Towards Introducing Uniform Energy Accounting: The Rationale and Way
Forward
Jamaluddin Ahmed PhD FCA
Member CouncilThe Institute of Chartered Accountants of Bangladesh
Objectives of the Paper
1. Economics of Regulation2. Specific need of Uniform Energy
Accounting3. Core issues in Uniform Energy
Accounting4. Scope of uniform Energy Accounting5. Development of Uniform Energy
Accounting in Bangladesh6. Summary and conclusion
Milestones in Infrastructure Reforms
1984:British Telecom1986:British Gas1987:British Airways1987:British Airport Authority1989:Water and Sewerage Companies1990:Electricity Companies1995:British Rail1996:British Energy-Nuclear
1990:Telecommunications1991:Railway1996:Electricity1996:Gas
United KingdomUnited States of America
EU Liberalization
Financial Change Management
Power Sector Reform in Chronology
Creation of Rural Electricity Board Establishment of Dhaka Electricity Supply Authority
Private sector participation allowed
National Energy Policy and Proposal for Regulatory Commission Creation of Power Cell Private Sector Power Generation Policy Corporatization of Ashugonj Power Station Corporatization of West Zone Power Distribution Corporatization of North West Zone Power Distribution Formation of Strategic Business Unit Creation of Power Grid Company of Bangladesh Establishment of Energy Regulatory Commission
Post Reform Change Management
Command to MarketGovernment to Business OrganizationGovernment to Commercial Business RulesGovernment to own Financing Welfare to Business ConceptLoss Making to reasonable Return on InvestmentCash Based to Accrual AccountingEffective Utilization of ResourcesPoliticization to Performance Based ManagementPoliticization to Performance Goal OrientationFixed bonus to performance bonusBureaucrats to Business ManagerTowards value addition and customer satisfaction
Paradigm Shift From
Addressing Post Reform Issues
Finalize terms and conditions of vendor agreementIndependent valuation of assets and liabilities Hand and take over of assets & liabilitiesPrepare strategic business planFinalizing win win power purchase agreementPrepare and approve functional organizationNegotiate per unit power priceDesign Appropriate OrganizationFix up effective tariff
Addressing Post Reform Issues
Shift from Cash to Accrual accounting system Customize Charts of Accounts in with commercial principles Harmonized Charts of Accounts for Corporatized unit Harmonization of Accounting Policies for Holding and subsidiary Companies Financial Statements in line with IAS and best practiceEffective MISSustainable financial management system
Point of difference
Focus
Accounting
Activities considered
Yardstick competition
Degree of homogeneity
Basis of cost
Allocation of common cost
Financial Accounting
Firm
Within a firm
Both regulated and un-regulated
Can not provide
Difficult
Temporal cost imputation rule
Inadequate allocationBetween regulated andUn-regulated activities
Regulatory Accounting
Regulated activities
Regulated activities of more firms
Separation of regulated and un-regulated activities
Can provide
Easier
Not included in asset base until inService
A regulated firm would have strong Incentive to allocate common cost to its regulatory activities rather to anyOf its competitive activities
Objectives
Collect information for Sustainability, Allocative Efficiency, Productive Efficiency, Equity or Distributive Efficiency
Addressing Human Resources Issues
Bring Personnel Records up to dateIdentify and eliminate ghost workersBasis for severance and early retirement optionsEnsure accuracy of subsequent workforce analysisEstablish effective record-keeping procedures to regain control over payrollProvide an accurate basis for review of job positions
Staff Audit is the First step to
Addressing Human Resources IssuesBenchmarking Internal benchmarkSector benchmarkFunctional benchmark
Generic workforce BenchmarksGross or net revenue per employeeTotal payroll cost per employee
Ratio of headcounts by function:Management/ operation, customer service/ maintenanceSalary levels by functionAverage weekly hours per employeeUnits produced per work hourProduct/service line per staff-hour/full-time equivalent employeeTraining in person-days per year
Addressing Human Resources IssuesWorkforce Analysis
General Principles of Regulatory Accounting
Revenues, costs, assets, and financial obligations should be allocated according to each activity
The allocation should be based on objective principles and should not imply any undue benefit to any organization or individual
The methodology of assignation should be clear. The accounts should be clearly distinguishable
The allocation criteria should be constant from one year to another; however, in case of changes in accounting methods, the company
should provide the necessary revisions and explanations for such modifications
An accounting departure is considered material if its omission and misrepresentation has the potential to alter the financial position or the nature of company’s regulated and unregulated services
Internal transferences of costs and revenues should be transparent and in accordance with standard cost
The information should comply with the requirements established according to the normThe costs imputed to services should be previously assigned to each
particular activity that generates these services
Causality
Objectivity
Transparency
Coherence
Materiality
Neutrality
SufficiencyDisaggregation
Information Requirements for OperatorsThe concession must supply to the regulator the following documents
Regulatory AccountingIncome StatementBalance SheetCash Flow StatementStatement of Changes in EquityNotes to the Accounts
Additional DocumentsReport of accounting procedures used to prepare the financial statements, with detail breakdown of the cost driversReport of detailed transactions with related partiesReport containing a detailed explanation of current results and any deviation from the budgetary figuresReport of the use of assets and investment plansSources of financing of current and future investmentsOperational statisticsMethodology used to set unregulated pricesAuditors reportDeclaration of directors’ responsibilityOther valuable information for understanding of information
Costs which are not identifiable in line withGeneration Transmission &Distribution function
ExampleInterest on foreign loan of miscellaneous projects and Forex lossGeneral & Admin Expenses of Service Departments, Directorates of Accounts, Finance, Personnel
Basis of Allocation of Central Overhead
Cover Operating Costs
Meet Past and Future Investment Needs
Provide Investors Rate of Return on
Investment
Operate Without Subsidies
Tariff Setting: Getting the Price Right
Full Cost of Energy
Repairs and Maintenance
Labor
Customer Service
Taxes
Interest on Debt
Cover Operating Costs
Procedure for Electricity Rate Calculations
Projections Calculation of overall costs
Calculation of individual costs
Determination of electricity rates
Demand Projection
Facility Plan
Funding plan
Depreciation costs
Operation costs
Labor costs
Fuel costs
Repair costs
Taxes
Business returns
Principles of the tariff system
Fixed rate system
Usage-based charge system
Basic charge system
Lighting
Low-voltage power
High-voltage power
Ultra-high-voltage power
Fixed lighting
Usage-Based Power
Low-voltage Power
Night Power
High-Voltage Power
Commercial Power
Ultra-high-VoltagePower
Commercial Power
Operation Plan
Time Table for Resetting a Price ControlRequest for Information
2 years ahead
Assess and amend Information18 months ahead
Operating Costs Demand forecasts
Assets Base
Determine form of Cap15 months ahead
Select candidate Price Cap12 months ahead
Investment
Determine Rate of Return15 months ahead
Calculate Revenue Needs Predict Resulting Revenue
Compare with Revenue NeedsCheck cash flows etc
If Appropriate If not
Propose Price CapAt least 9 months ahead
Company Accepts Company Rejects
Appeal mechanism: 9-3 months
Implement Price CapAt least 1 month ahead
Source:Green R and Pardina M R (1999), Resetting Price Control for Privatized Utilities: A manual for Regulation (p 3), EDI Development Studies
Single Buyer Model for Electricity
Generators Transmission and Dispatch
Distribution
Customers
Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and Competition. A Compilation of World Bank and Oxford University Press
The Wholesale Competition Model for Electricity
Generators Transmission and Dispatch
Distributors Customers
Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and Competition. A Compilation of World Bank and Oxford University Press
Purpose of Uniform System of Accounts (USoAC)
USoAC are important for systematic and efficient functioning of the regulated utilities financial system
It allow regulators, creditors, auditors, and others to rely on creditable, transparent, and comparable financial accounting & Reporting information
Current BERC Regulated Utilities subject to
Uniform System of Accounts
BERC
DPDC DESCO WZDC NZDC PDB REB PGCB EGCB.
Current Accounting System Each regulated utility under BERC jurisdiction records
their accounting books in a non-consistent forms Utilities have different aggregated Chart of Accounts The adaptation of Accounting Practices varies from
utility to utility Revenue recognition Asset recognition Expense recognition
Submission of Reports to BERC on the basis of aggregated accounting practice
All Utilities will provide their financial statements to BERC in the same format
All the records will follow a uniform system of accounts
Guidelines for proper booking and accounting of utility operation
Establishment of Guidelines for all accounts & sub-accounts
Establishment of reliable financial and accounts information for regulators, creditors and other interveners.
Allow transparency in the Sector’s financial system
Uniform System of Accounts
Advantages of Uniform Accounting System
Necessary: for BERC to carry out its regulatory functions under the Act.
Uniform Reporting System: to BERC for rate setting by auditing utilities’ books and records and establishing fair and reasonable rate of return
Cost Allocation: provides needed accounting information for cost of service study
Transparency: Provides the regulators and the public transparency in the regulated utilities accounting recording system
Completeness: Provide consistent financial and accounting information to the Regulators and the public
Flexibility: Provide a platform that can be modified and enhanced as needed
Continuity: In accordance with the existing practice in the companies
Limitations of Existing Accounting System
Lack of proper financial and accounting recording system for the regulators and the public to investigate rate case applications.
Non-Compliance for auditing by the regulators and the independent auditors
Non-Compliance of International Accounting Standards (IAS)
Non-Comparability between utilities within the Sector
Current practices as observed by Statutory Auditors performing
recent independent audit of the following firms:
Examples of Current Accounting System
Bangladesh Power Development Board
Qualifications
Only maintains Cash Book & Bank Book Gratuity & Pension Expenses not correctly shown in
Financial Statements Accrued Fixed Deposit Receipts (FDR) income not
recognised Customer Security Deposit could not be identified
correctly Clearing A/Cs not reconciled with Regional
Accounting Office (RAO) A/Cs Foreign & Govt. grants not properly recognized
Bangladesh Power Development Board
Qualifications (cont.)
Deposit work fund created but no adjustment made after the construction/installation of Assets
Correct status of slow moving/obsolete inventory could not be verified (applies to all utilities)
Power Grid Company of Bangladesh Ltd.
Qualifications
No physical count of fixed assets conducted and no fixed asset register maintained
No physical inventory count
No recognition obtained from NBR for “Unfunded Gratuity Scheme”
Power Grid Company of Bangladesh Ltd.
Concerns
Inadequate Insurance Coverage of FA Absence of FA Addition & Disposal Policy Item-wise Inventory List not Available GMD reported Inventory differs from
Physical Counting of Inventory No Financial & Accounting Policy Developed Inadequate Internal Audit Coverage and
Consolidation of Financial Statements
Power Grid Company of Bangladesh Ltd.
Concerns (cont.)
Transmission charge not Independently Verified
Cash Transaction amount Notable Opportunity Lost in FDR Interest Bank Reconciliation Statements incorrectly
prepared Long Outstanding cheques in Reconcilation Tax at Source deducted inadequately
Power Grid Company of Bangladesh Ltd.
Concerns (cont.)
Overtime Register for employees not found Log-book of Sub-Station not Updated Long Pending of Unadjusted Advance
REB: 70 PBSs
Qualifications
Theft, burn or damage to Electricity/ Equipment in Service was not recognized correctly in the Financial Statements
Interest on Long Term Loan recognized in the wrong period.
Cash flow Statement had not been prepared Compensation received Electrical Equipment
Damaged/Destroyed was not included in the P & L A/C.
Concerns
Company is operating below BEP PBS could not utilise a line bought from PBS
causing loss System loss percentage prescribed by REB
has been fluctuating over last 5 years Obsolete items in PBS store Significant amount of Consumer bills lie
outstanding
REB: 70 PBSs
Concerns (cont.)
PBS required to invest in Asset Replacement Fund but there is a shortfall
PBS required to invest in Donation Reserve Fund but there is a shortfall
Significant amount of money lies with the Cashier which is not covered by insurance
No inventors of materials in shops
REB: 70 PBSs
Concerns
Detailed break down of FA valuation as not available for which ascertaining FA value for future insurance claim might be difficult
2 Generation Plants inactive, and there is a risk of penalty by BPDB if the 3rd plant closes
Depreciation treatment are not provided properly in accounting system
Correct status of slow moving/obsolete inventory could not be verified
Tax on dividend to shareholders not correctly done
Tax on ‘off-shore’ technical service also not correctly adjusted
Non-regulated Independent Power Producers (IPP)(Current problems which may benefit from USoAC)
Observed Issues to be Addressed
No asset valuation in any Utility
No current fixed asset register
No current Depreciation Study after the transfer of assets
No Uniformity in depreciation application across the Utility
Implementation of the Uniform System of Accounts allows BERC to carry out the provisions of the Act
and provide transparency & reduce the information asymmetry and to improve the quality of regulation
For Bangladesh USoAC is one of the key regulatory elements
for effective regulations of utilities and is important for systematic functioning of the regulated utilities
financial system recording within the sector.
In a Nutshell
What is the USoAC??
USoAC or the Uniform System of Accounts is a Prescribed System of Accounts
Designed to segregate each account type of the Utilities according to Assets, Liabilities, Income and Expense
The USoAC has been successfully implemented and practiced in the United States for more than 100 years
It is operated by the Federal Energy Regulatory Commission (FERC) in USA
Purpose of the USoAC
USoAC is important for systematic and efficient functioning of the regulated utilities financial system
It allow regulators, creditors, auditors, and others to rely on creditable, transparent, and comparable financial accounting & Reporting information
How the USoAC will Function?
Advantages of the USoAC
Current Accounting Practice
Limitations of Current Accounting Practice
Collaborative Workshops
1st Collaborative Workshops
2nd Collaborative Workshops
3rd Collaborative Workshops
4th Collaborative Workshops
4th Collaborative Workshops (contd.)
No. of Participants
Organization Designation
2 DPDC DGM (Finance), Deputy Manager (F)
1 WZPDCL Manager (F)
1 United Power Gen. & Dist. Co. Ltd.
Deputy Manager (A & F)
1 RPCL Deputy Manager (A & F)
1 DESCO Deputy Manager (F)
1 BPDB Additional Director (Finance)
2 EGCB Ltd. Manager (F & A), Manager (F)
1 REL Chief Accountant, Manager (A/cs & Tax)
2 REB Controller (F & A), Director (Finance)
2 PGCB Deputy Manager (A), Manager (A)
1 APSCL Asst. Manager (F),
1 Summit Power Manager (Internal Audit)
2 NWZPDCL Deputy Director (F), Director (F
Power Cell Deputy Director (F)
Features of the Workshops
Following the Workshops
Thank You