The FERC Chart of Accounts sets the standard for electric fixed assets accounting. This case study details one utility's direct experience and execution. While the solution took time, the outcome was spot-on. If your electric co-op or utility is considering addressing deficiencies in its fixed assets or property records, this detailed 9-step approach will be a winner.
Article Summary
- Many electric co-ops and utilities wrestle with inaccurate fixed asset or continuing property records.
- This case study details a 9-step approach to using fewer fixed assets and continuing property record units, ultimately leading to more accurate general ledger balances.
- Business processes for electric construction should be constantly examined for completeness and any bottlenecks removed to keep the flow of information from the field to the office safe, uninterrupted, and perfectly accurate.
The Situation
A western US electric utility paid a payment in lieu of taxes (aka a property tax) to the local municipality based on the value of its fixed asset plant balances in its general ledger. Utility financial management knew that the processes for retiring fixed assets were not working well.
Fixed assets are retired at their historical installed costs for the year they were placed into service. The utility's financial management team knew that several issues were contributing to the fact that there were assets on the books that were not currently serving customers. Their preliminary analysis showed that information regarding assets retired on projects was not always provided to the accounting department, so the retirement of the fixed assets from the general ledger was not being made. Additionally, the utility had thousands of record types, meaning there was confusion with field crews as to what unit types were actually being retired. Because fixed assets and general ledger balances were overstated, it led to a higher tax than was appropriate.
In addition, the utility included depreciation expense in its electric rates. The cash collected in electric rates for depreciation expense is used to fundamentally replace the assets that are being depreciated. If fixed assets are overstated, utility financial management realized that depreciation was artificially overstated and that electric rates were higher than needed.
The utility's financial management philosophy towards electric rates was that customers should pay fair rates based on the cost to serve them. Equitable rates means fair rates, not rates that subsidize other non-related business activities, customer classes, or city departments. Utility management felt that the utility should not have to "take one for the team" and pay a higher tax to the City than was appropriate.
🎓 Master the FERC Uniform System of Accounts
Understanding fixed assets accounting and continuing property records requires a solid foundation in the FERC Chart of Accounts. Our FERC Accounting 101 course provides the framework you need to properly record, track, and retire utility assets—with practical examples from real utilities.
Explore the Course →Step-by-Step Implementation
Sounds easy? Maybe on paper, but this was a multi-year effort to complete the project. Here's exactly how the utility went about it utilizing a 9-step workplan.
Step 1: Define Fixed Asset and Continuing Property Record Types
Accounting and engineering staff worked together to define the fixed asset and continuing property record types. These asset types should not be confused with Compatible Units, which are units that engineering departments use to design electric projects. For accounting purposes, the key pieces of information are "what was retired and how much did it cost when we put it in?"
Step 2: Perform a Physical Inventory
The utility performed the physical inventory over a year, using mainly hired interns. Utility line crews trained the interns to identify each type of fixed asset. The line crews then divided the utility's service territory into grids. The interns counted by grid, taking pictures of each fixed asset unit while summarizing the units by type and map location.
Step 3: Summarize the Inventoried Units
The interns then transferred the fixed asset data to spreadsheets. =SUMIF formulas work well for this as well as pivot tables. It helped that some of the interns were "modelers," aka hot spreadsheet artists.
Step 4: Determine Current Construction Costs
Accounting and engineering staff worked together to price the current construction cost for each fixed asset unit, i.e. what it cost in today's dollars to construct one of each fixed asset unit. The pricing included the major cost types:
- Labor
- Materials
- Overheads - labor, materials management, equipment, allowance for funds used during construction, and general and administrative costs
Step 5: Use the Handy-Whitman Index
The Handy-Whitman index is the consumer price index for electric construction. For example, the first step in the process is to determine the costs to construct "one" of a fixed asset. Let's use a 50' pole for our discussion. After the cost to construct a 50' pole in the current year is determined based on current year costs, using the Handy-Whitman index will allow a reasonable estimation to be made of the cost to construct a 50' pole for any year in the past.
If it costs $1,000 today to build a 50' pole and the Handy-Whitman index shows it cost 60% of today's cost 20 years ago to construct a 50' pole, the cost 20 years ago would be $1,000 × 60% = $600.
Step 6: Calculate Total Costs
Using the units summarized in Step 3, the total costs inventoried are calculated and summarized by the historical year of installation.
Step 7: Compare to Current General Ledger Balance
The computed totals of units will now become the new general ledger balances. The computed totals are compared to the current general ledger balances to determine the differences. The new balances should be lower than the old ones, as the assumption is that units of property have been taken out of service, but due to a lack of efficiencies in work order processes, the information was not made available to record the retirement. If the new balances are higher, check the computations.
Step 8: Prepare Journal Entries
The difference between the old and new balances is recorded as an adjustment to accumulated depreciation (for the unrecorded retirements). As an example, here are facts for FERC Account 364 Poles, Towers, and Fixtures:
- New computed balance - $10,000,000
- Current computed balance - $12,000,000
- Difference - $2,000,000
Debit - FERC Account 108.364 Accumulated Depreciation-Poles, Towers, & Fixtures ........ $2,000,000
Credit - FERC Account 101.364 Poles, Towers, & Fixtures ........ $2,000,000
Step 9: Review and Improve Business Processes
Improving business processes includes identifying deficiencies and bottlenecks, obtaining input from process users, redesigning new processes, training staff in new processes, documenting procedures, and revisiting processes to maintain their integrity.
The key to making all of this work pay off is to keep it accurate in the future. The utility put a plan in place to regularly review its business processes for completeness and any bottlenecks to keep the flow of information from the field to the office and office to the field smooth, uninterrupted, and accurate.
What Is the Impact of the Journal Entries for the New Balances?
The journal entry itself is revenue neutral, i.e. does not impact revenues, expenses, or operating income. In the longer-term, depreciation expenses will be reduced, as the plant in service balance has been reduced. The impact on the ratebase is zero, as the declines in FERC 101.364 Poles, Towers, & Fixtures and 108.364 Accumulated Depreciation Poles, Towers & Fixtures offset each other.
While this was a fair amount of technical detail, the approach to remedying inaccurate fixed asset records is Steps 1-8, but Step 9 is needed regularly to be vigilant in keeping the success and benefits of the project alive.
Is This a Do-It-Yourself Project?
The utility did use an outside consultant to oversee the project, help determine project steps, analyze business processes, and facilitate developing new processes, but the vast majority of the work was executed with dedicated in-house resources.