Case Study - Electric and Water Utility Shrinks the Number of Fixed Asset Records for FERC - Why?
Shrink the units? How can less be better?
Accurate fixed asset records can quickly become less accurate due to such factors as inefficient field processes, the flow of information from field crews to the finance department, and too many choices of fixed asset types. Inaccurate fixed assets lead to inequitable customer rates.
Here is a case study of one electric and water utilities’ recognition of problems in fixed assets and their path to a solution.
Shrink the Units Takeaways
A large electric and water utility found that its continuing property records (fixed asset records) did not accurately reflect the actual value of the utility plant in service that served its customers.
This led to incorrect retirements of fixed assets, which in turn led to cost-of-service allocations in rate studies that were not accurate.
The utility consolidated its fixed asset records into larger, more generic groups. The consolidation took thousands of units and compressed them into several hundred.
Business processes in engineering, construction, and finance were reconfigured, so that the flow of project as-builts and retirements was more accurate.
The Situation
A large electric and water utility found that its continuing property records (fixed asset records) did not accurately reflect the actual value of the utility plant in service that served its customers. This was due to too many fixed asset types, leading to inaccuracy in recording retirements. Field crews or finance staff did not always identify the proper fixed asset type to be retired.
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Electric Fixed Assets - Continuing Property Records
A solution to fix the issues
We worked with the client to identify bottlenecks in the work order process, flowcharting each major process and designing an approach to making the information flow more accurate.
Part of this process was to reduce the number of fixed asset record types from thousands to approximately 200. This process involved analyzing fixed asset types, and grouping them into more generic items appropriate for the finance department and financial records. There is a difference between fixed asset records used for project design and those fixed asset records needed for the financial records. We helped to define those differences.
The consolidation of the fixed assets included:
Analyzing fixed asset records for the history of the utility.
Consolidating the data into the new assets.
Combining records into the proper vintage.
Revaluing asset values.
Preparing journal entries to reclassify general ledger balances.
The Outcome
The client noticed an immediate improvement in the flow of information and greater accuracy in recording fixed assets additions and retirements. The communication between engineering, construction, and finance improved, as each area was using more common terms. This improved information flow will lead to more accuracy in financial reporting, cost of service, and rate design studies.
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.