Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC
GAO-08-289
Published: Feb 25, 2008. Publicly Released: Mar 06, 2008.
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Highlights
Under the Public Utility Holding Company Act of 1935 (PUHCA 1935) and other laws, federal agencies and state commissions have traditionally regulated utilities to protect consumers from supply disruptions and unfair pricing. The Energy Policy Act of 2005 (EPAct) repealed PUHCA 1935, removing some limitations on the companies that could merge with or invest in utilities, leaving the Federal Energy Regulatory Commission (FERC), which already regulated utilities, with primary federal responsibility for regulating them. Because of the potential for new mergers or acquisitions between utilities and companies previously restricted from investing in utilities, there has been considerable interest in whether cross-subsidization--unfairly passing on to consumers the cost of transactions between utility companies and their "affiliates"--could occur. GAO was asked to (1) examine the extent to which FERC changed its merger and acquisition and post merger review and oversight processes since EPAct to protect against cross-subsidization and (2) survey state utility commissions about their oversight.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Federal Energy Regulatory Commission | The Chairman of the Federal Energy Regulatory Commission (FERC) should develop a comprehensive, risk-based approach to planning audits of affiliate transactions in holding companies and other corporations that it oversees to more efficiently target its resources to highest priority needs and to address the risk that affiliate transactions pose for utility customers, shareholders, bondholders, and other stakeholders. |
Closed – Implemented
FERC established in its FY 2009-2014 Strategic Plan a performance goal requiring that most audits be planned and prioritized using a risk-based approach. In addition, FERC's Division of Audits implemented a comprehensive risk-based approach to planning affiliated transaction audits using an internally developed screen to rank and select candidates for affiliate transaction audits. The ranking is an important factor in assessing the potential risk of inappropriate cross-subsidization. Furthermore, the Division of Audits has completed 10 of 16 affiliate transaction audits--6 are ongoing--to further implement this recommendation.
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| Federal Energy Regulatory Commission | The Chairman of the Federal Energy Regulatory Commission (FERC) should, as an aid to developing this risk-based approach, develop a better understanding of the risks posed by each company by doing the following: (1) monitoring the financial condition of utilities to detect significant changes in the financial health of the utility sector, as some state regulators have found it useful to do. To do this, FERC could leverage analyses done by the financial market and develop a standard set of performance indicators; and (2) developing a better means of collaborating with state regulators to leverage resources already applied to enforcement efforts and to capitalize on state regulators' unique knowledge. As part of this effort, FERC may want to consider identifying a liaison, or liaisons, for state regulators to contact and to serve as a focal point(s). |
Closed – Implemented
In January 2009, FERC issued a rule requiring public utilities to provide additional information on affiliate transactions in FERC Form 1 and 2 in order to assess at each public utility the type, amount, accounting and reporting of affiliate transactions. In addition, FERC's Division of Audits reviews bond ratings, stock prices, various financial and non-financial information from outside databases and purchased software, SEC filings, and FERC Forms 1,2, and 60 to better understand the risks posed by each company. Furthermore, the Division of Audits assesses the level of state commissions' review of affiliated transactions using state rate information about cost recovery mechanisms (formula, state, or fixed rates). The Audit staff also routinely communicates with state commission staff shortly after an audit is initiated to facilitate planning and collaborating with state regulators as needed during the course of the audit. They also typically contact state commission officials at the conclusion of the audit to discuss audit results. FERC's Office of External Affairs also maintains extensive communication with state commissions through its Division of State, International, and Public Affairs.
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| Federal Energy Regulatory Commission | The Chairman of the Federal Energy Regulatory Commission (FERC) should develop an audit reporting approach to clearly identify the objectives, scope and methodology, and the specific findings of the audit, irrespective of whether FERC takes an enforcement action, in order to improve public confidence in FERC's enforcement functions and the usefulness of audit reports on affiliate transactions for FERC, state regulators, affected utilities, and others. |
Closed – Implemented
During the course of the GAO Audit (11/2007) with issuance of FERC's audit report on Kansas City Power & Light Company, FERC's Division of Audits began providing greater transparency to the audit process by providing more detail of the audit steps completed by the audit staff. All audit reports now reflect the audit objectives and findings, where applicable. FERC is promoting increased transparency in it audit reports to motivate compliance with the Commission's regulations, including company's internal compliance programs, which is a key enforcement objective in FERC's strategic plan.
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| Federal Energy Regulatory Commission | The Chairman of the Federal Energy Regulatory Commission (FERC) should, after developing a more formal risk-based approach, reassess whether it has sufficient audit resources to perform these audits. If FERC believes that it does not have sufficient resources to conduct adequate auditing of the companies that it oversees within its existing staff and budget, FERC should provide this information to Congress and request additional resources. |
Closed – Implemented
Since issuance of the GAO report in February 2008, FERC's Division of Audits staff has grown from 34 to 61 full-time equivalents. This reflects FERC's increased responsibility for ensuring the reliability and security of the nation's bulk power system as well as its broader responsibility for ensuring compliance in all areas of the Commission's jurisdiction.
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Audit oversightAuditing standardsCorporate auditsCorporate mergersElectric energyElectric utilitiesFederal lawFederal regulationsIndependent regulatory commissionsInternal controlsNatural gasPublic utilitiesReporting requirementsUtility rates