FERC and RUS Construction Overhead Methods - Best Practices
Direct labor and materials are the tip of the project cost iceberg
Once past the direct costs of power and utilities construction - direct labor and materials - there is a universe of related costs that should be charged to construction projects. These costs fall under the umbrella of "overheads" and can sometimes be close to or above a project's direct labor and inventory costs.
In general, investor-owned utilities, electric cooperatives, and large/mid-sized municipal utilities have a solid approach to this area. Smaller electric systems should also ensure that they can analyze and apply overhead costs to construction projects.
Overhead costs reflect the costs of having the support functions of doing business as a utility and include:
Employee benefits (including accrued compensation)
Materials handling
Equipment
Cost of capital
Charging these overhead costs to construction projects is imperative to ensure that customers pay for their full cost of service. Customers pay for the costs of replacing utility infrastructure through depreciation expense on those assets. As that infrastructure reaches the end of its useful life, the amount recovered in utility rates from depreciation expense is used to pay towards replacing that infrastructure. Often, in the case of joint owners of power plants, overhead costs are an area of dispute.
Current utility customers should pay for their current use of the electric infrastructure. Not including sufficient overheads in utility construction costs means that current customers are not paying the full cost of replacing the assets they are using.
All electric overhead costs are included in this picture
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Calculating electric construction overheads
This section of the article is a high-level discussion of overheads components and the loading mechanism used to charge them to utility projects.
The major overhead categories and their cost components are shown in Table 1:
What difference can overhead allocations of electric costs make in total project costs?
In a construction project, overhead costs can be a significant percentage of total project costs.
The percentages of overhead loadings shown in Table 2 are typical:
Of course, every utility has its unique cost structure, and overhead cost percentages should be based on calculating the utility’s actual costs.
What can you do with your pot of overhead costs?
Our discussion has been fundamental in this area. This article is directed at utilities that do not have a robust process to calculate overhead cost allocations annually for their construction projects. Great tips can be found from the FERC Compliance report on best practices that regulators feel are appropriate. These practices also apply to jointly owned power plants.
A detailed discussion that digs down into the weeds for the impact on rates can be found in our course – Utility Construction Accounting – Level 2.
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.