(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation. The bill would require the commission to maintain an inventory of the balancing accounts and would require public utilities to record all related costs and revenues in their balancing accounts. The bill would require the commission to adopt balancing account review procedures that prioritize the review of balancing accounts with specified attributes and to annually provide the Legislature with an update on the status of its review of balancing accounts.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation. The bill would require the commission to maintain an inventory of the balancing accounts and would require public utilities to record all related costs and revenues in their balancing accounts. The bill would require the commission to adopt balancing account review procedures that prioritize the review of balancing accounts with specified attributes and to annually provide the Legislature with an update on the status of its review of balancing accounts.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the Public Utilities Commission commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation. The bill would require the commission to maintain an inventory of the balancing accounts and would require public utilities to record all related costs and revenues in their balancing accounts. The bill would require the commission to adopt balancing account review procedures that prioritize the review of balancing accounts with specified attributes. attributes and to annually provide the Legislature with an update on the status of its review of balancing accounts.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the Public Utilities Commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation. The bill would require the commission to maintain an inventory of the balancing accounts and would require public utilities to record all related costs and revenues in their balancing accounts. The bill would require the commission to adopt balancing account review procedures that prioritize the review of balancing accounts with specified attributes.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the Public Utilities Commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation. The bill would require the commission to maintain an inventory of the balancing accounts, accounts and would require public utilities to include record all related costs and revenues in their balancing accounts. The bill would require the commission to adopt balancing account review procedures that prioritize the review of balancing accounts with specified attributes.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the Public Utilities Commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation. The bill would require the commission to maintain an inventory of the balancing accounts, and would require public utilities to include all related costs and revenues in their balancing accounts. The bill would require the commission to adopt balancing account review procedures that prioritize the review of balancing accounts with specified attributes.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the Public Utilities Commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would rename the reserve accounts balancing accounts and would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation.

(1)Under existing law, the Public Utilities Commission has regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. The California Constitution authorizes the commission to establish rules, examine records, and prescribe a uniform system of accounts for all public utilities. The Public Utilities Act requires the commission to inspect and audit the books and records of electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations for regulatory and tax purposes. An inspection and audit is required to be done at least every 3 years if the utility has over 1,000 customers and at least every 5 years if the utility has 1,000 or fewer customers. The act requires that reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities.

This bill, which would be known as the Public Utilities Commission Audit Compliance Act of 2016, would delete the requirement that the reports of the inspections and audits and other pertinent information be furnished to the State Board of Equalization for use in the assessment of the public utilities and instead would require the commission to post reports of the inspections and audits and other pertinent information on its Internet Web site.

(2)Existing law directs the Public Utilities Commission to require a public utility to establish and maintain a reserve account whenever the commission authorizes a change in rates reflecting and passing through to customers specific changes in costs to reflect the balance between the related costs and revenues.

This bill would require the commission to develop a risk-based approach for reviewing those balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and are supported by appropriate documentation.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2168

Author:(Williams)

As Amended Ver:June 30, 2016

Majority vote

Original Committee Reference: U. & C.

SUMMARY: Revises California Public Utilities Commission (CPUC) reporting requirements on inspections and audits and modifies current auditing requirements. Specifically, this bill:

1. Deletes the requirement for the CPUC to furnish reports on inspections and audits and other pertinent information to the Board of Equalization (BOE) and instead requires the CPUC to post the specified documents on its Internet Web site.
2. Requires the CPUC to develop a risk-based approach for periodically reviewing balancing accounts to ensure that ratepayer funds are used for allowable purposes and are supported by appropriate documentation. Requires the CPUC to maintain an inventory of the balancing accounts.
3. Requires the CPUC to require public utilities to record all related costs and revenues in the balancing accounts, unless specific costs or revenues are exempted by the CPUC.
4. Requires the CPUC to adopt balancing account review procedures that prioritize certain types of accounts, as specified.
5. Requires the CPUC to forego the required balancing account review if the Office of Ratepayer Advocates or an independent Auditor plans to review or audit the account. Requires the CPUC to retain sole responsibility for the results of the delegated reviews or audits.

The Senate amendments require a status report in the CPUC annual report to the Legislature on its review of public utilities' balancing accounts.

FISCAL EFFECT: According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs.

COMMENTS:

1. Purpose: According to the author, this bill codifies the State Auditor's recommendations to the Legislature regarding the CPUC's review of utility balancing accounts and the release of utility audit and inspection reports.
2. Background: In March 2014, the State Auditor issued a report in response to a request by the Joint Legislative Audit Committee concerning the CPUC oversight of the utility balancing accounts of the entities it regulates. The Auditor found the CPUC lacked adequate oversight over balancing accounts, and did not always comply with legal audit requirements. Additionally, for over three decades, the CPUC failed to provide audit results to the BOE for tax purposes. This bill addresses the audit findings and implements its recommendations.
3. Balancing Accounts: A balancing account is a tracking mechanism used to ensure a utility recoups from ratepayers any costs the CPUC has authorized. The balancing account also ensures 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 to adjust future rates to either refund or recoup the balance.
4. 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 the funds it had previously authorized for replacing those poles, wires and transformers were 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.

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.

Analysis Prepared by: Sue Kateley / U. & C. / (916) 319-2083 FN: 0003706

 THIRD READING  

Bill No: AB 2168

Author:

:

Vote:

SENATE ENERGY, U. & C. COMMITTEE: 10-0, 6/21/16

AYES: Hueso, Morrell, Cannella, Gaines, Hertzberg, Lara, Leyva, McGuire, Pavley, Wolk

NO VOTE RECORDED: Hill

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 78-0, 5/5/16 - See last page for vote

SUBJECT:

SOURCE: California Public Utilities Commission

DIGEST: This bill requires the California Public Utilities Commission (CPUC) to periodically review balancing accounts of utilities based on a risk-based approach to ensure transactions are for allowable purposes. This bill also deletes the requirement that the reports of the inspections and audits of utilities be furnished to the State Board of Equalization (BOE).

ANALYSIS:

Existing law:

1. 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 §314.5)
2. 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 five percent 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 five percent threshold is not exceeded. After January 1, 2006, this adjustment shall occur when deemed appropriate. (Public Utilities Code §454.5(d)((3))
3. 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 account at the time of a subsequent rate adjustment. (Public Utilities Code §792.5)
4. 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 §797)
5. Establishes an Office of Ratepayer Advocates (ORA) 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 §309.5)

This bill:

1. Establishes the Public Utilities Commission Audit Compliance Act of 2016 and states that the Legislature finds and declares the need to amend statute related to the CPUC in order to institute the legislative recommendations of the State Auditor.
2. Requires the CPUC to post reports of the inspections and audits and other pertinent information on its Internet Web site.
3. Renames the reserve accounts to balancing accounts of a public utility.
4. 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 supported by documentation.
5. Requires the CPUC to maintain an inventory of the balancing accounts.
6. Requires the CPUC to require the utility to record all related costs and revenues in the balancing account.
7. Requires the CPUC to adopt balancing account review procedures that prioritize the review of balancing accounts meeting specified criteria.
8. Authorizes the CPUC to forgo the review of a balancing account if the ORA or an independent auditor plans to review or audit the balancing account.
9. Requires the CPUC to annually provide the Legislature with an update on the status of its review of public utilities’ balancing accounts by including in its annual report to the Legislature or by posting it in a conspicuous area of its Internet Web site, or both.

Background

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. The CPUC has authorized over 300 balancing accounts, which vary by utility on activities such as low-income energy efficiency, renewables, enhanced oil recovery, pension expenses, water revenue adjustment and many others.

State Auditor issues report. In March 2014, the State Auditor issued a report (2013-109) which concluded that the CPUC lacks adequate processes to provide sufficient oversight of utility balancing accounts to protect ratepayers from unfair rate increases. State law requires the CPUC to review semiannually certain balancing accounts. However, the Auditor discovered that the CPUC only reviews some balancing accounts when a utility requests to incorporate the balance in that account into future rates as a surcharge or a credit. The Auditor noted the need to develop more systematic process to review the balancing accounts.

Risk-based approach. The State Auditor’s report included several recommendations including a recommendation to the Legislature to amend Public Utilities Code §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 are supported by appropriate documentation, such as invoices. The report also included a series of recommendations to the CPUC in order to provide appropriate oversight of balancing accounts and better protect the interests of ratepayers. This bill attempts to incorporate the State Auditor’s recommendations and require the CPUC to utilize a risk-based approach that prioritizes review of balancing accounts that may be more at risk of inappropriate transactions.

Related/Prior Legislation

AB 825 (Rendon, 2015) would have deleted the requirement that the reports of the inspections and audit of utilities by the CPUC be furnished to the BOE for use in the assessment of utilities. The bill was vetoed by the Governor.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 7/28/16)

California Public Utilities Commission (source)

OPPOSITION: (Verified 7/28/16)

None received

ARGUMENTS IN SUPPORT: The author contends that the statutory change will protect ratepayers by ensuring that the transactions recorded in balancing accounts are for allowable purposes and are supported by appropriate documentation, such as invoices. The author further states, AB 2168 is an outgrowth of the State Auditor’s audit of the CPUC’s monitoring of utility-related balancing accounts.

ASSEMBLY FLOOR: 78-0, 5/5/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

NO VOTE RECORDED: Beth Gaines, Jones-Sawyer

Prepared by:

8/3/16 18:56:58

**** END ****

SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2015 - 2016 Regular

Bill No: AB 2168 Hearing Date: 6/21/2016

SUBJECT: Public Utilities Commission Audit Compliance Act of 2016

DIGEST: This bill requires the California Public Utilities Commission (CPUC) to periodically review balancing accounts of utilities based on a risk-based approach to ensure transactions are for allowable purposes. This bill also deletes the requirement that the reports of the inspections and audits of utilities be furnished to the State Board of Equalization (BOE).

ANALYSIS:

Existing law:

1. 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 §314.5)
2. 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 five percent 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 five percent threshold is not exceeded. After January 1, 2006, this adjustment shall occur when deemed appropriate. (Public Utilities Code §454.5(d)((3))
3. 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 account at the time of a subsequent rate adjustment. (Public Utilities Code §792.5)
4. 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 §797)
5. Establishes an Office of Ratepayer Advocates (ORA) 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 §309.5)

This bill:

1. Establishes the Public Utilities Commission Audit Compliance Act of 2016 and states the Legislature finds and declares the need to amend statute related to the CPUC in order to institute the legislative recommendations of the State Auditor.
2. Requires the CPUC to post reports of the inspections and audits and other pertinent information on its Internet Web site.
3. Renames the reserve accounts to balancing accounts of a public utility.
4. 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 supported by documentation.
5. Requires the CPUC to maintain an inventory of the balancing accounts.
6. Requires the CPUC to require the utility to record all related costs and revenues in the balancing account.
7. Requires the CPUC to adopt balancing account review procedures that prioritize the review of balancing accounts meeting specified criteria.
8. Authorizes the CPUC to forgo the review of a balancing account if the ORA or an independent auditor plans to review or audit the balancing account.

Background

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. The CPUC has authorized over 300 balancing accounts, which vary by utility on activities such as low–income energy efficiency, renewables, enhanced oil recovery, pension expenses, water revenue adjustment and many others.

State Auditor issues report. In March 2014, the State Auditor issued a report (2013-109) which concluded that the CPUC lacks adequate processes to provide sufficient oversight of utility balancing accounts to protect ratepayers from unfair rate increases. State law requires the CPUC to review semiannually certain balancing accounts. However, the Auditor discovered that the CPUC only reviews some balancing accounts when a utility requests to incorporate the balance in that account into future rates as a surcharge or a credit. The Auditor noted the need to develop more systemic process to review the balancing accounts.

Risk-based approach. The State Auditor’s report included several recommendations including a recommendation to the Legislature to amend Public Utilities Code §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 are supported by appropriate documentation, such as invoices. The report also included a series of recommendations to the CPUC in order to provide appropriate oversight of balancing accounts and better protect the interests of ratepayers. This bill attempts to incorporate the State Auditor’s recommendations. Utilizing a risk-based approach that prioritizes review of balancing accounts that may be more at risk of inappropriate transactions is not full-proof. However, the proposed schedule and prioritization seems appropriate. In order to ensure the CPUC follows through with the approach, the author and committee may wish to amend this bill to require the CPUC to provide an annual update on the status of reviewing balancing accounts within its annual report to the Legislature.

Prior/Related Legislation

AB 825 (Rendon, 2015) would have deleted the requirement that the reports of the inspections and audit of utilities by the CPUC is furnished to the BOE for use in the assessment of utilities. The bill was vetoed by the Governor.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT:

California Public Utilities Commission (Source)

OPPOSITION:

None received

ARGUMENTS IN SUPPORT: The author contends that the statutory change will protect ratepayers by ensuring that the transactions recorded in balancing accounts are for allowable purposes and are supported by appropriate documentation, such as invoices. The author further states, AB 2168 is an outgrowth of the State Auditor’s audit of the CPUC monitoring of utility-related balancing accounts.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2168

Author:(Williams)

As Amended Ver:April 28, 2016

Majority vote

SUMMARY: Revises California Public Utilities Commission (CPUC) reporting requirements on inspections and audits and modifies current auditing requirements. Specifically, this bill:

1. Deletes the requirement for the CPUC's to furnish reports on inspections and audits and other pertinent information to the Board of Equalization (BOE) and instead requires the CPUC to post the specified documents on its Internet Web site.
2. Requires the CPUC to develop a risk-based approach for periodically reviewing balancing accounts to ensure that ratepayer funds are used for allowable purposes and are supported by appropriate documentation. Requires the CPUC to maintain an inventory of the balancing accounts.
3. Requires the CPUC to require public utilities to record all related costs and revenues in the balancing accounts, unless specific costs or revenues are exempted by the CPUC.
4. Requires the CPUC to adopt balancing account review procedures that prioritize certain types of accounts, as specified.
5. Requires the CPUC to forego the required balancing account review if the Office of Ratepayer Advocates or an independent Auditor plans to review or audit the account. Requires the CPUC to retain sole responsibility for the results of the reviews or audits.

FISCAL EFFECT: According to the Assembly Appropriations Committee, additional costs are absorbable within existing resources.

COMMENTS:

1. Purpose: According to the author, this bill codifies the State Auditor's recommendations to the Legislature regarding the CPUC's review of utility balancing accounts and the release of utility audit and inspection reports.
2. Background: In March 2014, the State Auditor issued a report in response to a request by the Joint Legislative Audit Committee concerning the CPUC oversight of the utility balancing accounts of the entities it regulates. The State Auditor found the CPUC lacked adequate oversight over balancing accounts, and did not always comply with legal audit requirements. Additionally, for over three decades, the CPUC failed to provide audit results to the BOE for tax purposes. This bill addresses the audit findings and implements its recommendations.
3. Balancing Accounts: A balancing account is a tracking mechanism used to ensure a utility recoups from ratepayers any costs the CPUC has authorized. The balancing account also ensures 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 to adjust future rates to either refund or recoup the balance.
4. 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 the funds it had previously authorized for replacing those poles, wires and transformers were 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.

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.

Analysis Prepared by: Sue Kateley / U. & C. / (916) 319-2083 FN: 0002816

ASSEMBLY THIRD READING

ATR Bill Id:AB 2168

Author:(Williams)

As Amended Ver:April 4, 2016

Majority vote

SUMMARY: Revises California Public Utilities Commission (CPUC) reporting requirements on inspections and audits and modifies current auditing requirements. Specifically, this bill:

1. Deletes the requirement for the CPUC's to furnish reports on inspections and audits and other pertinent information to the Board of Equalization (BOE) and instead requires the CPUC to post the specified documents on its Internet Web site.
2. Requires the CPUC to develop a risk-based approach for periodically reviewing balancing accounts to ensure that ratepayer funds are used for allowable purposes and are supported by appropriate documentation. Requires the CPUC to maintain an inventory of the balancing accounts.
3. Requires the CPUC to require public utilities to record all related costs and revenues in the balancing accounts, unless specific costs or revenues are exempted by the CPUC.
4. Requires the CPUC to adopt balancing account review procedures that prioritize certain types of accounts, as specified.
5. Requires the CPUC to forego the required balancing account review if the Office of Ratepayer Advocates or an independent Auditor plans to review or audit the account. Requires the CPUC to retain sole responsibility for the results of the delegated reviews or audits.

FISCAL EFFECT: According to the Assembly Appropriations Committee, additional costs are absorbable within existing resources.

COMMENTS:

1. Purpose: According to the author, this bill codifies the State Auditor's recommendations to the Legislature regarding the CPUC's review of utility balancing accounts and the release of utility audit and inspection reports.
2. Background: In March 2014, the State Auditor issued a report in response to a request by the Joint Legislative Audit Committee concerning the CPUC oversight of the utility balancing accounts of the entities it regulates. The Auditor found the CPUC lacked adequate oversight over balancing accounts, and did not always comply with legal audit requirements. Additionally, for over three decades, the CPUC failed to provide audit results to the BOE for tax purposes. This bill addresses the audit findings and implements its recommendations.
3. Balancing Accounts: A balancing account is a tracking mechanism used to ensure a utility recoups from ratepayers any costs the CPUC has authorized. The balancing account also ensures 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 to adjust future rates to either refund or recoup the balance.
4. 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 the funds it had previously authorized for replacing those poles, wires and transformers were 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.

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.

Analysis Prepared by: Sue Kateley / U. & C. / (916) 319-2083 FN: 0002761

Date of Hearing: April 13, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2168

Author:(Williams) – As Amended Ver:April 4, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill revises California Public Utilities Commission (PUC) reporting requirements on inspections and audits and modifies current auditing requirements. Specifically, this bill:

1. Deletes the requirement for the PUC's to furnish reports on inspections and audits and other pertinent information to the Board of Equalization (BOE) and instead requires the PUC to post the specified documents on its Internet Web site.
2. Requires the PUC to develop a risk-based approach for periodically reviewing balancing accounts to ensure that ratepayer funds are used for allowable purposes and are supported by appropriate documentation. Requires the PUC to maintain an inventory of the balancing accounts.
3. Requires the PUC to require public utilities to record all related costs and revenues in the balancing accounts, unless specific costs or revenues are exempted by the PUC.
4. Requires the PUC to adopt balancing account review procedures that prioritize certain types of accounts, as specified.
5. Requires the PUC to forego the required balancing account review if the Office of Ratepayer Advocates or an independent Auditor plans to review or audit the account. Requires the PUC to retain sole responsibility for the results of the delegated reviews or audits.

FISCAL EFFECT:

Additional costs are absorbable within existing resources.

COMMENTS:

1. Purpose. According to the author, this bill codifies the State Auditor's recommendations to the Legislature regarding the PUC's review of utility balancing accounts and the release of utility audit and inspection reports.
2. Background. In March 2014, the State Auditor issued a report in response to a request by the Joint Legislative Audit Committee concerning the PUC oversight of the utility balancing accounts of the entities it regulates. The Auditor found the PUC lacked adequate oversight over balancing accounts, and did not always comply with legal audit requirements. Additionally, for over three decades, the PUC failed to provide audit results to the BOE for tax purposes. This bill addresses the audit findings and implements its recommendations.
3. Balancing Accounts. A balancing account is a tracking mechanism used to ensure a utility recoups from ratepayers any costs the PUC has authorized. The balancing account also ensures 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 to adjust future rates to either refund or recoup the balance.

Analysis Prepared by: Jennifer Galehouse / APPR. / (916) 319-2081

Date of Hearing: March 30, 2016

ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE

Mike Gatto, Chair

ABPCA Bill Id:AB 2168 (

Author:Williams) – As Introduced Ver: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:

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 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 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).
   1. 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 utility balancing accounts of entities it regulates. The Auditor found the CPUC:
   1. Lacks adequate processes to provide sufficient oversight of utility balancing accounts to protect ratepayers from unfair rate increases.
   2. 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.
   3. 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.
   4. 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.

• 1. 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.
  2. The CPUC should direct its energy division to perform in‑depth reviews of balancing accounts that Ratepayer Advocates has not reviewed.
  3. 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.
  4. The CPUC should follow the state law requirement to inspect and audit the accounting records of utilities it regulates within required time frames.
  5. 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.

1. 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 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:

• 1. 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).
  2. Authorized revenue requirements that fall in the top 25th percentile of all accounts.
  3. Volatile fluctuations in quarterly balances over time.
  4. 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.

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.

1. 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 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 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.

1. 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.
2. 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.

1. Suggested amendments:

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 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.
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

1. http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M158/K418/158418841.PDF ↑