Utility of the future: accounting’s role in sustainable strategy

Utility of the future

In the “utility of the future,” the infrastructure and internal and external systems used to deliver electricity to end users 10 to 20 or more years in the future will be different than what is place today. Predicting the future is fraught with uncertainty, but current utility industry trends lead to these supportive assumptions:

• Off-grid customer renewable energy resources
• Delivery of electricity without wires
• Cost recovery over a shrinking demand for services
• Real-time pricing
• Doing more with less due to a smaller workforce
• Sustainability accounting requirements
• Convergence of delivery of broadband and electricity
• Cloud services to customers
• Strategy driven by data analytics

While many changes are expected, one constant will be the need for accurate accounting information that not only tells the historical tale of operations but also readily supports utility strategy and real-time decision-making.

How will utility accounting and financial systems evolve to meet changing reporting requirements? How will utilities address shifting workforce needs? Utility leadership who oversee financial management, systems and reporting must consider such questions in their current reporting and long-term strategic planning process. This whitepaper covers the following topics:

• Rate recovery
• Workforce development and succession planning
• Financial reporting
• Automation of financial business processes

State of the industry in the next 20 years

A survey by UtilityDive asked utility executives to project what their business model would be in 20 years compared to their current operations. The majority of the respondents noted the decline of the traditional integrated regulated utility and the necessity to morph into an energy services utility model or an integrator of utility services. Future trends lean toward increased customer choice and self-generating options and third-party infrastructure delivery systems.1

In the New York Power Authority’s Strategic Vision 2014–2019, the utility of the future moves towards a preponderance of micro-grids and on-site generation possibilities for all utility customer rate classes.2

Rate recovery

As the power industry transforms — from the today’s relative guarantee of cost recovery for infrastructure investments to a new model with a smaller customer base paying for electric services — utility rates will need to change. A transitional period will find declining units of services (kWh) to spread out fixed investment costs. Couple this scenario with other transitional factors such as completing debt payments on current infrastructure assets while determining whether to replace these assets and/or move to new electric delivery technologies (generating assets) or whether to abandon the generation business altogether.

Potential rate recovery strategy: fixed charges should reflect full cost of service

The increase in distributed generation options underscores to the need to ensure the customer fixed charge reflects all fixed infrastructure costs dedicated to customer service — whether or not customers take service. This “available for use” approach ensures customers pay their full share of fixed costs and other ratepayers do not subsidize the costs of serving distributed generation customers that do not receive energy from the utility.

When doing a cost of service study, utilities should “unbundle” their cost structure to fully identify all fixed and variable costs. Should a customer have the choice to obtain energy from a supplier other than the utility that built the infrastructure, the utility will have the ability to charge “distribution exit fees,” to fully recover the fixed customer delivery cost. As the microgrid revolution becomes more prevalent, cost unbundling will work as cost recovery insurance for existing infrastructure investments.

Potential rate recovery strategy: decoupling revenues

A Baker Tilly article that explores decoupling revenues as a rate management tool states, “Many local distribution electric and natural gas utilities mandate peak demand energy or gas savings targets are achieved through energy efficiency and demand-side management (EE/DSM) activities. However, the traditional utility ratemaking process … overemphasizes customer consumption for recovery of fixed costs and does not anticipate the impact of EE/DSM programs/activities on sales.

“Alternative regulatory mechanisms, such as revenue decoupling, allow for cost relief. By weakening the link between sales and revenue streams, distribution utilities can address prudent fixed cost recovery and revenue attrition and to remove inherent disincentives to pursuing energy efficiency.”

The mechanics of revenue decoupling breaks out the revenue reduction due to demand side/distributed generation activities, allowing better alignment with fixed distribution costs. This lessens the impact of fluctuating revenues and can remove barriers to seeking energy efficiency programs while maintaining rate equitability.

Potential rate recovery strategy: real-time pricing for all classes

With increased usage of smart meters, utilities are clearing the path for real-time usage analyses of all customers. Smart metering will provide the information to develop time-of-use rates for all customer classes. This approach can address the inequity that stems from customers that use electricity during off-peak times generally subsidizing peak users. Rates will be developed that consist of a three-part bill for customers:

• Fixed charges for customer services
• Energy charges (based on time of day)
• Capacity charges for infrastructure and peak usage

While customer rates always have a political component and do not necessarily reflect the actual cost of service, it is important to know the customer class and inter-class characteristics to determine where cross-subsidies lie in a utility’s rate structure.

Financial reporting

Financial reporting and how your utility tracks various costs and revenues will also need to adapt to the changing landscape. Some notable areas for evaluation include:

1. Does your utility use the Uniform System of Accounts published by the Federal Energy Regulatory Commission (FERC)? Using the FERC chart of accounts allows for proper classification of costs needed for cost of service studies.
2. Utility costs should be fully unbundled into fixed and variable costs by activity. The FERC chart of accounts is built for this approach.
3. If your utility is a vertically integrated utility (generation, transmission and distribution services), each service should have its own financial statement. In the case of generation services — if it is possible — each type of power supply source (coal, gas, hydro, solar, wind, biomass) should have its own income statement. This information is needed for cost of service determination, rates, gross margins, equitable cost allocations, profitability and strategy development.
4. Utility rate models should have the ability to determine profitability by customer class and have the flexibility for various operating scenarios and impact on overall utility profitability.

These are just a few areas that require immediate focus. As financial systems and integration with real-time metering become more robust, the information gathered will be able to directly feed financial statements and mold cost allocations and rate model development into a more vibrant tool based on current customer usage patterns.                   

Automation of financial business processes

Many industries are in the process of automating repetitive functions. Financial processes are no exception. Automating routine business processes is a method for controlling costs and freeing workers to pursue other tasks. Areas of automation available in our current environment include:

• Accounts payable invoice routing, approval and payment
• Purchase orders
• Time-keeping
• Materials management ordering
• Online customer payments
• Self-service customer kiosks
• Contract analysis to determine lease components
• Employee expense reporting and payment
• Speed of financial reporting
• Real-time integration of the utility construction process

Future applications for the utility of the future will include real-time customer invoicing, billings and collection, general accounting, internal and external financial reporting, budgeting and others. Even your financial audits will have a component of automation through integration of your systems and lessen demand on utility finance staff time. Greater value will be derived through more risk-based audit approaches than financial statement number crunching.

Providing training for workers displaced by automation must become part of your utility’s strategy. Enhancing the abilities of former accounts payable, payroll, customer service, meter reading and accounting personnel will aid your organization’s data analysis and decision-making. Mesh training with utility strategy to deliver services your customers expect now and in the future — perhaps ones your utility currently does not provide.

Embracing the utility of the future

The utility of the future is on the way. Your organization must proactively plan for its arrival by staying current and anticipating changes in the deployment of technology and human capital and the impact it will have on your utility’s business model in delivering customer service.

For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.

[1] What utility execs think the future holds, UtilityDive, January 27, 2015

[2] Strategic vision 2014-2019, New York Power Authority, March 2014