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Basic Concepts in FERC and Utility Accounting

APPA Business and Finance Workshop Savannah, Georgia September 14, 2009 Thomas Unke, Baker Tilly Virchow Krause


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

1. Enjoy ourselves 2. Questions at anytime 3. 15 minutes at end for questions and dialogue too

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

Why did FERC create the USOA?

Consistency in monitoring allowed for easier administration to monitor and regulate those who are regulated by FERC.

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

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)

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

FERC USoA Has Instructions to follow some are obvioussome 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

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



FERC Sections 1-2 Commission Order of Applicability Definitions FERC Sections 3-5 General Instructions Electric Plant Instructions Operating Expense Instructions



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

FERC Buckets
What does it cost when a customer flips on his lights ? FERCs Answer-

Muni Govt. Power Production

500-557 accts. no FERC accts.

560-574 accts. P a y r o l l

Human resources,

580-598 accts.

Admin. & Genl

920-935 accts.

Cust. Svc/Info
906-910 accts.

Customer Accts
901-905 accts.


You Can Find of FERCs USoAs at:

FERC website:

U.S. Government Printing Offices, Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328

(202) 512-1800

Ask for the Code of Federal Regulations, Title 18, Parts 1-399.


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.


Next Session:

Utility Accounting


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 dont need to be followed if you choose not to


The big one is..

Statement of Financial Accounting Standard #71 (This has been updated by the new FASB Codification)


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.


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

Cant ignore the economic realities of regulation


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


SFAS 71 Definition of Regulated

Independent 3rd party regulator (most munis dont) Rates intended to recover specific costs of regulated activities Rates are reasonable and likely to be collected
No, there is no definition of reasonable


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


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

Next Session:

Common Accounting Complexities


Construction or Maintenance The Basic Concept is Simple


What is Construction
Construction (aka Capitalized costs) - Means recording cost of asset to the utilitys 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

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


Expenses incurred to sustain an assets 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


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.


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

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.

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 hasnt
The introduction of new utility services (i.e. telcom) creates more challenges relative to plant accounting, cost allocation and retirement accounting.

Common complexity topics

Retirement accounting
how to retire an asset that isnt a specified retirement unit

Technology spending
how and when to capitalize

Capitalization Policies
what is reasonable and makes sense for your utility


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.

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.

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.


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.

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


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.


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.


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.


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.


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


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.


Capitalization Policies

What is your threshold?

Do you feel it is reasonable? How often is it updated?


Lease payments

Always consider lease payment for consideration of a fixed asset addition rather than operating expense.
4 criteria to determine capital treatment.


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.



Thanks for attending this session


About the Instructor

Tom is a partner with Baker Tilly Virchow Krause, LLP and is the leader of Baker Tillys 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 APPAs 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