Towards Introducing Uniform Energy Accounting: The Rationale and Way Forward

1. Towards Introducing Uniform Energy Accounting: The Rationale and Way Forward Jamaluddin Ahmed PhD FCA Member Council The Institute of Chartered Accountants of Bangladesh

2. Objectives of the Paper • Economics of Regulation • Specific need of Uniform Energy Accounting • Core issues in Uniform Energy Accounting • Scope of uniform Energy Accounting • Development of Uniform Energy Accounting in Bangladesh • Summary and conclusion

3. Economics of Utility Regulation Economic theory consider information to be a key element in the Regulatory Game based on two important milestones (Laffont 1999). First: Regulation is contractual relationship in which regulator attempts to control a firm. The main difficulty is the regulators are in lack of information about the regulated firms (Leob and Magat 1979) Second: Economists understood regulation as a game of two players, the regulator and the firm that do not share the same information (Baron and Mayerson, 1982) Laffont and Tirole (1994) developed a model with cost or profit observability and with symatry of information about firm’s technology and cost reducing efforts has become the basic paradigm of theoretical analysis of regulation.

4. Milestones in Infrastructure Reforms 1978: Airline Deregulation Act 1980:Staggers Act (Rail deregulation) 1980: Motor Carrier Act (Trucking deregulation) 1984: AT&T Divestiture 1992: Federal Energy Regulatory Commission-Gas 1996: Federal Energy Regulatory Commission-Electricity 1996: Telecommunications Act 1984:British Telecom 1986:British Gas 1987:British Airways 1987:British Airport Authority 1989:Water and Sewerage Companies 1990:Electricity Companies 1995:British Rail 1996:British Energy-Nuclear United Kingdom EU Liberalization United States of America 1990:Telecommunications 1991:Railway 1996:Electricity 1996:Gas

9. Financial Vs Regulatory Accounting Point of difference Focus Accounting Activities considered Yardstick competition Degree of homogeneity Basis of cost Allocation of common cost Financial Accounting Firm Within a firm Both regulated and un-regulated Can not provide Difficult Temporal cost imputation rule Inadequate allocation Between regulated and Un-regulated activities Regulatory Accounting Regulated activities Regulated activities of more firms Separation of regulated and un-regulated activities Can provide Easier Not included in asset base until in Service A regulated firm would have strong Incentive to allocate common cost to its regulatory activities rather to any Of its competitive activities

10. Need for Uniform System of Accounting Uniform System of Accounting (USoA) sets the principles and rules of presentation of information for regulated companies. Objectives Collect information for Sustainability, Allocative Efficiency, Productive Efficiency, Equity or Distributive Efficiency

11. Regulators need for Uniform System of Accounting • Reporting of regulated activities • Separation of information on sub activities • Disclosure of information on unregulated activities • Information on both financial and non-financial • Format for information • Periodicity of reporting • Defining allocative rules • Defining valuation rules

12. Consistency between USoA and Statutory Accounting • USoA statements are addition to any statutory financial reporting • Must be prepared on the basis of GAAP • Based on same sources of information • Follow regulatory accounting guidelines over accounting standards wherever the two conflicts

13. Core issues in USoA • Separation of regulated and unregulated activities • Separation of activities whether their markets are competitive • Separate activities based on the degree to which un-regulated activity is vertically intrgrated with regulatory activities • Accounting separation regulated and un-regulated activities. • Regulatory asset base determination • Asset base valuation • Regulatory asset base composition • Regulatory approach to depreciation • Related party transactions • Cost allocation

14. Regulatory Accounting Guidelines • Purpose • Legal basis of authorities • Disclosure and confidentiality rules • Definition of terms

15. General Principles of Regulatory Accounting • Causality • Objectivity • Transparency Consistency • Materiality

16. Conformity of Regulatory Accounting with National Standard • Substance to prevail over legal form • Related party transactions • Third party transactions • Third party benefits • Directors responsibility • Audit • Qualification of costs

27. Single Buyer Model for Electricity Generators Transmission and Dispatch Distribution Customers Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and Competition. A Compilation of World Bank and Oxford University Press

28. The Wholesale Competition Model for Electricity Generators Transmission and Dispatch Distributors Customers Ioannis N Kessides (2004):Reforming Infrastructure: Privatization, Regulation, and Competition. A Compilation of World Bank and Oxford University Press

35. Purpose of Uniform System of Accounts (USoAC) • USoAC are important for systematic and efficient functioning of the regulated utilities financial system • It allow regulators, creditors, auditors, and others to rely on creditable, transparent, and comparable financial accounting & Reporting information

36. BERC DPDC DESCO WZDC NZDC PDB REB PGCB EGCB. Current BERC Regulated Utilities subject to Uniform System of Accounts

37. Current Accounting System • Each regulated utility under BERC jurisdiction records their accounting books in a non-consistent forms • Utilities have different aggregated Chart of Accounts • The adaptation of Accounting Practices varies from utility to utility • Revenue recognition • Asset recognition • Expense recognition • Submission of Reports to BERC on the basis of aggregated accounting practice

38. Uniform System of Accounts • All Utilities will provide their financial statements to BERC in the same format • All the records will follow a uniform system of accounts • Guidelines for proper booking and accounting of utility operation • Establishment of Guidelines for all accounts & sub-accounts • Establishment of reliable financial and accounts information for regulators, creditors and other interveners. • Allow transparency in the Sector’s financial system

39. Advantages of Uniform Accounting System • Necessary: for BERC to carry out its regulatory functions under the Act. • Uniform Reporting System: to BERC for rate setting by auditing utilities’ books and records and establishing fair and reasonable rate of return • Cost Allocation: provides needed accounting information for cost of service study • Transparency: Provides the regulators and the public transparency in the regulated utilities accounting recording system • Completeness:Provide consistent financial and accounting information to the Regulators and the public • Flexibility: Provide a platform that can be modified and enhanced as needed • Continuity: In accordance with the existing practice in the companies

40. Limitations of Existing Accounting System • Lack of proper financial and accounting recording system for the regulators and the public to investigate rate case applications. • Non-Compliance for auditing by the regulators and the independent auditors • Non-Compliance of International Accounting Standards (IAS) • Non-Comparability between utilities within the Sector

41. Current practices as observed by Statutory Auditors performing recent independent audit of the following firms: Examples of Current Accounting System

42. Qualifications Bangladesh Power Development Board • Only maintains Cash Book & Bank Book • Gratuity & Pension Expenses not correctly shown in Financial Statements • Accrued Fixed Deposit Receipts (FDR) income not recognised • Customer Security Deposit could not be identified correctly • Clearing A/Cs not reconciled with Regional Accounting Office (RAO) A/Cs • Foreign & Govt. grants not properly recognized

43. Qualifications (cont.) Bangladesh Power Development Board • Deposit work fund created but no adjustment made after the construction/installation of Assets • Correct status of slow moving/obsolete inventory could not be verified (applies to all utilities)

44. Qualifications Power Grid Company of Bangladesh Ltd. • No physical count of fixed assets conducted and no fixed asset register maintained • No physical inventory count • No recognition obtained from NBR for “Unfunded Gratuity Scheme”

45. Concerns Power Grid Company of Bangladesh Ltd. • Inadequate Insurance Coverage of FA • Absence of FA Addition & Disposal Policy • Item-wise Inventory List not Available • GMD reported Inventory differs from Physical Counting of Inventory • No Financial & Accounting Policy Developed • Inadequate Internal Audit Coverage and Consolidation of Financial Statements

46. Concerns (cont.) Power Grid Company of Bangladesh Ltd. • Transmission charge not Independently Verified • Cash Transaction amount Notable • Opportunity Lost in FDR Interest • Bank Reconciliation Statements incorrectly prepared • Long Outstanding cheques in Reconcilation • Tax at Source deducted inadequately

47. Concerns (cont.) Power Grid Company of Bangladesh Ltd. • Overtime Register for employees not found • Log-book of Sub-Station not Updated • Long Pending of Unadjusted Advance

48. Qualifications REB: 70 PBSs • Theft, burn or damage to Electricity/ Equipment in Service was not recognized correctly in the Financial Statements • Interest on Long Term Loan recognized in the wrong period. • Cash flow Statement had not been prepared • Compensation received Electrical Equipment Damaged/Destroyed was not included in the P & L A/C.

49. Concerns REB: 70 PBSs • Company is operating below BEP • PBS could not utilise a line bought from PBS causing loss • System loss percentage prescribed by REB has been fluctuating over last 5 years • Obsolete items in PBS store • Significant amount of Consumer bills lie outstanding

50. Concerns (cont.) REB: 70 PBSs • PBS required to invest in Asset Replacement Fund but there is a shortfall • PBS required to invest in Donation Reserve Fund but there is a shortfall • Significant amount of money lies with the Cashier which is not covered by insurance • No inventors of materials in shops