Transcript Slide 1

Towards Introducing Uniform
Energy Accounting: The
Rationale and Way Forward
Jamaluddin Ahmed PhD FCA
Member Council
The Institute of Chartered Accountants of Bangladesh
Objectives of the Paper
1.
2.
3.
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5.
6.
Economics of Regulation
Specific need of Uniform Energy
Accounting
Core issues in Uniform Energy
Accounting
Scope of uniform Energy Accounting
Development of Uniform Energy
Accounting in Bangladesh
Summary and conclusion
Milestones in Infrastructure Reforms
United States of America
United Kingdom
EU Liberalization
1984:British Telecom
1986:British Gas
1987:British Airways
1987:British Airport
Authority
1989:Water and Sewerage
Companies
1990:Electricity Companies
1995:British Rail
1996:British Energy-Nuclear
1990:Telecomm
unications
1991:Railway
1996:Electricity
1996:Gas
Financial Change Management
Power Sector Reform in Chronology
 Creation of Rural Electricity Board
 Establishment of Dhaka Electricity Supply Authority
 Private sector participation allowed
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National Energy Policy and Proposal for Regulatory Commission
Creation of Power Cell
Private Sector Power Generation Policy
Corporatization of Ashugonj Power Station
Corporatization of West Zone Power Distribution
Corporatization of North West Zone Power Distribution
Formation of Strategic Business Unit
Creation of Power Grid Company of Bangladesh
Establishment of Energy Regulatory Commission
Post Reform Change Management
Paradigm Shift From
Command to Market
Government to Business Organization
Government to Commercial Business Rules
Government to own Financing
Welfare to Business Concept
Loss Making to reasonable Return on Investment
Cash Based to Accrual Accounting
Effective Utilization of Resources
Politicization to Performance Based Management
Politicization to Performance Goal Orientation
Fixed bonus to performance bonus
Bureaucrats to Business Manager
Towards value addition and customer satisfaction
Addressing Post Reform Issues
Finalize terms and conditions of vendor agreement
Independent valuation of assets and liabilities
Hand and take over of assets & liabilities
Prepare strategic business plan
Finalizing win win power purchase agreement
Prepare and approve functional organization
Negotiate per unit power price
Design Appropriate Organization
Fix up effective tariff
Addressing Post Reform Issues
Shift from Cash to Accrual accounting system
Customize Charts of Accounts in with commercial principles
Harmonized Charts of Accounts for Corporatized unit
Harmonization of Accounting Policies for Holding and subsidiary
Companies
Financial Statements in line with IAS and best practice
Effective MIS
Sustainable financial management system
Point of difference
Financial Accounting
Regulatory Accounting
Focus
Firm
Regulated activities
Accounting
Within a firm
Regulated activities of more firms
Activities considered
Both regulated and
un-regulated
Separation of regulated and
un-regulated activities
Yardstick competition
Can not provide
Can provide
Degree of homogeneity Difficult
Easier
Basis of cost
Temporal cost
imputation rule
Not included in asset base until in
Service
Allocation of
common cost
Inadequate allocation
Between regulated and
Un-regulated activities
A regulated firm would have strong
Incentive to allocate common cost to
its regulatory activities rather to any
Of its competitive activities
Objectives
Collect information for Sustainability, Allocative
Efficiency,
Productive Efficiency,
Equity or Distributive Efficiency
Addressing Human Resources Issues
Staff Audit is the First step to
Bring Personnel Records up to date
Identify and eliminate ghost workers
Basis for severance and early retirement options
Ensure accuracy of subsequent workforce analysis
Establish effective record-keeping procedures to regain
control over payroll
Provide an accurate basis for review of job positions
Addressing Human Resources Issues
Benchmarking
Internal benchmark
Sector benchmark
Functional benchmark
Generic workforce Benchmarks
Gross or net revenue per employee
Total payroll cost per employee
Ratio of headcounts by function:Management/operation,
customer
service/maintenance
Salary levels by function
Average weekly hours per employee
Units produced per work hour
Product/service line per staff-hour/full-time equivalent employee
Training in person-days per year
Addressing Human Resources Issues
Workforce Analysis
General Principles of Regulatory Accounting
Causality
Revenues, costs, assets, and financial obligations should be allocated
according to each activity
Objectivity
The allocation should be based on objective principles and should not
imply any undue benefit to any organization or individual
Transparency The methodology of assignation should be clear. The accounts
should be clearly distinguishable
Coherence
The allocation criteria should be constant from one year to another;
however, in case of changes in accounting methods, the company
should provide the necessary revisions and explanations for such
modifications
Materiality
An accounting departure is considered material if its omission and
misrepresentation has the potential to alter the financial position or the
nature of company’s regulated and unregulated services
Neutrality
Internal transferences of costs and revenues should be transparent and in
accordance with standard cost
Sufficiency
The information should comply with the requirements established according
to the norm
The costs imputed to services should be previously assigned to each
Disaggregation
Information Requirements for Operators
The concession must supply to the regulator the following documents
Regulatory Accounting
Additional Documents
Income Statement
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity
Notes to the Accounts
Report of accounting procedures used to
prepare the financial statements, with detail
breakdown of the cost drivers
Report of detailed transactions with related
parties
Report containing a detailed explanation of
current results and any deviation from the
budgetary figures
Report of the use of assets and investment plans
Sources of financing of current and future
investments
Operational statistics
Methodology used to set unregulated prices
Auditors report
Declaration of directors’ responsibility
Other valuable information for understanding of
information
Basis of Allocation of Central Overhead
Costs which are not identifiable in line with
Generation
Transmission &
Distribution function
Example
Interest on foreign loan of
miscellaneous projects and Forex loss
General & Admin Expenses of Service
Departments, Directorates of Accounts, Finance,
Personnel
Tariff Setting: Getting the Price Right
 Cover Operating Costs
 Meet Past and Future Investment Needs
 Provide Investors Rate of Return on
 Investment
 Operate Without Subsidies
Cover Operating Costs
 Full Cost of Energy
 Repairs and Maintenance
 Labor
 Customer Service
 Taxes
 Interest on Debt
Procedure for Electricity Rate Calculations
Projections
Calculation of
overall costs
Depreciation costs
Demand Projection
Lighting
Low-voltage power
Repair costs
High-voltage power
Operation Plan
Taxes
Business returns
Principles of the tariff system
Fixed lighting
Low-voltage Power
Night Power
Fuel costs
Funding plan
Determination of
electricity rates
Usage-Based Power
Operation costs
Labor costs
Facility Plan
Calculation of
individual costs
High-Voltage Power
Commercial Power
Ultra-high-voltage
power
Ultra-high-Voltage
Power
Commercial Power
Fixed rate system
Usage-based charge
system
Basic charge system
Time Table for Resetting a Price Control
Request for Information
2 years ahead
Assess and amend Information
18 months ahead
Operating Costs
Demand forecasts
Assets Base
Determine form of Cap
15 months ahead
Investment
Determine Rate of
Return15 months ahead
Select candidate Price Cap
12 months ahead
Predict Resulting Revenue
Calculate Revenue Needs
Compare with Revenue Needs
Check cash flows etc
If Appropriate
If not
Propose Price Cap
At least 9 months ahead
Company Accepts
Company Rejects
Appeal mechanism: 9-3 months
Implement Price Cap
At least 1 month ahead
Source:Green R and Pardina M R (1999), Resetting Price Control for
Priv atized Utilities: A manual for Regulation (p 3), EDI Development Studies
Single Buyer Model for Electricity
Generators
Transmission
and Dispatch
Distribution
Customers
Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation,
and Competition. A Compilation of World Bank and Oxford University Press
The Wholesale Competition Model for Electricity
Generators
Transmission and
Dispatch
Distributors
Customers
Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and
Competition. A Compilation of World Bank and Oxford University Press
Purpose of Uniform System of Accounts
(USoAC)
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USoAC are important for systematic and
efficient functioning of the regulated utilities
financial system
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It allow regulators, creditors, auditors, and
others to rely on creditable, transparent, and
comparable financial accounting & Reporting
information
Current BERC Regulated Utilities
subject to
Uniform System of Accounts
BERC
DPDC
DESCO
WZDC
NZDC
PDB
REB
PGCB
EGCB
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Current Accounting System
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Each regulated utility under BERC jurisdiction records
their accounting books in a non-consistent forms
Utilities have different aggregated Chart of Accounts
The adaptation of Accounting Practices varies from
utility to utility
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Revenue recognition
Asset recognition
Expense recognition
Submission of Reports to BERC on the basis of
aggregated accounting practice
Uniform System of Accounts
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All Utilities will provide their financial statements
to BERC in the same format
All the records will follow a uniform system of
accounts
Guidelines for proper booking and accounting of
utility operation
Establishment of Guidelines for all accounts &
sub-accounts
Establishment of reliable financial and accounts
information for regulators, creditors and other
interveners.
Allow transparency in the Sector’s financial
system
Advantages of
Uniform Accounting System
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Necessary: for BERC to carry out its regulatory functions
under the Act.
Uniform Reporting System: to BERC for rate setting by
auditing utilities’ books and records and establishing fair and
reasonable rate of return
Cost Allocation: provides needed accounting information for
cost of service study
Transparency: Provides the regulators and the public
transparency in the regulated utilities accounting recording
system
Completeness: Provide consistent financial and accounting
information to the Regulators and the public
Flexibility: Provide a platform that can be modified and
enhanced as needed
Continuity: In accordance with the existing practice in the
companies
Limitations of Existing
Accounting System
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Lack of proper financial and accounting
recording system for the regulators and the
public to investigate rate case applications.
Non-Compliance for auditing by the
regulators and the independent auditors
Non-Compliance of International Accounting
Standards (IAS)
Non-Comparability between utilities within
the Sector
Examples of Current
Accounting System
Current practices as observed by
Statutory Auditors performing
recent independent audit of the
following firms:
Qualifications
Bangladesh Power Development Board
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Only maintains Cash Book & Bank Book
Gratuity & Pension Expenses not correctly shown in
Financial Statements
Accrued Fixed Deposit Receipts (FDR) income not
recognised
Customer Security Deposit could not be identified
correctly
Clearing A/Cs not reconciled with Regional
Accounting Office (RAO) A/Cs
Foreign & Govt. grants not properly recognized
Qualifications (cont.)
Bangladesh Power Development Board
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Deposit work fund created but no adjustment
made after the construction/installation of
Assets
Correct status of slow moving/obsolete
inventory could not be verified (applies to all
utilities)
Qualifications
Power Grid Company of Bangladesh Ltd.
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No physical count of fixed assets conducted
and no fixed asset register maintained
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No physical inventory count
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No recognition obtained from NBR for
“Unfunded Gratuity Scheme”
Concerns
Power Grid Company of Bangladesh Ltd.
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Inadequate Insurance Coverage of FA
Absence of FA Addition & Disposal Policy
Item-wise Inventory List not Available
GMD reported Inventory differs from
Physical Counting of Inventory
No Financial & Accounting Policy Developed
Inadequate Internal Audit Coverage and
Consolidation of Financial Statements
Concerns (cont.)
Power Grid Company of Bangladesh Ltd.
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Transmission charge not Independently
Verified
Cash Transaction amount Notable
Opportunity Lost in FDR Interest
Bank Reconciliation Statements incorrectly
prepared
Long Outstanding cheques in Reconcilation
Tax at Source deducted inadequately
Concerns (cont.)
Power Grid Company of Bangladesh Ltd.
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Overtime Register for employees not found
Log-book of Sub-Station not Updated
Long Pending of Unadjusted Advance
Qualifications
REB: 70 PBSs
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Theft, burn or damage to Electricity/
Equipment in Service was not recognized
correctly in the Financial Statements
Interest on Long Term Loan recognized in the
wrong period.
Cash flow Statement had not been prepared
Compensation received Electrical Equipment
Damaged/Destroyed was not included in the
P & L A/C.
Concerns
REB: 70 PBSs
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Company is operating below BEP
PBS could not utilise a line bought from PBS
causing loss
System loss percentage prescribed by REB
has been fluctuating over last 5 years
Obsolete items in PBS store
Significant amount of Consumer bills lie
outstanding
Concerns (cont.)
REB: 70 PBSs
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PBS required to invest in Asset Replacement
Fund but there is a shortfall
PBS required to invest in Donation Reserve
Fund but there is a shortfall
Significant amount of money lies with the
Cashier which is not covered by insurance
No inventors of materials in shops
Concerns
Non-regulated Independent Power Producers (IPP)
(Current problems which may benefit from USoAC)
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Detailed break down of FA valuation as not
available for which ascertaining FA value for
future insurance claim might be difficult
2 Generation Plants inactive, and there is a risk of
penalty by BPDB if the 3rd plant closes
Depreciation treatment are not provided properly
in accounting system
Correct status of slow moving/obsolete inventory
could not be verified
Tax on dividend to shareholders not correctly
done
Tax on ‘off-shore’ technical service also not
correctly adjusted
Observed Issues to be Addressed
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No asset valuation in any Utility
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No current fixed asset register
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No current Depreciation Study after the
transfer of assets
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No Uniformity in depreciation application
across the Utility
In a Nutshell
Implementation of the Uniform System of Accounts
allows BERC to carry out the provisions of the Act
and provide transparency & reduce the information
asymmetry and to improve the quality of regulation
For Bangladesh USoAC
is one of the key regulatory elements
for effective regulations of utilities and is important for
systematic functioning of the regulated utilities
financial system recording within the sector.
What is the USoAC??
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USoAC or the Uniform System of Accounts is a Prescribed System of
Accounts
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Designed to segregate each account type of the Utilities according
to Assets, Liabilities, Income and Expense
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The USoAC has been successfully implemented and practiced in the
United States for more than 100 years
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It is operated by the Federal Energy Regulatory Commission (FERC)
in USA
Purpose of the USoAC
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USoAC is important for systematic and efficient functioning of the
regulated utilities financial system
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It allow regulators, creditors, auditors, and others to rely on
creditable, transparent, and comparable financial accounting &
Reporting information
How the USoAC will Function?
Advantages of the USoAC
Current Accounting Practice
Limitations of Current
Accounting Practice
Collaborative Workshops
1st Collaborative Workshops
2nd Collaborative Workshops
3rd Collaborative Workshops
4th Collaborative Workshops
4th Collaborative Workshops (contd.)
No. of
Participants
Organization
Designation
2
DPDC
DGM (Finance), Deputy Manager (F)
1
WZPDCL
Manager (F)
1
United Power Gen. & Dist. Co.
Ltd.
Deputy Manager (A & F)
1
RPCL
Deputy Manager (A & F)
1
DESCO
Deputy Manager (F)
1
BPDB
Additional Director (Finance)
2
EGCB Ltd.
Manager (F & A), Manager (F)
1
REL
Chief Accountant, Manager (A/cs & Tax)
2
REB
Controller (F & A), Director (Finance)
2
PGCB
Deputy Manager (A), Manager (A)
1
APSCL
Asst. Manager (F),
1
Summit Power
Manager (Internal Audit)
2
NWZPDCL
Deputy Director (F), Director (F
Power Cell
Deputy Director (F)
Features of the Workshops
Following the Workshops
Thank You