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Unplanned Distributed Energy Resources Negatively Impacting Your Budget? Use ASC 980 Regulatory Accounting to Smooth the Impact

Russ Hissom's picture
Owner, Utility Accounting Education Specialists - utilityeducation.com

Russ is the owner of Utility Accounting Education Specialists a firm that provides power utilities consulting services and online/on-demand courses on accounting, finance, FERC best-practices,...

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  • Oct 29, 2021
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Where did our revenues go?

Distributed energy resources (DERs) are customer-generated power from renewable sources - solar, wind, and bio-mass. DERs can throw a wrench into your electric co-op or utility budget if they are unplanned. This can send you on a trip to the panic room. But, fear not! Accounting standards ASC 980 and GASB 62 (Regulated Operations) are the gift that keeps on giving, in that these accounting standards can allow you to separate the impact of DERs on the budget, book those “losses” from DERs, and determine a strategy to collect the amounts in future rates. In short, you’ll be cleaning up your DER budget problem with ASC 980 and GASB 62. Here’s an example of this approach in practice.

At the start of the latest fiscal operating year, you, your management team and oversight body gave a big thumbs up to the annual revenue and expense budget. Now, as you review year to date revenues compared to the budget, a sinking feeling surrounds you as you ask "how did we miss our revenue forecast by so much?"

With analytical trend tools at our disposal, budgets are more realistic and numbers are tighter than prior. However, trends that do not show up yet in historical sales data will not work their way into our forecasting methods. For example, the growth in distributed generation is a relatively new trend. Microgrids are even more recent. Both are forecasted to grow exponentially in the next decade. Both reduce kWh sales from the utility where they are located. These “losses” from Distributed Energy Resources should be included in a cost of service study performed to determine electric rates.

The cost map for electric utilities

Costs for utilities, like any business, are a combination of fixed and variable costs. Fixed costs are the infrastructure to size the electric system and connect customers, while variable costs are the cost of fuel or purchased power and system maintenance. These are shown in the following image:

 

DER Transactions

How are these costs recovered?

How do we recover utility "available for use" costs?

"Available for use" costs are those fixed costs to connect customers to the utility's electric system. Whether or not these customers use their connection, the cost of the connection must be recovered in utility rates. While distributed generation or microgrid customers may not always need this connection to the utility due to their ability to self-generate , the connection is there and available when needed.

Those connection costs should be recovered in the utility's fixed monthly customer or demand charge. However, these customers will be consuming less kWh's from the utility's native system (due to their alternative use of distributed generation), so if the reductions in kWh are not considered in the revenue budget forecast for the year, a revenue budget "miss" results. Distributed Energy Resources do not get a break from the math that calculates their cost of available electric service.

Distributed Energy Resources

Rewriting revenue history for lost kWh sales

While kWh sales are variable revenues generated by variable costs (fuel, purchased power), there is a profit margin built into the rate for each kWh and declining kWh sales will erode the utility's gross profit margin from the planned budget.

Allowing those lost revenues to slip away inflicts a permanent detriment on the utility's financial results and cash flows. Accounting methods such as "decoupling" exist to capture these "lost" revenues in order to collect them in the future. 

 

Decouple lost revenues for future recovery

Decoupling is a form of regulatory accounting used to record these lost revenues for recovery in future years. Keep in mind that if your utility is regulated by a state public regulatory commission that this process may or may not be allowable for rate recovery in your rates. For utilities regulated at the local level (such as municipal utilities and electric cooperatives), decoupling should be a consideration. 

The mechanics of decoupling actual from budgeted revenues is shown in the following image:

 

For example, if the utility budgets $10 million of revenues but sales are $9 million, that $1 million of “missing revenue” can be treated in one of two ways:

Accepted and thus the margin on this amount is not available for use in the business, or

Deferred as an asset with attempted recovery in the next rate case or as a cost adjustment recovery clause

Consider how “decoupling” might fit with your utility’s revenue strategy

If your utility is missing revenue targets and budgets and the cause can be identified as a faulty forecast due to Distributed Energy Resources kWh losses, these accounting treatments provide options. As you move into a new budget season, decoupling may be a tool that fits your utility’s revenue strategy. 

 

Author - Russ Hissom, CPA

 

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About Russ Hissom

 

Russ is the owner of Utility Accounting Education Specialists. He has over 35 years serving electric investor-owned and public power utilities, electric cooperatives, and telecommunications providers as a past partner in a national public accounting and consulting firm's energy practice. 

Find out more about about Utility Accounting Education Specialists here or you can reach Russ at russ.hissom@utilityeducation.com

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The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by UAES. You should seek formal advice on this topic from your accounting advisor.

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