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FERC Enforcement Report Brief 2024
Observations for energy and utility companies from the 2024 FERC Enforcement Report
The Federal Energy Regulatory Commission (FERC or Commission) has released the 2024 Enforcement Report identifying observations and findings resulting from audits of electric utilities, natural gas pipelines and oil pipelines as well as FERC audits of formula rate filings.
The Enforcement Report provides a window into the types of deficiencies noted by the Division of Audits and Accounting (DAA) during their audits and should be used by FERC-regulated electric, gas and oil companies, and others who follow the FERC Uniform System of Accounts (USoA) as a check on their compliance with FERC rules and regulations, particularly with respect to the accounting requirements contained in the FERC USoA, completion of the relevant FERC financial statements, and FERC formula rate filings (e.g., FERC Form 1, Form 2, etc.).
The Enforcement Report listed the following major areas of noncompliance:
- Charging labor and labor-related costs to construction projects based on a metric and not using an appropriate cost allocation method or time-tracking process to ensure capitalized labor costs have a definite relation to construction as required by the FERC USoA. (Particular areas of focus were Administrative & General [A&G] and Engineering & Supervision [E&S] cost pools)
- Errors in determining the Allowance for Funds Used During Construction (AFUDC) rate and/or the Construction Work in Progress (CWIP) and Retirement Work in Progress (RWIP) balances to which the AFUDC rate is applied
- Improperly accounting for merger-related costs as operating expenses, included in recoverable costs, without first obtaining FERC approval
- Recording certain expenses in the incorrect FERC USoA accounts (e.g., above-the-line versus below-the-line) as well as recording certain costs as A&G instead of charging such costs to generation, transmission or distribution functional accounts, thereby misstating the revenue requirements of certain functions
- Other areas include misclassification of Units of Property, non-compliance with Commission orders and tariffs, inaccuracies or deficiencies in reporting, and several other electric, gas, and oil specific matters.
FERC Enforcement at a glance: Division of Audits and Accounting
Included in the FERC's Enforcement Report is a section covering the results from the FERC's Division of Audits and Accounting (DAA). This section highlights areas noted during audits to increase awareness of the DAA's concerns to help facilitate compliance efforts. The overall DAA results included
$
million of findings
$
million refunds/recoveries
findings of noncompliance
$
million estimated avoidance in future rates
recommended corrective actions
Below are several recurring issues consistently identified in FERC Enforcement Reports. It is suggested that companies use these issues and download the entire Brief as a checklist before filing (Formula Rates, Forms 1 and 2, page 700 of Form 6) with FERC.
Issue: FERC supports capitalization of indirect costs (including A&G, E&S, etc.) related to construction activities. DAA’s Audit findings have taken exception to companies leveraging “metrics” rather than “time charging” or “time study” as a basis for capitalization.
Comment: We observe that many utilities have not supported capitalization of labor based on time studies, More recently, companies are performing time studies to support their methodology. We have also seen companies revisit the costs to be considered for capitalization for potential expense leakage.
Companies should consider whether changes in their workforce or business may necessitate a refresh of the current methodology or capitalization percentages in place. We have also seen companies revisit the costs to be considered for capitalization for potential expense leakage.
Issue: FPC Order 561 provides guidance on how to calculate the AFUDC rate as well as the CWIP or RWIP balance to which such rate should be applied.
AFUDC guidance includes the assumption that short-term debt is to be the first source of construction financing, and some utilities have not followed this approach.
Other findings in this area include the improper inclusion or exclusion of certain amounts in the AFUDC debt or AFUDC equity rate calculation, the accrual of AFUDC on inactive or suspended construction projects, non-cash accruals, or other projects that already receive incentive rate treatment, or other computational errors.
AFUDC compliance errors result in recalculating and recording correct balances, which could trigger refunds with an impact on future rate base/depreciation consequences.
Comment: On every audit, it appears that FERC is going to review the AFUDC calculation as well as the CWIP/RWIP base to which it applies. This AFUDC review occurs in virtually every FERC audit whether it be an electric, gas or oil company. It would be prudent for companies to check their calculations in this area.
Issue: During audits, FERC finds many jurisdictional companies have recorded non-operating expenses as well as functional operating and maintenance expenses in A&G expense accounts, thus resulting in errors in calculating the revenue requirement.
Examples include lobbying expenses, charitable contributions, storm damage costs to distribution systems, distribution system maintenance expenses, generation function costs, costs of services provided to affiliates, penalties and employment discrimination settlement payments.
Comment: The FERC USoA differentiates between accounts incurred for expenses recoverable in the ratemaking process and those that are non-recoverable.
Further, accounts exist for various functions (generating, transmission, distribution) and, if costs are not segregated and reported in the appropriate function, the respective tariffs will not reflect the true cost of service.
Processes and internal controls should be in place and operate effectively to prevent misclassifications.
Issue: FERC regulated gas transmission and oil pipeline companies are subject to the same DAA audit process.
During these audits, the DAA has identified issues of non-compliance that may be consistent with electric utilities, such as findings related to the calculation of AFUDC, classification or presentation of A&G expenses, and errors or omissions in reporting or filings.
Additionally, the DAA has identified industry specific matters related to the filing of depreciation studies, the accounting over pipeline loss allowances or gravity shrinkage deduction, and other matters.
Comment: Similar to electric companies, FERC regulated oil and gas companies should utilize this Enforcement Report as a checklist to measure compliance with FERC rules and regulations ahead of the filing of a FERC Form 2 or FERC Form 6 (Page 700). The DAA has long demonstrated the importance of compliance with FERC regulations for all FERC regulated entities.
How PwC can help
PwC’s Complex Accounting & Regulatory Solutions Practice (CARS) specializes in supporting rate regulated entities, improving efficiencies and reducing risk within their regulatory functions. Our goal is to help utilities identify solutions that are positive for all stakeholders, improving profitability and fostering positive regulatory outcomes. Our team of specialists offer a wide range of bespoke rate case, regulatory and accounting solutions to help solve your most complex business issues. We drive value by supporting companies in a variety of areas, including expert testimony, rate case process/controls evaluation, rate case preparation and pre-filing analysis, development of rate design solutions, and assistance with broad array of complex accounting matters.
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