HomeMy WebLinkAboutManagement Guide Electric Utility Upgrade Business Operating Plan 2008SAMPLE COST OF FUEL WORKSHEET
First: Determine the purchase cost of fuel /per gallon (C)
Diesel #1 $ i gallons = (C) $ per gallon
Diesel #2 $ / gallons = (C) $ per gallon
Gasoline $140,000/40,000 gallons = (C) $3.50 _per gallon
Other $ / gallons = (C) $ per gallon
Second: Determine the delivery cost of fuel /per gallon (D)
Delivery costs $20,000 / 100,000 Total gallons = (D) $.20 per gallon
Third: Determine the cost per gallon by type of fuel (C+D) = E
Diesel #1 (C) + (D)
Diesel #2 (C) + (D)
Gasoline (C)_$3.50 + (D) $.20
Other (C) + (D)
per gallon
per gallon
3.70 _per gallon
per gallon EES a RS, pRAR 5 Fourth: Determine the inflationary factor for fuel /per gallon
(E times Percent Inflation) = F
Diesel #1 (E)$ per gallon x %= (F)$ per gallon increase
Diesel #2 (E)$ per gallon x %= (F) $ per gallon increase
Gasoline (E)$ 3.70 per gallon x__5 %= (F) $.185 __ per gallon increase
Other (E)$ per gallon x % = (F) $ per gallon increase
Fifth: Determine the fuel cost per gallon by type of fuel (E+F)
Diesel #1 (E) + (F) per gallon
Diesel #2 (E) + (F) $ per gallon
Gasoline (E) $3.70 + (F) $.185 $ 3.885 per gallon
Other (E) + (F) $. per gallon
Step One:
Step Two:
SAMPLE PRICE-SETTING WORKSHEET
Determine total estimated sales/usage by type of fuel
A. Diesel #1 = 35,000 gallons
B. Diesel #2 = 25,000 gallons
C. Gasoline = 40,000 gallons
D. Other = gallons
Determine the per gallon O&M and R&R costs
A. This year’s O& M cost is $.45 per gallon
B. This year’s R&R cost is $.0557 per gallon
Total Facility O&M and R&R costs per gallon = $.45 + $.0557= $.5057
Step Three:
Step Four:
Step Five:
Step Seven:
Determine the General & Administrative Expenses
A. Additional administrative salaries are $15,000
B. Additional office supplies and expenses are $5,000
C. Bulk fuel loan interest is $10,000
D. Other miscellaneous expenses are $6,500
Divide total other general & administrative expenses by total
estimated usage/sales
$36,500 / 100,000 gallons = $.365 per gallon
Determine the per gallon costs of providing service (A)
O&M and R&R costs =$.5057
General & Administrative = $.365
Per gallon costs for providing service = $ .5057 + .865 = $.8707
Determine the cost of fuel purchase/per gallon by type of
fuel (B) (See Cost of Fuel Worksheet)
Diesel #1 $3.55 per gallon
Diesel #2 $3.25 per gallon
Gasoline $3.885 per gallon
Other $ sper gallon
Determine the price per gallon by type of fuel (A+B)
Diesel #1 (A) $.8707 + (B) $3.55 = $4.4207 per gallon
Diesel #2 (A)_$.8707 + (B) $3.25 = $4.1207 per gallon
Gasoline (A)_$.8707 + (B) $3.885 = $4.7557 per gallon
Other (A) + (B) = $ per gallon
Add Markup/Profit Percentage
-15-
Fifth: Determine the fuel cost per gallon by type of fuel
(E+F)
Lastly, you simply add together the delivered cost of fuel and the
estimated price increase:
Gasoline (E) $3.70 + (F) $.185= $3.885 per gallon
So, you would use $3.885 per gallon as the cost. And, then you repeat
the procedure for all types of fuel you are pricing.
Now, let’s enter the cost per gallon by type of fuel information
into the Fuel Pricing Worksheet, using the cost we calculated
above for gasoline ($3.885) and let’s assume a price of $3.55 for
diesel #1 and $3.25 for diesel #2.
Determine the cost of fuel purchase/per gallon by type of fuel (B)
Diesel #1 $3.55 per gallon
Diesel #2 $3.25 per gallon
Gasoline $3.885 per gallon
Other Not applicable
Step Six: Determine the price per gallon by type of fuel (A+B)
The sixth step in developing your fuel prices is to total the cost of
providing the service and the cost of fuel. This is the last step unless
you are going to add a markup for a profit percentage, which is often a
very good idea.
Diesel #1 (A)$.8707 + (B)$38.55 = $4.4207 per gallon
Diesel #2 (A)$.8707 + (B)$3.25 = $4.1207 per gallon
Gasoline (A)$.8707 + (B)$3.885 = $4.7557 per gallon
Other Not applicable
Step Seven: Add Markup/Profit Percentage
The last step in developing your fuel prices is to add any profit margin
or markup that your business has determined is necessary. Adding a
profit margin or markup is a good way to make sure that you are
collecting enough cash to pay future bills as prices and other costs go
up!
Here’s an example of how to use the Cost of Fuel Worksheet to
calculate the cost of gasoline:
First: Determine the purchase cost of fuel /per gallon (C)
So, let’s say that you just bought 40,000 gallons of gasoline for
$140,000. Then, the per gallon price is:
Gasoline $140,000 divided by 40,000 gallons = $3.50 per gallon
Second: Determine the delivery cost of fuel /per gallon (D)
And, let’s say that the fuel company charged you a total of
$20,000 to deliver all the fuel you purchased including diesel and
gasoline. The delivery charge per gallon is:
Delivery cost $20,000 divided by 100,000 Total gallons =
3.20 per gallon
Third: Determine the cost per gallon by fuel type (C+D) =E
Next, all you do is add the two numbers from above together to
get the delivered cost per gallon:
Gasoline (C) $3.50 + (D)$.20 = (E) $ 3.70 per gallon
Fourth: Determine the inflationary factor for fuel /per
gallon - (E times Percent Inflation) = F
Now, this next step is a bit of guess work. It requires you to
think ahead and guess whether fuel prices will go up. And, they
usually do!
So, let’s say that fuel prices over the past few years have gone up
each year — an average of 5 percent. You might decide, then, that
next year’s fuel prices will also go up 5 percent. But, let’s say you
just heard on the television news that oil production had greatly
declined and gas prices were expected to go up. In that case, you
might decide to assume that fuel prices will go up 10 percent.
Ultimately, it is a bit of guess work. But, it is important to think
about this step so that you collect enough cash for the next fuel
purchase. But, let’s assume 5 percent for now:
Gasoline $3.70 per gallon x .05% = $.185 per gallon increase
COST OF FUEL WORKSHEET
First: Determine the purchase cost of fuel /per gallon (C)
Diesel #1 $ / gallons = (C) $ per gallon
Diesel #2 $ / gallons = (C) $ per gallon
Gasoline $ / gallons = (C) $ per gallon
Other $ / gallons = (C) $ per gallon
Second: Determine the delivery cost of fuel /per gallon (D)
Delivery costs $ / Total gallons = (D) $ per gallon
Third: Determine the cost per gallon by type of fuel (C+D) = E
Diesel #1 (C) + (D)
Diesel #2 (C) + (D)
Gasoline (C) + (D)
Other (C) + (D)
per gallon
per gallon
per gallon
per gallon SESS PRALR =~ Fourth: Determine the inflationary factor for fuel /per gallon
(E times Percent Inflation) = F
Diesel #1 (E)$ per gallon x % = (F) $ per gallon increase
Diesel #2 (E)$ per gallon x % = (F) $ per gallon increase
Gasoline (E)$ per gallon x % = (F)$ per gallon increase
Other (E)$ per gallon x % = (F)$ per gallon increase
Fifth: Determine the fuel cost per gallon by type of fuel (E+F)
Diesel #1 (E) + (F) $. per gallon
Diesel #2 (E) + (F) $ per gallon
Gasoline (E) + (F) $ per gallon
Other (E) + (F) $ per gallon
Next, take the amount you calculated in Step Three, the General and
Administrative Expenses, and enter it on to the worksheet:
General & Administrative (G&A) = $.865
Now, let’s add the two numbers together to determine the Per
Gallon Costs for Providing Service:
$.5057 (O&M and R&R) + $.365 (G&A) = $.8707
Step Five: Determine the cost of fuel purchase/per gallon by
type of fuel (B) (See Cost of Fuel Worksheet)
Diesel #1 $ per gallon
Diesel #2 $ per gallon
Gasoline $ per gallon
Other $. per gallon
The fifth step in developing your fuel prices is to estimate the per
gallon charge you should add to cover the cost of fuel. This step is very
important because, what you need to do is to estimate what you believe
the cost of your next fuel purchase will be — do not use the cost of fuel
for the delivery you just received! Why? Because, if you do, you are
setting a fuel price that will not allow you to collect enough cash to
cover the cost of your NEXT fuel purchase, AND, your utility operation.
You need to look ahead not behind!
There are a couple of different ways to approach this step:
1. You could ask your fuel supplier what prices are going to be
or
2. You could use the current fuel prices and apply an inflationary
factor to estimate future fuel prices.
A Cost of Fuel Worksheet is provided below to help you calculate the
cost of fuel using current fuel prices and an inflationary factor.
Operating Plan, and, therefore, would be included here in the
general and administrative expenses.
How do these expenses differ from the annual O&M expenses? Well,
in reality they may not differ very much. And, in fact for purposes of
calculating your fuel prices — it might be easier to combine your
O&M and general and administrative expenses. That’s OK! The
important thing is to make certain that you include ALL of your
costs when computing fuel pricing.
So, for purposes of filling out the worksheet, let’s assume the
following:
Additional administrative salaries are $15,000
Additional office supplies and expenses are $5,000
Bulk fuel loan interest is $10,000
Depreciation expenses is $6,500
$36,500 divided by 100,000 gallons = $.865 per gallon
Step Four: Determine the per gallon costs of providing service (A)
O&M and R&R costs = $
General & Administrative = $
Per gallon costs for providing service = $
The fourth step in developing your fuel prices is fairly simple. All you
are going to do is — add together the numbers from steps two and three.
First, take the amount you calculated in Step Two, the O&M and R&R
costs and enter it on the worksheet:
O&M and RER costs = $.5057
of $5,572 and then divide by the number of gallons you
think you will use/sell. So, your R&R surcharge would be
$.1307 per gallon.
$5,572 for annual R&R deposit plus $7,500 for generator = $13,072
$18,072 divided by 100,000 gallons = $.1307 per gallon
Total Facility O&M and R&R Costs
And, finally to get the total O&M and R&R costs — add
together the per gallon surcharge for O&M and the R&R
(Example #1).
$.45 (O&M) + $.0557 (R&R example 1) = $.5057
Step Three: Determine the General & Administrative Expenses
A. Additional administrative salaries are $
B. Additional office supplies and expenses are $
C. Bulk fuel loan interest are $
D. Other miscellaneous expenses are $
Divide total other general & administrative expenses by
total estimated usage/sales
$ / gallons = $ per gallon
The third step in developing your fuel prices is to estimate the per
gallon charge you should add to cover your annual general and
administrative expenses. General and administrative expenses are
defined as administrative costs that are incurred on an annual basis
(bookkeeper labor, fuel loan interest, etc.). These costs will vary
greatly from utility to utility, but, might include administrative
salaries, office expenses, phone expenses, loan interest, etc. These
expenses would also include any costs for training, an audit or
insurance, that are beyond what is required by the Denali
Commission and that are described in your Business Operating
Plan. For example, if you have Spill Liability Insurance - the cost of
that policy would be beyond the requirements of the Business
-9-
Updating R&R Costs
Generally, for purposes of investing money into your required R&R
bank account, you should probably refer to the annual R&R deposits
detailed in your Business Operating Plan. However, if you are
aware of a major R&R expenditure you need to make in the
upcoming year, and, you do not yet have enough money deposited
into your R&R bank account — then, you should add your annual
R&R payment amount to the cost of the item(s) you know you need
to buy in the upcoming year. Why add both into the pricing model?
Because, you need to make an annual deposit into the R&R account
to continue to build a fund balance that will provide for major repair
and renewal items into the future.
So, on the worksheet:
O&M Costs
Example: If you have put together your operating budget
for the next year, and, the total is $45,000, and in step one
above, you determine that you would sell/use a total of
100,000 gallons — then, your O&M cost would be $.45 per
gallon.
$45,000 divided by 100,000 gallons = $.45 per gallon
R&R Costs
Example #1: If you do not know of any major repair or
renewal items that you have to buy in the upcoming year —
then, you simply refer to the Business Operating Plan. Go
to the table that shows the annual amount you should
deposit into your R&R account and divide by the number of
gallons you estimate you will use/sell. So, in the third year
of the utility’s operation, we would take the year three
amount from the Business Operating Plan — let’s assume
it’s $5,572 — and divide it by the number of gallons you
estimate to use/sell — let’s assume 100,000 gallons. Then,
your R&R cost would be $.0557 per gallon.
$5,572 divided by 100,000 gallons = $.0557 per gallon
Example #2: If you know you will need to spend about
$7,500 to repair a generator in the upcoming year, then you
should add the $7,500 to the annual R&R deposit amount
-8-
Step Two: Determine the per gallon Facility Upgrade Surcharge
A. This year’s O& M cost is $.__ per gallon
B. This year’s R&R cost is $.__ per gallon
Total Facility O&M and R&R per gallon= $
The second step in developing your fuel prices is to estimate the per
gallon charge you should add to cover your facility O&M and R&R.
These costs have two parts — the O&M (operations and
maintenance) costs and the R&R (repair and renewal) costs. The
O&M costs are expenses, required by the Business Operating Plan,
for the purpose of operating the electric utility, for routine and
regular items, such as administration, postage, audit, liability
insurance and annual maintenance expenses, such as filters and
parts; and, long-term repair and renewal items that are less than
$5,000, such as pumps, small fence repair, etc. The R&R costs are
expenses for repair and renewal items that are not annual and cost
more than $5,000.
Updating O&M Costs
The goal of this step is to establish an O&M budget projection for
the new year. You will need to compare the actual O&M
expenditures against budgeted O&M costs. To accomplish this, first
gather together your bookkeeping records that identify your O&M
costs for this fiscal year. Ideally, you will have monthly records of
actual expenses as well as a compiled total fiscal year summary
statement of your O&M actual expenditures. Review the actual
expenditure records and compare against the budgeted projections.
Decide if you actually spent more or less than what was budgeted.
If for some reason you spent more or less in any one area, ask
yourself if some event or unique circumstance caused the
expenditure or savings or will the same likely occur in the new year.
You will need to make judgments and corresponding adjustments to
your O&M budget. Any actual expenditures or savings that were
incurred during the previous year, that you believe will stay the
same in the coming year, need to be reflected in the coming year’s
budget.
PRICE-SETTING WORKSHEET INSTRUCTIONS
Step One: Determine total estimated sales by type of fuel
A. Diesel #1 = gallons
B. Diesel #2 = gallons
C. Gasoline = gallons
D. Other = gallons
The first step in developing your fuel prices is to estimate how much
fuel you will be selling and using to operate the utility. If you
contribute fuel to a community purpose, without collecting payment
for the fuel, do not include those gallons in your estimate. Why?
Because you are attempting to estimate the number of gallons that
you will be able to sell or use at the utility, and how much cash you
will collect, in order to help fund your fuel purchase and your
operations. If you currently are allowing customers to charge for
fuel purchases, and, some of those customers are not paying their
bills — then, do not include those gallons in your estimate. Why?
Because, if the customers are not paying their bills, you will not
receive cash from them to help pay for fuel purchases or pay for
utility operations.
You should calculate “estimated sales/usage” by type of fuel — mostly
because you probably pay a slightly different amount for each type
of fuel.
For purposes of working through the worksheet, let’s assume
the following estimated sales information for the upcoming
year:
Diesel #1 = 35,000 gallons
Diesel #2 = 25,000 gallons
Gasoline = 40,000 gallons
Other = 0 gallons
Total gallons = 100,000
Step One:
Step Two:
Step Three:
Step Four:
Step Five:
Step Seven:
PRICE-SETTING WORKSHEET
Determine total estimated sales/usage by type of fuel
A. Diesel #1 = gallons
B. Diesel #2 = gallons
C. Gasoline = gallons
D. Other = gallons
Determine the per gallon O&M and R&R cost
A. This year’s O& M cost is $.__ per gallon
B. This year’s R&R cost is $.__ per gallon
Total O&M and R&R per gallon = $
Determine the General & Administrative Expenses
A. Additional administrative salaries are $
B. Additional office supplies and expenses are $
C. Bulk fuel loan interest are $
D. Other miscellaneous expenses are $
Divide total other general & administrative expenses by total
estimated sales/usage
$ / gallons = $ per gallon
Determine the per gallon costs of providing service (A)
O&M and R&R cost = $
General & Administrative = $
Per gallon costs for providing service = $
Determine the cost of fuel purchase/per gallon by type of
fuel (B) (See Cost of Fuel Worksheet)
Diesel #1 $ per gallon
Diesel #2 $ per gallon
Gasoline $ per gallon
Other $ per gallon
Determine the price per gallon by type of fuel (A+B)
Diesel #1 (A) + (B)
Diesel #2 (A) + (B)
Gasoline (A) + (B)
Other (A) + (B)
per gallon
per gallon
per gallon
per gallon A ARAA Add Markup/Profit Percentage
Se
O&M and R&R Costs
The operations and maintenance (O&M) and renewal and >
replacement (R&R) costs include: @
1. O&M: O&M items are those items that are necessary to ensure
the on-going operation of the utility. These O&M costs are
defined as expenses that are incurred on a regular basis
(supplies, audits, etc.) and maintenance expenses that are
incurred on an annual basis, as well as replacement costs of
items under $5,000.
. R&R: R&R costs are those expenses defined as items costing
greater than $5,000 and/or that are not incurred on an annual
basis, and, are required to ensure the long-term, on-going
operation of the utility.
General & Administrative Expenses
In addition to the O&M costs an electric utility may have
additional general and administrative costs. Such additional WG
costs could include additional salaries and office expenses for invoicing
retail customers, additional insurance (beyond what is required by the
Business Operating Plan), additional salary expense for employees, etc.
Again, make certain that all your costs are included in the fuel prices.
Overall Pricing Goal
The most important thing to remember about developing and managing
your fuel prices is — you are trying to set a price that allows you to
collect enough money to pay for your next fuel purchase
We) Say and to operate the utility. If you buy fuel only once CNG2 7, a year, then, you need to collect enough money to
; RES buy next year’s fuel and to operate the utility. Also
remember — fuel costs generally go up!
< CON
Price-Setting Method — Per Gallon Pricing
Determining Cost of Service
The recommended price-setting method requires determining the price
elements described below. Calculating the true cost of providing service
requires fairly detailed and accurate accounting. The cost of service
can be estimated using available data from the fuel invoices, the R&R
plan, operating budget and other available accounting data.
Allocate Costs Based on Usage
The next step is to determine how much of the total cost each customer
should pay. The fairest way to do this is to allocate the costs on a per
gallon basis for each type of fuel sold. Therefore, it is important to keep
good fuel records — amount of fuel purchased, used and sold.
Adoption & Review
The method of establishing prices should be described in the utility’s
operations procedures and approved by senior management.
It should be in writing and explain what is included and
excluded from the price set for each type of fuel. A
minimum price should be reviewed frequently.
Elements of Price - Per Gallon Pricing
Fuel prices are designed to generate revenue to recover the cost of
operating, maintaining, managing or replacing the electric utility, and,
in some cases, making a profit. So, what are those costs? The most
common costs that will be incurred by electric utilities can be divided
into three areas:
1. Cost of fuel
2. O&M and R&R costs
3. General & administrative expenses
Cost of Fuel
The cost of bulk fuel inventory can be further broken into three
parts: cost of product, cost of transportation and cost of delivery \ S
services. Large enterprises track these three items separately,
but, for most small enterprises, it is more efficient to combine them.
Either way, it is important to make sure that you include all the fuel
charges in your fuel pricing.
32
2. The use of business funds to subsidize other operations (such as
street maintenance, fire or police) is OK only if all of the fuel
business’s costs, including long-term repair and renewal, also are
being included in the price.
. Prices should be fair to all. Discounts and special prices are OK —
but, only if offered to all customers under the same terms. For
example, all customers purchasing more than 1,000 gallons per
year receive a $.01 per gallon discount.
Change Pricing as Needed
Prices should be reviewed frequently — ideally monthly — to ensure that
all of the assumptions that you used to develop your price are still true.
And, prices should be reviewed when any of the following occur:
. each year during the budget development process
. a major change in the cost of bulk fuel
. a major change in the utility or operations
. a major change in your customer base
Elements of Price —- Special Charges
Cost of Special Services
Electric utilities could provide special services, such as fuel delivery,
fuel storage and sale of other products. The charges for recovering the
cost of providing these services are called service charges. These
charges are applied only to the individual customer who receives the
service and usually wouldn't be included in the per gallon cost of fuel.
Cost of Penalty Items
When customers fail to pay a bill on time, they increase the cost of
operating the utility. The charges for recovering these types of costs are
called penalties and normally should be charged to the individual
customers rather than added to the per gallon cost of fuel. However,
once you determine that a customer will likely never pay their
outstanding bill, and, you have terminated their service, then that
outstanding amount becomes bad debt and will need to be incorporated
into your general and administrative expenses.
SETTING FUEL PRICES
Occasionally, as an electric utility, you may decide to
sell some of your bulk fuel inventory. The price you set
for the fuel will be critical to maintaining the financial
health of your electric utility. And, in order to properly
set prices, you must know how much it costs per gallon
of fuel to operate the electric utility. Once you have determined how
much it costs to operate the utility — then you have a basis for setting
prices.
If your electric utility decides to sell some of its fuel, properly setting the
price will assure that your utility can provide adequate funds for the
proper management, operation, maintenance, renovation or expansion of
the utility!
Fuel Pricing Policies
There are three major criteria that should be met in the development
and establishment of fuel prices. Prices should be:
1. Set using an established written procedure adopted by the policy-
making body. (NOTE: A written procedure does not need to be
long and complicated. It can be as simple as stating that you will
use the “Price-Setting Worksheet” and will include a markup of
5% to each gallon of fuel.)
2. Understandable and explainable to the policy-making body and
the customers.
3. Fair to all customers.
Price-Setting Philosophy
There are three key price-setting elements that are generally accepted
by many businesses, including:
1. The subsidizing of certain classes of customers (such as elders) is
OK as long as the amount of subsidy and the effect it has on
other customer’s prices are understood.
$400. In year one, you would take only $200 in depreciation
expense. In years 2 through 6, you would take $400 in
depreciation expense. And, you would add year 7 and take the
remaining $200 in depreciation expense. Depending upon your
policies regarding depreciation, the purpose for which you are
reporting depreciation (such as taxes, PCE, etc.) you may need to
use the mid-year convention.
Sample Depreciation Schedule
A “Sample Depreciation Schedule” form, an example of how to fill the
schedule out and general instructions for its use are included on the CD
attached to the back of this “Management Guide”.
This schedule is fairly simple to use - either on a computer or manually.
A computer spreadsheet program, such as MS Excel, would make
keeping this schedule relatively simple, but, if you do your accounting
manually or don’t know how to use a computer spreadsheet program,
then you can use plain paper or columned paper, or make a copy of the
PCE schedule and write on that copy. The important thing is - keep
the schedule.
Depreciation Bookkeeping
A utility needs to report depreciation accurately in its financial
statements in order to achieve two main objectives. First, to match its
expenses with the income generated by the expenses. Second, to
ensure that the asset values in the balance sheet are not over stated.
An asset acquired in the year 2008 is unlikely to be worth the same
amount in 2007.
For historical cost purposes, assets are recorded on the balance sheet at
their original costs. Depreciation is not taken out of these assets
directly. Instead, it is recorded as a contra asset account - called
accumulated depreciation. In order to determine what the value of the
asset account is on the date the balance sheet was prepared, all you
have to do is .... subtract the accumulated depreciation from the value
of the asset account...and, that’s the net book value of the assets.
Additionally, each year an annual amount is expensed on the Income
Statement to account for the declining value in assets for that year - it
is normally in an account called Depreciation Expense.
One final thought on depreciation, and that’s a concept called mid-year,
or half-year, convention. What’s that? Well, it sounds worse than it is.
The concept of mid-year convention when dealing with depreciation is
simply this --- in the year that you purchase an asset, you don’t usually
get a full year’s use out of the asset; and, therefore, some would argue,
you shouldn’t take a full year’s depreciation. The mid-year convention
simply says, that in the first year of the asset’s life, you only take one-
half of a year’s worth of depreciation and then take the other one-half
at the end of the asset’s useful life.
Example: A computer has a useful life of six years. It costs $2,400
and has no resale value at the end of its useful life. So, you simply
divide $2,400 by 6 and obtain the yearly depreciation figure of
-6-
B Cc D iE F G H
Schedule of Depreciation and Amortization FOR TEST YEAR ENDING: 12/31/2006 Accum Book Accum Book
Date placed Dep Value 2006 Dep Value Asset in service Cost Life 12/31/05 12/31/2005 Depreciation 12/31/2006 12/31/2006
HYDRAULIC PRODUCTION PLANT 330 1 Land 330.2 Land Rights 331 Structures and improvements.
Column A - Asset - In the first column, list the type of asset
being depreciated. Indicate whether it’s a computer or generator,
etc. One of the nice features of the PCE schedule below is that it
provides a listing of the type of equipment and assets to get you
started.
Column B - Date placed in service - In this column, indicate
when you first started using the asset in the utility - when you
purchased it.
Column C - Cost - In this column, indicate the cost of asset -
what you actually paid for it. (Remember, for PCE purposes you
may not include depreciation expense on assets you did not
purchase, such as grant-funded equipment).
Column D - Life - In this column, indicate the useful life of the
asset in years.
Column E - Accumulated Depreciation (prior year) - In this
column, indicate how much total depreciation you had taken on
this asset as of the end of the last accounting year.
Column F - Book Value (prior year) - In this column, indicate
the book value of the asset as of the end of the last accounting
year. Book value is the “Cost (Column A) - Accumulated
Depreciation (Column E).
Column G - Depreciation (Current Year) - In this column,
indicate the annual depreciation expense for the current
accounting year.
Column H - Accumulated Depreciation (Current Year) - In
this column, indicate how much total depreciation you have taken
on this asset as of the end of the current accounting year.
Column E plus Column G.
Column I - Book Value (Current Year) - In this column,
indicate the book value of the asset as of the end of the current
accounting year. Column F minus Column G.
lower percentage (from the tables) until the cost is fully
depreciated.
Depreciation Schedule
Simply put, a depreciation schedule is the best tool available for
helping you keep track of your assets, purchase information and
depreciation information. After all, you, or someone like you, will have
to track the depreciation of many of the utility’s assets over 20 to 30
years. That’s a long time. No one could keep track of all that
information without some sort of schedule. Below is a great example of
a depreciation schedule, that also just happens to part of the required
record keeping for the PCE Program.
‘Schedule of Depreciation and Amortization
FOR TEST YEAR ENDING: 12/31/2006
Accum Book Accum Book
Date placed Dep Value 2006 Dep Value Asset inservice Cost Life 12/31/05 12/31/2005 Depreciation 12/31/2006 12/31/2006
HYDRAULIC PRODUCTION PLANT
330.1 Land 330.2 Land Rights
331 Structures and improvements.
332 Reservoirs, dams, and waterways.
333 Water wheels, turbines and generators.
334 Accessory electric equipment.
335 Miscellaneous power plant equipment.
336 Roads, railroads and bridges.
OTHER PRODUCTION PLANT 340 Land and land rights. 341 Structures and improvements. 342 Fuel holders, producers, and accessories. 343 Prime movers 344 Generators, 345 Accessory electric equipment 346 Miscellaneous power plant equipment.
TRANSMISSION PLANT 350 Land and land rights 352 Structures and improvements. 353 Station equipment. 354 Towers and fixtures. 355 Poles and fixtures. 356 Overhead conductors and devices. 357 Underground conduit 358 Underground conductors and devices 359 Roads and trails.
DISTRIBUTION PLANT 360 Land and land rights.
361 Structures and improvements. 362 Station equipment. 363 Storage battery equipment 364 Poles, towers and fixtures.
365 Overhead conductors and devices 366 Underground conduit. 367 Underground conductors and devices
368 Line transformers.
369 Services. 370 Meters 371 Installations on customers’ premises
372 Leased property on customers’ premises. 373 Street lighting and signal systems
GENERAL PLANT 389 Land and land rights. 390 Structures and improvements. 391 Office furniture and equipment. 392 Transportation equipment. 393 Stores equipment 394 Tools, shop and garage equipment
395 Laboratory equipment. 396 Power operated equipment 397 Communication equipment. 398 Miscellaneous equipment 399 Other tangible property, TOTAL ACCUMULATED DEPRECIATION
Depreciation Methods
There are two main ways of calculating depreciation: the straight-line
method and the accelerated methods.
Straight-line method - The simplest and most common way to
depreciate an asset is the straight-line method. To use this method,
divide the estimated useful life of an asset into its purchase price
(minus any resale value). Resale value is the estimated amount a
company can expect to receive from the sale of an asset at the end of its
useful life. For most assets that you'll be depreciating, there most
probably isn’t much resale value. So, in that case, you'll use the
purchase price.
Example: A computer has a useful life of six years. It costs $2,400
and has no resale value at the end of its useful life. So, you simply
divide $2,400 by 6 and obtain the yearly depreciation figure of
$400.
Accelerated methods - Many fixed assets are more valuable in their
earlier years than in their later years. This is due to changes in
technology or wear and tear. Accelerated depreciation attempts to
reflect this value by allowing greater depreciation in the early years.
There are many accelerated methods of depreciation - however, the
method you are most likely to encounter is the modified accelerated
recovery system (MACRS) that is used by the Internal Revenue
Service. The good news about MACRS is that the IRS gives us the
property classes and useful lives - it’s the same table we looked at on
the preceding page (more details are available in IRS “Publication 946,
How to Depreciate Property’). So, using MACRS is very easy in that
we simply find the class of property we’re dealing with and use the
property life listed in the table.
Example: A computer, according to the MACRS listings, is a five-
year property. Again, it costs $2,400 and has no resale value. In
this case, you don't just divide the cost by five years. Instead, you
use a percentage provided in the IRS publication - assume that the
first year percentage listed in the tables is 80%. So, you simply
multiply the cost of $2,400 x 30% and obtain the first year
depreciation figure of $720. And, each year you would apply a
consistent for tax purposes (if you file income taxes). The “cons” of
using the IRS property classes is that it’s a very broad listing, which
often is not very helpful, and it does not always conform to other
conventions you might need to use. A broad listing of the IRS property
classes follows:
Type of Property General Rale-Class Life of: Specific Classifications by Statute Applicable Recovery Period
3-year properly 4 years of lexs Certaia race horses and most other horses;
qualified rent-to-own 3 years
S.year propeny More than 4 but less than 10 years
Automobiles and light general purpose trucks,
semi-conductor manufacturing equipment; computer-based telephone cerzral office switching equipment; qualified technological
equipment;! certain research peoperty; certain
solar, wind or geothermal energy property.
5 years
19 of more but less than 16
years; ako, property (other than real property) without a
class life
Railroad tack; certain motorsports
entertainment complexes; certain Alaska
natural gas pipeline.
16 or more but Jess than 20 years
Any single purpose agncultural or
horticultural structure, any tree or vine bearing fruit or nuts.
15-year property 20 or more but less than 25 years
Any municy~al wastewater teatment plant,
certain telephone distnbution equipment: certain retail motor fuek ontler property: qualified leaschold improvements placed in service before January 1, 2006; qualified
restaurant property placed in service before
January 1, 2006, initis! clearing and grading land improvemeats with respect to gas utility property.
20-year property 25 of more years
inmial cleanng and gradimg land
improvements with respect to any cleciric
utility transmission and distribution plant
Water utility property
Residential renial property
Nonresidential teal property
Any railroad grading or
tunnel bore
Also, there are guidelines speci
acceptable to the RCA and AEA for PCE participants:
fic to electric utilities, which are
Plant Type Annual Rate
Generators
Transformers
Poles, Towers _
Overhead Lines _
Underground Conduit
Meters
Service
Buildings ;
Office Equipment _
Vehicles
Fuel Tanks
Computers _
Street Lights
Power Stat Meters/Displays
Small Engines
7%
4% - 5%
10% 16% — 25% _
6.66% 16.67%
5%
10%
20%
DEPRECIATION
Depreciation is an accounting concept that confuses
many people - but really, it is a relatively simply one.
Depreciation is simply a method of spreading the cost
of an asset over its estimated life. So, if you purchase
an asset this year - say a computer - that will last six
years and costs $2,400, then you would spread the
cost of the computer over six years. It makes sense -
doesn’t it? The computer is not going to last forever. And, each year
that you own the computer, it loses some value, until the computer
finally stops running and has no value to the business. Depreciation
expense is just a measure for this loss in value of the asset. So, in the
first year, rather than expensing the entire cost of the computer, you
would expense one-sixth of the cost, or $400. And, in the next five
years you would also expense one-sixth of the cost, or $400 each year.
Pretty simple, right?
So, the key to understanding depreciation is to be systematic -
breakdown the concept into its basic elements:
e What is the estimated life of the asset?
e What depreciation method should I use?
e What is the annual amount to depreciate?
Estimated Life of the Asset
Estimating the useful life of an asset requires a bit more than simply
making a guess as to how long you think the item will last. Why? Your
guess is as good as anyone else’s, right? Well, while that might be
right, the problem lies in that for much of the time - others have to
agree with your decisions regarding depreciation. There’s the Internal
Revenue Service - and, if you file income taxes, it has to agree with
your depreciation decisions. There’s the Regulatory Commission of
Alaska - and, if you participate in PCE, it has to agree with your
depreciation decisions. And, there are others. To help, there are
established conventions for determining the useful life of an asset. One
such convention is to defer to the Internal Revenue Service
determination, which is called “Property Classes and Recovery
Periods”, and is available on the Internal Revenue Service website--
www.irs.gov, see “Publication 946, How to Depreciate Property”. The
“pros” of using the IRS property classes is that it’s easy to find and is
ai
Step Five: In the Estimated Income/Cashflow section: Copy the annual
depreciation expense from the Annual G&A, O&M and Fuel Budget
and copy the “Total R&R Expenses from the Annual R&R Budget
Worksheet.
|Estimated Income
Less: Estimated Uncollectable Accounts
26,240
13,230
Less: Total Annual R&R Expenses 24,257
Plus: Depreciation Expense 12,500
Step Six: In the Estimated Income/Cashflow section: Subtract the
“Estimated Uncollectable Accounts” and the “Total R&R Expenses”
from the “Estimated Income’ to calculate “Estimated Cashflow”.
Estimated Income/Cashflow
Estimated Revenue
Less: Estimated Expenses
Estimated Income
Less: Estimated Uncollectable Accounts
346,500
320,260
13,230
Less: Total Annual R&R Expenses
Plus: Depreciation Expense
24,257
12,500
Estimated Cashflow
Step Two: In the Estimated Expense section, using information
calculated on the G&A, O&M and Fuel Budget worksheet: Enter your
estimates for “Subtotal General & Administrative”, “Subtotal
Operations”, and “Subtotal Fuel Costs”.
Estimated Expenses
Subtotal General & Administrative 87,301
Subtotal Operations 37,209
Subtotal Fuel Costs 195,750
tetimated Expenses $ 320,260 |
Next, copy the result to the Estimated Income/Cashflow section:
Step Three: In the Estimated Income/Cashflow section: Subtract the
“Estimated Expenses” from the “Estimated Revenue” to calculate the
“Estimated Income”. Record the result.
Estimated Income/Cashflow
Estimated Revenue 346,500 |
Less: Estimated Expenses 320,260
Estimated Income
Step Four: In the Estimated Income/Cashflow section: Estimate the
total amount of your utility billings that will be uncollectable during
the year and enter the result as “Estimated Uncollectable Accounts”.
For purposes of working through the worksheet, let’s assume
the following information:
Let’s assume that we will collect all of the commercial accounts and
90% of the residential accounts. Therefore, our uncollectable accounts
would be $132,300 X 10% = $13,230.
Estimated Income/Cashflow
Estimated Revenue 346,500 |
Less: Estimated Expenses 320,260
Estimated Income Less: Estimated Uncollectable Accounts 13,2380
Large
Step Three: Total the results to calculate the “Total Annual R&R
Expenses”.
Total R&R Expenses from Operations $ 6,250
Annual R&R Bank Deposit:
Enter below the amount that you plan to deposit
into your R&R Bank Account this year:
Annual R&R Bank Deposit $ 18,007
Total Annual R&R Expenses $ 24,257
Annual Summary:
The Annual Summary worksheet has three sections: Estimated
Revenue, Estimated Expenses and Estimated Income/Cashflow.
Step One: In the Estimated Revenue section: Enter your estimate for
the annual revenue. And, total results to calculate “Estimated
Revenue”. Transfer the result to the Estimated Income/Cashflow
section below.
For purposes of working through the worksheet, let’s assume
the following information:
Let’s assume that we will generate 630,000 kWh for sale — 252,000 for
commercial customers at $.55 per kWh and 378,000 for residential
customers at $.55 per kWh (with a PCE credit of $.20).
Using these assumptions, your annual Estimated Revenue would be:
Estimated Revenue
Residential Customers 132,300 PCE Subsidy __75,600
Commercial Customers 138,600
3___346,500
in the bank. And, let’s assume that we will have enough cash from
our operations to pay for the generator maintenance.
Using these assumptions, your annual estimated R&R expenses from
operations would be:
Generator Maintenance
Step Two: Enter the amount that you plan to deposit into your R&R
Bank Account this year.
For purposes of working through the worksheet, let’s assume
the following information:
Annual R&R Bank Payment - $18,007
Let’s assume that we are in the second year of operating the
upgraded electric utility. And, let’s assume that we are following
the R&R payment schedule in our Business Operating Plan. We
would simply look in the Plan, at the Year Two R&R Annual
Payment, and, use that amount for the annual bank deposit.
Using these assumptions, your annual estimated R&R Bank Payment
would be:
Enter below the amount that you plan to deposit
into your R&R Bank Account this year:
Annual R&R Bank Deposit $ 18,007
Step Three: In the Fuel Costs section, estimate the fuel costs for the
utility. Record the result. For purposes of working through the
worksheet, let’s assume the utility will use 45,000 gallons of diesel at
$4.35 per gallon, or $195,750.
Subtotal Fuel Costs 195,750
Fuel Costs
Thus, the “Total G&A, O&M, Fuel” is $320,260 — which is the sum of
the following:
General & Administrative _ $87,301
Operations _ $37,209
Fuel Costs $195,750
|Total G&A, O&M, Fuel $ 320,260
Annual R&R Budget:
The Annual R&R Budget worksheet has two sections: Annual Renewal
& Replacement Expenses from Operations and Annual R&R Bank
Deposit.
Step One: First, enter your estimate for the annual amount that you
plan to spend on R&R items that will be funded only from operations —
NOT FROM YOUR R&R BANK ACCOUNT. Then total the expenses.
For purposes of working through the worksheet, let’s assume
the following information:
Generator Maintenance - $6,250
Let’s assume that one of the generators will require maintenance.
And, let’s assume that we don’t want to take the $6,250 from our
R&R bank account, because we don’t yet have a significant balance
-14-
Step Two: In the Operations section: Enter your estimate for the
annual budget for each expense category. Then total the expenses.
For purposes of working through the worksheet, let’s assume
the following expenses information:
Salaries
Position Hourly Hours Annual
Rate Per Week Estimate
Lead Operator $18 20 $18,720 _
Backup Operator $18 8 $7,488
Payroll Taxes
—_ T. Rate ax
FICA 6.2%
Medicare 1.45%
FUTA .8%
ESC 3.0%
Other Expenses:
Maintenance Supplies Average $500 per month
Training Average $800 per year
Outside labor Average $1,200 per year
Using these assumptions, your annual Operations budget would be:
Operations
Operator Labor
Payroll Taxes
Maintenance Supplies
Training
Travel
Dues/fees
Other:
Outside Labor
Other Expenses:
Heating Fuel Average $1,000 per month
Office Supplies Average $100 per month
Phone Average $75 per month
Board Expenses $15 fees x 8 members per month
Training Quickbooks - $1,200 class and $1,000 travel
Audit $1,500 for electric utility share of total audit
Accounting $150 per month average
Postage Average $115 per month
Freight Estimated $500 per year
Depreciation Estimated $12,500 per year
Rent Average $1,200 per month
Using these assumptions, your annual O&M budget would be:
Annual G&A, O&M, Fuel Expenses
Administrative Salaries
Payroll Taxes
Worker's Compensation _
Phone
Heating Fuel
Office Supplies
Postage
Freight
Audit
Training
Insurance
Depreciation
Rent
Board Expenses
Accounting Services
Other:
Subtotal General & Administrative
SAMPLE ANNUAL BUDGET WORKSHEETS
SAMPLE EXERCISE
Below is an example of how to complete the worksheet for preparing an
Annual Budget. This sample exercise is included as an MS Excel
worksheet on the CD attached to the back cover of this “Management
Guide”.
Annual G&A, O&M and Fuel Budget:
The G&A, O&M and Fuel Budget worksheet has three sections: General
& Administrative, Operations and Fuel Costs.
Step One: First, enter your estimate for the annual budget for each
expense category in the General and Administrative. Then total the
expenses.
For purposes of working through the worksheet, let’s assume
the following expenses information:
Salaries
Position Hourly Hours Annual
Rate Per Week Estimate
Clerk $15 20 $15,600
Manager $25 8 | $10,400
Payroll Taxes
Tax
FICA
Medicare
FUTA
ESC
Workers Compensation/ Insurance:
Annual Cost
Workers’ Compensation $6,004
Insurance $2,500
Step Three: Finally, add “Total R&R Expenses from Operations” and
“Annual R&R Bank Deposit” to calculate “Total Annual R&R
Expenses’.
Annual Summary:
The Annual Summary worksheet has three sections: Estimated
Revenue, Estimated Expenses and Estimated Income/Cashflow.
Step One: In the Estimated Revenue section: Enter your estimate for
the annual revenue. And, total results to calculate “Estimated
Revenue”. Transfer the result to the Estimated Income/Cashflow
section below.
Step Two: In the Estimated Expenses section: Copy your estimates
from the Annual G&A, O&M and Fuel Worksheet for the “Subtotal
General & Administrative”, “Subtotal Operations” and “Subtotal Fuel
Costs”. Then, total results to calculate “Estimated Expenses”.
Transfer the result to the Estimated Income/Cashflow section below.
Step Three: In the Estimated Income/Cashflow section: Subtract the
“Estimated Expenses” from the “Estimated Revenue” to calculate the
“Estimated Income”. Record the result.
Step Four: In the Estimated Income/Cashflow section: Estimate the
total amount of your utility billings that will be uncollectable during
the year and enter the result as “Estimated Uncollectable Accounts”.
Step Five: In the Estimated Income/Cashflow section: Copy the
Annual Depreciation Expense from the Annual G&A, O&M and Fuel
Budget Worksheet. And, copy “Total Annual R&R Expenses” from the
Annual R&R Budget Worksheet.
Step Six: In the Estimated Income/Cashflow section: Subtract the
“Estimated Uncollectable Accounts” and the “Total R&R Expenses”
from the “Estimated Income” and add “Depreciation Expense” to
calculate “Estimated Cashflow”.
SAMPLE ANNUAL BUDGET
WORKSHEET INSTRUCTIONS
The Electric Utility Annual Budget includes three (3) worksheets — the
Annual G&A, O&M and Fuel Budget, the Annual R&R Budget and the
Annual Budget Summary.
Annual G&A, O&M and Fuel Budget:
The G&A, O&M and Fuel Budget worksheet has three sections: General
and Administrative, Operations and Fuel Costs.
Step One: Enter your estimate for the annual budget for each expense
category in the General and Administrative section. And, total the
results to calculate the “Subtotal General & Administrative”.
Step Two: Enter your estimate for the annual budget for each expense
category in Operations section. And, total the results to calculate the
“Subtotal Operations”.
Step Three: In the Fuel Costs section: Estimate the amount of fuel
that the utility will use during the year. Record the result and
calculate the “Subtotal Fuel Costs”.
Step Four: And, total the results to calculate the “Total Annual G&A,
O&M and Fuel Expenses”.
Annual R&R Budget:
The R&R Budget worksheet has two sections: Annual Renewal &
Replacement Expenses from Operations and Annual R&R Bank Deposit.
Step One: In the Renewal & Replacement Expenses from the
Operations section: Enter your estimate for the annual amount that
you plan to spend on R&R items that will be funded only from
operations —- NOT FROM YOUR R&R BANK ACCOUNT. And, total
the results to calculate the “Total R&R Expenses from Operations’.
Step Two: In the Annual R&R Bank Deposit Section: Enter the
amount that you plan to deposit into your R&R Bank Account this year.
Electric Utility:
Annual Budget Summary
For the Year Ending __
Estimated Revenue
Residential Customers
|PCE Subsidy
|Commercial Customers
Estimated Revenue :
Estimated Expenses
Subtotal General & Administrative
Subtotal Operations
Subtotal Fuel Costs
Estimated Expenses
Estimated Income/Cashflow
|Estimated Revenue
Less: Estimated Expenses
Estimated Income
Less: Estimated Uncollectable Accounts
Less: Total Annual R&R Expenses
Plus: Depreciation Expense
Electric Utility:
Annual R&R Budget
For the Year Ending sites
Annual R&R Expenses from Operations:
Enter below any R&R items that you plan to do
this year - that you will pay for from your operating
funds. DO NOT ENTER ANY R&R ITEMS THAT
YOU PLAN TO PAY FOR WITH FUNDS FROM
YOUR R&R BANK ACCOUNT!
Annual R&R Bank Deposit:
Enter below the amount that you plan to deposit
into your R&R Bank Account this year:
Electric Utility; _ =
Annual G&A, O&M and Fuel Budget
For the Year Ending sis
Annual G&A, O&M, Fuel Expenses
General and Administrative Budget
Administrative Salaries
Payroll Taxes
Worker's Compensation
Phone
Heating Fuel
Office Supplies
Postage
Freight
Audit
Training
Insurance
Depreciation
Rent
Board Expenses
Accounting Services
Other:
+
Subtotal General & Administrative
Operations
Operator Labor
Payroll Taxes
Maintenance Supplies
Training
Travel
Dues/fees
Other:
Outside Labor
Subtotal Operations
Fuel Costs
Fuel
Other:
Subtotal Fuel Costs
Total G&A, O&M, Fuel
Amending the Budget
A budget is a plan, and sometimes a plan doesn’t
work the way you expect. Changes, that no one can
predict, occur. Costs can sometimes double on an
item, while another doesn’t cost what was originally
projected. It’s time to amend the budget! If you’re a
City and the budget was adopted as an appropriations
ordinance, the ordinance needs changing. To make changes to the
appropriations ordinance a budget amendment ordinance is required.
The important thing is that you must periodically review your budget
and make changes as needed.
You’re Finished with the Budget, Are You Done?
No.
Now it’s time to make sure the budget is followed. You
should:
. Develop a chart of accounts from your budget categories.
. Track all revenues and expenditures through either a manual or
computerized accounting system.
. Prepare monthly financial statements for the governing body and
management.
. Prepare a year-end financial statement for the governing body and
management.
Sample Annual Budget Worksheet
A “Sample Annual Budget Worksheet” and instructions for its use are
included below — and, a copy is included on the CD attached to the back
cover of this “Management Guide”:
Training
To budget training costs, determine what training will be needed,
such as operator training, bookkeeping training, computer
training, etc. Then compute the cost of training necessary during
the fiscal year. Make certain that you include the cost of
transportation, per diem and other expenses for each trip in the
travel budget.
Fuel
Fuel costs can be very difficult to budget, since the amount of fuel
required is subject to many variables, particularly the weather.
An extremely cold month or long, cold season can increase fuel
costs significantly.
You can estimate fuel costs by two methods: 1) take a look at your
historical cost and raise this year’s budget a percentage increase
over the prior year cost; or 2) prepare a schedule of the amount of
fuel you expect to use and multiply it by the expected cost per
gallon. The second method is probably the better one during
periods of fluctuating or high fuel prices.
Office/Maintenance Supplies
The first thing to do when estimating office or maintenance
supplies is to check the amount of supplies you presently have on
hand. Carefully analyze any items that are expensive or must be
purchased in bulk, but, not bought regularly (such as valves,
preprinted letterhead, preprinted envelopes, checks for the various
bank accounts, forms or booklets).
Then, estimate the amount of supplies you will need for the next
year and estimate how much money you will need to budget.
Audit/Insurance
Generally, you can estimate audit or insurance costs by two
methods: 1) take a look at your historical cost and raise this year’s
budget a percentage increase over the prior year cost; or 2) contact
your audit and/or insurance firm and ask for a price quote. The
second method is probably the better one because a quote will most
likely be more accurate than your “guess”. But, if you can’t get a
quote, make an informed guess based on past or similar costs.
Payroll taxes
Payroll taxes are calculated as a percentage of gross wages. FICA
tax (or Social Security) is 6.2% of gross wages. Medicare is 1.45%
of gross wages. FUTA (Federal Unemployment Tax) is .8%;
however, cities, federally recognized tribes and non-profits do not
pay FUTA. Alaska Unemployment Tax (or Employment Security
Contribution) is the amount established by the state on a
contribution report. The percentage can vary from 2.85 % to more
than 5% depending on the amount of turnover the organization
reports.
Budget only the employer’s portion of the payroll taxes, since the
employee’s portion is deducted from their gross wages and is
already budgeted.
Retirement Plans/Public Employee Retirement System (PERS)
If you have employees that participate in PERS or any other
retirement program; and, the organization has contracted to match
their contributions or contribute to their accounts, then multiply
their gross wages by the percentage of contribution. Again, only
the organization’s portion should be budgeted since the employee’s
contribution is a deduction from their gross wages.
Travel & per diem
Travel and per diem expense is incurred for employees and
officials/board/council. Travel expenses are transportation, per
diem and other. Transportation includes airfares, automobile
mileage allowances, taxis and any other form of essential
transportation expense incurred on official business. Per diem is
paid to an employee to cover the cost of lodging and meals.
Lodging is backed up with receipts and meals are usually a flat
rate. Other charges may be telephone, parking fees (not parking
tickets), emergency purchases of supplies and other charges to
complete official business.
To budget travel and per diem expense, determine the number of
trips necessary during the fiscal year and compute the cost of
transportation, per diem and other expenses for each trip. It is
important to remember necessary training for operators and other
personnel.
account in your bookkeeping and accounting systems. The O&M
bank account does not have to be an interest-bearing account.
Renewal & Replacement (R&R) Bank Account and Funds
Your Electric Utility Upgrade Business Operating Plan requires
that you establish a set of accounting records to track your annual
expenses and payments for long term renewal and replacement of
the facility. You must deposit your R&R funds into a separate
bank account, which must be interest- bearing. Once you have
built up a significant balance in the account, usually $100,000, you
are required to deposit the R&R funds into a separate managed
savings or invested escrow-type account.
Annual Budgets & Planning Requirements
Your Electric Utility Upgrade Business Operating Plan requires that
each year you prepare a budget for your G&A, O&M and your R&R
expenses. Budgeting requires “guesswork”; however, your “guesses”
should be based upon some rationale. Let’s take a look at some ways to
estimate expenses.
Estimating Expenses
Below are some of the most common expense categories
for electric utilities and suggestions for how to estimate
annual expenses.
Wages
Wages are normally the largest expenditure of the organization
and budgeting the approximate wage expense is the most
important expense item. To estimate this expense - list each
employee, the rate they are paid and the usual number of hours
they work per pay period. Multiple the rate, times the hours,
times the number of pay periods. There are 52 weeks in a year. If
you pay weekly, the number of pay periods would be 52. If you pay
biweekly (every other Friday), then the number of pay periods
would be 26. If you pay semi-monthly, each 15th and 31st, then
the number of pay periods would be 24. Then, add all the
employee wages together in the department to compute the total
gross wages.
ANNUAL BUDGETS/ANNUAL PLANNING
The Primary Operator is responsible for the on-going
administration (G&A), operation and maintenance
(O&M) of the facility, the long-term repair and
replacement (R&R) of facility components and the on-
going financial management of the facility. Your
Electric Utility Upgrade Business Operating Plan, and
good business practices, requires that the Primary Operator develop a
budget each year for the General & Administrative (G&A), Operations &
Maintenance (O&M) and Repair and Replacement (R&R) expenses and
payments.
Financial Responsibilities of the Primary Operator
Basically, the primary operator is responsible for all aspects of the
management and financial accounting for the facility, including:
Properly establishing and maintaining a financial management
system, including budgets, financial reports and audits/reviews.
Accounting for, billing for, and using its best efforts to collect all
electric billings and all other receivables.
Establishing required bank accounts and depositing monies into
the appropriate accounts.
Maintaining adequate cash reserves for G&A, O&M and R&R
expenses.
Required Bank Accounts
The primary operator of the facility is responsible for
establishing and managing accounting systems and bank
accounts for O&M and R&R to ensure that sufficient
financial resources exist to sustain the facility.
Operations & Maintenance (O&M) Bank Account and Funds
Your Electric Utility Upgrade Business Operating Plan requires
that you establish a set of accounting records to track your annual
expenses for general operations and routine maintenance of the
facility. You must deposit your O&M funds into a bank account —
however, the account does not have to be a separate bank account.
You must, however, separately track funds for the electric utility
21
Assumed
C ollec table
Kui / Year
215,569
371,597
214,960
ty 315,314
366,445
85
502,965
594,294
961,991 1,001,260
165,338
199,417
433,585
574,643
443, 520
507, 116
606,317
Infiat om Rat :
Reinvestment Rat :
Datial K wii C dleetuble = Diitial Cost per Kul :
S year step costinczease : MOTAHSVO LNAWAOV 1dde GNV TVMANAY UVAA OF AdVUNdN ALIMILN OAL TA Oo LNANHOVLLVY
Renewal and Replacement Guidelines
The Primary Operator shall establish a Facility savings account or interest-bearing invested
escrow managed renewal and replacement account acceptable to the Denali Commission,
which will ensure capitalization of an amount sufficient to maintain the R&R Schedule (see
R&R Account Information”). Section VII. Financial Information provides Table G: 40 Year R&R
Schedule as a guide to plan for annual R&R activities and Table H: 40 Year R¢*R Cashflow as a
guide to estimate annual R&R required contributions. These costs are based on the R&R
cost estimate provided by xxxxxxx, Inc. See Appendix B: O¢M and R&*R Cost Estimate.
The Primary Operator will use the estimates in this Plan for year one contributions, and in
subsequent years will recalculate contributions based upon actual costs.
ATTACHMENT B
EXAMPLE OF LANGUAGE IN DENAI COMMISSION FUNDED ENERGY
FACILTIES
Financial Responsibilities
There are three cost categories that will be incurred in the ongoing administration, operation
and upkeep of the Electric Utility equipment - G&A, O&M and R&R.
1) G&A: The Primary Operator will incur a number of expenses that are General &
Administrative (G&A) in nature — interest expense, rent, office expenses, depreciation, etc.
G&A expenses are defined as administrative expenses that are incurred on an annual basis.
G&A expenses are detailed in Table F: Annual G&~A and Depreciation Expenses.
The Primary Operator will incur a number of expenses relating to the O&M of the
equipment. O&M items are defined as expenses that are incurred on a regular basis
(administration, audits, etc.) and maintenance expenses that are incurred on an annual basis.
O&M expenses are detailed in Table C: Annual O@M Schedule and a narrative detail is
provided in Section VIII. Financial Information to address estimates and assumptions.
R&R costs are those expenses defined as items costing greater than $5,000 and/or that are
not replaced on an annual basis. Table G: 40 Year R&R Schedule details the anticipated items,
the frequency of their replacement and their present day value.
The Primary Operator will maintain separate O&M and R&R accounting records and a
separate R&R bank account. The Primary Operator will maintain a sufficient account
balance to meet the O&M and R&R financial goals in this Plan. The Manager will be
authorized to draw against the O&M funds for routine expenses of the Facility; however,
individual expenditures in excess of $5,000 will require authorization of the Primary
Operator’s management or governing body. See Appendix A: Statement of Qualification for an
overview of the Primary Operator’s fiscal controls and accounting procedures. The R&R
account must be an interest-bearing, savings account, which requires two signatories and a
resolution from the governing body for withdrawals. When the cash balance of the R&R
account makes an escrow account more cost effective (at least when the balance reaches
$100,000); then the R&R account must be transferred to an interest-bearing invested escrow
account that is acceptable to the Denali Commission. See Attachment 4: R&R Account
Information, for examples of acceptable R&R account agreements and a sample community
resolution that limits the use of the funds to R&R expenses only.
At least once a year, no later than August 31, the Primary Operator will develop a budget for
the upcoming fiscal year, October 1 through September 30, for both annual O&M and R&R
costs and annual bank deposits.
Operations and Maintenance Guidelines
The Primary Operator will maintain separate accountings, and maintain a sufficient O&M
cash balance, for the Facility O&M, so that the O&M schedule can be completed and the
Facility operations can be sustained into the future (this is anticipated to be an active non-
interest bearing account). Section VIII. Financial Information provides Table C: Annual O&M
Schedule and Table D: 40 Year O&M Schedule as a guide to plan for annual maintenance
activities.
ae
ATTACHMENT A
Resolution for Disbursement of Renewal and Replacement Funds
for Energy Facility
An Identical Resolution to This Must be Passed and Signed by the Primary Operator to Withdraw
Funds from the R&R Account
Name of Utility:
Resolution No.
WHEREAS, the has established an interest-bearing renewal and
replacement account with the financial institution of for the purpose of
renewal and replacement expenditures related to the facility, which was
partially or fully funded by the Denali Commission, and
WHEREAS, pursuant to the approved business plan for facility the
primary operator, and other participants, has agreed that funds deposited into this renewal
and replacement account will only be used for the renewal and replacement of
facility, and
WHEREAS, eligible withdrawal of funds from this account must be for the labor,
transportation, equipment rental, professional services, materials, equipment and other
costs for the replacement and repair of assets essential to the on-going sustainability of
the facility. For energy facilities this is including but not limited
to: Access Roads, Buildings, Poles, Transformers, Generators, Radiators, Electrical
Systems, Wires, Meter Systems, Pumps, Fencing, Fuel Storage Tanks, Fuel Distribution
Systems, Walkways, Access Roads Dispensers, Fill Stations, Tank Liners, Fencing, Pad,
Valves, Pipelines, Piling, Decks, Manwalks, Headers, Ground Maintenance and
Containment Systems.
THEREFORE, the hereby attests that the funds being requested
from the interest bearing renewal and replacement account with the financial institution
of is for renewal and replacement expenses related to the
facility as outlined above and is not being used for any other
purpose, and
THEREFORE, the requests the total sum of $ for the
following detailed expenses
Signed by two representatives,
First National Bank West Star Escrow
Alaska Municipal League/
Joint Insurance Association
(City-owned facilities only)
Manager
First National Bank
Operations Center
1751 Gambell St.
Anchorage, AK 99501
Phone: (907) 777-3424
Fax: (907) 777-3446
Manager
3201 C Street, Suite 112
Anchorage, AK 99503
Phone: (907) 265-2160
Toll Free: 1-888-859-3557
Fax: (907) 265-2170
AML/JIA
807 G Street, Suite 356
Anchorage, AK 99501
Phone: (907) 258-2625
Fax: (907)279-3615
Web: http://www.akml.org/
To establish an account:
1. Contact one of the representatives above.
2. Tell them you need to establish a “Denali Commission Renewal and
Replacement Account”.
3. Sign the Account Agreement for the institution.
4. Pay set-up fee and fill out other general information to establish account.
Attachments:
1. Sample Resolution
2. Sample Business Operating Plan Language
3. Sample Business Operating Plan R&R Cashflow
How to Establish a Renewal and Replacement Account for
Denali Commission Funded Public Infrastructure
Background
Under the guidelines of Denali Commission funding, an electric utility is required to have
a business plan that outlines how the Denali Commission funded project will be operated
and maintained. One of the conditions required in the business plan is the establishment
of a Renewal and Replacement (R&R) Account. An R&R account will provide a
mechanism for the utility to save money for the inevitable renewal and replacement costs
associated with the facility.
Generally, the Business Operating Plan states: “The ... R&R account must be an
interest-bearing, savings account, which requires two signatories and a resolution from
the governing body for withdrawals. When the cash balance of the R&R account makes
an escrow account more cost effective (at least when the balance reaches $100,000); then
the R&R account must be transferred to an interest-bearing invested escrow account that
is acceptable to the Denali Commission.”
General Guidelines of a Renewal and Replacement Escrow Account
e Allows utility to make monthly deposits
e Must be an interest bearing account
e Only allows withdrawal of funds for Renewal and Replacement costs of the
facility.
o Requires a Resolution from the governing body certifying funds are being
used for Renewal and Replacement expenses related to the facility that
was partially or wholly funded by the Denali Commission.
Account must allow for Denali Commission and other Auditing agencies to
monitor deposit and withdrawal activity (A copy of the R&R year-end bank
statement must be sent to the Denali Commission as part of your Annual Report.)
Financial Institutions for R&R Escrow Accounts
The Denali Commission has negotiated terms with two Financial Institutions and the
Alaska Municipal League/Joint Insurance Association that will allow for the unique
guidelines of these R&R accounts. Other institutions that will allow accounts that meet
the guidelines above are acceptable.
So, let’s assume that our facility was put into operation in 2002, and in
2008 we are looking for the annual R&R payment amount. If 2002 is
Year 1, then 2008 is Year 7 — the seventh year of operation. Therefore,
the annual R&R deposit amount for the City of Anywhere for Year 7 is -
$26,964.
" Ammal Cashflow Before Taxes
Further Information
Denali Commission Guidelines, with Sample Resolution and Sample
Business Plan Language, are included below:
Let’s take a closer look at the City of Anywhere’s summary information
on Table A:
Notice in the sample Table A, there are two main sections to the
spreadsheet — the “Annual Revenue & Expenses” and the “Annual
Cashflow Before Taxes”.
NetIne ome
Ee fore Taxes
How Much Should be Deposited into the R&R Account?
No one can accurately predict the future. No one can tell you today
exactly how much money you might need for future facility repairs or
replacements. All you can do is — deposit a reasonable amount into
your savings account each year.
Your Business Operating Plan provides a schedule for funding your
R&R account — and, you should deposit, at least, the amount identified
by the Plan into the R&R account each year.
Just go to Table A of your Business Operating Plan Financial Tables
and look up the annual deposit for the proper year. Table A provides a
summary of the utility’s net income and cashflow, including the annual
R&R deposit, for the first 40 years of operation.
See the sample Table A below:
TABLE A
40 YEAR ESTIMATED UTILITY NET INCOME AND CASHFLOW
Amat Prt tte FITTER]
‘RammalE xpenses
Gerenl & FulCas | Administrative! Depreciat om Tord Exper es ‘Scan quae yok Expere
velo e BSUS CE OBE Se owe u SSeS kee eee se 310,144 piers 325,430 B76 wesw 334238 380,300" erase. [$357,230 603,012 393,036 3.37 wees 703,686 [$410,908 727 413301 wei y377 02638 wien ani ‘9,00 VSVRS ee BR see esas ty Iaafos Jus ue foo ax fos fos fos fun] mam 3
RENEWAL & REPLACEMENT ACCOUNT INFORMATION
The Business Operating Plan requires the primary operator
to arrange for the utility’s renewal and replacement (R&R)
funds to be placed in a separate bank account.
What is the Purpose of the R&R Account?
An R&R account will provide a method for the utility to
save money for the long-term renewal and replacement of the
facility. Everything wears out eventually; and, your facility will also. So,
in order to repair generators, equipment and system parts, you need to put
some money into a savings account each and every year.
What Kind of Bank Account is Required?
Generally, the Business Operating Plan states: “The R&R account
must be an interest-bearing savings account, which requires two
signatories and a community resolution for withdrawals. When the
cash balance of the R&R account makes an escrow account more cost
effective (at least when the balance reaches $100,000); then the R&R
account must be transferred to an interest-bearing invested escrow
account that is acceptable to the Denali Commission.”
Savings Account - So, to begin with, your R&R funds must be
deposited into an interest-bearing, savings account, which
requires two signatories for withdrawals. Additionally, you must
obtain a resolution from your governing body (council, board, etc.)
before you make a withdrawal from the R&R savings account.
Escrow Account — When your R&R savings account reaches a
balance of $100,000, you must transfer the funds into an interest-
bearing managed or escrow account. The escrow account must
allow for monthly deposits; and, you must have a resolution from
your governing body (council, board, etc.) in order to make the
withdrawal. Additionally, the account must allow for the Denali
Commission and other Auditing agencies to monitor the deposit
and withdrawal activity (send a copy of the end-of-year statement
to the Denali Commission as an attachment to your Annual
Report).
Denali Commission Guidelines, with Sample Resolution and
Business Plan Language, are included at the end of this section.
= iia
Where to Obtain Training Program Schedule:
Alaska Energy Authority
813 West Northern Lights Blvd.
Anchorage, AK 99502
1-888-300-8534 or (907) 771-3000
Or on the web at: www.akenergyauthority.org
From the Web Page:
A. Click on Training in the Program Box
B. Click on Training Schedule
C. Current Training Program
“=.
initial inspection of the tank farm, identification of operation and
maintenance needs, hands-on-repair and replacement of minor
maintenance items and additional on-site training as necessary.
Training for reporting requirements is provided as well, if needed.
MANAGEMENT AND BOOKKEEPING TRAINING
Utility Clerk Training (PCE Clerk Training)
This course focuses on Power Cost Equalization (PCE) reporting,
Regulatory Commission of Alaska (RCA) reporting, bulk
fuel loans application process and general accounting
practices by which utilities can keep their records and
reports current.
Bulk Fuel Business Training
This course includes interactive discussions and hands-
on activities utilizing forms and exercises developed
with information from the bulk fuel facility business
plans. Participants will be trained on all the reporting and bookkeeping
requirements of the business plan and evaluated by the training
instructor.
Electric Utility Business Training
This course includes interactive discussions and hands-on activities
utilizing forms and exercises developed with information
from the electric utility business plans. Participants will
be trained on all the reporting and management
requirements of the business plan and evaluated by the
training instructor.
Follow-up Training & Technical Assistance
Follow-up training and technical assistance is available to participants
following the electric utility business training and the bulk fuel
business training. A business consultant travels to communities and
provides on-site training and technical assistance in a :
variety of areas including, rate-setting, accounting, FNS
bookkeeping business operating plans, budgeting and : ae
more.
TECHNICAL OPERATIONS TRAINING
Power Plant Operator Training
This is the entry level course for power plant operators and provides
the necessary skills to operate and maintain a power plant. The
program includes engine maintenance, troubleshooting and theory,
electrical systems and generators, introduction to electrical distribution
systems, diesel electric set operations, control panels,
paralleling generators sets, load management, fuel
management, waste heat recovery, plant
management, power plant safety and industrial CPR.
Advanced Power Plant Operator Training
This advanced course provides the necessary knowledge and skills to
diagnose and repair failures in power plants. The program includes a
review of electrical fundamentals, testing equipment, basics of
computerized engine control systems, sensors and actuators, electronic
signatures and waveforms, diagnostics and testing.
Hydro Training
This course trains local operators to ensure that hydro
facilities can be sustained over the long-term. The
program includes hydro plant overview (including
hydrology and fuel systems), operation of all systems
involved (hydro, diesel, system voltage control and safe
clearance procedures), maintenance of all systems involved (hydro,
diesel, reservoir and electrical distribution system) and record keeping.
Bulk Fuel Operator Training
This course provides the knowledge and skills necessary to
safely operate and maintain a bulk fuel storage facility,
while complying with state and federal laws. The program
includes bulk fuel storage facility construction, facility
operations, tank farm inspection criteria, facility maintenance,
inventory control, tank farm safety, spill detection and spill response
planning.
Itinerant Bulk Fuel Training
_ This course is a follow-up to bulk fuel operator
training. An instructor travels to communities and
provides on-site training for previously-trained Bulk
Fuel Operator students. Training activities include an
a514
AEA TRAINING PROGRAMS
» AEA, along with the Denali Commission Training
~w Fund, continues to provide training opportunities to
local residents for their energy projects and
infrastructure. The intent of this training is to
ensure that community personnel have the best skills
with which to sustain their energy infrastructure in a
business-like manner. With proper training, operators
will keep their facilities code-compliant and managers and bookkeeping
staff will keep their facilities financially healthy and well-managed.
Overview
The Alaska Energy Authority has developed a series of courses relating
specifically to electric utility operations and management. For
information, contact the Alaska Energy Authority at 1-888-300-8534
(toll free in Alaska) or at 907-771-3000 and ask for the Training
Program Manager.
Technical Operations Training f= ALASKA
@@=_ ENERGY AUTHORITY
Power Plant Operator
Advanced Power Plant Operator Training
Hydro Power Plant Operator Training
Bulk Fuel Operator Training
Itinerant Bulk Fuel Training
Management and Bookkeeping Training
PCE Utility Clerk Training
Electric Utility Business Training
Bulk Fuel Business Training
Where to Obtain Loan Applications:
Alaska Energy Authority
813 West Northern Lights Blvd.
Anchorage, AK 99502
1-888-300-8534 or (907) 771-3000
Or on the web at: www.akenergyauthority.org
From the Web Page:
A. Click on Programs
B. Click on Loan Programs
C. Find Appropriate Loan for you
iia emesis emt. [ee ie
Who is eligible to apply?
Electric utilities
Regional electric authorities
Municipalities
Regional and village corporations
Village councils
Independent power producers
Nonprofit marketing cooperatives
Loans may be used for a variety of projects including:
e Reconnaissance studies, feasibility studies, license and permit
applications, preconstruction engineering and design of power
projects;
Constructing, equipping, modifying, improving and expanding
small-scale power production facilities that are designed to
produce less than 10 megawatts of power, bulk fuel storage
facilities and transmission and distribution facilities,
including energy production, transmission and distribution,
waste energy, energy conservation, energy efficiency and
alternative energy facilities and equipment;
Reconnaissance studies, preconstruction engineering, design,
construction, equipping, modification and expansion of potable
water supply including surface storage and groundwater
sources and transmission of water from surface storage to
existing distribution systems; and,
e A power project or for bulk fuel, waste energy, energy
conservation, energy efficiency or alternative energy facilities.
Contact the AEA Loan Officer for more details.
Loan Amounts, Interest Rats & Terms:
Loan amounts, interest rates and terms are dependent upon the
project and should be discussed with the AEA Loan Officer.
Amount:
¢ Maximum loan amount per fiscal year (July 1 — June 30) is
$400,000.00 per borrower or up to $1.5 million for cooperative
organizations representing more than one community
($400,000 multiplied by the number of communities).
Cannot exceed 90% of the wholesale price of the fuel, plus the
cost of fuel transportation.
A non-refundable $25 application fee is required at the time of
the submission of the application.
A .5% origination fee of the total loan amount is charged at the
time the loan is disbursed.
Interest Rate & Term:
e Generally no interest is charged on the first Bulk Fuel Loan.
e¢ Generally 5% is charged on the second Bulk Fuel Loan.
e« The third and subsequent bulk fuel loans are charged an
interest rate equal to the average weekly yield of municipal
bonds for the proceeding year (12 months).
The loan will be repaid within one year or less and generally
the term is nine (9) equal monthly installments.
Applicants are considered on a "first come, first serve" basis.
Because the loans are for the purchase of new fuel, it is advisable for
communities to submit their application well in advance of the
anticipated time of purchase of community fuel supplies.
Power Project Loan Fund
The AEA Power Project Loan Fund provides loans to
local utilities, local governments or independent power
producers for the development or upgrade of electric
power facilities, including conservation, bulk fuel
storage, waste energy conservation or potable water supply projects.
The loan term is related to the life of the project and interest rates vary
between tax-exempt rates at the high end and zero on the low end.
AEA ENERGY LOAN PROGRAMS
The Alaska Energy Authority (AEA) provides loans
for the purchase of fuel as well as loans for power
) development projects or upgrades to electric power
facilities. Both of these programs are subject to State
of Alaska statutes and regulations as outlined below. For more
information on the AEA loan programs contact: AEA Loan Officer,
Phone (907) 771-3000.
Bulk Fuel Revolving Loan Fund
The purpose of the AEA Bulk Fuel Revolving Loan Fund is to assist
communities, utilities or fuel retailers, in small rural
communities, in purchasing emergency, semi-annual or
annual bulk fuel supplies. Loans are only for the
purchase of new fuel. Loans will not be provided for fuel
already purchased, in the process of being used or
already consumed.
Who is eligible to apply?
- An organized municipality or unincorporated village with a
population under 2,000 people.
« A person, including private individuals, corporations and
cooperatives, with a written endorsement from the governing
body of each community for which the fuel will be used.
Bulk fuel may be used for:
« Municipal electrical power generators, municipal heavy
equipment.
Heating fuel for the municipality, residents and businesses.
Municipal, business and residential motor vehicles and for
subsistence purposes.
Generally, aviation fuel and other non fuel-related supplies are
not covered under the AEA Bulk Fuel Loan Program.
Loan proceeds may not be used to subsidize a business or to
make a profit unless the profit is used to purchase additional
community fuel supplies.
Month
Beginning Balance -
|Gallons of Fuel
|Gallons of Fuel
Purchased
Monthly Fuel Inventory Records
|Gallons of Fuel Used
\Gallons of Fuel Sold
Ending Hook Balance - Gallons of Fuel
jin Gallons
Physical Measurement - 178,700
Difference Between
Physical and Book «in
[Gallons
Ending Month Balance | Aneuned te be che Physical Measurement)
Reasons for Shortage/Ov erage:
Temperature is causing fuel to contract Temperature ix causing fuel to contract Temperature is causing fuel ta contract \Don't Know|Don't Enow
Don't Know/ Don't Enow
For purposes of working through the worksheet, you don’t
need any new assumptions - just record the beginning
balance!
In the “February” column, “Beginning Balance — Gallons of Fuel”
row, you enter the number of gallons of diesel that you entered in
the “Ending Month Balance” that you recorded in the “January”
column. The entry for January and February is shown below:
Month January Februar:
Beginning Balance - Gallons of Fuel 124,500
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book - in
Gallons
Ending Month Balance
(Assumed to be the Physical
Measurement)
Reasons for
Shortage/Overage:
Temperature
is causing fuel
to contract
FOLLOWING IS A COMPLETE EXAMPLE OF THE DIESEL
“MONTHLY FUEL INVENTORY RECORDS” FOR 2007.
323 =
Month January
Beginning Balance -
Gallons of Fuel fad500
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book - in
Gallons
Ending Month Balance
(Assumed to be the Physical
Measurement)
Reasons for
Shortage/Overage:
Temperature is
causing fuel to
contract.
Step Ten: Record the Beginning Balance for the next month.
Finally, each month you should record the “Beginning Balance” of fuel
with which you will start the next month.
Month
Beginning Balance -
Gallons of Fuel
inventory. Again, is it leakage?...is someone taking fuel without
paying?...is the physical measurement being done correctly?...are we
accounting for temperature’s effect on the fuel levels? There are lots of
reasons — the important thing is to figure out what is happening.
For purposes of working through the worksheet, let’s assume
the following!
Difference Reasons
in Gallons
January 15 Temperature
February 20 Temperature
March (26) Temperature
April 6 Don't Know
May (4) Don't Know
June (3) Don’t Know
July 0 Don't Know
August (3) Don't Know
September 5 Don’t Know
October 1 Don't Know
November (1) Don’t Know
December 3 Don’t Know
In the “Reasons for Shortage/Overage” row, you simply enter the
same notation that explains the shortage/overage. The entry for
January is shown below:
Step Nine: Record the Reasons for any Shortage/Overage.
Each month, if you have a difference between the Physical
Measurement and the Ending Book Balance — you should record the
reason for the shortage or overage.
January
Gallons of Fuel
(Purchased
in Gallons
Difference Between
Physical and Book - in
Gallons
Ending Month Balance (Assumed to be the Physical Measurement)
Reasons for
IShortage/Overage:
292999
If the difference between the Physical Measurement and the Ending
Book Balance is very small — then it is okay to consider the reason
“insignificant” and not attempt to find the reason for the difference.
Otherwise, it is very important that you find out why there is a
difference between the accounting/sales records and the physical
2905
Month
Beginning Balance -
Gallons of Fuel
January
124,500
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book - in
Gallons
Ending Month Balance
(Assumed to be the Physical
Measurement)
-19-
The eighth step each month is to record the Ending Month. You do this
by copying the “Physical Measurement — in Gallons” to the “Ending
Month Balance” row. MAKE CERTAIN THAT YOU HAVE THE
CORRECT PHYSICAL MEASUREMENT —- MAKE SURE THAT YOU
HAVE DOUBLE CHECKED EVERYTHING BEFORE YOU RECORD
THE ENDING MONTH BALANCE.
For purposes of working through the worksheet, you don’t
need any new assumptions - just record the balance!
In the “Difference between Physical Measurement - Gallons” row, you
simply enter the number of gallons of diesel that you entered in the
“Physical Measurement — in Gallons” row into the “Ending Month
Balance”. The entry for January is shown below:
Step Eight: Record the Ending Month Balance in Gallons of Fuel.
Each month, enter the ending balance of fuel for the end of the month.
This should be the amount of fuel you actually have in the tank. So,
use the physical measurement as your ending balance.
Month January
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book - in
Gallons
Ending Month Balance
(Assumed to be the Physical
Measurement)
The seventh step each month is to calculate the Difference Between the
Physical Measurement and the Ending Book Balance in Gallons of
Fuel. You do these by subtracting “Physical Measurement — in Gallons’
from the “Ending Book Balance — Gallons of Fuel”.
>
For purposes of working through the worksheet, you don’t
need any new assumptions — just do the math!
In the “Difference between Physical Measurement - Gallons” row, you
would enter the number of gallons of diesel difference between what
your books say you have left and the physical measurement in the
Diesel “Monthly Fuel Inventory Record”. The entry for January is
shown below:
[ Month January
Beginning Balance -
Gallons of Fuel 124,500
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book - in
Gallons
= Oe
that could be at fault — so, you need to spend some time trying to figure
it out.
REMEMBER - The best time to fix a problem is as soon as you discover
it. It only gets harder if you delay.
Month January
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book - in
Gallons
-15-
Gallons of Diesel in the Tanks at the End of the Month
January 94,735
February 67,3865
March 40,501
April 28,165
May 81,669
June 65,172
July 49,272
August 32,505
September 178,700
October 156,199
November 129,700
December 100,772
In the “Physical Measurement — in Gallons” row, you would enter the
number of gallons of diesel measured in the tanks at the end of each
month in the Diesel “Monthly Fuel Inventory Record”. The entry for
January through May is shown below:
Month January February
Physical Measurement -
in Gallons 94,735 67,365
Step Seven: Calculate the Difference Between the Physical
Measurement and the Ending Book Balance in Gallons of Fuel.
Each month, you will compare the difference between the number of
gallons that your bookkeeping records “say” you have on hand and the
number of gallons of fuel that were physically measured in the tanks.
NOTE: If the difference is large — then, you need to figure out “why?”
The first thing to do is check the numbers you entered on the
worksheet — are they correct? Next, have the operator re-measure the
fuel in the tank. Now, if you re-do everything and there is still a large
difference, you will need to get others involved in problem solving
because it sounds like the problem is something other than
bookkeeping. Is there a leak? Is there an equipment malfunction —
such as the dispenser not reporting the amount of fuel dispensed? Is
someone taking fuel without payment? There are any number of things
-14-
Month
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
Physical Measurement - 999999
in Gallons
The sixth step each month is to record the number of gallons that are
left in the tank at the end of the month.
For purposes of working through the worksheet, let’s assume
the following physical amounts were the results of the
measurements taken at the end of each month:
Month January
Beginning Balance -
Gallons of Fuel 124,500
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
94,750 Ending Book Balance -
Gallons of Fuel
Step Six: Enter the number of gallons that were measured, at
the end of the month, in the tank, in the “Physical Measurement
in Gallons” row.
We recommend that you measure the tanks’ levels on the last day of
the month, but, if that doesn’t work, use the same day each month.
Why? If you don’t use information from the same day — you won't be
able to compare the two numbers and make any sense out of them.
Remember, what you are trying to do is to compare one month to the
next — so, your measurements should be a month apart. Remember: It
is this comparison that will help ensure that you always know how
much fuel you have left and helps you to identify any fuel losses early
enough to do something about them before they become a big problem.
=i2-
Step Five: Calculate the Ending Book Balance in Gallons of
Fuel.
Month January
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
Ending Book Balance -
Gallons of Fuel
The fifth step each month is to calculate the Ending Book Balance in
Gallons of Fuel. You do this by adding the beginning balance in
gallons, plus any gallons you purchased, then you subtract any gallons
you used or sold. This is your Ending Book Balance, which may be
different from the Physical Measurement in the tanks.
For purposes of working through the worksheet, you don’t
need any new assumptions — just do the math!
In the “Ending Book Balance” row, you would enter the number of
gallons of diesel that your books say you have left in the Diesel
“Monthly Fuel Inventory Record”. The entry for January is shown
below:
Step Four: Enter the number of gallons, if any, you sold during
the month, for each month in “Gallons of Fuel Sold” row.
Month January
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold DUE g The fourth step each month is to record the number of gallons, if any,
you sold during the month. Make certain that you only record the
gallons of fuel that you sold to someone during the month — this does
not include fuel that you used for your own operation/business.
For purposes of working through the worksheet, let’s assume
that none of the diesel was sold to anyone else — we only use
the diesel we buy to generate power.
In the “Gallons of Fuel Sold” row, you would enter the number of
gallons sold each month in the Diesel “Monthly Fuel Inventory
Record”. The entry for January through May is shown below:
Month January February April May
Gallons of Fuel Sold
The third step each month is to record the number of gallons, if any,
you used during the month. Make certain that you record all of the
gallons of fuel that you used for your operations/business during the
month — this does not include fuel that you sold to someone else.
For purposes of working through the worksheet, let’s assume
the following amounts were used, rather than sold:
Gallons of Diesel Used for Power Generation
January 29,750
February 27,350
March 26,890
April 17,330
May 16,500
June 16,500
July 15,900
August 16,770
September 18,800
October 22,500
November 26,500
December 28,925
In the “Gallons of Fuel Used” row, you would enter the number of
gallons of diesel used each month in the Diesel “Monthly Fuel
Inventory Record”. The entry for January through May is shown
below:
Month January February April
Gallons of Fuel Used 29,750 27,350 17,330
For purposes of working through the worksheet, let’s assume
the following monthly purchases:
Fuel purchased in May:
Diesel = 75,000 gallons
Heating Fuel = 75,000 gallons
Gasoline = 55,000 gallons
Fuel purchased in September:
Diesel = 165,000 gallons
Heating Fuel = 175,000 gallons
Gasoline = 65,000 gallons
In the “Gallons of Fuel Purchased” row, you would enter 75,000
gallons in the “May” column and 165,000 gallons in “September”
column on the Diesel “Monthly Fuel Inventory Record”. The entry
for May is shown below:
Month January February April
Gallons of Fuel
Purchased
Step Three: Enter the number of gallons, if any, you used during
the month, for each month in “Gallons of Fuel Used” row.
Month
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Diesel = 124,500 gallons
Heating Fuel = 115,450 gallons
Gasoline = 54,005 gallons
Other = 0 gallons
Total gallons = 293,955 gallons
In the “Beginning Balance — Gallons of Fuel” row of the “January”
column, you would enter 124,500 gallons on the Diesel “Monthly Fuel
Inventory Record”:
Month January
Beginning Balance -
Gallons of Fuel 124,500
Step Two: Enter the number of gallons, if any, you purchased
during the month, for each month in “Gallons of Fuel
Purchased” row.
Month January
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
The second step each month is to record the number of gallons, if any,
you purchased during the month. Make certain when you purchase
fuel that you confirm the amount of fuel that went into the tank.
Again, you always want to keep your eye on the actual amount of fuel
that is in the tanks.
MONTHLY FUEL INVENTORY RECORDS
SAMPLE EXERCISE
There are a couple of different ways you can approach the use of this
inventory worksheet — you can track all of your fuel on one worksheet
or, you can use a sheet for each type of fuel that you have. But, as we
mentioned above, for most electric utilities, we would recommend that
you keep a separate worksheet for each type of fuel in your facility.
Why? Because, if you experience a problem with the worksheet
matching the physical levels in the tanks or the bookkeeping records, it
will be much easier to solve the problem if you are only dealing with
one type of fuel.
Below is an example of how to complete the worksheet for tracking
diesel fuel. This sample exercise is included as an MS Excel worksheet
on the CD attached to the back cover of this “Management Guide”.
Step One: Determine the beginning amount of fuel you have for
each type of fuel and enter that number in the “Beginning
Balance - Gallons of Fuel” row of the “January” column:
Month January
Beginning Balance - 22999 Gallons of Fuel AEs
The first step in starting your new fuel inventory record for each year is
to determine the beginning balance in the tanks. Again, it is important
that you use the physical amount of fuel in the tanks — don’t just take
the amount in your bookkeeping records. One of the primary purposes
for this fuel inventory record is to ensure that you are tracking the
physical balance of fuel that you have in the tanks — so, you know when
to record, etc.
For purposes of working through the worksheet, let’s assume
the following beginning balance information:
-6-
Step Five: Each month, compare the difference between the number of
gallons that your bookkeeping “says” you have on hand and the number
of gallons of fuel that were physically measured in the tanks.
NOTE: If the difference is large — then, you need to figure out “why?”
The first thing to do is check the numbers you entered on the
worksheet — are they correct? Next, have the operator re-measure the
fuel in the tank. Sometimes the operator may complain about the need
to do this — but, be firm, it needs to be rechecked. Now, if you re-do
everything and, there is still a large difference, you will need to get
others involved in problem solving, because, it sounds like the problem
is something other than bookkeeping. Is there a leak? Is there an
equipment malfunction — such as the dispenser not reporting the
amount of fuel dispensed? Is someone taking fuel without payment?
There are any number of things that could be at fault — so, you need to
spend some time trying to figure it out.
REMEMBER - The best time to fix a problem is as soon as you discover
it. It only gets harder if you delay.
Step Six: Enter the ending balance of fuel for the end of the month.
This should be the amount of fuel you actually have in the tank. So,
use the physical measurement as your ending balance. NOTE: If you
had a large difference between the bookkeeping records and the
physical measurement — you still need to figure out why, so you can
adjust your bookkeeping records.
Step Seven: Enter the ending balance of fuel for the end of the month
as the beginning balance for the next month.
NOTE: If you are going to begin using this worksheet mid-year,
the easiest way to begin is to enter your beginning fuel balance
in the “Physical Measurement - in Gallons” row for the month
before you start. For example, let’s say that you plan to begin
using the worksheet in April and, your beginning fuel balance is
40,501 gallons - simply enter 40,501 in the “Physical
Measurement — in Gallons” row for March. The worksheet will
automatically carry the 40,501 as the starting inventory for
April.
MONTHLY FUEL INVENTORY RECORDS
WORKSHEET INSTRUCTIONS
NOTE: For most electric utilities, we would recommend that you
keep a separate worksheet for each type of fuel in your facility.
Why? Because, if you experience a problem with the worksheet
matching the physical levels in the tanks or in the bookkeeping
records, it will be much easier to solve the problem, if you are
only dealing with one type of fuel.
Step One: To begin using the worksheet, first record the number of
gallons of fuel you have in the tanks as of the beginning of the year —
make certain that you measure the physical level of the tanks. It is
very important that you start with the correct number of gallons.
Step Two: Each month, enter the gallons of fuel you purchased, used or
sold in the Monthly column. It is important that you calculate these
numbers as of the date that your operator measures the physical level
in the tanks. We recommend that you use the last day of the month,
but, if that doesn’t work DO MAKE CERTAIN THAT YOU
CALCULATE YOUR MONTH TOTALS AS RECORDED IN YOUR
BOOKKEEPING RECORDS ON THE SAME DAY THAT THE
OPERATOR MEASURES THE LEVELS IN THE TANKS. Why? If
you don’t use information from the same day — you won't be able to
compare the two numbers and make any sense out of them.
Remember, what you are trying to do is to compare the bookkeeping
records and the physical measurements. It is this comparison that will
help ensure that you always know how much fuel you have left and
helps you to identify any fuel losses early enough to do something about
them before they become a big problem.
Step Three: Each month, calculate the Ending Book Balance in Gallons
of Fuel. You do this by adding the beginning balance in gallons, plus
any gallons you purchased, then, you subtract any gallons you used or
sold. This is your Ending Book Balance, which may different from the
Physical Measurement in the tanks.
Step Four: Each month, enter the gallons of fuel that were physically
measured in the tanks.
SAMPLE MONTHLY FUEL INVENTORY RECORDS
Month March rill June
Beginning Balance -
Gallons of Fuel
Gallons of Fuel
Purchased
Gallons of Fuel Used
Gallons of Fuel Sold
‘Ending Book Balance -
Gallons of Fuel
Physical Measurement -
in Gallons
Difference Between
Physical and Book -in
Gallons
Ending Month Balance (Assumed to be the Physical Measurement)
Reasons for
|Shortage/Overage:
This inventory tracks:
1. Gallons of fuel purchased
2. Gallons of fuel used
3. Gallons of fuel in storage tanks
4. Gallons of fuel lost due to waste, spill or theft
Annual consumption of fuel by a small city or village is important when
deciding how much fuel to store at the electric utility. You need to keep
a close eye on how much fuel is being consumed and how much fuel
remains in your fuel tanks. Generally, measuring the fuel in your
tanks is something that you should do at the end of the month. This is
so you can compare the physical measurement to the bookkeeping
records.
Why? Both the physical measurement and sales/bookkeeping inventory
should correspond with each other. By comparing these two amounts
at the end of each month, you will be able to determine if the utility is
“losing fuel”. Any loss, either by fuel leaks or theft, should be identified
as soon as possible and corrected.
Fuel losses cost money — somehow, the utility and its customers will
have to make up for fuel losses, which costs money.
The following formula for tracking bulk fuel inventory will identify
gallons of fuel lost for the utility manager.
Plus/Minus Gallons of Fuel
Beginning Fuel in Tank Plus
Gallons of Fuel Purchased Plus
Gallons of Fuel Used Minus
Gallons of Fuel Sold Minus
Ending Fuel in Tanks Plus
Gallons of Fuel Lost Balance
Sample Monthly Fuel Inventory Record
A “Sample Monthly Fuel Inventory Record” and instructions for its use
are included below — and, a copy is included on the CD attached to the
back cover of this “Management Guide”:
-2-
EU (FUEL) INVENTORY MANAGEMENT
Electric inventory management is an itemized list of
assets or goods on hand. This inventory includes the
fuel necessary for generating power, storage tanks,
generators and the supplies needed to operate the
utility. Your costs increase when you store too much or
too little inventory. Inventory control is the process of
cataloging and managing these items or assets. It’s the
key to effective operational management of your electric utility.
Good inventory management means having the right amount of
inventory, in the right place, at the right time. Obviously, one of the most
important assets that a utility will hold or store is fuel to operate the
generators. Because fuel is a very significant assist, we have included
some “best practices” for fuel inventory management below.
Pros and Cons of Holding Fuel
Many electric utilities like to store more inventory than they need for
immediate use or sale. This is because reserve inventory can:
1. Provide capacity to respond quickly to unexpected demand
increases.
2. Provide reliable source of fuel to the community.
3. Take advantage of bulk purchase discounts.
4. Minimize freight and delivery costs.
But, there is a downside to holding inventory:
1. The cost of purchasing a large quantity of fuel.
2. The cost of storing the fuel and not using the fuel immediately.
3. Risks of loss due to waste, spill or theft.
4. The administrative costs of keeping track of inventory.
Comparing Physical Fuel Levels with Bookkeeping Records
One of the more important “best practices of fuel inventory
management” is the monthly comparison of physical fuel levels with
bookkeeping records. This requires that you have current and accurate
record keeping that tracks bulk fuel inventory.
-l-
Step One:
Step Two:
Step Three:
Step Four:
Step Five:
Step Seven:
SAMPLE RATE-SETTING WORKSHEET
Determine total estimated annual kilowatt information
A. Total kilowatts expected to be produced = 560,000 kWh
B. Billable kilowatts = 492,800 kWh (12% Line Loss)
C. Collectable kilowatts = 443,520 (90% Collection Rate)
Estimate this year’s O&M (or take from O&M Budget)
A. Labor estimate = $25,000
B. Supplies estimate = $5,000
C. Training estimate = $2,000
Estimated O&M = $32,000
Total Estimated O&M/Collectable Kilowatts =
$32,000 divided by 443,520 = $.0722
Determine this year’s G&A Expenses (or take from G&A Budget)
A. Administrative salaries estimate = $12,500
B. Office supplies estimate = $7,500
C. Bulk fuel loan interest estimate = $2,500
D. Insurance estimate = $3,000
E. Other miscellaneous estimate = $5,000
Estimated G&A = $30,500
Total Estimated G&A divided by Collectable Kilowatts =
$30,500 divided by 443,520 = $0688
Estimate this year’s R&R (Depreciation) Expenses
A. Annual depreciation (R&R) estimate = $7,000
Total Estimated Depreciation (R&R)/Collectable Kilowatts =
$7,000 divided by 443,520 = $.0158
Estimate this year’s Fuel Expense
A. kWh generated per gallon of fuel= 14
B. Total kWh generated = 560,000 kWh
C. Gallons of fuel needed to produce kWh =
560,000 divided by 14 = 40,000 gallons
D. Per gallon cost of fuel = $4.56
E. Total fuel costs = 40,000 x $4.56 = $182,400
Fuel Expenses/Collectable Kilowatts = $182,400 divided by 443,520 = $.4113
Total = Rate
A. O&M (Step Two) $.0722
B. G&A (Step Three) $.0688
C. Depreciation/R&R (Step Four) $.0158
D. Cost of Fuel (Step Five) $.4113
Total $.5681
Add Markup/Profit Percentage
=elelee
Step Six: Total = Rate
A. O&M (Step Two) $.
B. G&A (Step Three) $.
C. Depreciation/R&R (Step Four) $
D. Cost of Fuel (Step Five) $
Total $
The sixth step in developing your electricity price is to total the
information from above to arrive at a rate.
So, for purposes of filling out the worksheet, let’s assume the
following:
A. O&M (Step Two) $.0722
B. G&A (Step Three) $.0688
C. Depreciation/R&R (Step Four) $.0158
D. Cost of Fuel (Step Five) $.4113
Total $.5681
Step Seven: Add Markup/Profit Percentage
The last step in developing your electricity prices is to add any profit
margin or markup that your utility has determined is necessary.
Adding a profit margin or markup is a good way to make sure that
you are collecting enough cash to pay future bills as prices and other
costs go up!
There are a couple of different ways to approach this step:
1. You could ask your fuel supplier what prices are going to be
or
You could use the current fuel prices and apply an
inflationary factor to estimate future fuel prices.
NOTE: If you participate in the PCE program your allowable fuel
costs will be based upon actual fuel costs. But, again you should
consider including the costs you believe fuel will be in the future —
otherwise, you might not be collecting enough cash to cover the cost
of your NEXT fuel purchase.
In order to make this calculation, you will need to know the number
of kWh that your utility generates per gallon of fuel. This is
information that should be readily available from the Operator’s
logs. Once you know this number, you need to estimate the total
kWh that your facility will generate during the year. REMEMBER,
you need to estimate the total kilowatts that will be generated, not
just the amount sold. Why? Because you will need to purchase fuel
for all of the kilowatts that are generated regardless of whether or
not they are sold. So, for this calculation use the total number of
kilowatt hours generated.
So, for purposes of filling out the worksheet, let’s assume the
following:
. kWh generated per gallon of fuel = 14
. Total kWh generated = 560,000 kWh
. Gallons of fuel needed to produce kWh =
560,000 divided by 14 = 40,000 gallons
. Per gallon cost of fuel = $4.56 per gallon
. Total fuel costs = 40,000 gallons x $4.56 = $182,400
Next, we need to figure out how much per kilowatt hour we should
charge to cover our fuel expenses. For this calculation, it is
important to use Collectable Kilowatts not total generated!
Fuel Expenses/Collectable Kilowatts =
$182.400 divided by 443,520 = $.4113
-9-
The tricky part is determining what is the correct amount to include
in your rates. And, that depends. You could include just the
amount of depreciation expense you report on your Income
Statement. But, that amount might not be enough to build up
sufficient funds to cover future expenses. So, you might want to
include your R&R Bank Deposit, as required by your Business
Operating Plan. But, that amount might not be considered an
allowable cost in your PCE rate. So, the right amount is something
that your utility will need to determine. However, in order to ensure
that you collect enough money to make your required R&R Bank
Deposit — you need to include at least that amount, regardless of
whether it is considered a reimbursable cost under the PCE
program.
So, for purposes of filling out the worksheet, let’s assume the
following:
A. Annual depreciation (R&R) estimate = $7,000
Total Estimated Depreciation (R&R) Collectable Kilowatts =
$7,000 divided by 443,520=$.0158
Step Five: Estimate this year’s Fuel Expense
. kWh generated per gallon of fuel = $
. Total kWh generated = $
. Gallons of fuel needed to produce kWh = $
. Per gallon cost of fuel = $
. Total fuel costs = $
The fifth step in developing your electricity prices is to estimate the
annual fuel expense. This step is very important because, what you
need to do is to estimate what you believe the cost of your next fuel
purchase will be — do not use the cost of fuel for the delivery you just
received! Why? Because, if you do, you are setting an electricity
price that will not allow you to collect enough cash to cover the cost
of your NEXT fuel purchase, AND, your facility operation. You
need to look ahead not behind!
The third step in developing your electricity prices is to estimate the
per kilowatt charge you should add to cover your annual general and
administrative expenses. General and administrative expenses are
defined as administrative costs that are incurred on an annual basis
(bookkeeper labor, fuel loan interest, etc.). These costs will vary
greatly from facility to facility, but, might include administrative
salaries, office expenses, phone expenses, loan interest, etc.
How do these expenses differ from the annual O&M expenses? Well,
in reality they may not differ very much. And, in fact, for purposes
of calculating your electricity prices — it might be easier to combine
your O&M and general and administrative expenses. That’s OK!
The important thing is to make certain that you include ALL of your
costs when computing electricity pricing.
So, for purposes of filling out the worksheet, let’s assume the
following:
. Administrative salaries estimate = $12,500
. Office supplies estimate = $7,500
. Bulk fuel loan interest estimate = $2,500
. Insurance estimate = $3,000
. Other miscellaneous estimate = $5,000
Estimated G&A = $30,500
Total Estimated G&A/Collectable Kilowatts =
$30,500 divided by 443,520=$.0688
Step Four: Estimate this year’s R&R (Depreciation) Expenses
A. Annual depreciation (R&R) estimate = $
Total Estimated Depreciation (R&R)Collectable Kilowatts =
$
The fourth step in developing your electricity prices is to determine
what amount to include to account for Depreciation and/or long-term
Repair and Replacement of the utility’s assets. It is important to
include a Depreciation/R&R amount in your rates so that you are
collecting some money that can be set-aside for future Repair &
Replacement. NOTE: It is very important that once you include a
Depreciation/R&R amount in your rate, that you put those funds
into your R&R account for future use.
=x
Updating O&M Costs
The goal of this step is to establish an O&M budget projection for
the new year. You will need to compare the actual O&M
expenditures against budgeted O&M costs. To accomplish this, first
gather together your bookkeeping records that identify your O&M
costs for this fiscal year. Ideally, you will have monthly records of
actual expenses as well as a compiled total fiscal year summary
statement of your O&M actual expenditures. Review the actual
expenditure records and compare them against the budgeted
projections.
Decide if you actually spent more or less than what was budgeted.
If for some reason you spent more or less in any one area, ask
yourself if some event or unique circumstance caused the
expenditure or savings or will the same likely occur in the new year.
You will need to make judgments and corresponding adjustments to
your O&M budget. Any actual expenditures or savings that were
incurred during the previous year, that you believe will stay the
same in the coming year, need to be reflected in the coming year’s
budget.
If you have already completed an O&M budget for the year — just
put that total amount in the “Estimated O&M” line.
For purposes of working through the worksheet, let’s assume
the following information for the upcoming year:
A. Labor estimate = $25,000
B. Supplies estimate = $5,000
C. Training estimate = 2,000
Estimated O&M = $32,000
Total Estimated O&M/Collectable Kilowatts =
$32,000 divided by 443,520= $.0722
Step Three: Determine the General & Administrative Expenses
A. Administrative salaries estimate = $
B. Office supplies estimate = $
C. Bulk fuel loan interest estimate = $
D. Other miscellaneous estimate = $
RATE-SETTING WORKSHEET INSTRUCTIONS
Step One: Determine total estimated annual kilowatt
information
A. Total kilowatts expected to be produced =
B. Billable kilowatts =
C. Collectable kilowatts =
The first step in developing your electricity prices is to estimate how
many kilowatt hours you will be selling. If you use electricity or
contribute it to a community purpose, without collecting payment for
the kilowatt hours, do not include those hours in your estimate.
Why? Because you are attempting to estimate the number of
kilowatt hours that you will be able to sell, and collect cash from, in
order to fund your fuel purchase and your operations. If you
currently are allowing customers to charge for electricity purchases;
and, some of those customers are not paying their bills — then, do
not include those hours in your estimate. Why? Because, if the
customers are not paying their bills, you will not receive cash from
them to help pay for fuel purchases or pay for utility operations.
For purposes of working through the worksheet, let’s assume
the following information for the upcoming year:
A. Total kilowatts expected to be produced = 560,000 kWh
B. Billable kilowatts = 492,800 (12% Line Loss)
C. Collectable kilowatts = 443,520 (90% Collection Rate)
Step Two: Estimate this year’s O&M (or take from O&M Budget)
A. Labor estimate = $
B. Supplies estimate = $
C. Training estimate = $
Estimated O&M = $
Total Estimated O&M divided by Collectable Kilowatts = $
Step One:
Step Two:
Step Three:
Step Four:
Step Five:
Step Seven:
RATE-SETTING WORKSHEET
Determine total estimated annual kilowatt information
A. Total kilowatts expected to be produced =
B. Billable kilowatts =
C. Collectable kilowatts =
Estimate this year’s O&M (or take from O&M Budget)
A. Labor estimate = $
B. Supplies estimate = $.
C. Training estimate = $.
Estimated O&M = $
Total Estimated O&M/Collectable Kilowatts = $
Determine this year’s G&A Expenses (or take from G&A Budget)
A. Administrative salaries estimate = $
B. Office supplies estimate = $
C. Bulk fuel loan interest estimate = $
D. Other miscellaneous estimate = $
Estimated G&A = $
Total Estimated G&A/Collectable Kilowatts = $
Estimate this year’s R&R (Depreciation) Expenses
A. Annual depreciation (R&R) estimate = $
Total Estimated Depreciation (R&R)/Collectable Kilowatts = $
Estimate this year’s Fuel Expense
A. kWh generated per gallon of fuel =
B. Total kWh generated =
C. Gallons of fuel needed to produce kWh =
D. Per gallon cost of fuel = $
E. Total fuel costs = $
Fuel Expenses/Collectable Kilowatts = $
Total = Rate
A. O&M (Step Two) $
B. G&A (Step Three) $.
C. Depreciation/R&R (Step Four) $
D. Cost of Fuel (Step Five) $.
Total $
Add Markup/Profit Percentage
-4-
requires fairly detailed and accurate accounting. The cost of service
can be estimated using available data from the fuel invoices, the R&R
plan, operating budget and other available accounting data.
Allocate Costs Based on Usage
The next step is to determine how much of the total cost each customer
should pay. The fairest way to do this is to allocate the costs on a per
kilowatt hour basis.
Adoption & Review
The method of establishing rates should be described in the utility’s
operations procedures and approved by senior management.
y_)} It should be in writing and explain what is included and
<W excluded from the price set for electricity. A minimum
price should be reviewed frequently.
Elements of Rates — Per Kilowatt Pricing
Electricity prices are designed to generate revenue to recover the cost of
operating, maintaining, managing or replacing the electric utility, and,
in some cases, making a profit. So, what are those costs? The most
common costs that will be incurred by electric utilities can be divided
into three areas:
1. General & administrative expenses (G&A) — administrative costs
that are incurred on an annual basis (bookkeeper labor, fuel loan
interest, etc.)
. Operating & maintenance expenses (O&M) — operational
expenses that are incurred on a routine, regular basis (operator
labor, maintenance supplies, lube oil, etc.)
. Depreciation and/or R&R expenses (R&R) — expense for items
that are long-term, not incurred on an annual basis.
Overall Rate-Setting Goal
The most important thing to remember about developing and managing
your electricity rates is — you are trying to set a rate that allows you to
collect enough money to pay for your next fuel
purchase, other bills and to operate the utility. If you
buy fuel once a year, then, you need to collect enough
money to buy next year’s fuel and to operate the
utility. Also remember — fuel costs generally go up!
=32
3. Prices should be fair to all. Discounts and special prices are OK —
but, only if offered to all customers under the same terms. For
example, all residential customers receive a $.05 per kilowatt
discount.
Change Rates As Needed
Rates should be reviewed frequently — ideally monthly — to ensure that
all of the assumptions that you used to develop your rate are still true.
And, rates should be reviewed when any of the following occur:
. each year during the budget development process
. a major change in the cost of bulk fuel
. a major change in the utility or operations
. a major change in your customer base
Elements of Rates - Special Charges
Cost of Special Services
Electric utilities could provide special services, such as service hook-
ups, meter replacements and sale of other products. The charges for
recovering the cost of providing these services are called service
charges. These charges are applied only to the individual customer who
receives the service and usually wouldn't be included in the per
kilowatt price of electricity.
Cost of Penalty Items i,
When customers fail to pay a bill on time, they increase the cost of
operating the utility. The charges for recovering these types of costs are
called penalties and normally should be charged to the individual
customers rather than added to the per kilowatt price of electricity.
However, once you determine that a customer will likely never pay
their outstanding bill, and, you have terminated their service, then that
outstanding amount becomes bad debt and will need to be incorporated
into your general and administrative expenses.
Rate-Setting Method - Per Kilowatt Pricing
Determining Cost of Service
The recommended rate-setting method requires determining the rate
elements described below. Calculating the true cost of providing service
ye
RATE-SETTING PROCESS
The establishment and adjustment of electricity rates is critical to
maintaining the financial health of your utility. And, in order to
properly set rates, you must know how much it costs per
kilowatt to provide the service. Once you have
determined how much it costs to operate the utility —
then you have a basis for setting rates.
Properly setting electricity rates will assure that your
utility can provide adequate funds for the proper
management, operation, maintenance, renovation or expansion of the
utility!
Rate-Setting Policies
There are three major criteria that should be met in the development
and establishment of electricity rates. Rates should be:
1. Set using an established written procedure adopted by the policy-
making body. (NOTE: A written procedure does not need to be
long and complicated. It can be as simple as stating that you will
use the “Rate-Setting Worksheet” and will include a markup of
2% to each kilowatt sold.)
2. Understandable and explainable to the policy-making body and
the customers.
3. Fair to all customers.
Rate-Setting Philosophy
There are three key rate-setting elements that are generally accepted
by many businesses, including:
1. The subsidizing of certain classes of customers (such as elders) is
OK as long as the amount of subsidy and the effect it has on
other customer’s rates are understood.
. The use of business funds to subsidize other operations (such as
street maintenance, fire or police) is OK only if all of the electric
utility’s costs, including long-term repair and renewal, also are
being included in the rate.
Page Three: Denali Commission Report
Instructions
REPORT SUBMITTAL
Z: Send a copy of the report, including all attachments to the Denali
Commission at the following address:
Denali Commission, Attn: Energy Program
510 L Street, Suite 410
Anchorage, AK 99501
Send a copy of the report, without attachments, to the Alaska
Energy Authority at the following address:
Alaska Energy Authority, Rural Energy Group
813 West Northern Lights Blvd.
Anchorage, AK 99503
Provide the name, title and signature of the person preparing the
Report Form and the date the report was mailed.
Page Three: Denali Commission Report
Name of Primary Operator:
Report Period:
6. Report Submittal: Please submit the following reports annually:
An original report, including attachments to: Submit a copy of report, without attachments:
Denali Commission Alaska Energy Authority
Attn: Energy Program Rural Energy Group
CZ) 510 L Street, Suite 410 813 West Northern Lights Blvd. &®
Anchorage, AK 99501 Anchorage, AK 99503
7. Prepared By:
Name
Signature
Revised: Apzil 2008
Let’s take a closer look at the content of this “Management Guide:
Electric Utility Upgrade Business Operating Plan”:
Denali Commission Annual Report — An overview and set of
written instructions is provided; along with blank forms on the
CD.
Rate-Setting Process — An overview of rate-setting principles, a
rate-setting model, along with samples, instructions, and blank
forms and examples on the CD.
KU (Fuel) Inventory Management — An overview of inventory
control principles, an inventory control worksheet along with
samples of instructions, blank forms and examples on the CD.
AEA Energy Loan Programs — Information about Alaska
Energy Authority Loans, including contact information.
AKA Training Programs — Information about Alaska Energy
Authority Training Programs, including contact information.
R&R Bank Account Information — Information about required
R&R bank accounts, and Denali Commission Requirements.
Annual Budgets/Annual Planning — An overview of the
annual budgeting process, business operating plan requirements
and a sample budgeting worksheet. A set of written instructions
is provided; along with blank forms and examples on the CD.
Depreciation — Overview of the concept of depreciation, depreciation
methods and a sample depreciation schedule, along with samples of
instructions, blank forms and examples on the CD.
Setting Fuel Prices — An overview of pricing principles, a
pricing-model along with samples of instructions, blank forms
and examples on the CD.
INTRODUCTION
Electric utility managers and staff are some of the most important
people in their community — they are working hard to ensure that the
community has the ability to produce power in a safe and economically
viable facility. The Alaska Energy Authority (AEA) and The Denali
Commission recognize that everyone comes to their electric utility
positions with different levels of knowledge and experience and, as
such, have developed this “Management Guide: Electric Utility Upgrade
Business Operating Plan” to provide management information and
tools for a variety of business management topics.
This guide is a supplement to your Electric Utility Upgrade
Business Operating Plan, which provides a guideline for
the maintenance, operation and sustainability of electric
utility upgrades.
Business Operating Plan Overview
Generally, the Business Operating Plan: estimates operation and
maintenance needs and costs, estimates renewal and replacement
needs and costs, and estimates a per kilowatt charge for power. The
Business Operating Plan requires the Primary Operator to be
responsible for all aspects of the management and financial accounting
for the facility, including:
Properly establish and maintain a financial management system,
including budgets, financial reports and audits.
Account for, bill for, and use its best efforts to collect all
electricity billings and all other receivables.
Establish bank account(s) and deposit monies into the
appropriate accounts.
Maintain adequate cash reserves for both O&M and R&R.
Guide Contents
This guide provides tools to assist you with the successful
implementation of your Business Operating Plan and contains both
written materials and materials on a CD.
==
List of items on CD
Section 1 - Denali Commission Annual Report
Denali Commission Report Form
Section 2 - Rate-Setting Process
Rate-Setting Excel Worksheets (calculations)
Sample: Completed Rate-Setting Worksheets
Section 3 - Electric Utility (Fuel) Inventory Management
Fuel Inventory Records Excel Worksheets (calculations)
Sample: Completed Fuel Inventory Records Worksheets
Section 6 —- Annual Budgets/Annual Planning
Electric Utility Upgrade Annual Budget Excel Worksheets (calculations)
Sample: Electric Utility Upgrade Annual Budget Worksheets
Section 8 —- Depreciation
Depreciation Schedule Excel Worksheets
Sample: Completed Depreciation Schedule Worksheets
Section 9 — Setting Fuel Prices
Fuel Pricing Excel Worksheets (calculations)
Sample: Completed Fuel Pricing Worksheets
Table of Contents (continued)
Section 7 - Annual Budgets/Annual Planning
Financial Responsibilities of the Primary Operator
Required Bank Accounts
Annual Budgets & Planning Requirements.
Estimating Expenses
Amending the Budget
You're Finished with the Budget, Are You Done? .
Sample Annual Budget Worksheet
Worksheet Instructions - Sample Annual Budget
Sample Exercise — Sample Annual Budget Worksheets
Section 8 - Depreciation
Estimated Life of the Asset
Depreciation Methods
Depreciation Schedule...
Depreciation Bookkeeping
Sample Depreciation Schedule
Section 9 —- Setting Fuel Prices
Fuel Pricing Policies
Price-Setting Philosophy
Change Pricing as Needed
Elements of Price — Special Charges
Price-Setting Method — Per Gallon Pricing
Elements of Price — Per Gallon Pricing
Overall Pricing Goal
Price-Setting Worksheet
Cost of Fuel Worksheet
Table of Contents
Introduction
Section 1 - Denali Commission Annual Report
Itemized Instructions for Denali Commission Report
Section 2 —- Rate-Setting Process
Rate-Setting Policies
Rate-Setting Philosophy
Change Rates as Needed
Elements of Rates — Special Charges
Rate-Setting Method — Per Kilowatt Pricing
Elements of Rates — Per Kilowatt Pricing
Overall Rate-Setting Goal
Rate-Setting Worksheet
Worksheet Instructions — Rate-Setting
Section 3 - Electric Utility (Fuel) Inventory Management
Pros and Cons of Holding Fuel
Comparing Physical Fuel Levels with Bookkeeping Records...
Sample Monthly Fuel Inventory Records
Worksheet Instructions — Monthly Fuel Inventory Records
Section 4 -—- AEA Energy Loan Programs
Bulk Fuel Revolving Loan Fund
Power Project Loan Fund
Where to Obtain Loan Applications
Section 5 —- AKA Training Programs
Overview
Technical Operations Training
Management and Bookkeeping Training
Where to Obtain Training Program Schedule
Section 6 —- Renewal & Replacement Account Information (R&R)
What is the Purpose of the R&R Account? ......c ce eeecceeeceeeeeeeeeeeeeeeeeeeeneeeeaeeens 1
What Kind of Bank Account is Required? ..........ccccccceeceeeeeseeeeeteeeeeeeeeeeneeesneeens 1
Published by
Alaska Energy Authority
813 West Northern Lights Blvd.
Anchorage, AK 99503 (907) 771-3000
Project Funding
Denali Commission
Compiled and Designed by
Aurora Consulting
April 2008
Included in the back of this manual is a CD with all
of the examples, exercises, etc. described in this manual.
If it is not there, please call the Alaska Energy Authority’s
Training Program Manager at
(907) 771-3000 for a replacement.
Management Guide:
Electric Utility Upgrade
Business Operating Plan
April 2008
Alaska Energy Authority
[=ALASKA
@il> ENERGY AUTHORITY