Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. Existing law directs the commission to require a public utility to establish and maintain a balancing 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. Existing law requires 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. Existing law requires the commission to maintain an inventory of the balancing accounts and requires public utilities to record all related costs and revenues in their balancing accounts. Existing law requires the commission to adopt balancing account review procedures that are consistent with a risk-based approach.

Existing law requires the commission to annually provide the Legislature with an update on the status of its review of balancing accounts as part of an annual report or by posting it on its internet website, as provided.

Existing law requires that all charges demanded or received by any public utility, or by any 2 or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered be just and reasonable and provides that every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful.

This bill would require the commission to include, as part of its annual update to the Legislature on the status of its review of balancing accounts, the amount of funds in, and the expenditures from, the memorandum accounts and balancing accounts of each public utility. The bill would require the commission to conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum account or balancing account of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the commission is unable to review all those accounts by July 1, 2025, as provided. The bill would require the commission, if it determines that any actual costs recorded in those electrical corporation accounts have already been authorized and collected from customers, to deny the electrical corporation a 2nd recovery of those costs and to close the account after granting the electric corporation recovery of any just and reasonable costs that have not been collected from customers. costs. The bill would require the commission to make those determinations and take those actions in a manner that ensures that the rates are sufficient to enable the public utility to recover a just and reasonable rate of return.

Under existing law, a violation of any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because a violation of a commission action implementing this bills requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. Existing law directs the commission to require a public utility to establish and maintain a balancing 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. Existing law requires 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. Existing law requires the commission to maintain an inventory of the balancing accounts and requires public utilities to record all related costs and revenues in their balancing accounts. Existing law requires the commission to adopt balancing account review procedures that are consistent with a risk-based approach.

Existing law requires the commission to annually provide the Legislature with an update on the status of its review of balancing accounts as part of an annual report or by posting it on its internet website, as provided.

Existing law provides requires that all charges demanded or received by any public utility, or by any 2 or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable and provides that every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful.

This bill would require the commission to include, as part of its annual update to the Legislature on the status of its review of balancing accounts, the amount of funds in, and the expenditures from, the memorandum accounts and balancing accounts of each public utility. The bill would require the commission to annually determine if conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum account and each or balancing account has achieved its intended purpose in the previous year. of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the commission is unable to review all those accounts by July 1, 2025, as provided. The bill would require the commission, if it determines that the intended purpose has not been achieved and those any actual costs should not be subject to recovery in the next general rate case, recorded in those electrical corporation accounts have already been authorized and collected from customers, to deny the public utility electrical corporation a 2nd recovery of those costs and other expenses and to reduce the authority of the public utility to use, or close, the memorandum account or balancing to close the account in order to limit future rate increases. after granting the electric corporation recovery of any just and reasonable costs that have not been collected from customers. The bill would require the commission to make those determinations and take those actions in a manner that ensures that the rates are sufficient to enable the public utility to recover a just and reasonable rate of return.

Under existing law, a violation of any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because a violation of a commission action implementing this bills requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law vests the Public Utilities Commission with regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. Existing law directs the commission to require a public utility to establish and maintain a balancing 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. Existing law requires 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. Existing law requires the commission to maintain an inventory of the balancing accounts and requires public utilities to record all related costs and revenues in their balancing accounts. Existing law requires the commission to adopt balancing account review procedures that are consistent with a risk-based approach.

Existing law requires the commission to annually provide the Legislature with an update on the status of its review of balancing accounts as part of an annual report or by posting it on its internet website, as provided.

Existing law provides that all charges demanded or received by any public utility, or by any 2 or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable and that every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful.

This bill would require the commission to include, as part of its annual update to the Legislature on the status of its review of balancing accounts, the amount of funds in, and the expenditures from, the memorandum accounts and balancing accounts of each public utility. The bill would require the commission to annually determine if each memorandum account and each balancing account has achieved its intended purpose in the previous year. The bill would require the commission, if it determines that the intended purpose has not been achieved and those costs should not be subject to recovery in the next general rate case, to deny the public utility recovery of those costs and other expenses and to reduce the authority of the public utility to use, or close, the memorandum account or balancing account in order to limit future rate increases. The bill would require the commission to make those determinations and take those actions in a manner that ensures that the rates are sufficient to enable the public utility to recover a just and reasonable rate of return.

Under existing law, a violation of any order, decision, rule, direction, demand, or requirement of the commission is a crime.

Because a violation of a commission action implementing this bills requirements would be a crime, the bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Under existing law, local publicly owned electric utilities are under the direction of their governing boards. Existing law requires each local publicly owned electric utility serving end-use customers to prudently plan for and procure resources that are adequate to meet its planning reserve margin and peak demand and operating reserves, sufficient to provide reliable electric service to its customers.

This bill would express the intent of the Legislature to enact legislation regarding local publicly owned electric utility service resource adequacy and reliability.

SENATE COMMITTEE ON

Senator Anna Caballero, Chair

2023 - 2024 Regular Session

AB 3256 (Irwin) - Memorandum and balancing accounts: audits: reports to the Legislature

Bill Summary:

This bill would require the California Public Utilities Commission (CPUC) to conduct a comprehensive audit, with specified criteria, of each wildfire or emergency-related account held by an electrical corporation, as provided.

Fiscal Impact:

• The CPUC estimates ongoing costs of about $2.2 million annually (ratepayer funds) due to the substantial increase in expanded audit workload related to balancing accounts and memorandum accounts. The number of balancing and memorandum accounts fluctuate year to year. In 2023, the CPUC estimates that electric utilities reported 21 balancing accounts and 58 memorandum accounts related to wildfire or emergencies.

Background:

Cost Recovery Processes: GRCs, balancing accounts, and memorandum accounts. Utilities employ a number of accounts to track expenses, both anticipated and unanticipated. Anticipated costs are determined through the General Rate Case (GRC) proceedings at the CPUC. The GRCs evaluate both past expenses and utility forecasts of likely future costs. They cover four years of a utility’s anticipated costs. The GRC establishes how much money the utilities are allowed to collect, and a fixed escalation rate is applied to expenses for the subsequent three years captured in the GRC cycle. Once the CPUC authorizes the costs, the costs are allocated to different classes of customers and built into future billing.

Balancing accounts. Balancing accounts are typically used for costs that are expected and occur on a regular basis, but cannot be estimated accurately. For instance, the Energy Resource Recovery Account (ERRA) is a balancing account that tracks, and utilities are pre-approved to collect, costs of fuel and power purchases. These accounts are subject to audit and adjustment, but do not automatically undergo a reasonableness review. Rather the CPUC authorizes a scope of the recorded activity, and maximum level of acceptable expense, before the utility undertakes the activity. But forecasts are imperfect. If the CPUC authorizes a forecasted amount and also a balancing account for that activity, then when actual costs are higher or lower than the authorized forecast, rates are adjusted up or down to compensate for the forecasting error.

Memorandum accounts. Memorandum accounts are used for activities that are likely to be a reasonable use of ratepayer funds. The CPUC does not decide on the reasonableness of the costs recorded in the memorandum accounts; rather they authorize the tracking of costs that may be reasonable. Costs recorded in memorandum accounts are subject to a later reasonableness review, with the potential inclusion in rates, but such recovery is not guaranteed. Memorandum accounts are meant to address expenditures that are much less certain than balancing accounts. For example, per statute, utilities record costs incurred in responding to emergencies in Catastrophic Event Memorandum Accounts.

CPUC review of balancing accounts. The CPUC has a responsibility to authorize the rates that regulated utilities may charge their customers. The CPUC does not audit every large balancing account or utility record every year. Statute requires the CPUC to review or audit balancing accounts periodically using a risk-based approach, but allows it to forgo the review or audit if an independent auditor has performed a review in the preceding five years. In a 2014 State Auditor report regarding the CPUC’s monitoring of balancing accounts, the auditor recommended that the CPUC adopt a risk-based approach to select a sufficient number of accounts to review. This was recommended after the CPUC was found to have not reviewed many balancing accounts over the years reviewed by the auditor, despite a statutory mandate requiring audits at least once every three years. In 2022, the Legislature made the auditor’s recommendation of risk-based auditing a requirement.

As directed by statute, the Utility Audits Branch (UAB) utilizes a risk-based approach for reviewing or auditing balancing accounts to ensure that the transactions recording in the balancing accounts are for allowable purposes and are supported by appropriate documentation. According to the CPUC’s 2022 Annual Report, as of December 31, 2021, the total population of balancing accounts consisted of 8 energy and 12 water utility companies, encompassing a total of 486 balancing accounts (367 electric and gas, and 119 water). UAB’s completed audits seek to ensure that balancing accounts operate within the context of what has been authorized. The CPUC reported in its annual report that UAB completed 45 utility audits in 2023.

In addition to the CPUC’s UAB, the California Public Advocates Office (PAO) likewise reviews utility balancing accounts. PAO typically reviews a selection of balancing accounts, usually based on whether the utility requests rate changes related to an account, not based on the size of the account, noted in the 2023 State Auditor Report. According to the same report, PAO audited between 35-42 electricity balancing accounts over three years, or about 6-33 percent of each electric utility’s balancing accounts.

Proposed Law:

This bill would require the CPUC to conduct a comprehensive audit, with specified criteria, of each wildfire or emergency-related account held by an electrical corporation. Specifically, it would:

1. Require the CPUC to include, as part of its annual update to the Legislature on the status of its review of balancing accounts, the amount of funds in, and the expenditures from, the memorandum accounts and balancing accounts of each public utility.
2. Require the CPUC to conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum account balancing account of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the CPUC is unable to review all those accounts by July 1, 2025, as provided.
3. Require the CPUC, if it determines that any actual costs recorded in those electrical corporation accounts have already been authorized and collected from customers, to deny the electrical corporation a second recovery of those costs. 
4. Require the CPUC to make those determinations and take those actions in a manner that ensures that the rates are sufficient to enable the public utility to recover a just and reasonable rate of return.

Related Legislation:

AB 2054 (Bauer-Kahan, 2024) among its provisions, would authorize the CPUC to allocate between ratepayers and shareholders any costs recorded in a balancing account above an authorized forecast.

AB 2666 (Boerner, 2024) would require the CPUC to review the actual past costs an electrical or gas corporation records following each GRC test year, and adjust the authorized revenue requirement in the subsequent GRC, as appropriate.

AB 2847 (Addis, 2024) would require electric and gas IOUs to provide in their request for capital expenditures their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value.

Staff Comments: Energy utility rates have been rising and affordability continues to be a central concern for the Legislature and Californians. In the 2023 State Auditor report on the CPUC and the PAO reports that as of December 2022, the large energy IOUs maintained over 300 balancing accounts tracking $16.8 billion in balances. This represents a third of IOU authorized revenue. In some scenarios a balancing account is a helpful tool that allows the utility to track costs that are otherwise difficult to forecast in advance. In other scenarios, the opportunity to track costs in a balancing account may undermine or even removes the incentives for the utility to assert spending discipline. By requiring the CPUC to audit the balancing and memorandum accounts by July 1, 2025, this bill attempts to focus the CPUC’s resources on these accounts. However, in recognition that some flexibility is needed, this bill would provide the CPUC with the ability to determine criteria to prioritize accounts that may have the biggest impact.

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SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Steven Bradford, Chair

2023 - 2024 Regular

Bill No: AB 3256 Hearing Date: 7/2/2024

SUBJECT: Memorandum and balancing accounts: audits: reports to the Legislature

DIGEST: This bill requires the California Public Utilities Commission (CPUC) to conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum accounts and balancing accounts of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the CPUC is unable to review all those accounts by July 1, 2025, as provided. 

ANALYSIS:

Existing law:

1. Establishes and vests the CPUC with regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. (Article XII of the California Constitution)
2. Directs the CPUC to require a public utility to establish and maintain a balancing account whenever the CPUC 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. Requires the CPUC 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. Requires the CPUC to maintain an inventory of the balancing accounts and requires public utilities to record all related costs and revenues in their balancing accounts. Requires the CPUC to adopt balancing account review procedures that are consistent with a risk-based approach. (Public Utilities Code §792.5)
3. Requires the CPUC to annually provide the Legislature with an update on the status of its review of balancing accounts as part of an annual report or by posting it on its internet website, as provided. (Public Utilities Code §910.7)
4. Requires that all charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable and provides that every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful. (Public Utilities Code §451)

This bill:

1. Requires the CPUC to include, as part of its annual update to the Legislature on the status of its review of balancing accounts, the amount of funds in, and the expenditures from, the memorandum accounts and balancing accounts of each public utility.
2. Requires the CPUC to conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum account balancing account of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the CPUC is unable to review all those accounts by July 1, 2025, as provided. 
3. Requires the CPUC, if it determines that any actual costs recorded in those electrical corporation accounts have already been authorized and collected from customers, to deny the electrical corporation a second recovery of those costs and to close the account after granting the electric corporation recovery of any just and reasonable costs that have not been collected from customers. 
4. Requires the CPUC to make those determinations and take those actions in a manner that ensures that the rates are sufficient to enable the public utility to recover a just and reasonable rate of return.

Background

Cost Recovery Processes: GRCs, balancing accounts, and memorandum accounts. Utilities employ a number of accounts to track expenses, both anticipated and unanticipated. Anticipated costs are determined through the General Rate Case (GRC) proceedings at the CPUC. The GRCs evaluate both past expenses and utility forecasts of likely future costs. They cover four years of a utility’s anticipated costs. The GRC establishes how much money the utilities are allowed to collect, and a fixed escalation rate is applied to expenses for the subsequent three years captured in the GRC cycle. Once the CPUC authorizes the costs, the costs are allocated to different classes of customers and built into future billing.

Balancing accounts. Balancing accounts are typically used for costs that are expected and occur on a regular basis, but cannot be estimated accurately. For instance, the Energy Resource Recovery Account (ERRA) is a balancing account that tracks, and utilities are pre-approved to collect, costs of fuel and power purchases. These accounts are subject to audit and adjustment, but do not automatically undergo a reasonableness review. Rather the CPUC authorizes a scope of the recorded activity, and maximum level of acceptable expense, before the utility undertakes the activity. But forecasts are imperfect. If the CPUC authorizes a forecasted amount and also a balancing account for that activity, then when actual costs are higher or lower than the authorized forecast, rates are adjusted up or down to compensate for the forecasting error.

Memorandum accounts. Memorandum accounts are used for activities that are likely to be a reasonable use of ratepayer funds. The CPUC does not decide on the reasonableness of the costs recorded in the memorandum accounts; rather they authorize the tracking of costs that may be reasonable. Costs recorded in memorandum accounts are subject to a later reasonableness review, with the potential inclusion in rates, but such recovery is not guaranteed. Memorandum accounts are meant to address expenditures that are much less certain than balancing accounts. For example, per statute, utilities record costs incurred in responding to emergencies in Catastrophic Event Memorandum Accounts.

CPUC review of balancing accounts. The CPUC has a responsibility to authorize the rates that regulated utilities may charge their customers. The CPUC does not audit every large balancing account or utility record every year. Statute requires the CPUC to review or audit balancing accounts periodically using a risk-based approach, but allows it to forgo the review or audit if an independent auditor has performed a review in the preceding five years. In a 2014 State Auditor report regarding the CPUC’s monitoring of balancing accounts, the auditor recommended that the CPUC adopt a risk-based approach to select a sufficient number of accounts to review. This was recommended after the CPUC was found to have not reviewed many balancing accounts over the years reviewed by the auditor, despite a statutory mandate requiring audits at least once every three years. In 2022, the Legislature made the auditor’s recommendation of risk-based auditing a requirement.

As directed by statute, the Utility Audits Branch (UAB) utilizes a risk-based approach for reviewing or auditing balancing accounts to ensure that the transactions recording in the balancing accounts are for allowable purposes and are supported by appropriate documentation. According to the CPUC’s 2022 Annual Report, as of December 31, 2021, the total population of balancing accounts consisted of 8 energy and 12 water utility companies, encompassing a total of 486 balancing accounts (367 electric and gas, and 119 water). UAB’s completed audits seek to ensure that balancing accounts operate within the context of what has been authorized. The CPUC reported in its annual report that UAB completed 45 utility audits in 2023.

In addition to the CPUC’s UAB, the California Public Advocates Office (PAO) likewise reviews utility balancing accounts. PAO typically reviews a selection of balancing accounts, usually based on whether the utility requests rate changes related to an account, not based on the size of the account, noted in the 2023 State Auditor Report. According to the same report, PAO audited between 35-42 electricity balancing accounts over three years, or about 6-33 percent of each electric utility’s balancing accounts.

Comments

Need for this bill. As shared by the author’s office, outlined in a report by the PAO, utilities have gained additional mechanisms to charge for wildfire mitigation and energization beyond the GRC. Balancing accounts allow utilities to ensure the recovery of certain costs and have usually been used for highly predictable costs each year. Memorandum accounts have typically been used for costs with high year-to-year volatility. Since 2020, the PAO has noted over $14 billion of utility wildlife-related balancing and memorandum account requests. These regulatory accounts have expanded the investor-owned utilities’ (IOUs) ability to request increased budgets, passing along the costs to ratepayers. AB 3256 would require the CPUC to audit emergency-related balancing and memo accounts to determine if the costs in the accounts were authorized, if the costs have already been collected from ratepayers, and the impact to ratepayers outside of the GRC. This will provide increased oversight and accountability for how regulatory accounts funds are managed.

Impacts to ratepayers. Energy utility rates have been rising and affordability continues to be a central concern for the Legislature and Californians. In the 2023 State Auditor report on the CPUC and the PAO reports that as of December 2022, the large energy IOUs maintained over 300 balancing accounts tracking $16.8 billion in balances. This represents a third of IOU authorized revenue. In some scenarios a balancing account is a helpful tool that allows the utility to track costs that are otherwise difficult to forecast in advance. In other scenarios, the opportunity to track costs in a balancing account may undermine or even removes the incentives for the utility to assert spending discipline. By requiring the CPUC to audit the balancing and memorandum accounts by July 1, 2025, this bill attempts to focus the CPUC’s resources on these accounts. However, this bill recognizes some flexibility is needed and provides the CPUC the ability to determine criteria to prioritize accounts that may have the biggest impact.

Opponents raise concern about language requiring closing accounts. Among its provisions, this bill would require balancing accounts to be closed where a utility has already recovered those costs. The opponents raise concern that closing accounts for what may be bookkeeping errors could jeopardize critical utility work, including wildfire mitigation. They suggest such an approach fails to recognize the that balancing accounts were created to help ensure critical utility work is not delayed between GRCs. In this regard, the opposition raises a valid concern about the practical effect of requiring the accounts to close. In order to address these concerns, the author and committee may wish to amend this bill to delete clause requiring the closure of the accounts while preserving the other required review and other elements of this bill.

Prior/Related Legislation

AB 2054 (Bauer-Kahan, 2024) among its provisions, authorizes the CPUC to allocate between ratepayers and shareholders any costs recorded in a balancing account above an authorized forecast. The bill is pending in this committee.

AB 2666 (Boerner, 2024) requires the CPUC to review the actual past costs an electrical or gas corporation records following each GRC test year, and adjust the authorized revenue requirement in the subsequent GRC, as appropriate.

The bill is pending in this committee.

AB 2847 (Addis, 2024) requires electric and gas IOUs to provide in their request for capital expenditures their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value. The bill is pending in committee.

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

SUPPORT:

Sonoma Clean Power

OPPOSITION:

California State Association of Electrical Workers

California Water Association

Coalition of California Utility Employees

Pacific Gas and Electric Company

San Diego Gas and Electric Company

Southern California Edison

ARGUMENTS IN SUPPORT: Sonoma Clean Power states:

The number, size, and scope of memorandum and balancing accounts subject to Public Utilities Commission jurisdiction have grown significantly in recent years, with minimal oversight. This has led to significant ratepayer impacts, including to those ratepayers served by Sonoma Clean Power. At a time of rapid growth in utility rates, the state of California needs to explore all possible avenues to keep costs contained where feasible. AB 3256 is a common-sense measure that will impose a basic level of accountability on some of the biggest drivers of utility rates today. Again, we strongly support AB 3256

ARGUMENTS IN OPPOSITION: SCE, SDG&E, and PG&E state:

AB 3256 could undercut investments in the grid, impacting safety and reliability. Closing a memorandum or balancing account in mid-GRC cycle could lead to bookkeeping challenges. How will a utility conduct wildfire mitigation efforts in the second or third year of the GRC cycle if the balancing account in which the costs are tracked is closed? The utility would likely have to submit an application for a new balancing account mid-GRC cycle, creating unnecessary administrative inefficiencies. And, while we wait for Commission’s authorization, the critical safety and reliability work that the previous account would have allowed is now on hold. CPUC and Cal Advocates are already taking steps to strengthen transparency. …The CPUC and Cal Advocates have agreed to take appropriate actions to implement the State Auditor’s recommendation. AB 3256 disregards the State Auditor’s recommendation and would institute more rigorous changes before the Auditor’s recommendations can be accomplished.

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SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Steven Bradford, Chair

2023 - 2024 Regular

Bill No: Hearing Date: 7/2/2024

SUBJECT:

DIGEST: This bill requires the California Public Utilities Commission (CPUC) to conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum account balancing account of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the CPUC is unable to review all those accounts by July 1, 2025, as provided. 

ANALYSIS:

Existing law:

1. Establishes and vests the CPUC with regulatory authority over public utilities, including electrical corporations, gas corporations, heat corporations, telegraph corporations, telephone corporations, and water corporations. (Article XII of the California Constitution)
2. Directs the CPUC to require a public utility to establish and maintain a balancing account whenever the CPUC 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. Requires the CPUC 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. Requires the CPUC to maintain an inventory of the balancing accounts and requires public utilities to record all related costs and revenues in their balancing accounts. Requires the CPUC to adopt balancing account review procedures that are consistent with a risk-based approach. (Public Utilities Code §792.5)
3. Requires the CPUC to annually provide the Legislature with an update on the status of its review of balancing accounts as part of an annual report or by posting it on its internet website, as provided. (Public Utilities Code §910.7)
4. Requires that all charges demanded or received by any public utility, or by any two or more public utilities, for any product or commodity furnished or to be furnished or any service rendered or to be rendered shall be just and reasonable and provides that every unjust or unreasonable charge demanded or received for such product or commodity or service is unlawful. (Public Utilities Code §451)

This bill:

1. Requires the CPUC to include, as part of its annual update to the Legislature on the status of its review of balancing accounts, the amount of funds in, and the expenditures from, the memorandum accounts and balancing accounts of each public utility.
2. Requires the CPUC to conduct a comprehensive audit, with specified criteria, of each wildfire- or emergency-related memorandum account balancing account of each electrical corporation on or before July 1, 2025, or, on or before January 1, 2027, if the CPUC is unable to review all those accounts by July 1, 2025, as provided. 
3. Requires the CPUC, if it determines that any actual costs recorded in those electrical corporation accounts have already been authorized and collected from customers, to deny the electrical corporation a 2nd recovery of those costs and to close the account after granting the electric corporation recovery of any just and reasonable costs that have not been collected from customers. 
4. Requires the CPUC to make those determinations and take those actions in a manner that ensures that the rates are sufficient to enable the public utility to recover a just and reasonable rate of return.

Background

Cost Recovery Processes: GRCs, balancing accounts, and memorandum accounts. Utilities employ a number of accounts to track expenses, both anticipated and unanticipated. Anticipated costs are determined through the General Rate Case (GRC) proceedings at the CPUC. The GRCs evaluate both past expenses and utility forecasts of likely future costs. They cover four years of a utility’s anticipated costs. The GRC establishes how much money the utilities are allowed to collect, and a fixed escalation rate is applied to expenses for the subsequent three years captured in the GRC cycle. Once the CPUC authorizes the costs, the costs are allocated to different classes of customers and built into future billing.

Balancing accounts. Balancing accounts are typically used for costs that are expected and occur on a regular basis, but cannot be estimated accurately. For instance, the Energy Resource Recovery Account (ERRA) is a balancing account that tracks, and utilities are pre-approved to collect, costs of fuel and power purchases. These accounts are subject to audit and adjustment, but do not automatically undergo a reasonableness review. Rather the CPUC authorizes a scope of the recorded activity, and maximum level of acceptable expense, before the utility undertakes the activity. But forecasts are imperfect. If the CPUC authorizes a forecasted amount and also a balancing account for that activity, then when actual costs are higher or lower than the authorized forecast, rates are adjusted up or down to compensate for the forecasting error.

Memorandum accounts. Memorandum accounts are used for activities that are likely to be a reasonable use of ratepayer funds. The CPUC does not decide on the reasonableness of the costs recorded in the memorandum accounts; rather they authorize the tracking of costs that may be reasonable. Costs recorded in memorandum accounts are subject to a later reasonableness review, with the potential inclusion in rates, but such recovery is not guaranteed. Memorandum accounts are meant to address expenditures that are much less certain than balancing accounts. For example, per statute, utilities record costs incurred in responding to emergencies in Catastrophic Event Memorandum Accounts.

CPUC review of balancing accounts. The CPUC has a responsibility to authorize the rates that regulated utilities may charge their customers. The CPUC does not audit every large balancing account or utility record every year. Statute requires the CPUC to review or audit balancing accounts periodically using a risk-based approach, but allows it to forgo the review or audit if an independent auditor has performed a review in the preceding five years. In a 2014 State Auditor report regarding the CPUC’s monitoring of balancing accounts, the auditor recommended that the CPUC adopt a risk-based approach to select a sufficient number of accounts to review. This was recommended after the CPUC was found to have not reviewed many balancing accounts over the years reviewed by the auditor, despite a statutory mandate requiring audits at least once every three years. In 2022, the Legislature made the auditor’s recommendation of risk-based auditing a requirement.

As directed by statute, the Utility Audits Branch (UAB) utilizes a risk-based approach for reviewing or auditing balancing accounts to ensure that the transactions recording in the balancing accounts are for allowable purposes and are supported by appropriate documentation. According to the CPUC’s 2022 Annual Report, as of December 31, 2021, the total population of balancing accounts consisted of 8 energy and 12 water utility companies, encompassing a total of 486 balancing accounts (367 electric and gas, and 119 water). UAB’s completed audits seek to ensure that balancing accounts operate within the context of what has been authorized. The CPUC reported in its annual report that UAB completed 45 utility audits in 2023.

In addition to the CPUC’s UAB, the California Public Advocates Office (PAO) likewise reviews utility balancing accounts. PAO typically reviews a selection of balancing accounts, usually based on whether the utility requests rate changes related to an account, not based on the size of the account, noted in the 2023 State Auditor Report. According to the same report, PAO audited between 35-42 electricity balancing accounts over three years, or about 6-33 percent of each electric utility’s balancing accounts.

Comments

Need for this bill. As shared by the author’s office, outlined in a report by the PAO, utilities have gained additional mechanisms to charge for wildfire mitigation and energization beyond the GRC. Balancing accounts allow utilities to ensure the recovery of certain costs and have usually been used for highly predictable costs each year. Memorandum accounts have typically been used for costs with high year-to-year volatility. Since 2020, the PAO has noted over $14 billion of utility wildlife-related balancing and memo account requests. These regulatory accounts have expanded the investor-owned utilities’ (IOUs) ability to request increased budgets, passing along the costs to ratepayers. AB 3256 would require the CPUC to audit emergency-related balancing and memo accounts to determine if the costs in the accounts were authorized, if the costs have already been collected from ratepayers, and the impact to ratepayers outside of the GRC. This will provide increased oversight and accountability for how regulatory accounts funds are managed.

Impacts to ratepayers. Energy utility rates have been rising and affordability continues to be a central concern for the Legislature and Californians. In the 2023 State Auditor report on the CPUC and the PAO reports that as of December 2022, the large energy IOUs maintained over 300 balancing accounts tracking $16.8 billion in balances. This represents a third of IOU authorized revenue. In some scenarios a balancing account is a helpful tool that allows the utility to track costs that are otherwise difficult to forecast in advance. In other scenarios, the opportunity to track costs in a balancing account may undermine or even removes the incentives for the utility to assert spending discipline. By requiring the CPUC to audit the balancing and memorandum accounts by July 1, 2025, this bill attempts to focus the CPUC’s resources on these accounts. However, this bill recognizes some flexibility is needed and provides the CPUC the ability to determine criteria to prioritize accounts that may have the biggest impact.

Opponents raise concern about language requiring closing accounts. Among its provisions, this bill would require balancing accounts to be closed where a utility has already recovered those costs. The opponents raise concern that closing accounts for what may be a bookkeeping errors could jeopardize critical utility work, including wildfire mitigation. They suggest such an approach fails to recognize why balancing accounts were created to help ensure critical utility work is not delayed between GRCs. In this regard, the opposition raises a valid concern about the practical effect of the requiring the accounts to close. In this regard, the author and committee may wish to amend this bill to delete this section while preserving the other required review and other elements of this bill.

Prior/Related Legislation

AB 2054 (Bauer-Kahan, 2024) among its provisions, authorizes the CPUC to allocate between ratepayers and shareholders any costs recorded in a balancing account above an authorized forecast. The bill is pending in this committee.

AB 2666 (Boerner, 2024) requires the CPUC to review the actual past costs an electrical or gas corporation records following each GRC test year, and adjust the authorized revenue requirement in the subsequent GRC, as appropriate.

The bill is pending in this committee.

AB 2847 (Addis, 2024) requires electric and gas IOUs to provide in their request for capital expenditures their best estimation, alongside supporting documents, of the impact of the proposed expenditures on the utility’s authorized revenue for each year of the life of the capital asset, as well as the asset’s net present value. The bill is pending in committee.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT:

Sonoma Clean Power

OPPOSITION:

California State Association of Electrical Workers

California Water Association

Coalition of California Utility Employees

Pacific Gas and Electric Company

San Diego Gas and Electric Company

Southern California Edison

ARGUMENTS IN SUPPORT: Sonoma Clean Power states:

The number, size, and scope of memorandum and balancing accounts subject to Public Utilities Commission jurisdiction have grown significantly in recent years, with minimal oversight. This has led to significant ratepayer impacts, including to those ratepayers served by Sonoma Clean Power. At a time of rapid growth in utility rates, the state of California needs to explore all possible avenues to keep costs contained where feasible. AB 3256 is a common-sense measure that will impose a basic level of accountability on some of the biggest drivers of utility rates today. Again, we strongly support AB 3256

ARGUMENTS IN OPPOSITION: SCE, SDG&E, and PG&E state:

AB 3256 could undercut investments in the grid, impacting safety and reliability. Closing a memorandum or balancing account in mid-GRC cycle could lead to bookkeeping challenges. How will a utility conduct wildfire mitigation efforts in the second or third year of the GRC cycle if the balancing account in which the costs are tracked is closed? The utility would likely have to submit an application for a new balancing account mid-GRC cycle, creating unnecessary administrative inefficiencies. And, while we wait for Commission’s authorization, the critical safety and reliability work that the previous account would have allowed is now on hold. CPUC and Cal Advocates are already taking steps to strengthen transparency. …The CPUC and Cal Advocates have agreed to take appropriate actions to implement the State Auditor’s recommendation. AB 3256 disregards the State Auditor’s recommendation and would institute more rigorous changes before the Auditor’s recommendations can be accomplished.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 3256

Author:(Irwin)

As Amended Ver:April 29, 2024

Majority vote

SUMMARY

Requires the California Public Utilities Commission (CPUC) to conduct a comprehensive audit of each wildfire-related or emergency-related account the CPUC has required an electrical corporation to maintain.

Major Provisions

Specifically, this bill, among other things, requires the CPUC to do all the following, and in a way that ensures that rates charged to the customers of an electrical corporation (also known as an investor-owned electric utility, or IOU) are sufficient to enable the IOU to recover a just and reasonable rate of return:

1. By July 1, 2025, conduct a comprehensive audit of each wildfire-related or emergency-related memorandum account the CPUC has required an IOU to maintain, and of each wildfire-related or emergency-related balancing account the CPUC has required an IOU to maintain. The bill requires each audit to include CPUC's examination of (a) whether the actual costs recorded in the account subject to the audit were expenses the CPUC authorized in the IOU's general rate case (GRC), (b) whether the IOU complied with the terms that the CPUC identified when authorizing the IOU track the costs in the account and (c) the rate impact to customers if all those recorded costs were approved.
2. If the CPUC determines that any actual costs recorded in an account have already been authorized and collected from the IOU customers, (a) deny the IOU a second recovery of the costs from the IOU's customers and (b) close the account after granting the IOU recovery of any just and reasonable costs recorded in the account that the IOU has collected from its customers.
3. If the CPUC is unable to review all the wildfire- or emergency-related memorandum or balancing accounts of each IOU on or before July 1, 2025, specify criteria to be used to select accounts that will most impact rates and establish a review schedule prioritizing those high-impact accounts, so that every IOU account be reviewed on or before January 1, 2027. The bill also authorizes the CPUC to contract with the State Auditor's Office, the Department of Finance or another qualified audit or consulting firm for any necessary auditing or review services.
4. Report annually to the Legislature on its review of the accounts.

COMMENTS

The CPUC regulates the rates charged by the state's IOUs. Rates have increased considerably over the past decade. According to the Public Advocates Office (PAO) at the CPUC, the rates for electricity charged by Pacific Gas and Electric (PG&E), Southern California Edison (SCE) and San Diego Gas and Electric have increased over the past ten years by 127%, 91%, and 72%, respectively. Similarly, many IOU customers have seen their electric utility bills increase, in some cases dramatically from month to month, which the PAO attributes, in part, to wildfire mitigation, transmission and distribution investments and rooftop solar incentives, though the PAO also notes higher bills often coincide with increased electricity use, such as greater reliance on air conditioning. In any case, the higher cost of electricity, and the jump in monthly electric bills, has led to concerns over affordability and about the ability of the state to meet its climate goals through widespread electrification (electric vehicle adoption and installation of heat pumps, for example).

The main way the CPUC regulates IOU rates is the general rate case, an adversarial process occurring every four years at which the IOU asserts all anticipated costs of doing business, as well as uncompensated costs the IOU incurred prior to the immediate general rate case. Various parties dispute the IOU's purported costs and the CPUC, having considered the evidence, authorizes the IOU to collect from its ratepayers an amount of money the CPUC deems sufficient to cover all the IOU's just and reasonable costs, plus a reasonable amount of return on investment.

There are methods, however, by which an IOU may recover costs beyond that which the CPUC approved in the general rate case. One such method is the use of balancing accounts. Generally, the CPUC authorizes an IOU to use a balancing account to track costs for a defined scope of work that are foreseeable but difficult to estimate accurately (fuel costs, for example) and authorizes the IOU to collect those costs from ratepayers. However, if the actual costs the IOU records in the balancing account differs from the amount the CPUC approved the IOU to collect, then the CPUC will adjust the IOU's rates to reflect the difference. It is important to note that the CPUC generally does not review an IOU's balancing account expenditures for reasonableness, though the CPUC may periodically audit such an account.

An advantage of the use of balancing accounts is they allow an IOU to undertake work with uncertain costs without waiting for approval through the CPUC's quadrennial general rate case. A disadvantage of the use of such accounts is the CPUC may scrutinize costs recorded in them less closely than it does costs asserted in the IOU's general rate case. This bill increases CPUC review of the reasonableness of costs recorded in a balancing account that exceed the amount the CPUC authorized. The author's intent is to incentivize the IOUs to control costs. Another effect may be to make IOUs reluctant to experience costs not already approved in a general rate case. In some cases, that may mean IOUs temporarily foregoing activities that advance state policy.

Similarly, the CPUC may approve an IOU to use a memorandum account, in which the IOU simply records costs that it may seek authority from the CPUC to recover in rates. The CPUC has approved IOUs to use both balancing account and memorandum accounts for wildfire and emergency-related purposes.

According to the Author

"Since 2015, utilities have sought additional budget authorizations outside of the general rate cases, citing wildfire and energization costs. These requests, once emergency exceptions to utility budgets, have become the norm, and resulted in rate increases of 127% for PG&E ratepayers, 91% for Southern California Edison ratepayers, and 72% for SDG&E ratepayers over the past 10 years. Investor-owned utilities have used balancing and memo accounts to recoup wildfire mitigation costs while simultaneously boasting record profits. Ratepayers can no longer shoulder these exorbitant utility costs and as such, there must be greater oversight of these regulatory accounts."

Arguments in Support

Sonoma Clean Power, a regional community choice aggregator whose electricity is supplied via IOU infrastructure, writes in support of the bill, noting these memo and balancing accounts "have grown significantly in recent years, with minimal oversight. This has led to significant ratepayer impacts, including to those ratepayers served by Sonoma Clean Power."

Arguments in Opposition

A coalition of labor and IOUs are opposed to the bill, writing the bill "disregards existing CPUC processes" and "could undercut investments in the grid."

FISCAL COMMENTS

According to the Assembly Committee on Appropriations, this bill will result in significant new workload to be done by, or contracted out by, the CPUC; upwards of $2.5 million in one-time funding and $608,000 annually.

VOTES

ASM UTILITIES AND ENERGY: 14-0-2

YES: Petrie-Norris, Bauer-Kahan, Calderon, Connolly, Friedman, Holden, Joe Patterson, Reyes, Santiago, Schiavo, Ting, Wallis, Wood, Zbur

ABS, ABST OR NV: Jim Patterson, Chen

ASM APPROPRIATIONS: 13-2-0

YES: Wicks, Sanchez, Arambula, Bryan, Calderon, Wendy Carrillo, Mike Fong, Grayson, Haney, Hart, Pellerin, Ta, Villapudua

NO: Dixon, Jim Patterson

UPDATED

VERSION: April 29, 2024

CONSULTANT: Laura Shybut / U. & E. / (916) 319-2083 FN: 0003274

Date of Hearing: May 15, 2024

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Buffy Wicks, Chair

ABPCA Bill Id:AB 3256

Author:(Irwin) – As Amended Ver:April 29, 2024

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

SUMMARY:

This bill requires the California Public Utilities Commission (CPUC) to conduct a comprehensive audit of each wildfire-related or emergency-related account the CPUC has required an electrical corporation to maintain.

Specifically, this bill, among other things, requires the CPUC to do all the following, and in a way that ensures that rates charged to the customers of an electrical corporation (also known as an investor-owned electric utility, or IOU) are sufficient to enable the IOU to recover a just and reasonable rate of return:

1. By July 1, 2025, conduct a comprehensive audit of each wildfire-related or emergency-related memorandum account the CPUC has required an IOU to maintain, and of each wildfire-related or emergency-related balancing account the CPUC has required an IOU to maintain. The bill requires each audit to include CPUC’s examination of (a) whether the actual costs recorded in the account subject to the audit were expenses the CPUC authorized in the IOU’s general rate case (GRC), (b) whether the IOU complied with the terms that the CPUC identified when authorizing the IOU track the costs in the account and (c) the rate impact to customers if all those recorded costs were approved.
2. If the CPUC determines that any actual costs recorded in an account have already been authorized and collected from the IOU customers, (a) deny the IOU a second recovery of the costs from the IOU’s customers and (b) close the account after granting the IOU recovery of any just and reasonable costs recorded in the account that the IOU has collected from its customers.
3. If the CPUC is unable to review all the wildfire- or emergency-related memorandum or balancing accounts of each IOU on or before July 1, 2025, specify criteria to be used to select accounts that will most impact rates and establish a review schedule prioritizing those high-impact accounts, so that every IOU account be reviewed on or before January 1, 2027. The bill also authorizes the CPUC to contract with the State Auditor’s Office, the Department of Finance or another qualified audit or consulting firm for any necessary auditing or review services.
4. Report annually to the Legislature on its review of the accounts.

FISCAL EFFECT:

This work will entail significant new workload to be done by, or contracted out by, the CPUC.

The CPUC estimates it will need $2.5 million in one-time funding to contract with an outside entity that will audit the 70 to 90 wildfire and emergency-related balancing or memorandum accounts subject to the requirements of this bill. In addition, the CPUC anticipates needing $608,000 for three positions annually, until the audits are complete—one senior management auditor and two senior regulatory analysts—to oversee the audits and to coordinate internally, with utilities and with auditing entities (Public Utilities Commission Utilities Reimbursement Account).

COMMENTS:

1. Purpose. The author describes recent utility rate increases as “exorbitant” and intends this bill to lead to lower rates and, ultimately, lower utility bills. According to the author:

Since 2015, utilities have sought additional budget authorizations outside of the general rate cases, citing wildfire and energization costs. These requests, once emergency exceptions to utility budgets, have become the norm, and resulted in rate increases of 127% for PG&E ratepayers, 91% for Southern California Edison ratepayers, and 72% for SDG&E ratepayers over the past 10 years. Investor-owned utilities have used balancing and memo accounts to recoup wildfire mitigation costs while simultaneously boasting record profits. Ratepayers can no longer shoulder these exorbitant utility costs and as such, there must be greater oversight of these regulatory accounts.

1. Background. The CPUC regulates the rates charged by the state’s IOUs for each unit of electricity the IOUs sell to their customers. Rates have increased considerably over the past decade. According to the PAO at the CPUC, the rates for electricity charged by Pacific Gas and Electric (PG&E), Southern California Edison (SCE) and San Diego Gas and Electric have increased over the past ten years by 127%, 91% and 72%, respectively. Similarly, many IOU customers have seen their electric utility bills increase, in some cases dramatically from month to month, which the PAO attributes, in part, to wildfire mitigation, transmission and distribution investments and rooftop solar incentives, though the PAO also notes higher bills often coincide with increased electricity use, such as greater reliance on air conditioning. In any case, the higher cost of electricity, and the jump in monthly electric bills, has led to concerns over affordability and about the ability of the state to meet its climate goals through widespread electrification (electric vehicle adoption and installation of heat pumps, for example).

The main way the CPUC regulates IOU rates is the general rate case, an adversarial process occurring every four years at which the IOU asserts all anticipated costs of doing business, as well as uncompensated costs the IOU incurred prior to the immediate general rate case. Various parties dispute the IOU’s purported costs and the CPUC, having considered the evidence, authorizes an amount of money the IOU may collect from its ratepayers the CPUC deems sufficient to cover all the IOU’s just and reasonable costs, plus a reasonable amount of return on investment.

There are methods, however, by which an IOU may recover costs beyond that which the CPUC approved in the general rate case. One such method is the use of balancing accounts. Generally, the CPUC authorizes an IOU to use a balancing account to track costs for a defined scope of work that are foreseeable but difficult to estimate accurately (fuel costs, for example) and authorizes the IOU to collect those costs from ratepayers. However, if the actual costs the IOU records in the balancing account differs from the amount the CPUC approved the IOU to collect, then the CPUC will adjust the IOU’s rates to reflect the difference. It is important to note that the CPUC generally does not review an IOU’s balancing account expenditures for reasonableness, though the CPUC may periodically audit such an account.

An advantage of the use of balancing accounts is they allow an IOU to undertake work with uncertain costs without waiting for approval through the CPUC’s quadrennial general rate case. A disadvantage of the use of such accounts is the CPUC may scrutinize costs recorded in them less closely than it does costs asserted in the IOU’s general rate case. This bill increases CPUC review of the reasonableness of costs recorded in a balancing account that exceed the amount the CPUC authorized and charges IOU shareholders with a portion of any such excess costs. The author’s intent is to incentivize the IOUs to control costs. Another effect may be to make IOUs reluctant to experience costs not already approved in a general rate case. In some cases, that may mean IOUs temporarily foregoing activities that advance state policy.

Similarly, the CPUC may approve an IOU to use a memorandum account, in which the IOU simply records costs that it may seek authority from the CPUC to recover in rates.

The CPUC has approved IOUs to use both balancing account and memorandum accounts for wildfire and emergency-related purposes.

1. Support and Opposition. The only organization to support this bill is Sonoma Clean Power, a regional community choice aggregator whose electricity is supplied via IOU infrastructure, which asserts:

Commission jurisdiction have grown significantly in recent years, with minimal oversight. This has led to significant ratepayer impacts, including to those ratepayers served by Sonoma Clean Power.

At a time of rapid growth in utility rates, the state of California needs to explore all possible avenues to keep costs contained where feasible. AB 3256 is a common-sense measure that will impose a basic level of accountability on some of the biggest drivers of utility rates today.

The bill is opposed by labor organizations and the state’s large IOUs, the latter of which collectively write the bill “misconstrues how utilities earn a rate of return” and “could undercut investments in the grid.” Specifically, the utilities contend:

AB 3256 is a solution in search of a problem and undermines CPUC’s longstanding rules that utility cost recovery be carefully established and enhanced to ensure reasonable rates for safe, reliable, and fair access to electricity in California.

Analysis Prepared by: Jay Dickenson / APPR. / (916) 319-2081

Date of Hearing: April 24, 2024

ASSEMBLY COMMITTEE ON UTILITIES AND ENERGY

Cottie Petrie-Norris, Chair

ABPCA Bill Id:AB 3256 (

Author:Irwin) – As Amended Ver:March 21, 2024

SUBJECT: Memorandum and balancing accounts: reports to the Legislature

SUMMARY: Requires the California Public Utilities Commission (CPUC) to annually determine if accounts of public utilities have achieved their intended purpose; and if not, to deny ratepayer recovery of the costs recorded therein and to limit the public utility in using such accounts. Additionally requires the CPUC to include the status of utilities’ accounts as part of an existing report.

EXISTING LAW:

1. Mandates the CPUC to require utilities to maintain balancing accounts reflecting the balance between the related costs and revenues whenever the CPUC authorizes a change in rates. Additionally requires the CPUC to take action on any balance remaining during a subsequent rate adjustment. (Public Utilities Code § 792.5 (a))
2. Mandates the CPUC develop a risk-based approach for auditing utility balancing accounts, and to maintain an inventory of the balancing accounts. Permits the CPUC from auditing any balancing account an independent audit has reviewed in the preceding five years. (Public Utilities Code § 792.5 (b)-(f))
3. Requires the CPUC to annually report on the status of its balancing account audit activities, and to share the report publicly, as specified. (Public Utilities Code § 910.7)
4. Mandates the CPUC apply a risk-based approach for auditing records of electrical, gas, telephone, water, and sewer corporations. Requires the CPUC to conduct the review or audit of every electrical or gas corporation at least once every 5 years; and of every high-risk telephone, water, or sewer corporation at least once every 10 years. Allows an audit or review of balancing accounts to fulfil this requirement. (Public Utilities Code § 314.5)
5. Authorizes the CPUC to conduct financial and performance audits of any entity or program created by any order, decision, motion, settlement, or other action of the CPUC and authorizes the CPUC to conduct additional follow-up work that is related to any findings and recommendations related to the audit. Requires that the audit be completed in a timely manner consistent with applicable auditing standards. (Public Utilities Code § 314.6)
6. Authorizes the CPUC to conduct audits or reviews of specified telecommunications funds whenever the CPUC deems necessary, applying a risk-based methodology to reviewing the program-related costs and activities. Authorizes the CPUC to contract with the California State Auditor’s Office, the Department of Finance, or another qualified audit firm for any necessary auditing or review services. (Public Utilities Code § 274)
7. Defines “public utility” as every common carrier, toll bridge corporation, pipeline corporation, gas corporation, electrical corporation, telephone corporation, telegraph corporation, water corporation, sewer system corporation, and heat corporation, where the service is performed or commodity is delivered to the public. (Public Utilities Code § 216)

FISCAL EFFECT: Unknown. This bill is keyed fiscal and will be referred to the Committee on Appropriations for its review.

BACKGROUND:

Cost Recovery Processes: GRCs, Balancing Accounts, and Memorandum Accounts – Utilities employ a number of accounts to track expenses, both anticipated and unanticipated. Anticipated costs are determined through the General Rate Case (GRC) proceedings at the CPUC. The GRCs evaluate both past expenses and utility forecasts of likely future costs. They cover four years of a utility’s anticipated costs. The GRC establishes how much money the utilities are allowed to collect, and a fixed escalation rate is applied to expenses for the subsequent three years captured in the GRC cycle. Once the CPUC authorizes the costs, the costs are allocated to different classes of customers and built into future billing.

Balancing accounts are typically used for costs that are expected and occur on a regular basis, but cannot be estimated accurately. For instance, the Energy Resource Recovery Account (ERRA) is a balancing account that tracks, and utilities are pre-approved to collect, costs of fuel and power purchases. These accounts are subject to audit and adjustment, but do not automatically undergo a reasonableness review. Rather the CPUC authorizes a scope of the recorded activity, and maximum level of acceptable expense, before the utility undertakes the activity.^[1] But forecasts are imperfect. If the CPUC authorizes a forecasted amount and also a balancing account for that activity, then when actual costs are higher or lower than the authorized forecast, rates are adjusted up or down to compensate for the forecasting error. For example in data provided to this committee, Edison reported overcollections for their 2019, 2020, and 2023 ERRA; these overcollections were returned to customers.^[2] However, 2022 ended with a $1.5 billion undercollection, primarily driven by the severe spike in natural gas prices that occurred that winter; customers paid for that undercollection.^[3]

Memorandum accounts are used for activities that are likely to be a reasonable use of ratepayer funds. The CPUC does not decide on the reasonableness of the costs recorded in the memorandum accounts; rather they authorize the tracking of costs that may be reasonable. Costs recorded in memorandum accounts are subject to a later reasonableness review, with the potential inclusion in rates, but such recovery is not guaranteed. Memorandum accounts are meant to address expenditures that are much less certain than balancing accounts. For example, per statute,^[4] utilities record costs incurred in responding to emergencies in Catastrophic Event Memorandum Accounts.

The differences in the account types lie in the timing and certainty of cost recovery. Memorandum accounts require a review of reasonableness before cost recovery is approved. Balancing accounts pre-approve the scope of activities and their associated costs because they are believed to be both certain and reasonable. This allows IOUs to incorporate the costs incurred in balancing accounts into rates as soon as it is practicable for them to do so.

Before the regular use of memorandum and balancing accounts, utilities were at risk of absorbing the cost of unforeseen activities until the next GRC is authorized, a process years in the making. The CPUC has noted to this committee that prior to the use of these accounts, utilities were hesitant to engage in activities unforeseen during the GRC, leading to unnecessary delays. In the current era of decarbonizing our electric and gas sector, and mitigating and responding to climate events, such delays might carry dire consequences.

Balanced Accounting –The CPUC has a responsibility to authorize the rates that regulated utilities may charge their customers. The CPUC does not audit every large balancing account or utility record every year. Statute requires the CPUC to review or audit balancing accounts periodically using a risk-based approach, but allows it to forgo the review or audit if an independent auditor has performed a review in the preceding five years. In a 2014 State Auditor report regarding the CPUC’s monitoring of balancing accounts, the auditor recommended that the CPUC adopt a risk-based approach to select a sufficient number of accounts to review.^[5] This was recommended after the CPUC was found to have not reviewed many balancing accounts over the years reviewed by the auditor, despite a statutory mandate requiring audits at least once every three years.^[6] In 2022, the Legislature made the auditor’s recommendation of risk-based auditing a requirement.^[7]

As directed by statute, the Utility Audits Branch (UAB) utilizes a risk-based approach for reviewing or auditing balancing accounts to ensure that the transactions recording in the balancing accounts are for allowable purposes and are supported by appropriate documentation. According to the CPUC’s 2022 Annual Report, as of December 31, 2021, the total population of balancing accounts consisted of 8 energy and 12 water utility companies, encompassing a total of 486 balancing accounts (367 electric and gas, and 119 water).^[8] UAB’s completed audits seek to ensure that balancing accounts operate within the context of what has been authorized.^[9] The CPUC reported UAB completed 45 utility audits in 2023.^[10]

In addition to the CPUC’s UAB, the California Public Advocates Office (PAO) likewise reviews utility balancing accounts. PAO typically reviews a selection of balancing accounts, usually based on whether the utility requests rate changes related to an account, not based on the size of the account.^[11] According to a recent State Auditor report, PAO audited between 35-42 electricity balancing accounts over 3 years, or about 6-33% of each electric utility’s balancing accounts.^[12]

COMMENTS:

1. Author’s statement. According to the author, “Since 2015, utilities have sought additional budget authorizations outside of the general rate cases, citing wildfire and energization costs. These requests, once emergency exceptions to utility budgets, have become the norm, and resulted in rate increases of 127% for PG&E ratepayers, 91% for Southern California Edison ratepayers, and 72% for SDG&E ratepayers over the past 10 years. Investor-owned utilities have used balancing and memo accounts to recoup wildfire mitigation costs while simultaneously boasting record profits. Ratepayers can no longer shoulder these exorbitant utility costs and as such, there must be greater oversight of these regulatory accounts.”
2. Financial Icebergs. PAO, in their role of reviewing utility finances, has noted a growing trend of more utility expenses being recorded outside the GRC in memorandum and balancing accounts. They note over $14 billion in wildfire-related expenses alone have been requested through these accounts since 2020.^[13] As noted in a recent State Auditor report, PAO only reviews a fraction of utility accounts.^[14] Many utility accounts carry high balances, and do not receive scrutiny until a utility requests recovery for costs in the account.^[15] In other words, that $14 billion PAO tracked may be the tip of the financial iceberg. The State Auditor report highlights this possibility, noting “reviewing those accounts with significant undercollected balances is prudent and helps to ensure that reported costs are not overstated and do not lead to improper rate increases.”^[16] This bill requires the CPUC to annually review every utility account, and determine if the account has achieved its intended purpose. In so doing, the author hopes to provide increased oversight and accountability for these accounts, reversing a growing trend noted by both the PAO and State Auditor.
3. Broad Strokes. This bill, in seeking to capture the universe of potential financial accounts overseen by the CPUC, has cast a wide net. It requires the CPUC to annually evaluate every utility memorandum and balancing account. As noted above, the CPUC’s UAB is the primary office to audit utility accounts. However, the UAB is small and reviews accounts in a risk-based approach, as recently mandated by statute.^[17] In 2022, this risk-based approach led UAB conduct 34 audits; a fraction of the review needed to cover the 486 balancing accounts operational that year, not to mention the additional memorandum accounts called for under this measure.

This bill is also inclusive of reviewing the accounts of all “public utilities,” a term which captures every conceivable aspect of public utility service: from toll bridge corporations to pipeline owners, telephone corporations, or sewer system providers.^[18] For the CPUC to undertake this effort in the entirety proposed by this bill – all accounts of all public utilities – would likely take years to complete.^[19] To do so annually, as required under this measure, would likely take an unprecedented increase to staff positions at the CPUC; positions which would be paid for by ratepayers.^[20]

Finally, this bill includes review of both balancing and memorandum accounts, and upon a CPUC finding that the intended purpose of the account has not been achieved then the recorded costs will be ineligible for rate recovery. As noted above, memorandum and balancing accounts differ in the timing and certainty of cost recovery. Memorandum accounts require a review of reasonableness before cost recovery is approved. Balancing accounts receive pre-approval of the scope of activities and their associated costs. This bill contemplates an after-the-fact reasonableness review for both account types. Writing in joint opposition, the investor-owned utilities^[21] highlight this point, commenting that the bill “misconstrues” utility financing. Because the bill is inclusive of all current and future accounts – including balancing accounts that have already received pre-approval from the CPUC – requiring a reasonableness review for those costs increases risk to these utilities’ creditworthiness^[22] or even presents potential constitutional challenges. Given the author’s stated intent for this measure to help alleviate ratepayer costs as well as specific concerns raised regarding the accounting practices of electric utility wildfire expenses, the author may wish to limit this measure to a review of the wildfire balancing accounts of electrical corporations, and in so limiting, remove the after-the-fact reasonableness review currently called for under this measure.

1. Intents and Purposes. This bill requires the CPUC to determine whether an account of a public utility has achieved its “intended purpose.” However, it is unclear what is meant to be captured in this evaluation. On its face, an account that was established to record utility costs is fulfilling its intended purpose by doing just that: recording costs. Presumably, the desire is for the costs recorded within the accounts to be evaluated to determine whether they were spent in a manner as previously authorized, not double-collected, and still required to serve the need originally requested; in essence, a reasonableness review and a prospective determination of the continued need for the account. The author may wish to clarify the intended purpose for the account review called for under this measure, to best guide the CPUC in its efforts.
2. Amendments Needed. This bill seeks to address a growing concern around the growth of IOU balancing and memorandum accounts to record costs outside the GRC. Such activity, while permitted and legal, may lead to unforeseen and volatile increases in rates. There is also a growing concern that utilities may be recording costs in a manner that is hard to track, and difficult to determine whether those costs have already been authorized or collected. As noted in the 2023 State Auditor report, “there is risk that a utility may attempt to include activities in a cost recovery application that are the same as those it already included in a GRC application, thus passing on the same costs to customers twice.”^[23] The auditor raises utility vegetation management work as a prime example of this possibility, where IOUs have recently been directed to conduct enhance vegetation management, exceeding the previous vegetation management requirements that were authorized in the GRC. The audit notes, “because these activities are similar, clearly distinguishing between the costs that a utility included in its previous GRC application and those costs that it incurred to meet enhanced requirements is not straightforward.”^[24]

A March 2022 State Auditor report specifically focused on IOU wildfire spending found evidence for this.^[25] The audit notes a CPUC-contract auditor’s findings of nearly $2.5 billion in wildfire costs that could either duplicate already authorized costs or require additional documentation from the IOUs to properly evaluate. Following this audit, the CPUC instituted internal procedures to safeguard against duplicative cost recovery. The 2023 State Auditor report noted the CPUC applied these principles to an audit of Southern California Edison’s (SCE) 2021 wildfire mitigation and vegetation management costs. The CPUC found that SCE had overstated its expenses and sought to recover unsubstantiated funds, leading the auditor to note “such findings can underscore the importance of scrutinizing cost recovery applications closely.” ^[26]

This bill seeks such close scrutinizing of utility cost recovery applications. However, as noted above, it tries to capture too much at once. Since the author has indicated the chief motivation for this measure is better tracking of utility wildfire expenses, the committee recommends amendments to narrow the bill to only electrical corporation wildfire and emergency related memorandum and balancing accounts. Rather than an annual determination, the committee recommends amendments to require the CPUC conduct a comprehensive audit of each of these accounts by July 1, 2025; on a one-time, not recurring, basis.^[27] The committee recommends amendments to clarify denial of cost recovery shall only be for expenses that have already been authorized and collected from customers, thus preventing double recovery. Finally, the committee recommends amendments to allow the CPUC to prioritize high-impact accounts and set up a review schedule should it be unable to meet the July 1, 2025 timeline. The CPUC may contract with outside firms to conduct the audits mandated by these amendments.

Moreover, this bill makes reference to a nonexistent section of Public Utilities Code. This appears to be a drafting error. The committee recommends correcting this, by having the annual CPUC account review be consistent with Public Utilities Code Section 739.17, not 739.14.

1. Related Legislation.

AB 2054 (Bauer-Kahan), among other provisions, requires the CPUC to conduct a reasonableness review prior to a utility receiving rate recovery for any costs recorded in memorandum or balancing accounts above those authorized in a forecast. Mandates that any costs above the authorized forecast, regardless of reasonableness, shall be allocated between ratepayers and shareholders, with the ratepayers responsible for no more than 50% of the costs. Status: pending hearing in the Assembly Committee on Appropriations, after passage in this committee on April 3^rd on a 12-2-2 vote.

1. Prior Legislation.

AB 209 (Committee on Budget), among its many provisions, adopted a risk-based approach for CPUC auditing of balancing accounts. Status: Chapter 251, Statutes of 2022.

AB 1072 (Jim Patterson), modifies statute regarding the CPUC's obligation to audit or review the books of the electric, gas, heat, telegraph, telephone and water corporations it regulates. Status: Chapter 448, Statutes of 2019.

REGISTERED SUPPORT / OPPOSITION:

Support

Sonoma Clean Power

Oppose

California State Association of Electrical Workers
California Water Association
Coalition of California Utility Employees
Pacific Gas and Electric Company
San Diego Gas & Electric
Southern California Edison

Analysis Prepared by: Laura Shybut / U. & E. / (916) 319-2083

1. Functionally, a balancing account tracks the difference between actual expenditures associated with the account, revenue authorized for recovery by the CPUC (authorized revenue requirement), and the actual revenues collected within customer rates to cover those specific expenditures. Applicable rules for a given balancing account are presented in the utility’s Preliminary Statement, which also includes a description of the purpose of the account, the types of costs and/or revenues that are to be tracked in the account, and specific accounting procedures that the utility must follow to record transactions in the balancing account. Additionally, unless approved otherwise, a balancing account is required to accumulate monthly interest at a rate equal to one-twelfth of the previous month’s interest rate on three-month Commercial Paper published by the Federal Reserve. Actual revenues collected by a utility in rates can be more or less than what CPUC had authorized to collect because rates are always forward-looking and based on forecasted sales. Thus, the balance in a balancing account can either be over-or under-collected. If a balancing account is over- or undercollected, the net balance is typically recovered from or refunded to ratepayers on an annual basis through an adjustment in rates. ↑

2. Southern California Edison,“ERRA Analysis 2019-2023,” March 28, 2024. ↑

3. Ibid. ↑

4. PUC § 454.9 ↑

5. State Auditor, California Public Utilities Commission: Improved Monitoring of Balancing Accounts Would Better Ensure that Utility Rates Are Fair and Reasonable. Report 2013-109, March 2014. ↑

6. Formerly in PUC § 274, changed under AB 209 (Committee on Budget, Chapter 251, Statutes of 2022) ↑

7. PUC § 792.5 ↑

8. Pg. 69, CPUC 2022 Annual Report, https://www.cpuc.ca.gov/-/media/cpuc-website/divisions/news-and-outreach/reports/annual-reports/ar2022_web_013123.pdf ↑

9. Pg. 68, Ibid. ↑

10. Pg. 37, CPUC 2023 Annual Report. ↑

11. Pgs. 53-54, State Auditor, Electricity and Natural Gas Rates, August 2023; Report 2022-115 ↑

12. Pg. 53, State Auditor, August 2023, Ibid. ↑

13. Slide 7, presentation of Linda Serizawa, “Affordability Concerns in the Electric Sector,” March 6, 2024; Assembly Utilities and Energy Committee hearing, State Capitol Room 437; https://autl.assembly.ca.gov/system/files/2024-03/2-linda-serizawa-pao-assembly-utilities-energy-hearing-final.pdf ↑

14. Pg. 53, State Auditor, August 2023, Ibid. ↑

15. Pg. 54, State Auditor, August 2023, Ibid. ↑

16. Ibid. ↑

17. PUC § 792.5 ↑

18. PUC § 216 ↑

19. Recognizing, of course, that these other utilities likely do not carry the volume, if any at all, of memorandum or balancing accounts as the electric, gas, and water utilities. ↑

20. PUC § 431-435; establishes the Public Utilities Commission Utilities Reimbursement Account (PUCURA) ↑

21. Southern California Edison, Pacific Gas and Electric, and San Diego Gas and Electric ↑

22. As they may now be carrying millions to billions of costs that are more at risk of not being recoverable. ↑

23. Pg. 41, State Auditor, August 2023 Ibid. ↑

24. Pg. 42, State Auditor, August 2023, Ibid. ↑

25. State Auditor, Electrical System Safety: California’s Oversight of the Efforts by IOUs to Mitigate the Risk of Wildfire Needs Improvement, Report 2021-117, March 2022. ↑

26. Pg. 43, State Auditor, August 2023, Ibid. ↑

27. As the committee is only aware of the audit of SCE’s 2021 wildfire expenses performed under this enhanced scrutiny to date ↑