Best Practices in Utility Fixed Assets and Continuing Property Records

Electric Utilities and Co-ops of All Sizes Wrestle with Inaccurate Fixed Asset Records

Many utilities have this underlying problem: the balance of utility continuing property records (CPRs) does not equal the units of plant in service on the utility's system that is serving customers.

In most cases, the amount and value of plant serving customers is LESS than the amount recorded in the utility general ledger.

Why does this matter? Depreciation expense is recovered in utility rates and is calculated based on the balance of utility plant in service. An inaccurate ledger leads to an inaccurate calculation of depreciation expense and under-recovery (or, in reality, mainly over-recovery) of depreciation expense. Accurate fixed asset records are more conducive to equitable electric rates.

Different Utility Departments Have Different Informational Needs

The three main departments involved in the construction process are Finance and Accounting, Engineering, and Construction. Each has its roles and informational needs:

The Finance and Accounting Department is Responsible For:

• 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 meet the identification of retired units as defined by engineering

The Engineering Department Focuses On:

• Efficient project design
• Ensuring proper resources (materials and labor) are available for construction
• Managing project budgets
• "As-builts" meet the project design
• Projects identified as completed can be "closed" for proper accounting and recording of fixed assets

The Construction Crew's Focus Is:

• Constructing assets based on engineering design
• Recording inventory costs and crew time
• Managing project budgets
• Making sure project construction meets safety standard specifications
• Timely reporting of completed projects to engineering

The Solution - Shrink the Units

An elegant solution that meets the needs of each department should focus on:

1. The engineering department using as many units as it needs to design and build physical units
2. 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

For example, utilities with as many as 25,000 CPRs make their fixed asset accounting work well, while other utilities with CPRs in the thousands can struggle with accuracy. If your utility's experience isn't meeting your accounting and engineering needs, consider shrinking CPR units into the hundreds. Some utilities that implement this "shrink the units" solution end up with as little as 200 CPR units.

Example of "Shrink the Units" Approach

Situation: The utility currently has six individual CPRs for wood poles and another six individual CPRs for steel poles. Each CPR represents a different pole height, class, and dollar amount. Using the "shrink the units" approach, the utility reduces its CPRs from 12 to two – wood poles and steel poles.

Whether there are 12 CPRs or two CPRs, the same amount is recorded in the general ledger in FERC Account 364 – Poles, Towers and Fixtures for these units.

The information that flows from the field crews that perform replacement projects to the finance and accounting department would now be that a "wood pole" was replaced versus a "45' wood pole – Class 4." The work for both the crew and finance and accounting is easier, as there is less opportunity for confusion or interpretation of the actual work. The "shrunk" CPRs would reflect all wood poles' average cost for that year and the amount to be retired.

CPR Conversion Plan

Shrinking and consolidating the CPRs involves performing a physical inventory of the utility's plant in service and analyzing the underlying CPR data to match the two. The process is a multi-year investment due to the volume of information that must be analyzed and the physical work involved with the inventory. But, your field crews, engineering, and accounting personnel will reap the benefits of these efforts.

You Can't Be in a Hurry to Make These Changes

A CPR conversion plan will take time, but once the units are shrunk and a more efficient CPR process is created, the accuracy of financial information will increase. This leads to more accurate rates and time savings for all departments involved in utility construction.