Unregulated Power - Utilities that is

crossposted from unbossed

Utilities, especially power utilities, are not my area. However, a new report released by GAO last week is a must-read, especially if you are concerned that power companies have now found a way to excuse themselves from regulation and oversight. It appears you may be correct. One unique aspect of this report is that GAO has provided on-line access to its survey results.

Here are the key excerpts from the report.  Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC  GAO-08-289, February 25, 2008

Why GAO Did This Study

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 The Energy Policy Act of 2005 (EPAct) repealed PUHCA 1935, removing some limitations on the companies that could merge with or invest in utilities, leaving the Federal Energy Regulatory Commission (FERC),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.

Conclusions

The repeal of PUHCA 1935 further opened the door for new and different corporate combinations, including the ownership of utilities by complex international companies or equity firms, potentially providing needed investment to the utility industry. However, this potential to increase investment comes at the potential cost of making regulation more difficult. Further, the introduction of new types of investors, with incentives that may be at odds with traditional utility company services, could change the utility industry into something quite different than the industry that FERC and the states have overseen for decades. Despite these evolving changes, FERC continues to rely to a considerable degree on companies to self-certify that they will not cross-subsidize and self-report when they do. On the basis of our discussions with industry, state regulators, and audit experts, this reliance on self-enforcement - backed up by a few audits - does little to convince consumers and other market stakeholders that FERC’s oversight is sufficiently vigilant.

As FERC and states approve mergers, the responsibility for ensuring that cross-subsidization will not occur shifts to FERC’s Office of Enforcement and state commission staffs. However, in the case of FERC this presents a challenge because FERC lacks a formal way of allocating resources to the areas of highest potential risk - leaving audit resources deployed in an ad hoc manner. Without a risk-based audit approach, FERC may not allocate its scarce audit resources to the right areas, potentially allowing cross-subsidization to go undetected. In addition, since states generally review only a very small percent of affiliate transaction to identify potential cross-subsidization and many reported resource constraints, some states’ detection of cross-subsidization may be limited.

By reassessing its audit approach, how it shares the results of its audits, and its resources, FERC could take important steps to demonstrate its commitment to ensure that companies are not engaged in cross-subsidization at the expense of consumers. Absent such a reassessment, the potential exists for FERC to approve the formation of companies that are difficult and costly for it and states to oversee and potentially risky for consumers and the broader market.

Recommendations for Executive Action

We recommend that the Chairman of the Federal Energy Regulatory Commission (FERC) take the following actions:

1. 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.

2. As an aid to developing this risk-based approach, FERC should develop a better understanding of the risks posed by each company by doing the following:

a. 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.

b. 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).

3. 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.

4. 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.

And for the e-supplement

Utility Oversight: Survey of State Public Utility Commissions on Utility Commission Authorities and Reporting Responsibilities For Overseeing Utilities Since the Passage of EPAct 2005 (GAO-08-290SP, February 2008), an E-supplement to GAO-08-89

This document presents the results of GAO’s survey of the staff of state commissions that oversee regulated electrical and natural gas utilities. The responses represent the views of these staff and may not represent the formal position or informal opinions of state commissions or any specific commissioner.

We conducted an internet-based survey of state utility commissions in the 50 states and the District of Columbia to determine states’ current regulatory authorities, recent oversight activities, and available resources for regulating utilities. In addition, we asked utility commissions for their views on utility regulation in light of the passage of EPAct 2005 - particularly their views of federal agency authorities related to utility mergers, oversight of affiliate transactions, and financial reporting. Note, some survey questions cover periods prior to the passage of EPAct 2005.

To ensure that we obtained information from those staff with knowledge of state electric and natural gas regulation, we obtained designated staff contact points for each commission from the National Association of Regulatory Utility Commissioners (NARUC), a national organization that represents state public utility commissions, then sent letters to the chairmen of each utility commission describing our survey and its purpose, and asking them to confirm these contacts or to designate a more appropriate contact. For security and data integrity purposes, we provided each official with a username and password to access and complete the survey. We received responses from 49 states plus the District of Columbia, although officials did not always provide responses to every question. One state declined to respond due to other high priority activities occurring at the time of our survey.

Because we administered the survey to all of the state public utility commissions, our results are not subject to sampling error. However, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents in answering a question, or the types of people who do not respond can introduce unwanted variability into the survey results To reduce nonsampling errors, we had knowledgeable officials at NARUC review the survey to make sure they understood the questions. We also pretested the survey with two states to ensure that (1) the questions were clear and unambiguous, (2) terminology was used correctly (3) the survey did not place an undue burden on commission officials, and (4) the survey was comprehensive and unbiased. In selecting the pretest sites, we sought the advice of NARUC and selected states that had different types of regulatory requirements. We incorporated these reviewers’ comments into the final survey.

A discussion of our scope and methodology and a discussion related to some of the survey results are contained in our report entitled: "Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC" GAO-08-289. We conducted our survey work from January 8, 2007 to June 30, 2007 in accordance with generally accepted government auditing standards.