Strategic Capital Controllership

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Strategic Capital Controllership

• Santa Ana Pueblo
• New Mexico

AGA/EEI Accounting Leadership Conference
Mark Heinemann
PowerPlan Consultants, Inc.
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Capital Accounting

• Image of Monks with Quill Pens
• Asset Accountants used to have their FERC
  scriptures memorized and adhered to them
  religiously.

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But for Regulated and Competitive UtilitiesFixed
Asset Accounting is Strategic

• The Utility Business Is Basically to Build and
  Lease Infrastructure to the Public
• Book Recovery of the Accounting Investment Is the
  Profit Formula through the Rate Process.
  Accounting Impacts Revenues
• How Assets are Accounted for Has a Large Impact
  on Cash Flow and Taxes
• The Complexity Can Lead to Compliance Issues

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Capital Control

• Asset Decisions Are Large and Last Such a Long
  Time
• How Productive and Effective Will the Asset
  Become
• Is the Price Right and Cost Managed
• How Is the Recovery Accomplished
• What Is the Risk Financing, Timing, Etc.
• Booked Assets Can Be Dangerous
• Drain Cash by Delaying Income Tax Recovery
• Generally Increase Property Tax
• Eventually Debit the Income Statement

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Todays Topics

• Timely In Service
• Realistic Retirements
• Depreciation Nonsense
• CWIP Overheads and Tax Benefits
• Reimbursable Work
• Conclusions

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Timely In Service
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Timely In Service

• Benefits
• Increase rate base as soon as allowed
• Particularly true for 12 or 13 month average rate
  base
• Realize tax depreciation expense deduction
  presently, rather than in the future
• Accounting Compliance

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Timely In Service

• Example
• 500,000,000 Annual Capital Expenditures
• 10 Ongoing Process Improvement
• 40 Cumulative Tax Rate
• 7 Discount Rate
• Benefits
• 20,000,000 Cash Flow over 20 years
• 10,881,349 NPV

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Timely In Service

• Responsibilities of Property Accounting
• Create preliminary assets automatically
• Accommodate late In Service date notification
• Monitor CWIP aging and understand the problem
  areas, review estimated in service dates, detect
  inactive work orders, etc.
• Field Process and Technology Integration
• Require the right data upfront. Predefine and
  control exceptions, such as storms.
• Eliminate dual entry by translating natural
  engineering and design variables.
• Do not encumber In Service notification.

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Realistic Retirements
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Under Retirements of Assets Is A Serious
Industry Problem

• Multi Million Dollar Per Year Impacts
• It Is Becoming More Evident and Worse (in Rate
  Cases and Extended Lives)
• So Even Industry Comparison Statistics are
  Unsatisfactory

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Many Bad Things Result

• Balance Sheet Misstatement
• Longer Estimated Lives, which means under
  recovery of cash through rates
• Reduction in Loss Deductions for Income Taxes
• Property Tax on Non-Existent Asset Dollars
• Cost of Removal is Accidentally Capitalized. It
  Is then Capitalized for Property Tax and Income
  Tax instead of Deducting it Currently

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Getting Retirements and COR Reported

• Process Improvements
• Replacement Activities
• Tie to WMS, GIS, and Maintenance Systems
• Make the Process Simple
• Automatic Vintaging and Matching
• Online Pricing and Trending for Non-Mass Partial
  Retirements
• Bad Records Do Not Simplify the Process
• Monitoring
• Tests of Reserve Adequacy (and Retirements)
  Against Current Lives and Mortality Curves.
• Monitoring Cost of Removal against Retirements
• Monitoring Replacements vs. New Adds
• Incentives for the Field

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Retirements a FIFO Aside

• Determining the Vintage (without GIS)
• FIFO is essentially a curve, i.e. statistical
  dispersion, albeit unrealistic and unfavorable
  for the company
• FIFO is bad for Rates (It takes out too few
  dollars) and for tax
• The Service allows curves
• If it is impossible for the taxpayer to maintain
  records from which he can establish the vintage
  of mass assets as retirements occur, the taxpayer
  may use an appropriate mortality dispersion table
  to make the determination . . . 1

1. Internal Revenue Service 1.167(a)-11(d)(3)(v)(
d)
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Depreciation Nonsense
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Group Depreciation

• Not a short cut method. It is substantially
  more complicated.
• But it is much better at allocating costs to the
  useful lives of the assets (good accounting) and
  thus to the ratepayers (good regulatory).

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Example 3 Assets (A,B, C)
Avg. Exp. Life 2 Years
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Other Depreciation Nonsense

• Catch Up Depreciation but what about
• The retirements problem
• The underlying methodology
• Is the reserve under or over
• Fixing in-service reporting
• Net Values
• AROs
• Anomalies
• Exposures
• Time spent could have saved actual M

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CWIP Overheads Tax Benefits
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Maximize AFUDC Minimize Tax Interest

• AFUDC
• Interest Cost Expensed Is Lost
• CWIP in Base
• Post in Service Carrying Cost
• Tax Interest
• Rules are Complex, Subject to Interpretation
• Minimizing Compounding, Charge Eligibility,
  Timing, Good in Service
• Current Calculation versus Return Calculation

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Extract Other Tax Benefits

• Repair Allowance
• (Again good retirement tracking)
• Repair Expense
• Tax Overheads, Mixed Service Costs, etc.
• FERC vs. Uniform Cap
• Timing and Classification Issues

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ReimbursableWork Orders
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Reimbursable Work Orders

• How Profitable Would a Subsidiary Be if It only
  Did Your Reimbursable Work?
• Are the jobs fully costed including billing cost,
  return, working capital, increased field
  supervision, etc.
• Taxable work and gross ups.
• AFUDC and profit.
• Estimating, Billing, and Payments
• Deposits and progress billings to protect working
  capital
• Visibility of data and collections

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CWIP Project Management
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Project Management Is Not Todays Topic, but

• Important to Provide Data
• Timely Data (requires commitment information)
• Proper Breakdown (Work vs. Accounting)
• East Outlooking / Forecasting
• Sometimes Non-Dollars Items are just as Important
  
• E.g. tracking timing
• Monitoring against Decision Process

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Conclusions

• With the Construction Programs Ramping up, Action
  is Overdue
• Millions of Dollars of Cash Can Take Flight that
  Can Easily Be Captured
• Processes, Systems, and Metrics Need to be
  Reviewed
• Someone Needs to Be in Charge of Asset Accounting
  Who Thinks President