CSA
Recommendations
Read the report at California State Auditor ↗
September 2016
California Public
Utilities Commission
It Should Reform Its Rules to Increase Transparency
and Accountability, and Its Contracting Practices Do
Not Align With Requirements or Best Practices
Report 2016-104
COMMITMENT
INTEGRITY
LEADERSHIP
CALIFORNIA STATE AUDITOR
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Elaine M. Howle State Auditor
Doug Cordiner Chief Deputy
September 22, 2016 2016-104
Th e 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 (CPUC)
contracting practices and the contracts that the CPUC ordered four energy utilities to
enter into. In addition to entering into its own contracts for services, the CPUC has
broad authority to direct utilities to enter into contracts, which it orders through
public proceedings.
Th is report concludes that to increase the transparency and accountability of its
contracting directives, the CPUC must change the rules that govern the circumstances in
which commissioners can participate in its proceedings and the entities and individuals
who must report private communications about those proceedings. In our audit, we found
that a commissioner—the then-president of the CPUC—participated in approving a
152 million contract despite evidence that suggested that he was unable to act impartially
towards a ratepayer advocate group’s request to deny the contract. Further, we found
that private communications about a 25 million contract were not reported because the
CPUC does not require commissioners to disclose when they have engaged in private
discussions about the CPUC’s public proceedings. We also found that the CPUC often
does not follow state requirements or best practices when it issues and oversees its own
contracts for services. Th is includes a failure to conduct market research to ensure that it
obtains the best value in cases where competitive bidding is not required.
We recommend that the Legislature require the CPUC to adopt new standards requiring
commissioners to recuse themselves if their impartiality is reasonably questioned and to
report the content of private communications they hold related to CPUC proceedings.
We also recommend that the CPUC change the way it oversees its own contracts to ensure
that it receives the best value when it contracts out for services.
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
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CALIFORNIA STATE AUDITOR | Report 2016-104 v
September 2016
CONTENTS
Summary 1
Introduction 3
The CPUC Has Not Eff ectively Guarded Against the Appearance of
Improper Infl uence in Its Public Decision Making 9
The CPUC Has Failed to Fully Disclose Important Communications
Between Commissioners and External Parties 15
The CPUC’s Contracting Activity Has Not Been Consistent With
State Requirements or Best Practices 23
Other Areas We Reviewed 39
Scope and Methodology 43
Appendix
The CPUC’s Oversight of Energy Utility Contracts 51
Response to the Audit
California Public Utilities Commission 53
California State Auditor’s Comments on the Response From
the California Public Utilities Commission 57
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CALIFORNIA STATE AUDITOR | Report 2016-104 1
September 2016
SUMMARY
Th e California Public Utilities Commission (CPUC) is a state entity that is subject to
the contracting requirements in state law and the State Contracting Manual. In addition
to entering into its own contracts, it has the authority to direct the utility companies
it regulates to enter into contracts, and it also approves or denies contracts these
utilities propose. For this audit, we reviewed the CPUC’s actions related to both its own
contracting and the energy utility contracting that it oversaw from 2010 through 2015.
Th is report draws the following conclusions:
The CPUC has not eff ectively guarded against the appearance of
improper infl uence in its public decision making. Page
Th e CPUC directed utilities to enter into sole-source contracts, for a
cumulative total of about 74 million, with a vendor who volunteered to
run a statewide outreach program. Because the CPUC did not adequately
explain how it knew the vendor would provide the best value for
ratepayers, its decision appears infl uenced by the vendor. In another case,
the then-president (former president) of the CPUC voted to approve a
152 million contract despite evidence suggesting that he had discussed
the contract with the utilities before they submitted it for approval.
The CPUC has failed to fully disclose important communications
between commissioners and external parties. Page
Th e former president of the CPUC failed to ensure that the public
knew about communications he had with Southern California Edison
and the University of California. Th ese unreported communications
have cast doubt on whether a multibillion-dollar settlement protects
ratepayers and on the appropriateness of the CPUC’s selection of the
University of California for a 25 million contract.
The CPUC’s contracting activity has not been consistent with state
requirements or best practices. Page
We found numerous defi ciencies in the CPUC’s approach to contracting,
including a lack of market research in 24 cases in which contracts were
not competitively bid, 2.4 million in unexplained additional contract
funding, and an absence of evidence that the CPUC monitored
contractor performance in nearly one-third of the contracts we reviewed.
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September 2016
In addition, we reviewed the CPUC’s approval of sole-source
contracts that energy utilities proposed, its response to California
Public Records Act requests related to contracts, and potential
confl icts of interest related to the CPUC’s and utilities’ contracts.
In some of these areas, we found that the CPUC could improve its
processes, and we have made recommendations that are discussed
in the Other Areas We Reviewed section of this report beginning on
page 39.
Summary of Recommendations
Legislature
Th e Legislature should amend state law to require the CPUC to
adopt a new standard for commissioners to recuse themselves from
proceedings when their impartiality is reasonably questioned and
to adopt new rules that require commissioners to publicly report
private communications with any parties to its proceedings.
CPUC
To ensure that the choice of a vendor is suffi ciently justifi ed, the
CPUC should explain how a particular vendor was chosen in any
case for which it does not competitively select the vendor with
which it directs utilities to contract.
To address several defi ciencies in its contracting practices, the
CPUC should update its contracting manual, conduct a supervisory
review of contracts, and require regular training for contract staff .
Agency Comments
Th e CPUC agreed with most of the recommendations we made.
It disagreed with a recommendation to explicitly require parties
to disclose their interest in CPUC proceedings because it believes
such a requirement is redundant.
CALIFORNIA STATE AUDITOR | Report 2016-104 3
September 2016
INTRODUCTION
Background
Th e mission of the CPUC is to serve the public interest by protecting consumers and
ensuring the provision of safe, reliable utility service and infrastructure at reasonable rates,
with a commitment to enhancing the environment and promoting a healthy California
economy. Th e CPUC was established by a constitutional amendment and has broad
regulatory authority over privately owned electric, natural gas, telecommunications,
water, railroad, rail transit, and passenger transportation companies. Th e CPUC consists
of fi ve commissioners who are appointed by the Governor and approved by the Senate.
It employs a supporting staff and is funded by fees imposed on the public utilities it
regulates. Its staff is organized into an administrative division as well as divisions for
each subject matter the CPUC regulates. Th is audit focused on the CPUC’s practices
for contracting for consultant services and the contracting that the CPUC directs or
approves for four energy utilities—Pacifi c Gas and Electric, San Diego Gas and Electric,
Southern California Edison, and Southern California Gas—to enter into.1
State Contracting Requirements and the CPUC’s Contracting Practices
Each state agency is responsible for its own contracting program. Th ese responsibilities
include ensuring the necessity of services, securing appropriate funding, complying
with laws and policies, writing contracts in a manner that safeguards the State’s interest,
and obtaining required approvals, including approvals from the Department of General
Services (General Services). General Services serves as a business manager for the State.
It maintains the State Contracting Manual. Th e State Contracting Manual provides
policies, procedures, and guidelines to promote sound business decisions and practices in
securing necessary services for the State, and it includes guidance regarding contracting
requirements found in state law as a resource for persons involved in the State’s
contracting process.
Table 1
Dollar Threshold for Competitive Bidding and Department of General Services’ Approval for
California Public Utilities Commission Contracts
CONTRACT VALUE COMPETITIVE BIDDING REQUIRED? GENERAL SERVICES’ APPROVAL REQUIRED?*
Under $5,000 No No
$5,000–$50,000 Yes, but some contracts are exempt† No
$50,001 or higher Yes, but some contracts are exempt† Yes, but some contracts are exempt‡
Source: California State Auditor’s analysis of the State Contracting Manual, Volume 1.
* If an amendment increases a contract’s funding to more than the $50,000 threshold, the amendment is subject to
General Services’ approval.
† Contracts for legal services or expert witness services for litigation, interagency agreements, and emergency contracts are exempt by
statute from competitive bidding requirements regardless of their dollar value.
‡ Some contracts are exempt from General Services’ approval. For example, some contracts are exempt from approval because of
statute or because of exemption letters issued by General Services.
1 Consistent with our audit objectives, our review focused on contracts for services not specifi cally related to information technology, and
this report refers to those agreements as CPUC contracts. We did not review contracts for goods or for information technology services.
4 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
State law and the State Contracting Manual establish baseline
requirements for how agencies must contract for services, and
the CPUC also has internal policies for how it will ensure that its
contracts represent the best possible value. Figure 1 shows the
general process required by state law, by the State Contracting
Manual, and by the CPUC’s policies for contracting for a service.
State law generally requires a competitive bidding process for
service contracts unless the law or General Services’ policies make
these contracts exempt from competition (exempt contracts).
Examples of exempt contracts include contracts for legal services,
expert witness contracts for litigation, interagency agreements, and
emergency contracts; these types of contracts are all exempt from
competitive bidding requirements regardless of their total dollar
value. Although such contracts do not have to be competitively bid,
for almost all types of exempt contracts CPUC policy requires that
CPUC staff conduct a market survey so as to identify the contractor
that will provide the best value.
A contract’s dollar value is also a determining factor in whether
the contract must be competitively bid and approved by General
Services. Table 1 on the previous page shows the cumulative dollar
thresholds at which requirements change for competitive bidding
and General Services’ approval. CPUC contracts valued at more than
50,000, and any amendments to such contracts, generally must
be approved by General Services before the contract or contract
amendment is eff ective. If the CPUC enters into a contract for
50,000 or less and subsequently amends that contract to an amount
above that threshold, it must submit to General Services for approval
the amendment that increased the value to more than 50,000 and
any subsequent amendments. Agencies may use sole-source contracts
to obtain services that would have normally been obtained through
a competitive bidding process if the agency has established that only
one vendor can provide the service the agency needs.2 Th e CPUC’s
policy requires staff to conduct the same type of market survey for
sole-source contracts as staff does for exempt contracts. However,
agencies must obtain approval from General Services in a two-step
process for sole-source contracts that are more than 50,000. Before
an agency can execute a sole-source contract for more than 50,000,
it must fi rst obtain General Services’ approval of the sole-source
procurement and then seek General Services’ approval of the
actual contract.
2 This report refers to what the State Contracting Manual calls noncompetitively bid contracts as
sole-source contracts in order to avoid confusion between noncompetitively bid contracts and
contracts that are exempt from competitive bidding.
CALIFORNIA STATE AUDITOR | Report 2016-104 5
September 2016
Figure 1
Overview of the State’s and the California Public Utilities Commission’s Processes for Obtaining Services Contracts
Identify the need for services.
Determine that the services
cannot feasibly be performed
by civil service employees.
Determine the costs and
availability of funds.
Does state law exempt the contract
NO YES
from competitive bidding?
Are the number of vendors Contracts exempt by statute from competitive
that can provide this service YES bidding include these:
limited to one?
• Legal services contracts
• Expert witness contracts for litigation
• Contracts for less than $5,000
NO • Emergency contracts
Sole-Source Contract: • Interagency agreements
Conduct market survey to
confirm there is only one vendor
Prepare a solicitation, available or qualified to provide
and publicize the the services.
contracting opportunity.
Legal Services Contract: Conduct market survey by
contacting at least five
Obtain written consent
Obtain approval from the potential contractors to
from the Office of the
Evaluate the solicitation executive director for this determine which vendor
Attorney General, unless
response, and determine a procurement method. provides the best value.*
exempted by statute.
winner of the contract.
Obtain approval from the
Announce the results of Department of General Services
the bidding process and (General Services) for this Award contract based on
award the contract. procurement method. market survey results.
Process contract for signature, approval, and distribution.
Contracts for more than $50,000 must be approved by General Services.†
Statewide requirement CPUC-specific requirement
Sources: California State Auditor’s analysis of the State Contracting Manual and the California Public Utilities Commission Policies and Procedures Manual:
Personal Services Consultant Contracts.
* Emergency contracts and interagency agreements do not require a market survey.
† Emergency contracts do not require General Services’ approval before taking eff ect. In addition, some service contracts are exempt from
General Services’ approval, such as contracts that are specifi cally exempt by statute or by an exemption letter issued by General Services.
6 Report 2016-104 | CALIFORNIA STATE AUDITOR
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Th e CPUC is subject to all contracting requirements in state
law and the State Contracting Manual with one exception: state law
allows the CPUC to bypass approval from General Services for
consultant or advisory service contracts if the CPUC makes a
fi nding that extraordinary circumstances exist. State law does
not defi ne extraordinary circumstances or identify a time limit
on this exemption, and we identifi ed no information in state
law that explains why the CPUC is allowed this exemption from
contracting requirements. However, the history of the legislation
that established the exemption indicates that the intent of the
Legislature was to enable the CPUC to hire expert consultants in
major ratesetting proceedings without missing deadlines.
To manage diff erent components of its contracting process, the
CPUC separates contract duties between project managers and
contract analysts. A project manager is the program expert
and overall manager for a CPUC contract. He or she identifi es the
need for the contract or for an amendment to an existing contract
and determines, with the assistance of the contract analyst, the
procurement method the CPUC will use to obtain the service. If
the contract is competitively bid, a team of individuals at the CPUC
collaborates to score bids and chooses a vendor.3 In situations
where the CPUC does not use a competitive bidding process for
a contract, the project manager identifi es and selects the vendor
that will be awarded the contract. Regardless of procurement
method, the project manager is responsible for monitoring the
progress of the work that the contractor performs. Th e CPUC
employs a contract manager and three contract analysts to ensure
that contracts comply with and are administered according to
state requirements from the time that a project manager proposes
the contract through the conclusion of the contract’s terms. Th e
contract analyst advises the project manager on contracting options
as well as policy and procedural requirements, and he or she
serves as the CPUC liaison with General Services.
The CPUC’s Oversight of Energy Utility Contracting
Th e CPUC has broad authority under state law to oversee energy
utilities, including the authority to direct those utilities to contract
with other entities. Generally, the CPUC issues these directions
through its decisions, which are the product of CPUC proceedings.
Th e three categories of formal CPUC proceedings—adjudicatory,
ratesetting, and quasi-legislative—are described in more detail
3 For a certain type of competitively bid contract, the CPUC must award the contract to the vendor
with the lowest bid.
CALIFORNIA STATE AUDITOR | Report 2016-104 7
September 2016
in the text box. At the outset of certain proceedings,
the CPUC issues a scoping memo that describes the Categories of California Public Utilities
scope of issues to be considered in the proceeding. Commission Proceedings
Adjudicatory proceedings: Investigate possible violations
Interested persons and entities may formally
of state law, a CPUC order or rule, or both—as well as
participate in CPUC proceedings by becoming a
complaints against regulated entities—except those that
party to the proceeding. Contractors interested in
challenge the reasonableness of rates. Can be initiated by
CPUC-directed contracts are not prohibited from
the CPUC for enforcement purposes or when a consumer
becoming parties to CPUC proceedings. Parties
or entity fi les a complaint.
must adhere to certain rules, such as those related
Ratesetting proceedings: Set or investigate rates for
to communications between parties and decision
utilities. Can be initiated by a regulated entity that fi les an
makers. As a party, a person or organization can
application, by those challenging the reasonableness of
present evidence and witnesses, obtain information
rates or charges, or by the CPUC to establish a mechanism
from other parties, and submit relevant motions,
that in turn sets rates.
petitions, objections, and briefs to the CPUC. Th is
Quasi-legislative proceedings: Establish policy or rules
participation can aff ect the eventual decisions that
aff ecting a class of regulated entities. Can be initiated by
the CPUC makes as a result of its proceedings.
legislation, petition, or by the CPUC.
For example, parties can advance arguments
either for or against contract awards. However, Sources: California State Auditor’s analysis of California Code
of Regulations, title 20, section 1.3 and a CPUC presentation
because the ultimate decision-making authority
regarding CPUC decision making dated March 23, 2016.
rests with the commissioners, no confl ict of interest
can be attributed to decision makers by having
contractors participating and advocating for their
own interests.
After a comment or hearing process, the CPUC issues a proposed
decision based on the evidence presented. Parties and the public are
given an opportunity to review and comment on the proposed decision
and, after this comment period closes, the CPUC commissioners vote
on whether to approve a fi nal version of the proposed decision. CPUC
decisions generally include a discussion of the arguments or comments
the parties submitted to the proceeding. Th ese decisions may include
orders that direct energy utilities to contract with third parties or
approve contracts that the utilities propose.
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CALIFORNIA STATE AUDITOR | Report 2016-104 9
September 2016
The CPUC Has Not Eff ectively Guarded
Against the Appearance of Improper Infl uence
in Its Public Decision Making
Key Points:
• Although the CPUC can direct utilities to contract with specifi c vendors, it did
not adequately support one decision to do so. As a result, it appears that the
choice of that contractor was inappropriately infl uenced by the contractor’s
participation in the CPUC proceeding.
• Th e standard that the CPUC applies to questions of bias in decision making
makes it more diffi cult in California than it is in other states to disqualify a
commissioner from participating in decision making. Because of this standard,
the CPUC allowed one of its commissioners to participate in a decision when
there was evidence that reasonably suggested he had been infl uenced by
off -the-record conversations with utilities.
The CPUC’s Direction of Sole-Source Contracts
Th e CPUC directs energy utilities to enter into contracts with third-party vendors,
and this direction generally comes from CPUC decisions. In many cases, before the
CPUC issues a decision, it holds related proceedings. We asked the energy utilities
to report the number of contracts the CPUC directed them to enter into from 2010
through 2015 and the method the CPUC used to order each contract. Using the
information the energy utilities reported to us, we determined that the CPUC ordered
a total of 25 contracts. Table 2 shows the distribution of contracts among the diff erent
utilities. We reviewed 18 of these contracts and found that all but two were funded
through ratepayer funds. For 12 of the 18 contracts, the CPUC named the specifi c
entities with which the utilities were required to contract. We reviewed the CPUC
decisions or other actions that led to all 18 contracts and found that for eight contracts,
the entities that received contracts formally participated in the related proceedings.
Table 2
Total Number of Contracts the California Public Utilities Commission Directed Energy Utilities to
Enter Into From 2010 Through 2015
UTILITY NUMBER OF CONTRACTS
Pacifi c Gas and Electric 8
San Diego Gas and Electric 6
Southern California Edison 4
Southern California Gas 7
Total 25
Sources: California State Auditor’s analysis of information provided by Pacifi c Gas and Electric, San Diego Gas and Electric,
Southern California Edison, and Southern California Gas.
Note: In some instances, the CPUC directed multiple energy utilities to enter into a joint contract. For these cases, this table
includes the contract under the name of the utility that we determined, through review of CPUC decisions and contract
documents, was the lead entity in the contract.
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In one of those eight instances, a participating entity off ered to
administer a program and appeared to infl uence the CPUC decision
to award the contract to that entity despite opposition from other
interested parties. In an October 2011 ruling, the CPUC asked
parties how a statewide outreach program for energy effi ciency
should be administered. Th e four energy utilities commented
that they should collectively administer the outreach program. In
contrast, a San Diego-based nonprofi t entity—the California Center
for Sustainable Energy (Center)—commented that a network of
local energy nonprofi ts should share ownership of the energy
effi ciency outreach program. Th e Center then suggested that
because of its experience, it should act as the coordinating entity for
that network.
Th e CPUC appeared to fi nd the Center’s suggestion persuasive.
In March 2012—four months after the Center’s comments—the
CPUC released a proposed decision stating that it was intrigued by
the suggestion and that the Center had the experience and vision to
execute the statewide campaign. Th e proposed decision indicated
that the CPUC planned to direct the energy utilities to enter into a
contract with the Center to administer the program. In response to
this proposed decision, the energy utilities all submitted comments
stating that a competitive bidding process should be used to
select the outreach program’s administrator. San Diego Gas and
Electric and Southern California Gas jointly commented that there
was no proof that the Center had the experience to execute the
statewide campaign.
Despite the objections from all four energy utilities, the CPUC’s
fi nal decision directed the utilities to enter into a sole-source
contract with the Center to administer the outreach program.
Th is contract was budgeted at about 3.8 million for 2012. Th e
CPUC’s fi nal decision explained that although it prefers to conduct
competitive solicitations, competition was not required. Th e CPUC
further specifi ed that the Center would select any subcontractors
through a competitive process, that time was of the essence, and
that the CPUC was not aware of any organization similar to the
Center in the State.
Nonetheless, the CPUC could have better justifi ed its choice of the
contractor and avoided the appearance of improper infl uence. As
it did in this case, the CPUC has the authority to direct utilities to
contract with a specifi c entity, and it is not required to choose that
entity through a competitive process. However, when it does not
select a vendor competitively, the CPUC is directing contracts that
are similar in nature to the sole-source contracts that state agencies
may choose to enter into. General Services requires agencies to
justify a sole-source contract by explaining how they determined
that no other vendor could meet the business need. In the case of
CALIFORNIA STATE AUDITOR | Report 2016-104 11
September 2016
the contract for program administration, the CPUC decision to
direct the contract to a specifi c entity would have been justifi ed had
the CPUC provided such an explanation. Th is is especially true given
that the entity ultimately awarded the contract was the one that
proposed the idea for establishing the contract in the fi rst place.
Without an explanation to support its decision, the CPUC risked
appearing improperly infl uenced by the Center’s participation in the
proceeding. Further, it did not consider other vendors that may have
provided better value before directing the energy utilities to contract
with this vendor using ratepayer funds.
Although one commissioner concurred with the decision that
directed the contract for the outreach program, he wrote that he was
deeply troubled that the CPUC awarded the contract to the Center
without competitive solicitation. In his view, awarding the contract
in this way suggested that the CPUC considers itself above the rules
it imposes on others. In this respect, the commissioner stated, the
decision was crucially defi cient. Subsequent CPUC decisions also
demonstrate the prolonged eff ect of this sole-source selection:
after the CPUC chose the Center for the 3.8 million contract, it
continued to direct the utilities to contract with the Center as the
outreach program administrator.
One commissioner was deeply troubled
that the CPUC awarded the contract to the
Center without competitive solicitation.
According to information provided to us by Pacifi c Gas and
Electric, the lead utility responsible for contracting with the Center,
the cumulative contract value the Center received because of the
CPUC’s sole-source selection was about 74 million through 2016.
In March 2016, the CPUC issued a decision that ordered its staff to
lead a competitive solicitation to determine the entity that should
administer the program beginning in October 2016.
In the remaining seven instances in which contractors formally
participated in proceedings related to the decisions in which they
received contracts, we found no evidence that the participation
improperly infl uenced the CPUC. Th is absence of inappropriate
infl uence was true even though contractors sometimes advocated
or suggested outcomes that would fi nancially benefi t themselves.
For example, in one instance, a contractor suggested that the
contract it held to administer a solar energy program should not
be reopened for bidding when it expired. Instead, the contractor
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September 2016
argued that it should be directly awarded the new contract
for program administration. A signifi cant number of other
participants—including those with competing interests, such
as other nonprofi t entities and the energy utilities—supported
the contractor’s position that it should remain as program
administrator and that the CPUC should not reopen the contract
for competitive bidding because they believed the contractor was
administering the program well. Th e CPUC agreed and awarded the
new contract directly to this entity.
Standard for Recusal of a Commissioner
In addition to directing contracts, the CPUC also approves contracts
that utilities propose. We found that the CPUC can improve its
rules concerning when its commissioners can participate in those
approval decisions. We reviewed a selection of 20 sole-source
contracts that the energy utilities submitted to the CPUC for
approval. One of those contracts was submitted in July 2011
by Pacifi c Gas and Electric, San Diego Gas and Electric, and
Southern California Edison as a joint application for a 152 million
research and development agreement with Lawrence Livermore
National Laboratory (Lawrence Livermore). In March 2012, Th e
Utility Reform Network (TURN), a utility consumer advocacy
organization, requested that the CPUC prohibit the then-president
(former president) of the CPUC from participating in the CPUC
decision about that application. TURN argued that the former
president could not participate in the CPUC proceeding in an
unbiased manner because he had engaged in discussions about the
contract before the utilities submitted their application.
In an attachment to its request, TURN submitted emails that had
been sent to and from the former president of the CPUC and
representatives of Pacifi c Gas and Electric, Lawrence Livermore,
and an energy sector consultant during the year before the utilities
submitted their application. Th e content of these emails strongly
suggests that the former president of the CPUC participated
in early discussions regarding the research and development
agreement, made multiple inquiries about the agreement’s status,
and saw a draft version of the agreement before the utilities
submitted it to the CPUC. Even after the utilities submitted the
application, the former president of the CPUC continued to inquire
about the status of the agreement. In its request, TURN noted that
the emails showed that the former president played a signifi cant
role in the development of the application. It concluded that given
the actions he took to initiate and foster the agreement, the only
reasonable conclusion would be that the former president was
unable to act in an unbiased manner towards TURN’s proposal that
the CPUC reject the agreement.
CALIFORNIA STATE AUDITOR | Report 2016-104 13
September 2016
However, the CPUC standard for recusal of a commissioner from
a proceeding requires more than the appearance of bias. Instead
of considering whether there is an appearance of bias, the CPUC
considers whether the evidence clearly and convincingly shows that
a commissioner has an unalterably closed state of mind regarding
the matter the CPUC is considering. Accordingly, in the same
decision in which it approved the proposed contract, the CPUC
dismissed TURN’s request to remove the former president from the
proceeding. Th e former president participated in the CPUC decision,
which held that TURN had not presented convincing evidence that
he had an unalterable state of mind and that TURN’s conclusions had
no basis in fact.
Th e CPUC standard is a more diffi cult standard for parties to
challenge than the standards used by other states’ public utilities
commissions, and it does not demonstrate a commitment by
the CPUC to avoid apparent bias. For example, the standards
of conduct for commissioners of the Public Utility Commission of
Texas state that a commissioner must remove himself or herself
from a proceeding if the commissioner’s impartiality has been
reasonably questioned.
The CPUC standard does not demonstrate
a commitment by the CPUC to avoid
apparent bias.
Additionally, the standard for CPUC commissioners is a more
diffi cult standard for parties to challenge than the standard for
disqualifi cation of CPUC administrative law judges. According to
the chief administrative law judge at the CPUC, when the CPUC
determines whether an assigned administrative law judge has bias, it
assesses whether a person who is aware of the facts may reasonably
entertain doubt as to whether the judge would be able to act
impartially. In the Lawrence Livermore proceeding, TURN submitted
an argument and evidence that could lead a reasonable person to
doubt the former president of the CPUC’s ability to review TURN’s
position in an impartial manner. If standards similar to those of other
agencies had been in place at the CPUC, TURN’s argument would
likely have resulted in the former president’s having to recuse himself
from the proceeding. Instead, by dismissing TURN’s request, the
CPUC allowed a commissioner—in this case, the former president—
to participate in a decision when there was evidence that reasonably
suggested he had been infl uenced by off -the-record conversations
with utilities.
14 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Recommendations
Legislature
Th e Legislature should amend state law to direct the CPUC to adopt
a standard that requires commissioners to recuse themselves from
proceedings if a person who is aware of the facts may reasonably
question whether a commissioner is able to act impartially.
CPUC
To ensure that the choice of a vendor is suffi ciently justifi ed and
that the vendor represents the best value, the CPUC should explain
in its fi nal decision how the vendor was the most qualifi ed in all
cases when the CPUC does not competitively select the vendor it
directs utilities to contract with.
CALIFORNIA STATE AUDITOR | Report 2016-104 15
September 2016
The CPUC Has Failed to Fully Disclose Important
Communications Between Commissioners and
External Parties
Key Points:
• CPUC rules do not require commissioners to report private communications with
parties to CPUC proceedings. Th ese rules do not align with best practices and have
resulted in conversations concerning a critical CPUC proceeding to go unreported.
• Th e former president of the CPUC participated in private conversations related
to the San Onofre Nuclear Generating Station (SONGS) decommissioning
settlement but was not required to make those conversations a matter of public
record. After the CPUC approved the settlement agreement, others disclosed that
these conversations had occurred, which led to questions about the integrity of
the settlement.
• Commissioners received 19 international trips funded by nonprofi t organizations
from 2010 through 2015. Six of these trips were paid for by a nonprofi t with strong
ties to entities that the CPUC regulates or fi nancially aff ects through its decisions.
Ex Parte Communications
Th e former president of the CPUC engaged in private discussions that were not disclosed
in a timely manner and that have cast doubt on a key CPUC decision. Th ese occurrences
demonstrate a need for changes in the way such conversations are disclosed to the public.
As discussed earlier, the energy utilities reported that the CPUC directed them to enter
into 25 contracts from 2010 through 2015.
One of those was a 25 million joint contract
between Southern California Edison, San Diego Rules for Ex Parte Communications For
Gas and Electric, and the University of Each Category of California Public Utilities
California as part of a multibillion-dollar Commission Proceeding
settlement agreement regarding the closing of
Adjudicatory proceedings: Ex parte communications
SONGS. Th e settlement provided consumer
are prohibited.
refunds and credits because of the premature
shutdown of SONGS, and it directed the Ratesetting proceedings: Ex parte communications are
permitted with restrictions, and interested persons must
development of a research program with
disclose the contents of their communications but not
the University of California to reduce emissions
those of the CPUC decision maker.
at current and future power plants. Th e CPUC
approved this settlement agreement in 2014, Quasi-legislative proceedings: Ex parte communications are
but the agreement has been the subject of allowed without restriction or reporting requirement.
widespread media attention because of
Sources: California State Auditor’s analysis of Public Utilities Code,
undisclosed negotiations between the former sections 1701.2, 1701.3, and 1701.4 as well as California Code of
Regulations, title 20, sections 8.3 and 8.4.
president of the CPUC and an executive from
Southern California Edison that occurred
during a trip they both took to Poland in 2013.
16 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Multiple news outlets later reported that while on the trip, the
former president and the executive from Southern California Edison
privately discussed the details of the agreement, which was active
business before the CPUC at the time of the trip.
CPUC rules govern under what circumstances such
communications, known as ex parte communications, are allowed
and who is responsible for disclosing them. CPUC regulations
defi ne ex parte communication as a written or oral communication
between an interested person and a CPUC decision maker
concerning any substantive issue in a formal proceeding before
the CPUC that does not occur in a public forum or on the
record of the proceeding. As discussed in the Introduction,
there are three diff erent categories of CPUC proceedings. Each
of these categories of proceedings has diff erent rules regarding
ex parte communications, which are shown in the text box on the
previous page. Interested parties in a ratesetting proceeding are
required to report ex parte communications regardless of who
initiated the communication, and these reports must describe the
communications the interested party makes and their content but
not those made by the CPUC decision maker.
Because the SONGS settlement resulted from a ratesetting
proceeding, under CPUC disclosure rules Southern California
Edison, not the former president of the CPUC, was required to
disclose within three working days the communication its executive
had in Poland with the former president.
Interested parties in a ratesetting
proceeding are required to report some
ex parte communications regardless of
who initiated the communication.
However, the utility did not fi le a timely disclosure of the
conversation; instead, Southern California Edison fi led its notice of
ex parte communication almost two years after the conversation
took place and three months after the CPUC approved the SONGS
settlement agreement. In its notice of ex parte communication,
Southern California Edison indicated that it was the former CPUC
president who had initiated the conversation about SONGS while
on the trip to Poland.
CALIFORNIA STATE AUDITOR | Report 2016-104 17
September 2016
Th is conversation was not the only private discussion the former
president had that went undisclosed until after the CPUC
had already approved the SONGS settlement. According to a
disclosure that the University of California fi led more than a year
late, the former president of the CPUC also engaged in several
communications with representatives of the University of California
about the 25 million contract that, with later modifi cations,
became part of the settlement agreement. Th e University of
California submitted email records showing that the former
president reviewed a proposal for the contract arrangement and
relayed comments he had received from Southern California Edison
on the proposal. Th e disclosure also mentions that the former
president and a University of California representative had
discussed the proposal during a trip to Spain in May 2014.
Th e fact that these conversations were not disclosed before the CPUC
issued its decision on the SONGS settlement also casts doubt on how
well the settlement protects ratepayers and on the selection of the
University of California as the recipient of the 25 million contract
as part of the settlement. After the ex parte communication from
the trip to Poland was disclosed, the CPUC’s independent consumer
advocate questioned the integrity of the SONGS settlement, stating
that the Poland conversation may have impaired the advocate’s ability
to negotiate on behalf of ratepayers. One news outlet reported that a
lawyer who analyzed notes from the Poland meeting believed that the
private discussions allowed Southern California Edison to strengthen
its negotiating stance, which may have cost customers as much as
1.3 billion. In May 2016, the CPUC reopened the record of the
proceeding to reassess the settlement. Th e California State University
fi led a motion to become a party to the reopened proceeding and
stated that it will contend that the University of California should not
be the sole recipient of the 25 million contract.
Th ese criticisms of the SONGS decision might have been
avoided if the former president of the CPUC had ensured that
the public was promptly made aware of his conversations with
Southern California Edison and the University of California.
Although Southern California Edison and the University of
California disclosed these ex parte communications months after
the settlement was approved, the former president of the CPUC
was an integral participant in these conversations and could have
made them a matter of public record before the CPUC approved
the settlement agreement. Instead, he voted to approve the SONGS
settlement without disclosing the conversations.
18 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
CPUC disclosure rules are not aligned with best practices because
they do not require CPUC decision makers to take responsibility for
disclosing ex parte communications. In 2014 the CPUC contracted
with a consultant to recommend ways the CPUC could guard against
future inappropriate contact between CPUC employees and entities
that are parties to CPUC proceedings. In its resulting report issued
in June 2015, the consultant observed that it is common practice
among agencies similar to the CPUC to require the agency decision
maker or both the agency decision maker and the interested party to
disclose ex parte communications. Th e consultant’s report also noted
that unlike the CPUC, most agencies it reviewed require disclosure of
the agency decision maker’s statements, or at least disclosure of any
response to the ex parte communication, and that only the CPUC
specifi cally exempts decision makers’ statements from disclosure.
If the CPUC had disclosure requirements similar to those of
other agencies, ex parte communications would be disclosed
comprehensively, and the CPUC’s decision-making process
would be more transparent and its decision makers would be
more accountable. For example, the disclosure of the ex parte
communications with the University of California would have
provided crucial context on how the university was chosen to
receive the 25 million contract as part of the SONGS settlement.
Gifts of International Travel
Th e two examples of ex parte communications discussed in this
section both took place while the former president of the CPUC
was on international trips. Such travel is not uncommon among
CPUC commissioners. We reviewed the economic interest
disclosures for commissioners who served from 2010 through 2015,
and of the 11 commissioners who served during this period,
seven disclosed that they went on international trips that were
gifts from nonprofi t organizations. Th ese seven commissioners
participated in 19 international trips from 2010 through 2015
that totaled more than 150,000 in value. Figure 2 shows the
destinations of these trips. Th e Political Reform Act of 1974, which
is a foundational component of the State’s confl ict-of-interest
requirements, allows for reimbursements for travel expenses
reasonably related to a governmental purpose that certain
nonprofi ts provide to state offi cials. According to information the
commissioners reported, all of the trips they took were allowed
under these rules because they were gifts from qualifi ed nonprofi ts.
CALIFORNIA STATE AUDITOR | Report 2016-104 19
September 2016
Figure 2
The Number of Times Nonprofi ts Funded International Trips for Commissioners From 2010 Through 2015
SWEDEN*
2 CHINA JAPAN
1 1
BELGIUM GERMANY
1 2
PHILIPPINES
POLAND 1
IRELAND/U.K. 1
1
CZECH
REPUBLIC*
SPAIN
2 + 1 AUSTRALIA
4
ITALY
2
Sources: California State Auditor’s analysis of commissioners’ 2010 through 2015 economic interest disclosures and the membership roster of the
California Foundation on the Environment and the Economy (CFEE).
= Number of trips funded by CFEE, a nonprofi t with a signifi cant number of board members who are employees of entities that are regulated by, or
have fi nancial interest in, CPUC proceedings.
= Number of trips funded by other nonprofi ts.
* One trip to Sweden also involved the commissioner’s traveling to the Czech Republic.
However, one of these nonprofi ts, the California Foundation on the
Environment and the Economy, which paid for six of the 19 trips,
including the Poland trip mentioned previously, has a signifi cant
number of board members who are employees of entities that had a
fi nancial interest in CPUC proceedings, including some individuals
who represent energy utilities the CPUC regulates. Figure 3 on
the following page shows some of the entities with employees who
are board members of this nonprofi t and how they are connected
to the CPUC. Information about the board membership for the
nonprofi ts that paid for the other trips was unavailable online, or
the nonprofi ts’ websites did not list any board members who were
employees of regulated entities or entities with a fi nancial interest
in CPUC proceedings. However, it is possible that nonpublic
information about these nonprofi ts would show a close tie to utilities
or to other entities with a fi nancial interest in CPUC proceedings.
20 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Figure 3
Members of the California Foundation on the Environment and the Economy That Have Had a Financial Interest in
California Public Utilities Commission Proceedings
CALIFORNIA FOUNDATION ON THE
ENVIRONMENT AND THE ECONOMY
BOARD MEMBERS
REGULATED TELECOMMUNICATIONS
ENERGY UTILITIES WATER ENTITIES COMPANIES
Edison International* California-American Water Company AT&T California
Pacific Gas and Electric California Water Service Group Comcast Cable
of California
San Diego Gas and Electric Golden State Water Company
Time Warner Cable
Southern California Gas Turlock Irrigation District
ENERGY ENTITIES
AES Southland Shell Energy North America
Calpine Corporation Marin Clean Energy sPower
Chevron Corporation NextEra Energy Resources SunPower
Exelon Corporation NRG Energy, Inc. Tesoro
Iberdrola Renewables TransCanada Corporation
Sources: California State Auditor’s analysis of California Foundation on the Environment and the Economy’s membership roster, websites of entities
listed on the membership roster, the CPUC website, and various CPUC decisions and resolutions.
* Edison International is the parent of Southern California Edison.
Advisors to the commissioners who went on these
nonprofi t-funded trips had diff ering opinions about their
usefulness. For example, according to one advisor, international
travel helps educate commissioners about new projects and
cutting-edge technologies, and the offi ce of the Governor would
likely not approve of such trips if they were funded solely by the
CPUC. We also noted that commissioners reported that they made
speeches or participated in panel discussions on some of these trips.
However, another advisor stated that he believed that international
travel was not essential to the duties of a commissioner and that
there may be increased opportunity for discussion about CPUC
business on these trips. In the consultant report mentioned
previously, the consultant advised the CPUC to consider
CALIFORNIA STATE AUDITOR | Report 2016-104 21
September 2016
prohibiting commissioners from receiving free travel, lodging, and
meals from organizations affi liated with regulated utilities and from
other parties to proceedings before the CPUC.
When we discussed these trips with the CPUC, it acknowledged
the appearance of inappropriate relationships that could come
from these gifts. According to the assistant general counsel who
supervises the CPUC’s confl ict-of-interest legal team, the advice
her team gives to staff and commissioners is not limited to a review
of the legality of accepting a gift, but the advice also focuses on the
appearance of accepting a gift. For example, a commissioner can
legally receive a gift of a meal from a regulated utility so long as the
total value of all gifts from that utility does not exceed a specifi c
dollar amount in a calendar year; however, such meals can still
carry the appearance of inappropriate infl uence. Our review of
commissioners’ economic interest disclosures shows that from 2010
through 2015, fi ve commissioners also received gifts, unrelated to
the trips mentioned previously, from regulated utilities or other
energy companies with a combined total value of about 1,600.
Our review of commissioners’ economic
interest disclosures shows that from 2010
through 2015, fi ve commissioners also
received gifts from regulated utilities or
other energy companies.
Although some gifts are allowed legally, such gifts as travel that
come from entities with close ties to those with a fi nancial stake
in the outcomes of CPUC proceedings create the appearance
of inappropriate relationships between the CPUC and those it
regulates. In its report, the CPUC consultant referred to allegations
of improper private meetings between commissioners and
regulated utilities and discussed the public’s interest in whether
utility-related organizations sponsor travel for CPUC decision
makers in exchange for greater opportunities for direct contact.
Widespread media reports also describe the public’s distrust of
the CPUC because of accounts of a culture of improper access
and infl uence granted to utilities. To help restore its image as a
trustworthy, unbiased regulatory agency, the CPUC would benefi t
from establishing a prohibition against accepting travel, meals, or
other gifts from individuals or entities that have a strong or direct
connection to the utilities it regulates.
22 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Recommendations
Legislature
Th e Legislature should amend state law to direct the CPUC to adopt
rules for ex parte communications between CPUC commissioners
and interested parties that include the following:
• A requirement for CPUC commissioners to disclose any
ex parte communications in which they participate, in addition
to the existing requirement for interested party disclosure. Th is
disclosure should occur within the same time frame as the
interested party disclosure.
• A requirement that commissioners’ disclosures include a description
of the commissioners’ communications and their contents.
CPUC
To avoid the appearance of inappropriate relationships, the CPUC
should adopt a policy to prohibit commissioners from accepting
gifts from regulated utilities and energy companies and free travel
from organizations with signifi cant ties to regulated utilities and
other parties with fi nancial interests in CPUC proceedings.
CALIFORNIA STATE AUDITOR | Report 2016-104 23
September 2016
The CPUC’s Contracting Activity Has Not Been
Consistent With State Requirements or Best Practices
Key Points:
• In many of the 60 contracts for services that we reviewed, the CPUC failed to meet
state requirements and did not align its actions with good business practices. Table 3
shows a summary of the defi ciencies we observed in the contracts we reviewed.
• Th e shortcomings we noted in CPUC contracting practices resulted from a lax
control environment that the CPUC has allowed to persist. Th is lax environment is
characterized by outdated guidance to staff , the absence of supervisory review, and a
lack of training for key staff members.
Table 3
Summary of the Results of the State Auditor’s Review of the California Public Utilities Commission’s
Contracts for Services
CONTRACT ASPECTS REVIEWED SUMMARY OF RESULTS
Civil service exemption For personal service contracts, regulations require the CPUC to include with a request for contract approval
detailed and specifi c information explaining why services cannot be obtained through the civil service.
Of the 40 contracts we reviewed that were sent to General Services for approval, 23 did not contain this
specifi c and detailed information.
Market survey CPUC policy requires staff to complete a market survey for some contracts that are exempt from
competitive bidding.*
We reviewed 35 contracts subject to this policy and found no evidence that the CPUC conducted
complete market surveys for 24 of these contracts.
Adding dollar value To follow best practices, the CPUC should explain its rationale for adding funds to contracts when the scope of
work for those contracts does not change.
The CPUC did not document the reasons additional funds were necessary for 12 of 24 contracts we
reviewed in which it increased contract funding but did not change the scope of work.
Changes to scope of work We expected, as a best practice, that any amendments to the scope of work for a contract would include
additional work that is closely related to the original scope.
For 3 of 14 contracts in which the CPUC signifi cantly changed the scope of work through an amendment,
the CPUC did not justify why the existing contracts were the optimal way to obtain the new services.
Monitoring performance The State Contracting Manual states that a contract manager’s responsibilities typically include monitoring
the progress of contracted work. Also, state law requires that agencies complete contractor evaluations at
the expiration of all consultant services contracts of $5,000 or more.
For 19 of the 60 contracts we reviewed, the CPUC did not maintain evidence that the contract manager
monitored the contractor’s progress during the life of the contract. Further, in the 38 contracts valued
at $5,000 or more, although end-of-contract performance evaluations were required, the CPUC did not
complete any evaluations.
Performance criteria The State Contracting Manual requires consultant services contracts of $5,000 or more to contain detailed
performance criteria.
However, 9 of the 56 contracts we reviewed for an amount more than $5,000 did not contain detailed
performance criteria.
Sources: California State Auditor’s analysis of selected CPUC contract fi les, state regulations, the State Contracting Manual, and the
CPUC’s Policies and Procedures Manual: Personal Services Consultant Contracts.
* The CPUC does not require market surveys for contracts with other government entities or emergency contracts. These types of
contracts are not included in our count of 35.
24 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Exemptions From Using Civil Service
Th e CPUC has consistently failed to explain in a suffi cient manner
why it contracted outside the state civil service for a majority of the
contracts we tested. Th e state constitution generally requires that
services conducted on behalf of state government be performed
by civil service employees, although state law does provide specifi c
exemptions that agencies can use to bypass this requirement
appropriately. For each contract that requires General Services’
approval—generally most services contracts for more than
50,000—state regulations require agencies to submit a written
justifi cation to General Services that includes specifi c and detailed
information demonstrating how the contract meets one or more
of the exemptions from civil service requirements. Th e CPUC sent
40 of the 60 contracts we reviewed to General Services for approval,
but more than half—23 of these contracts—did not contain specifi c
and detailed information to support the civil service exemption the
CPUC claimed. When we asked why the CPUC was not adequately
supporting the civil service exemptions, the chief of the management
services branch (management services branch chief), who oversees
the contracts offi ce, stated that the CPUC has never had any
issue with General Services’ approving the contracts because of
inadequately supported civil service exemptions; therefore, she did
not believe its exemptions were unsupported.
The CPUC sent 40 of the 60 contracts we
reviewed to General Services for approval, but
more than half—23 of these contracts—did
not contain specifi c and detailed information
to support the civil service exemption.
Nonetheless, for 12 of the 23 contracts, the only information the
CPUC included to support its exemptions was text taken verbatim
from state law without additional explanations to support its
claims to the exemptions for those specifi c contracts. Th is citation
of state law is clearly not the type of detailed information the
regulation requires. In the remaining 11 cases, the CPUC provided
explanations that went beyond merely quoting state law, but the
content still fell short of specifi c and detailed justifi cations. Further,
we note that the requirement to include specifi c and detailed
factual information is a requirement that state regulations place on
CALIFORNIA STATE AUDITOR | Report 2016-104 25
September 2016
the contracting agency, not on General Services. We expected the
CPUC to be aware of and meet this requirement independent of
whether General Services eventually approved its contracts.
In addition, we believe that it is reasonable to expect the CPUC
to suffi ciently justify its need to contract outside the civil service
regardless of whether the contract requires General Services’ approval.
We reviewed the remaining 20 contracts that did not require such
approval and found that the CPUC did not adequately support the
civil service exemption for 13 of those contracts. In each of these cases,
the CPUC could not demonstrate that it was complying with state
law because it did not prepare detailed and specifi c information for
its decision to contract for the service. Fully supported civil service
exemptions serve as evidence that the CPUC considered whether it
needed to contract for services. When it does not fully document
its rationale when contracting for outside assistance, the CPUC leaves
itself open to challenges that its contracts are not necessary and that
the State may incur unwarranted costs as a result.
Market Surveys
Th e CPUC did not consistently conduct market research to ensure
that it obtained the best value when contracts it issued were exempt
from competitive bidding requirements. Th e CPUC contracting
manual requires its staff to conduct a market survey for some exempt
contracts to help the CPUC choose the most
qualifi ed contractor for the service. As shown in the
text box, the CPUC highlighted this policy in a
Testimony by California Public Utilities
legislative hearing in August 2015. However, Figure 4
Commission at an August 2015 Legislative Hearing
on the following page shows that for nearly
70 percent of the contracts we reviewed that “. . . the CPUC, as part of its internal business process,
required such a survey, the CPUC could not provide requires the project manager that requests the contract
documentation that a market survey took place or to conduct some level of market analysis—we call it a
that it conducted a complete survey by contacting market survey—of potential vendors in order to assure
the minimum number of potential contractors its ourselves that the rates for the requested services are fair for
contracting manual requires. For example, in the ratepayers to pay.” (Emphasis added.).
one 75,000 contract for expert witness services,
Source: Testimony by the former deputy executive director
contract documents state that the contractor was of administrative services for the CPUC at an August 17, 2015,
Assembly Utilities and Commerce committee hearing.
selected because he was known by CPUC staff
members and because he off ered to provide his
services at a reduced rate. According to the former
deputy executive director of administrative services (deputy director),
the CPUC is not legally required to conduct a market survey for
exempt contracts. However, since 2007 the CPUC has had a policy
requiring market surveys, including in cases where the CPUC was
seeking expert witness services. Without conducting market
research, the CPUC cannot ensure that it is obtaining the best value
for services it acquires outside of competitive bidding.
26 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Figure 4
Percentage of Contracts for Which the California Public Utilities Commission
Required but Did Not Perform a Market Survey to Assess Best Value
Contracts with
incomplete market
surveys—23%
Contracts with no
market survey—46%
Contracts with
complete market
surveys—31%
Source: California State Auditor’s analysis of selected CPUC contract fi les and the CPUC’s Policies and
Procedures Manual: Personal Services Consultant Contracts.
We identifi ed another instance in which the CPUC did not conduct
a market survey and in which it has continued to rely on that
selected contractor for years without knowing whether the State is
truly receiving the best value. In June 2009, the CPUC entered into
a contract to obtain legal advice and counsel for various bankruptcy
and bond securitization questions. Although legal services
contracts are exempt from competitive bidding requirements, the
CPUC requires its staff to conduct a market survey before it awards
a legal services contract. However, the CPUC did not document
that it conducted a market survey for this contract. Th erefore, it is
unable to demonstrate how it knew that it obtained the best value
for these services. Further, as of August 2016, the CPUC continued
to use the same contractor’s services under the same contract.
Th erefore, for more than seven years, the CPUC has used the
same contractor without originally establishing that the contractor
off ered the best value for the service. When we asked why the
CPUC did not conduct a market survey for this contract, the former
project manager stated that the contractor already had a positive
working relationship with the CPUC and was very experienced with
bankruptcy proceedings and bond fi nancing issues.
CALIFORNIA STATE AUDITOR | Report 2016-104 27
September 2016
Funds Added to Contracts
Th e CPUC did not always clearly document why it needed to add
funds to some of its contracts. For the contracts we reviewed, the
CPUC amended 24 of them to add funding without changing
the scope of work for the contracts. To follow best practices, the
CPUC should have explained the rationale for adding funds
to contracts when the scope of work for those contracts had
not changed. However, in 12 of these cases, we did not fi nd adequate
explanations within the contract documents to describe why
additional funding was necessary. Th ese cases included fi ve contracts
with amendments that more than doubled the original contract
value. Th e CPUC did not document why it needed a total of about
2.4 million in additional funding for these 12 contracts. According to
the management services branch chief, the contracts offi ce staff was
not consistently ensuring that the amendments contained suffi cient
explanations for why the amendments were necessary.
The CPUC did not document why it needed
a total of about 2.4 million in additional
funding for these 12 contracts.
One of these 12 contracts was an agreement for legal representation
that the CPUC amended to add 460,000 in unsupported
additional funding. In March 2010, the CPUC entered into a
500,000 agreement for representation in employment-related
litigation. In January 2013, the CPUC added another 200,000 to
this contract. A contract request document in the CPUC’s contract
fi le indicates the reason the funds were necessary was that the
CPUC had expected that the employment case would settle, but
the case instead went to trial. However, four months later, the
CPUC amended this contract again to add another 460,000 to
the contract value. Th e CPUC provided no explanation in contract
documents it sent to General Services for why these additional
funds were necessary, and its contract request document merely
repeated the statement from the previous amendment about the
case going to trial.
In addition to these 12 cases, we noted another contract the CPUC
amended without initially providing an adequate explanation for
why it needed 5.1 million in additional funding. In November 2014,
the CPUC entered into a 49,000 contract for legal representation.
Th e scope of this contract stated that the contractor would
represent the CPUC in all criminal, civil, and administrative
28 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
proceedings and investigations undertaken by any federal, state, or
local agency involving any allegations of inappropriate interactions
by CPUC personnel with any utility from 2009 through 2014.
According to the project manager at the time it entered into
this contract, the CPUC anticipated that the contract would
require additional funding, but it needed immediate assistance
in responding to investigations. Th erefore, by entering into a
contract for 49,000, the CPUC was able to obtain legal services
without waiting for General Services’ approval. As explained in the
Introduction, contracts for legal services do not require competitive
bidding regardless of dollar value, and contracts valued at 50,000
or less do not need General Services’ approval.
However, within fi ve months of entering into this 49,000 contract,
the CPUC amended the contract to extend the contract’s term
by one year and to add 5.1 million in funds. Th e CPUC sent the
contract amendment to General Services for approval, but
the contract documents that it submitted to General Services did
not explain the need for additional funding. Instead, those contract
documents repeated the exact scope of work contained in the original
49,000 contract. According to the attorney at General Services
who reviews CPUC contracts, it was highly unusual to see a contract
amendment raise the total value of the contract by this magnitude.
Within fi ve months of entering into this
49,000 contract, the CPUC amended the
contract to extend the contract’s term by
one year and to add 5.1 million in funds.
After receiving additional information from the CPUC, General
Services’ deputy director of legal services approved the amendment.
Th at additional information for this contract included a separate
letter from the CPUC project manager in which the CPUC
explained that the contract amendment was necessary because the
scope of investigations at the CPUC was expanding and the number
of witnesses to be interviewed and the documents the CPUC
needed to provide were growing. Further, the letter acknowledged
that the original contract dollar amount was insuffi cient.
Although the letter that the CPUC’s project manager sent to
General Services explains why the CPUC needed additional
funding for this contract, the CPUC did not provide us with a copy
of this letter when we discussed this contract. We obtained the
letter by asking General Services for any additional documentation
CALIFORNIA STATE AUDITOR | Report 2016-104 29
September 2016
that the CPUC submitted to support the need for the additional
funds. However, the information contained in the letter could have
easily been included in the contract documents that the CPUC
sent to General Services, and this inclusion would have eliminated
the need to send subsequent additional information. As shown by
this contract and the other 12 contracts for which we did not fi nd
adequate support for additional funds, the CPUC can improve in
the area of explaining adequately its need for additional funds.
Changes to Contracts’ Scope of Work
Th e CPUC amended some of the contracts we reviewed to add
activities that signifi cantly diff ered from those in the contracts’
original scope of work. Th e CPUC’s initial determination that a
particular vendor provided the best possible value was based on
a specifi c service that the vendor could provide; therefore, we
expected as a best practice, that any amendments to the scope of
work for a contract would include additional work that was related
closely to the contract’s original scope. We reviewed 14 contracts
that the CPUC amended to add services and determined that
three were amended to add services that were unrelated to the
original scope of work. For example, the CPUC contracted with a
vendor to provide training to its supervisory staff but later amended
the contract to add additional training courses for other staff
levels. Th e CPUC allocated about 34,000 to provide training for
its supervisory staff and added about 193,600 for the additional
training courses.
We reviewed 14 contracts that the CPUC
amended to add services and determined
that three were amended to add services that
were unrelated to the original scope of work.
According to the project manager for this contract, the contract
was amended because of the contractor’s expertise and the quality
of training courses as well as staff satisfaction with the contractor’s
initial performance. However, the training courses the CPUC
added, which included a course on strategy for analyzing data and
research methods, diff ered from the basic supervision course it
originally solicited. Th erefore, the CPUC did not justify that the
contractor it chose for the supervision training still represented
the best choice for providing the additional training courses.
30 Report 2016-104 | CALIFORNIA STATE AUDITOR
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In another example, the CPUC entered into a contract for legal
representation to defend itself against a lawsuit related to its
compliance with the California Public Records Act (Public Records
Act). After it settled the lawsuit, the CPUC amended this contract
so that the contractor could assist the CPUC in responding to
Public Records Act requests. To obtain legal representation, the
CPUC allocated 99,000 and then added approximately 1 million
to the contract for responding to Public Records Act requests.
According to the former project manager for this contract, this
contractor was the best choice for the additional service because
the contractor had experience with Public Records Act requests
and was familiar with CPUC staff . However, responding to Public
Records Act requests and providing defense in a court proceeding
are two signifi cantly diff erent services. Th e factors an agency
should consider when choosing a contractor likely vary based
on the type of service it needs. For example, when contracting
for legal representation in civil litigation, the CPUC might want
someone with experience in similar court cases, which would
not be a necessary prerequisite for responding to Public Records
Act requests. Because it did not conduct a new procurement for
these services, the CPUC cannot demonstrate that the contractor
it selected for the original contract represents the best value for
responding to Public Records Act requests.
According to the management services branch chief, contract
analysts were not monitoring whether contract amendments
related to the original scope of work. However, such monitoring is
crucial to ensuring that the CPUC obtains the best value for new
services it contracts to obtain. Moreover, the CPUC contracting
manual does not provide guidance regarding contract amendments.
It is important that the CPUC provide such guidance to its project
managers and contract analysts so that they can implement prudent
business practices when contracting for services.
Monitoring and Evaluating Contractors’ Performance
Despite a requirement in the State Contracting Manual, the
CPUC has not been consistently monitoring the progress of
its contractors’ performance. Th e manual states that a contract
manager’s responsibilities typically include monitoring the progress
of contracted work to ensure that services are performed according
to the quality, quantity, objectives, time frames, and manner
specifi ed in the contract and ensuring that all work is completed
and accepted before the contract expires. To monitor the progress
of work, the CPUC requires project managers to complete an
invoice review form before issuing a payment to the contractor. To
verify that the project managers completed invoice review forms,
we fi rst checked the contract fi les. In instances where the contract
CALIFORNIA STATE AUDITOR | Report 2016-104 31
September 2016
fi les did not contain any completed invoice review forms, we
searched records maintained by the CPUC fi scal unit. At the fi scal
unit, we selected up to fi ve payments per contract and determined
whether the CPUC completed invoice review forms. However, for
nearly one-third—19 of the 60 contracts we reviewed—we were
unable to fi nd invoice review forms in either the contract fi le or in
the records kept by the CPUC fi scal unit. As a result, the CPUC
cannot demonstrate that its contract or fi scal offi ces were aware of
whether project managers were monitoring the progress of work
or ensuring that the services met the quality and needs specifi ed
in these contracts. It is critical that the contract and fi scal offi ces,
as the two offi ces responsible for ensuring that invoices are correct
before issuing payment, are aware of whether project managers
are adequately monitoring contractor performance. Without this
knowledge, the CPUC risks paying a contractor for services that it
did not perform or that did not meet minimum standards.
For nearly one-third of the contracts
we reviewed, we were unable to fi nd
invoice review forms in either the
contract fi le or in the records kept by
the CPUC fi scal unit.
Further, we identifi ed three instances in which the CPUC
completed invoice review forms but the contractors appeared to be
working beyond the scope or dollar limit of the contract. Th e CPUC
subsequently amended these contracts to account for work that had
already been performed. For example, for one of these contracts, a
contractor submitted an invoice for about 88,600 more than the
balance of funding remaining on the contract. When the CPUC
received the invoice, the project manager advised the assigned
contract analyst to postpone its processing until the CPUC could
amend the contract to cover these additional charges. According
to that project manager, the contractor had completed work at the
request of another staff member at the CPUC without the project
manager’s knowledge, and this new work, although within the
scope of the original contract, was not accounted for in the contract
budget. In all three of these cases, although the project managers
completed the invoice review forms, the project managers did not
appear to have been actively monitoring the contracts. Th e CPUC’s
practice of allowing contractors to perform additional work before
approving contract amendments places it at greater risk for disputes
with contractors over payment or delivery of work products.
32 Report 2016-104 | CALIFORNIA STATE AUDITOR
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In addition to not monitoring the progress of work during the
contract term, the CPUC also has not evaluated contractor
performance at the end of a contract. State law requires that
agencies complete contractor evaluations at the expiration of all
consultant services contracts of 5,000 or more. However, the
CPUC did not conduct these evaluations for any of the 38 contracts
from our selection that were valued at 5,000 or more and that
were completed at the time of our review in April 2016. Th e
management services branch chief confi rmed that project managers
were not completing the contractor evaluations at the end of
contracts; she explained that the contracts offi ce is understaff ed and
that its contract analysts do not have time to ensure that project
managers are completing this task. Nevertheless, if the CPUC is
not evaluating contractor performance at the end of a contract,
it cannot determine whether it received the quality of work that it
expected and may unknowingly enter into subsequent contracts
with poorly performing vendors.
However, the CPUC may fi nd it diffi cult to monitor contractor
performance without improving the level of detail in its contracts.
Although the State Contracting Manual requires consultant services
contracts of 5,000 or more to contain detailed performance criteria
and a schedule of performance, nine of the 56 applicable contracts
we reviewed did not contain such detailed criteria.
The CPUC may fi nd it diffi cult to monitor
contractor performance without improving
the level of detail in its contracts.
For example, in one case we reviewed, the CPUC entered into
a contract with some portions of the scope of work written in
an open-ended format that allowed the contractor to perform
special projects for the CPUC as needed. It is unclear how the
CPUC would be able to monitor the contractor’s performance and
progress in fulfi lling his duties in these contract areas. In addition,
we found that 17 of the contracts we reviewed did not contain a
schedule of performance.4 For example, one contract to provide
training services did not contain a description of the period when
the CPUC wanted the training to occur. Without providing a
4 In reviewing the 56 consultant services contracts of 5,000 or more, we determined that it was
reasonable that 13 of the contracts did not contain schedules of performance because the nature
of the services provided under these contracts, such as representation in pending litigation,
made it diffi cult to establish set schedules of performance.
CALIFORNIA STATE AUDITOR | Report 2016-104 33
September 2016
timeline for provision of the services, the CPUC could fi nd it
diffi cult to hold the contractor accountable for meeting the CPUC’s
needs in a timely manner.
Lax Control Environment
We observed a few key defi ciencies indicative of a lax control
environment over CPUC contracting activity, and that lax
control environment likely contributed to many of the issues we
noted with CPUC service contracts. One of these defi ciencies
is the outdated contracting manual, which was last updated
in 2007. We compared the CPUC manual to state contracting
requirements and found that it does not provide staff with any
guidance about contract amendments and does not include
direction about a specifi c confl ict-of-interest rule from the State
Contracting Manual. Specifi cally, the CPUC manual does not
specify that a consultant under contract should not be awarded
any subsequent contract that the consultant recommends in its
previous consulting contract. According to the management
services branch chief, contract analysts do not consult the manual
for guidance because it is outdated. She also said that the task of
updating the contracting manual is time-consuming, and staff has
prioritized processing contracts and amendments over spending
time on the manual. However, she stated that the staff is currently
working on revising the manual and is expected to complete it in
December 2016. Having an up-to-date contracting manual that
describes CPUC contracting policies and procedures will provide
staff with the needed guidance to properly process contracts that
comply with state requirements and best practices.
Contract analysts do not consult the manual
for guidance because it is outdated.
Furthermore, the contracts offi ce manager (manager) has not been
reviewing contracts before they are sent for signature. According
to the management services branch chief, in 2011 the manager no
longer reviewed contracts before the contract analysts sent them for
executive director approval. She stated that the manager’s review
was offi cially discontinued when a former deputy director instructed
the offi ce that the manager should stop conducting this review. When
we spoke with the deputy director who succeeded the deputy director
who ordered the manager’s review discontinued, she informed us
that although there was no longer any formal review of the contracts
34 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
before they were sent to her for approval, she believed that it was
adequate that the contract analysts worked together with the manager
when they faced more complicated tasks. Although the manager
and contract analysts may be working together on a case-by-case
basis when dealing with diffi cult contracts, formalizing a review of
all contracts would be benefi cial to the CPUC because—based on
the variety of issues we found—it is clear that the contract analysts’
work alone does not ensure that the CPUC complies with state
requirements and best practices. Additionally, when we asked the
management services branch chief about many of the defi ciencies
we identifi ed, her response was that staff was simply not performing
work that would prevent the problems we identifi ed. Nonetheless,
we expected the supervisory personnel at the CPUC to be actively
overseeing the work its staff performs and thus preventing the
frequency of the issues we found.
We expected the supervisory personnel at
the CPUC to be actively overseeing the work
its staff performs and thus preventing the
frequency of the issues we found.
Another defi ciency that contributes to the lax control environment
at the CPUC is the lack of training for contract analysts and
project managers. According to the management services branch
chief, contract analysts are certifi ed by General Services at the
intermediate level in contract procurement, which is the highest
level of procurement training that General Services off ers. However,
the management services branch chief stated that the contract
analysts have not attended trainings routinely to refresh their
knowledge because the staff ’s priority is to process contracts and
amendments. Although she hopes to establish a policy for routine
training, she believes that the workload of the contract analysts
does not provide time to attend trainings. Also, she and the project
managers we spoke with confi rmed that project managers do not
receive formal training on their contract-related responsibilities.
Specifi cally, the management services branch chief stated that the
project managers do not receive such training because the contracts
offi ce does not have the staff to provide it. We also noted that the
CPUC does not have any parameters limiting the number of project
managers assigned within divisions. Establishing a maximum
number of project managers could help the CPUC ensure that it
trains all project managers, particularly when individuals are newly
appointed to do that work.
CALIFORNIA STATE AUDITOR | Report 2016-104 35
September 2016
Because training is an essential part of ensuring that staff members
are equipped to perform well at their jobs, it is important for the
CPUC to provide regular training to those who oversee contracts.
Without this training, contract analysts may not be consistent
in conducting their reviews, and project managers may be
unaware of their duties to conduct market surveys or to monitor
contractor performance.
Sole-Source Contracts
Most of the CPUC sole-source contracts we reviewed—13 out of 15—
complied with key criteria related to sole-source contracting. For
the fi rst of the two noncompliant contracts, the CPUC did not
follow the State Contracting Manual requirements for amending
such contracts. Th e manual requires agencies to obtain new
sole-source contract approval from General Services when they
amend sole-source contracts to expand beyond the originally
approved amount, term, and scope of work. In February 2013, the
CPUC amended a sole-source contract for court reporting services
and increased the contract funding by 12,000 but did not seek new
sole-source approval from General Services to add this funding.
Because it added funding that was not included under the original
approval, the CPUC should have obtained General Services’ approval
to use sole source as the method for obtaining the additional services.
Th is was the only sole-source contract we reviewed that the CPUC
amended to add additional funding.
For the second contract, which was related to the fi rst, the
CPUC did not plan eff ectively to avoid sole-source contracting.
One month before the contract for court reporting services was
set to expire, the CPUC entered into a new sole-source contract
with the same vendor for the same services. In the request for
sole-source approval that the CPUC submitted to General Services,
it stated that it had planned to solicit bids for these services but was
requesting a sole-source contract because time and staff availability
were constrained. Although General Services gave the CPUC
authority to procure these services through a sole-source contract,
it is unclear why the CPUC did not solicit competitive bids for these
services, given that these were services the CPUC had a predictable
need to acquire and had at least one year’s notice that it would need
to execute a new contract. Th e CPUC’s chief hearing reporter
stated that she was not involved with the contract, but because her
unit is extremely busy, she can understand why her predecessor
may not have had time to solicit bids. She explained that her
unit has not received much guidance on the contracting process.
However, the chief hearing reporter agreed that the CPUC knew
in advance that the services were needed and could have solicited
36 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
bids for the services during a less busy period. She stated that she
anticipates using a bid process when the CPUC contracts for these
services in the future.
Attorney General Approval
To enhance the overall effi ciency and economy of state government,
state law generally requires agencies to employ the Offi ce of
the Attorney General (Attorney General) as legal counsel or to
obtain the Attorney General’s written consent to employ other
legal counsel. However, the CPUC has not consistently contacted
the Attorney General before it has contracted for outside legal
assistance. Of the 12 legal services contracts we reviewed, only
one documented that the CPUC had requested assistance from the
Attorney General. In this case, the Attorney General declined to
represent the CPUC because of a potential confl ict of interest, and
the CPUC therefore contracted for the service. In the other 11 cases
in which the CPUC did not contact the Attorney General, the
CPUC may have obtained legal services that the Attorney General
could have provided at a lesser cost.
Of the 12 legal services contracts we
reviewed, only one documented that the
CPUC had requested assistance from the
Attorney General.
Th e CPUC did not contact the Attorney General in most cases
we reviewed because it believes that state law exempts it from the
requirement to use the Attorney General. An assistant general
counsel at the CPUC claimed that the CPUC has often asked the
Attorney General to represent it in matters that involve expertise
and resources that the CPUC does not possess; however, this did
not appear to be the case among the contracts we reviewed. In
addition, the assistant general counsel explained that the CPUC
believes that state law, specifi cally section 11041 of the Government
Code, exempts it from having to use the Attorney General for all
legal needs. Th is section of law does list selected agencies, including
the CPUC, and states that they are exempt from the requirement to
employ the Attorney General as legal counsel.
However, section 632 of the Public Utilities Code states that the
requirement to use the Attorney General applies to the CPUC for
consultant or advisory services contracts, which include contracts
CALIFORNIA STATE AUDITOR | Report 2016-104 37
September 2016
for legal services, except when the CPUC makes a fi nding that
extraordinary circumstances justify expedited contracting. In
response to our questions about these two statutes, the general
counsel at the CPUC stated that the CPUC believes that section 11041
of the Government Code clearly exempts the CPUC from obtaining
legal services from the Attorney General. However, after reviewing
the legislative history of section 632 of the Public Utilities Code,
including legislative committee analyses, we concluded that the
Legislature intended to limit the CPUC’s exemption from using the
Attorney General in cases where the CPUC decides to contract for
legal services. Further, the general counsel stated that Public Utilities
Code section 307 gives the CPUC the authority to represent the
people of California in all matters relating to the Public Utilities Code
and to any act or order of the CPUC. Although we acknowledge
the authority that state law grants the CPUC under this additional
section, we believe section 632 requires the CPUC to use the
Attorney General or obtain its written consent before contracting
for legal services without making a fi nding that extraordinary
circumstances exist. To ensure the CPUC acts as the Legislature
intends, a change to state law is needed.
Recommendations
Legislature
Th e Legislature should amend Public Utilities Code section 632 to
clarify that its provisions related to the Attorney General apply
to the CPUC regardless of Government Code section 11041 and
Public Utilities Code section 307.
CPUC
To ensure that its contracting practices align with state requirements
and best practices, the CPUC should take the following actions:
• Update, distribute, and follow its contracting procedures manual.
Th e manual should identify specifi c responsibilities for both
contracts offi ce staff and project managers, and it should provide
specifi c guidance about the processes the CPUC will employ to
do the following:
- Fully justify civil service exemptions.
- Conduct market research for exempt contracts.
- Fully support the need for additional funding.
38 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
- Ensure that it does not change the scope of work too
signifi cantly from the original.
- Monitor contractor performance against criteria included in
its contracts.
- Avoid sole-source contracts when it is able to solicit
competitive bids for services.
• Provide immediate refresher training to its contract analysts
and contracts offi ce manager, and establish a regular schedule of
annual training for them to attend.
• Designate a limited number of project managers for each division
at the CPUC, and provide those individuals with training on
the CPUC’s processes related to contracting, including how to
monitor progress of a contractor’s work.
• Implement a supervisory review by the contracts offi ce manager
of proposed contracts and contract amendments to occur before
contracts and amendments go to vendors for signature.
CALIFORNIA STATE AUDITOR | Report 2016-104 39
September 2016
OTHER AREAS WE REVIEWED
To address the audit objectives that the Joint Legislative Audit
Committee approved, we reviewed the subject areas shown in
Table 4. In the table, we indicate the results of our review and any
associated recommendations we made that are not discussed in
other sections of this report.
Table 4
Other Areas Reviewed as Part of This Audit
CPUC Responses to Public Records Act Requests
• The CPUC has publicly stated that its general policy related to Public Records Act requests
(record requests), which was last updated in 1982, is outdated and not aligned with
current law. For example, the policy cites a specifi c Public Utilities Code section as an
authority for exempting records even though the CPUC believes that the law neither
creates a privilege of nondisclosure for utilities nor designates any specifi c types of
documents as confi dential.
• We reviewed 20 record requests related to contracts. The CPUC did not meet the statutory
deadline for responding with its determination of whether it possessed the requested
records and whether those records were disclosable for fi ve of these record requests.
However, it was late by only about three days on average.
• We found that the CPUC did not always clearly communicate whether it had the records
that a member of the public requested and its reasons for withholding certain public
records. However, the CPUC has recently developed templates to address these issues.
• In one record request we reviewed, the CPUC should have provided records to the
requester earlier than it did. In this case, nearly four months elapsed between the time the
CPUC identifi ed the requested documents and when it began sending those documents
to the requester. According to the head of the CPUC’s legal division’s public records offi ce,
the CPUC did not closely oversee the staff member assigned to respond to the request.
Further, our review of the CPUC’s process for tracking the status of unresolved records
requests indicated that the CPUC tracks the status of record requests inconsistently.
Recommendations
The CPUC should update its general policy on responding to record requests so that the policy
aligns with state law.
The CPUC should develop and follow procedures to regularly track and review record requests it
has not fully responded to and determine whether it can provide information.
continued on next page . . .
40 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Tracking of Sole-Source Contracts
• We determined that the CPUC entered into or amended at least 15 sole-source
contracts from 2010 through 2015. However, our conclusion is based on information we
obtained from a hand count of contracts we found at General Services. According to the
management services branch chief, the CPUC does not use its contract database to track
its method of procurement. The CPUC is generally not required to submit contracts of less
than $50,000 to General Services for approval and, according to General Services, it does
not maintain records for contracts that expired before 2011; therefore, our total may not
refl ect all CPUC sole-source contracts from this period.
• If the CPUC used its contract database to track the procurement methods it uses, it would
be able to more accurately and effi ciently complete required reports. General Services
requires the CPUC to report on contract activity every fi scal year so that General Services
can accumulate and report information on statewide contracting activity. Included in the
CPUC’s report is a count of the number of sole-source contracts that the CPUC entered
into or amended in the fi scal year.
• The management services branch chief stated that the CPUC reports to General Services
by querying its database in several diff erent ways and through manually reviewing
contract fi les. However, we reviewed the reports that the CPUC submitted to General
Services for fi scal years 2010–11 through 2014–15 and found the reports did not always
accurately identify contracts as sole source and it did not identify all the sole-source
contracts the CPUC entered into.
Recommendation
The CPUC should use its contract database to track the procurement method for each contract.
Contracts Below Competitive Bidding and Delegated Purchasing Authority Thresholds
• We reviewed four contracts the CPUC entered into that were less than the competitive
bidding threshold of $5,000 and found that the CPUC did not amend these contracts to
increase funding.
• We also reviewed 15 additional contracts the CPUC entered into that were $50,000 or less,
which is the threshold for General Services’ approval. The CPUC later amended nine of
these 15 contracts to exceed the $50,000 threshold, and it obtained General Services’
approval in all nine cases. However, as noted earlier in this report, the CPUC did not always
document the reason why it needed to add funding to contracts we reviewed.
Recommendation
Refer to our recommendation regarding adding contract funding on page 37.
General Business Practices at the CPUC
• At the start of our audit, we observed that the CPUC contract offi ce had poorly organized
the contracts it stored on-site. As a result, it took the CPUC about 1.5 months to locate
one contract we reviewed and about four months to locate another we had selected for
review. Since we raised this as an issue with the contracts offi ce manager, the CPUC has
reorganized the fi ling system and has issued suffi cient guidance to contract analysts
about how to maintain this organization.
CALIFORNIA STATE AUDITOR | Report 2016-104 41
September 2016
Parties Disclosing Interests in Proceedings
• In the rules it has adopted related to party status in proceedings, the CPUC requires some
entities who are parties to a CPUC proceeding to disclose their interest in the proceeding
as a condition of becoming a party.
• One way to become a party to a proceeding without being required to disclose interests
is by fi ling an application, petition, or complaint with the CPUC. This path to party status
is for regulated entities and other persons or interested organizations that request CPUC
action on an issue. These entities would all have explicit stakes in the proceeding that
could be inherent in their applications, petitions, or complaints to the CPUC, and thus
additional disclosure would likely be redundant.
• However, entities can also become parties to a proceeding by fi ling a protest or response
to an application or petition or by fi ling comments in response to a rulemaking. Entities
who become a party through this method are not subject to any requirement to disclose
their interest in the proceeding.
• Our review found that parties who were not required to disclose their interests generally
volunteered their interests in the proceeding. However, we believe that it would be
prudent for the CPUC to ensure that all parties disclose their interests by amending its
rules for becoming a party to a proceeding.
Recommendation
The CPUC should update its regulations to require parties joining a proceeding by fi ling a protest
or response to an application or petition, or by fi ling comments in response to a rulemaking
proceeding to fully disclose their interests in the proceeding.
Contracts That Utilities Proposed
• The CPUC reviews and approves contracts that energy utilities propose, including
sole-source contracts, which are not selected through a competitive bidding process.
According to the information the energy utilities provided to us, the CPUC approved
138 sole-source contracts that those utilities proposed from 2010 through 2015. We
present further information about the way the CPUC oversees these contracts in the
Appendix of this report.
• We reviewed 20 of those contracts, 16 of which were sole-source power purchase
agreements. We determined that the information the energy utilities submitted to the
CPUC shows those 16 contracts complied with key sole-source contracting requirements,
including a requirement that the cost of the energy procured in these agreements be
comparable to the cost of energy utilities obtained through competitively bid contracts.
• One of the four remaining sole-source contracts we reviewed was a research and development
proposal that three energy utilities fi led jointly and that the CPUC approved. Although
two entities that advocate for ratepayer interests objected to the proposal—primarily because
it lacked specifi c and clearly defi ned projects—our review determined that the CPUC met
the requirements in state law for how it should review and assess research and development
proposals when it considered this contract. Beginning on page 12, we discuss our concerns
about the former president of the CPUC’s participation in approving this contract.
• The three other sole-source contracts we reviewed consisted of two gas pipeline capacity
agreements and a resource adequacy agreement between a utility and an outside entity. The
information that the utilities submitted to the CPUC when seeking approval of these contracts
shows that the contracts met all applicable requirements for contracts of these types.
• In response to concerns raised in the audit request letter, we also reviewed
four competitively bid contracts that one utility proposed. We found that the utility
submitted evidence to the CPUC that demonstrated the utility had complied with the
applicable requirements for competitively bid contracts.
Recommendation
Refer to our recommendation regarding a recusal standard for commissioners on page 14.
continued on next page . . .
42 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Contracts That the CPUC Directed Utilities to Enter Into
• The CPUC did not monitor individual contractor performance in 12 of the
18 CPUC-directed contracts we reviewed. However, 11 of these contractors performed
work under the CPUC’s energy effi ciency initiatives, and the CPUC performs analyses on
its energy effi ciency eff orts to know whether energy effi ciency program goals are being
met and if the programs are cost-eff ective for ratepayers. Additionally, the CPUC’s Utility
Audit, Finance, and Compliance Branch annually audits the utility energy effi ciency
expenditures, which can include expenditures under these contracts, to help ensure
that expenditures are accurately reported, reasonable, and in compliance with CPUC
objectives. In the case of the other contract, which was not related to energy effi ciency,
the CPUC reviewed the usefulness and management of the program that the contractor
was hired to implement. As a result of that review, the CPUC recommended that the
program continue under the direction of a third-party contractor.
• In the remaining six cases we reviewed, the CPUC monitored contractor performance by
performing tasks such as reviewing contractor invoices or deliverables.
Confl icts of Interest Related to CPUC Contracts and Utilities’ Contracts
• We compared the interests that commissioners and contract decision makers disclosed
on their statements of economic interests to the names of selected vendors that received
contracts from the CPUC or energy utilities. Using the statements of economic interests
we were able to review, we identifi ed no confl icts of interest related to these contracts.
• In examining one case, we initially believed that a commissioner had a confl ict of interest
when participating in a CPUC decision because of the commissioner’s disclosure of
economic interests and documentation related to the project that was approved in that
CPUC decision. However, we conducted follow-up work and concluded that he had
erroneously reported ownership of stock on his economic interest disclosure, that he did
not own the stock at the time of the decision, and that there was no confl ict of interest.
• We were unable to determine whether decision makers had confl icts of interest related to
some contracts because the CPUC could not locate 23 statements of economic interests.
The CPUC was not able to determine if these statements were misplaced, if the employees
did not fi le the required statements, or if the CPUC confl ict-of-interest code did not
require these employees to fi le statements of economic interests.
• According to the CPUC’s former fi ling offi cer, the database she relied on to identify all
employees who needed to fi le disclosures was not always accurate because of employees’
changing positions or classifi cations.
• In addition, according to the CPUC’s former fi ling offi cer, the CPUC retains staff statements of
economic interests for only four years. However, state law requires original statements to be
retained for seven years.
Recommendation
The CPUC should ensure that it has accurate information about who is required to fi le
statements of economic interests and then verify that all such persons fi le those statements
when required.
The CPUC should update and follow its retention policy for economic interest disclosures so that
it is aligned with state law.
Sources: California State Auditor’s analysis of CPUC records and interviews with key CPUC staff members
about the subject areas identifi ed in the table.
CALIFORNIA STATE AUDITOR | Report 2016-104 43
September 2016
SCOPE AND METHODOLOGY
Th e Joint Legislative Audit Committee (Audit Committee) directed
the California State Auditor to review the CPUC’s contracting
practices and procedures. Specifi cally, we were directed to review
the practices related to the CPUC’s own contracts and the regulated
utilities’ contracts that it directs or approves to determine how it
ensures best value, meets competitive bidding requirements, avoids
confl icts of interest, and monitors contractor performance. Table 5
lists the objectives that the Audit Committee approved and the
methods used to address those objectives.
Table 5
Audit Objectives and the Methods Used to Address Them
AUDIT OBJECTIVE METHOD
1 Review and evaluate the laws, rules, and Reviewed relevant laws, rules, regulations, CPUC decisions, and resolutions.
regulations signifi cant to the audit objectives.
2 Determine the extent to which state contracting • Reviewed the contracting requirements in the Public Contract Code and the
requirements, including those in state statute and State Contracting Manual.
the State Contracting Manual, apply to the CPUC. • Reviewed the legislative history of the CPUC’s exemptions from specifi c
Note any areas in which the CPUC is exempt from contracting requirements under certain circumstances to determine the reason
state requirements, the reasons, and any time for the exemptions.
limits for the exemptions.
3 Review the CPUC’s contracting policies, • Reviewed the CPUC contracting manual and other contracting-related
procedures, and practices to determine whether documents the CPUC makes available to its staff on its intranet.
and how they ensure best value, address • Compared the key state contracting requirements identifi ed under
competitive bidding, avoid confl icts of interest, Objectives 1 and 2 in the areas of requirements for ensuring best value,
and ensure that deliverables and costs meet addressing competitive bidding, avoiding confl icts of interest, and ensuring
requirements. Note any ways these policies diff er that deliverables and costs meet requirements to the CPUC manual and
from state contracting requirements. guidance documents and noted any areas where the requirements diff er from
the manual and guidance.
• For all areas in which we identifi ed discrepancies, interviewed CPUC staff and
asked why the diff erences existed.
4 For a selection of contracts for services, including • For all objectives where the Audit Committee asked us to review information
but not limited to legal and other consulting from 2010 through 2014, we also included information from 2015 in our
services that the CPUC entered into or amended review because information from 2015 was available when we began this
between 2010 and 2014, determine the following: audit, and it provided us with the opportunity to review more recent CPUC
contracting activity.
• Used data from the CPUC contract database to identify all contracts the CPUC
entered into or amended between 2010 and 2015. From that population,
judgmentally selected 60 service contracts from various points throughout the
period and with varied initial dollar values.
• As described in Table 4 on page 40, neither we nor the CPUC could locate for
about four months one contract we initially selected for review. As a result, we
selected another contract for review. Once the CPUC located the contract,
we reviewed the contract and found no additional types of defi ciencies
beyond the ones we identify in the section of the report addressing CPUC
contracting activity.
continued on next page . . .
44 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
a. Whether the CPUC solicited and awarded the • Compared the CPUC’s activity on the 60 selected contracts to the relevant
contracts in accordance with applicable laws, criteria in state law, the State Contracting Manual, and best business practices,
rules, policies, and best practices, including including criteria related to contract approval, bidding, competition,
those relating to contract approval, bidding, justifi cation for noncompetition, and cost/price reasonableness. Determined
competition, justifi cation for noncompetition, whether the contracts contained detailed performance criteria and schedules
and cost/price reasonableness, and whether of performance and whether the CPUC had eff ectively monitored the
they contained appropriate requirements, contractors’ performance.
such as detailed performance criteria and • Interviewed staff to determine the reasons why contracting activity did not
adequate controls for monitoring and ensuring align with key criteria.
contractor performance.
b. Whether the CPUC complied with applicable • Identifi ed individuals who were in decision-making roles related to the
contracting laws, rules, and policies intended 60 contracts we selected. We also identifi ed the individuals who served as
to avoid confl icts of interest, such as the commissioners at any time from 2010 through 2015.
participation of outside contractors or • Reviewed the statements of economic interests that each decision maker and
other individuals with fi nancial interests in commissioner fi led and identifi ed all interests related to investments, income,
the contract. loans, and business positions.
• Used the Lexis Total Research System, whenever information was available, to
identify the parent company of the vendors awarded the contracts we selected.
• Compared the names of the vendors that were awarded each of the contracts
we selected and all of their identifi ed parent companies to the economic
interests that commissioners and decision makers disclosed to determine
whether any commissioner or decision maker had a fi nancial interest in the
contracts we selected for review.
c. Whether the CPUC awarded the contract for • Reviewed four contracts with initial values below the competitive bidding
an amount beneath the competitive bidding threshold and determined whether the CPUC amended the contracts to exceed
threshold or within its delegated purchasing the initially authorized amount.
authority but then amended the contract to • Reviewed 15 additional contracts that the CPUC entered into within its
exceed the initially authorized amount. delegated purchasing authority and determined whether it later amended the
contracts to exceed the initially authorized amount.
• Determined whether the CPUC obtained appropriate approval from
General Services for the contracts it amended to exceed its delegated
purchasing authority.
5 Determine the number of sole-source contracts • As discussed in Table 4 on page 40, the CPUC has not used its contract database
for services the CPUC entered into or amended to track the procurement method for each of its contracts. As a result, we could
between 2010 and 2014. For a selection of those not use the CPUC data to determine the number of sole-source contracts the
sole-source contracts, determine the following: CPUC entered into or amended between 2010 and 2015.
• Determined that the next best sources of information were records kept by
General Services. Refer to the Tracking of Sole-Source Contracts section in Table 4
on page 40 for a discussion of the limitations of this approach.
• Conducted a manual count of the CPUC sole-source contracts that General
Services had on record and corroborated that count with information from
General Services’ Offi ce of Legal Services contract database.
• Selected for review all 15 sole-source contracts we identifi ed.
a. Assess whether sole-source contracts were • Compared the 15 selected sole-source contracts to key criteria in state law and
suffi ciently justifi ed and complied with state the State Contracting Manual related to sole-source contracts. We reviewed the
law and contracting policies. Determine contracts to determine whether they were suffi ciently justifi ed and whether
whether any of those sole-source contracts the contract values changed without corresponding changes to scopes of work.
were subsequently amended to increase their We identifi ed only one contract with such an increase in funding.
amount without any changes in scope, and • Interviewed staff to determine the reason contracting activity did not align with
whether such actions complied with state law key criteria.
and contracting policies.
• Performed the steps described under Objective 4(b) for the
15 sole-source contracts.
CALIFORNIA STATE AUDITOR | Report 2016-104 45
September 2016
b. Determine whether the practice of including • Reviewed state law and related criteria to determine whether contractor
contractors as advocates in CPUC proceedings participation in CPUC proceedings violated any relevant criteria.
complies with state law and contracting • Reviewed CPUC regulations that dictate how entities can become parties
policies, and whether it creates a confl ict of to proceedings.
interest or is in the best interest of ratepayers.
• As described under Objective 5(c), reviewed the participation of contractors in
proceedings to assess the potential harm to ratepayers.
c. To the extent possible, determine the number • Because of the high volume of records, it was cost-prohibitive to determine the
of times contractors have participated number of times that contractors had participated in CPUC proceedings.
as advocates in CPUC proceedings and • For the contracts reviewed under Objective 8, identifi ed the related CPUC
whether they had any infl uence on contract proceeding and reviewed the list of individuals and organizations that were
award decisions. parties to each proceeding to determine how often contractors participated in
the proceedings that led to their contracts.
• For all cases where contractors participated in the proceedings related to their
contracts, reviewed the CPUC decisions that resulted from the proceedings
and the comments the contractors and other key parties submitted in the
proceedings, and attempted to determine whether the contractors infl uenced
contract award decisions.
• Reviewed interest disclosures that contractors made before participating
in these proceedings to determine whether they suffi ciently disclosed their
interests in the proceeding.
• Reviewed CPUC’s regulations related to participation in a proceeding and what
those regulations require individuals or organizations to disclose.
6 Determine the extent, if any, to which private Reviewed key sections of state law to determine whether the utilities regulated
utility entities regulated by the CPUC are by the CPUC are required to follow any state contracting requirements related
required to follow state requirements related to to competitive bidding, avoiding confl icts of interest, and ensuring that contract
competitive bidding, avoiding confl icts of interest, deliverables and costs meet requirements.
and ensuring that contract deliverables and costs
meet requirements.
7 Identify any CPUC policies or procedures for • Interviewed staff to determine what policies and procedures the CPUC has
overseeing the contracting processes of regulated established for overseeing the contracting processes of utilities.
utility entities. • Reviewed key CPUC decisions and portions of state law that relate to contract
oversight requirements.
8 To the extent possible, determine how many The CPUC did not track the contracts it ordered the energy utilities—Pacifi c
contracts the CPUC directed regulated utility Gas and Electric, San Diego Gas and Electric, Southern California Edison, and
entities to enter into with other companies Southern California Gas—to enter into in a manner that was cost-eff ective for
between 2010 and 2014. For a selection of those us to review. Therefore, we asked the energy utilities for a listing of the contracts
contracts, to the extent possible, determine that the CPUC directed them to enter into from 2010 through 2015 and the
the following: related CPUC decisions or resolutions that directed the contracts. We reviewed
the responses from the energy utilities, verifi ed their accuracy, and identifi ed
additional contracts after following up with the utilities and with CPUC staff . We
determined that the CPUC directed the utilities to enter into 25 contracts during
our audit period. We selected 18 contracts for further review.
a. Whether the contracts were paid from Reviewed the CPUC decisions or resolutions that directed the 18 contracts we
ratepayer funds. selected to determine whether the CPUC authorized the utilities to use ratepayer
funds for these contracts.
b. Whether the CPUC ensured that the contracts • Reviewed CPUC decisions and other related documents to determine whether
complied with applicable requirements the CPUC ensured that the contracts we selected complied with applicable
related to competitive bidding, avoiding requirements related to competitive bidding and ensured that contract
confl icts of interest, and ensuring that deliverables and costs met requirements.
the contract deliverables and costs • For commissioners only, completed the steps indicated under Objective 4(b) for
meet requirements. each of the selected contracts.
continued on next page . . .
46 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
9 Determine how many sole-source contracts The CPUC did not comprehensively track the sole-source contracts that the
proposed by regulated entities the CPUC energy utilities requested that the CPUC approve. Therefore, we asked the energy
approved between 2010 and 2014. For a selection utilities for a listing of the sole-source contracts that they proposed and the CPUC
of those contracts, determine the following: approved from 2010 through 2015 and the related CPUC decision or resolution
that approved each contract. We reviewed the responses from the energy utilities,
verifi ed their accuracy, and selected 20 sole-source contracts for further review.
We focused our review on sole-source contracts that the utilities proposed and
that the CPUC approved as discrete contracts. We did not include in our review
any contracts that were a component of a larger program the utilities proposed,
such as an energy effi ciency program.
a. Whether the contract complied • Identifi ed the sole-source contracting requirements energy utilities are required
with applicable requirements for to follow.
sole-source contracts. • Reviewed the 20 selected contracts and the contract information the energy
utilities submitted to the CPUC and determined whether the contracts met the
requirements for sole-source contracting.
b. Whether the contracts complied with • For each of the selected contracts, determined the following:
applicable requirements or best practices - Whether the utility performed an assessment to determine if the contract was
related to achieving best value, avoiding the best value and the results of that assessment.
confl icts of interest, and ensuring that
- Whether the contracts contained safeguards, such as performance
the contract deliverables and costs
requirements, default provisions, and remedies to ensure that contract
meet requirements.
deliverables and costs met requirements and noted no concerns.
• For commissioners only, completed the steps indicated under Objective 4(b) for
each of the selected contracts.
10 Identify any CPUC policies and procedures Reviewed CPUC policies and procedures related to record requests.
for responding to requests for public records
regarding its contracts and contracts between
regulated entities and other parties and
determine the following:
a. Whether the CPUC’s policies and procedures • Reviewed a CPUC proceeding in which the CPUC considered updating its record
for responding to these requests are request policy and noted the weaknesses that it identifi ed in the policy.
consistent with state law. • Confi rmed with CPUC staff members that they do not have a current desk
procedure manual for responding to record requests.
b. To the extent possible, determine whether the • Using the CPUC record request tracking system, we selected 20 contract-related
CPUC complies with its policies and state law record requests from 2012 through 2015 and reviewed the CPUC’s response to
when receiving requests for public documents those requests against key requirements in state law. We did not select record
related to contracts and contract deliverables. requests from 2010 and 2011 because the CPUC’s record retention policy does
not require it to keep requests after three years have elapsed.
• Interviewed staff to inquire about any discrepancies between the CPUC’s
responses and the requirements in state law.
11 Review and assess any other issues that are • Reviewed economic interest disclosures for the commissioners who served
signifi cant to the audit. from 2010 through 2015 to identify any gifts or interests that had the
appearance of impropriety.
• Reviewed the CPUC’s rules and regulations for ex parte communications and an
associated report related to a contract identifi ed under Objective 8.
• Reviewed the CPUC’s rules for commissioner recusal related to a contract
identifi ed under Objective 9.
• Reviewed disclosures to identify economic interests that had a higher likelihood
of causing a confl ict of interest. For each of these interests, we searched CPUC
decisions to determine if the entity that a commissioner had an interest in was
ever named in a CPUC decision.
• Conducted follow-up research on the only economic interest and CPUC decision
match we found within our audit period to determine whether a commissioner
had a confl ict of interest in CPUC decisions in which he participated.
Sources: California State Auditor’s analysis of the Joint Legislative Audit Committee’s audit request number 2016-104 as well as information and
documentation identifi ed in the column titled Method.
CALIFORNIA STATE AUDITOR | Report 2016-104 47
September 2016
Assessment of Data Reliability
Th e U.S. Government Accountability Offi ce, whose standards
we are statutorily required to follow, requires us to assess the
suffi ciency and appropriateness of the computer-processed
information that we use to materially support our fi ndings,
conclusions, or recommendations. In performing this audit, we
obtained contract data from the CPUC’s Microsoft Dynamics
Customer Relationship Management system (contract database)
to determine the number of sole-source contracts that the CPUC
entered into or amended from 2010 through 2015 and to make
a selection of sole-source contracts and contracts that were not
sole-source that the CPUC entered into or amended in the same
period. We performed data-set verifi cation procedures and
electronic testing of key data elements and did not identify any
signifi cant issues. However, as discussed in greater detail in the
Other Areas We Reviewed section of this report beginning on
page 39, the CPUC’s contract database does not identify the type
of procurement method used for a contract, such as sole-source.
Because we were only able to use the data to make a selection of
active CPUC contracts from 2010 through 2015, a data reliability
assessment was not required. Instead, we needed to gain assurance
that the population was complete.
We also used data from the CPUC’s Legal Information Request
database to select requests for public documents related to
contracts and contract deliverables from 2012 through 2015.
Because we were only using the data to make a selection of
requests, a data reliability assessment was not required. Instead, we
needed to gain assurance that the population was complete.
We previously audited the CPUC and found pervasive weaknesses
in the general controls it has implemented over its information
systems. We noted in a report we issued in April 2015 that
although the CPUC had certifi ed to the California Department
of Technology that it complied with all policy requirements
in Chapter 5300 of the State Administrative Manual (security
standards), we found that key information security documents
were nonexistent or lacked critical components.5 Specifi cally, the
CPUC had yet to inventory all of its information assets, assess
the risk to those assets, and develop an information security plan
for mitigating those risks. Further, we reported that the CPUC did
not have an incident response plan to ensure its timely response to
and recovery from information security incidents such as malicious
cyberattacks. Finally, although the CPUC had a current technology
5 The April 2015 report is titled California Public Utilities Commission: It Needs to Improve the Quality
of Its Consumer Complaint Data and the Controls Over Its Information Systems, Report 2014-120.
48 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
recovery plan, we questioned the plan’s usefulness because it failed
to consistently identify critical applications, establish acceptable
outage time frames for these applications, and develop strategies for
recovery. We concluded that the CPUC had poor general controls
over its information systems, compromising the confi dentiality,
integrity, and availability of the information systems it uses to
perform its day-to-day operations.
To rectify these control weaknesses, we recommended that the
CPUC ensure compliance with all security standards no later
than April 2016. When we initially followed up with the CPUC in
April 2016 about the status of its general controls, it asserted that
it had made progress toward implementing our recommendation
and estimated that it would achieve full compliance with all security
standards by the end of May 2016. When we again followed up
with the CPUC to verify its compliance status, we expected, at
a minimum, that it would have achieved full compliance with
nearly all of the security standards. However, we found that the
CPUC signifi cantly overstated its progress toward addressing
our recommendation. Although it submitted copies of various
information security documents for our review, it was substantially
out of compliance with the majority of the security standards.
When we questioned the CPUC about the disconnect between
its asserted level of compliance and its actual level of compliance, it
explained that it did not fully understand the depth of the security
standards when it provided the April 2016 status update. However,
the CPUC explained that as a result of our follow-up work, it now
believes it has a much clearer understanding of the requirements.
Th e CPUC also cited limited staff resources as a barrier to its ability
to achieve full compliance with the security standards. According to
the CPUC, it recently received authorization to hire two more
individuals for its information security team. As of August 2016, the
CPUC asserted that it was actively trying to fi ll these two positions.
Nonetheless, the CPUC estimates it will not achieve full compliance
with the security standards until December 2019. Until the CPUC
improves the controls it has implemented over its information
systems, the confi dentiality, integrity, and availability of its
information systems will continue to be at risk. Although we
determined there is an unacceptably high risk that the population
of contracts and the population of requests for public documents
related to contracts and contract deliverables were not complete,
there was suffi cient evidence in total to support our audit fi ndings,
conclusions, and recommendations.
CALIFORNIA STATE AUDITOR | Report 2016-104 49
September 2016
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. Th ose standards require that we plan and perform the audit to obtain suffi cient, appropriate
evidence to provide a reasonable basis for our fi ndings and conclusions based on our audit objectives
specifi ed in the Scope and Methodology section of the report. We believe that the evidence obtained
provides a reasonable basis for our fi ndings and conclusions based on our audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Date: September 22, 2016
Staff : Linus Li, CPA, CIA, Audit Principal
Bob Harris, MPP
Brian D. Boone, CIA, CFE
Nisha Chandra
Jessica Derebenskiy
Derek J. Sinutko, PhD
IT Audits: Michelle J. Baur, CISA, Audit Principal
Lindsay M. Harris, MBA, CISA
Sarah Rachael Black, MBA, ACDA
Sean M. Harrison
Legal Counsel: Joseph L. Porche, Staff Counsel
For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Aff airs, at 916.445.0255.
50 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Blank page inserted for reproduction purposes only.
CALIFORNIA STATE AUDITOR | Report 2016-104 51
September 2016
APPENDIX
THE CPUC’S OVERSIGHT OF ENERGY UTILITY CONTRACTS
Privately owned energy utilities subject to the CPUC’s authority are
not state agencies and therefore are not subject to the requirements
in the Public Contract Code and the State Contracting Manual when
they contract with private third-parties. However, the CPUC has broad
authority under state law to oversee energy utilities’ agreements with
third parties to help ensure that state policy goals are met and that utility
ratepayer interests are protected. Th is oversight includes approving
agreements that energy utilities propose and, in other instances,
directing the utilities to contract with third parties.
One key type of agreement that energy utilities propose for CPUC
approval is a power purchase agreement. To submit power purchase
agreements for approval, energy utilities submit an advice letter or
an application to the CPUC describing the terms of the proposed
agreement and how it complies with CPUC requirements. Although
the CPUC allows its energy division to approve some agreements if
they conform to an existing CPUC order, the CPUC contract review
process for power purchase agreements involves participation by
multiple entities as shown in Figure A on the following page. Each
energy utility has its own procurement review group that reviews
the utility’s proposed agreements. Th ese procurement review groups
include CPUC energy division representatives, representatives from
the Offi ce of Ratepayer Advocates—an entity housed within the
CPUC that represents the interests of public utility customers and
subscribers with the goal of obtaining the lowest possible rates for
service consistent with reliable and safe service levels—and parties
that are not market participants. Additionally, an independent
evaluator retained by the utility monitors some of the negotiations
and reviews the cost-eff ectiveness and overall appropriateness of the
agreements. Finally, CPUC staff reviews the proposed agreements
for compliance with CPUC requirements before the agreements are
approved or denied through a CPUC resolution.
Th e CPUC also has the authority to approve and oversee
other agreements between energy utilities and third parties—such as
agreements to establish research and development programs. State law
establishes guidelines for the CPUC’s review of energy utility research,
development, and demonstration programs. Th ese statutory guidelines
require the CPUC to consider whether the projects provide a reasonable
probability of providing benefi ts to ratepayers and whether the projects
unnecessarily duplicate research that other entities are undertaking.
State law also requires the CPUC to consider whether a project supports
a specifi c objective, such as environmental improvement, public and
employee safety, or development of new resources and processes.
52 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
Figure A
The California Public Utilities Commission’s Process for Overseeing and Approving Power Purchase Agreements
PROCUREMENT
INVESTOR-OWNED UTILITY REVIEW GROUP INDEPENDENT EVALUATOR
Utility proposes an agreement A group the CPUC requires Outside entity retained by a
based on negotiations, utilities to create, consisting of utility to provide third-party
competitive solicitation, or both. CPUC energy division staff, oversight of the procurement
Office of Ratepayer Advocates process. The independent
staff, and nonmarket evaluator monitors the
participants, reviews and negotiations, cost-effectiveness,
assesses the details of a utility’s and overall appropriateness of
overall procurement strategy, contracts. A utility is required to
solicitations, specific proposed seek the input of its dedicated
contracts, and other procurement review group and
procurement processes. the CPUC when selecting the
independent evaluator and
must, to the fullest extent
possible, follow that advice.
CPUC STAFF
Reviews proposed contract to determine consistency
and compliance with CPUC decisions and other
applicable requirements. The review includes an
evaluation of the reasonableness of the contract’s costs,
project viability, procurement review group participation,
and independent evaluator review.
CPUC
Approves or denies proposed contract
and may impose conditions.
Sources: California State Auditor’s analysis of CPUC decisions D.15-11-041, D.06-05-039, D.02-08-071; Advice Letters AL 2273-E and AL 3449-E;
CPUC resolutions E-4425 and E-4286; and independent evaluator reports.
CALIFORNIA STATE AUDITOR | Report 2016-104 53
September 2016
*
* California State Auditor’s comments begin on page 57.
54 Report 2016-104 | CALIFORNIA STATE AUDITOR
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1
CALIFORNIA STATE AUDITOR | Report 2016-104 55
September 2016
2
3
56 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
4
4
CALIFORNIA STATE AUDITOR | Report 2016-104 57
September 2016
COMMENTS
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE
RESPONSE FROM THE CPUC
To provide clarity and perspective, we are commenting on the
CPUC’s response to the audit. The numbers below correspond
to the numbers we have placed in the margin of its response.
We fi nd the CPUC’s response to this recommendation confusing. 1
Th e CPUC appears to state that it cannot agree with our
recommendation because its commissioners need to consider
and adopt a policy that would address our recommendation. Th e
CPUC makes this assertion despite also stating that it agrees it
should avoid the appearance of inappropriate relationships, which
is precisely what our recommendation is meant to achieve. Further,
the CPUC characterizes its ability to agree with and implement
this recommendation much diff erently than it does for another
recommendation that it addressed in its response letter. In response
to our recommendation that it explain how it chose a vendor in
all cases when it does not competitively select a vendor it directs
utilities to contract with, the CPUC stated on page 53 that it
agreed with our recommendation and stated that its staff would
recommend that the commissioners adopt such a policy. We are
puzzled that the CPUC is able to agree with this recommendation,
and in turn recommend the CPUC adopt it, but take a contradictory
position in not believing that it can agree with the recommendation
pertaining to gifts.
Although the CPUC states that supervisory review has been in place 2
since May 2016, it also indicates that this process is still being
reviewed, refi ned, and clarifi ed. Th erefore, we look forward to hearing
in the CPUC’s 60-day response to the audit recommendations
more about how it has formalized this process, including how it will
incorporate it into its new contracting manual.
Th e CPUC overstates our conclusion about how it tracks and 3
reviews unresolved Public Records Act requests. On page 39 of
our report, we state that the CPUC inconsistently tracked the
Public Records Act requests. As we note on that same page, this
inconsistent tracking meant that the CPUC did not provide records
as promptly as it could have in response to one of the requests we
reviewed. Th e inconsistency of the CPUC’s tracking and monitoring
led us to make the recommendation on page 39 that it should
regularly track and review its unresolved record requests.
58 Report 2016-104 | CALIFORNIA STATE AUDITOR
September 2016
4 Despite the CPUC’s objections, we continue to believe it is
important for the CPUC to implement our recommendation.
Although the CPUC states that its current rules and practices
already achieve the desired result of getting parties to adequately
disclose their interests in CPUC proceedings, the rules do not
explicitly require that parties disclose those interests when fi ling a
protest or response to an application or petition, or comments in
response to a rulemaking. Because those interests are potentially
relevant to the CPUC’s proceedings, we recommend on page 41
that the CPUC take the prudent step to ensure that in the future all
those who become a party to the CPUC’s proceedings through this
method be required to disclose their interests.
Further, we fi nd the CPUC’s assertion that a party’s interests are
generally immaterial when the party responds to a CPUC Order
Instituting Rulemaking to be unpersuasive. On pages 10 and 11 of
our report, we discuss a CPUC proceeding in which the CPUC
directed utilities to contract with a vendor that was a party to
that proceeding. In that particular case, the CPUC proceeding
was a rulemaking proceeding and the vendor became a party by
commenting on an Order Instituting Rulemaking. As we discuss
on page 10, despite the objections from all four energy utilities,
the CPUC directed the utilities to contract with this vendor
after the vendor volunteered to administer an outreach program—
yet the CPUC did not provide an adequate justifi cation as to
how the CPUC knew the vendor represented the best possible
value for ratepayers. We note on page 11 of our report that the
cumulative result of this decision was that the vendor received
contracts from the utilities totaling about 74 million. Although
in this instance the vendor voluntarily disclosed its interest in
the proceeding, this example shows that parties who participate
in this type of proceeding can fi nancially benefi t as a result of
participating and therefore their interests are material to these types
of proceedings.