Chapter 2Setting and Enforcing Standards
(Continued)PROPOSAL 7
PUC's Customer Protection and Enforcement Division should be consolidated with other agency audit functions. PUC should take steps to improve its audit process.
BACKGROUND
PUC's Customer Protection and Enforcement (CP&E) Division is charged with ensuring compliance by all utility companies with PUC rules, orders and regulations.[ 33 ] This division reports directly to the Executive Director. CP&E conducts compliance audits, investigates possible rules violations, and recommends fines and penalties for noncompliance. Since PUC began conducting compliance audits in 1989, it has completed 79 electric and telephone utility audits which resulted in 1,546 noncompliance findings and generated nearly $3.3 million in refunds to consumers.[ 34 ] Most of these refunds resulted from tariff and service charge errors, incorrect customer deposit accounting, and billing mistakes.
The 1995 Legislature authorized PUC to impose administrative penalties for noncompliance with its rules and orders. PUC adopted the rule implementing that law in September 1996. Since then, CP&E has stopped its compliance audits and focused instead on investigations generated from consumer complaints, to test its new penalty provisions.[ 35 ]
Audit and investigation processes
The CP&E manager generally initiates compliance audits. According to the CP&E audit staff, no specific criteria are applied to select a utility for audit; instead, PUC auditors generally chose a utility that had not had a compliance audit before and nor in the midst of a rate case or other PUC action at the time.
After a utility is selected for compliance audit or investigation, the auditor sends a letter to the utility informing them about the date of the audit and requesting any background data needed for an advance review. These data are reviewed for compliance with approved tariffs and service standards. After this initial office review, the auditor uses the on-site visit to sample customer accounts and interview key personnel. During this time, audit findings may be chosen for further analysis.
The auditor examines the sample information gathered during the on-site visit and develops findings and recommendations to address any violations. These are incorporated in an audit report. The audit report is first mailed to the utility to confirm the factual information. When the report comes back from the utility, it is submitted to the Executive Director and the commissioners and then mailed to the utility with a letter asking them to submit an affidavit saying they will follow PUC recommendations and correct the violations listed in the audit report. Generally, PUC negotiates a settlement with the utility informally on audit recommendations. If an agreement can not be reached, the Office of Regulatory Affairs (ORA) determines subsequent actions against the utility, ranging from a formal hearing against the utility to filing a suit by the Office of the Attorney General on behalf of PUC.[ 36 ]
By contrast, an investigation is initiated in response to a specific complaint. After the investigation is completed, a report is prepared and distributed to the legal staff of ORA for review and concurrence. If the ORA director concurs, the executive director can submit a final report to the commissioners and the audited utility, along with a letter requiring the utility to correct any violations identified within 30 days. PUC rules prescribe a specific series of options for the utility to respond to the investigation report. They can accept the penalty, request a settlement conference, or hearing on the violation.
Compliance audit process inadequate
Clear, established processes and procedures for compliance audits and enforcement investigations would ensure efficient and effective regulation. TPR found, however, that CP&E has no schedule of planned audits and does not use a systematic methodology to select companies for audit, whether by size, location, or any other factor.
Despite the lack of a systematic audit planning process, PUC's compliance audits have been fruitful in detecting service errors. Unfortunately, since PUC started conducting compliance audits in 1989, it has audited only about half of the electric and telephone companies it regulates. Some of the largest companies have not yet been audited.[ 37 ]
No follow-up audits
After completing a compliance audit, PUC sends a letter to the utility with a list of violations found during the audit and suggested recommendations to correct those violations. At this point, PUC only requires the utility to file an affidavit stating that it will correct the identified violations. PUC does not confirm that violations are indeed corrected. So far, PUC has never conducted any follow-up compliance audits to verify utilities' implementation of audit recommendations.
Audit procedures obsolete
PUC's current procedure manual for all compliance audits was developed in 1992. Agency rules have been revised significantly since the manual was last updated. Thus, the potential for inconsistencies is extremely high. PUC's auditors told TPR that they do not consider the outdated manuals to be a problem, since they are experienced with the audit process. However, if PUC's present auditors were to leave, new auditors would be forced to rely on an out-of-date manual.
Investigations
As with compliance audits, TPR found that PUC lacks a systematic process for identifying and prioritizing potential violations that warrant immediate investigation. For example, the agency does not categorize consumer complaints or search for patterns that would constitute "red flags" for investigation. Without such a mechanism, the agency is not targeting its investigations effectively or measuring their effectiveness. Because of this lack of a process, TPR found that PUC sometimes has no choice but to initiate an investigation after a problem has been reported in the media.
By contrast, the Texas Department of Insurance (TDI) has a sophisticated process for identifying and initiating investigations. Its Early Warning System uses policyholder complaints and company financial information to analyze key performance measures and identify potential problem companies. The University of Texas at Austin's Graduate School of Business assessed this system and found it to be very effective in identifying troubled companies.[ 38 ] TDI's Technical Analysis Section also analyzes policyholder and company data to develop trends and provide reports to management that identify companies not complying with state law or agency rules.[ 39 ]
Similar to the compliance audit process, the procedures for enforcement investigations are out-of-date. For example, PUC's existing payphone provider checklist, an audit tool for payphone audits (where complaints are common), is obsolete and TPR interviews indicated that it is not followed by the auditors during payphone audits. New payphone auditors would benefit from a comprehensive checklist with clear instructions on required elements for compliance.
Penalty authority divided
Although the executive director manages the compliance auditors and investigators, PUC rules specify that the director of ORA, who manages the legal staff, must concur in the findings of an audit or investigation before any penalty can be assessed. TPR was told that this division of authority sometimes results in delays in pursuing action against a utility.
Other audit functions
With the exception of compliance audits and enforcement investigations, all other PUC audit functions are housed in ORA's Financial Review Division. This division employs 22 staff members including analysts, accountants, and auditors. The division's Financial Analysis Section, with a staff of seven analysts, conducts annual financial reviews based on utility earnings reports filed in May.[ 40 ] A Regulatory Auditing Section, with a staff of three, conducts affiliate transaction audits, or reviews of cost allocation between parent companies and regulated affiliates to ensure that ratepayers are not subsidizing unregulated operations.[ 41 ] This section also has conducted internal audits of PUC.[ 42 ] An Accounting Section, with a staff of 12, used to conduct management audits on utilities every 10 years as required by the law. Since that requirement has been relaxed by the Legislature in 1995, now they are being conducted at the request of the PUC's managers as deemed necessary. Thus, for the most part, these auditors assist the Regulatory Audit Section with affiliate transaction audits.
TPR believes that the placement of the compliance audit function within Consumer Affairs may not have been the best approach. Prior to 1994, all PUC audits were conducted from a single division-the Operations Review Division. In 1994, the Operations Review Division was incorporated into the Financial Review Division; while the compliance audit group was transferred to Consumer Affairs. During the 1995 reorganization, the commission was uncertain as to the proper place in the agency for its audit/investigation functions. While other functions were specifically assigned to the newly created Policy, Regulatory, and Executive Offices, the "Audit and investigate functions" and "rulemaking and compliance functions" were divided between the Consumer Protection and Enforcement and Financial Review divisions.[ 43 ]
Efforts in other states
Of the 20 states that supplied detailed information on their utility audit functions in a recent survey by the National Association of Regulatory Utility Commissioners (NARUC), 14 have centralized all their audit functions. Five states conduct compliance audits through a separate Compliance and Enforcement Division. Only one other state combines compliance audit activities with consumer affairs.[ 44 ]
The New Jersey Board of Public Utilities (BPU) maintains a unified audit program. BPU's Division of Audits conducts management, financial, compliance, and special-needs audits for BPU's commissioners and technical divisions. According to BPU, its audit activities have been acknowledged by experts in the utility audit industry as the nation's most aggressive.[ 45 ]
In addition, BPU uses a database to monitor utilities' progress in correcting violations found during its audits. Data in the system are gathered from monthly visits to utilities with outstanding violations.[ 46 ]
RECOMMENDATIONS
A. PUC should merge its compliance audit and enforcement investigation functions and all its other utility audit functions into a single section under a single manager within the Office of Regulatory Affairs.
This newly created section could be named as "Investigations and Compliance Section" to reflect its goal to ensure compliance with PUC's regulations.
The compliance audit and investigative responsibilities of CP&E could be performed more effectively in conjunction with other audit responsibilities in the Financial Review Division. All related auditing functions would reside under one functional unit, improving the coordination, management,and effectiveness of these closely related functions. Proposal 19 further describes the recommended reorganization of PUC.
Scheduled audits would be much more comprehensive in scope, and could be conducted by the same audit team. The consolidation of audit activities also would help streamline travel planning and reduce PUC's travel expenses.
The combined audits would also be less burdensome to utility companies as well. They could prepare for all PUC audits and provide all necessary data at one time. They could have fewer, but more comprehensive audits.
B. PUC should design a formal annual audit schedule for comprehensive service provider audits.
A schedule for combined financial, affiliate, and compliance audits would ensure that all providers are reviewed on a regular basis.
CP&E investigators presently focus on field investigations of consumer complaints rather than on compliance audits. The effectiveness of previous compliance audits, however, suggests that they should not be abandoned. Their success supports the need for systematic audits of all providers subject to PUC rules.
C. PUC should create a program of follow-up audits to ensure compliance with previous audit findings.
At present, PUC does not conduct any follow-up audits. Instead, it relies on affidavits from the utility that it will correct violations. However, the follow-up audits could be more effective in monitoring the utility's progress in correcting the original audit findings.
D. PUC should develop a formal process for identifying and prioritizing complaint investigations.
The current investigations process does not systematically identify and prioritize complaints. A systematic process would allow for better resource allocation and better measurement of the effectiveness of selection criteria. Proposal 15 describes the use of consumer complaint information to assist in the investigation process.
E. PUC should continually update and revise all its compliance audit and investigations procedures, checklists and manuals.
Updated, reliable policies help ensure continuity and consistency. The comprehensive audit manual should address current responsibilities for financial, affiliate, and compliance audits.
FISCAL IMPACT
The concentration of audit functions within PUC could be accomplished primarily by reallocating existing personnel, and no fiscal impact should result. The consolidation of audit activities would result in improved efficiency and effectiveness in auditing and should reduce some agency travel expenses over time. Investigations would be completed more quickly, and fewer duplicative activities would occur. Any savings realized should be reinvested in the audit process.
PROPOSAL 8
Public Utility Regulatory Act of 1995 should be amended to strengthen PUC's enforcement powers.
BACKGROUND
PUC has several mechanisms at its disposal to ensure that utilities comply with its rules and orders. First, PUC has had ultimate approval authority over the rates service providers may charge.[ 47 ] State law also allows PUC to refer violations to the Office of the Attorney General (OAG) for civil trial and potential penalties of up to $5,000 per day per violation.[ 48 ] Utilities convicted of willful violations of the law also may be charged with a third-degree felony.[ 49 ] However, these methods have not always been effective. For example, PUC cannot act on rates until a rate case is filed, and a rate review is a clumsy vehicle for addressing minor rules violations.[ 50 ]
Administrative penalties
New state legislation approved in 1995 allows PUC to impose administrative penalties for noncompliance with its regulations.[ 51 ] The law authorizes penalties of up to $5,000 per violation per day, with the proceeds to be deposited in the state's General Revenue Fund.[ 52 ] This ability to impose financial penalties allows PUC to discipline violators in a timely manner, without initiating a full rate proceeding or asking OAG to file suit.
The current administrative penalty law contains a potentially significant flaw, however. Under current law, a utility can avoid any penalties by simply correcting the violations identified by PUC within 30 days and showing that the violations are accidental. No matter how often the utility violates the same rules, PUC cannot impose a penalty as long as it is cured within 30 days. This stipulation effectively cripples PUC's enforcement authority. No other Texas regulatory agency is saddled with a similar provision.
Since the rule implementing this administrative penalty law is quite recent, having been adopted in September 1996, no investigations have been completed that would allow PUC to judge the effect of this loophole. Nevertheless, the provision could become a serious problem as the number of new service providers increases.
Certification and registration
PUC's rules dealing with the certification and registration of electric and telecommunication service providers are conflicting and inconsistent, making it difficult for the agency to monitor the companies it regulates.
Some providers, such as operator service providers, payphone providers, power marketers, and exempt wholesale generators, are required by law to register with PUC. TPR found that PUC, however, does not attempt to identify companies that fail to do so.
Other utilities are regulated by PUC but are not required to register, such as apartment complex owners who submeter electricity to their renters.[ 53 ] This makes it difficult to target investigations and respond to complaints. For example, TPR learned that a Dallas apartment complex owner who submetered electricity to his renters has disappeared without paying the local utility. Since the utility's customer is the apartment owner, the tenants lost their service.[ 54 ] TPR found that PUC sent investigators to assess and correct this situation after the story was covered by the local media.
Deregulation promises to greatly increase the number of market participants over which some degree of regulation may be imposed. PUC estimates that as many as 600 more payphone providers operating in Texas are not registered.[ 55 ] PUC also estimates that about 800 apartment complexes in the state submeter electric service to more than 100,000 units.[ 56 ] These complexes are not required to register with PUC, but are subject to limited regulatory oversight on billing and service matters.[ 57 ]
PUC will not be able to ensure consumer protection in the competitive market unless it can track all electric and telecommunications service providers operating in Texas. At present, various provider registrations are filed with different divisions at PUC, and no one is responsible for ensuring that all registrations and certificates are kept current. Importantly, TPR found that PUC does not attempt to identify providers that fail to register or to keep their registrations current, as required in the agency's rules.
Finally, PUC's rules regarding revocation of certification and registration for violations are inconsistent. Model legislation proposed by the National Consumer Law Center includes specific authority for utility licensing and license revocation proceedings if a licensee proves to have a history of fraudulent or anti-consumer conduct. The center asserts that "if there is no authority to revoke a license or to limit its terms and conditions, registration is nothing more than a paper-pushing exercise of little value to consumers."58
RECOMMENDATIONS
A. State law should be amended to eliminate the restriction prohibiting PUC from imposing administrative penalties for violations corrected within 30 days.
Under current law, PUC cannot impose a penalty if a violation is corrected within 30 days regardless of how often the violation reoccurs. Without the ability to impose penalties based on a utility's history of violations, PUC has little real compliance authority. Giving PUC greater discretion to impose penalties would discourage repeated violations.
B. PUC should monitor all utility service providers' compliance with its registration requirements and assess administrative penalties against providers who fail to register.
For enforcement purposes, the agency should track all service providers, as proposed in Proposal 4 of this report. To ensure compliance, PUC's administrative penalty rule could be applied to those who fail to register.
The registration process also should require the provider to submit sufficient information to allow them to be tracked by the agency. This would provide PUC with information to schedule audits and respond to consumer complaints quickly and efficiently.
C. PUC should develop rules providing explicit authority to revoke operating certificates for recurring rule violations.
The privilege of operating within Texas for any utility should be based on compliance with PUC rules and quality of service. PUC should have explicit authority to revoke any certificate, permit, or registration for noncompliance with any of its rules.
FISCAL IMPACT
Broader enforcement powers would require additional staffing. Consolidating CP&E's audit staff with other agency auditors could provide the necessary additional staff (see Proposal 7). Tougher enforcement would result in better compliance and additional penalties and may bring additional money into the General Revenue Fund. These additional revenues cannot be estimated.
Endnotes
[ 33 ] Public Utility Commission of Texas, Moving Towards the Future: The Role of Customer Protection and Enforcement (Austin, Texas, 1996), p. 1.
[ 34 ] Public Utility Commission of Texas, "Status Report on Compliance Audits as of September 30, 1996" (Austin, Texas, October 1996), p. 4. (Handout prepared for a presentation to PUC commissioners.)
[ 35 ] Interview with John Capitano, October 21, 1996.
[ 36 ] Interview with John Capitano, October 21, 1996.
[ 37 ] Public Utility Commission of Texas, "Status Report on Compliance Audits as of September 30, 1996," pp. 1-4.
[ 38 ] The Texas Department of Insurance, An Assessment of the Early Warning Information System, by Patrick L. Brockett and James E. Jarrett (Austin, Texas, July 18, 1996), pp. 1-2. (Consultant's report.)
[ 39 ] Interview with Audrey Selden, associate commissioner for Consumer Protection, Texas Department of Insurance, Austin, Texas, November 6, 1996.
[ 40 ] Interview with Paul Bellon, deputy director, Financial Review Division, Public Utility Commission of Texas, Austin, Texas, December 2, 1996.
[ 41 ] Interview with Carole Vogel, director, Office of Regulatory Affairs, Public Utility Commission of Texas, Austin, Texas, October 18, 1996.
[ 42 ] Public Utility Commission of Texas, Financial Review Division, Regulatory Audit Section, Final Report on the Internal Review of Management Information Systems within the Public Utility Commission, by Sid Lajzer and Patricia Dolese (Austin, Texas, March 1996).
[ 43 ] Memorandum from Pat Wood III, chairman, to Robert W. Gee, commissioner, on Public Utility Commission of Texas reorganization, June 27, 1995, p. 8.
[ 44 ] National Association of Regulatory Utility Commissioners, Profiles of Regulatory Agencies of the United States and Canada, Yearbook 1994-1995 (Washington, D.C., August 23, 1995).
[ 45 ] New Jersey Board of Public Utilities, 1995 Annual Report (Newark New Jersey, 1996), pp. 34-37.
[ 46 ] New Jersey Board of Public Utilities, 1995 Annual Report, p. 37.
[ 47 ] Vernon's Ann. Civ. St. art. 1446c-O, SS2.202.
[ 48 ] Vernon's Ann. Civ. St. art. 1446c-O, SS1.321 and SS1.322.
[ 49 ] Vernon's Ann. Civ. St. art. 1446c-O, SS1.325.
[ 50 ] Vernon's Ann. Civ. St. art. 1446c-O, SS2.211.
[ 51 ] Vernon's Ann. Civ. St. art. 1446c-O, SS1.3215.
[ 52 ] Vernon's Ann. Civ. St. art. 1446c-O, SS1.3215 (b) (q).
[ 53 ] 16 T.A.C. SS23.51.
[ 54 ] Interview with Patricia Dolese, October 17, 1996.
[ 55 ] Interview with Patricia Dolese, December 6, 1996.
[ 56 ] Interview with John Capitano, December 6, 1996.
[ 56 ] 16 T.A.C. SS23.51(a).
[ 57 ] The Regulatory Assistance Project, Consumer Protection Proposals for Retail Electric Competition, p. 75.
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