FERC Enforcement Report Brief 2024

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.