Basic Concepts in FERC and Utility Accounting
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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. Agenda. Learn the BASICS of the FERC Chart of Accounts Discuss what it means to “Utility Accounting”

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Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia


  • 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

Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

  • Housekeeping

  • Enjoy ourselves

  • Questions at anytime

  • 15 minutes at end for questions and dialogue too

Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

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

  • Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

    • 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
    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
    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
    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 obvious some are not

    Don’t do accounting


    Do this!

    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







    rules !


    What is the uniform system of accounts what are its contents
    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 s usoa s
    FERC’s USoA’s Contents?

    • FERC Sections 1-2

    • Commission Order of Applicability

    • Definitions

    • FERC Sections 3-5

    • General Instructions

    • Electric Plant Instructions

    • Operating Expense Instructions

    Ferc s usoa s1
    FERC’s USoA’s Contents?

    • 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
    FERC Buckets Contents?

    What does it cost

    when a customer

    flips on his lights ?

    FERC’s Answer-

    Muni Govt.

    no FERC accts.

    Power Production

    500-557 accts.


    560-574 accts.


    580-598 accts.

    Human resources,








    Admin. & Gen’l

    920-935 accts.

    Cust. Svc/Info

    906-910 accts.

    Customer Accts

    901-905 accts.

    You can find of ferc s usoa s at
    You Can Find of FERC’s USoA’s at: Contents?

    • FERC website:


    • 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.

    Ferc buckets vs governmental accounting
    FERC Buckets vs Governmental Accounting Contents?

    • FERC buckets would be easy to use except for:

    • Incorporating into city systems

    • Budget requirements unique to each utility

    • Resource costing by department, location, etc.

    Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

    Utility accounting is also known as regulatory accounting
    Utility Accounting is also known as Contents?“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

    Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

    • The big one is….. Contents?

    • Statement of Financial Accounting Standard #71

    • (This has been updated by the new FASB Codification)

    Sfas 71 definitions
    SFAS 71 Definitions Contents?

    What regulatory assets or liabilities

    do you have to account for ?


      What is your definition of a regulatory asset?

    …represent incurred costs that are deferred because

    recovery will come through future rates.


      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
    Rate Regulation and GAAP Contents?

    • 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

    Sfas 71 intent and purpose
    SFAS 71 Intent and Purpose Contents?

    • 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
    SFAS 71 Definition of “Regulated” Contents?

    • 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”

    Sfas 71 general standards
    SFAS 71 General Standards Contents?

    • 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
    SFAS 71 and SFAS 101 Contents?

    • 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

    Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

    Construction or maintenance the basic concept is simple
    Construction or Maintenance Contents?The Basic Concept is Simple

    What is construction
    What is Construction Contents?

    • 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

    Construction cont
    Construction (cont.) Contents?

    • 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

    Maintenance Contents?

    • 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

    Industry experience
    Industry Experience Contents?

    • 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
    Simple Facts For All Public Power Utilities Contents?

    • 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
    What are the problems? Contents?

    • 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
    What are the problems, continued Contents?

    • 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.

    Common complexity topics
    Common complexity topics Contents?

    • 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

    Retirement accounting gets cluttered when ineffective capitalization exists
    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
    Broad Capitalizations Increases Confusion Capitalization Exists

    • 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
    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
    Technology Spending With Work Order Closings.

    • 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
    System Planning Costs Before Development With Work Order Closings.

    • 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
    Dealing With Large Planning Investments for Technology With Work Order Closings.

    • 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 Costs With Work Order Closings.

    • 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
    In-house Development Costs, cont. With Work Order Closings.

    • 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
    In-house Development With Work Order Closings.

    • 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
    Hardware Investment Accounting Options With Work Order Closings.

    • 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
    Hardware Investment Accounting With Work Order Closings.

    • 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
    Capitalization Policies With Work Order Closings.

    • What is your threshold?

    • Do you feel it is reasonable?

    • How often is it updated?

    Lease payments
    Lease payments With Work Order Closings.

    • Always consider lease payment for consideration of a fixed asset addition rather than operating expense.

      • 4 criteria to determine capital treatment.

    Quiz time
    Quiz time With Work Order Closings.

    • Replace a roof

    • Move lines for a road widening project

    • Installation costs of a transformer

    • Buy $20,000 of chairs that cost $100 each.

    Basic concepts in ferc and utility accounting appa business and finance workshop savannah georgia

    • Questions? With Work Order Closings.

    • Thanks for attending this session

    About the instructor
    About the Instructor With Work Order Closings.

    • 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