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California Public Utilities Commission
Internal Audit Unit
Energy Savings Assistance (ESA) Program
October 2017
STATE OF CALIFORNIA EDMUND G. BROWN JR., Governor
PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE
SAN FRANCISCO, CA 94102-3298
October 11, 2017
Finance and Administration Committee
California Public Utilities Commission
505 Van Ness Avenue
San Francisco, CA 94102
Final Audit Report – CPUC Internal Audit Unit (IAU) Report of the Energy Savings Assistance (ESA)
Program
Dear President Picker:
The Internal Audit Unit has completed its review of the CPUC’s ESA Program as of June, 2016. This
report represents the IAU’s findings regarding risks and controls associated with the CPUC staff’s
management and oversight of this energy efficiency program.
We wish to credit the full assistance and cooperation of the Energy Division staff assigned to this
important program. They agreed with our findings and their responses are included in the audit report.
We appreciate their willingness to incorporate our recommendations to improve the effectiveness of
staff’s management and oversight of the program, as well as increase overall transparency of its finances.
This audit report is for the information and use of you and your colleagues on the Commission. If you
have any questions regarding this report, please feel free to contact me at 415-703-1823 or
Sincerely,
Carl Danner
Carl Danner
Chief Internal Auditor, California Public Utilities Commission
Enclosure
cc: Commissioners
Timothy J. Sullivan, Executive Director
Arocles Aguilar, General Counsel
Maryam Ebke, Deputy Executive Director
Barbara Owens, Risk and Compliance Officer
CPUC Internal Audit Unit • Energy Savings Assistance (ESA) Program
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TABLE OF CONTENTS
EXECUTIVE SUMMARY .............................................................................................................. II Introduction .................................................................................................................................................... ii Background and Criteria ............................................................................................................................. ii Objectives ....................................................................................................................................................... ii Methodology.................................................................................................................................................. iii Results .............................................................................................................................................................. iii Conclusion / Next Steps ............................................................................................................................... iii
INTRODUCTION ......................................................................................................................... 1 Audit Objective ............................................................................................................................................. 1 Qualifications/Limitations ............................................................................................................................. 2 Detailed Audit Results ................................................................................................................................... 2 Program Areas Considered ......................................................................................................................... 2
INTERNAL AUDIT FINDINGS ....................................................................................................... 4 SUMMARY EVALUATION ................................................................................................................................ 4 FINDING No. 1 – Verification of ESA Program Finances and PPP Surcharge Expenditures ............. 5 FINDING No. 2 - Lack of Regular Financial and Compliance Audits (PU Code §900)..................... 5 FINDING No. 3 - Limited Review of LIEE and ESA Program -Specific Balancing Accounts ............. 6 FINDING No. 4 – Verification of IOU's Fraud Prevention Controls ......................................................... 7 ADDITIONAL ISSUE – Significant Unspent and/or Underspent ESA Program Fund Balances ........... 9
MANAGEMENT RESPONSE TO THE IAU’S ESA PROGRAM AUDIT .......................................... 10 Internal Memo from Ed Randolph - dated May 5, 2017 ...................................................................... 10
APPENDIX A .......................................................................................................................... A-1 Description of the ESA Program .............................................................................................................. A-1
Background and History of ESA Program ............................................................................................. A-2 Program Enrollment and Funding.......................................................................................................... A-3 Energy Savings and Compliance with PU Code § 382(e) .................................................................. A-3 Energy Division Management and Oversight ...................................................................................... A-4 Low Income Oversight Board (LIOB) ..................................................................................................... A-4
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EXECUTIVE SUMMARY
Introduction
This following report presents the conclusions of the Internal Audit Unit’s (IAU) review of the
Energy Savings Assistance (ESA) Program previously known as and referred to as the Low Income
Energy Efficiency (LIEE) program. It is a program that provides no-cost weatherization services to
low-income households that meet certain income guidelines. A detailed description of the ESA
Program is included in Appendix A. ESA is one of a number of public purpose programs funded
by a rate surcharge applicable to all customers. The day-to-day operations of the ESA Program
are managed by the investor-owned utilities (IOUs) themselves; the Commission does not
manage the finances of the program directly. The Commission and its staff maintain primarily an
oversight and policymaking role, approving program attributes and budgets typically on a
three-year cycle. It was the intent of the IAU to evaluate the CPUC staff’s management of the
program, identify any risks that currently exist regarding compliance with the Public Utilities Code
and supporting decisions, and evaluate the effectiveness of control measures to mitigate these
risks. Where significant residual risks were determined to be present in the procedural operations
of the program, additional control measures are recommended below.
Background and Criteria
California Public Utility Code Sections 382(e), 386(a)(3), 900, 2790, and the California Energy
Efficiency Strategic Plan (CAEESP) generally require that the CPUC’s low income energy
efficiency program cost effectively produce energy savings while providing an improved quality
of life for low income customers. The CPUC is directed to ensure that all eligible low income
customers are given the opportunity to participate by in the ESA Program by the year 2020 and
that the ESA Program will be an energy resource by delivering increasingly cost-effective and
longer-term energy savings. Additionally, PU Code Section 900 allows the Commission to
conduct compliance and financial audits of IOU programs to ensure compliance with
Commission orders relating to the implementation of PU Code Section 2790. The IAU also
recognizes that best practice criteria require solid internal controls over management of the ESA
Program and the use of the Public Purpose Program funds. In addition, there should be regular
and pertinent review of the ESA Program finances, with supporting documentation, and regular
oversight and fund balance reconciliation.
Objectives
The overall objectives of this audit included the following:
Verify compliance with relevant codes, regulations, and CPUC decisions;
Establish if existing processes and controls are adequate to assure that program
cost and revenue figures provide an accurate basis for ratemaking purposes, and
for reports and disclosures about the program;
Determine if the program is being managed in an effective and cost-efficient
manner that reasonably addresses areas of program risks, including the use of
best practices where appropriate (including those outlined in the State
Administrative Manual (SAM) and other commonly accepted management and
accounting practices).
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Methodology
The methodology included a review of applicable laws, CPUC decisions, and reports; research
interviews; process flow mapping; and a walkthrough and testing exercises. The Energy Division
– Residential Demand Program Section (ED-RDPS) staff (client) responded to data requests, and
follow-up discussions were conducted. We are pleased to credit the full cooperation of
management with this audit.
Results
In general, we find that the longstanding low-income home weatherization and energy
efficiency (ESA) program is functioning as required according to the established criteria, with a
moderate to low level of risk. Based on our review of program materials, interviews with ED-RDPS
staff, as well as an assessment of the legal requirements for the program (PU Code §§382(e),
386(a)(3), 900, 2790, California Energy Efficiency Strategic Plan) and a review of its general
control environment, we conclude with an overall positive finding regarding the program, with
the exception of the specific items identified in this audit report.
For each of the findings below, the IAU concludes that the application of certain additional
controls would help the program function more effectively and reduce related risks to the CPUC.
Each of these findings is identified in the following table (Table ES-1), and described in detail in
this audit report. While we believe that these recommendations will help the CPUC perform
better with regard to its statutory obligations, in our view none of the findings rise to the level of
non-compliance with any law or rule to which the program is subject.
Conclusion / Next Steps
While it is the conclusion of the IAU that the ED-RDPS appropriately manages the ESA program
within the existing regulatory framework and resource allocation, we also note that with some
minor changes to the control structure the program could function more effectively and present
less risk to the CPUC and ratepayers of California.
Table ES-1 Summary of Internal Audit Findings – ESA Program
FINDING
NO. FINDING TITLE SUMMARY OF ISSUE
ADD’L
CONTROLS?
1. Verification of ESA Program Finances
and PPP Surcharge
Recommend evaluation of IOU
internal controls regarding ESA
Program financial information and
ratepayer supported PPP
expenditures, possible additional
controls based on evaluation
Yes
2. Lack of Regular Financial and
Compliance Audits (P.U. Code § 900)
Last financial and compliance audit of
ESA Program was conducted in 2011;
more regular oversight recommended
Yes
3. Limited Review of the IOU’s ESA
Program Balancing Accounts
More frequent review of ESA Program
balancing accounts would reduce risk
of inefficient use of ratepayer funds
Yes
4. Verification of IOU’s Fraud Prevention
Controls
Program management would benefit
from a better understanding of IOU’s
fraud risks and controls
Yes
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INTRODUCTION
The The purpose of this internal audit was to review and evaluate the CPUC staff’s internal
management and oversight of the Energy Savings Assistance (ESA) Program. In general terms,
the ESA program is a home weatherization and energy efficiency program authorized by the
CPUC for qualifying low income participant households. Both the large investor owned utilities
(IOUs) and smaller multi-jurisdictional utilities (SMJUs) in California are required to maintain ESA or
similar programs to assist qualifying low income residents. The ESA Program is funded by utility
customers of all classes through a Public Purpose Program (PPP) charge on ratepayer energy
bills.
Although the CPUC itself does not actually manage the finances of the ESA Program (since fees
for the program are collected directly by each participating utility as a rate based subsidy), the
agency does review and approve the budget applications which are generally submitted every
three years by the utilities. Staff also submits data requests, analyzes legislative proposals,
reviews advice letter filings related to the program, and advises decision-makers on policy and
program implementation. The staff of the Energy Division – Residential Demand Programs
Section (ED-RDPS) is responsible for budgets, policies and overall administration of the ESA
program for the CPUC.
Disclosure
On February 13, 2017, the lead auditor on this project transferred to a new position within the
CPUC’s Energy Division, dealing with infrastructure permitting and environmental review under
the California Environmental Quality Act. This created a potential for conflict in that the staff
operations reviewed here occur in another section of the Energy Division. However, the
fieldwork and analysis for this audit were completed prior to February 13th, the auditor’s new
position does not report through the supervisor, program manager or deputy director overseeing
the ESA program, and the Chief Internal Auditor reviewed the analysis and work products and is
satisfied that they represent independent analysis. Nonetheless, we are including this note by
way of full disclosure.
Audit Objective
The objectives of this audit included the following:
Verify compliance with relevant codes, regulations, and CPUC decisions;
Establish if existing processes and controls are adequate to assure that program cost and
revenue figures provide an accurate basis for ratemaking purposes, and for reports and
disclosures about the program;
Determine if the program is being managed in an effective and cost-efficient manner that
reasonably addresses areas of program risks, including the use of best practices where
appropriate (including those outlined in the State Administrative Manual (SAM) and other
commonly accepted management and accounting practices).
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Qualifications/Limitations
The intent of this audit is to evaluate the internal risks and controls related to the CPUC staff’s
management of the ESA Program. The IAU has not conducted a financial audit of the ESA
Program, because the Commission itself does not actually handle the program’s finances. The
financial component has not been audited in a number of years, and our review led to
recommendations for financial review that are incorporated into this report – for the verification
of the IOUs’ self-reported ESA budget numbers; and for regular audit of utilities’ ESA balancing
accounts – pursuant to PU Code § 900 which authorizes compliance and financial audits of the
program. This verification would in essence comprise a financial audit of the program going
forward. In addition, the ED-RDPS has reported that the State Controller’s Office (SCO) is in the
process of conducting an audit of the 2013-2015 low income programs, including the ESA
Program. A regular cycle of reconciliation of these accounts would strengthen the credibility of
the CPUC’s oversight and provide added assurance for the best interests of ratepayers. Neither
did the IAU examine internal controls maintained by the utilities.
I. Research and fieldwork was completed during June-August, 2016 and represents
conditions found during that period. It should be noted that the majority of this audit was
completed prior to the recently approved Commission decision on the 2015-2017
CARE/ESA Programs (D.16-011-016), however the decision was reviewed by the IAU prior
to finalization of this audit.
Detailed Audit Results
Initially, the IAU reviewed background information and applicable legislative provisions and
CPUC decisions to identify the requirements of the program, subsequently translating these
requirements into the objectives and goals of the ESA Program. The second step in the audit
process was to identify the various procedural requirements of the program, and to identify the
risks associated with each of these processes. Next, the IAU categorized the risk level for each
process, in terms of the impact of the risk, and the apparent likelihood or velocity of the risk.
Once the risk levels were identified, available management controls were identified and
evaluated to determine their effectiveness. A walkthrough of each process was then
conducted, and control testing objectives were identified to determine the severity of the
observed risks. Findings resulted where compliance with statute or Commission decisions could
be improved, or where significant risks were identified which were not effectively controlled.
Program Areas Considered
Each of the California Public Utilities Code sections (PU Code) which directly apply to the
management and oversight of the ESA Program were identified, along with objectives and/or
procedural steps derived from these provisions. The applicable provisions include PU Code §§
382(e), 386(a)(3), 900 and 2790 and the California Energy Efficiency Strategic Plan.
In summary, the CPUC staff (referred to as “management” in the audit process) is required to
provide policy development, program implementation oversight, and evaluation support for the
ESA Program. They are also required to review and approve budget applications, typically
submitted every three years by IOU program administrators. In addition, management oversee
program administrators, oversee components of the measurement and evaluation work, submit
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data requests, review advice letters, analyze legislative proposals, and advise decision makers
on policy and program implementation. Table 1 summarizes the IAU’s assessment of the current
level of program consistency with each PU Code section, along with the related audit findings.
Table 1
Assessment of Program Consistency with Public Utilities Code Sections
Public Utility
Code Section (§) Summary
Program Consistency
Assessment
(Full, Partial, Non)
Related Audit
Finding No.
382 (e)
Provide all eligible customers the
opportunity to participate in ESA by
2020; ESA should result in long-term
reductions in consumption through
efficiency upgrades
Partial; Ongoing 2, 4
386 (a)(3)
Each IOU shall provide low or no-cost
energy efficiency measures to reduce
energy consumption
Full 2, 4
2790 (a) Weatherization program Full 3, 4
2790 (b) Types of measures Full 3, 4
2790 (c) Other measures Full 3, 4
2790 (d) Needs assessment Full 3, 4
2790 (e) Energy management Full 3, 4
900
Provide efficient and cost effective ESA
program; Conduct financial and
compliance audits to ensure consistency
Partial 1, 2, 3, 4
CA Energy
Efficiency
Strategic Plan
Similar to §382(e) requiring eligible
customers the opportunity to participate
by 2020, and that ESA is an energy
resource which delivers cost-effective,
long-term energy savings
Full 2, 4
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INTERNAL AUDIT FINDINGS
The following section presents our audit findings along with the supporting information on which
they are based. For each finding, the topic is identified, followed by the evaluation criteria used
as a review standard, the existing situation related to the ESA Program, why the criteria are not
being met, and the resulting risk. In addition, recommendations are provided to promote
compliance, strengthen controls, and/or mitigate associated risks.
SUMMARY EVALUATION
The IAU has determined that overall, the CPUC staff’s management of the ESA Program is in
compliance with the established criteria in statute (PU Code §§ 382(e), 386(a)(3), 900, 2790 and
the CA Energy Efficiency Strategic Plan) which state that the Commission shall cost effectively
produce energy savings while providing an improved quality of life for all eligible low-income
customers by 2020. The IAU’s review of a variety of program materials, interviews with ED-RDPS
staff, analysis of program documents, and assessment of the general control environment
provided evidence supporting this finding.
While a financial audit of the IOUs’ ESA programs has not been conducted for a number of
years, when last conducted in 2011 there were very few discrepancies identified. The ED-RDPS
staff functions effectively to oversee the ESA Program with limited resources and expanding
responsibilities. Although some risk areas were determined as part of this audit as discussed in
the findings below, no risk areas categorized as “very high” were identified by the IAU.
FINDING No. 1 – Verification of ESA Program Finances and PPP Surcharge
Expenditures
1-A Review Standard/Criteria - Compliance with P.U. Code §382(e), §386(a)(3), §900, §2790 and
the California Energy Efficiency Strategic Plan, which requires that the CPUC cost effectively
produce energy savings while providing an improved quality of life for the low income
ratepayers. The CPUC is directed to ensure that all eligible low income customers are given the
opportunity to participate by in the program by 2020 and that the ESA program will be an
energy resource by delivering increasingly cost-effective and longer-term energy savings.
Additionally, as mandated in PU Code §900, the Commission may conduct compliance and
financial audits to ensure compliance with Commission orders relating to the implementation of
programs related to PU Code § 2790.
Best Practice Criteria - requires solid internal controls over management of the ESA Program and
use of the Public Purpose Program funds. In addition, there should be regular and pertinent
review of the ESA Program finances, with supporting documentation, and regular oversight and
fund balance reconciliation.
1-B Conditions/Existing Situation - Specific to the IOUs’ ESA Program budgets, the participating
utilities self-report running totals and program reconciliations on a monthly and annual basis.
Each utility maintains its own program finances in multiple categories and accounts for each
component of the program. They conduct their own verification and perform proprietary
controls to minimize risk. We did not find any instances where the ED Residential Division staff
independently performed verification of IOU reported figures (such as random checks), or
attempted to verify the internal controls the utilities may maintain in this regard.
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It should be noted that two specific areas of ESA Program finances were considered in this audit.
The first is the ESA Program accounts, i.e., the various accounts maintained by the IOUs for each
aspect of the program. The second distinct account type is the ESA Balancing Accounts, which
are the accounts utilized by each IOU to account for differences between budget estimates
and actual PPP surcharge collections during a program year. The Balancing Account allows the
IOUs to ‘true up” these differences. The first type of account is discussed in this Finding, and the
second is discussed in Finding No. 3.
1-C Causes / Why criteria not met? – The verification or initiation of controls to assure the
accuracy of the utilities’ self-reported ESA Program budget account numbers was not identified
as a priority by the ED unit that administers the ESA and CARE programs (among other duties).
This is primarily due to, an expectation that the utilities report spending accurately, and an
assumption that other controls are present, including retrospective audits.
1-D Effects/Potential Risk - Without some form of regular control or assurance regarding the
accuracy of the self-reported ESA Program budget numbers, the CPUC and its staff are at risk of
errors in reported account numbers and/or inaccuracies in the level of public purpose program
funds collected by the utilities to support the program. Inaccurate ESA budget entries also
present a risk to the CPUC for competent full disclosure, such as in annual reports that address
the program.
1-E Recommendations and/or action plans (Cause focused, corrective, or recovery) Cause
focused recommendation - We recommend that Energy Division staff require each IOU to
provide a detailed explanation of its control measures aimed at reducing the risk of financial or
accounting errors as described above. Based on a review and assessment of the integrity of
those controls within the utilities, we recommend that ED staff further consider whether
additional controls are needed to maintain related risks at an acceptable level, such as
developing a verification program that might periodically sample utility records and test
numbers back to original data or invoices. These proactive steps, coupled with a return to a
regular audit cycle by the CPUC, its sister agency, or a contractor to audit the ESA Program on a
regular cycle (as Finding No. 2 addresses) will help ensure that overall program risks are
minimized.
FINDING No. 2 - Lack of Regular Financial and Compliance Audits
(P.U. Code § 900)
2-A Review Standard/Criteria - Compliance with P.U. Code §382(e), §386(a)(3), §900, §2790 and
the California Energy Efficiency Strategic Plan, which requires that the CPUC cost effectively
produce energy savings while providing an improved quality of life for the low income
population. The CPUC is directed to ensure that all eligible low income customers are given the
opportunity to participate by in the program by 2020 and that the ESA program will be an
energy resource by delivering increasingly cost-effective and longer-term energy savings.
Additionally, as provided in PU Code §900, the Commission may conduct compliance and
financial audits to ensure compliance with Commission orders relating to the implementation of
programs related to PU Code § 2790.
Best Practice Criteria - requires solid internal controls over management of the ESA Program and
use of the Public Purpose Program funds. In addition, there should be regular and pertinent
review of the ESA Program finances, with supporting documentation, and regular oversight and
fund balance reconciliation.
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2-B Conditions/Existing Situation – From 2006 - 2011, the CPUC’s Division of Water and Audits
(reorganized in 2016 as the Utility Audits branch) conducted annual Financial and Compliance
Audits of the IOU’s CARE, LIEE and ESA programs. After 2011, the DWA discontinued this practice
and no further audits were conducted. Therefore, from 2011 – 2016 the ESA program was not
utilizing the authority provided by PU Code § 900 to perform audits to verify program accounting
and compliance and increase public confidence in the regulatory process.
2-C Causes / Why criteria not met? - According to the ED-RDPS, the DWA ceased its program
of regular audits of the CARE, LIEE and ESA Program in 2011 due to budget and staffing
limitations. Since there were no financial or compliance audits of the ESA program conducted
for a period of at least 5 years, the CPUC was not exercising its authority under PU Code § 900 to
provide assurance regarding the expenditure of substantial amounts in an important program.
2-D Effects/Potential Risk – Lacking regular financial and compliance audit testing of the self-
reported ESA Program budget numbers, the CPUC is at risk of errors in the accuracy of reported
account balance numbers and/or inaccurate public purpose program funds collected by the
utilities. Inaccurate ESA Program account entries also present a risk to the CPUC for competent
full disclosure, such as in annual reports. Auditing of these accounts presents a useful tool to
minimize the level of risk present with this large dollar value program.
2-E Recommendations and/or action plans (Cause focused, corrective, or recovery) Cause
focused recommendation – At the time this audit data was collected, there was not an ESA
Program audit program in place to ensure the Commission’s consistency with the PU Code and
compliance with state law. Subsequent to data collection, the ED has contracted with the SCO
to conduct a financial and compliance audit of the CARE and ESA Program and that work is
currently underway. The IAU recognizes this initiative and recommends that a program of
regular audits be continued and incorporated into the staff’s ESA planning and review process
to ensure consistency with required regulations, and to minimize the overall risk associated with
ED-RDPS’s management of the program.
FINDING No. 3 - Limited Review of LIEE and ESA Program - specific Balancing
Accounts
3-A Review Standard/Criteria - Compliance with P.U. Code §382(e), §386(a)(3), §900, §2790 and
the California Energy Efficiency Strategic Plan, which requires that the CPUC cost effectively
produce energy savings while providing an improved quality of life for the low income
population. The CPUC is directed to ensure that all eligible low income customers are given the
opportunity to participate in the program by 2020 and that the ESA program will be an energy
resource by delivering increasingly cost-effective and longer-term energy savings. Additionally,
as mandated in PU Code §900, the Commission may conduct compliance and financial audits
to ensure compliance with Commission orders relating to the implementation of programs
related to PU Code § 2790.
Best Practice Criteria - requires solid internal controls over management of the ESA Program and
use of the Public Purpose Program funds. In addition, there should be regular and pertinent
review of the ESA Program finances, with supporting documentation, and regular oversight and
fund balance reconciliation.
3-B Conditions / Existing Situation - Each of the IOU’s maintain multiple separate program
specific “balancing accounts” to track collection of ESA Program surcharges and expenditures
so that and differences can be recouped in later advice fillings or proceedings. This allows the
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utilities to reconcile any differences between estimated program expenditures and budgeted
administrative costs with the amount of surcharge fee collected in rates. The current practice is
that the ED performs a high level review of the IOUs’ informal filings, and the DWA and ORA
perform more detailed audits of some balancing accounts when the utilities file for a formal or
informal proceeding to refund or recoup some of their balances. However, regular reviews or
financial audits of the ESA Program balancing accounts are not conducted. A series of financial
audits of the CARE, LIEE and ESA program costs were performed by the Division of Water and
Audits for program years 2006-2011, but none have been completed subsequent to those years.
3-C Causes – Why Criteria Not Met? - Since there is no regular review or oversight of the IOU’s
ESA Program-specific balancing accounts, the risk for errors or inaccuracies leading to possible
unfair increases to ratepayers is present. Currently, there does not appear to be any kind of
independent verification or random checking of the utilities self-reported numbers. There are a
variety of possible reasons why additional independent verification of the program specific
balancing accounts does not occur, but regardless, the existing internal controls over the ESA
Program specific balancing account appears to be weak. This finding mirrors an analogous
finding the IAU made with regard to the CARE Program.
3-D Effects / Potential Risk - Ratepayer dollars allocated to the ESA program in any given year
represent a significant component of the CPUC’s Public Purpose Programs dollars. In summary,
the IOUs annually treat approximately 250,000 households with energy efficiency upgrades and
a total of about 375 million dollars is budgeted from ratepayer revenues. Without any review of
the ESA Program-specific balancing accounts, the CPUC and its staff are at risk of errors in the
accuracy of reported funds collected by the utilities. The potential for inaccurate ESA Program
Balancing Account entries also present a risk to the CPUC for competent full disclosure.
3-E Recommendations and/or Action Plans (Cause focused, corrective, or recovery) - Cause
focused recommendation – The IAU notes that the ED Residential Division has negotiated an
agreement with the SCO to regularly audit the ESA (and CARE) programs. In addition, as a result
of the recommendation contained in the 2014 State Auditor’s Report, the legislature has
amended the California Public Utilities Code, Section 792.5, to require the commission to
develop a risk-based approach for reviewing all balancing accounts periodically to ensure that
“the transactions recorded in the balancing accounts are for allowable purposes and
supported by appropriate documentation, such as invoices.” This amended law took effect in
2017. Regular audits of this type for programs like ESA will decrease the likelihood of ratepayers
paying more than required and will increase transparency and public confidence in both the
CPUC and IOUs.
FINDING No. 4 – Verification of IOUs’ Fraud Prevention Controls
4-A Review Standard/Criteria - Compliance with P.U. Code §382(e), §386(a)(3), §900, §2790 and
the California Energy Efficiency Strategic Plan, which requires that the CPUC cost effectively
produce energy savings while providing an improved quality of life for the low income
population. The CPUC is directed to ensure that all eligible low income customers are given the
opportunity to participate by in the program by 2020 and that the ESA program will be an
energy resource by delivering increasingly cost-effective and longer-term energy savings.
Additionally, as mandated in PU Code §900, the Commission may conduct compliance and
financial audits to ensure compliance with Commission orders relating to the implementation of
programs related to PU Code § 2790.
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Best Practice Criteria - requires solid internal controls over management of the ESA Program and
use of the Public Purpose Program funds. In addition, there should be regular and pertinent
review of the ESA Program finances, with supporting documentation, and regular oversight and
fund balance reconciliation.
4-B Conditions / Existing Situation - ED-RDPS does not maintain information regarding the IOUs’
internal controls to prevent fraudulent activity) in the ESA program. Due to the number of
contractors and complexity of activities associated with the ESA program, the potential for
fraudulent activity is high, and something that the utilities themselves monitor closely. As
previously mentioned, a series of financial and compliance audits of the CARE, ESA and LIEE
programs were conducted by the Division of Water and Audits for PY’s 2006-2011, but none
have been completed subsequent to those years. In one of these audits, the DWA requested a
list of fraud prevention controls, risks that would trigger a fraud investigation and subsequent
audits, but it does not appear that such information was ever provided to the ED-RDPS.
4-C Causes – Why Criteria Not Met? - The ED staff working on the CARE and ESA programs is not
tasked with monitoring the IOUs fraud prevention and control activities. Since the IOUs
themselves handle the actual finances of the ESA program, this activity is not a procedure which
Commission staff are required to conduct. These activities include fraud prevention controls or
fraud investigation triggers for each utility.
4-D Effects / Potential Risk - Ratepayer dollars flowing through the ESA program in any given year
are a substantial component of the CPUC’s Public Purpose Programs overall budget. Fraud
represents a significant risk to a program of this magnitude and complexity of contractors and
other moving parts. While it needs to be stated clearly that we currently have no evidence of
fraud or malfeasance in any aspect of the ESA program, the implementation of the
recommendations below will reduce this risk even further and increase transparency, which can
only benefit the CPUC. The lack of such documentation and/or working knowledge of the IOUs
fraud prevention controls and list of risks which would trigger a fraud alert limits the ability of the
CPUC’s internal management and oversight of the ESA Program to evaluate these risks and
consider remedial measures where they may be warranted.
4-E Recommendations and/or Action Plans (Cause focused, corrective, or recovery) - Cause
focused recommendation – We recommend that the ED-RDPS follow up on previously
recommended audit findings that require each of the IOUs to file a response to a data request
which summarizes its control measures regarding customer eligibility and the prevention of fraud
in the ESA Program. We recommend that this include a list or description of risks which would
trigger a fraud alert and subsequent investigation. Due to the magnitude and complexity of the
ESA Program along with the number of contractors involved in the installation of retrofits, the
potential for the risk of ineligible beneficiaries or fraud is elevated, and therefore we recommend
that Commission staff maintain a heightened level of awareness of this issue.
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ADDITIONAL ISSUE - Significant Unspent and/or Underspent ESA Program Fund
Balances
In addition to the formal Findings listed above, the IAU identified another issue that merits
comment.
At the time audit data was collected for the ESA program, a total of approximately 400 million
dollars in underspent or unused funds were held by the IOUs. These funds accrued over time
due to a number of programmatic limitations which disallowed treatment of ESA Program
eligible homes. For a variety of reasons, each of the IOUs was unable to spend significant
portions of their ESA Program budgets, resulting in an increase in unspent fund balances.
Maintaining nearly 400 million dollars in unused ESA program funds caused a cost to ratepayers
that did not create a program benefit. However, the disposition of a large carryover balance in
the ESA program is an issue that cannot generally be determined by staff level managers. ED
staff was aware of this situation and had provided some recommendations for how to address
the issue, in keeping with good management practice. We note that the balance was
addressed in D.16-11-016, which as a Commission policy decision was beyond the scope of this
audit.
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In addition to helpful informal comments, the ED-RDPS provided the following response to the
draft audit report:
MANAGEMENT RESPONSE TO THE IAU’S
ESA PROGRAM AUDIT
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The IAU appreciates the complete cooperation and responsiveness of the ED-RDPS staff as well
as the time required to review and comment on the audit report. In addition, we thank all others
who have assisted in the preparation of this report. This final audit report contains the revisions
noted in the “Informal Comments and Suggestions” section of the management response letter
shown above.
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APPENDIX A
Description of the Energy Savings Assistance (ESA) Program
Background and History of ESA Program
The Energy Savings Assistance (ESA) Program was originally instituted by the Commission as the
Low Income Energy Efficiency (LIEE) program in the early 1980’s. The program of energy
efficiency began in response to the energy crisis of the 1970’s. After 1981, the Commission
decided that the utilities programs should include participation by low-income and non-English
speaking persons, renters, and the elderly. The objective of the program was to promote equity
and to help relieve low-income customers of the burden of rising energy prices. It was intended
to cost effectively produce energy savings while providing an improved quality of life for the
low-income population.
Over time, the ESA Program measures expanded from simple weatherization measures to a
much broader array of services which include refrigerator replacement, and providing heating
and air conditioning equipment. The program remains in effect, and continues to install
weatherization and energy efficiency measures, provide minor home repairs, and energy
education “free of charge” to eligible participant households to assist customers in reducing
energy consumption, resulting in bill savings.
The Energy Savings Assistance Program was established and supported via P.U. Code § 2790
which states:
(a) The Commission shall require an electrical or gas corporation to perform home
weatherization services for low income customers, as determined by the Commission under
Section 739, if the Commission determines that a significant need for those services exist in the
corporations service territory, taking into consideration both the cost-effectiveness of the
services and the policy of reducing the hardships facing low-income households.
(b)(1) For purposes of this section, "weatherization" may include, where feasible, any of the
following measures for any dwelling unit:
(A) Attic insulation.
(B) Caulking.
(C) Weather stripping.
(D) Low flow showerhead.
(E) Water heater blanket.
(F) Door and building envelope repairs that reduce air infiltration.
(2) The Commission shall direct any electrical or gas corporation to provide as many of these
measures as are feasible for each eligible low-income dwelling unit.
(c) "Weatherization" may also include other building conservation measures, energy
management technology, energy-efficient appliances, and energy education programs
determined by the commission to be feasible, taking into consideration for all measures both the
cost-effectiveness of the measures as a whole and the policy of reducing energy-related
hardships facing low-income households.
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(d) Weatherization programs shall use the needs assessment pursuant to Section 382.1 to
maximize efficiency of delivery.
(e) For purposes of this section, "energy management technology" may include a product,
service, or software that allows a customer to better understand and manage electricity or gas
use in the customer's home.
The goals of the ESA Program are codified in PU Code § 382 (e) and also outlined in the
California Energy Efficiency Strategic Plan as follows: By 2020, all eligible customers will be given
the opportunity to participate in the LIEE program (now ESA Program ); and the ESA Program will
be an energy resource by delivering increasingly cost-effective and longer-term savings.
California Public Utilities Code § 382 (e) states:
The Commission shall, by no later than December 31, 2020 ensure that all eligible low-income
electricity and gas customers are given the opportunity to participate in low-income energy
efficiency programs, including customers occupying apartments or similar multiunit residential
structures. The commission and electrical corporations and gas corporations shall make all
reasonable efforts to coordinate ratepayer-funded programs with other energy conservation
and efficiency programs and to obtain additional federal funding to support actions undertaken
pursuant to this subdivision. These programs shall be designed to provide long-term reductions in
energy consumption at the dwelling unit based on an audit or assessment of the dwelling unit,
and may include improved insulation, energy efficient appliances, measures that utilize solar
energy, and other improvements to the physical structure.
ESA Program measures have expanded from simple weatherization measures in the early 1980s
to a much broader array of services today which include refrigerator replacement, and
providing heating and air conditioning equipment. New conservation and efficiency measures
are proposed by each of the IOUs with every budget cycle. In addition, research and
development and continued implementation of the Evaluation, Measurement, and Verification
(EM&V) program provide new efficiency measures and regular refinements to the ESA program.
Further, technology pilot programs and programs funded by the general Energy Efficiency
docket (such as the Emerging Technologies Program and the IDEAA 3655 solicitations) also
provide ongoing improvements to energy efficiency program portfolio. Program measures also
vary by the utility service provider or IOU, geographic location, and climate zone. Table 5-1 in
the ESA Policy and Procedure Manual (2013) includes a list of all current upgrade and efficiency
measures.
Program Enrollment and Funding
To qualify for the ESA Program, households must be at or below 200% of federal poverty
guidelines (similar to the CARE program.) There are a set of specific guidelines for program
enrollment based on household size and income. Many low-income households are enrolled in
both the CARE and ESA programs. Customers in geographic areas where at least 80 percent of
the households are at or below 200 percent of the FPG may also be eligible for ESA if they are
already enrolled in one of a number of public assistance programs (Medicaid/Medi-Cal, SSI,
etc.). Certain Commission decisions dictate a mandatory “high usage” policy under the CARE
program which requires that participants with monthly usage at or above 400 percent of
baseline may be required to enroll in the ESA Program and where usage exceeds 600 percent of
baseline the customer must enroll in ESA Program which includes a residential energy
assessment.
The Commission utilizes a particular methodology to estimate the number of participants
qualified to enroll in the ESA program. This process is updated regularly in budget authorization
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decisions, and is informed by the results of the Low Income Needs Assessment (LINA) study which
is prepared every three years as mandated by PU Code § 739.1. Based on a complex series of
calculations the IOUs determine prior year enrollments, a growth percentage, number of
potential participants unwilling to enroll, and number already treated. Ultimately, the number of
eligible households remaining is divided by the years remaining until the legislatively mandated
goal - all eligible homes being treated by 2020. To implement the program, the IOUs utilize
contractors to verify participant’s eligibility, assess homes treated with efficiency upgrades, install
program measures, and conduct final compliance inspections.
At the time the audit evidence was collected, ESA Program participants could not be receiving
program measures since 2002 (the Go Back Rule) and be eligible for at least three program
measures or meeting the modified Three Measure Minimum (3MM) rule which allows less than
three program measures if total energy savings yield 125 kWh annually or 25 therms /annually.
Since this time, it should be noted that many changes to the programs have subsequently been
instituted in D.16-11-016, which recently extended the ESA Program and CARE programs through
2020 and incorporated many revisions to the programs intended to increase overall energy
efficiency, address current issues and events such as the shutdown of SONGS and gas leak at
Aliso Canyon, and improve the quality of life for the low-income population in the State.
Similar to the CARE program and others, ESA Program is funded via a Public Purpose Program
(PPP) surcharge. The funds are requested and authorized in Commission Application
proceedings and collected by the utilities from ratepayers to fund ESA Program activities
including outreach, enrollment, assessments, installations, inspections, evaluations, etc. Monthly
and annual compliance reports, advice letter filings, and ESA program audits are utilized as
check and control points. Administrative costs for the ESA Program are requested and
authorized within specific budget categories which dictate how the funds can be utilized.
While the IOUs are expected to maintain the program costs within the adopted budgets, the
benefits are considered needs-based, meaning that utilities can recover the full amount of
energy efficiency costs provided. Each year the number of participants and costs fluctuate,
making program cost estimates necessarily uncertain when developing the budget for the
forthcoming year. In general, ESA Program costs are recovered via a two-way balancing
account. Historically, the CPUC authorizes a budget for the ESA (and CARE) program costs
once every three years. These budgets are used to set the PPP surcharge each year. There are
also very specific “fund-shifting” guidelines which the utilities must adhere to in order to shift
authorized funds in or out of the various budget categories.
There are several other programs which are closely related to the ESA program including the
California Alternative Rates for Energy (CARE) program, the Family Electric Rate Assistance
(FERA) program, and the Middle Income Direct Install (MIDI) Program.
Energy Savings and Compliance with PU Code § 382 (e)
As previously stated, the goal of the ESA program (as codified in PU Code § 382(e)) is to create
an energy resource by delivering increasingly cost-effective and long-term energy savings. As
stated, a primary objective of the program is to achieve long term reduction in energy
consumption for low-income households. To evaluate the program’s consistency with these
goals, the Commission requires the preparation of an Impact Evaluation every program cycle to
estimate the energy savings resulting from the implementation of ESA program measures. A
copy of the most recent Impact Evaluation was reviewed as audit evidence for this report. The
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primary objective of the Impact Evaluation is to estimate program year savings in the following
manner:
1. Calculate first year gas and electric energy savings and resulting peak demand
reduction;
2. Calculate overall energy savings as well as the levels of savings calculated as a result of
each ESA installed program measure and savings by housing type;
3. Conduct billing regression models to improve the energy savings for each installed
measure, including evaporative coolers, furnace repairs, and furnace replacements
Although there is much debate regarding the overall effectiveness of these public purpose
programs and their ability to achieve stated goals, the most recent (2011) Impact Evaluation
determined that ESA measures had averaged a total of 3 percent savings for electricity
households and 4 percent savings for natural gas households.
Energy Division Management and Oversight
Commission staff provides policy development, program implementation oversight, and
evaluation support for the ESA Program. Staff review and approve budget applications as they
are submitted by the IOU’s every three years by the program administrators. In addition,
Commission staff review advice letter filings related to the program, advise decision-makers on
policy and program implementation, submit data requests, and analyze legislative proposals.
Pursuant to CPUC directives contained in D. 01-03-028 and D.02-07-033, each of the IOUs are
required to submit both monthly and annual reports on their respective ESA program. While
each is formatted differently, the reports document program expenditures and penetration
levels. The utilities are required to submit formal filings with the Commission every three years to
request approval of their program budgets, number of homes treated and savings projected,
new/retired program measures and policy updates. While the typical program cycle is three
years, in recent years bridge funding has been issued to continue program activities when
decisions have been delayed.
Low Income Oversight Board (LIOB)
The Low Income Oversight Board (LIOB) is an advisory board established to provide advice on
low-income electric and gas issues and serve as a liaison between the Commission and low
income ratepayers and their representatives. The LOIB was established pursuant to PU Code §
382.1 and its charter was updated in 2007 under Resolution E-4095. The LOIB maintains a website
at www.loib.org. The LIOB hosts quarterly meetings to address low income issues and provide
recommendations to the Commission. The LIOB is comprised of eleven members of the public, a
Commissioner, a gubernatorial appointee, and a variety of utility and industry representatives.
The LOIB website provides information and direct links to the CARE and ESA programs, as well as
other low-income programs.
Final – October 2017
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