Response to the Audit

California Public Utilities Commission Response to CSA Audit 2018-118 CPUC – Rate Setting Process

It Could Improve the Transparency of Water Rate Increases by Disclosing Its Review Process and Ensuring
That Utilities Notify Customers as Required

Finding #1: The CPUC has not provided customers with clear information about water rate increases and its process for approving rates.

The CPUC could do more to provide customers with understandable information about the reasons their water rates are changing, its general rate case process, and the advice letters that authorize changes to water rates. At present, it does not clearly disclose to customers the full impact that its decisions may have on water rates, and it has not made information about its ratesetting processes readily available.

Recommendation 1: By May 2019, the CPUC should begin to publish a summary of why and by how much water rates will change as a result of each general rate case proceeding, and by July 2019, make information about the general rate case process and advice letters more understandable to the public .

• To ensure that water utility customers can access understandable information regarding why and how their water rates are changing as a result of general rate case proceedings, by May 2019, the CPUC should create a webpage for water customers that includes the following information:
• A summary of water rate changes for each general rate case for Class A water utilities.
• A summary of any additional resolutions and decisions, that give water utilities the authority to change their rates for reasons external to the general rate case process, such as an increase in the fees the CPUC charges utilities for regulating them.
• To ensure transparency and promote public understanding of its processes, by July 2019, the CPUC should create and publish information for customers regarding its general rate case and advice letter processes, including how and when water utilities are required to notify customers of increased rates and how customers can participate in both processes.
• To ensure that the public can access advice letters on the CPUC’s website and because it is unknown when the system it is developing will be complete, the CPUC should immediately begin developing another process to make advice letters easily available by July 2019, such as scanning them and placing copies on the Water Division’s webpage.

Response: CPUC: [X] Agrees [ ] Disagrees with the recommendation.

The CPUC will post on its public website summaries of water rate changes for all its Class A water utility general rate proceedings, as well as a listing of any additional resolutions and decisions and their respective impacts on water rates. Planned completion date: May 31, 2019.

The CPUC will develop additional customer information that will describe the general rate case and advice letter processes. This information will also explain further how and when water utilities are required to notify customers of increased rates, and how utility ratepayers can participate in these processes. Additionally, the CPUC will post on its public website all water utility advice letters, and require utilities to do the same on their website. Planned completion date: July 31, 2019.

Finding #2: The CPUC has not ensured that water utilities notify customers about public hearings and proposed rate increases as required.

The CPUC does not verify whether water utilities comply with the regulations related to certain types of notifications to the public. The CPUC requires water utilities to provide these forms of notice within a specified time frame, but several of the utilities we reviewed did not always provide timely notifications to customers, thereby possibly limiting customer participation in and feedback to the ratesetting process.

Recommendation 2: The CPUC should verify that water utilities are providing their

customers with timely notifications of rate increases and public hearings and implement this verification process by May 2019 .

• To ensure that it informs its customers that they have an opportunity to provide their input regarding their general rate cases, by May 2019, the CPUC should implement a process to verify and maintain records that demonstrate that water utilities are submitting notifications to their customers of the following:
• Public participation hearings in accordance with the time frames set out in regulations and any additional notification requirements the ALJs may impose.
• General rate case application filings in accordance with the time frames set out in regulations.
• To the extent that it identifies noncompliance with notification requirements, the CPUC should evaluate whether to impose a fine on the water utility.
• To ensure that all customers receive timely notification from water utilities of potential and actual rate increases, the CPUC should implement a process by May 2019 that requires water utilities to submit proof of customer notification to its Water Division, which should then review these notifications to ensure that the utilities are meeting the requirements. If the water utilities do not comply with the requirements, the CPUC should consider whether to impose a fine on the water utility.

Response: CPUC: [X] Agrees [ ] Disagrees with the recommendation.

The CPUC will develop a process to ensure that customer notifications for Public Participation Hearings and other notifications of potential rate changes, including notices for general rate case proceedings, are recorded and verified. The CPUC will develop and implement procedures to verify customer notifications, review such notifications, and enforce its procedures. Planned completion date: May 31, 2019.

Finding #3: The CPUC has not conducted audits of water utilities as required.

The CPUC lacks policies and procedures detailing how it will conduct legally required audits of the largest water utilities and it has not conducted the majority of audits of the smaller water utilities as required by law. Without timely and effective audits, the CPUC lacks assurance that these water utilities are complying with applicable requirements, which could affect the rates and service that customers receive.

Recommendation 3: The CPUC should develop and implement policies and procedures

setting forth detailed requirements for the audits of Class A water utilities May 2019 and ensure it completes audits of small water utilities as required .

To ensure that the CPUC fulfills its statutory requirement for auditing all water utilities, it should:

• Immediately begin to follow its Standard Practice when auditing Class A water utilities, or develop policies and procedures by May 2019 to ensure that the audits conducted of Class A utilities provide appropriate assurance regarding a utility’s services and rates.
• Develop a plan to complete audits of all Class A water utilities and small water utilities in a timely manner.

Response: CPUC: [X] Agrees [ ] Disagrees with the recommendation.

The Utility Audit Branch (UAB) is currently developing policies and procedures and revamping its audit program to ensure it addresses both compliance and financial accountability issues with the water utilities. These efforts will be completed by May 31,2019. UAB is also updating the audit manual to comply with generally accepted government auditing standards. In addition, the Water Audit Unit is performing a risk assessment of the entire population of water utilities based on established criteria to ensure our limited audit resources will be diverted to those with the highest risk. UAB’s audit plan for water utilities will also incorporate the new auditing requirements and criteria outlined in SB 1410 enacted in September 2018.

Further, to address the number of water utility audits and their complexity, we will request additional auditors utilizing the BCP process to ensure Utility Audits has adequate staff to perform the required work. Currently, there are two authorized auditor positions focused on auditing small water utilities. Approval of more auditor positions will assist in addressing the audits of both the Class A and the small water utilities in a more timely and efficient manner.

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