Finance in the Electric Utility of the Future
Accounting in the Electric Utility of the Future
In the “utility of the future,” the infrastructure and internal and external systems used to deliver electricity to end users will definitely be different than what is place today. it isn’t a stretch to consult our crystal ball, but current utility industry trends lead to these supportive assumptions:
Off-grid customer renewable energy resources
Delivery of electricity without wires
Cost recovery over a shrinking demand for services
Real-time pricing
Doing more with less due to a smaller workforce
Sustainability accounting requirements
Convergence of delivery of broadband and electricity
Cloud services to customers
Strategy driven by data analytics
While many changes are expected, one constant will be the need for accurate accounting information that not only tells the historical tale of operations but also readily supports utility strategy and real-time decision-making.
How will utility accounting and financial systems evolve to meet changing reporting requirements? How will utilities address shifting workforce needs? Utility leadership who oversee financial management, systems and reporting must consider such questions in their current reporting and long-term strategic planning process. Here we discuss a few of these topics:
Rate recovery
Financial reporting
Automation of financial business processes
State of the industry over the next 20 years
A survey by UtilityDive asked utility executives to project what their business model would be in 20 years compared to their current operations. The majority of the respondents noted the decline of the traditional integrated regulated utility and the necessity to morph into an energy services utility model or an integrator of utility services. Future trends lean toward increased customer choice and self-generating options and third-party infrastructure delivery systems.
Rate recovery
As the power industry transforms — from the today’s relative guarantee of cost recovery for infrastructure investments to a new model with flat or declining sales (due to greater efficiencies in electric consumption and in customer generation of electricity) — utility rate recovery methods will need to change. The overall process for developing rates will also need to be modified.
A transitional period will find declining units of services (kWh) to spread out over fixed investment costs. Couple this scenario with other transitional factors such as completing debt payments on current infrastructure assets while determining whether to replace these assets and/or move to new electric delivery technologies (smart meters, solar, wind) or whether to abandon the generation business altogether.
Potential rate recovery strategy: fixed charges should reflect full cost of service
The increase in distributed generation options underscores the need to ensure the customer fixed charge reflects all fixed infrastructure costs dedicated to customer service — whether or not customers take service. This “available for use” approach ensures customers pay their full share of fixed costs and other ratepayers do not subsidize the costs of serving distributed generation customers, who generate their own kWh’s through solar and wind power and do not always need to receive energy from the utility.
Potential rate recovery strategy: real-time pricing for all classes
With increased usage of smart meters, utilities are clearing the path for real-time usage analyses of all customers. Smart metering will provide the information to develop time-of-use rates for all customer classes. This approach can address the inequity that stems from customers that use electricity during off-peak times generally subsidizing peak users. Rates will be developed that consist of a three-part bill for customers:
Fixed charges for customer services
Energy charges (based on time of day)
Capacity charges for infrastructure and peak usage
While customer rates always have a political component and do not necessarily reflect the actual cost of service, it is important to know the customer class and inter-class characteristics to determine where cross-subsidies lie in a utility’s rate structure.
Electric Utility and Co-op Financial reporting
Financial reporting and how your utility tracks various costs and revenues will also need to adapt to the changing landscape. Some notable areas for evaluation include:
Does your utility use the Uniform System of Accounts published by the Federal Energy Regulatory Commission (FERC)? Using the FERC chart of accounts allows for proper classification of costs needed for cost of service studies.
Utility costs should be fully unbundled into fixed and variable costs by activity. The FERC chart of accounts is built for this approach.
If your utility is a vertically integrated utility (generation, transmission and distribution services), each service should have its own financial statement. In the case of generation services — if it is possible — each type of power supply source (coal, gas, hydro, solar, wind, biomass) should have its own income statement. This information is needed for cost of service determination, rates, gross margins, equitable cost allocations, profitability and strategy development.
Utility rate models should have the ability to determine profitability by customer class and have the flexibility for various operating scenarios and impact on overall utility profitability.
These are just a few areas that require immediate focus. As financial systems and integration with real-time metering become more robust, the information gathered will be able to directly feed financial statements and mold cost allocations and rate model development into a more vibrant tool based on current customer usage patterns.
Automation of financial business processes
Many industries are in the process of automating repetitive functions. Financial processes are no exception. Automating routine business processes is a method for controlling costs and freeing workers to pursue other tasks. Areas of automation available currently include:
Accounts payable invoice routing, approval and payment
Purchase orders
Time-keeping
Materials management ordering
Online customer payments
Self-service customer kiosks
Contract analysis to determine lease components
Employee expense reporting and payment
Speed of financial reporting
Real-time integration of the utility construction process
Applications for the utility of the future will include real-time customer invoicing, billings and collection, general accounting, internal and external financial reporting, budgeting and others. Even financial audits will have a component of automation through integration of your systems and lessen demand on utility finance staff time. Greater value will be derived through more risk-based audit approaches than financial statement number crunching.
Providing training for workers displaced by automation must become part of your utility’s strategy. Enhancing the abilities of former accounts payable, payroll, customer service, meter reading and accounting personnel will aid your organization’s data analysis and decision-making. Mesh training with utility strategy to deliver services your customers expect now and in the future — perhaps ones your utility currently does not provide.
Embracing the utility of the future
The utility of the future is on the way. Your organization must proactively plan for its arrival by staying current and anticipating changes in the deployment of technology and human capital and the impact it will have on your utility’s business model in delivering customer service.
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.