Transcript Utility Accounting - American Public Power Association

Basic Concepts in FERC and Utility
Accounting
APPA Business and Finance Workshop
Savannah, Georgia
September 14, 2009
Thomas Unke,
Baker Tilly Virchow Krause
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Agenda
› Learn the BASICS of the FERC Chart of
Accounts
› Discuss what it means to “Utility
Accounting”
› Learn how to practically apply the FERC
Chart of Accounts
› Address the common complexities with
utility accounting
2
Housekeeping
1. Enjoy ourselves
2. Questions at anytime
3. 15 minutes at end for questions and
dialogue too
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Origin of FERC Uniform System
of Accounts (USOA)
• 1922 National Association of Regulatory Comm.
(NARUC)
–
Recommended uniform structure
–
Still exists, sets for water & sewer
–
Not universally adopted - state commissions had own
• 1935 Expanded Federal Power Commission (FPC)
–
Wholesale power sales in interstate commerce
–
Issued original USOA in 1937 - states begin adopting
• 1977 FERC (Dept of Energy) Succeeds FPC
–
USOA continued with some revisions over time
»
Represents the standard accounting system for elect. utility industry
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Why did FERC create the USOA?
Consistency in monitoring allowed for
easier administration to monitor and
regulate those who are regulated by
FERC.
5
Accounting for Public Power Systems Torn Between 2 Worlds
• Not Really an Investor Owned Utility (IOU) or a Governmental
Entity
–
–
Many must operate as a unit of govt.
»
Utilize acctg. system used by the govt. - fund accounting
»
Enterprise fund system which is based on organization,
Responsibility and resource-oriented structures - not activities
• Need USOA for Management & Industry Comparability
Purposes
–
Captures functional cost info
»
Production, transmission, distribution, customer, administrative
»
Operation, maintenance, capital, non-current
»
Includes detailed descriptions of accounts considered “standard”
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Why Public Power Systems Use
FERC - USOA
• Most Compelling Reason is to Satisfy Regulatory Requirements
•
How do we Justify Expanding our Accounting System to USOA
to
our City Govt. if not Regulated ?
–
Consistency
–
Capital vs expense
–
»
Capital intensive organization
»
Impacts rates (exp = current; cap = over time thru depreciation)
Recoverable costs
»
“above” & “below the line” costs (IOU oriented, pass-thru)
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Implementation of FERC USOA
and the difference to fund
accounting
• Govt. Fund Accounting vs FERC
•
What does it cost when a customer flips on his
lights ?
–
–
Govt. fund accounting answers based on resources consumed
»
Labor
»
Benefits
»
Materials & supplies
»
Contractual services
»
etc.
FERC accounting answers based on functional activity cost
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FERC USoA Has Instructions to
follow some are obvious…some
are not
– There are 24 General Instructions in FERC
establishes general record keeping rules
– 16 Electric Plant Instructions
addresses balance sheet items
– 4 Operating Expense Instructions
covers items impacting income statement
Follow
these
rules !
Here
are
your
instructions
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What is the Uniform System of Accounts?
What are its Contents?
• Code of Federal Regulations (Part of the
Federal Register)
– CFR, Title 18
– Parts 1-399
• Eleven Sections
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FERC’s USoA’s
FERC Sections 1-2
• Commission Order of Applicability
• Definitions
FERC Sections 3-5
• General Instructions
• Electric Plant Instructions
• Operating Expense Instructions
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FERC’s USoA’s
FERC Sections 6-7
• Balance Sheet Chart of Accounts and
Descriptions
• Electric Plant Chart of Accounts and
Descriptions
FERC Sections 8-11
• Income Chart of Accounts and Descriptions
• Retained Earnings Chart of Accounts and
Descriptions
• Operating Revenue Chart of Accounts and
Descriptions
• Operation and Maintenance Expense Chart of
Accounts and Descriptions
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FERC Buckets
What does it cost
when a customer
flips on his lights ?
FERC’s Answer-
Muni Govt.
Power Production
no FERC accts.
500-557 accts.
Transmission
560-574 accts.
Human resources,
Admin. & Gen’l
920-935 accts.
P
a
y
r
o
l
l
Distribution
580-598 accts.
Cust. Svc/Info
Customer Accts
906-910 accts.
901-905 accts.
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You Can Find of FERC’s USoA’s at:
FERC website:
www.ferc.gov/legal/ferc-regs/acct-matts/usofa-electric.asp
Mail:
U.S. Government Printing Offices, Superintendent of
Documents, Mail Stop: SSOP, Washington, DC 20402-9328
Call:
(202) 512-1800
Ask for the Code of Federal Regulations, Title 18, Parts 1-399.
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FERC Buckets vs Governmental Accounting
FERC buckets would be easy to use except
for:
1. Incorporating into city systems
2. Budget requirements unique to each
utility
3. Resource costing by department,
location, etc.
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Next Session:
Utility Accounting
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Utility Accounting is also known as
“Regulatory Accounting”
• Most utilities follow regulated
pronouncements:
–
#71, 90, 92, 101.
–
As well as, #106, 137 138, 143, 144
• These pronouncements are elective
which means they don’t need to be
followed if you choose not to
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The big one is…..
Statement of Financial Accounting
Standard #71
(This has been updated by the new FASB
Codification)
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SFAS 71 Definitions
REGULATORY ASSET
What is your definition of a regulatory asset?
…represent incurred costs that are deferred because
recovery will come through future rates.
REGULATORY LIABILITY
What is your definition of a regulatory liability?
…represent obligations to make refunds associated with costs
not likely to be incurred in the future.
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Rate Regulation and GAAP
• Basic difference centers around timing of
cost/revenue recognition
–
Regulators may require capitalization (deferral) of expenses
that would normally be expensed by a non-regulated business
following GAAP
»
Often have material impact on financials
»
Creates inconsistencies in financial reporting
»
Can’t ignore the “economic realities” of regulation
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SFAS 71 Intent and Purpose
•
Attempted to define when acceptable departure from GAAP
•
Intended to apply to the general purpose financial statements
of regulated enterprises
•
Does not apply to financial statements submitted to regulator
•
Recognizes regulatory deviations from GAAP for rate making
•
However, emphasizes GAAP must be followed unless issue is
related to the economic effects of rate-making
•
Does not identify who must comply with its guidelines
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SFAS 71 Definition of “Regulated”
–
Independent 3rd party regulator (most muni’s
don’t)
–
Rates intended to recover specific costs of
regulated activities
–
Rates are reasonable and likely to be collected
No, there is no definition of “reasonable”
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SFAS 71 General Standards
• Before costs, which would under GAAP be expensed, are
capitalized (deferred), it must be probable that the
regulator will allow recovery through future rates
• A regulatory liability can be imposed on an enterprise by
the regulatory body – refunds or rate adjustments
• Rate actions by regulator can reduce/eliminate value of an
asset If asset disallowed, it cannot be expected to produce
revenue in the future through the rate-making process and
since the asset is “impaired” it must be written down
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SFAS 71 and SFAS 101
• Does not set specific guidelines for other regulatory
deviations from GAAP (left up to regulatory jurisdiction)
• If conflict with other GAAP– then SFAS 71 should be
followed
• Regulated companies following SFAS 71 are GAAP
compliant
• Due to deregulation and intro of “competition”
–
SFAS 101 issued
–
If now “unregulated” - SFAS 71 no longer applies
–
SFAS 101 deals with “discontinuance” of SFAS 71
–
Defines transitional reporting requirements
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Next Session:
Common Accounting Complexities
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Construction or Maintenance
The Basic Concept is Simple
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What is Construction
• Construction (aka Capitalized costs) - Means
recording cost of asset to the utility’s balance
sheet
• Costs include:
– Direct (labor & material)
– Indirect (labor, supervision, tools, insurance, etc.)
– Selling, general and administrative
• Construction costs are capitalized as an asset
when placed into service.
– Expenses are accumulated in construction in progress
(CIP) until they are placed into service.
• Why capitalize?
– Benefits are for the future
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Construction (cont.)
• Treatment of capitalized construction
costs
– Examples include buildings, equipment and
infrastructure (substations, water mains, etc.)
– Capitalized assets are depreciated over the useful life
of the asset
– Depreciation is the reduction in value of an asset due
to usage, passage of time, etc.
– Retired (taken off the books) when asset is taken out of
service
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Maintenance
• Expenses incurred to sustain an asset’s
life
– Includes expenses incurred to:
»
fix/repair assets
» Prevent problems in the future
» Keep the asset in working order
– Expenses that enhance the life and/or use of the asset may
be considered capital assets (improvements)
– Examples
» Painting a water tower
» Repairs of meters, transformers, equipment
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Industry Experience
• Inconsistencies with accounting
treatment have continued to persist over
the years.
• Tolerance levels for accuracy and the
increased fiduciary expectations over
utility assets have prompted serious
assessments of current utility practices.
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Simple Facts For All Public
Power Utilities
• Utility plant in service represents one of
the largest assets owned by city
government.
• Utility plant is the basis for determine just
and reasonable rates.
• Utilities are more keenly aware of the
ability to shift costs to manage results
which have increased scrutiny
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What are the problems?
• Insufficient standard industry guidance to
determine when capitalization or expense
recognition is appropriate.
• Sins of the past. Ambiguous capitalization of
construction and single mass assets make it
extremely difficult to properly reflect
retirements.
• Changes in technology and software have both
changed the manner in which construction costs
can be accounted for and the life of originally
recorded assets.
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What are the problems,
continued
• Technology changes allow utilities to
become increasingly accurate for plant
accounting, but the process utilities
follow to accumulate and track
construction hasn’t
• The introduction of new utility services
(i.e. telcom) creates more challenges
relative to plant accounting, cost
allocation and retirement accounting.
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Common complexity topics
• Retirement accounting
– how to retire an asset that isn’t a specified retirement
unit
• Technology spending
– how and when to capitalize
• Capitalization Policies
– what is reasonable and makes sense for your utility
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Retirement Accounting Gets
Cluttered When Ineffective
Capitalization Exists
• Broad capitalizations in previous years makes
retirements extremely difficult and usually
serves as the basis to capitalize future costs.
• Inadequate communications of retired assets
from operations staff makes retirements
extremely difficult
• Given depreciation methods such as individual
or group/class asset depreciation, utilities
usually do not properly reflect asset retirements
properly.
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Broad Capitalizations Increases
Confusion
• First, implement a strategy to fix the
issue going forward
– Establish a method to determine manageable cost
pools when unitizing assets upon project completion
and if your assets values tend to very large, work with
the engineers to establish retirement units that focus
on identifiable units
– Try to stay away from non-mass units titled “2004
substation project”. Try for:
› Arthur road buss bar; Arthur road fuse link, etc.
– Focus on allocating costs to units that have similar
useful lives. This will increase the probability of not
having to make partial retirements.
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Focus on Established Unit of
Property Policies to Assist With
Work Order Closings.
• The majority of public power utilities do
not use unit of property accounting.
• Units of property help provide employees
the ability to determine if maintenance or
replacement has occurred.
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Technology Spending
• Look to SOP 98-1
• What about systems planning costs before
development occurs?
• What to do with in-house development costs and
the development of utility-owned intellectual
property?
• How to account for the costs of hardware when
hardware costs fall below your capitalization
limits.
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System Planning Costs Before
Development
• Costs associated with investigating
alternatives should be expensed as these
costs do not enhance the future asset –
they help you make a better decision
• All costs incurred up to the time of final
project selection should be expensed
including travel and site visits
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Dealing With Large Planning
Investments for Technology
• Some states have allowed deferral of
costs for future rate recovery if current
rates are not sufficient to cover the costs.
• For those implementing FAS #71, options
for deferral may be available assuming
they meet FAS #71 criteria.
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In-house Development Costs
• In-house development typically begins
upon the formal approval for the project
and a project leader has been assigned to
control project.
• Capitalize all direct costs associated with
development. This process differs
greatly among utilities.
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In-house Development Costs,
cont.
• Utility A – Capitalize only direct costs.
• Utility B – Capitalize labor costs and
indirect costs up to a cap.
• Utility C – Only programming costs and
related loadings.
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In-house Development
• Auditors have a responsibility to
determine reasonableness and ensure
materially correct financial statement
presentation.
• All of the previous examples should be
allowable for external auditors.
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Hardware Investment Accounting
Options
• When hardware that, on a per unit basis
falls below your capitalization criteria, is
purchased in bulk the assets may be
capitalized as a group asset.
• Regardless of whether or not the
hardware assets are capitalized, these
assets should still be tracked for control
purposes
44
Hardware Investment Accounting
• Calls to several large utilities (including IOUs)
provided differing aspects of capitalization.
• The majority do capitalize assets as classes of
costs if the joint purchase is over a certain dollar
limit.
• Most also acknowledged that it will eventually be
problematic for future retirements, however.
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Capitalization Policies
• What is your threshold?
• Do you feel it is reasonable?
• How often is it updated?
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Lease payments
• Always consider lease payment for
consideration of a fixed asset addition
rather than operating expense.
– 4 criteria to determine capital treatment.
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Quiz time
• Replace a roof
• Move lines for a road widening project
• Installation costs of a transformer
• Buy $20,000 of chairs that cost $100
each.
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Questions?
Thanks for attending this session
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About the Instructor
Tom is a partner with Baker Tilly Virchow Krause,
LLP and is the leader of Baker Tilly’s Energy and
Utility team. He has over 19 years of expertise
working with public utilities, cooperatives and
investor-owned utilities. He is the instructor of
APPA’s advance utility accounting course and
currently uses his experience to service utilities
around the nation with energy market and financial
consulting as well as providing auditing services to
them. He is married and has two daughters and
resides in Madison, WI
Thomas E. Unke, CPA
Partner
608.240.2394
[email protected]
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