Report 2013-109 Recommendation 4 Responses

Report 2013-109: California Public Utilities Commission: Improved Monitoring of Balancing Accounts Would Better Ensure That Utility Rates Are Fair and Reasonable (Release Date: March 2014)

Recommendation #4 To: Public Utilities Commission

To ensure that it has the necessary information to provide appropriate oversight of the balancing accounts, the commission should maintain accurate and timely information on utility balancing accounts. Specifically, it should use the list to guide its efforts to oversee balancing accounts more effectively, by using a risk-based approach to select a sufficient number of balancing accounts, as well as those with the most potential impact on ratepayers, for review each year to provide appropriate coverage over all regulated utilities.

1-Year Agency Response

Energy Division developed its risk based approach in August 2014 as part of the Balancing Account Review Procedures document. This document was provided to the State Auditor as part of the 6 month update in September, 2014. The risk based criteria include the following:

1. Balancing accounts with quarter-end balances outside of ±10% or more of the currently authorized revenue requirement for a given account (ratio of balance to authorized revenue requirement).

2. Authorized revenue requirements that fall in the top 25th percentile of all accounts.

3. Volatile fluctuations in quarterly balances over time.

4. Accounts that have not been reviewed in the previous three reviews.

Balancing Accounts that meet the above identified risk-based criteria but are planned to be reviewed or audited by the Division of Ratepayer Advocates, the Division of Water and Audits, or by independent auditors are excluded. The risk based criteria will be revised based on our experience with the in-depth reviews.

The Director of the Division of Water and Audits has sent a memorandum to Division staff outlining the risk-based approach the Division will use in selecting balancing accounts for review each year that have the most potential impact in terms of rates on ratepayers. This risk-based approach is applicable to all Class A and B water and sewer utilities. Since the State Auditor's Report was first issued in March 2013, the Commission has processed three general rate case decisions along with two general rate case decisions pending that have reviewed the balances in the various utility balancing accounts for the five affected utilities. In addition, the Division of Water and Audits has reviewed and audited 20 utility balancing accounts representing the largest risk-based account balances for the utilities.

Completion Date: March 2015
Response Date: March 2015

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

Energy Division has met with the major energy utilities to understand the details of their accounting systems. Energy Division has also developed an initial risk based approach to select a sufficient number of balancing accounts with the most impact. The criteria include quarter end balances exceeding a certain threshold, balancing accounts with activity in the top 25th percentile and excessive volatility. Energy Division has also separated out revenue and cost balancing accounts to apply the risk based criteria. The risk based criteria will be revised based on our experience with the in-depth reviews. Energy Division will be focusing on balancing accounts which track actual costs or revenues to authorized costs first and select a sufficient size sample to perform an invoice level review. The attached Balancing Account Review Procedures document describes the risk based approach Energy Division is planning to use.

Estimated Completion Date: 03/04/2015
Response Date: September 2014

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

Energy Division is in the process of determining an appropriate risk based approach to select a sufficient number of balancing accounts with the most impact. No decision has been made yet. However, we have started the first step of separating out revenue and cost balancing accounts. Energy Division will be focusing on balancing accounts which track actual costs to authorized costs first and select a sufficient size sample to perform an invoice level review.

Estimated Completion Date: EOY 2014
Response Date: April 2014

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2013-109

Agency responses received are posted verbatim.