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Are You Part Owner of a Power Plant? Regular Joint Power Supply Contract Audits Will Help You Sleep at Night
Multiple-Owner Power Plants Mitigate Financing and Power Supply Cost Risk
A common arrangement in the power supply process is joint ownership of power plants. Joint ownership arrangements involve two or more owners of a power plant, with one owner designated as the operator owner β who operates the plant, bills the other owners for operating costs, and from which all owners receive their share of the power supply.
The joint ownership is governed by an overall power supply agreement that designates various committees β management, operating, and finance β charged with governance and oversight of the contract. These contracts generally include audit provisions allowing any owner to audit billings under the contract, using their own personnel or through an independent party such as an accounting firm.
Key Takeaways on Joint Power Supply Contract Audits
- Joint ownership of generating units is common in the power industry due to the need for base load power supply and the high cost of sole-ownership construction.
- The common ownership agreement has governance structures in place for contract oversight and audit provisions.
- Even with the best of intentions, the contract billing process can yield errors in billings to all owners.
- A contract audit is a way to review the contract for billing accuracy and identify greater efficiencies in the billing process.
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In practice, contract audit relationships run a wide spectrum β from arrangements where the audit process is actively avoided and contentious when conducted, to arrangements where all owners agree to perform a contract audit every year or biennially as part of the committee oversight process, sharing the cost of the audit.
Even with the best of intentions, billing errors can occur. Beyond finding errors, the audit process also provides an opportunity to review aspects of the contract and make amendments that make the arrangements and processes better, more efficient, and more equitable where needed.
Main Areas of Focus for a Power Contract Audit
Having performed many contract audits, the areas for review consistently fall into several main categories β areas that are open to interpretation, or become complicated as different power plant operator software platforms and processes are used.
The anchor point for any contract audit is the contract itself. An effective workplan lines up each provision of the contract and designs process tests and inquiries to test each point. Source data β invoices, timesheets, billing records, and calculations β should be readily available as outlined in the contract, so that testing can be thorough and conclusive.
1. Cost Allocations
As the operator owner may also own and operate other power plants, there are overhead costs allocated among all of the operator's units. These include common support costs β administrative and general, information technology, and Human Resources. Various industry-standard formulas allocate those costs based on percentages of employees, plant in service, and operating expenses. The inputs into those formulas should be reviewed annually, as the cost and input mix of these allocations change from year to year.
2. Capital Projects
Annual capital project expenditures are approved by the management committee established by the contract. An audit test reviews capital expenditures to ensure they are either included in the approved budget, or were part of follow-up committee documentation approving the expenditure. Any impairment losses that are part of capital expenditures are shared by the owners in proportion to their ownership interest.
3. Fuel Allocations
If the joint power plant units use gas or coal as fuel, the fuel used is charged directly to each unit's operating costs and should be straightforward. Where multiple power plants share a site, there can be joint operations for fuel handling, personnel for operation and maintenance, and other joint facility costs. These joint costs go through an allocation process that should be reviewed as part of the audit.
4. Billing Errors
Even with the best of intentions, billing errors occur. When the billing process combines system data retrieval with manual calculation of allocated costs on spreadsheets, errors can enter the process. Contract testing should include a review of the billing error correction process β and should document amounts for billing errors that were not resolved prior to the audit, including them in the findings and questioned costs.
Report of Findings and Questioned Costs
While the title sounds formal, a structured report should be prepared and submitted to the joint owner and the appropriate oversight committee. The report should cover the following sections:
| # | Report Section | Description |
|---|---|---|
| 1 | Scope of the Audit | Periods covered, contract provisions tested, data sources reviewed |
| 2 | Areas Working Well | Acknowledge processes and controls that are functioning properly |
| 3 | Business Process Recommendations | Suggestions for improving efficiency, accuracy, or equity in billing processes |
| 4 | Specific Findings & Questioned Costs | Itemized billing errors found in testing β for or against the joint owner β with sufficient detail to recreate and discuss each issue |
| 4a. Supporting Detail | Each finding should include enough documentation to allow it to be independently recreated and discussed at the oversight committee | |
| 5 | Recommended Resolution | Proposed resolution for each disputed item, including amounts and timing |
The owner should have the opportunity to respond with a written rebuttal report, and the matters should be discussed at the oversight committee meeting.
Mutual Resolution of the Issues
Resolution of findings runs the full spectrum β from checks being issued promptly for differences to arbitration and court cases over contested items. A tightly written joint ownership contract leads to easier resolution of any contract billing issues and better overall relations between all of the power plant owners.
All owners should share the same fundamental goals: keeping operating costs in line with budgets and meeting the terms of the joint ownership agreements. A well-structured audit process supports those shared goals β and helps everyone sleep a little better at night.
About the Author
Russ Hissom, CPA is a principal of UtilityEducation.com , providing on-demand professional education classes in FERC, RUS, FASB, and GASB accounting, finance, ratemaking, artificial intelligence, and management for electric, gas, wastewater, and water utilities and electric cooperatives.
Contact Russ at [email protected]
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists, LLC. You should seek formal advice on this topic from your accounting or legal advisor.