The Crimson Press Curriculum Center

First Page and the Assignment Questions:
We lost money last year [Exhibit 1], and we obviously have to reverse that this year if we're going to be self-sustaining. But that means we’ve got to know the cost of each of our products. We provide several different products, including some unregulated ones, but we don’t know which ones make money and which don’t.

Liz Conaway, the chief executive office of Harbor City Electric (HCE), was meeting with Robert Simi, her recently-hired chief financial officer. She continued:

The key lies in our cost accounting system, which is supposed to abide by certain guidelines, but I don’t think it does. Yet, without good cost information, I can’t know if we’re operating efficiently. And, if I don’t know that, I can’t even think about asking the DPU [Department of Public Utilities] for a rate increase.

BACKGROUND

HCE was established in 1998, shortly after the state’s electric utility industry had undergone some moderate deregulation. According to it’s mission statement “. . .our most important job is to keep the lights on, and if there is a service interruption, to get energy restored quickly and safely.”

The organization’s primary business was energy delivery—moving electricity from suppliers to homes and businesses. HCE procured electricity from generators, and, working much like a large warehouse, used bulk purchasing to keep the cost of power low to its customers. In this regard, it offered four categories of services (The revenue for each is shown in Exhibit 1).

1.   Distribution. This was for the provision of the capacity to deliver electricity. In accordance with DPU regulations, the revenue from distribution was for for the recovery of capital investments plus the operation and maintenance costs related to the organization’s electrical distribution infrastructure.

2.   Transmission. This was the movement of electricity over high voltage lines from a generator in a power plant to substations. According to DPU regulations, this revenue was for the recovery of the costs incurred for the transmission activity.

3.   Acquisition and Transfer. “Acquisition” was the purchase of the electricity itself, usually under long-term contracts with nuclear and non-nuclear power plants. “Transfer” was the movement of that electricity from a substation to the customer. DPU regulations stipulated that the charges to customers were for recovery of the costs incurred to acquire and transfer the energy.

4.   Customer Support. This was designed to help HCE’s customers use energy more efficiently. With energy costs rising, HCE’s customer support programs were seeing rapidly increasing demand. There were four such programs:

Assignment

1.   Are the allocation bases suggested in the case “reasonable”? If not, how would you change them? Which of the two bases under discussion for the non-salary costs of operations and maintenance would you use? Why?

2.   In what sequence should the support center costs be allocated? Why?

3.   Should Ms. Conaway apply to the DPU for a rate increase? If so, for which products and for how much for each? If not, how should she go about eliminating the loss?

4.   What else would you recommend to Ms. Conaway?