George Godding Director DMC Office of Market Oversight and Investigations Federal Energy Regulatory Commission USEA/USAID Energy Partnership Program Brasilia,

George Godding Director DMC

Office of Market Oversight and InvestigationsFederal Energy Regulatory Commission

USEA/USAID Energy Partnership ProgramBrasilia, BrazilAugust 10, 2005

Operational & Financial Audits

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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.

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Director

Deputy DirectorMarket

Oversight & Assessment

Deputy DirectorMarket

Oversight & Assessment

Deputy DirectorInvestigations& Enforcement

Deputy DirectorInvestigations& Enforcement

Division of Management & Communication

Division of Energy Market

Oversight

Division of Integrated

Market Assessment

Division of Information

Development

Division of Operational

Audits

Division of Financial

Market Assessment

Division of Enforcement

Division of Financial

Audits

Office of Market Oversight and Investigations

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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

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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

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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.

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Create Audit Plan

Prepare Survey

Complete Risk Analysis

Conduct Audit

Brief FERC & Auditee

Process Overview

Complete Audit Report

Select Auditee

Finalize Audit Report

Determine Scope

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Create Project Audit Plan• Purpose

• Objective

• Scope/Resources

• Criteria for Evaluation

• Methods

• Benefits

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Audit Survey – High Level Review

• Broad Verification 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.

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Audit Survey – Steps

• Gather and review data

• Review work performed by others

• Conduct high-level testing

• Prepare audit survey

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Risk Analysis

• Summarizes areas of risk detected during the survey phase of the audit

• Provides the basis for planning and conducting further detailed testing

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Conduct Audit

• Data requests

• On-site reviews

• Transaction testing and analysis, and

• Interviews

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Illustrative Operational Audit Topics• 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

• Natural Gas Industry– Pipeline Operations– Stand./Codes of Conduct– Capacity Release– Contracting Practices– Filing Requirements– Tariff Compliance– Behavioral Rules

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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

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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

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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

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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

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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

Questions?