Report 2018-118 Recommendation 6 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 #6 To: Public Utilities Commission

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 reviews Public Advocates conducts of general rate cases demonstrate compliance with the legal requirement for audits of these utilities.

Annual Follow-Up Agency Response From October 2022

The Utility Audits Branch (UAB) has updated and follows its Standard Practice Audit Manual to include a risk-based approach which incorporates all water and sewer utilities (including Class A and small water utilities) regulated by the California Public Utilities Commission (CPUC). The Standard Practice Audit Manual can be found at:

https://www.cpuc.ca.gov/about-cpuc/divisions/utility-audits-risk-and-compliance-division/utility-audits-branch

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 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 updated its Standard Practice Audit Manual to include a risk-based approach which incorporates all water and sewer utilities (including Class A and small water utilities) regulated by the California Public Utilities Commission (CPUC). The Standard Practice Audit Manual can be found at:

https://www.cpuc.ca.gov/about-cpuc/divisions/utility-audits-risk-and-compliance-division/utility-audits-branch

However, even with incorporating a modernized approach, 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 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 an internal policy to perform alternative procedures to oversee Class A water utilities by performing reviews of their CPA-audited financial statements. UAB has incorporated that policy and procedures into its Standard Practice. UAB has completed its reviews of the documents filed by all Class A water utilities for the years 2019 and 2020. The results of those reviews are located at:

ftp://ftp.cpuc.ca.gov/utilityaudits/Class_A_Water_Utility_Audits/

UAB is also in the process of developing a legislative proposal to amend PU Code Section 314.5 to streamline and clarify the frequency of audit requirements.

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

Although the UAB is reviewing Class A water utility financial statements, it is not auditing those utilities as required by state law. Until it does so, or state law is amended to reflect its practice, we will assess this recommendation as partially implemented.

1-Year Agency Response

UAFCB has adopted an internal policy to perform alternative procedures to oversee Class A water utilities by reviewing their audited financial statements. UAFCB has incorporated that policy and procedures into its Standard Practice. UAFCB is in the process of reviewing the documents filed by Class A water utilities. The results of those reviews are located at

ftp://ftp.cpuc.ca.gov/utilityaudits/Class_A_Water_Utility_Audits/Results%20of%20UAB's%20Reviews%20of%20Independent%20CPA%20Audit%20Reports/2018/

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

The CPUC has now adopted a policy to implement its alternative approach to auditing class A water utilities, and the link they included in their response demonstrates that it is actively following that policy. However, the CPUC is still not conducting audits of Class A water utilities as required and, until it does so, we will assess this recommendation as partially implemented.

6-Month Agency Response

In lieu of directly auditing Class A water utilities, the Commission has developed an alternative approach by adapting new policies and procedures (see attachment) to meet the statutory requirements and the California State Auditor's recommendations. The Utility Audit, Finance and Compliance Branch (UAFCB) will incorporate these new policies and procedures into its Standard Practice, titled "UAFCB Audit and Attestation Standard Practice," and follow them when performing alternative audit procedures for Class A water utilities.

Please see attached policy.

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

60-Day Agency Response

The Utility Audit, Finance and Compliance Branch (UAFCB) continues to follow its Standard Practice Audit Manual, Titled "Utility Audit, Finance and Compliance Branch UAFCB Audit and Attestation Standard Practice", for all audits of all water utilities

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

As indicated in its response to recommendation #7, the CPUC is currently requesting additional staff and revising its audit program to better meet the statutory requirement to audit water utilities. Until it has finalized the revised audit program, we will assess this recommendation as pending.

All Recommendations in 2018-118

Agency responses received are posted verbatim.