BILL ANALYSIS Ó
AB 2168
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Date of Hearing: March 30, 2016
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Mike Gatto, Chair
AB 2168
(Williams) - As Introduced February 17, 2016
SUBJECT: Public Utilities Commission Audit Compliance Act of
2016
SUMMARY: Deletes a requirement that the California Public
Utilities Commission (CPUC) furnish reports on inspections and
audits to the State Board of Equalization (BOE) and modifies
current auditing requirements for the CPUC to require a risk
based approach to performing audits on utility balancing
accounts. Specifically, this bill:
1)Deletes the requirement that the CPUC's reports on inspections
and audits and other pertinent information be furnished to the
BOE for use in the assessment of the public utilities and
instead requires the CPUC to post these documents on the CPUC
Web site.
2)Requires the CPUC to develop a risk-based approach for
reviewing balancing accounts periodically to ensure that
ratepayer funds are used for allowable purposes and supported
by appropriate documentation.
EXISTING LAW:
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1)Establishes an Office of Ratepayer Advocates to represent and
advocate on behalf of public utility customers with a goal to
obtain the lowest possible rate for service consistent with
reliable and safe service levels with a primary focus on
residential and small commercial customers. (Public Utilities
Code Section 309.5)
2)Requires the CPUC to inspect and audit the books and records,
for regulatory or tax purposes, of every electrical, gas heat,
telegraph, telephone, and water corporation serving over 1,000
customers at least once every three years and provide the
inspections and audits to the BOE for the its use in the
assessment of public utilities. (Public Utilities Code Section
314.5)
3)Requires the CPUC to review the balancing accounts, not less
than semiannually, of electrical corporations to ensure timely
recovery of prospective procurement costs incurred pursuant to
an approved procurement plan. Until January 1, 2006, the CPUC
shall ensure that any over-collection or under-collection in
the power procurement balancing account does not exceed 5% of
the electrical corporation's actual recorded generation
revenues for the prior calendar year excluding revenues
collected for the Department of Water Resources. Requires the
CPUC to determine the schedule for amortizing the
over-collection or under-collection in the balancing account
to ensure that the 5% threshold is not exceeded. After
January 1, 2006, this adjustment shall occur when deemed
appropriate. (Public Utilities Code Section 454.5(d)((3))
4)Requires the CPUC, whenever authorizing a change in rates
reflecting costs that are passed through to customers, to
require public utilities to maintain balancing accounts that
reflect the costs and revenues, whether negative or positive,
and that the CPUC take into account any adjustment any
positive or negative balance remaining in the balancing
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account at the time of a subsequent rate adjustment. (Public
Utilities Code Section 792.5)
5)Requires the CPUC to periodically audit, or direct that an
independent audit be periodically conducted for, all
significant transactions, as specified by the CPUC, between a
water corporation with more than 2,000 service connections, or
an electrical, gas, or telephone corporation, and every
subsidiary or affiliate of, or corporation holding a
controlling interest in, that water, electrical, gas, or
telephone corporation. The CPUC, in this connection, may
utilize the services of an independent auditor, who shall be
selected and supervised by the CPUC, or may direct a water
corporation with more than 2,000 service connections, or an
electrical, gas, or telephone corporation, to utilize the
services of an independent auditor, who shall be selected and
supervised by that water, electrical, gas, or telephone
corporation. (Public Utilities Code Section 797)
FISCAL EFFECT: Unknown.
COMMENTS:
1)Author's statement: "AB 2168 codifies the State Auditor's
recommendations to the Legislature regarding the Commission's
review of utility balancing accounts and release of utility
audit and inspection reports."
2)Utility costs and revenues: A regulatory utility presents
costs to the CPUC in three main categories: capital costs,
fixed-budget costs, and pass-through costs. The CPUC allows
utilities to make a certain level of profit on capital costs,
which represent the utilities' investment in the
infrastructure and equipment used to provide electricity,
natural gas, or water to consumers, such as a power plant or a
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pipeline for natural gas or water. For fixed-budget costs,
the CPUC generally authorizes a budget for the utility to
recoup the costs that it can reasonably control, such as
administration costs. The utility must absorb any
fixed-budget costs it incurs that are in excess of the
authorized budget, but if costs are under budget, it keeps the
amount saved as profit. Finally, for pass-through costs, which
are costs that are difficult to reasonably predict, such as
costs of purchasing electricity, natural gas, or water, the
CPUC allows the utility to recoup, through rates and without
any mark-up, all costs the utility incurs. These three types
of costs, including allowed profit margins on capital costs,
are incorporated into the rate that the utility proposes to
collect from different classes of ratepayers (classes of
customers are residential, commercial, industrial,
streetlight, and agricultural).
a) For emergency expenditures, a utility is required to
take appropriate steps to correct the issue and there are a
number of avenues for a utility to seek additional funding
if it is needed. For example, a utility can open a
Catastrophic Emergency Management Account (CEMA), use funds
reserved for operational emergencies, divert funds from
non-safety related project or submit an Application for
CPUC's consideration. Failure by a utility to address an
urgent safety issues immediately can trigger an enforcement
action by the CPUC.
3)What's a balancing account: A balancing account is a tracking
mechanism used to ensure that a utility recoups from
ratepayers costs the CPUC has authorized and that ratepayers
do not pay more than they should. If a balancing account has
a balance - indicating an over- or under-collection from
ratepayers - the utility will generally seek periodically to
adjust future rates to either refund or recoup the balance.
4)State Auditor's Report: In March 2014 the State Auditor
issued a report in response to a request by the Joint
Legislative Audit Committee, the California State Auditor
presents this audit report concerning the CPUC oversight of
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utility balancing accounts of entities it regulates. The
Auditor found the CPUC:
a) Lacks adequate processes to provide sufficient oversight
of utility balancing accounts to protect ratepayers from
unfair rate increases.
b) Lacks the necessary information, such as the size of a
balancing account and the last time it was reviewed, to
determine which balancing accounts it should review.
c) In addition to not providing adequate oversight over
balancing accounts, the CPUC has not always complied with a
requirement to audit utilities' books and records according
to the schedule prescribed by state law.
d) For over three decades, it has not provided the results
of these audits to the California State Board of
Equalization for tax assessment purposes, as required by
state law.
5)State Auditor's Recommendations: The State Auditor made the
following recommendations in the March 2014 report:
The Legislature should amend California Public Utilities Code,
Section 792.5, to require the CPUC to develop a risk-based
approach for reviewing all balancing accounts periodically to
ensure that the transactions recorded in the balancing
accounts are for allowable purposes and supported by
appropriate documentation, such as invoices.
a) The CPUC should regularly update the list of balancing
accounts that it authorized and verify its accuracy and use
this list to guide oversight efforts.
b) The CPUC should direct its energy division to perform
in-depth reviews of balancing accounts that Ratepayer
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Advocates has not reviewed.
c) The CPUC water division should, within six months,
develop policies to ensure that reviews of balancing
accounts are appropriately documented, subjected to
supervisory approval, and retained.
d) The CPUC should follow the state law requirement to
inspect and audit the accounting records of utilities it
regulates within required time frames.
e) The Legislature should amend state law to remove the
requirement that the CPUC provide audit reports to
Equalization.
The CPUC has internally implemented some of these
recommendations, including maintaining an inventory of
balancing accounts and adoption of a Balancing Account Review
Procedure.
The author may wish to consider an amendment that would
include the other recommendations made by the State Auditor,
specifically: a requirement to maintain an inventory of all
balancing accounts, adoption of a Balancing Account Review
Procedure, a requirement that utilities include authorized
amounts in the balancing account unless specifically exempted
from doing so by the CPUC.
6)Risk-based analysis: This bill requires the CPUC to develop a
risk-based approach for reviewing all balancing accounts
periodically to ensure that the transactions recorded in the
balancing accounts are for allowable purposes and are
supported by appropriate documentation. The State Auditor
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recommended that the CPUC review of balancing accounts be
"based on the risk and the magnitude of the potential for
unfair rate changes."
The bill does not include a definition of a risk-based
analysis.
According to the CPUC, since April 30, 2013, the CPUC's Energy
Division requires utilities to file updated lists of balancing
accounts and balances in each balancing account every quarter.
The CPUC Energy Division Energy Division developed its risk
based approach in August 2014 as part of its Balancing Account
Review Procedures. The procedures were provided to the State
Auditor as part of the 6 month update in September 2014. The
risk based criteria include the following:
a) Balancing accounts with quarter-end balances outside of
?10% or more of the currently authorized revenue
requirement for a given account (ratio of balance to
authorized revenue requirement).
b) Authorized revenue requirements that fall in the top
25th percentile of all accounts.
c) Volatile fluctuations in quarterly balances over time.
d) Accounts that have not been reviewed in the previous
three reviews.
The CPUC excludes reviewing those Balancing Accounts that meet
the above identified risk-based criteria but are planned to be
reviewed or audited by the Division of Ratepayer Advocates
(subsequently renamed in statute the Office of Ratepayer
Advocates), the Division of Water and Audits, or by
independent auditors.
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Current statute does not assign audit or review
responsibilities to the Office of Ratepayer Advocates.
Therefore it is unclear if, when the CPUC delegates audits or
reviews to the Office of Ratepayer Advocates, the CPUC has
fulfilled its statutory responsibility to conduct audits and
reviews.
The author may wish to amend AB 2168 to include the criteria
the CPUC Energy Division established in its Balancing Account
Review Procedures.
In addition, the author may wish to clarify that the
responsibility for conducting audits and reviews are solely
the responsibility of the CPUC, including those audits and
reviews that the CPUC has delegated to the Office of Ratepayer
Advocates or independent auditors.
7)Checking to see if the work was done: An important gap that
is not addressed by auditing and reviewing balancing accounts
is a requirement for the CPUC to verify that expenditures for
the work it has authorized is actually completed.
When the utilities ask for funding from ratepayers it presents
papers and testimony to justify the request for funding from
ratepayers. In the areas of maintenance and operations, these
requests are typically detailed on the number of poles to be
replaced, miles of wires to replace, and transformers to
replace in the case of an electrical corporation. Similarly,
the gas corporations submit testimony on gas pipeline
maintenance and operations. Once the CPUC has approved the
requests for funding the CPUC allows the regulated companies
to redirect spending. There may be unknown safety consequences
if, for example, a utility redirected funds and failed to
replace aging power poles. In the next cycle of funding
requests the utility could again request funds for replacing
poles, wires, and transformers. The CPUC might not know that
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the funds it had previously authorized for replacing those
poles, wires and transformers was redirected to another
purpose.
If the analysis of balancing accounts is based solely on
impacts related to unfair rate changes it might not see the
impact on future rates due to power outages or facility
failures, possibly a result of redirecting funds away from
maintenance and operations.
In January 2016, the CPUC Executive Director published an
updated Safety Action Plan<1> and included in it a new staff
activity:
Electric and gas investor-owned utilities (IOUs)
propose expenditures on safety-related programs in
their General Rate Cases, and the CPUC votes on
whether or not to approve the program and the
appropriate level of expenditures. General Rate
Cases (GRC) are forward-looking exercises, and the
analysis of safety programs and expenditures in a
rate case necessarily focuses on the programs'
prospective benefits and the amount of money
necessary to realize those benefits in a cost
effective manner. The prospective nature of GRC has
not always, however, been conducive to retrospective
examination of safety programs approved in prior GRC
for a given IOU.
The CPUC believes that an understanding of the
status of safety programs and expenditures approved
in prior GRC will enhance the CPUC's evaluation of
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<1>
http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M158/K418/15
8418841.PDF
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prospective safety programs and expenditures in
General Rate Cases under consideration. For example,
how does a newly proposed safety program relate to
programs approved in prior GRC? Have previously
authorized expenditures been spent as expected? Are
there any economic or operational efficiencies that
could be realized in an overlap in funding or
program design between newly proposed and previously
approved safety programs? Therefore, in order to
contribute to a more robust analysis of the
relationship of IOU safety programs to each other
and the extent to which previously approved
expenditures have been spent as expected, the CPUC
will implement a new staff report. In this report,
Energy Division staff will review the status of
safety programs and expenditures approved in prior
GRC.
It is unclear if the review of safety-related program
expenditures will occur during balancing account audits or if
there will be additional reviews of the same balancing
accounts at some later date. The CPUC may want to consider
coordinating or consolidating these activities so that safety
and ratepayer protection are addressed simultaneously.
8)Support and Opposition: The CPUC is the sponsor of this bill.
The CPUC states that: "AB 2168 codifies recommendations made
by the State Auditor to the Legislature by amending Section
314.5 of the Public Utilities Code CPUC reports of inspections
and audits and other pertinent information available on the
CPUC's Internet Web site. At the same time, AB 2168 deletes
the requirement that the CPUC furnish reports of its utility
inspections and audits to the State Board of Equalization. The
bill will also modify Section 792.5 of the Public Utilities
Code requiring the CPUC to develop a risk-based approach to
reviewing all balancing account periodically.
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9)Related Legislation:
ACA 11 (Gatto) 2016: Authorizes a ballot initiative to
empower the Legislature, on a 2/3 vote, to reallocate CPUC
responsibilities. Pending in the Assembly Utilities and
Commerce Committee.
AB 2570 (Quirk) 2016: Deletes the requirement that reports of
the inspections and audits and other pertinent information be
furnished to the BOE. Pending in the Assembly Utilities and
Commerce Committee.
AB 1651 (Obernolte) 2016: Requires the PUC to post online
contracts awarded, "directed" contracts, and any audit of CPUC
contracting conducted by the Department of General Services.
Pending in the Assembly Utilities and Commerce Committee.
AB 825 (Rendon) of 2015: Deletes the requirement that the
reports of the inspections and audit and other pertinent
information be furnished to the State Board of Equalization
for use in the assessment of the public utilities. Vetoed by
the Governor.
SB 879 (Padilla), Chapter 523, Statutes of 2011: Requires any
unspent moneys in the balancing account for capital
expenditures for the maintenance and repair of transmission
pipelines to be returned to ratepayers.
10)Suggested amendments:
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SECTION 1. This act shall be known, and may be cited, as the
Public Utilities Commission Audit Compliance Act of 2016.
SEC. 2. (a) The Legislature hereby finds and declares that the
California State Auditor, at the behest of the Joint Legislative
Audit Committee, has made multiple legislative recommendations
relating to the operations of the Public Utilities Commission in
recent years. Those include, among other recommendations, both
of the following:
(1) The Legislature should amend Section 314.5 of the Public
Utilities Code to remove the requirement that the Public
Utilities Commission provide audit reports to the State Board of
Equalization (Report 2013-109, Recommendation 15).
(2) To ensure proper oversight of balancing accounts to protect
ratepayers from unfair rate increases, the Legislature should
amend Section 792.5 of the Public Utilities Code to require the
Public Utilities Commission to develop a risk-based approach for
reviewing all balancing accounts periodically to ensure that the
transactions recorded in the balancing accounts are for
allowable purposes and are supported by appropriate
documentation, such as invoices (Report 2013-109, Recommendation
1).
(b) It is the intent of the Legislature in enacting this act to
codify the California State Auditor's legislative
recommendations described in subdivision (a) to ensure that the
Public Utilities Commission continues to prioritize the
protection of ratepayers and remains accountable to legislative
oversight.
SEC. 3. Section 314.5 of the Public Utilities Code is amended to
read:
314.5. The commission shall inspect and audit the books and
records for regulatory and tax purposes (1) at least once
every three years in the case of every electrical, gas, heat,
telegraph, telephone, and water corporation serving over 1,000
customers, and (2) at least once every five years in the case
of every electrical, gas, heat, telegraph, telephone, and water
corporation serving 1,000 or fewer customers. An audit conducted
in connection with a rate proceeding shall be deemed to fulfill
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the requirements of this section. The commission shall post
reports of the inspections and audits and other pertinent
information on its Internet Web site.
SEC. 4.
Section 792.5 of the Public Utilities Code is amended to read:
792.5. (a) Whenever the commission authorizes any change in
rates reflecting and passing through to customers specific
changes in costs, except rates set for common carriers, the
commission shall require as a condition of the order that the
public utility establish and maintain a balancing account
reflecting the balance, whether positive or negative, between
the related costs and revenues, and the commission shall take
into account by appropriate adjustment or other action any
positive or negative balance remaining in the balancing account
at the time of any subsequent rate adjustment.
(b) The commission shall develop a risk-based approach for
reviewing all balancing accounts periodically to ensure that the
transactions recorded in the balancing accounts are for
allowable purposes and are supported by appropriate
documentation.
(c) The commission shall maintain an inventory of all balancing
accounts authorized by the commission.
(d) The commission shall require the inclusion of authorized
funding in the balancing accounts unless specifically exempted
from doing so by the commission.
(e) The commission shall adopt balancing account review
procedures that shall include, but not be limited to the
following:
(1)Balancing accounts with quarter-end balances outside of plus
or minus ten percent or more of the currently authorized
revenue requirement for a given account
(2)Authorized revenue requirements that fall in the top 25th
percentile of all accounts.
(3)Volatile fluctuations in quarterly balances over time.
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(4)Accounts that have not been reviewed in the previous three
reviews.
(5)The commission may exclude reviewing those balancing accounts
consistent with this subsection that will be reviewed or
audited by the Office of Ratepayer Advocates or by independent
auditors. The commission shall retain sole responsibility for
the results of the reviews delegated to and conducted by the
Office of Ratepayer Advocates or by independent auditors.
REGISTERED SUPPORT / OPPOSITION:
Support
California Public Utilities Commission (Sponsor)
Opposition
None on file.
Analysis Prepared by:Sue Kateley / U. & C. / (916) 319-2083
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