by Michael A. “Casey” Herman and Phil Koos, PricewaterhouseCoopers
The economic stimulus package offers utility and power companies an opportunity to jump-start smart grid and other clean energy projects.
It’s no wonder utility companies are enticed by the American Recovery and Reinvestment Act of 2009 (ARRA) and its billions of economic stimulus dollars waiting to be spent on renewable energy projects, smart grid technologies and clean energy initiatives.
Signed into law Feb. 17, the federal legislation provides about $83 billion in tax incentives, loan guarantees and government grants for investments in energy-efficient technologies and renewable energy programs. These incentives might be a precursor to a more comprehensive U.S. energy policy with renewable energy and a cap-and-trade climate change as prominent components.
As the legislative debate on how best to cut carbon emissions continues, utility companies are looking at federal tax incentives and grants to offset investments in costly infrastructure projects that are mostly optional but soon could become mandatory.
Rather than delay, many utility companies see federal stimulus grants as an opportunity to jump-start their energy initiatives. There is also a presumption that regulators expect utilities to access these incentives to mitigate raising customer rates to pay for the improvements.
The stimulus package earmarks $4.5 billion for smart grid projects to help utilities retool the electrical grid while saving power and reducing congestion that can result in blackouts. As wind, solar and geothermal energy sources evolve, smart grid technology becomes essential to making renewable energy sources available to customers with evolving plug-in needs from new electronic devices to electric cars.
Because the energy efficiency advantages of a smarter electrical grid are critical and the projects are expensive to build, the Department of Energy recently raised the grant cap from $20 million to $200 million. Further, the Federal Energy Regulatory Commission issued a policy statement and plan to accelerate smart grid technology development.
But it’s not easy money. With significant financial and regulatory incentives to apply for stimulus grant funding come federal oversight provisions that might require some utility companies to implement new procedures or tailor policies to ensure their compliance.
The government anticipates spending $74.5 million on federal and state audits of approved stimulus projects. An additional $84 million of the ARRA money will be spent on oversight activities of the Recovery Accountability and Transparency Board, created to prevent fraud, waste and abuse.
To know whether pursuing a federal stimulus grant will be advantageous, utility companies must understand the government grant process and know about the compliance, accounting and tax implications.
Federal Grant Knowledge, Preparation
At $787 billion, ARRA is the largest combined spending and tax bill in U.S. history. Accountability and transparency are of primary importance to the U.S. government. Even companies with federal grant experience and knowledge might need a refresher to understand and comply with ARRA’s new reporting measures.
Without the proper compliance structure, a utility could be excluded from receiving ARRA grants or risk having grant payments suspended before a project is complete. Failure to meet any of the complex reporting, accounting and compliance requirements could cause an award to be terminated and result in unwanted publicity.
Compliance, Reporting Depend on Whose Rules
Compliance requirements may vary depending on the type of award (contract or grant) and whether the grant is federal or state. Differences also might exist among states, making it difficult to identify applicable regulations and laws. It is important to have this kind of information before the grant is awarded because compliance requirements begin with the proposal and application and generally end three years after final payment.
Compliance begins with the pricing included in the proposal or budget submitted to the funding agency. If compliance requirements associated with the cost proposal or budget are not fully understood, it could result in future disallowance of costs by the government or findings of defective pricing associated with contracts subject to the Truth in Negotiations Act (TINA). Such findings can have severe impact because they reduce the costs that can be recovered by a company and may result in fines and penalties if certain laws, such as TINA, are violated.
Key elements associated with proposal pricing include the allowability of costs, methods to estimate cost categories such as labor, ensuring proposed cost sharing conforms to the rules and indirect costs calculated using the appropriate causal or beneficial relationships. Also, ensuring the pricing is properly supported by basis of estimates, historical data and other corroborating information can help companies mitigate findings associated with pre-award audits of the proposal or budget and reduce the risk of defective pricing allegations. The proposal process also gives organizations an opportunity to understand the compliance requirements that will be applied during the performance of the contract.
Compliance during the life of an award involves many systems and might require developing additional policies, procedures and internal controls. The compliance requirements involve the accounting system and related subsystems including but not limited to:
- Time and expense reporting,
- Labor distribution,
- Materials management,
- Government property, and
- Contract and subcontract administration
For example, the government may take an ownership interest in equipment and real property purchased under an award. This often results in seeking disposition instructions from the government at the end of the project, which may have a negative cash flow impact on the company. Understanding this up-front helps companies make the bid or no-bid decision by considering potential pricing and negotiation techniques that reduce the risks associated with government property.
Understanding requirements associated with the regulations is important to developing a negotiating position and mitigating risk of fraud, waste, abuse, adverse pre-award findings that may preclude an award and adverse findings during performance of an award. For companies new to government-funded awards, this requires early planning to assess and compare current systems with the award requirements so risks are understood and action can be taken to remediate deficiencies prior to accepting an award. Failure to plan might lead to significant government fines and penalties and negative media coverage if fraud, waste or abuse exist or negative audit findings result.
In addition to core system requirements, companies are subject to other equally important laws and regulations. For example, ARRA funding opportunities may require the application of the provisions of the Buy American Act as well as the concept of prevailing wages of the Davis-Bacon Act. The Buy American Act could have implications on procurement methods, and the prevailing wage provisions can affect reporting, record retention requirements and labor costs. Also applicable to Recovery Act funds is the False Claims Act, which imposes significant criminal and civil penalties, fines and possible prosecution if invoices include improper amounts. Having the proper project reporting process and billing controls is critical to mitigate risk.
Recovery Act awards include the normal reporting requirements associated with government funding including but not limited to progress and financial reports and annual incurred cost submissions. The Recovery Act, however, requires substantially more reporting and transparency than is normally expected with government funding, including the reporting of data and information in public forums for review by all interested parties. Specifically, recipients may be required to report on the following:
- Job creation and retention,
- Total ARRA funds awarded, amount of money received and expended and the funding amount not yet committed as a project expense,
- Details of the project, including a description of the activity and evaluation of the completion status, and
- Detailed information on subawards, including names and locations of subawardees, primary place of performance of the work, a description of the subawards and unique identifiers (i.e., name or code) for the subawardees and their parents.
In addition, entities receiving Recovery Act funding may be required to report the total compensation of the five highest-paid individuals employed by the contractor and the first-tier subcontractor.
Companies also must be aware that federal government regulations may change and states may implement their own reporting requirements. Therefore, before proposing on or accepting an award, companies should have the proper systems and methods to stay current on state and federal reporting requirements and to be able to identify and capture the right data to meet reporting requirements.
Companies also should be aware that the information provided to the government may include data that can be obtained through the Freedom of Information Act. Therefore, protection of sensitive and proprietary data must be a top priority.
Securing Stimulus Funding
Utility company leaders who understand federal grant compliance, accounting and tax implications are able to apply for and secure funding to advance the strategic directions of their companies.
Although deadlines for companies to submit certain grant applications are approaching, there is ample time to act now and take advantage of federal funding to:
- Prioritize projects by developing a list of viable ventures,
- Conduct an early assessment of each project to understand the objectives of each opportunity and the evaluation factors to use for calculating an effective bid and the costs involved to submit the proposal or application,
- Develop and manage the application by assessing the costing techniques to facilitate compliance,
- Develop application strategies that strive for competitive advantage while being mindful of economic consequences, and
- Evaluate accounting and compliance systems by:
- Assessing compliance gaps in the organization and developing and implementing actions to remediate any weaknesses and enhance the organization’s competitive position. The goal is to convince the government that the organization is ready to accept and perform under an award.
- Understanding compliance risks and public perception risks and developing methods to mitigate any risks that might arise because of the transparency requirements of the economic stimulus package.
Federal stimulus grants might not be easy money, but ARRA funding is available and can provide utilities a crucial boost to implement smart grid technology and other energy initiatives, such as renewables and core infrastructure. It also can help the utility industry enhance its public image and put a spotlight on the many areas where the industry is engaged in clean energy programs.
Casey Herman is the leader of PricewaterhouseCoopers’ U.S. Utilities Accounting and Auditing Practice. He has a Bachelor of Science in economics and accounting from Tulane University.
Philip Koos is a director in the Government Contracts Practice at PricewaterhouseCoop-ers and has more than 15 years of government contract accounting and compliance experience. He graduated with a Bachelor of Science from York College of Pennsylvania and a Master of Business Administration from The American University.
Exclusive C Three Equity Index
Fifth Positive Month in a Row
July continued the move back into positive territory for The C Three Group’s equity indices. They are still outperforming the Dow Industrials and the S&P 500.
This in light of the fact that many companies are still reporting depressed year-over-year unit sales and are predicting that the unit sales downturn is going to last longer than originally predicted.
Some industry wags are even beginning to speak the unspeakable: that the sales declines could be permanent.
Southern Co., Xcel Energy, Portland G&E, DTE Energy, FirstEnergy, Exelon and Public Service Enterprise have reported continued year-over-year declines in retail and wholesale sales.
Only Dominion Resources has so far reported slightly higher year-over-year unit sales. While unit sales declines have been steepest in the industrial sector, commercial and residential sales are down as well. The C Three Group expects this trend to hold as more companies report 2Q earnings.