While 2014 isn't quite over, we thought it would be useful to share a few things we've learned from our utility company customers this year.
1. Cost flow models are the real culprits.
When we're engaged to audit SAP FERC processes, we sometimes find that a utility's core challenge is not regulatory accounting itself, but rather its larger cost flow model. Utilities that have been on SAP Financials for a decade or more often have cost flows that are too complex, too long, or otherwise ill-suited to support both the fine details required for rate cases, and the high-level summarization required for effective budgeting. Simplifying those legacy cost flow models to support modern internal and external reporting is usually Step One for these customers.
2. Payroll burdens aren't as transparent as they could be.
Utilities that charge "bundled" labor rates to orders — i.e., fully loaded with labor, allocated costs of employee benefits, and the employer portion of payroll taxes — lose the identity of the burdens when combined with long and complex cost flows. This makes compliance with FERC accounting regulations far more difficult, because the more secondary cost movements in a cost flow model, the less transparent the labor burdens become. The traditional FI-centric FERC solution and its flow of costs trace program attempts to keep track of those burdens as they move from senders to receivers, but this approach has a price: FERC and CO results of operations don't match. And that leads us to take-away #3...
3. FERC and CO don't match, and that's a problem.
We've talked about this many times before, and it's worth repeating: FI-based FERC models just don't work as well as CO-centric approaches in today's environment. Twenty years ago, when we thought that regulation would be phased out, it was entirely reasonable for FERC accounts to be based on FI documents alone. But in today's world, in which CO has such rich cost detail, there is no reason to tolerate painful FERC-CO reconciling differences any longer. More utilities are recognizing that "one version of the truth" can be more than just a marketing catch-phrase by adopting a CO-centric model in which both primary and secondary costs support FERC balances.
4. Regulatory accounting is under-appreciated.
This is a sensitive topic, but we've got to call it out: few people within utilities truly understand how important regulatory accounting is to their own business. Compliance with FERC, cost recovery, and rate case support are the ways in which regulated utilities make money, but this fact is often lost on staff outside the Rates department. We are starting to see more of the Finance and IT professionals who support Rates reevaluate their perspectives, recognizing that a modern FICO/FERC design must be prioritized in order to gain efficiencies, reduce costs, and take full advantage of their SAP ERP.
5. Few see value in high-speed databases — yet.
For all of the recent hoopla about in-memory databases, we're not seeing that much interest from utility Finance teams. We believe that will change in the coming year or three, when management recognizes the benefits of line item-level reporting. The sheer volume of detail that will continue to grow will mandate adoption of high-speed infrastructure. We predict that Finance won't pursue speed itself, but rather the granularity that enables "closing every day" —
which
will require speed.
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