Here’s our Top 5 reasons to use FERC accounting to record electric overhead costs

Electric overhead costs are the icing on the cake of an electric project - while the cake contains most ingredients, a cake is not a cake without frosting. This frosting is made up of the overhead costs that make the construction process possible. These include:

• o Labor overheads

• o Stores expense, aka. materials management costs

• o Equipment costs

• o Cost of capital - the Allowance for Funds Used During Construction

• o Administrative and general overheads

If all project costs are not recorded, including these overheads, customers will not fully reimburse your electric utility or cooperative for the total costs of capital replacement. Cash flow will suffer, directly impacting customer service and system reliability.

The case for adjusting overhead rates annually

1. Labor costs and benefits change annually - as labor costs change, the ratio of benefit costs to labor costs will also change. Also, benefit programs may change from year to year, and labor overhead rates should reflect those changes.

2. Business processes may change from year to year - in some areas, materials management, for example, changes in processes that result in greater efficiencies, i.e., how materials are handled, storage practices, and perhaps movement in the area of inventory reduction impacts stores expense rates.

3. Equipment costs change with age and technology - as utilities introduce more field technical tools and replace equipment, the cost of ownership changes.

4. Cost of capital is not static - interest rates change annually, as does the mix of financing for projects. Inflation will also impact the cost of capital. The changes in interest rates, financing mix, and inflation should be reflected in the cost of capital rate. 

5. General and administrative costs reflect the current make-up of your organization - as your organization changes, so does the make-up of its supporting functions. Perhaps your utility or coop is implementing more Automated Intelligence (AI) practices in the finance area. Long-term, this should reduce costs and change processes, but up-front software and programming costs should be reflected in overhead rates. This impacts interdepartmental cost allocations as well.

6. Bonus comment. It is not a best practice to adjust overhead rates monthly. Costs will fluctuate over the ebb and flow of the year, and changing overhead rates monthly will over charge some projects with additional overhead costs and under charge other projects. Timing is everything in this scenario, and an annual rate reflects a smoothness to the application of overheads over the year. 

Update overhead rates annually

Updating overhead rates should be part of the normal business planning cycle. As your utility or electric cooperative’s cost structure changes, projects in any given year should reflect those structural adjustments. Provide reliable customer service, but make sure those customers pay for the privilege of being served. 

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.