other than directly related to accounting. Some of the benefits include:
Estimating project costs based on the cost of individual standard units
Estimating costs of developer additions and reimbursement needed for constructing the asset for the developer
Evaluating construction projects using in-house resources or out-sourcing projects for cost savings
But the primary use of standard units in the accounting process is to allocate the costs of constructed assets to the proper FERC account. A high-level overview of the use of standard units is as follows:
Determine the standard units that will become part of the utility's library of continuing property records (CPR)
"Build the units," i.e., what does it cost to construct each CPR unit at the utility's current standard costs?
a. Work with the utility team that designs and builds the units, i.e., engineering and construction groups
3. Input the standard units and unit costs into the utility's work order software or tool used for construction accounting
4. Record the actual costs of construction for projects that are done by the utility
5. Compare the total actual costs of construction to the standard unit costs – using the standard unit costs of the same number of units that were constructed
6. Determining an allocation factor for allocating the construction costs (i.e., this is called the unitization factor). The factor is calculated as:
a. Actual project costs divided by Standard unit costs, then
7. Multiply each unit that comprises the sum of the standard costs by the unitization factor
8. Taking the answer in #6 to prepare the journal entry that classifies the actual costs into the proper FERC account
9. Annually update the standard unit costs of each unit
If this sounds technical, it isn't; it is just a systematic business process. In this article, we will cover items #1, #2, and #3 and in subsequent articles will move on to a more in-depth discussion of the remaining steps.
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Electric utility standard unit construction specifications
While each utility has a standard way of constructing each type of asset, the design generally has its foundation in utility construction safety standards and industry best practices. Your utility's construction department most likely has a library of standard units that it uses to plan construction projects. One of the best examples I've seen for standard unit definitions and designs come from the electric cooperative industry and its oversight body, the US Department of Agriculture (USDA). The USDA has many publications on standard unit designs that can be used for a starter set or to evaluate your current list.
For example, Illustration 1 shows the standard design and standard unit for a crossarm:
Suppose your utility does not have standard unit definitions. In that case, the USDA publications are a good starting point to determine the standard units that will become part of the utility’s unit library.
Building an electric standard unit
Building the unit is a non-technical term for determining the cost of a standard unit. Our example in Illustration 2 shows the process for building the unit – a 45’ pole.
The all-in installed cost for a 45’ pole with an inventory value of $500, is $2,472.
What’s next?
The process of defining standard units should be completed for each unit that will be part of the utility’s library of fixed asset or continuing property records (CPR). Annually, update the standard unit costs to keep pace with the increase in the utility’s inventory, labor, equipment, general and administrative, and allowance for funds used during construction rate. Many work order systems automatically update the standard costs based on user-defined inputs.
The foundation of the electric work order system
The heart and foundation of any work order system begin with establishing standard units and standard unit prices. This article gives you the framework, but the process may take some time to complete if you are starting from scratch. You’ll be glad you did.
Our next article in this series discusses analyzing and unitizing electric construction project costs. The excitement continues!!
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.