Summary

March 2014 California Public Utilities Commission Improved Monitoring of Balancing Accounts Would Better Ensure That Utility Rates Are Fair and Reasonable Report 2013-109 COMMITMENT INTEGRITY LEADERSHIP The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the California State Auditor’s Office at the following address: California State Auditor 621 Capitol Mall, Suite 1200 Sacramento, California 95814 916.445.0255 or TTY 916.445.0033 OR This report is also available on our Web site at www.auditor.ca.gov. The California State Auditor is pleased to announce the availability of an online subscription service. For information on how to subscribe, visit our Web site at www.auditor.ca.gov. Alternate format reports available upon request. Permission is granted to reproduce reports. For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. For complaints of state employee misconduct, contact the California State Auditor’s Whistleblower Hotline: 1.800.952.5665. Elaine M. Howle State Auditor Doug Cordiner Chief Deputy March 4, 2014 2013‑109 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the California Public Utilities Commission’s (commission) oversight of utility balancing accounts of entities it regulates. This report concludes that the commission lacks adequate processes to provide sufficient oversight of utility balancing accounts to protect ratepayers from unfair rate increases. State law directs the commission, whenever it authorizes any rate change that includes costs passed on to customers, to require utilities to establish a balancing account. A balancing account is a tracking mechanism used to ensure that a utility recoups from ratepayers costs the commission has authorized and that ratepayers do not pay more than they should. If a balancing account has a balance—indicating an over‑ or under‑collection from ratepayers—the utility will generally seek periodically to adjust future rates to either refund or recoup the balance. State law requires the commission to review semiannually certain balancing accounts; however, it does not otherwise require the commission to review all balancing accounts. Currently, the commission only reviews some balancing accounts when a utility requests to incorporate the balance in that account into future rates as a surcharge or a credit. This practice does not ensure that the commission adequately reviews balancing accounts to protect ratepayers from unreasonable rates. Although the commission relies on the Office of Ratepayer Advocates (Ratepayer Advocates)—an independent office within the commission—to review energy utility balancing accounts, this reliance is misplaced because Ratepayer Advocates is not required to review all energy utility balancing accounts. Ratepayer Advocates primarily focuses on balancing accounts that energy utilities include in formal proceedings, which resulted in it reviewing only 58 percent of the value of large energy utilities’ balancing accounts active during 2009 through 2011. It did not review other balancing accounts with a value of $37.6 billion during this period. Given that balancing accounts directly affect rates that a utility charges ratepayers and given the broad authority the commission has to inspect and audit utilities’ books, accounts, and records, we believe that the commission should use a systematic process that ensures a review of all those balancing accounts that can have the most impact on ratepayers. However, the commission lacks the necessary information, such as the size of a balancing account and the last time it was reviewed, to determine which balancing accounts it should review. In addition to not providing adequate oversight over balancing accounts, the commission has not always complied with a requirement to audit utilities’ books and records according to the schedule prescribed by state law. Also, for over three decades, it has not provided the results of these audits to the California State Board of Equalization (Equalization) for tax assessment purposes, as required by state law. Although Equalization believes that this requirement is no longer appropriate, neither Equalization nor the commission has sought to change the law. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.auditor.ca.gov Blank page inserted for reproduction purposes only. California State Auditor Report 2013-109 v March 2014 Contents Summary 1 Introduction 5 Audit Results The California Public Utilities Commission Does Not Have Adequate Processes for Monitoring Utility Balancing Accounts 15 Analysts Do Not Always Document and Supervisors Do Not Always Approve Ratepayer Advocates’ Reviews of Balancing Accounts 21 Most Water Division’s Reviews of Balancing Accounts Had Supporting Documentation and Approvals From Supervisors 25 The Commission Does Not Comply With Certain Auditing and Reporting Requirements of State Law 26 Recommendations 30 Appendix A Public Utility Balancing Accounts Active During the Last Nine Years and the Frequency of Their Detailed Review 35 Appendix B Our Review of Balancing Accounts Maintained by Utilities That Are Regulated by the California Public Utilities Commission 47 Responses to the Audit California Public Utilities Commission 49 California State Auditor’s Comments on the Response From the California Public Utilities Commission 53 Office of Ratepayer Advocates of the California Public Utilities Commission 55 California State Auditor’s Comments on the Response From the Office of Ratepayer Advocates of the California Public Utilities Commission 67 vi California State Auditor Report 2013-109 March 2014 Blank page inserted for reproduction purposes only. California State Auditor Report 2013-109 1 March 2014 Summary Results in Brief Audit Highlights . . . The California Public Utilities Commission (commission) is Our audit on the California Public Utilities responsible for ensuring that California utility customers have Commission‘s (commission) monitoring safe, reliable utility service at reasonable rates, for protecting utility of balancing accounts highlighted customers from fraud, and for promoting the health of California’s the following: economy. The commission has broad authority, including the » The commission lacks adequate processes authority to inspect and audit the records of regulated utilities. for sufficient oversight of utility balancing As such, it regulates the six electric, seven natural gas, and accounts to protect ratepayers from unfair 116 water investor‑owned utilities (utilities) in California, and it rate increases. is responsible for authorizing the rates these utilities may charge ratepayers. Utilities must justify their proposed rates by presenting » The Office of Ratepayer Advocates cost information to the commission during general rate case (Ratepayer Advocates) reviewed only proceedings (general rate case), typically every three years. The 58 percent of the value of large energy commission’s staff, the Office of Ratepayer Advocates (Ratepayer utilities’ balancing accounts active Advocates), and advocacy groups review the information that during 2009 through 2011, leaving a utilities present during the general rate case to determine value of $37.6 billion in other balancing whether proposed costs are necessary and reasonable. Ratepayer accounts unreviewed. Advocates is an independent office within the commission with a mission to obtain the lowest possible rate for service consistent » The commission does not have a with reliable and safe service levels. Based on the reviews and systematic process for selecting balancing recommendations and upon hearing all evidence and testimonies accounts to review. during a formal hearing, the commission authorizes the rates that utilities may charge their customers. » Ratepayer Advocates does not ensure that its analysts adequately document and Because the rates are derived from projected costs and projected receive formal supervisory approval for consumption of service, state law directs the commission to require reviews of balancing accounts. utilities to establish balancing accounts to track the actual costs and the related revenues the utilities collect from ratepayers for certain » The commission does not periodically activities. The purpose of a balancing account is to allow the utilities audit the accounting records of the to recoup the costs the commission has authorized, while ensuring utilities it regulates according to a that ratepayers do not pay more than they should. If a balancing schedule prescribed in law. account has a balance—indicating that the utilities have over‑ or under‑collected from ratepayers compared to their costs—the » A state law requiring the commission to utilities generally seek periodically to adjust their future rates to provide the audit reports to the California either refund or recoup the balance. The utilities use both formal State Board of Equalization is outdated. and informal proceedings to do so. Although the Energy Division (energy division) performs a high‑level review of energy utilities’ informal filings, the commission’s Division of Water and Audits (water division) and Ratepayer Advocates perform a more detailed review of some balancing accounts when the utilities file for a formal or informal proceeding to refund or recoup their balances. We noted, however, that the commission lacks adequate processes to provide sufficient oversight of balancing accounts to protect ratepayers from unfair rate increases. The commission relies on Ratepayer Advocates to review balancing accounts of energy 2 California State Auditor Report 2013-109 March 2014 utilities (electric, natural gas, or both). However, Ratepayer Advocates only reviews those energy utilities’ balancing accounts that are included in certain formal proceedings before the commission. Specifically, Ratepayer Advocates reviewed only 23 percent of large energy utilities’ balancing accounts active during 2009 through 2011, representing 58 percent of the dollar value of these balancing accounts. It did not review other balancing accounts that had a total value of $37.6 billion during this period. Given that balancing accounts directly affect rates that a utility charges ratepayers and given the broad authority the commission has to inspect and audit utilities’ books, accounts, and records, we believe that the commission should use a systematic process that ensures a review of all those balancing accounts that can have the most impact on ratepayers. However, the commission does not have the necessary information, such as the size of the balancing account and the last time the commission reviewed it, to help determine which balancing accounts it should review. Although the commission obtained this information from the utilities upon our request, we found omissions and errors in that information, which will limit its usefulness as a monitoring tool. In addition to the commission lacking an adequate review process, Ratepayer Advocates’ process for performing these reviews had weaknesses. Of the 18 reviews of balancing accounts we examined, only two had sufficient documentation to demonstrate the procedures that Ratepayer Advocates performed. The other 16 reviews were either poorly documented or not documented at all. The lack of documentation for many of the 18 reviews may be caused in part because Ratepayer Advocates does not require supervisors to formally approve analysts’ reviews of balancing accounts. Instead, supervisory approval happens during informal discussions about the conclusions analysts have reached in a review without examining the actual work the analysts performed. We believe that a documented supervisory review is necessary to assure Ratepayer Advocates management and other stakeholders that the analyst has performed all planned procedures appropriately and that any reductions in recovery amounts that the analyst may be proposing are accurate. In contrast, most of the water division’s reviews of balancing accounts that we tested had appropriate documentation and had received formal approval from a supervisor. We also found the commission does not audit the accounting records of the utilities it regulates according to the schedule prescribed by state law: every three years for those utilities that serve more than 1,000 customers and every five years for those utilities that serve 1,000 or fewer customers. The intent of the law is to ensure that the commission regularly audits all utilities to increase public confidence in the regulatory process. California State Auditor Report 2013-109 3 March 2014 The commission generally complies with the audit requirement through procedures it performs during the review of a utility’s general rate case. However, the commission does not ensure that all utilities file a general rate case every three or five years to coincide with the audit requirement. Specifically, the commission has allowed five energy utilities with more than 1,000 customers to file their general rate cases beyond a three‑year cycle, and it has allowed another small energy utility to adjust rates through informal filings without a general rate case. Further, because it only requires the 10 largest water utilities to file their general rate case every three years, more than half of the remaining 106 water utilities had not filed their general rate cases in time to coincide with the audit requirement in state law. As a result, the commission is not ensuring that it audits these utilities within the time frames the law requires. Finally, the California State Board of Equalization (Equalization) believes that the law requiring the commission to provide audit reports to Equalization is out of date. Specifically, state law requires the commission to provide its audit reports on utilities’ accounting records to Equalization for use in assessing taxes on those utilities. However, the commission has not done so in over three decades. Equalization stated that the commission’s general rate cases do not focus on the same components of a utility’s operations and finances as assessment of taxes requires. Further, Equalization told us that it assesses taxes on many more companies than those that the commission regulates. Equalization has established its own process to audit all companies, including utilities, in the State and believes that it is in a better position to carry out this function than the commission. Equalization believes that requiring the commission to do the work necessary to allow Equalization to assess taxes on utilities may not be cost‑effective for the State. The director of the energy division noted that the commission has not taken a position on whether to change the existing law. Although Equalization believes that the law should be revised to remove the requirement that the commission provide its audit reports to Equalization for tax assessment purposes, neither of them has sought to change the law. Recommendations To ensure proper oversight of balancing accounts, the Legislature should amend California Public Utilities Code, Section 792.5, to require the commission to develop a risk‑based approach for reviewing all balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and supported by appropriate documentation, such as invoices. 4 California State Auditor Report 2013-109 March 2014 To ensure that it has the necessary information to provide appropriate oversight of the balancing accounts of regulated utilities and thus protect ratepayers from unfair rate increases, the commission should regularly update the list of balancing accounts that it authorized and verify its accuracy. Both the commission and Ratepayer Advocates should use this list to guide their oversight efforts. To ensure that it efficiently and effectively monitors energy utilities’ balancing accounts to protect ratepayers from unfair rate increases, the commission should direct its energy division to perform in‑depth reviews of balancing accounts that Ratepayer Advocates has not reviewed. Both Ratepayer Advocates and the water division should, within six months, develop policies to ensure that reviews of balancing accounts are appropriately documented, subjected to supervisory approval, and retained. The commission should follow the state law requirement to inspect and audit the accounting records of utilities it regulates within required time frames. The Legislature should amend state law to remove the requirement that the commission provide audit reports to Equalization. Agency Comments Although Ratepayer Advocates disagreed with some of our conclusions, both it and the commission agreed with our recommendations and plan to implement them. California State Auditor Report 2013-109 5 March 2014 Introduction Background The California Public Utilities Commission (commission) is responsible for ensuring that California utility customers have safe, reliable utility service at reasonable rates, for protecting utility customers, and for promoting the health of California’s economy. The commission consists of five members appointed by the governor and approved by the Senate. Along with supporting staff, it regulates all investor‑owned utilities (utilities) in the State and is responsible for authorizing the rates these utilities may charge ratepayers. It has broad authority, including the authority to inspect and audit the records of regulated utilities at any time. As of 2013 there were six electric, seven natural gas, and 116 water utilities regulated by the commission in California that served 11.5 million, 10.7 million, and 6.8 million customers, respectively. As Figure 1 shows, the commission has several divisions. The Energy Division (energy division) and the Division of Water and Audits (water division) are responsible for ensuring that utilities comply with commission directives, among other duties. The commission also includes the Office of Ratepayer Advocates (Ratepayer Advocates), an independent office whose director is appointed by the governor; it was established to represent the interests of public utility customers, with the goal of obtaining the lowest possible rate for service consistent with reliable and safe service levels. State law provides Ratepayer Advocates independent authority to review the records of regulated utilities during rate‑setting proceedings. Figure 1 Organization of the California Public Utilities Commission COMMISSIONERS OFFICE OF RATEPAYER ADVOCATES EXECUTIVE DIRECTOR DIVISION OF WATER AND AUDITS ENERGY DIVISION OTHER DIVISIONS (cid:127) Consumer Services and Information (cid:127) Safety and Enforcement (cid:127) Administrative Services (cid:127) Communications (cid:127) Policy and Planning (cid:127) Office of Governmental Affairs Source: The California Public Utilities Commission. 6 California State Auditor Report 2013-109 March 2014 Utilities Establish the Rates Charged to Consumers Through a General Rate Case Proceeding The commission authorizes the rates that utilities may charge their customers through a process known as the general rate case, which typically occurs every three years. Rate setting is a complex process: utilities present their financial records to the commission as well as their proposed rates, which are based on the differing costs of serving various customer classes, on certain statutory requirements, and on public policy reasons for charging different rates per unit. As Figure 2 shows, when developing its proposed rates, a utility presents costs in three main categories: capital costs, fixed‑budget costs, and pass‑through costs. The commission allows utilities to make a certain level of profit on capital costs, which represent the utilities’ investment in the infrastructure and equipment used to provide electricity, natural gas, or water to consumers, such as a power plant or a pipeline for natural gas or water. For fixed‑budget costs, the commission generally authorizes a budget for the utility to recoup the costs that it can reasonably control, such as administration costs. The utility must absorb any fixed‑budget costs it incurs that are in excess of the authorized budget, but if costs are under budget, it keeps the amount saved as profit. Finally, for pass‑through costs, which are costs that are difficult to reasonably predict, such as costs of purchasing electricity, natural gas, or water, the commission allows the utility to recoup, through rates and without any mark‑up, all costs the utility incurs. These three types of costs, including allowed profit margins on capital costs, are incorporated into the rate that the utility proposes to collect from different classes of ratepayers. After the commission has determined the total amount it will authorize the utility to recover from its customers based on the cost to provide services, the next step is to develop a per unit rate (for example, cents per kilowatt‑hour for electricity). However, the cost of serving customers in different classes can vary. For example, some large industrial customers may receive electrical service directly from a transmission line without using additional utility infrastructure, resulting in a lower rate than residential customers who need intermediary utility infrastructure, such as substations and distribution lines, to receive electricity. To reflect these differences in costs, the commission approves different rates for customer classes. The utilities develop these rates based on their forecasts of sales and costs, then they propose the rates to the commission. California State Auditor Report 2013-109 7 March 2014 Figure 2 The Relationship Between Approved Rates and Balancing Accounts Rate Authorized by the California Public Utilities Commission (commission) This is the rate that a utility charges its ratepayers. It has three primary components and certain activities are tracked in balancing accounts. Revenue Capital Costs These are the investments that the utility makes in the infrastructure it uses to provide utility services to consumers, such as a power Balancing plant or pipeline for gas or water. These costs include a profit margin Accounts as approved by the commission. To ensure that the utility recovers all Fixed-Budget Costs authorized costs and the ratepayers do not pay more than the authorized Fixed-budget costs are those that the utility can reasonably control, amounts, the commission requires such as administration costs. The utility is responsible for any costs it the utility to establish balancing incurs above the commission-approved budget. If actual costs are accounts to track the costs it below the budget, the utility may keep the additional revenue it authorized to include in rates and collects from ratepayers up to the approved budget, but it must the associated revenues that are refund any revenue collected in excess of the approved budget. generally based on forecasts. This process might result in under- or over-collection from ratepayers. Pass-Through Costs Utilities adjust future rates to reflect These are costs that the utility cannot reasonably control, such as the under- or over-collections. fuel, electricity, or water purchases, which are typically directly associated with providing utility services to ratepayers. For these types of expenditures, the utility is allowed to recover from ratepayers only its actual costs. Source: California State Auditor’s review of documentation from the commission. When a utility files a general rate case, the commission, its staff, Ratepayer Advocates, and other advocacy groups review the costs the utility presents to ensure that the costs are necessary, reasonable, and fair. During the general rate case process, Ratepayer Advocates reviews the utility’s accounts, past and projected expenses, revenue forecasts, capital costs, and plant additions; and it may protest the utility’s proposed rates on behalf of the ratepayers. Moreover, individuals and groups that represent the interest of ratepayers, businesses, and special interests known as interveners, may also provide testimony to the commission regarding proposed rates. These parties may reach an agreement with the utility to adjust its proposed rates. The commission ultimately authorizes the rates the utility may charge its customers after hearing testimony from all involved parties. Because a utility presents numerous documents to justify its proposed rates and because of the time required for the parties to review those documents and to reach an agreement on any adjustments to the 8 California State Auditor Report 2013-109 March 2014 proposed rates, the general rate case may last as long as 18 months. As a result, a utility typically files for the general rate case well in advance of the date the proposed rate would become effective in order to help ensure that it receives commission approval on time. If the commission does not approve the proposed rate before it is due to become effective, the utility may charge ratepayers an interim rate based on the most recent commission‑approved rate adjusted for inflation and then recoup or refund the difference between the interim and final rate from ratepayers after the commission has authorized the final rate. The Commission Requires That Utilities Track Certain Costs and Related Revenues Using Balancing Accounts State law requires the commission to direct utilities to track specific types of costs and related revenues from customers using a tracking mechanism. This tracking mechanism—known as a balancing account—protects ratepayers and utilities by identifying any under‑ or over‑collection of revenue from ratepayers compared to the utilities’ actual allowed costs. Because the rates that the commission approves are predicated on projected costs of the utility and projected consumption by ratepayers, both the utilities and the commission have a vested interest in determining the actual costs and revenues related to certain components to determine whether the utility under‑ or over‑collected from ratepayers. For example, the price of natural gas that a gas utility purchases for its ratepayers can fluctuate widely in a short time. Thus, the actual cost that a utility incurs to purchase natural gas can vary from the cost that the utility projected and incorporated into the authorized rate. Because a natural gas utility can only collect from ratepayers up to the price it paid for the purchase of natural gas, the cost of purchasing natural gas and related revenue from ratepayers must be tracked to ensure that the utility recovers its costs and ratepayers do not pay more than the utility’s costs. Before setting up a balancing account, a utility must file a statement that details the purpose of the balancing account and the types of costs or revenue to be tracked in the account with the commission for approval. This statement also details the specific accounting procedures the utility must perform to record a transaction in this balancing account. The Commission Generally Reviews Balancing Accounts When a Utility Wishes to Incorporate the Balance of an Account Into Future Rates To the extent that a balancing account has a balance, reflecting either over‑ or under‑collection of revenue from ratepayer charges compared to authorized costs, the utility will periodically incorporate the balance into future rates by providing a reduction or an increase to future rates. Although a utility typically incorporates the balances in these accounts into future rates when it files for a general rate case, at other times it California State Auditor Report 2013-109 9 March 2014 may request a rate adjustment to reflect the balance by filing an advice letter, which is an informal filing, or by filing a formal application for certain proceedings. The commission noted that allowing a utility to incorporate the balance in a balancing account into future rates before the next general rate case, can mitigate sudden large swings in rates for ratepayers by making smaller changes to the rates more frequently. The commission provides specific guidance on when the utilities can incorporate a balance into future rates. A large water utility, one with more than 10,000 service connections, may choose to incorporate the balance in an account into future rates using an informal process by filing an advice letter with the commission’s water division when the balance exceeds 2 percent of the utility’s total annual gross operating revenue. A smaller water utility, one with 10,000 or fewer service connections, is required to file an advice letter at any time before its next general rate case if the balance in one of its balancing accounts exceeds 2 percent of the utility’s total annual gross operating revenue. Those advice letters, filed with the water division, contain such information as the total balance in the account, the amount of the credit or surcharge the utility wishes to add to future rates, and other supporting documents. After the water division approves the advice letter, the utility adds the credit or surcharge to its rates. An energy utility—electric, natural gas, or both—can also use the informal process by filing an advice letter with the energy division. However, unlike a water utility, an energy utility is generally not subject to a similar threshold and it may choose to file an advice letter to incorporate the balance into future rates at any time it deems necessary before its next general rate case. An electric utility also presents certain costs, such as those for fuel and purchased power, twice each year to the commission through formal proceedings known as Energy Resource Recovery Account (ERRA) proceedings. In the first ERRA proceeding, the utility presents its fuel and purchased power forecasts to the commission for review. In the second ERRA proceeding, the utility submits balancing accounts, such as the utility’s designated ERRA balancing account, to incorporate their balances into future rates. Similarly, a natural gas utility must incorporate into future rates the balances in certain balancing accounts through two separate formal proceedings before the commission. Specifically, it must annually file an application for the Gas Procurement Incentive Mechanism proceeding, which allows the commission to review the utility’s natural gas purchasing activities to ensure that it is obtaining the best prices. In addition, a natural gas utility must file an application for either the Biennial Cost Allocation Proceeding or the Triennial Cost Allocation Proceeding. These proceedings address the way the utility allocates its costs for providing services to customers. An energy utility can choose to include balancing accounts during these proceedings as a means to incorporate any balances into its rates. 10 California State Auditor Report 2013-109 March 2014 State law grants the commission authority to inspect the accounts, books, papers, and documents, including balancing accounts, of any public utility at any time. In addition to giving the commission this authority, state law also gives Ratepayer Advocates access to any information from public utilities that it deems necessary to perform its duties. State law requires the commission to audit the books and records of all utilities it regulates every three or five years depending on the number of customers a utility serves and to provide these audits to the California State Board of Equalization for tax assessment purposes. Although state law requires the commission to review power procurement balancing accounts semiannually, commonly referred to as ERRA, there is no requirement for the commission or Ratepayer Advocates to specifically review other balancing accounts. The energy division and the water division, as well as Ratepayer Advocates, review balancing accounts that a utility includes in informal advice letters or applications for formal proceedings, and they may request that the utility provide additional support to verify the costs and revenues charged to each balancing account included in these filings. As Table 1 shows, the details included in these reviews vary based on the entity performing the review and the purpose of the review. The energy division is responsible for reviewing all filings by energy utilities to ensure that the utilities are complying with commission decisions, including making changes to the utility rates based on under‑ or over‑collection in a balancing account before the next general rate case. This review includes verifying that the utility has appropriate authorization to file for rate adjustment, and the energy division may request additional information from the utility if the balance is very large. However, when reviewing those informal filings requesting a change to rates, the energy division does not verify the accuracy or appropriateness of the costs that the energy utility has charged to the balancing account by reviewing detailed documentation, such as invoices. On the other hand, the commission’s water division, which is responsible for reviewing informal filings by water utilities, does verify the accuracy and appropriateness of the costs the utility has charged to the balancing account. Ratepayer Advocates reviews balancing accounts for both water and energy utilities during informal and formal filings. In reviewing informal filings by a water utility, Ratepayer Advocates may initially complete a high‑level review of the balancing accounts included in the filing, and it may complete a more comprehensive review if the initial review raises any concerns. While Ratepayer Advocates reviews the informal filings by energy utilities only to ensure that the balances and proposed changes to the balances they included in the filing are reasonable, its oversight efforts are focused on the formal proceedings, during which it completes a more comprehensive review of all of the balancing accounts the energy utility includes during that proceeding. California State Auditor Report 2013-109 11 March 2014 Table 1 The Nature of Oversight the Various California Public Utilities Commission Units Provide for Balancing Accounts ENTITY PROVIDING OVERSIGHT WATER UTILITY BALANCING ACCOUNTS ENERGY UTILITY BALANCING ACCOUNTS Energy Division Performs a high‑level review of energy utilities’ balancing accounts included in informal advice letter filings by all energy utilities. Specifically, it takes the following steps: • Verifies that the utility has appropriate authorization to file for rate recovery by reviewing relevant California Public Utilities Commission (commission) documents such as decisions and preliminary statements. • May request additional information from the utility if the under‑ or over‑collection is very large. • Examines balances included in a balancing account to assess reasonability of the size of the balance submitted. Division of Water and Performs an in‑depth review of balancing accounts Audits (water division) included in informal advice letter filings by all water utilities and formal rate‑making applications for the 106 smaller water utilities. Specifically, it takes the following steps: • Verifies the accuracy and appropriateness of the costs the utilities charged to the balancing accounts by reviewing invoice‑level documents to determine whether costs are supported and for allowable purposes. • If it identifies any costs that it believes should not be allowed, it requests that the utility make adjustments to the balance. • May perform audits of a limited number of balancing accounts at the direction of the commission. Office of Performs a review of balancing accounts included in Reviews all balancing accounts included in informal Ratepayer Advocates formal proceedings and informal advice letter filings advice letter filings submitted by energy utilities by the 10 largest water utilities. Specifically, it takes and examines balances for those accounts to assess the following steps: reasonability of the size of and changes to the balances • Performs a high‑level review of all balancing submitted, but it does not perform any detailed accounts included in advice letters to verify verification at that time to ensure that balances mathematical accuracy of the balance and to are accurate. ensure that costs and revenues presented are Performs an in‑depth review of balancing accounts adequately supported with documentation and included in formal applications for three formal are consistent with the commission’s authorization proceedings (two for natural gas, one for electric) by for the balancing account. doing the following: • If it identifies any concerns through the high‑level • Verifies balance submitted for balancing accounts review, it may perform a more in‑depth review to is supported by documents such as invoices and verify that the costs and revenues charged to the accounting records. account are supported by adequate accounting • Reviews relevant commission documents, such as records that agree with invoice‑level details or decisions and preliminary statements, to verify that other documents. costs included in the account are allowable. • If it identifies concerns through the in‑depth • Following completion of the comprehensive review, review or high‑level review, it recommends in a prepares written testimony that describes the formal protest letter that the water division either results of the review and identifies any issues and require the utility to make appropriate corrections adjustments to the amount the utility requested or modifications, or to reject the advice letter. for recovery. Source: California State Auditor’s review of the commission’s procedures for reviewing balancing accounts. 12 California State Auditor Report 2013-109 March 2014 Scope and Methodology The Joint Legislative Audit Committee (audit committee) directed the California State Auditor to audit the commission’s policies and procedures for overseeing the balancing accounts of the utilities it regulates. The analysis the audit committee approved contained seven separate objectives. We list the objectives and the methods we used to address them in Table 2. Table 2 Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, Obtained, reviewed, and evaluated laws, rules, and regulations pertaining to the California Public and regulations significant to the Utilities Commission’s (commission) oversight of balancing accounts. audit objectives. 2 Determine how the commission • Obtained and reviewed commission policies and procedures for establishing utility rates and for oversees the entities it regulates requiring utilities to track certain expenses and revenues using balancing accounts. by performing, at a minimum, • Interviewed appropriate commission staff and reviewed documents to understand the the following: commission’s practices for overseeing balancing accounts. a. Review and evaluate the • Assessed whether the commission’s policies, procedures, and practices comply with applicable commission’s policies and procedures laws and regulations. for inspecting and auditing* the revenues and expenditures of the balancing accounts of those entities. b. Determine whether such policies and procedures comply with applicable laws, regulations, and auditing standards. 3 Determine the number of balancing To determine the number of balancing accounts authorized and established over the last nine years, accounts authorized and established we requested and obtained data from the commission about all balancing accounts authorized and over the last nine years, and the established over the last nine years. number and frequency with which To determine the number and frequency with which the commission reviewed balancing accounts, the commission audited them. If all we did the following: required audits were not completed, • Obtained from the Office of Ratepayer Advocates (Ratepayer Advocates) a list of balancing determine why. account reviews it conducted over the last nine years. • Selected three reviews per year to ensure balancing accounts reported as reviewed were, in fact, reviewed. We found no errors. • We requested the commission’s Division of Water and Audits (water division) to provide similar information, but it could not. However, it identified certain balancing accounts included in two audits performed at the direction of the commission. • Determined the number and value of the balancing accounts that the commission did not review for the six largest energy utilities. Determined whether the commission completed reviews of balancing accounts in accordance with any legal requirements. However, we found that there is no legal requirement for the commission or Ratepayer Advocates specifically to review balancing accounts. California State Auditor Report 2013-109 13 March 2014 AUDIT OBJECTIVE METHOD 4 Review the commission’s practices • Interviewed Ratepayer Advocates and water division staff to identify how these entities over the last three years and determine which balancing accounts to review. determine whether the commission • Inquired with Ratepayer Advocates and the water division whether they have requested has complied with applicable laws, additional resources to carry out reviews of balancing accounts. Ratepayer Advocates indicated regulations, and policies in auditing its staffing was sufficient and the water division had not submitted any budget change proposals the balancing accounts of the entities over the past three years. it regulates. If not, assess the reasons for noncompliance. 5 From a selection of commission audits From the list of reviews Ratepayer Advocates conducted, selected two reviews for each of the conducted on balancing accounts in three types of utilities (natural gas, electric, and water) during fiscal years 2010–11 through 2012–13, the last three years, determine the for a total of 18 reviews. For these reviews, we performed the following: following: • Determined if Ratepayer Advocates followed its policies and procedures (including review a. Whether the audits were plans and methodologies) when conducting these reviews and that supervisory approvals conducted in accordance with were performed. applicable laws, policies, and • Examined available review documents to determine whether findings and conclusions were procedures, including any supported and reported. reporting requirements. • Determined whether the commission agreed with any recommendations Ratepayer Advocates b. The findings and conclusions made to reduce amounts in balancing accounts that utilities proposed to recover in rate increases. reached in each audit and the Selected a sample of six reviews of balancing accounts the water division performed from 2010 actions the commission took in through mid‑2013 and evaluated the methodologies to determine if they were reasonable for the response to those findings. purpose of the reviews. c. The revenues and expenditures for the selected accounts in each of the three years. 6 From a selection of balancing Selected nine balancing accounts that the commission did not review during fiscal years 2010–11 accounts that were not audited, through 2012–13, and performed the following procedures: or using the selection identified in • Reviewed relevant documents the commission approved to determine the purpose for which the objective number 5 above, to the balancing accounts were established. extent possible determine: • Reviewed relevant documents to identify the total revenues and expenditures charged to the a. The purpose for which each selected accounts during the year reviewed. account was authorized and • Selected five expenditures from each selected balancing account and traced them to supporting whether each account was documentation such as invoices and the utilities’ accounting records. Determined whether these appropriately funded. expenditures were allowable and reasonable. b. The sources of revenue and the major types of expenditures. c. For a selection of expenditures, determine whether they were allowable and reasonable. 7 Review and assess any other To determine whether the commission complies with a state law requiring it to conduct periodic issues that are significant to the audits of the books and records of utilities it regulates for regulatory and tax purposes and to provide reviews of balancing accounts by its reports to the California State Board of Equalization (Equalization) for tax assessment purposes, we the commission. performed the following: • Interviewed commission staff to determine how the commission complies with this legal requirement. • Assessed whether the commission’s processes are adequate to ensure compliance. • Discussed with Equalization any concerns it had with the commission’s audits. Sources: California State Auditor’s analysis of the Joint Legislative Audit Committee’s audit request number 2013‑109, planning documents, and analysis of information and documentation identified in the column titled Method. * For the purposes of our audit report, we use the term “review” to describe the commission’s oversight efforts related to balancing accounts because the commission’s procedures do not constitute a complete audit under audit standards. 14 California State Auditor Report 2013-109 March 2014 Assessment of Data Reliability In performing this audit, we obtained electronic data files the commission received from the utilities it regulates identifying the balancing accounts active during 2004 through 2012. The U.S. Government Accountability Office, whose standards we follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support our findings, conclusions, or recommendations. We did not perform accuracy and completeness testing of these data because the source documents required for this testing are maintained by utilities located throughout the State that provided the information to the commission, making such testing cost‑prohibitive. Consequently, we determined that the data were of undetermined reliability for the purpose of identifying all balancing accounts the commission authorized during 2004 through 2012. However, as we discuss in the Audit Results, we identified certain concerns with the data based on limited comparison of these data against the records of the commission and of Ratepayer Advocates. California State Auditor Report 2013-109 15 March 2014 Audit Results The California Public Utilities Commission Does Not Have Adequate Processes for Monitoring Utility Balancing Accounts The California Public Utilities Commission (commission) lacks adequate processes for sufficient oversight of balancing accounts to protect ratepayers from unfair rate increases. Given that balancing accounts directly affect rates that a utility charges ratepayers and given the broad authority the commission has to inspect and audit utilities’ records, we believe that the commission should use a systematic process that ensures a review of those balancing accounts that can have the most impact on ratepayers. Currently, the commission only reviews balancing accounts when a utility requests to revise the future rates to recoup or refund the balance in the balancing account. Moreover, the commission relies on the Office of Ratepayer Advocates (Ratepayer Advocates) to review balancing accounts of energy utilities (electric, natural gas, or both), but Ratepayer Advocates only reviews the balancing accounts of energy utilities that are included in certain formal proceedings before the commission. During 2009 through 2011, Ratepayer Advocates reviewed only 58 percent of the authorized amounts for the balancing accounts of the six largest energy utilities, leaving balancing accounts with a total value of $37.6 billion unreviewed. Further, the commission lacks the necessary information, such as the size of the account and the last time the commission reviewed it, to help identify those balancing accounts that are good candidates for review. Although the commission obtained this information from the utilities upon our request, the omissions and errors we found in the information will limit its usefulness as a monitoring tool. The Commission Has Not Reviewed Many Large Balancing Accounts for Energy Utilities State law directs the commission, whenever it authorizes any rate change that includes costs passed on to customers, to require utilities to establish balancing accounts so that any under‑ or over‑collection of payments from ratepayers is appropriately incorporated into future rates as a surcharge or a credit. A state law requires the commission to review semiannually certain balancing accounts called power procurement balancing accounts, which are commonly referred to as Energy Resource Recovery Accounts (ERRA) and which track the difference between a utility’s forecasted and actual costs to procure electricity for its customers. However, state law does not otherwise expressly require the commission to review other balancing accounts although it does authorize the commission to review utilities’ records in the context of rate‑setting 16 California State Auditor Report 2013-109 March 2014 procedures. Moreover, state law authorizes the commission, at any time, to inspect and audit utilities’ books, accounts, and records, which would include balancing accounts. Thus, given the commission’s important responsibility to monitor balancing accounts to ensure that ratepayers are fairly charged and that utilities are fairly compensated, and in light of the broad authority granted to the commission to review utilities’ records, we believe the commission should adopt a process to provide more thorough oversight of balancing accounts through a risk‑based approach. The commission’s current Currently, the commission only reviews balancing accounts when a practice for reviewing balancing utility requests to incorporate the balance in that account into future accounts when a utility requests rates as a surcharge or a credit. This practice does not ensure that to incorporate the balance in the commission adequately reviews balancing accounts to protect that account into future rates ratepayers from unreasonable rate increases. For example, utilities as a surcharge or a credit does have an incentive to file more quickly with the commission to recover not protect ratepayers from the under‑collections reflected in their respective balancing accounts unreasonable rate increases. as this will result in an increase in their rates. On the other hand, for balances that utilities would need to refund to their ratepayers through a reduction in rates, less incentive may exist for the utilities to file quickly. Although it has a clear authority to review balancing accounts, as a result of its current practice, the commission has not reviewed many of the balancing accounts it has authorized over the past three years. The Energy Division (energy division), which has oversight responsibility for energy utilities, does not review balancing accounts in detail. Instead, as we show in Table 1 on page 11, the energy division performs several high‑level procedures that do not provide the assurance that a detailed review would provide. According to the commission, the energy division’s higher‑level review is acceptable because Ratepayer Advocates examines balancing accounts dealing with procurement costs in depth each year. Therefore, the commission relies on Ratepayer Advocates to review energy utility balancing accounts rather than having the energy division perform these reviews. However, the commission’s reliance is misplaced as Ratepayer Advocates’ reviews do not focus on all energy utility balancing accounts. As we discuss in the Introduction, Ratepayer Advocates focuses only on certain formal proceedings, such as the ERRA proceeding for electric utilities and the Gas Procurement Incentive Mechanism and Biennial or Triennial Cost Allocation proceedings for natural gas utilities, which it considers to have the most impact on consumer utility rates. The commission requires energy utilities to request to incorporate the balances in certain balancing accounts into future rates through these formal proceedings. An energy utility may, at its discretion, include other balancing accounts in an ERRA proceeding. Ratepayer Advocates asserted that by focusing on the balancing accounts included in these proceedings, it covers the balancing accounts that are most significant to its mission to reduce utility rates for customers consistent with California State Auditor Report 2013-109 17 March 2014 reliable and safe service levels. However, Ratepayer Advocates does not have a formal policy for identifying the balancing accounts that it believes are most significant; instead, it considers whether a review would be beneficial for making a case for a lower utility rate. Ratepayer Advocates also asserted that it is reviewing the majority of authorized amounts in balancing accounts. However, our review found that the number and dollar value of the balancing accounts that Ratepayer Advocates reviewed varied considerably among the six largest energy utilities. As Table 3 shows, only 23 percent of these utilities’ balancing accounts active during 2009 through 2011—representing 58 percent of the costs and related revenues being tracked in all authorized balancing accounts—were subject to review. Further, among the six utilities, the number and value of the reviewed balancing accounts differed significantly. For example, as shown in Table 3, Ratepayer Advocates reviewed more than half of Southern California Edison’s (Edison) balancing accounts, representing 94 percent of the dollar value of these accounts. In contrast, Ratepayer Advocates reviewed 5 percent of the balancing accounts for Pacific Gas and Electric Company (PG&E), which represent only one‑third of the costs and related revenues being tracked through its electric utility balancing accounts. For the other energy utilities and PG&E’s natural gas utility, the dollar value of the balancing accounts that Ratepayer Advocates reviewed ranged from 27 percent to 79 percent. Table 3 Balancing Accounts for the Large Energy Utilities Reviewed in Formal Filings by the Office of Ratepayer Advocates During 2009 Through 2011 BALANCING ACCOUNTS THAT THE OFFICE OF RATEPAYER ADVOCATES REVIEWED* SUM OF AUTHORIZED TOTAL NUMBER AMOUNTS TRACKED IN AUTHORIZED PERCENT OF TOTAL UTILITY OF BALANCING BALANCING ACCOUNTS† PERCENT OF AMOUNTS† AUTHORIZED TYPE UTILITY NAME ACCOUNTS† (IN MILLIONS) NUMBER† TOTAL NUMBER (IN MILLIONS) AMOUNTS Electric Pacific Gas and Electric Company 38 $33,268 2 5% $11,022 33% San Diego Gas and Electric Company 22 6,817 2 9 1,819 27 Southern California Edison 24 30,137 13 54 28,478 94 Natural Pacific Gas and Electric Company 36 11,808 3 8 4,734 40 Gas San Diego Gas and Electric Company 18 883 8 44 689 78 Southern California Gas Company 28 7,116 11 39 5,652 79 Totals 166 $90,029 39 23% $52,394 58% Sources: California State Auditor’s analysis of balancing account data provided by the California Public Utilities Commission and the Office of Ratepayer Advocates (Ratepayer Advocates). * Ratepayer Advocates indicates that several regularly scheduled balancing account reviews are underway but not yet completed, and they will be reviewed retroactively in future proceedings. † Numbers and amounts for balancing accounts are for the three‑year period. Balancing accounts are included only once in the number outstanding, but the value represents the total value of the balancing accounts over the three‑year period. Amounts represent the total authorized balances, regardless of whether the balancing account tracks expenditures or revenues. 18 California State Auditor Report 2013-109 March 2014 Although some of the individual balancing accounts that Ratepayer Advocates did not review were relatively small in value, together those balancing accounts not reviewed tracked authorized costs and related revenues totaling $37.6 billion, or 42 percent of the value of the energy utilities’ balancing accounts existing during 2009 through 2011. For example, in 2011 PG&E had more than $601 million in outstanding balances in its electric balancing accounts that Ratepayer Advocates did not review, an amount that may be passed on to customers in future rates. Table 4 shows that Ratepayer Advocates did not review some accounts that tracked as much as $9.1 billion in authorized amounts during 2009 through 2011. Because of the large authorized amounts, as well as the balances that utilities will pass on to ratepayers, these balancing accounts have significant potential to affect rates. Table 4 Three Largest Balancing Accounts for Large Energy Utilities That Did Not Undergo Detailed Review 2009 Through 2011 AUTHORIZED AMOUNT UTILITY NAME BALANCING ACCOUNT NAME (IN MILLIONS)* seitilitU cirtcelE Pacific Gas Distribution Revenue Adjustment Mechanism $9,113 and Electric Utility Retained Generation Base 3,875 Company Department of Water Resources Power Charge Collection 2,310 San Diego Gas Electric Distribution Fixed Cost 2,558 and Electric Non‑Fuel Generation 769 Company Advanced Metering Infrastructure 176 Southern Procurement Energy Efficiency 761 California Energy Efficiency Program 301 Edison California Solar Initiative 220 seitilitU saG larutaN Pacific Gas General Rate Case Distribution Base Revenues 3,288 and Electric Local Transmission 495 Company Backbone Transmission 483 San Diego Gas Gas Energy Efficiency 48 and Electric Advanced Metering Infrastructure 42 Company California Alternate Rates for Energy 41 Southern California Alternate Rates for Energy 392 California Gas Integrated Transmission 349 Company Demand Side Management 275 Total $25,496 Sources: California State Auditor’s analysis of data provided by the California Public Utilities Commission and the Office of Ratepayer Advocates. * Amounts represent the total authorized balances over the three‑year period, regardless of whether the balancing account tracks expenditures or revenues. California State Auditor Report 2013-109 19 March 2014 Ratepayer Advocates’ inconsistent level of review results from its focus on certain formal proceedings, primarily those related to ERRA filings, which vary considerably among the electric utilities in the value of the balancing accounts. For example, Edison included more balancing accounts than PG&E in formal filings Ratepayer Advocates reviewed. When presented with the results shown in Table 3 on page 17, Ratepayer Advocates could not explain how reviewing far more balancing accounts for Edison than for other electric utilities furthered its mission. However, Ratepayer Advocates believes that the commission is responsible for providing the oversight on all balancing accounts and that the commission cannot rely upon Ratepayer Advocates to conduct reviews of the energy utilities. As we stated in the Introduction, neither the commission nor Ratepayer Advocates is required to specifically review balancing accounts. In contrast, the Division of Water and Audits (water division) told us that its practice is to perform a detailed review of all balancing accounts that a water utility includes in its informal filings. The commission requires a water utility with 10,000 or fewer service connections to file an informal advice letter to incorporate the balance in a balancing account into future rates when the balance exceeds 2 percent of the utility’s total annual gross operating revenue. Although this requirement was intended to prevent utilities from filing to recover balancing account balances too frequently, it could also mitigate the risk that a water utility may not file a timely request to refund over‑collections from ratepayers. For these smaller water utilities, the water division indicates it will review balancing accounts the utility includes in the general rate case. For large water utilities— those with more than 10,000 service connections—Ratepayer Advocates will review the general rate case. The Commission Does Not Have a Systematic Process for Selecting Balancing Accounts to Review We believe that the commission’s process for reviewing balancing The commission’s process for accounts should be based on the risk and the magnitude of the reviewing balancing accounts potential for unfair rate changes, which would require that should be based on the risk and the commission maintain an accurate and up‑to‑date list of all the magnitude of the potential for balancing accounts, including information regarding the balances in unfair rate changes. those accounts. However, the commission neither maintains such a list of all balancing accounts nor has it been tracking the authorized amounts for those accounts in order to assess which accounts may be candidates for a closer review. When we asked the commission for a list of all utility balancing accounts it had authorized over the past nine years, the commission indicated it did not have that information available but was in the process of compiling a list in response to a recent Legislative Analyst’s Office report. 20 California State Auditor Report 2013-109 March 2014 According to the commission, it did not have a master list because balancing account reviews are conducted by staff that have worked with the utilities and that are most knowledgeable about specific balancing accounts. However, in response to our request, the commission asked the utilities for this information and was able to compile a list of energy balancing accounts for us during the audit. Going forward, the commission plans to obtain balancing account information periodically from utilities and maintain such a database to identify the balancing accounts of energy utilities it should review. The water division had already developed a database where it tracked advice letter filings, including advice letters filed to recover balances in balancing accounts; but as we discuss below, that database does not always identify the balancing accounts included in a water utility’s filing. As a result, the water division also had to request information from utilities to compile its list of balancing accounts for us. Because the commission obtained these lists from the utilities, we did not perform accuracy and completeness testing on these data. However, through our limited comparison of these data with the records of the commission and of Ratepayer Advocates, we identified concerns about the completeness and accuracy of the information that the utilities provided and that the commission compiled, which would limit these lists’ usefulness for guiding the commission’s future oversight efforts. For example, utilities did not always identify the authorized amount for a balancing account, and it was not always clear if this meant that the account had been closed or if there was a different reason. In certain instances, the commission noted that there were reasons why a balancing account would not have an authorized amount. We also discovered several instances in which Ratepayer Advocates reported reviewing a specific utility balancing account, but the utility did not include that balancing account in the information it provided to the commission for the lists. While the commission compiled these lists from information that the utilities submitted, it could not provide assurance that the information was complete and accurate. Although the lists are a helpful start, if the commission does not verify the accuracy and completeness of the lists, they will be of questionable value for future oversight purposes. We present the information from these lists in Appendix A. The commission does not have a complete list of all balancing The commission also does not have a complete list of all balancing accounts it has reviewed accounts it has reviewed during each year, which may hinder its during each year, which may ability to identify the balancing accounts that it has not reviewed hinder its ability to identify the recently. Although Ratepayer Advocates could tell us the reviews balancing accounts it has not it had performed, the water division was unable to provide similar recently reviewed. information because its database does not always identify any California State Auditor Report 2013-109 21 March 2014 balancing accounts the water utility included in the informal filing. Without knowing when the water division last reviewed a balancing account, the commission cannot adequately assess the timing of when to review the balancing accounts of water utilities. The water division acknowledged this problem and plans to take steps to record all future reviews. Analysts Do Not Always Document and Supervisors Do Not Always Approve Ratepayer Advocates’ Reviews of Balancing Accounts Ratepayer Advocates does not ensure that its analysts adequately document and that its supervisors properly approve reviews of balancing accounts. When utilities file to change future rates based on balances in a balancing account, Ratepayer Advocates analysts request and review various documents to determine whether the commission should grant the requested rate change. Ratepayer Advocates stated that when the analyst completes a balancing account review, he or she sends a written testimony, if applicable, summarizing the findings to a supervisor for approval. The analyst’s supervisor and program manager review and edit the written testimony, which includes any findings, the amount of any proposed reductions in recoveries, or other documents that Ratepayer Advocates recommends the commission consider during a formal hearing process. In our examination of 18 reviews that Ratepayer In our examination of 18 reviews of Advocates analysts conducted, we found that only two reviews balancing accounts that Ratepayer contained adequate documentation of the procedures that analysts Advocates conducted, only two completed and the conclusions they reached. Compounding reviews contained adequate the lack of adequate documentation, Ratepayer Advocates does documentation of the procedures not require formal supervisory approval of an analyst’s review analysts completed and conclusions of a balancing account; instead it relies on informal interactions they reached. between analysts and their supervisors to ensure that reviews are properly done. Formal supervisory review would be beneficial to ensure that Ratepayer Advocates can appropriately support its conclusions and recommendations to the commission regarding whether utilities should be allowed to incorporate the amounts in balancing accounts into their utility rates. Ratepayer Advocates Does Not Always Properly Document or Retain Its Reviews Ratepayer Advocates does not always properly document its reviews of balancing accounts, and because it lacks a document retention policy, some documentation of its reviews was not retained. Because Ratepayer Advocates’ reviews of balancing accounts can result in recommending that the commission disallow certain costs that utilities seek to incorporate into future rates, we expected these reviews to include adequate documentation 22 California State Auditor Report 2013-109 March 2014 evidencing the steps the analysts took to support their conclusions. However, we found that the extent of supporting documentation that Ratepayer Advocates’ staff prepared when reviewing balancing accounts varied considerably among those conducting the reviews. As shown in Table 5, we examined 18 reviews of balancing accounts that Ratepayer Advocates conducted in the last three fiscal years for which Ratepayer Advocates analysts indicated, among other procedures, that they had verified the accuracy and allowability of expenditures charged to those accounts, as applicable. We found that only two reviews had adequate documentation and analyses to demonstrate the procedures that the analysts performed and the conclusions that they reached. For example, for one of these two well‑documented reviews, Ratepayer Advocates reviewed PG&E’s 2013 ERRA balancing account. Ratepayer Advocates highlighted each sample it had chosen, and each line item had a reference letter and number that corresponded to the supporting documentation, such as invoices. For 16 reviews of balancing For the 16 remaining reviews, Ratepayer Advocates’ documentation accounts, we found that Ratepayer was inadequate to demonstrate the work performed, was not Advocates’ documentation was created by the analyst, or was unavailable for our review because inadequate to demonstrate the it had been discarded. Although Ratepayer Advocates was able to work performed, was not created provide supporting documentation for seven of these 16 reviews, by the analyst, or was unavailable the analyses included with that documentation were not clear because it had been discarded. enough or detailed enough to demonstrate the work the analyst performed. For example, as part of its review of Edison’s Base Revenue Requirement balancing account, which requested incorporating a nearly $171 million balance into future rates, the Ratepayer Advocates’ analyst reviewed utility‑created spreadsheets, accounting ledger entries, and invoices supporting the amount in the balancing account. Although we observed that the analyst made notations on these documents, indicating some level of review, these notations were not adequate to allow us to verify that the analyst performed the review steps he identified in his final written testimony. For another six of these 16 reviews, Ratepayer Advocates indicated that the analysts performing the reviews did not create any documentation during the review to demonstrate the procedures they followed. For example, in one instance Ratepayer Advocates was unable to provide documentation of the procedures the analyst had performed; it reported that because the analyst did not identify any needed adjustments to the balancing account, the analyst had created no documentation for the review. California State Auditor Report 2013-109 23 March 2014 5 elbaT demrofreP setacovdA reyapetaR fo ecffiO eht tahT sweiveR detceleS fo ycauqedA 31–2102 hguorhT 11–0102 sraeY lacsiF gniruD RO )‑REVO( LATOT SAW WEIVER TAHT NOITCELLOC‑REDNU FO TNUOMA SAW WEIVER SEOD TUB ,DETNEMUCOD SAW WEIVER DETSEUQER YTILITU EHT NOITCELLOC‑REDNU WEIVER DETNEMUCOD ETARTSNOMED TON YLETAUQEDA OTNI NOITAROPROCNI ROF ROF DEDNEMMOCER TON SAW TON TUB SERUDECORP EHT DETNEMUCOD )SNOILLIM NI( SETAR ERUTUF )SNOILLIM NI( NOITCUDER DETNEMUCOD DENIATER DEMROFREP DENIATER DNA DEWEIVER TNUOCCA GNICNALAB EMAN YTILITU 5.6$ – 5 enrecuL ynapmoC ecivreS retaW ainrofilaC – *AN 5 yaW‑enO sesnepxE noitavresnoC ynapmoC retaW etatS nedloG – *AN 5 ecnarroT fo ytiC ynapmoC retaW etatS nedloG 3.2 – 5 tsoC noitcudorP defiidoM †ynapmoC retaW sohcnaR yellaV elppA 7.8 8.4$ 5 tnuoccA pU‑eurT etaR miretnI ynapmoC retaW naciremA‑ainrofilaC 8.12 7.12 5 tnuoccA mudnaromeM maD etnemelC naS ynapmoC retaW naciremA‑ainrofilaC – – 5 esaC etaR lareneG ecivreS cirtcelE yellaV raeB 7.84 8.8 5 tnuoccA esualC tnemtsujdA tsoC ygrenE ynapmoC cirtcelE cfiicaP ainrofilaC )9.62( – 5 tsoC noitisnarT )cirtcelE( ynapmoC cirtcelE & saG ogeiD naS )8.47( – 5 tnuoccA yrevoceR ecruoseR ygrenE )cirtcelE( ynapmoC cirtcelE & saG cfiicaP )9.071( – 5 tnemeriuqeR euneveR esaB nosidE ainrofilaC nrehtuoS 9.93 8.3 5 seidutS cimsieS noynaC olbaiD )cirtcelE( ynapmoC cirtcelE & saG cfiicaP 4.5 – 5 tnuoccA saG desahcruP ynapmoC saG ainrofilaC nrehtuoS )4.59( – 5 tnuoccA tsoC dexiF eroC ynapmoC saG ainrofilaC nrehtuoS ynapmoC cirtcelE & saG ogeiD naS )9.4( – 5 noissimsnarT detargetnI )saG larutaN( – – 5 ‡msinahceM tnemtsujdA tsoC dexiF noitaroproC saG tsewhtuoS 3.4 – 5 tnuoccA egrahC dnameD enilepiP eroC )saG larutaN( ynapmoC cirtcelE & saG cfiicaP – – 5 § tnuoccA egarotS mriF eroC )saG larutaN( ynapmoC cirtcelE & saG cfiicaP II5.015$ 1.93$ 6 3 7 2 slatoT .detelpmoc )setacovdA reyapetaR( setacovdA reyapetaR fo ecffiO eht sweiver tnuocca gnicnalab fo sisylana s’rotiduA etatS ainrofilaC :ecruoS .elbacilppa toN = AN siht gniunitnoc fo ssenetairporppa eht dna ecnalab eht enimreted ot saw weiver siht gnirud sucof ’setacovdA reyapetaR .setar erutuf otni tnuocca siht ni ecnalab eht etaroprocni ot ksa ton did ytilitu ehT * .snoitpecxe on gnidnfi detacidni tI .tnuocca .gnilfi s’ytilitu eht ni dedulcni tnuocca gnicnalab detaler a dna tnuoccA gnicnalaB tsoC noitcudorP defiidoM eht htob sedulcni noillim 3.2$ fo noitcelloc‑rednu latot ehT † .esac etar lareneg sti gnilfi nehw tnuocca siht morf yrevocer tseuqer ton did ytilitu ehT ‡ etaerc ton did ti tub ,ynapmoC cirtcelE dna saG cfiicaP eht rof )ACDPC( tnuoccA egrahC dnameD enilepiP eroC eht sa gnideecorp emas eht ni tnuocca gnicnalab siht gniweiver setacidni setacovdA reyapetaR § .ACDPC eht rof noillim 3.4$ eht ni dedulcni si setar remotsuc no tceffe s’tnuocca gnicnalab siht ,rehtruF .noitatnemucod gnitroppus .stnuocca gnicnalab ni seulav gnidnatstuo fo edutingam wohs ot eulav etulosba si latoT II 24 California State Auditor Report 2013-109 March 2014 For the remaining three of these 16 reviews, Ratepayer Advocates indicated that although the analysts had prepared supporting documentation for the reviews, the documentation was not retained because it was not needed. Ratepayer Advocates does not have a document retention policy; after proceedings are completed and the amount from the balancing account that the utilities will be allowed to incorporate into rates is finalized, it allows analysts to retain documents at their discretion if there are no major adjustments or issues. However, state law requires every state agency, including Ratepayer Advocates, to have a document retention policy. It is especially important for Ratepayer Advocates to have such a policy considering the impact that its reviews can have on utility rates. Because of the lack of adequate documentation, we could not analyze Ratepayer Advocates’ recommendations to the commission that utilities not be allowed to recover all costs in balancing accounts. For the 18 reviews we examined, Ratepayer Advocates recommended that the commission reduce by $39 million the $119 million that utilities requested they be allowed to recover from four balancing accounts. Ratepayer Advocates did not have adequate documentation for any of these balancing accounts. For the reviews relating to two of these four balancing accounts, the commission rejected Ratepayer Advocates’ protests. Although the commission did not reject Ratepayers Advocates’ findings and recommendations for these two reviews on the basis of inadequate documentation, without proper documentation Ratepayer Advocates lacks assurance that its reviews are adequate and complete, nor can supervisors verify the conclusions that staff reach. Moreover, without adequate documentation, supervisors are unable to determine whether staff have missed other amounts that utilities should not be allowed to recover. Ratepayer Advocates Does Not Ensure That Supervisors Approve Analysts’ Reviews of Balancing Accounts Ratepayer Advocates does not have a formal policy requiring supervisors to document their examination of the analyst’s work that supports the prepared testimony, even if the analyst recommends reducing the proposed recovery. Instead, it indicated that supervisory approval occurs during discussions, meetings, draft testimony review, and e‑mail discussions with staff about the conclusions reached in Ratepayer Advocates’ supervisors a review, but supervisors do not examine the actual work analysts do not examine the actual work perform to ensure that all planned procedures were performed analysts perform to ensure that appropriately and to ensure that any proposed reductions in recovery all planned procedures were amounts are accurate. In fact, Ratepayer Advocates was unable performed appropriately and any to provide evidence of formal supervisory approval for any of the proposed reductions in recovery 18 balancing account reviews we examined and that are listed in amounts are accurate. Table 5 on page 23. California State Auditor Report 2013-109 25 March 2014 Considering that 16 of the 18 reviews we selected lacked adequate documentation, Ratepayer Advocates cannot be certain that the reviews that analysts performed were adequate and complete without documented supervisory approval. A more appropriate practice, and one that most organizations use when conducting reviews, is to have supervisors examine and approve the documentation supporting an analyst’s review to ensure that the costs that are questioned and other conclusions reached are accurate, supported, and appropriately documented. In addition to providing assurance that the analyst’s conclusion to question some costs is appropriate, such a practice would ensure that the analyst did not overlook any other unallowable costs. Moreover, Ratepayer Advocates performs these reviews to fulfill its mission to obtain the lowest possible rate for reliable and safe service, which could be undermined by the lack of a supervisory approval process. Therefore, to best protect ratepayers, Ratepayer Advocates should be taking steps to ensure that it appropriately performs and approves reviews of balancing accounts. Most Water Division’s Reviews of Balancing Accounts Had Supporting Documentation and Approvals From Supervisors Most reviews of balancing accounts that the water division performed had appropriate documentation to show the procedures that analysts performed and that it had received supervisory approval. The water division reviews supporting documentation when water utilities file informally to incorporate the balance from a balancing account into rates; they also review documentation for smaller utilities during formal proceedings. As Table 6 on the following page shows we examined six reviews of balancing accounts that the water division performed from 2010 through mid‑2013. Five of these six reviews had adequate documentation to show that analysts had verified the accuracy and allowability of the charges the utilities included in the balancing accounts. For these reviews, we found that the analyst generally verified the balances by analyzing supporting documentation, such as invoices, as appropriate. For the remaining balancing account review, which was of Park Water Company’s filing to recover nearly $2.5 million in its Water Revenue Adjustment Mechanism balancing account, the analyst’s documentation was not sufficient for us to determine the procedures he performed. The water division uses a coversheet to summarize the analyst’s work and conclusions as well as to evidence a supervisor’s approval of the work. On the coversheet for this review, the analyst indicated he checked the support for the filing and recommended its approval. However, although the review file contained accounting records and numerous invoices, there were no notations or marks on these documents to demonstrate 26 California State Auditor Report 2013-109 March 2014 the steps the analyst took to verify the accuracy and allowability of the costs. The analyst’s supervisor acknowledged that the review was not properly documented. He stated that the water division does not have a specific policy requiring analysts to document their reviews. Table 6 Adequacy of Selected Balancing Account Reviews That the Division of Water and Audits Performed From January 2010 Through June 2013 RECOVERY TOTAL (OVER‑) OR WAS WAS THE REDUCTION UNDER‑COLLECTION THAT WAS THE REVIEW SUPERVISORY ADVICE THAT THE THE UTILITY REQUESTED BALANCING ACCOUNT ADEQUATELY REVIEW LETTER REVIEW FOR INCORPORATION INTO WATER UTILITY REVIEWED DOCUMENTED? PERFORMED? APPROVED? IDENTIFIED FUTURE RATES California Water Service Company Incremental Cost Yes Yes Yes – $1,325,498 Park Water Company • Water Revenue Adjustment Mechanism • Modified No Yes Yes – 2,473,561 Production Cost • Incremental Cost Del Oro Water Company Full Cost Water Supply Yes Yes Yes – 64,406 (Paradise Pines) Bass Lake Water Company California Department of Yes No Yes – 10,508 Public Health User Fee Mountain Mesa Water Company Contract Work Yes Yes Yes $435 9,819 West San Martin Water Works, Inc. Water Quality Yes Yes Yes – 4,394 Source: California State Auditor’s analysis of reviews completed by the California Public Utilities Commission’s Division of Water and Audits for six advice letter filings. Finally, for one of the reviews with adequate documentation, a supervisor did not sign off on the analyst’s review. The director of the water division indicated that the water division requires supervisory approval of all reviews and that the lack of supervisory sign‑off on this review was an oversight. The Commission Does Not Comply With Certain Auditing and Reporting Requirements of State Law The commission also does not inspect and audit the records of utilities it regulates according to the schedule prescribed by law, nor does it provide the reports of these audits to the California State Board of Equalization (Equalization). Specifically, state law requires that the commission audit the accounting records of a utility every three or five years, depending on the number of customers the utility serves. The commission generally fulfills this audit requirement using the procedures it conducts in connection with a California State Auditor Report 2013-109 27 March 2014 general rate case, as the law allows. However, the commission does not ensure that utilities file general rate cases every three or five years to coincide with the audit requirement. As a result, it has not always complied with the legal requirement to periodically audit the utilities according to the prescribed schedule. This law also requires the commission to provide the reports of these audits to Equalization for use in assessing taxes on public utilities. However, the commission discontinued providing the required reports to Equalization shortly after the law became effective in 1975 because Equalization notified the commission that the audit reports were not useful for tax assessment purposes. Equalization believes that requiring the commission to perform the audit work for tax assessment purposes would not be cost‑beneficial for the State because Equalization already possesses this expertise. The Commission Does Not Always Audit Periodically the Books and Records of the Utilities It Regulates According to the Schedule Prescribed by Law The commission does not always conduct periodic audits of the books and records of the utilities it regulates according to the schedule prescribed by state law. Specifically, state law requires that every three years the commission audit the accounting records of utilities that serve more than 1,000 customers. The law also requires the commission to audit every five years those utilities that it regulates that have 1,000 or fewer customers. As state law allows, the commission fulfills this audit requirement using the procedures conducted in connection with a general rate case. During that proceeding, the commission’s staff, Ratepayer Advocates, and advocacy groups review the various costs and other financial information that the utility presents to support its proposed rates. The commission facilitates and, if needed, compels the utility to provide additional information that the parties request to evaluate the reasonableness of its request for cost recovery. However, the commission does not ensure that all regulated The commission does not ensure energy and water utilities file their general rate cases on a three‑ or that all regulated energy and five‑year cycle to allow it to meet the law’s audit requirement. water utilities file their general Although the commission requires most energy utilities to file rate cases on a three- or five-year a general rate case every three years, it has allowed two energy cycle to allow it to meet the law’s utilities to file rate cases on a four‑year cycle and it does not audit requirement. require three other smaller energy utilities to be on a three‑year cycle. Because each of these five energy utilities serve more than 1,000 customers, having them file beyond the three‑year cycle does not allow the commission to fulfill the state law’s requirement that they be audited every three years. The commission also allows one energy utility with fewer than 1,000 customers to adjust its rates solely using informal proceedings without periodically filing a general rate case. The director for the energy division acknowledged 28 California State Auditor Report 2013-109 March 2014 that the commission was not in compliance with the law but indicated that these utilities might file a general rate case every three years in the future. In addition to the six energy utilities that it has not required to file general rates cases every three or five years, the commission also does not require all water utilities to file their general rate cases on a regular schedule. Of the 116 water utilities that the commission regulates, 26 have more than 1,000 customers, requiring that they be audited every three years. The remaining 90 have 1,000 or fewer customers, requiring the commission to audit them every five years. However, the commission only requires the 10 largest water utilities to file a general rate case every three years. The director of the water division reported that the commission does not require smaller water utilities to file their general rate cases under any specific schedule. When we reviewed the dates that water utilities had filed their last two general rate cases, we found six of the 26 largest utilities subject to the three‑year audit requirement and 53 of the 90 smaller water utilities subject to the five‑year audit requirement did not always meet their respective timelines. One of these smaller utilities had not filed a general rate case since 1993, and another filed its most recent general rate case more than 20 years after its previous one. Because the commission relies upon the general rate case to comply with the audit requirement, to the extent that water utilities do not file their general rate cases every three or five years, the commission is not in compliance with state law. The director of the water division indicated that because of the complexity involved in establishing utility rates, many smaller water utilities require the water division’s assistance to file their general rate cases and resource constraints limit the water division’s ability to assist them. Further, he asserted that the water division lacks the resources to audit all water utilities that do not file their general rate cases within the statutory timeline. Moreover, the commission noted that when the smaller water utilities establish their rates, it performs a thorough review of the utility’s expenses and plant to determine that the approved rates are reasonable. The commission noted that utilities file for a general rate case to request authority to increase their revenues from ratepayers. Therefore, it was the commission’s belief that to the degree that these smaller water utilities are not filing for general rate cases, their customers benefit from stable rates. Without regularly reviewing However, without regularly reviewing these utilities’ accounting utilities’ accounting records, the records, the commission cannot be certain that it is adequately commission cannot be certain protecting the ratepayers from high utility rates. The legislative that it is adequately protecting the history of the state law requiring the commission to regularly ratepayers from high utility rates. audit these utilities indicates that the Legislature intended that these audits would be safeguards for the public and would protect against excessive rates. To the extent that the commission does not California State Auditor Report 2013-109 29 March 2014 ensure that it audits all regulated utilities as required, it does not meet the intent of the law to maintain public confidence in the regulatory process. Equalization Believes a State Law Requiring Coordination of Audits With the Commission Is Out of Date Equalization believes that a provision of state law requiring the commission to provide audit reports to Equalization is no longer appropriate. The law that requires the commission to audit periodically the records of utilities also requires that the commission provide the audit reports to Equalization for use in assessing taxes on public utilities. As noted in the previous section, the commission has chosen to meet the audit requirement through general rate cases, which results in written testimonies that summarize the results of the reviews of a utility’s costs; staff present these testimonies to the commission during a hearing. Because general rate cases are regulatory proceedings that examine Because the commission’s a utility’s operations and costs and are concerned with the rates general rate cases are regulatory that the utility may charge its customers, these proceedings do proceedings, these proceedings do not focus on the utility’s accounting records for taxation purposes not focus on the utility’s accounting and they are thus of no use to Equalization. For example, although records for taxation purposes and Equalization assesses taxes on the cost of construction work that are thus of no use to Equalization. is not yet completed, the commission does not allow a utility to consider this type of cost when developing rates until the construction is completed and the property is put into service. Additionally, Equalization has taxing authority only over those taxable properties that are within California, while some utilities have assets outside of California that nevertheless can influence the commission’s rate setting. For example, an electric utility might own a power plant in another state to generate electricity to provide to California ratepayers. The commission allows the utility to recoup through its rates some or all of the cost of building the out‑of‑state power plant. However, because the plant is in another state, Equalization does not have the authority to assess taxes on it. According to Equalization, in addition to the lack of tax‑related information within the commission’s reports, the timing of the general rate case for a utility is often not when Equalization needs the information for tax purposes. For example, the commission usually requires an electric utility to file a general rate case every three years. However, Equalization must complete audits on utilities within a four‑year period, which may not align with the general rate cases. Equalization indicated the property tax audits that its staff perform focus on the taxable or nontaxable nature of property costs at a level of detail that is not available from the commission’s reports. It further noted that it has maintained an audit program 30 California State Auditor Report 2013-109 March 2014 since 1977 and therefore has not required the commission’s reports. As a result, despite the legal requirement to do so, the commission has not provided these required reports to Equalization in more than three decades. Equalization indicated that because it needs to assess taxes on a variety of companies that may not be regulated by the commission, it has a process in place to audit these companies as necessary. According to Equalization, it does not have auditors specifically dedicated to auditing utilities that the commission regulates so it cannot quantify the cost of auditing those utilities; however, Equalization asserted that the additional cost it incurs for auditing the utilities the commission regulates is insignificant. Moreover, Equalization noted that it has been performing the tax assessment audits of utilities for many years and its staff possess the specific qualifications required of tax auditors. Equalization believes that the cost for the commission to begin performing this work would outweigh any benefits or cost‑savings Equalization might realize. Although Equalization’s conclusion appears reasonable, unless the statute is amended to remove this duty to provide the audits, the commission will continue to be out of compliance with the law. The director of the energy division indicated that in order for the commission to take a position on changes to existing law, it is required to vote on the matter. Therefore, commission staff cannot provide an official position on any changes to this law. Recommendations To ensure proper oversight of balancing accounts to protect ratepayers from unfair rate increases, the Legislature should amend the California Public Utilities Code, Section 792.5, to require the commission to develop a risk‑based approach for reviewing all balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation, such as invoices. To ensure that it has the necessary information to provide appropriate oversight of the balancing accounts, the commission should maintain accurate and timely information on utility balancing accounts. Specifically, it should do the following: • Review the accuracy and completeness of the data it has obtained from utilities to ensure that it has a complete list of balancing accounts. California State Auditor Report 2013-109 31 March 2014 • Regularly update this list of balancing accounts when the commission issues decisions authorizing opening new balancing accounts or closing existing balancing accounts, when utilities file balancing account updates, and when the commission performs reviews of balancing accounts. • Use this list to guide its efforts to oversee balancing accounts more effectively, by using a risk‑based approach to select a sufficient number of balancing accounts, as well as those with the most potential impact on ratepayers, for review each year to provide appropriate coverage over all regulated utilities. To ensure that it efficiently and effectively monitors energy utilities’ balancing accounts to protect ratepayers from unfair rate increases, the commission should do the following: • Direct the energy division to perform in‑depth reviews of balancing accounts to verify that account balances contain only allowable transactions and are supported. These reviews should include ensuring that transactions recorded in a balancing account are supported by appropriate documentation, such as invoices. • Direct the energy division to coordinate with Ratepayer Advocates to identify which balancing accounts Ratepayer Advocates plans to review during the year to avoid duplicating efforts. To further its mission to obtain the lowest possible rates for reliable and safe utility service for ratepayers through its reviews of balancing accounts, Ratepayer Advocates should do the following: • Use the commission’s list of balancing accounts to guide its selection of the number, size, and type of balancing accounts to review so that its review coverage is more proportional across all utilities. • Document the method used for its selection of balancing accounts to review. • Coordinate with the energy division to avoid duplicating review efforts. To ensure that findings and conclusions resulting from the reviews of balancing accounts are appropriate, complete, and supported, Ratepayer Advocates should perform the following, within six months: • Develop policies that clearly describe how analysts are to document their reviews of balancing accounts, including all work reviewed and conclusions reached for each sampled item that supports their conclusions. 32 California State Auditor Report 2013-109 March 2014 • Develop a document retention policy for all documents related to, among other things, balancing account reviews for a minimum of three years after the completion of these reviews. • Implement a formalized and documented method to ensure that supervisors approve analysts’ reviews of balancing accounts by checking the accuracy and completeness of the work that analysts prepare to support the conclusions of their reviews, including any proposed reductions in recoveries. To ensure that findings and conclusions resulting from the reviews of balancing accounts are appropriate, complete, and supported, the water division should remind analysts to document their reviews properly and remind supervisors to formally indicate that they checked the accuracy and completeness of reviews. The commission should follow the requirement in state law to inspect and audit the accounting records of utilities it regulates within required time frames. If the commission chooses to continue to meet this requirement through the general rate case process, it should ensure that all utilities file a general rate case on a regular schedule so as to comply with the state law’s audit requirement. However, the commission should follow alternate methods to comply with the audit requirement when a utility will not be filing for its general rate case in time to be audited within three or five years, depending on the timing of the required audit for that utility. The Legislature should amend California Public Utilities Code, Section 314.5, to remove the requirement that the commission provide audit reports to Equalization. California State Auditor Report 2013-109 33 March 2014 We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the scope section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor Date: March 4, 2014 Staff: John Baier, CPA, Audit Principal Kris D. Patel Brenton Clark, MPA Nathaniel Jones Joey Judson Legal Counsel: J. Christopher Dawson For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. 34 California State Auditor Report 2013-109 March 2014 Blank page inserted for reproduction purposes only. California State Auditor Report 2013-109 35 March 2014 Appendix A PUBLIC UTILITY BALANCING ACCOUNTS ACTIVE DURING THE LAST NINE YEARS AND THE FREQUENCY OF THEIR DETAILED REVIEW State law requires the California Public Utilities Commission (commission) to direct utilities to track specific types of costs and related revenues from customers using a tracking mechanism. This tracking mechanism—known as a balancing account—protects ratepayers and utilities by identifying any under‑ or over‑collection of revenue from ratepayers compared to the utilities’ actual allowed costs. Utilities establish and maintain the balancing accounts after the commission authorizes those accounts. However, the commission does not maintain a central database of all balancing accounts and related revenue requirements it has authorized for a utility. Upon our request, the commission obtained the information from the utilities it regulates related to balancing accounts established over the past nine years—2004 through 2012—and provided that information to us. However, as we stated in the Audit Results, we did not audit this information to verify its accuracy and completeness. As such, the information the commission provided us is of undetermined reliability. However, through our limited comparison of these data with the commission’s and the Office of Ratepayer Advocates’ (Ratepayer Advocates) records, we noted some concerns with the data that the utilities reported to the commission. For instance, we found several instances in which a utility did not include at least one balancing account. However, it is the only source of information available and we present it in Table A on the following pages. We also obtained information from Ratepayer Advocates and the Division of Water and Audits (water division) to determine which balancing accounts they reviewed during the nine‑year period from 2004 through 2012. We performed limited tests to verify the accuracy of the information Ratepayer Advocates provided by reviewing the appropriate documents or reports to ensure that the selected balancing accounts were reviewed as noted. On the other hand, as indicated in the Audit Results, the water division cannot identify a comprehensive list of balancing accounts it has reviewed without devoting significant resources. Therefore, we could not include the reviews that the water division performed of water utility balancing accounts. However, the water division was able to identify certain balancing accounts it reviewed as part of two audits it performed at the direction of the commission. Table A shows the number of accounts active during the nine‑year period from 2004 through 2012 and whether the commission reviewed them. 36 California State Auditor Report 2013-109 March 2014 Table A List of Authorized Utility Balancing Accounts and Detailed Reviews of Those Accounts Conducted Over the Last Nine Years ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU cirtcelE Bear Valley Purchased Power Adjustment Clause  $8,347,000 Electric Base Revenue Requirement  4,053,000 Service General Rate Case 1,447,000 California Alternate Rates for Energy 323,000 Low‑Income Energy Efficiency (236,000) California Energy Cost Adjustment Clause  38,551,000 Pacific Electric California Alternate Rates for Energy Company 618,000 Surcharge Provision Low‑Income Energy Efficiency 201,000 Surcharge Mechanism Baseline Electric and Magnetic Fields Experimental Research Pacific Gas Energy Resource Recovery        3,609,186,000 and Electric Distribution Revenue Adjustment Mechanism 3,460,698,000 Company Utility Retained Generation Base 1,776,720,000 Modified Transition Cost 409,015,000 Department of Water Resources Bonds 393,032,000 Dedicated Rate Component Series 1 332,982,000 Procurement Energy Efficiency Revenue  248,932,000 Adjustment Mechanism Advanced Metering/SmartMeter 176,800,000 Dedicated Rate Component Series 2 166,599,000 California Solar Initiative 121,295,000 Energy Efficiency 120,734,000 Low‑Income Energy Efficiency 87,766,000 New System Generation 86,952,000 Electric Program Investment Charge 72,082,000 Revenue Adjustment Mechanism Nuclear Decommissioning 44,270,000 Adjustment Mechanism Energy Recovery Bond 40,299,000 Cornerstone 32,537,000 Self‑Generation Incentive Program 29,839,000 Customer Energy Efficiency Incentive 21,982,000 Diablo Canyon Seismic Study      11,907,000 Environmental Enhancement 10,108,000 California Alternate Rates for Energy 7,699,000 Department of Water Resources Franchise Fees 1,269,000 Department of Water Resources Power (251,877,000) Charge Collection California State Auditor Report 2013-109 37 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU cirtcelE Advanced Metering and Demand Response Affiliate Transfer Fees Air Conditioning Cycling/Air Conditioning Expenditures/Demand Response Revenue British Columbia Renewable Study—Electric Climate Smart Colusa Power Plant Demand Response Expenditures/Demand Response Revenue Electric Reimbursable Fees Electric Restructuring Costs Electric Vehicle Family Electric Rate Assistance Hazardous Substance Mechanism Headroom Humboldt Generating Station Meter Reading Cost Non‑Tariff Procurement Energy Efficiency Revenue Procurement Transaction Auditing Public Purpose Programs Revenue  Adjustment Mechanism Research, Development and Demonstration Regulatory Asset Revenue Requirement Regulatory Asset Revenue Requirement True‑Up Tracking Renewables Retirement Plan (Distribution and Generation) Revised Customer Energy Statement Streamline Residual Trust Transfer Amount Vaca Dixon (2 Megawatt Photovoltaic Pilot Project) PacifiCorp Energy Cost Adjustment Clause $25,800,000 California Alternate Rates for Energy 2,900,000 Solar Incentive Program 1,075,000 Demand Side Management Programs Demand Side Management Programs (Surcharge Schedule S‑191) Greenhouse Gas Allowance Costs Greenhouse Gas Allowance Revenue Low‑Income Energy Efficiency Program continued on next page . . . 38 California State Auditor Report 2013-109 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU cirtcelE San Diego Gas Electric Distribution Fixed Cost $883,863,000 and Electric Energy Resource Recovery—Ongoing        Company 746,597,000 Non‑Fuel Generation 381,918,000 Electric Procurement Energy Efficiency 74,133,000 Transition Cost (Competition Transition Charge)     62,615,000 California Alternate Rates for Energy 43,623,000 Pension 22,410,000 Tree Trimming 19,652,000 Electric Program Investment Charge 12,730,000 Nuclear Decommissioning Adjustment 9,018,000 Mechanism Post‑Retirement Benefits Other Than Pension 7,231,000 Research, Development and 2,556,000 Demonstration Expense On Bill Financing 850,000 Advanced Metering Infrastructure Baseline Common Area 21st Century Energy Systems California Solar Initiative Electric Vehicle Hazardous Substance Cleanup Cost Post‑1997 Electric Energy Efficiency Renewables Research, Development and Demonstration Rate Design Settlement Component (Total Rate Adjustment Component) Rewards and Penalties Streamlining Residual Southern Base Revenue Requirement       5,541,288,000 California Energy Resource Recovery         4,084,426,000 Edison Public Purpose Programs        525,052,000 Adjustment Mechanism Procurement Energy Efficiency 297,251,600 Pensions Cost      161,175,000 Medical Program      145,990,000 California Solar Initiative 110,000,000 Energy Efficiency Program 100,415,000 Low‑Income Energy Efficiency Programs (Name changed later to Energy Savings  72,462,000 Assistance Programs Adjustment Mechanism) New System Generation      64,012,000 Demand Response Program      61,858,000 Post‑Employment Benefits Other Than      51,086,000 Pensions Costs California State Auditor Report 2013-109 39 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU cirtcelE Electric Program Investment Charge— $46,140,000 California Energy Commission Solar Photovoltaic Program 36,194,000 2012 Electric Program Investment 29,924,000 Charge Renewables 2012 Electric Program Investment Charge 28,563,000 Research, Development and Demonstration Nuclear Decommissioning       23,573,000 Adjustment Mechanism California Alternate Rates for Energy        17,842,000 Electric Program Investment Charge—Southern 12,058,000 California Edison On Bill Financing 5,333,000 Mohave      4,584,000 Research Development and Demonstration 2,781,000 Purchase Agreement Administrative Costs 1,047,175 Electric Program Investment Charge— 289,000 California Public Utilities Commission Clean Technology Generation Community Choice Aggregation Implementation Employee‑Related Family Energy Rate Assistance Gas Catalina Adjustment Clause Late Payment Charge Revenue Optional Pricing Adjustment Clause Other Distribution Adjustment Mechanism  Palo Verde      Smart Connect      San Onofre Nuclear Generating Station 2 & 3 Steam Generator Removal and Disposal San Onofre Nuclear Generating Station 2 & 3 Steam Generator Replacement seitilitU saG larutaN Pacific Gas Purchased Gas        1,437,574,000 and Electric General Rate Case Distribution Base Revenues 1,166,429,000 Company Local Transmission 208,606,000 Backbone Transmission 139,103,000 Public Purpose Programs Surcharge‑California 118,884,000 Alternate Rates for Energy Shortfall SmartMeter™ Project 82,514,000 Public Purpose Programs Energy Efficiency‑Gas  80,280,000 Public Purpose Programs—Low‑Income 69,960,000 Energy Efficiency Pension 43,764,000 Storage 35,729,000 Public Purpose Programs—Research, 10,717,000 Development and Demonstration continued on next page . . . 40 California State Auditor Report 2013-109 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU saG larutaN Self‑Generation Incentive Program  $6,480,000 Revenue Requirement Customer Access 4,821,000 Franchise Fees and Uncollectibles 3,419,000 Winter Gas Savings Program—Transportation 2,355,000 California Alternate Rates for Energy 1,904,000 Administrative Costs Core Brokerage Fee  (6,583,000) California Alternate Rates for Energy Shortfall Included in Public Purpose Programs (118,884,000) Funding Requirement Adjustment Mechanism of Costs Determined in Other Proceedings Affiliate Transfer Fee  Balancing Charge  Baseline ClimateSmart Cogeneration Distribution Shortfall  Core Fixed Cost  Core Firm Storage †     Core Pipeline Demand Charge        Core Transport Interstate Transition  Customer Energy Efficiency Incentive  Recovery—Gas Electricity Cost Enhanced Oil Recovery  PG&E Gas Schedule G‑10 Allocated Employee Discount Gas Advanced Metering Gas Meter Reading Costs Gas Reimbursable Fees Gas Transmission and Storage Revenue Sharing Mechanism Hazardous Substance Mechanism  Liquefied Natural Gas Natural Gas Vehicle  Noncore Customer Class Charge  Noncore Distribution Fixed Cost Non‑Tariffed Products and Services Public Purpose Programs Balance (Demand‑Side Management Rate Component) Public Purpose Programs—California Alternate  Rates for Energy Revised Customer Energy Statement Turlock Irrigation District Almond Power Plant Core Subscription Phase‑Out Account‡  California State Auditor Report 2013-109 41 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU saG larutaN San Diego Gas Core Fixed Cost         $210,398,000 and Electric Gas Energy Efficiency 18,533,000 Company Other Operating Costs and Revenues 18,059,000 California Alternate Rates for Energy 14,495,000 Integrated Transmission     10,587,000 Gas Low‑Income Energy Efficiency 9,540,000 Non‑Core Fixed Cost         5,430,000 Research Development & Demonstration 1,329,000 Advanced Metering Infrastructure Baseline Balance Distribution Integrity Management Program Gas Storage (Core and Non‑Core) Hazardous Substance Cleanup Cost         Interstate Transition Cost Surcharge Natural Gas Vehicle Non‑Margin Fixed Cost On Bill Financing Pension     Post‑Retirement Benefits Other Than Pension     Research, Development and Demonstration 1‑Way (Pre 2001) Rewards & Penalties         Curtailment Penalty Funds‡         Purchased Gas‡ †        † Southern Core Fixed Cost         1,481,501,000 California Gas Purchased Gas         Company 186,575,000 California Alternate Rates for Energy 140,422,000 Backbone Transmission     135,000,000 Demand Side Management 96,900,000 Direct Assistance Program 90,374,000 Noncore Fixed Cost         83,032,000 Integrated Transmission     72,898,000 Advanced Metering Infrastructure 35,793,000 Post‑Retirement Benefits Other Than Pension         26,154,000 Noncore Storage         26,067,000 Research, Development and Demonstration 12,284,000 Gas Surcharge Distribution Integrity Management Program 10,173,000 Research, Development and     10,173,000 Demonstration Expense Pension     3,825,000 Enhanced Oil Recovery     2,724,000 On Bill Financing 1,017,000 continued on next page . . . 42 California State Auditor Report 2013-109 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU saG larutaN Aliso/Goleta Tracking Affiliate Transfer Fee     Brokerage Fee Conservation Expense Company Use Fuel For Load     El Paso Turned‑Back Capacity Firm Access Rights Hazardous Substance Cost Recovery         Interstate Transmission—Firm Access Rights Interstate Transportation Cost Surcharge Montebello True‑Up Tracking         Noncore Fixed Cost Tracking Natural Gas Vehicles Pacific Interstate Transmission Company/Pacific Offshore Pipeline Company Transition Cost Rewards & Penalties         Compressor Station Fuel & Power‡         Southwest Gas Fixed Cost Adjustment Mechanism Margin          $81,694,000 Corporation Balancing Component California Alternative Rates For Energy 9,074,000 Low‑Income Energy Efficiency 3,173,000 Fixed Cost Adjustment Mechanism Upstream          Pipeline Charges Component Purchased Gas Cost †     Intrastate Transportation Cost †    Adjustment Mechanism Public Interest Research and Development Baseline seitilitU retaW Alisal Water Water Conservation 85,000 Corporation Water Quality Expenses Department of Public Health User Fee Apple Valley Water Revenue Adjustment Mechanism/  2,342,000 Ranchos Modified Cost Water Incremental Cost–Domestic System   207,000 Company California Alternative Rates for Water 106,000 Revenue Reallocation Incremental Cost‑Irrigation   38,000 Employee and Retiree Healthcare Pension Expense California Water Revenue Adjustment Mechanism/ 385,046,000 Water Service Modified Cost Company Pension Cost †  22,392,000 Conservation Expense One‑Way 2009 General   9,676,000 Rate Case California State Auditor Report 2013-109 43 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU retaW Water Conservation for 2005 and 2007 General Rate Cases – Purchased Power and Water Low‑Income Ratepayer Assistance Temporary Interest Rate †  Rate Support Fund †  Lucerne †    Incremental Cost (one account per district)‡   California‑ General Expense $11,597,000 American Water Revenue Adjustment Mechanism— Water Monterey (Old Water Revenue Adjustment 10,435,000 Company Mechanism) Ventura Interim Rate True Up 6,399,000 Los Angeles Interim Rate True Up † 5,796,000 Sacramento Interim Rate True Up  4,021,000 Monterey Expense 2,836,000 Monterey Seaside Adjudication Costs 2,756,000 Monterey Aquifer Storage and Recovery & 2,680,000 Los Angeles Patton Well Projects Purchased Power and Water—Los Angeles      † 1,231,000 Purchased Power and Water—Village 1,159,000 Purchased Power and Water—Sacramento     † 798,000 Purchased Power and Water—Monterey 534,000 Toro Interim Rates 404,000 Purchased Power and Water—Coronado      † 392,000 Los Angeles Distribution System Investment 184,000 Charge Surcharge Purchased Power and Water—Larkfield       † 70,000 Low‑Income Program (242,000) Monterey Carmel River Dam (417,000) Abandonment Project Pension Surcharge—Monterey (1,664,000) Purchased Power and Water—Felton Monterey Conservation Surcharge Felton Interim Rate True Up Monterey Interim Rate True Up Monterey Seaside Groundwater Basin Pension Surcharge—Felton Monterey Emergency Water Revenue Adjustment Mechanism Monterey Emergency Rationing Costs for Monterey Peninsula Water Management District Larkfield Interim Rate True Up Temporary Interest Rate continued on next page . . . 44 California State Auditor Report 2013-109 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU retaW Water Revenue Adjustment Mechanism/  Modified Cost—Coronado Water Revenue Adjustment Mechanism/  Modified Cost—Larkfield Water Revenue Adjustment Mechanism/  Modified Cost—Los Angeles Water Revenue Adjustment Mechanism/   † † Modified Cost—Monterey Water Revenue Adjustment Mechanism/ Modified Cost‑Monterey—Ambler Water Revenue Adjustment Mechanism/ Modified Cost—Village Employee Retirement Income Security Act‡    Purchased Power and Water—Ventura‡     † Water Revenue Adjustment Mechanism/  Modified Cost—Ventura‡ Del Oro Water Purchased Power and Water—Paradise Pines $740,000 Company Purchased Power and Water—River Island 254,000 Purchased Power and Water—Lime Saddle 157,000 East Pasadena Purchased Power – Water Pumping Assesment Company Purchased Water Tariffed Fruitridge Purchased Power Vista Water – Company Golden Water Revenue Adjustment Mechanism/ 20,695,000 State Water Modified Cost Company City of Torrance  – Purchased Power and Water – Temporary Interest Rate    – Pension and Benefits   – Well Study †  – Randall‑Bold † – Settlement Agreement (9,500,000) California Alternate Rates for Water †   Santa Maria Water Rights †  Conservation Expenses One‑Way‡   Great Oaks Groundwater Charges Other than 6,477,000 Water Agricultural Irrigation Company Purchased Power 683,000 Groundwater Charges—Agricultural Irrigation 3,300 Purchased Power and Pump Tax Recovery – (Advice Letter 155) Purchased Power and Groundwater Charges – Recovery (Advice Letter 157) Purchased Power and Groundwater Charges – Recovery (Advice Letter 161) California State Auditor Report 2013-109 45 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU retaW Purchased Power and Pump Tax Recovery – (Advice Letter 192) Purchased Power, Pump Tax and Low‑Income $(121,304) Program Recovery (Advice Letter 224) Park Water Water Revenue Adjustment Mechanism/ 2,467,000 Company Modified Cost Incremental Cost 4,637 California Alternative Rates for Water Revenue Reallocation One‑way Conservation Expense‡   One‑way Conservation Public   Information Expense‡ San Gabriel Purchased Power and Water—Fontana    † – Valley Water Water Revenue Adjustment Mechanism/ Company  † – Modified Cost—Fontana Purchased Power and Water—Los Angeles       – Water Revenue Adjustment Mechanism/ – Modified Cost—Los Angeles Conservation Program—Los Angeles California Alternative Rates for Water—Fontana‡    † San José Water Purchased Power Company Purchased Water Pump Tax Fire Hydrant Water Rate Assistance Program State Revolving Fund Loan 1 State Revolving Fund Loan 2 Overlook Drive Presure System Main Office Surcredit City of San José Franchise Surcharge Pension Expense Balancing Account Surcharge Mandatory Conservation Revenue Adjustment Memorandum Surcharge Balance 2004 Balancing Account And Interest Tracking 2005 Balancing Account And Interest Tracking 2006 Balancing Account And Interest Tracking 2007 Balancing Account And Interest Tracking 2008 Balancing Account And Interest Tracking 2009 Balancing Account And Interest Tracking 2010 Balancing Account And Interest Tracking 2011 Balancing Account And Interest Tracking Suburban Purchased Power/Purchased Water/Pump Tax 4,057,000 Water Systems 1‑Way Conservation 338,000 Water Revenue Adjustment Mechanism/ Modified Cost continued on next page . . . 46 California State Auditor Report 2013-109 March 2014 ACTIVITY YEAR REVIEWED 2012 AUTHORIZED UTILITY NAME BALANCING ACCOUNT NAME 2004 2005 2006 2007 2008 2009 2010 2011 2012 AMOUNT* seitilitU retaW Valencia Water Purchased Power and Water Company Water Revenue Adjustment Mechanism/ Modified Cost Conservation 1‑Way Sources: Data that the California Public Utilities Commission (commission) obtained from utilities and the Office of Ratepayer Advocates (Ratepayer Advocates). Most reviews were performed by Ratepayer Advocates, and a few were performed by the Division of Water and Audits (water division). The commission did not provide balancing account information for three small natural gas utilities because it indicated that their balancing account activity was minimal. The commission also did not provide us balancing account information for 100 small water utilities that have fewer than 2,000 service connections because it believed obtaining this information from the small utilities would have been overly burdensome on those utilities. Further, the commission informed us that two larger water utilities did not have any balancing accounts during the nine‑year period. Notes: As we state in the Scope and Methodology, we did not audit these data to verify their accuracy and completeness. Therefore, these data are of undetermined reliability. However, in our limited comparison of these data with the commission’s and Ratepayer Advocates’ records, we noted some concerns with the data. However, we present this information because it is the only source of data available. Based on the commission’s direction, we shaded balancing accounts tan where the utility did not report any activity in a given year. However, we cannot confirm in each instance if the account was open but inactive, or if it was closed during that time period. In addition, we found some instances where the commission mistakenly indicated that the balancing account was inactive in a year where the utility had recorded activity, or in a year where Ratepayer Advocates indicated a review had occurred.  = Reviewed by Ratepayer Advocates or the water division. * The utilities did not always identify authorized amounts for all balancing accounts. Although the commission noted that certain accounts do not have annual revenue requirements, and some omissions may have been for accounts that had been closed or were inactive, the commission could not verify the reasons for all accounts for which authorized amounts were not included. † This review covered less than six months of activity. ‡ The utilities did not include these balancing accounts in the data they provided to the commission. However, these accounts were listed in reviews the Ratepayer Advocates performed. California State Auditor Report 2013-109 47 March 2014 Appendix B OUR REVIEW OF BALANCING ACCOUNTS MAINTAINED BY UTILITIES THAT ARE REGULATED BY THE CALIFORNIA PUBLIC UTILITIES COMMISSION To determine the expenditures the utilities included in selected balancing accounts, we selected and reviewed nine balancing accounts maintained by six utilities that the California Public Utilities Commission (commission) had not reviewed during fiscal years 2010–11 to 2012–13. We chose three balancing accounts related to water utilities, three related to natural gas utilities, and three related to electric utilities. Our selection included larger utilities such as Pacific Gas and Electric Company with over 5.1 million electric customers and 4.3 million natural gas customers as well as utilities such as Suburban Water Systems, which has 300,000 customers. To ensure that we reviewed a cross‑section of activities, we selected balancing accounts of differing purposes and of different sizes based on the balances. Table B on the following page shows the results of our review of the nine balancing accounts that the commission had not reviewed. Based on our testing of balancing accounts at these six utilities, we concluded that the balancing accounts were properly maintained and we found no exceptions. 48 California State Auditor Report 2013-109 March 2014 Table B Results of the Review of Selected Public Utility Balancing Accounts TOTAL EXPENDITURES FOR FISCAL YEARS 2010–11 BALANCING THROUGH 2012–13 ACCOUNT TYPE OF SUBJECTED TO REVIEW PROPERLY UTILITY UTILITY NAME BALANCING ACCOUNT NAME DESCRIPTION OF BALANCING ACCOUNT (IN MILLIONS) MAINTAINED? seitilitU cirtcelE Pacific Gas Utility Generation Records the costs a utility incurs to produce power $6,233 Yes and Electric from its own facilities. Company New System Generation Records the benefits and costs of power purchase agreements associated with generation resources 99 Yes that will be allocated to benefitting customers. San Diego Gas Electric Procurement Records the costs of the procurement energy and Electric Energy Efficiency efficiency program and the revenues from a 163 Yes Company surcharge to fund this program. seitilitU saG Pacific Gas SmartMeter Project Records costs and revenues associated with the and Electric SmartMeterTM project. 440 Yes Company Southern Demand Side Management Records the cost of the non‑low‑income energy California Gas efficiency program and revenues from a surcharge 200 Yes Company to fund this program. California Alternate Rates Records expenses of the CARE program, a rate subsidy 374 Yes for Energy (CARE) program, and revenues to fund this program. seitilitU retaW San Gabriel Water Revenue Adjustment Tracks revenues collected under tiered Valley Water Mechanism* conservation rates against authorized revenues 49 Yes Company that would have been collected under a single rate. San José Water Pension Expense† Tracks contributions to the employee retirement Company plan against the pension expense included in the 7 Yes authorized rates. Suburban Purchased Power/Purchased Balance authorized costs for purchased power, Water Water/Pump Tax‡ purchased water, and pump taxes against actual costs. 18 Yes Systems Source: California State Auditor’s review of nine balancing accounts maintained by six public utilities. * The Water Revenue Adjustment Mechanism Balancing Account tracks revenues, not expenditures. Therefore, the amount in the expenditures column is for the revenues the utility is entitled to receive, which is compared against actual revenues collected. † The expenditures subject to review for this balancing account were based on calendar years, not fiscal years. ‡ The expenditures subject to review for this balancing account were for the time period January 2010 through April 2013. California State Auditor Report 2013-109 49 March 2014 * * California State Auditor’s comments begin on page 53. 50 California State Auditor Report 2013-109 March 2014 1 2 3 California State Auditor Report 2013-109 51 March 2014 52 California State Auditor Report 2013-109 March 2014 California State Auditor Report 2013-109 53 March 2014 Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE CALIFORNIA PUBLIC UTILITIES COMMISSION To provide clarity and perspective, we are commenting on the California Public Utilities’ Commission’s (commission) response to our audit. The numbers below correspond to the numbers we have placed in the margin of the commission’s response. The commission misstates the scope of our audit. Specifically, the 1 purpose of our audit was not “to review the [commission’s] audit practices overall.” As we state in the Scope and Methodology on page 12, the scope of the Joint Legislative Audit Committee’s audit request was limited to the commission’s oversight of balancing accounts. Table 2 beginning on page 12 lists the objectives of our audit, all of which relate to balancing accounts. The commission’s statement implies that we evaluated the 2 appropriateness of the audits it performs in conjunction with general rate case proceedings. To clarify, as we describe on pages 27 to 29, our scope was limited to determining whether the commission met the requirement in Section 314.5 of the California Public Utilities Code to audit the accounting records of a utility every three or five years, depending on the number of customers the utility serves. We did not evaluate the appropriateness of the audit procedures that the commission performs in conjunction with a general rate case proceeding. We disagree with the commission’s statement that it “does not have 3 a business need for a master list of all of the balancing accounts.” To implement our recommendation on page 31 to develop a risk‑based approach for selecting balancing accounts for review, the commission will also need to implement our recommendation to maintain accurate and timely information on utility balancing accounts. Without such a list, the commission will lack information on the overall population of balancing accounts to make informed decisions about which accounts may be candidates for a closer review. Moreover, despite its assertion of not needing this master list, the commission acknowledges later in the response that it will update and verify the list developed in response to our request during the audit. 54 California State Auditor Report 2013-109 March 2014 Blank page inserted for reproduction purposes only. California State Auditor Report 2013-109 55 March 2014 * 1 * California State Auditor’s comments begin on page 67. 56 California State Auditor Report 2013-109 March 2014 California State Auditor Report 2013-109 57 March 2014 2 3 4 58 California State Auditor Report 2013-109 March 2014 5 6 7 8 9 10 California State Auditor Report 2013-109 59 March 2014 11 60 California State Auditor Report 2013-109 March 2014 12 13 California State Auditor Report 2013-109 61 March 2014 13 62 California State Auditor Report 2013-109 March 2014 14 6 California State Auditor Report 2013-109 63 March 2014 10 6 10 64 California State Auditor Report 2013-109 March 2014 6 15 16 17 California State Auditor Report 2013-109 65 March 2014 17 10 66 California State Auditor Report 2013-109 March 2014 California State Auditor Report 2013-109 67 March 2014 Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM THE OFFICE OF RATEPAYER ADVOCATES OF THE CALIFORNIA PUBLIC UTILITIES COMMISSION To provide clarity and perspective, we are commenting on the response to our audit report from the Office of Ratepayer Advocates (Ratepayer Advocates) of the California Public Utilities Commission (commission). The numbers below correspond with the numbers we have placed in the margin of Ratepayer Advocates’ response. As part of our quality control process, our standard practice is to 1 provide agencies five working days—the agency review period— to review and comment on a draft copy of the report. During this time, we encourage agencies to discuss with us any concerns with the report, including any factual issues or word choices they may identify. In keeping with this practice, we provided copies of the draft report for Ratepayer Advocates staff to read at the exit conference on January 23, 2014. Further, during the agency review period, we contacted Ratepayer Advocates’ acting director or senior manager on three occasions and offered to discuss any concerns that the Ratepayer Advocates may have had; yet, Ratepayer Advocates did not accept our offers. In contrast, we had several conversations with the commission during the agency review period and, as appropriate, incorporated the commission’s feedback into our final report. We are aware that utilities may request recovery of certain costs 2 in proceedings other than the general rate case proceeding (general rate case). However, we focused on the general rate case proceedings because the commission indicated that the majority of utility costs are examined and most of the balancing accounts are authorized during general rate case proceedings. This is an issue that we would have expected Ratepayer Advocates 3 to let us know about during the agency review period. To address Ratepayers Advocates’ concern that our statement was too broad, we added the phrase “for certain activities” to the sentence on page 1. This is an issue that we would have expected Ratepayer Advocates 4 to let us know about during the agency review period. Based on discussions with the commission during the agency review period, we had already revised the text on page 1 to reflect the change that Ratepayer Advocates is suggesting. 68 California State Auditor Report 2013-109 March 2014 5 Ratepayer Advocates misunderstands the purpose of our Report Summary, which provides a high‑level overview of the key issues in our report, but is not intended to restate every issue. In this instance, we are discussing our concern with the commission’s reliance on Ratepayer Advocates for the review of balancing accounts of energy utilities. Later, in the Introduction, we discuss Ratepayer Advocates’ oversight of balancing accounts of water utilities in Table 1 on page 11 and in the text on page 10. 6 Ratepayer Advocates misses the point of our concerns with its practices for reviewing balancing accounts. As we show in Table 3 on page 17, Ratepayer Advocates’ level of review varied considerably among the six largest energy utilities. Specifically, although it reviewed 94 percent of the value of Southern California Edison’s (Edison) balancing accounts, it reviewed a substantially lower percentage of the value of the balancing accounts for the other five large energy utilities—between 27 percent and 79 percent. Further, as we show in Table 4 on page 18, the value of the three largest balancing accounts that Ratepayer Advocates did not review for the six large energy utilities totaled more than $25 billion, which could have a significant impact on the future rates that utilities charge ratepayers. 7 Throughout its response, Ratepayer Advocates refers to the procedures it performs on balancing accounts as “audits.” However, as noted in the footnote at the bottom of Table 2 beginning on page 12 of our report, we refer to these procedures as “reviews” because the procedures it performs do not constitute a complete audit under audit standards. 8 Ratepayer Advocates misinterprets our finding. While Ratepayer Advocates analysts’ written testimonies may undergo reviews by supervisors and management, as we state on page 24, its supervisors do not examine the work supporting these testimonies to ensure analysts perform all planned procedures appropriately and that any proposed reductions in recovery amounts are accurate. In fact, we found no evidence of documented supervisory approval of the analysts’ work for any of the 18 reviews we tested. Moreover, as discussed on page 22 and as shown in Table 5 on page 23, 16 of these 18 reviews of balancing accounts lacked adequate documentation to demonstrate the work that Ratepayer Advocates’ analysts performed, was not created by an analyst, or was not available for our review because it had been discarded. 9 Ratepayer Advocates’ statement is erroneous as our report does not include a finding of “no errors in 9 years of [Ratepayer Advocates] audits.” To the contrary, we noted a pervasive lack of documentation and supervisory approval for the 18 reviews that we tested, as shown in Table 5 on page 23 and discussed California State Auditor Report 2013-109 69 March 2014 on pages 21 through 25. Moreover, as Table 2 beginning on page 12 indicates, we limited our testing of these reviews to fiscal years 2010–11 through 2012–13. Contrary to Ratepayer Advocates’ assertion of using a “risk 10 based approach,” it was unable to provide us with any evidence of this approach—such as a written policy or methodology, or contemporaneous documentation of its reasons for determining which balancing accounts are most significant to its mission. In fact, a senior manager within Ratepayer Advocates confirmed for us that no written policy existed and that Ratepayer Advocates produces no documentation from the periodic meetings it holds to discuss the selection of balancing accounts to review. Lacking this documentation, we are unable to evaluate or verify Ratepayer Advocates’ claims of employing a risk‑based approach to determine the accounts or areas of accounts on which to focus its efforts. We are aware that California Public Utilities Code, Section 792.5, 11 as it currently reads, requires balancing accounts to be established to track pass‑through costs. However, the commission also authorizes utilities to establish balancing accounts to track other costs and, as we state on pages 10 and 15 of the report, other than a requirement to semiannually review the Energy Resource Recovery Accounts, there is no specific requirement related to reviewing balancing accounts of any other type. Therefore, we stand by our recommendation that the Legislature amend this section to require the commission to develop a risk‑based approach to reviewing balancing accounts. Nevertheless, we added the word “all” to our recommendations on pages 3 and 30 to clarify that the risk‑based approach should be used to review all balancing accounts. This is an issue that we would have expected Ratepayer Advocates 12 to let us know about during the agency review period. To clarify the nature of interveners, we added “businesses” and “special interests” to the description on page 7. This is an issue that we would have expected Ratepayer Advocates 13 to let us know about during the agency review period. To clarify that not all costs within each cost component are tracked in a balancing account we added the text “certain activities” in the top section of Figure 2 on page 7. In preparing Figure 2, we worked with the commission during the audit to ensure that it accurately reflected all information. However, after reviewing Ratepayer Advocates’ response, we again reached out to the commission to ensure the figure’s accuracy. Upon further discussion, the commission agreed with Ratepayer Advocates’ assertion that capital costs are not tracked using balancing accounts. We revised the figure to reflect that fact. However, based on discussions with 70 California State Auditor Report 2013-109 March 2014 the commission, other than these two changes, we believe that the remainder of the information in Figure 2 is accurate, thus we did not make the other changes that Ratepayer Advocates suggests. 14 This is an issue that we would have expected Ratepayer Advocates to let us know about during the agency review period. Based on our discussions with the commission during the agency review period, we had already revised the text on page 8 to clarify that utilities recoup or refund the difference between the interim and final rate from ratepayers after the commission has authorized the final rate. 15 Ratepayer Advocates misunderstands our finding. We do not cite generally accepted accounting principles as a reason to properly document and have supervisors approve balancing account reviews. Rather, as we state on page 25, considering that 16 of the 18 reviews we selected lacked adequate documentation, Ratepayer Advocates cannot be certain that the reviews that analysts performed were adequate and complete. 16 We commend Ratepayer Advocates for beginning the process to establish a standardized log to document supervisory approval of analysts’ reviews. However, as part of its supervisors’ approval, Ratepayer Advocates will also need to ensure that analysts actually prepare appropriate documentation of their reviews. Moreover, although Ratepayer Advocates asserts that “all [Ratepayer Advocates] reviews must be approved by [a] supervisor,” as we note on page 24, none of the 18 reviews we tested had evidence of a supervisory approval. 17 Ratepayer Advocates confuses its final product—the written testimony—with documentation of the procedures that analysts complete when performing a balancing account review. While Ratepayer Advocates provided us with the testimonies related to the 18 balancing account reviews we tested, including the three balancing accounts it specifically mentions, it was unable to provide us with the analysts’ original work used in compiling those testimonies. In fact, on December 17, 2013, a Ratepayer Advocates senior manager confirmed in writing to us that analysts created no documentation for the three reviews. Further, in response to our request for this documentation, because it allows staff to keep their workpapers at their discretion, Ratepayer Advocates generally told us to directly contact analysts who performed the 18 reviews. California State Auditor Report 2013-109 71 March 2014 cc: Members of the Legislature Office of the Lieutenant Governor Little Hoover Commission Department of Finance Attorney General State Controller State Treasurer Legislative Analyst Senate Office of Research California Research Bureau Capitol Press