Delivering service to customers requires a utility to have support operations that provide internal services to multiple departments within the utility. If a utility offers multiple services (electric, water, wastewater, gas, communications), the internal operational support must provide coverage to each service line.
Allocating utility costs is part art, part science, and always a topic for discussion and disagreement. A structured and defensible approach is needed to allocate these costs across the multiple departments and/or utility service lines.
This is the first part in Baker Tilly’s two-part series on utility cost allocation which covers the fundamentals of cost assignments and identification of shared service opportunities as well as common methods and best practices for the utility industry. In this article, you’ll learn the methodology of cost allocation and role of shared services.
The fairest and easiest cost allocators to share within a utility allocate cost based on “cost causation” — in other words, the cost driver behaviors behind the cost and the department or utility service drives that cost. The rules of cost allocations are simple:
Fundamental cost allocation methodology should have these characteristics:
These cost principles are designed to provide a defensible methodology for cost allocations.
The approach of “shared services” can deliver high quality internal services efficiently and effectively because it:
Functional characteristics of shared services include:
Analyzing and allocating shared services in a systematic manner can remove some of the negotiation inevitable when utility departments need and want the services but are concerned about the budgetary impact.
The benefits of shared services can be felt across the organization in four main areas – strategy, people, technology and process. Let’s examine each area and its benefits.
A utility’s strategy involves utilizing people, processes and technology to achieve its mission of providing reliable service at a reasonable cost. That doesn’t mean all costs shouldn’t be recovered. Rather, shared services drive strategy and make the utility’s mission possible.
By dedicating personnel to internal customers, resources are more effectively allocated across departments to:
Through standardized processes, shared services become a third-party supplier to the utility and
Shared technology provides a single source of information and technology solutions to:
Departments that are candidates for inclusion in a shared services allocation are listed below.
Many of these areas have the cost characteristics of being common and not critical to a specific utility department or service line. As in any case, directly assignable costs should be direct charged to a project or department, all others could be considered for a shared services allocation.
In part two of Baker Tilly’s two-part series on utility cost allocation, utilities will learn about common cost allocation methods that are industry best practices.
For more information on this topic, or to learn how Baker Tilly energy and utility specialists can help, contact our team.