OIG Audits - From the Distributor’s Point of View

1. TVPPA Accounting & Finance Conference Tena H. Porter - North Georgia EMC Anthony Taylor – EPB Mary Mealer – Tullahoma Utilities Board OIG Audits - From the Distributor’s Point of View

2. Who Is the OIG? • OIGs were established to create “independent and objective units” • They exist in governmental units from the Post Office to TVA • Inspector Generals (IG) to be appointed “without regard to political affiliation” and solely on the basis of integrity and demonstrated ability….”

3. TVA’s OIG • TVA’s OIG was created by the TVA Board of Directors in 1985 • The TVA OIG became statutory under the Inspector General Act Amendment of 1988 (IG Act) • The authority to appoint the TVA IG was transferred to the President in 2000 by Public Law No. 106-422

4. OIG Responsibilities • Conducting audits, inspections and investigations relating to TVA programs and operations • Recommend corrective actions and report on the progress made in implementing such actions • Keep the TVA Board and Congress informed about problems and deficiencies relating to the administration of those programs and operations

5. Why Distributor Audits? • OIG historically conducted contract compliance audits for procurement contracts • In 2008, IG decided to extend the contract compliance auditing function to include revenue contracts

6. Reaching to the Distributor • Determine compliance with key contract provisions, including: • Proper reporting of electric sales by customer class to facilitate proper revenue recognition and billing by TVA • Nondiscrimination in providing power to members of the same rate class • Use of revenues, including any surplus, for approved purposes

7. The Power Contract Link • “5.(a) Cooperative agrees that the power purchased hereunder shall be sold and distributed to the ultimate consumer without discrimination among consumers of the same class, and that no discriminatory rate, rebate, or other special concession will be made or given to any consumer, directly or indirectly.”

8. The Power Contract Link • “6. Use of Revenue • Cooperative agrees to use the gross revenues from electric operations for the following purposes: • Current electric system operating expenses, including salaries, wages, cost of materials and supplies, taxes, power at wholesale, and insurance; • Current payments of interest on System Indebtedness, and the payment of principal amounts, including sinking fund payments, when due; and

9. The Power Contract Link 3. From any remaining revenues, reasonable reserves for renewals, replacements, and contingencies; and cash working capital adequate to cover operating expenses for a reasonable number of weeks.”

10. Audit Process • Letter notification informing distributor of the audit • Meet with the distributor management regarding the objective of the audit and information needs several weeks before anticipated date of fieldwork. • In office review of data files • Fieldwork • Findings & Report

11. Audit Process • Auditors perform as much analysis as possible before coming to distributor offices • Work with billing agency or distributor to receive electronic billing information • Distributors send available information to auditors • Auditors run exception reports • Fieldwork dates set • Distributor process interviews • Exception reports or questions • Exit conference to discuss findings

12. Data Request – Big Picture • SAS 70 and external audit results • Organization charts • Billing data for a two year period • Information on special customer classifications, credits or other circumstances • Joint operations or investment in other lines of business • Capital project plans/expenditures • List of disbursements

13. Protecting Your Data • Consider requiring a Confidentiality Agreement to protect your data “In connection with its audit of North Georgia Electric Membership Corporation of Dalton, Georgia, a Rural Electric Cooperative (“NGEMC”), the undersigned Office of Inspector General for the Tennessee Valley Authority(“OIG”), understands that NGEMC has disclosed or may disclose certain confidential information including without limitation information relating to customer and employee names, which to the extent previously or subsequently disclosed to the OIG is hereinafter referred to as “Confidential Information”. This confidential information specifically includes the electronic listing of customers whose demand exceeded 1MW in any billing period during FY2008 and FY2009; and an electronic listing of customers with service address and rate class. - Continued next page

14. Protecting Your Data • Confidentiality Agreement Cont. – “As consideration for access to said confidential information given by NGEMC, OIG promises and agrees to disclose said confidential information only to those individuals who are employees or agents of OIG who have a legitimate need to know for purposes relating to OIG audit number 2010-13025, Distributor Review of North Georgia Electric Membership Corporation. Furthermore, OIG agrees to take reasonable precautions to protect such confidential information from unauthorized disclosure.” • Agreement will require headquarters signatures so request early in the process

15. What to Expect During Audit • Data requests are monumental, get the help of your billing agency • This is not a typical audit using statistical sampling – all transactions are reviewed • Billing data requested will be 100% of all consumer transactions for audit period (our audit period July 2007 – June 2009) • SEDC built data files and transferred to OIG

16. Documents Requested • Report of customers with rate codes and/or classification changes • Independent meter testing reports • Meter inventory listing showing all meters and the related customer and location • Hard or electronic copy of minutes of Board meetings

17. Documents Requested • Electronic version of all disbursement registers (i.e. check registers, ACH listings, wire transfer listings, AP register, Payroll register, etc.) – all check registers including Energy Services, Operating Accounts, Membership, etc. • Listing of professional services companies (CPA, legal firms, etc.) • Electronic copy of detailed trial balance for all companies

18. Documents Requested • Capital spending plans with associated documentation of senior mgmt/Board approval • Information on delayed projects included in above with a description of what caused the delay • Listing of all bank accounts with names, account numbers and descriptions

19. Documents Requested • Cash and Cash equivalent balances by account for each month of the audit period • Organizational charts or listing of employees including title, department and phone number • Listing of differences between your Chart of Accounts and the TVA Accountant’s Reference Manual • Listing of customers putting power back on grid

20. Documents Requested • Schedule 1 line items related to customer class codes in billing system • Policies/Procedures for: • Classification of customers, new customer setup • Modification of customer classifications • Meter testing, inventory and assignment • Generation of Schedule 1

21. Data Requested • What’s included in the consumer data file request? EVERYTHING! • Account #, name, rate class, physical address, billing address, account status • Meter #, multiplier, SIC Code • Revenue Month/Year • Usage, measured demand, metered demand, billed demand, KVA, KVAR, Contract demand • Current read & previous read date, read period • Avg consumed • Turn on date/turn off date • Meter size, status, power factor • Service amount, sales tax, other tax, penalty, tax codes • Environmental adjustments, FCAs, total $ billed • Estimated, Seasonal, or Flat amount?

22. Data Requested • Listing of all adjustments made during audit period – • Detailed adjustment records to support what/why & how much was adjusted • Listing of all residential accounts including – • Account #, name, rate class, physical address and billing address

23. What Are They Looking For? • Reconciliation of Schedule 1 to one month of the consumer data provided • Expect to explain variances due to adjustments, issues with their calculation assumptions, etc. • Was Outdoor Lighting kWh included? • Protected demands and related energy for 5MR or other special program customers

24. What Are They Looking For? • Residential accounts: • Multiple residential accounts with the same name or address – how many are getting the hydro credit? • Business/agency name on accounts • Group homes • Well pumps • Other misclassified accounts; primary usage • Non-discrimination of rates

25. What Are They Looking For? • Other Electric Classifications • Account classification not changed when demand or usage amounts meet the criteria for the next classification • Not keeping the account at the correct classification for the required time

26. What Are They Looking For? • Contracts based on load and credits contracts • Contracts for all customers > 1MW • Contracts for all credits (EGC, SMC, etc) • SIC Codes certifications • Properly classified (load vs. contract) • Contract demand in billing system matches contract • Correct calculation and application of large load contracts

27. What Are They Looking For? • Verification of rates in your billing systems – screen shots showing rates, FCAs, and Board action supporting any changes • Excess charges calculating correctly • Employee/Board home accounts

28. What Are They Looking For? • Metering Issues • Usage readings exceed threshold for requiring demand meters, but no demand meter installed • Lack of demand meters for customers with contract demand • Zero/repetitive usage • Usage readings estimated for extended periods

29. What Are They Looking For? • Proper use of Electric Revenue • Unusual expenditures • Expenditures to individuals • Credit Card statements • Policies/authorizations for expenditures (petty cash, donations, annual meetings, etc.)

30. What Are They Looking For? • Subsidiary businesses • Do you have a Joint Use Study by TVA for any subsidiary businesses? This is required, but often ignored. • If you have a study, has it been updated? • Are proper allocations being followed? • Are non-electric revenues and expenditures account for separately? • This has been an area of in-depth investigation by OIG

31. What Are They Looking For? • Cash levels will be assessed • Target range is 5-8% • Consider timing of Loan Draws

32. What Will They Find? • Customer classifications Every co-op will see issues with this – accept it and hope that it’s only minor Fix them and move on • Missing contracts • Metering issues • Issues with subsidiary businesses

33. Reporting on the Findings • Exit interview will be conducted and you will receive a draft of the draft report • What they find during the audit will be documented in the report • Items corrected during the audit (or even before) will still be reported • Recommendations based on the findings will be given to both the co-op and TVA

34. Reporting on the Findings • Draft report is issued to the distributor & TVA • Both have 30 days to provide written comments including agreement or disagreement with findings and completed or planned action(s) on each recommendation, including date completed or target date(s) for completion • Final report is issued with distributor and TVA comments attached

35. Your Response to the Report • Address your response to: • Robert E. Martin, Assistant Inspector General, Audits (OIG) • Address each recommendation: • List the recommendation, • Actions taken or planned to be taken, and • Date actions were completed or target completion date • Signed by General Manager or appropriate personnel

36. What Happens Next? • Final report is posted on OIG website • Reports posted on 15th of the month • www.oig.tva.gov • Once the report is posted, it’s available to the public • Potential for press attention

37. What Happens Next?

38. What Can I Do Today? • Look at other distributor reports • Currently 20 reports on OIG website • Sign-up for email notifications • Review consumer classifications • Check your contracts – they will receive 100% attention, so why not fix it now • Update non-electric allocations • Talk to your billing agency

39. What Can I Do Today? • Review your Records Retention Policy • Am I keeping billing/adjustment records long enough to cover this audit period? • Assume that they will look at previous 2 fiscal years – audit can last a long time, you may have an open window of 4 years by the time it’s finished

40. What Can I Do Today? • Plan for how you’re going to field check accounts for proper classification or where else can I find this information? • Talk with your TVA Field Accountant • Examine your relationship with your external auditor • Talk with your staff before the auditors arrive • Find ways to limit your exposure – who are the contacts for the audit?

41. What Can I Do Today? • Consider your attitude • What benefit can your co-op receive from this process? • Create a friendly, professional atmosphere • Give them what they ask for, but nothing more • Respond in a timely manner or explain why you can’t

42. What Can I Do Today? • Keep in mind they will find something – we’re not perfect • Time spent in your office will not be long, but the audit will last several months • The audit process will not go away due to the change to D&E billings – there will always be the opportunity for compliance audits with the power contract

43. In Closing………… • Contact information • Tena Porter – North Georgia EMC tporter@ngemc.com 706 259-3394 ext. 1242 • Anthony Taylor – EPB, Chattanooga tayloraw@epb.net 423 648-1347 • Mary Mealer – Tullahoma Utilities Board mmealer@tub.net 931 571-7139

44. In Closing………… • Rick Underwood – OIG (Chattanooga) rcunderwood@tvaoig.gov 423 785-4824 Thank you to the OIG staff for providing portions of the content for this presentation.