Authored by Russ Hissom
Not to generalize, but if laying odds, one could venture that 99 percent of utilities wrestle with this issue: the balance of utility continuing property records (CPRs) do not equal the units of plant in service on the utility’s system.
In plain language, the assets a utility has out in the field that provide service to customers do not equal the underlying records back in the office. In almost all cases, the amount and value of plant physically providing service to customers is LESS than the balance of the utility’s CPRs.
The culprits and causes generally fall into two categories:
- There isn’t a robust flow of information from the field to the office to notify finance staff when fixed assets are taken out of service. The results in unrecorded retirements of utility plant and/or:
- The utility has a large number of detailed CPRs and confusion reigns over what should be retired as a fixed asset (e.g., Does the finance staff know the difference between #4/0 Triplex and #6 Triplex conductor? Should they? No.)
What does this matter? The balance of CPRs supports the amount of plant in service on the utility’s general ledger and is the basis for calculating depreciation expense. As depreciation is a factor in utility rates (or a component in calculating routine utility additions), the balance disparity results in inaccurate depreciation expense.
In addition to financial factors, there’s also an operational issue: a large number of CPRs equates to additional process steps for finance personnel if the process is not well designed and operating as intended.
Factors in play
In the world of CPRs, two factors are in play:
- Compatible units. The tool used by engineering to design the physical units of plant to be installed, consisting of the construction materials, labor, equipment and overheads.
- Continuing property units. The tool used by finance and accounting to track the number, amounts and value of fixed assets.
One-to-one relationship between compatible units and CPRs isn’t necessary. In other words, a goal would be for engineering to have as many compatible units as it needs to design and build physical units and for finance and accounting to have as few CPRs as it needs to keep accuracy between the assets in the field and those recorded on the books.
Fulfilling the departmental needs
When transforming your utility to greater efficiencies, it’s important to understand the needs of each department that interacts in the construction and accounting process.
Finance and accounting
- Proper accumulation of costs
- Project analysis to determine costs recorded are correct
- Closing work orders to the proper Federal Energy Regulatory Commission (FERC) account based on predefined standards set by compatible units
- Ensuring CPR retirements are based on the identification of retired units as defined by engineering
- Efficient project design
- Ensuring proper resources (materials and labor) are available for construction
- Managing project budgets
- “As-builts” meet the project design and are identified
- Projects identified as completed can be “closed” for proper accounting and recording of fixed assets
- Constructing assets based on engineering design
- Ensuring inventory costs and crew time are fully recorded
- Managing project budgets
- Making sure project construction meets safety standard specifications
- Timely reporting of completed projects to engineering
Focusing on individuality
By focusing on the needs of each area, you will realize the individuality of each department’s needs should lead to independence in the recordkeeping methodology. In other words, the records for finance and accounting (CPRs) can be different than engineering (compatible units), with both areas meeting their information needs.
Shrink the units
An elegant solution that meets the needs of each department should focus on:
- Engineering using as many compatible units as it needs to design and build physical units
- Finance and accounting using as few CPRs as it needs to keep accuracy between the assets in the field and those recorded on the books
Utilities with as many as 25,000 CPRs, for example, have made this system work. Other utilities with CPRs in the thousands can struggle with accuracy, and if that is your utility’s experience, consider shrinking CPR units into the hundreds. Some utilities who implement this solution end up with as little as 200 CPR units.
Before undertaking this endeavor, consider this:
- Your utility’s CPRs have decades of embedded history. It can’t change overnight. Be patient!
- Your system may work fine. If so, don’t mess with it!
If you desire a change, a reduction in CPRs may be a solution. For example, the table below shows a “shrink the units” approach to reducing CPRs for poles from 12 to 2. Consider your finance and accounting function and whether you need to know a “45’ steel pole – Class 2”or just a “steel pole” was retired.
In the example below, a utility currently has six CPRs for wood poles and another six CPRs for steel poles; each CPR represents a different height, class and dollar amount. By using the “shrink the units” approach, the utility has reduced their CPRs from 12 to two – wood poles and steel poles, each with an aggregate dollar amount.
Whether there are 12 CPRs or two, the same amount ($10,000) is recorded in FERC Account 364 – Poles, Towers and Fixtures. This approach works for all FERC distribution plant accounts.
Reducing the number of CPRs has no impact on the financial balances of each account. But now operationally, the information that flows to finance and accounting is that a “wood pole” was retired versus a “45’ wood pole – class 4.” The CPR would reflect the average cost of all wood poles for that year and the amount to be retired. The unit count would be accurate as would the dollars.
CPR conversion plan
Should you decide to shrink or consolidate your CPRs, you will need to develop a CPR conversion work plan. Typically expect a two to three-year time investment as you decrease the number of CPRs to make the accounting and field process more efficient and accurate. Your field crews and accounting will reap the benefits of these efforts.
Perform these steps to improve the quality of the records while reducing the quantity of CPRs:
Wrestling with CPRs in utility accounting need not be a never ending problem! A CPR conversion plan will take time, but once you’ve shrunk the units and created more efficient CPR processes, the accuracy of financial information will increase, which in turn will lead to more accurate rates and time savings for all departments involved in utility construction.
For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.