Report 2018-118 Recommendation 7 Responses

Report 2018-118: California Public Utilities Commission: It Could Improve the Transparency of Water Rate Increases by Disclosing Its Review Process and Ensuring That Utilities Notify Customers as Required (Release Date: December 2018)

Recommendation #7 To: Public Utilities Commission

To ensure that the CPUC fulfills its statutory requirement for auditing all water utilities, it should immediately develop a plan to complete audits of Class A water utilities and small water utilities in a timely manner.

Annual Follow-Up Agency Response From October 2022

The Utility Audits Branch (UAB) has developed and implemented a modernized risk-based approach that now includes all water and sewer utilities (including Class A and small water utilities), regulated by the California Public Utilities Commission (CPUC).

However, even with incorporating a modernized risk-based approach, CPUC continued to lack adequate audit staff resources to meet the statutory requirement timeline. Therefore, the CPUC has continued to actively work with the State's control agencies and the Legislature and proposed amendments to Public Utilities (PU) Code sections 314.5, 274, and 792.5 outlining the CPUC's audit requirements. The proposed amendments introduced a risk-based approach to the audit requirements to clarify the frequency of the required audits. The Legislature passed the proposed bill amendments on August 31, 2022. CPUC is currently waiting for Governor's signature on Assembly Bill (AB) 209/Senate Bill (SB) 126 for the amendments to take effect. The amended audit requirements focus on utilizing the risk-based approach in auditing public utilities regulated by CPUC and require the CPUC to audit every electric and gas corporation every five years, and every high-risk telephone, water, and sewer corporation, as determined by the CPUC through a risk assessment methodology, at least every ten years. The amended language to the applicable PU Code sections can be viewed at the following links:

Bill Text - SB-126 Energy and climate change. (ca.gov)

Bill Text - AB-209 Energy and climate change. (ca.gov)

With these changes to the statutory requirements, CPUC is in compliance with the audit requirements.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

Annual Follow-Up Agency Response From October 2021

The Utility Audits Branch (UAB) has developed and implemented a modernized risk-based approach that now includes all water and sewer utilities (including Class A and small water utilities), regulated by the California Public Utilities Commission (CPUC). However, even with an audit plan, there is not enough audit staff to meet the current statutory requirement timeline.

Therefore, the CPUC has been working with State's control agencies and the Legislature to propose amendments that would introduce a risk-based approach to the Public Utilities (PU) Code sections outlining the audit requirements. If approved, UAB will have the ability to comply with the revised statutory requirements.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From November 2020

The Utility Audits Branch (UAB) has adopted a policy to perform alternative procedures to oversee the Class A water utilities by performing a review of audited financial statements in lieu of auditing them directly. UAB also developed a work plan to prioritize the reviews of the small water utilities that have never been audited in the past and transitioned its audit procedures from audits of financial statements to reviews of financial statements to streamline the audit process and ensure greater coverage of small utilities audited annually. The audit reports are posted at the following link: ftp://ftp.cpuc.ca.gov/utilityaudits.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

1-Year Agency Response

UAFCB has adopted a policy to perform alternative procedures to oversee the Class A water utilities in lieu of auditing them directly. UAFCB was authorized two new positions for Staff Services Management Auditor (SSMA) to conduct audits on small water utilities. UAFCB has filled one of the two new SSMA positions, and in the process of filling the remaining SSMA position. However, that still will not be enough staff to audit or review every water company. UAFCB plans to request additional staff through the BCP process.

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

6-Month Agency Response

The Commission has developed policies and procedures regarding overseeing Class A water utilities. In addition, the Commission submitted a BCP requesting additional audit staff to comply with the statutory audit requirements. UAFCB continues to audit small water utilities using a risk-based audit approach. UAFCB will continue to document its audit planning, risk assessments and analyses in every water utility audit. UAFCB will also ensure those audit working papers are properly kept for the California State Auditor's review upon request.

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

The CPUC received additional staff requested in the BCP it references in its response to this recommendation. However, until the CPUC fulfills its statutory requirement for auditing all water utilities, we will continue to report this recommendation as partially implemented.

60-Day Agency Response

The Utility Audit, Finance and Compliance Branch (UAFCB) is in the process of revising its Water Audit Program to guide its auditors in performing their duties and to implement the new auditing requirements as specified in the Public Utilities Code Section 314.5 by May 31, 2019. UAFCB is working on a BCP to request additional audit staff to comply with the audit requirement for water utilities with 10,000 or fewer customers. The Commission will develop policies and procedures to leverage on the work performed by the Public Advocates Office during its general rate case reviews in order for the Commission to meet the audit requirements of Class A water utilities.

In addition, the Water Audit Unit is performing a risk assessment of the entire population of CPUC regulated water utilities based on established criteria to ensure limited resources will be diverted to those with the highest risk

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

All Recommendations in 2018-118

Agency responses received are posted verbatim.