New Software for Utilities on SAP: HPC Cost Flow Forensics (CFF)

Total visibility into complex cost flows—to the penny

HPC Cost Flow Forensics (CFF) is software for utility companies on SAP® that provides total visibility into lengthy or complex cost flows. It enables Rates and Finance professionals to identify the dollars and descriptions associated with every single cost object by FERC account, even those typically obscured from view in between the final (receiver) and source (sender) objects. As a result, HPC CFF improves responsiveness to regulatory inquiries and reduces audit risk, with zero disruption to current operations practices.

Complex Cost Flows Hinder Transparent Regulatory Reporting in SAP

As utilities have grown through acquisition over the last decade, their cost flows have become increasingly lengthy and complex. Key elements in the flow are often obscured from view, challenging Rates and Finance to answer questions about actual costs from regulators and management. The traditional cost model and legacy SAP FERC solution are simply not sufficient to expose the rich detail typically found in internal orders and WBS elements:

HPC Cost Flow Forensics (CFF) Delivers Complete Transparency

In combination with the IS-U/FERC Module and HPC Utility Financials Accelerator, HPC CFF exposes all of the cost objects in between the cost flow's sender and receiver. In doing so, it improves responsiveness and accuracy to regulatory inquiries; reduces audit risk and strengthens rate case positions; and, ultimately, provides one version of the truth between FI, CO, and FERC.

Learn more about HPC Cost Flow Forensics and how it can benefit regulated utilities on SAP.

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.

SAP New GL and Cost Models

We've commented before about the increasing interest we're seeing from utilities in migrating to the SAP New General Ledger. In the context of SAP's recent announcement that ECC 6.0 will be supported until 2020, we expect to see even more interest—and action—since utilities are under no immediate pressure to upgrade. Instead, they can focus on a New GL migration independent of future upgrade plans.

That said, we also notice that some utilities are focusing almost exclusively on the migration itself, and not enough on their underlying cost model. Some aren't thinking about it at all, while others separate, uncoordinated initiatives in the works. This is a serious mistake. Not to discount the care with which a New GL migration must be undertaken, but it's essentially a technical procedure that can be handled smoothly with proper preparation and coordination with SAP. In contrast, there is far greater benefit potential from reassessing the cost model and transitioning from a cost center-centric to order-centric model—in other words, abandoning the approach adopted during 1990's deregulation, and going back to what most utilities did in the 70s and 80s (when they had no choice and regulation was the only business model). Here are a few quick reasons why this makes so much sense:

1. Cost-centric models are ideal for what we think of as the trifecta of utility financials: budgeting, regulatory reporting, and possibly in the near future, IFRS.


2. Using the order as the central point means evaluating activity type pricing and unbundling rates, such that the cost of labor going into each order is very close to the actual rate of pay.


3. By documenting secondary costs in each order, they'll be fully supported and enable easier cost recovery. They will, as we like to say, provide one version of the truth.

We'll revisit this topic in November to discuss some realistic approaches to a managing a cost model project in conjunction with a New GL migration.