Operational & Financial Audits

1. Operational & Financial Audits George Godding Director DMC Office of Market Oversight and Investigations Federal Energy Regulatory Commission USEA/USAID Energy Partnership Program Brasilia, Brazil August 10, 2005

2. Introduction • The Division of Operational Audits, (DOA) & Division of Financial Audits (DFA), OMOI, ensure the competitiveness of energy markets by conducting audits of jurisdictional entities for compliance with Commission’s rules, regulations, statutes, and orders. • Support the Commission’s Strategic Goals. • Participate in investigations with Enforcement attorneys. • Share Hotline responsibility: addressing complaints informally & alternative dispute resolution services. • Employees include accountants, auditors, engineers, economists, and energy industry analysts.

3. Office of Market Oversight and Investigations Director Division of Management & Communication Deputy Director Investigations & Enforcement Deputy Director Market Oversight & Assessment Division of Financial Market Assessment Division of Integrated Market Assessment Division of Information Development Division of Energy Market Oversight Division of Financial Audits Division of Operational Audits Division of Enforcement

4. Financial Audits Group Recently Added • Traditional efforts: • Sampling financial statements and data submissions • Requested company sorted data for analysis • Tariff compliance • New activities: • Broader scope & integrated • Capabilities from information technology • utility & independent web sites to confirm utility statements • use gross data to form basis for analysis • expanding E-mail and Voice-mail search capability • Forensic auditing capability being developed

5. Audits Aid Market Oversight • Proactive Approach – • Conduct random and targeted audits to: • establish a market presence • police energy markets to identify and remedy anti- competitive behaviors and rules violations • Reactive Approach – • Respond to: • complaints • hotline calls • emerging areas of concern

6. Approach to Audits Annual audit plan - a formal plan of action to accomplish audit goals and objectives for a specific year. Individual audit assignments - implement the annual audit plan and address late-breaking issues, such as, hotline calls or referrals from other FERC offices.

7. Process Overview Select Auditee Determine Scope Create Audit Plan Complete Audit Report Prepare Survey Complete Risk Analysis Conduct Audit Brief FERC & Auditee Finalize Audit Report

8. Create Project Audit Plan • Purpose • Objective • Scope/Resources • Criteria for Evaluation • Methods • Benefits

9. Audit Survey – High Level Review • BroadVerification of compliance in relevant areas • Non-discriminatory practices, • Tariff authorized rates and services, • Proper program delivery, and • Compliance with Commission statutes, orders, policies, rules and regulations. • Provide information for planning the audit verification work: • Areas that do and do not warrant in-depth review.

10. Audit Survey – Steps • Gather and review data • Review work performed by others • Conduct high-level testing • Prepare audit survey

11. Risk Analysis • Summarizes areas of risk detected during the survey phase of the audit • Provides the basis for planning and conducting further detailed testing

12. Conduct Audit • Data requests • On-site reviews • Transaction testing and analysis, and • Interviews

13. Illustrative Operational Audit Topics • Natural Gas Industry • Pipeline Operations • Stand./Codes of Conduct • Capacity Release • Contracting Practices • Filing Requirements • Tariff Compliance • Behavioral Rules • Electric Industry • Market Rules/Practices • Generator Outages • Stand./Codes of Conduct • Dispatch Practices • Transmission Access • Electric Quarterly Reporting (EQR) • Open Access Same-Time Information System • Behavioral Rules

14. Illustrative Financial Audit Topics Formula rate accounting Inventory accounting procedures Nuclear decommissioning trust funds Accounting for purchased power – fuel adjustment clause Pipeline assessment costs Cash management EQR data Interlocking Directorates Internal controls Governance

15. Audit Report • OMOI, other FERC offices, and the auditee are briefed • The auditee receives a draft audit report detailing audit findings • The auditee submits a response • If no issues remain, OMOI issues a letter order with a final audit report and a final response attached • If issues remain, the Commission decides further action

16. Operational Audit: Example 1 • Improper access to control center • Improper posting of TTC and ATC • Not posting information on tx request denials and curtailments and interruptions • Not up-to-date organizational charts and affiliate transactions • Not keeping records of affiliate discussions • Poor training on Standards of Conduct

17. Operational Audit: Example 2 • Failure to arrange tx service for off-system sales • Treated a system as a single node to serve off-system sales • Not posting all tx outages or curtailments on OASIS • Not filing of emergency deviations with FERC • Improper coding of tx service and posting denials • Not identifying affiliate tx requests • Not providing all ancillary services on OASIS

18. Financial Audit Examples • Used incorrect investment base in computing rate base for post 1996 plant investment • Customers improperly charged for failed development of Regional Transmission Organization

19. Questions?