Top 10 Utility Accounting Mistakes

Mistakes That Cost Utilities Money and Credibility

After decades working with electric utilities and cooperatives, certain accounting mistakes appear repeatedly — at organizations of all sizes, in all regions, at all levels of sophistication. These are systematic mistakes that persist because they are difficult to see from inside the organization and because their financial consequences accumulate slowly. Identifying and correcting them is one of the highest-value activities in utility financial management.

1. Misclassifying O&M vs. Capital

Charging capital costs to operating expense distorts financial statements, understates plant in service, and misrepresents the utility's financial position. The FERC USoA Plant Instructions provide the framework for this distinction, but consistent application requires ongoing staff training and supervisory review.

2. Missing Overhead Costs in Work Orders

Labor overhead, stores management costs, equipment clearing charges, and administrative and general allocations are required components of construction cost under FERC and RUS standards — but many utilities systematically omit some or all of these overheads, resulting in understated plant in service and under-recovery from ratepayers.

3. Not Using Regulatory Accounting

ASC 980 and GASB 62 are powerful tools for managing expenses and revenues in ways that match the timing of rate recovery. Utilities that do not use these standards for storm cost deferral, rate stabilization, and pension obligation management are leaving valuable financial management tools on the table.

4. Inaccurate Continuing Property Records

CPR systems that do not match the physical system create problems in retirement accounting, depreciation studies, and rate cases. Regular physical inventory comparisons and disciplined work order closeout procedures are the remedy.

5. Improper CWIP Closeout

Completed projects left open in CWIP do not generate depreciation expense and do not earn a rate of return. Timely closeout procedures with clear triggers for when a project moves from CWIP to plant in service are essential.

6. Ignoring AFUDC

Allowance for funds used during construction is a legitimate cost of major capital projects and a required element of the FERC USoA. Utilities that do not calculate and capitalize AFUDC are understating plant investment and under-recovering financing costs from ratepayers.

7. Not Reconciling Plant Subsidiary Ledgers

The plant subsidiary ledger should agree to the general ledger at all times. When these records diverge, retirements cannot be processed accurately, depreciation studies are unreliable, and rate cases become difficult to defend.

8. Mishandling Retirements

When plant is retired, both original cost and accumulated depreciation must be removed from the books. Salvage proceeds and removal costs flow through Account 108. Utilities that do not process retirements promptly accumulate ghost assets that inflate the plant balance and overstate the depreciation reserve.

9. Poor Storm Cost Documentation

Major storm costs that are not properly documented in work orders cannot be claimed from FEMA, may not qualify for insurance reimbursement, and are difficult to support in rate case testimony. Establish storm accounting procedures before the next storm — not during one.

10. Not Training Staff

Perhaps the most pervasive mistake is inadequate investment in staff training. Utility accounting is a specialized discipline. Without systematic training in FERC accounting, construction cost accounting, regulatory accounting, and rate-making fundamentals, even talented professionals will make recurring, expensive errors that better-trained peers would avoid.