Four Reasons Not to Charge Cost Centers

Back in the mid-1990s, when utilities expected regulation would be phased out and compliance with Title 18 would no longer be necessary, we saw charging cost centers as highly convenient. This was how non-regulated companies ran, and the practice was fully embraced by utilities.

Fast forward 20 years, and the situation is quite different: regulation is actually more stringent, and utilities spanning multiple jurisdictions face even greater scrutiny. Today, while cost centers are useful on the back end for summarizing orders, comparing budget to actual, and establishing a framework for accountability, they are decidedly not effective on the front end for at least four reasons:

1. Poor transparency. Charges to cost centers are less transparent than charges to work orders, and therefore make understanding, explaining, and justifying FERC-relevant costs far more difficult.

2. Increased processing time. In our experience, tracing costs from cost centers to work orders to FERC accounts doubles the processing time for the regulatory accounting close. Charging work orders directly speeds up the trace and simplifies the close.

3. Less control and flexibility. Once dollars are in a cost center, they must follow that cost center's labor. This can cause problems when below-the-line expenses are traced to above-the-line accounts. Adjustments to move non-labor from one cost center to another can inadvertently redistribute dollars to unintended FERC accounts. So while charging cost centers is convenient, it means giving up the control and flexibility inherent in charging orders directly. A utility can mitigate some of the risk by allocating cost center charges out to other receivers using assessments in Controlling. This practice, however, makes tracing costs from their origin even more complex as receivers are sometimes just other cost centers. The tracing can even become circular as the receiver may charge costs back to the original sender. This potential confusion is avoided if orders are charged directly, configured for each business transaction.

4. Unnecessary complexity. 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. In contrast, excluding non-labor costs from cost centers allows labor rates to be set uniformly across cost centers for similar roles.

If you've been charging cost centers and are experiencing some or all of these challenges, contact HPC to learn how you can modernize your cost model to address today's tougher external reporting standards.