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