Accounting A7/15 A7/A8 Activity Costing Analysis

Transcription

1 Accounting Separation 2014/15 A7/A8 Activity Costing Analysis (operating expenditure) 1.1 Background and purpose The purpose of this methodology statement is to illustrate the process and allocation procedures undertaken to complete table A7 (wholesale) and A8 (Retail). 1.2 Overall methodology ABC software is used to bind a variety of data sources required to complete the operating expenditure separation tables. The model holds our annual operating expenditure in detail and all associated driver data to ensure expenditure is allocated to the correct activity line. The use of a single database to contain ABC data in a safe and contained environment ensures output data is accurate, consistent, and easily verified for audit and review. Overview / Data and System Integration An outline of system integration to produce operating expenditure accounting separation tables is given below. Page 1 of 13

2 As the above diagram denotes inputs are either cost or driver related. All costs come from a single source, the general ledger (Great Plains), and are exactly replicated within the ABC model. Where costs explicitly relate to a specific business unit, expenditure has been coded directly to the business unit that consumed the goods or the service (For example doubtful debts and chemicals cost both costs being directly apportioned to the business unit water treatment). To assist with direct coding of labour costs to specific business units, job roles and activities have been used to apportion cost. Where direct coding is not possible, an allocation is made using an appropriate cost driver that has caused the cost to be incurred. Actual (real) collected data is sought for use as cost drivers, however, in some instances expert opinion has been used and where this is the case alternative future methods are being explored. Methodology Changes The methodology remains largely identical to that used for PR14 and the previous period 2013/14. Additionally we have retained the PR14 table format for retail and consolidate to provide table A8. The purpose for doing so allows us the opportunity to monitor costs at a more component level including the facility of breaking down retail support costs. Our methodology includes the following developments: The operational depots in each region have largely been to support the treated water distribution function, particularly focused in technician scheduling. The 2014/15 period has seen this support function stretch across to the production functions and therefore the allocation of activities regarding these depots has changed to a weighted average of our distribution and production teams for each area. The allocation of our distribution teams has historically used a SEW average. For this period allocations are analysed at a cost centre level and apportioned to the local cost centre. Our analysis and understanding regarding our energy usage continues to develop and whereas previous submissions has seen power allocated on a company basis we now allocate energy at a regional level based on regional allocation analysis. Building insurance has historically been allocated on a headcount basis. We have improved this allocation according to a property valuation and as such more building insurance is allocated to the wholesale function. Board of director allocations have historically being apportioned on a pro-rata basis. We have modified this approach to allocating each director based upon the weighted average of their directorate s allocation. The overall average of all directors defines the new allocation of activity for the board of directors cost centre. The amendments have not led to a significant change; however, allocation to retail has fallen from 39% to 34%, with the corresponding increase occurring in the wholesale function. Page 2 of 13

3 Accounting Separation Asset Boundaries To ensure costs are allocated to the correct business function primary company assets have been allocated to one of five business functions ranging from water resources to retail as defined in the below diagram. WATER RESOURCES RAW WATER DISTRIBUTION WATER TREATMENT TREATED WATER DISTRIBUTION RETAIL Raw water reservoirs Identified mains All treatment processess Service reservoirs Stopcock River intake pumps Identified booster pumps Onsite high lift pumps Water towers Customer supply pipe Borehole pumps Contact tanks Network boosters Onsite mains Sludge plants Transfer pumps Mains Communication Pipes Meters Allocating assets to the correct business function ensures associated activity and subsequent cost is also allocated to the correct business function. For example high lift pumps situated on a treatment sites, regardless of their function (e.g. pumping into distribution), are allocated to the Water Treatment business function. Hence, subsequent activity and cost related to high lifts pumps (e.g. routine maintenance) on treatment sites are also allocated to this business function. Exceptional Items Exceptional items related wholly to FRS17 adjustments and total 8.474m for the 2014/15 period. FRS17 adjustments are agreed in conjunction with our auditors, and represent the removal of contributions and the addition of service charges. Planned improvements As stated in the above methodology where possible actual driver data is sought allocate cross business function activity. However expert opinion currently exists within the production and leakage areas of the business. For the former this requires expert opinion on direct resource levels between abstraction and treatment, whilst the latter an element of expert opinion is used to determine direct resourcing of network and customer leakage. Both areas of expert opinion are planned to be removed by utilising our works management system that is currently being implemented into these areas of SEW, which will record activity (e.g. hours) and therefore provide a more robust and precise methodology for future allocation. 1.3 Wholesale Methodology The overall methodology ethic is consistently applied to both wholesale and retail, however outlined below is methodology specific to the wholesale function, including water resources, raw water distribution, water treatment, and treated water distribution. Page 3 of 13

4 Operating expenditure A7.1 Power All energy relating to treated distribution assets (i.e. service reservoirs, boosters, etc.) is wholly attributed to the relevant function. As outlined above our energy allocation at sites where energy is used across various functions is now taken from our Miser system, where cost data is held at an asset level to drive cost efficiency. A7.2 Income treated as negative expenditure SEW does not export any energy generation, and therefore no expenditure is recorded to this line. A7.3 Service charges A7.4 Bulk supply imports The majority of service charges relate to EA abstraction licences and are therefore directly attributable to the water resource function. A smaller element of expenditure relates to discharge consents, and is directly attributable to the water treatment function. Bulk supplies are a direct cost item at cost centre level and are therefore directly apportioned to either the water resources or water treatment function since SEW receive both non-potable and potable supplies from neighbouring companies. Included within this line are (direct) employment, hired and contracted, materials and consumables (e.g. chemicals), plus all general and support function costs. Where possible a direct allocation of cost to business function has been sought. This would include reviewing employee job descriptions and account lines to establish activity. A7.5 Other operating expenditure Where activity crosses business function then percentage apportions have been sought. Where employment or hired and contracted related, this has been established either through time sheet analysis, or through job description analysis. For materials and consumables crossing business function this has assumed to mimic labour activity. A further cost allocated to this line originates from support services such as HR, IT, and finance. Analysis of employee activity (using job description for example) has been undertaken to appropriately apportion cost between functions. A7.6 Local authority rates A7.7 Exceptional items Cumulo rates are apportioned according to our GMEAV allocations, whilst local authority rates are apportioned according to floor area. Solely related to FRS17 pension adjustments and are apportioned according to existing pension contributions. A7.8 Total Operating Expenditure (excluding 3 rd party services) Calculated sum of above lines Significant Changes in cost Trigger levels for comment regarding significant change includes line fluctuation exceeding 2% of total operating expenditure (either wholesale or retail expenditure), and also individual line cost which has changed by more than 30% of the prior year figure. The tables below outline for wholesale line components where either trigger has been exceeded. Page 4 of 13

5 Service Charges 2014/15 prices Total 14/15 Total 13/14 variance % of Opex WS %line Increase Service Charges 1.45m 3.27m % % Abstraction charges have significantly dropped in the period due to considerable compensation credits being received from the Environment Agency. In total abstraction charges are reduced by approximately 1.9m, due to a combination of not being charged compensation fees for the 2014/15 period (which were paid in 2013/14) and compensation credit payments received in return. Other Operating Expenditure 2014/15 prices Total 14/15 Total 13/14 variance % of Opex WS %line Increase Other Opex 36.05m 33.75m 2.3m 3.4% 6.8% Other operating expenditure has increased by 2.3m from the previous period, and although falls below the line increase trigger, as a proportional change of total wholesale opex the trigger is exceeded. The two significant drivers of this change are related to reactive maintenance and board of director increases. The previous period (2013/14) witnessed a benign period of reactive maintenance activity, and therefore predictably reactive maintenance has increased in the recent period to reflect a normal year, and is reflected through an increase in other operating expenditure. For 2014/15 we have amended the allocation regarding our Board of Directors. Previous returns we have provided a simple pro-rata of cost based on known cost allocation. For this period we have changed the approach with every director now allocated based upon a weighted average of their directorate. It is considers the overall average of this approach provides a more robust and reflective allocation for the board of directors. The conclusion of the analysis has led to less activity being apportioned to retail functions falling from 39% to 34%. The deduction is mirrored with an increase to wholesale functions and coupled with a cost centre increase is one driver leading to an increase in other operating expenditure. 1.4 Retail Methodology The overall methodology ethic is consistently applied to both wholesale and retail, however outlined below is methodology specific to the retail function. Page 5 of 13

6 Operating expenditure A8.1 Customer services A8.2 Debt management Line allocation We continue to report customer service activity at prior reporting levels, i.e. billing, network and non-network enquiries, payment handling). Each line is apportioned to household and nonhousehold using appropriate drivers (see right-hand column). The majority of expenditure allocated to this line is direct from associated cost centres (e.g. customer services, billing). The exception is activity undertaken by our distribution function that perform activities associated to both wholesale and retail. Timesheet analysis enables us to calculate hours spent to each function and is used to apportion cost Doubtful debt management is combination of direct and contractor Non-household allocation Bills Raised Payments Received Volume of Enquiries Actual debt analysis A8.3 Doubtful debts Represents a direct cost allocation. Actual debt analysis A8.4 Meter reading A8.5 Services to developers A8.6 Other operating expenditure The majority of meter reading is undertaken by an outsourced company and is therefore a direct expenditure allocation. A small internal team remains, and again relevant cost is apportioned to this line. A dedicated cost centre results in a direct cost allocation. Cost is largely recharged leaving a marginal expenditure posted to this line. Includes expenditure such as other direct costs, customer side leaks, scientific services, and general and support items. The majority of cost originates from support services such as HR, IT, and finance. Analysis of employee activity (using job description for example) has been undertaken to appropriately apportion cost between functions. Expenditure relating to the HR and IS helpdesk function have been allocated based on a headcount basis. Customer side leak repairs are undertaken by a mixture of direct and outsourced contractors. Leakage activity between wholesale and retail is currently apportioned using expert opinion, however planned improvements to our works management systems will enable activity in future periods to be apportioned using Meter Reads Non-household Property numbers Page 6 of 13

7 Operating expenditure A8.7 Local authority rates actual data. Line allocation Central government rates are apportioned according to our MEAV allocations. Non-household allocation Property numbers A8.8 Exceptional items Property numbers A8.9 Total Operating Expenditure (excluding 3 rd party services) Calculated sum of above lines Significant Changes in Cost Trigger levels for comment regarding significant change includes line fluctuation exceeding 2% of total operating expenditure (either wholesale or retail expenditure), and also individual line cost which has changed by more than 30% of the prior year figure. The tables below outline for retail line components where either trigger has been exceeded. Debt Management 2014/15 prices Total 14/15 Total 13/14 variance % of Opex WS %line Increase Debt Management 1.81m 2.25m % % Debt management cost has decreased by 400k from the previous period, thereby triggering the 2% of total (retail) opex threshold. The significant driver of this decrease is attributed to a reduction in contractor debt collection fees. Doubtful Debt 2014/15 prices Total 14/15 Total 13/14 variance % of Opex WS %line Increase Doubtful Debt 2.25m 3.82m - 1.6m - 8.4% % The driver for the decrease is due to a credit in March 2015, including: 1. The business wrote off credit balances over 6 years old amounting to 421k. 2. The Write off of refund cheques over 6 years relates to cheques not cashed by customers. These are initially written out of the cash book and then held in a holding balance sheet account until 6 years have passed or the cheque has been presented. 3. The Bad debt provision model has been tracking better than budget which in March it was agreed to release a 1m from the provision. Meter Reading 2014/15 prices Total 14/15 Total 13/14 variance % of Opex WS %line Increase Meter Reading 1.94m 1.23m % 57.9% Meter reading costs have increased by 0.7m over the period and reflect the Company's programme of compulsory metering. The increase in meter reading reflects the larger number of meters now being read. Page 7 of 13

8 Other Operating Expenditure 2014/15 prices Total 14/15 Total 13/14 variance % of Opex WS %line Increase Other Opex 6.76m 7.45m % - 9.2% Other operating costs have decreased by 0.7k over the period. Included within other operating expenditure includes support services (e.g. IT, HR etc.), customer side leakage activity, and demand side initiatives. There are two main drivers accounting for the decrease in expenditure for this line: 1. A reduction in customer-side leakage of approximately 220k as a result of structural changes to our leak detection teams leading to a reduced cost but also a refreshed approach of cost allocation to this area. The combined reason has led to the reduction in customer side leakage for 2014/15. Customer side leakage is likely to increase in future years as increased leakage is detected through increase metered penetration. 2. A change in approach regarding allocation of building insurance has led to a 250k reduction. In previous years the approach has been to simply allocate building insurance on a headcount basis. The new approach is based on property valuations and has resulted in more insurance being allocated to the wholesale business. 1.5 Atypical Expenditure There has been no atypical expenditure recorded in the period. s A9/A10 Fixed Asset - Accounting Separation 1.1 Background and purpose The purpose of the fixed asset accounting separation tables is to split the entire asset register of South East Water into five business units that are defined by Ofwat. This is included in the regulatory accounting requirements and requires us to look at each individual asset and determine which business unit(s) that it should be placed in. The business units are: Water Resources Raw Water Distribution Water Treatment Treated Water Distribution Retail divided into retail household and retail non household Page 8 of 13

9 1.2 Completion methodology The primary data sources for the fixed asset tables are the additions analysis, disposal analysis and MEA Revaluation working documents. The working papers have been audited by our reporter SMC to provide assurance with our regulatory compliance. The bulk of our asset values are brought forward from the prior year, the changes to the balances for the current year relate to changes in RPI, disposals, depreciation and additions. Disposals The disposals made by the business each year are required to be allocated to business units. Disposals are also required to be entered at their current cost. The current cost of the disposal is calculated using the change in RPI from the purchase date until the date of disposal. This process is exactly the same when calculating the depreciation charge that is removed from the tables due to the disposals. The basis of allocation for disposals varies for different types of assets, for example Vehicles, IT equipment and office furniture are allocated on a driver basis that is used in the tables A9 & A10. Other types of asset are allocated in line with the treatment of similar assets in the additions analysis. This data is captured in our Asset disposals analysis, where the disposals business unit and asset type is determined Additions The additions adjustment is based on the annual capital spend by the Company. The additions and CCD calculations are based on the Company s fixed asset accounting records, build up over the financial year from the Capital Expenditure Requests (CERs), where project managers describe the nature of expenditure and the regulatory allocation, including business unit, asset type and asset life. Determining Business unit Project managers use the CERs to identify which business unit a project s spend relates to. This is reviewed in the Finance Department as part of the authorisation process. Business unit information is maintained as part of the Company s accounting records. Expenditure on projects designated as general and support is allocated to business units based on cost drivers used in the opex tables. These projects are analysed individually to determine whether they can be allocated to one principal business unit. Each project is then assigned a best fit cost driver, for example IT expenditure in based on the IT cost driver. For split assets as defined in Regulatory Accounting Guideline 4.04, we use an apportionment method and cost drivers to allocate spend. Therefore there are no recharges between business units. Determining Asset Type The allocation of expenditure between infrastructure, operational and other assets is based on the information provided by project managers on the CERs. Page 9 of 13

10 Retail table assets A valuation of the Company s assets was carried out in 2008 and has been used as our opening balance for net book value and current cost depreciation. This has been analysed by relevant business units and is updated each year to current prices using RPI. The additions and disposals are then allocated to business units as described above. This process is performed manually as there is no automated system to determine these asset balances. Included in the assets allocated to Retail are costs of the billing system. While the original cost of the billing systems have been fully depreciated, enhancements and hardware replacement have a carrying value in the historic accounts of 1.0 million. The current cost depreciation charged on the billing systems in the year was 283,000. We are currently reviewing the process for identifying and recording current cost assets. CCA register The Company does maintain a CCA fixed asset register as part of its accounting records. Information is extracted from the Company s HCA register and analysed on spreadsheets to calculate CCA information. This manual process is carried out half yearly. Significant movements The table below compares additions during the year to the previous year, adjusting the previous year s expenditure to the new-year s price basis. Description AR14 reported 2013/14 AR14 re-priced to 2014/15 Reported 2014/15 Re-priced Variance Variance % Wholesale NI additions (6.6) (14) Wholesale Infra additions Retail additions Total additions (3.1) (4) The mix of assets types attracting capital expenditure changes from year to year. However, the reduction in wholesale asset additions in the year can be largely attributed to fall in spend at the Barcombe and Arlington treatment works (jointly down from 7.3 million to 1.9 million). A similar comparison of asset disposals is shown below. Description AR14 reported 2013/14 AR14 re-priced to 2014/15 Reported 2014/15 Re-priced Variance Variance % Wholesale NI disposals (6.5) (6.6) (5.2) Wholesale Infra disposals Retail disposals (1.8) (1.8) (2.6) (0.8) 44 Total disposals (8.3) (8.4) (7.8) Page 10 of 13

11 The major type of asset disposal in the Retail area over the past two years has been due to computer equipment and computer software replacements. The increase in disposal in the area of the business reflects the emphasis in the year in updating the Retail systems. The table below shows a comparison of current cost depreciation between the past two years. Description AR14 reported 2013/14 AR14 re-priced to 2014/15 Reported 2014/15 Re-priced Variance Variance % Wholesale disposals CCD (6.2) (6.3) (5.0) 1.3 (20) Retail disposals CCD (1.8) (1.8) (2.6) (0.8) 44 Wholesale charge for CCD Retail charge for CCD The increase in CCD on disposals in broadly in line with the increase in assets disposed of and reflects the largely depreciated nature of those assets. The increase in CCD for wholesale assets reflects the accelerated depreciation charged on assets that have been impaired but continue to be used in the business. This is mainly in respect of assets in the company s laboratory, which is being transferred to new premises. 1.3 Upstream Services As requested SEW for 2014/15 has completed trial upstream service tables. Water resources Abstraction license Raw water abstraction Raw water distribution Raw water transport Raw water storage Water treatment Water treatment Treated water distribution Trunk treated water distribution Local treated water distribution Operating expenditure IRC CCD Total operating costs Total BU operating cost Water Resources The accounting separation water resources function has been split into two functions: 1) Abstraction Licence; and 2) Raw Water Abstraction. The former relates to activities relating to negotiating abstraction rights and agreeing charges, as well as the annual cost of the licence itself. Subsequently using the accounting separation data we have allocated all cost from SEW Water Resources team allocated to the water resource function to the abstraction licence service since this department solely undertake activities associated with the service and also the guardians of the annual licence. All other cost in the accounting separation water service function can be attributed to raw water abstraction. Page 11 of 13

12 CCD There are no capitalised abstraction licenses, therefore 100% of the water resources CCD charge is allocated to raw water abstraction. Raw Water Distribution This accounting separation function is a marginal activity for SEW since nearly all abstraction and treatment occur on a single site. Subsequently it has not been possible to identify cost accurately to raw water storage, and therefore all cost has been associated to raw water transport. Treated Water Distribution The majority of this accounting separation function is split between 1) trunk and 2) local main activity. Given the combination of our GIS and works management systems we are able to identify and locate reactive (operating expenditure) activity to either trunk or local main network we have been able to establish that 95% of expenditure is associated to local treated water network. We have applied this level of allocation to all lines for treated water distribution except authority rates. For authority rates we have further broken down GMEAV analysis of treated water distribution assets to either local or trunk mains. The analysis has led to wholesale treated water distribution rates being allocated to local distribution by the value of 85%, with the remainder being driven to trunk distribution. The combination of these allocation rules is that cost apportioned to trunk distribution is 2.16m, and 27.73m being apportioned to local distribution. IRC The infrastructure renewal charge sits wholly within treated water distribution. As per renewals accounting, the infrastructure asset is a system or network as a whole to be maintained at a specific level of service. We have taken our whole network and proportionally allocated 35.4% to trunk treated water distribution and 64.6% to local treated water distribution. Significant movements The Company s costs for abstraction have halved in the year to 31 March 2015 due to the refund of surplus EIUC compensation contributions. This is reflected in the operating expenditure allocated to abstraction licences. All other costs are largely in line with the previous year. Page 12 of 13

13 Water resources Abstraction license Appendix - prior year 2013/14 Raw water abstraction Raw water distribution Raw water transport Raw water storage Water treatment Water treatment Treated water distribution Trunk treated water distribution Local treated water distribution Operating expenditure IRC CCD Total operating costs Total BU operating cost Page 13 of 13