BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
MARTHA M. ESCUTIA, CHAIRWOMAN
SB 386 - Campbell Hearing Date:
April 26, 2005 S
As Introduced: February 17, 2005 Non-FISCAL B
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DESCRIPTION
Current law requires the California Public Utilities Commission
(CPUC) to inspect and audit the books of the major electric,
telephone and water corporations every three years.
This bill requires these audits to conform with the Government
Auditing Standards published by the Comptroller General of the
United States, and where applicable, to the Generally Accepted
Auditing Standards of the American Institute of Certified Public
Accountants.
BACKGROUND
The auditing of utilities is a core function of the CPUC. These
audits have several components. The first is regulatory
compliance: Is the utility doing its business in a way that is
compliant with CPUC rules? The second is financial performance:
Are utility customers paying a fair rate for service? The
third is operational efficiency: Is the utility operating
efficiently? Depending on the regulatory structure of the
industry, each of these components will have a different degree
of emphasis.
The CPUC audits are far different from the annual audit
requirements of the Securities and Exchange Commission (SEC).
While the CPUC audits focus on regulatory compliance, the SEC
audits are focused on the accuracy of the financial accounting.
Moreover, the SEC requires an audit of the publicly-traded
company, while the CPUC audit is only of the regulated utility,
which is generally a subsidiary of the publicly-traded company.
For example, the SEC requires an audit of Verizon Communications
which serves 29 states, has numerous international operations,
and is a part owner of Verizon Wireless. The CPUC audits only
Verizon's California wireline operations.
There have not been rules or standards regarding the CPUC's
auditing practices. Rather the CPUC's audits are judged on
their merits. The CPUC Commissioners evaluate the audits and,
to the extent the audit demonstrates a problem, the
Commissioners act accordingly.
With but one exception, the CPUC's audits have been performed by
the Office of the Ratepayer Advocate (ORA) or its successor
divisions.
The CPUC has generally done a reasonable job keeping up with the
auditing of the energy utilities. It has done a worse job with
water utilities and a poor job with telecommunications
utilities. The CPUC's most current audit of SBC occurred in
2001 and looked at 1996-1998 results. Verizon, the state's
second largest telephone company, was audited for those same
years. Audits have never been performed for many of their much
smaller competitors.
COMMENTS
1. What's the Standard ? The Government Auditing Standards
are also known as Generally Accepted Government Auditing
Standards (GAGAS). They are generally described in a
publication by the United States General Accounting Office
entitled "Government Auditing Standards, 2003 Revision", a
202-page document.
GAGAS may be an inapt standard for the regulatory audits
conducted by the CPUC. GAGAS applies to "audits and
attestation engagements of government entities, programs,
activities, and functions, and of government assistance
administered by contractors, nonprofit entities, and other
nongovernmental entities."<1> The CPUC audits are not of
government entities, but rather of private entities (e.g.
utilities). Moreover, these types of CPUC audits are not
of government programs but rather the regulatory compliance
and financial performance of the utilities. GAGAS has been
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<1> Comptroller General of the United States, Government
Auditing Standards 2003 Revision (GAO-03-673G), June 2003 p.6.
required for use by federal inspectors in audits of federal
establishments and organizations, executive branch
departments, and entities receiving federal funding. These
are different entities and purposes than the audits
required by the CPUC.
It may well be useful to establish a set of professional
standards for the conduct of audits. While the CPUC has
historically let the quality of the audits speak for
themselves, establishing a minimum level of audit quality
may reduce some of the rancor that inevitably follows any
audit. To that end GAGAS may be helpful in that GAGAS is
"intended for use by government auditors to ensure that
they maintain competence, integrity, objectivity, and
independence in planning, conducting, and reporting their
work."<2>
While the specific GAGAS standards may be unsuitable, GAGAS
embraces principles which may be entirely appropriate. The
author and committee may wish to consider whether to
instead codify these principles, namely that the CPUC
auditors must maintain their competence, integrity,
objectivity, and independence in planning, conducting, and
reporting their work. The National Association of
Regulatory Utility Commissioners (NARUC) and National
Association of State Utility Consumer Advocates (NASUCA)
may also have articulated audit principles worth
considering.
2. Catching Up . The CPUC is so far behind in its
telecommunications audits it may never catch up. This
untimely auditing makes it more difficult to do a thorough
job, with potential harm to customers and competitors going
undetected. Remedies are also hard to enforce when the
improper activity is discovered many years later. Moreover,
competitors who were harmed by an unfair practice in the
late-1990s probably no longer exist; customers may have
moved on. The author and committee may wish to consider
ensuring that the CPUC complies with its statutory
obligation to audit by providing it with sufficient funds
to perform those audits and requiring regular reporting of
its progress in catching up.
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<2> id, p.5.
POSITIONS
Sponsor:
Author
Support:
None on file
Oppose:
Office of Ratepayer Advocates
The Utility Reform Network
Randy Chinn
SB 386 Analysis
Hearing Date: April 26, 2005