Our audit on the California Public Utilities Commission's (commission) monitoring of balancing accounts highlighted the following:
The California Public Utilities Commission (commission) is responsible for ensuring that California utility customers have safe, reliable utility service at reasonable rates, for protecting utility customers from fraud, and for promoting the health of California's economy. The commission has broad authority, including the authority to inspect and audit the records of regulated utilities. As such, it regulates the six electric, seven natural gas, and 116 water investor-owned utilities (utilities) in California, and it is responsible for authorizing the rates these utilities may charge ratepayers. Utilities must justify their proposed rates by presenting cost information to the commission during general rate case proceedings (general rate case), typically every three years. The commission's staff, the Office of Ratepayer Advocates (Ratepayer Advocates), and advocacy groups review the information that utilities present during the general rate case to determine whether proposed costs are necessary and reasonable. Ratepayer Advocates is an independent office within the commission with a mission to obtain the lowest possible rate for service consistent with reliable and safe service levels. Based on the reviews and recommendations and upon hearing all evidence and testimonies during a formal hearing, the commission authorizes the rates that utilities may charge their customers.
Because the rates are derived from projected costs and projected consumption of service, state law directs the commission to require utilities to establish balancing accounts to track the actual costs and the related revenues the utilities collect from ratepayers for certain activities. The purpose of a balancing account is to allow the utilities to recoup the costs the commission has authorized, while ensuring that ratepayers do not pay more than they should. If a balancing account has a balance—indicating that the utilities have over- or under-collected from ratepayers compared to their costs—the utilities generally seek periodically to adjust their future rates to either refund or recoup the balance. The utilities use both formal and informal proceedings to do so. Although the Energy Division (energy division) performs a high-level review of energy utilities' informal filings, the commission's Division of Water and Audits (water division) and Ratepayer Advocates perform a more detailed review of some balancing accounts when the utilities file for a formal or informal proceeding to refund or recoup their balances.
We noted, however, that the commission lacks adequate processes to provide sufficient oversight of balancing accounts to protect ratepayers from unfair rate increases. The commission relies on Ratepayer Advocates to review balancing accounts of energy utilities (electric, natural gas, or both). However, Ratepayer Advocates only reviews those energy utilities' balancing accounts that are included in certain formal proceedings before the commission. Specifically, Ratepayer Advocates reviewed only 23 percent of large energy utilities' balancing accounts active during 2009 through 2011, representing 58 percent of the dollar value of these balancing accounts. It did not review other balancing accounts that had a total value of $37.6 billion during this period.
Given that balancing accounts directly affect rates that a utility charges ratepayers and given the broad authority the commission has to inspect and audit utilities' books, accounts, and records, we believe that the commission should use a systematic process that ensures a review of all those balancing accounts that can have the most impact on ratepayers. However, the commission does not have the necessary information, such as the size of the balancing account and the last time the commission reviewed it, to help determine which balancing accounts it should review. Although the commission obtained this information from the utilities upon our request, we found omissions and errors in that information, which will limit its usefulness as a monitoring tool.
In addition to the commission lacking an adequate review process, Ratepayer Advocates' process for performing these reviews had weaknesses. Of the 18 reviews of balancing accounts we examined, only two had sufficient documentation to demonstrate the procedures that Ratepayer Advocates performed. The other 16 reviews were either poorly documented or not documented at all. The lack of documentation for many of the 18 reviews may be caused in part because Ratepayer Advocates does not require supervisors to formally approve analysts' reviews of balancing accounts. Instead, supervisory approval happens during informal discussions about the conclusions analysts have reached in a review without examining the actual work the analysts performed. We believe that a documented supervisory review is necessary to assure Ratepayer Advocates management and other stakeholders that the analyst has performed all planned procedures appropriately and that any reductions in recovery amounts that the analyst may be proposing are accurate. In contrast, most of the water division's reviews of balancing accounts that we tested had appropriate documentation and had received formal approval from a supervisor.
We also found the commission does not audit the accounting records of the utilities it regulates according to the schedule prescribed by state law: every three years for those utilities that serve more than 1,000 customers and every five years for those utilities that serve 1,000 or fewer customers. The intent of the law is to ensure that the commission regularly audits all utilities to increase public confidence in the regulatory process. The commission generally complies with the audit requirement through procedures it performs during the review of a utility's general rate case. However, the commission does not ensure that all utilities file a general rate case every three or five years to coincide with the audit requirement. Specifically, the commission has allowed five energy utilities with more than 1,000 customers to file their general rate cases beyond a three-year cycle, and it has allowed another small energy utility to adjust rates through informal filings without a general rate case. Further, because it only requires the 10 largest water utilities to file their general rate case every three years, more than half of the remaining 106 water utilities had not filed their general rate cases in time to coincide with the audit requirement in state law. As a result, the commission is not ensuring that it audits these utilities within the time frames the law requires.
Finally, the California State Board of Equalization (Equalization) believes that the law requiring the commission to provide audit reports to Equalization is out of date. Specifically, state law requires the commission to provide its audit reports on utilities' accounting records to Equalization for use in assessing taxes on those utilities. However, the commission has not done so in over three decades. Equalization stated that the commission's general rate cases do not focus on the same components of a utility's operations and finances as assessment of taxes requires. Further, Equalization told us that it assesses taxes on many more companies than those that the commission regulates. Equalization has established its own process to audit all companies, including utilities, in the State and believes that it is in a better position to carry out this function than the commission. Equalization believes that requiring the commission to do the work necessary to allow Equalization to assess taxes on utilities may not be cost-effective for the State. The director of the energy division noted that the commission has not taken a position on whether to change the existing law. Although Equalization believes that the law should be revised to remove the requirement that the commission provide its audit reports to Equalization for tax assessment purposes, neither of them has sought to change the law.
To ensure proper oversight of balancing accounts, the Legislature should amend California Public Utilities Code, Section 792.5, to require the commission to develop a risk-based approach for reviewing all balancing accounts periodically to ensure that the transactions recorded in the balancing accounts are for allowable purposes and supported by appropriate documentation, such as invoices.
To ensure that it has the necessary information to provide appropriate oversight of the balancing accounts of regulated utilities and thus protect ratepayers from unfair rate increases, the commission should regularly update the list of balancing accounts that it authorized and verify its accuracy. Both the commission and Ratepayer Advocates should use this list to guide their oversight efforts.
To ensure that it efficiently and effectively monitors energy utilities' balancing accounts to protect ratepayers from unfair rate increases, the commission should direct its energy division to perform in-depth reviews of balancing accounts that Ratepayer Advocates has not reviewed.
Both Ratepayer Advocates and the water division should, within six months, develop policies to ensure that reviews of balancing accounts are appropriately documented, subjected to supervisory approval, and retained.
The commission should follow the state law requirement to inspect and audit the accounting records of utilities it regulates within required time frames.
The Legislature should amend state law to remove the requirement that the commission provide audit reports to Equalization.
Although Ratepayer Advocates disagreed with some of our conclusions, both it and the commission agreed with our recommendations and plan to implement them.