May 25, 2020
How to Prepare for Increased Regulatory Scrutiny – Recommendations for Utilities on SAP
Given the increasing scrutiny utilities are experiencing from regulators, Utegration advocates that customers running SAP proactively optimize their regulatory accounting models. The recommendations below come from our team’s decades of experience advising customers and our unmatched expertise innovating software—starting with the original “FERC module” in the mid-1990s, all the way to our most recent add-on solutions for S/4HANA that are in production at utilities or certified by SAP as integrated with S/4.
Establish a “CO-Centric” Regulatory Model
The traditional approach to regulatory accounting with the delivered FERC module only utilizes Finance documents, which contain primary costs, to derive regulatory account balances. This design has some inherent weaknesses: FI, CO and FERC do not reconcile at the cost object level; the trace algorithm is error-prone; and complex cost flows can become opaque and difficult to understand and explain.
In contrast, Utegration recommends a modern CO-centric model that support FERC balances with both Finance and Controlling module documents. Our approach traces primary and secondary costs, which eliminates reconciling differences between FI, CO, and FERC. It also simplifies cost flow complexity with little disruption to current business processes. As a result, utilities gain a faster monthly FERC close, improved rate case support, and greater end-user self-sufficiency for regulatory reporting activities. [Read the SRP Case Study here.]
Turn off “FERC Clearing” in the FERC Module
The clearing function in the delivered FERC module’s post program is an abbreviated form of tracing from source to target records. It was developed 25 years ago and is still used by some utilities today. At that time, computing power was not adequate to handle the millions of records that large utilities had to process, so FERC clearing was intended to gain much-needed process efficiency. Unfortunately, it also has the adverse effect of obscuring details in the audit trail. As a result, users of FERC data are unable to drill back from some costs in FERC accounts to their original sources, which makes responding to interrogatories and supporting rate cases more difficult.
Utegration’s team has long recommended a regulatory design that does not use FERC clearing. In fact we urge utilities to get rid of it. One of our customers, a multi-jurisdictional Fortune 500 utility, used FERC clearing groups for Service Company cost allocations and payroll overhead distributions as a means of speeding up the FERC trace. As a result, this utility sacrificed FERC trace accuracy and data granularity—yet it still had to endure lengthy FERC runs each month. Utegration’s team optimized this customer’s regulatory accounting model in a manner that turned off FERC clearing, increased the transparency of functionalized costs, and cut FERC trace time by 50%.
Eliminate Negative Cost Flows in FERC
When corrections are made to prior periods in the FERC module, credits posted to cost centers generate a “negative flow.” As a result, when the negative amount is traced, the percentage distributions out of the cost center are no longer accurate for the current month’s costs traced to FERC accounts. Utegration recommends eliminating negative flows to improve data integrity and has a proven design to achieve it.
Get Rid of FERC Cost Centers
Some utilities rely on FERC cost centers at the end of their cost flow as a means of ensuring the trace runs without interruption, or to mitigate risks of cross-company settlements. Such a design, however, results in an even longer cost flow and FERC data that is too high-level or summarized to be useful. The dollars in the FERC cost centers are associated with a single account, far downstream from the work that was actually performed.
Utegration recommends that utilities put regulatory indicators on each order, which generates more granular, valuable functionalized cost data. Doing so enables FERC cost centers to be removed from the cost flow, and shorter cost flows mean greater transparency. To mitigate the risk of cross-company settlements being out of balance, we configure CO to ensure that charges are settled to the correct legal entities.
Charge Orders Whenever Possible
Utilities employ a variety of cost flow models, and one best practice we recommend is to charge orders instead of cost centers. Charging work orders directly speeds up the trace and simplifies the close. Charges to work orders are more transparent than charges to cost centers, and therefore make understanding, explaining, and justifying regulatory-relevant costs much easier. In contrast, charging cost centers makes labor rates more difficult to calculate because non-labor is also in the cost center, in amounts that vary by cost center.
To learn more about how your utility can best prepare for increasing regulatory scrutiny by optimizing your model on SAP ECC or planning for S/4HANA, contact Utegration and request an appointment with one of our expert consultants. You can also view all our resources on regulatory reporting here.