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FERC Enforcement Report 2022: insights for energy and utility companies
The Federal Energy Regulatory Commission (FERC or Commission) has released the 2022 Enforcement Report identifying observations from, among other things, FERC audits of formula rate filings, electric utilities, natural gas pipelines and oil pipelines. The findings include issues identified in prior Enforcement Reports as well as several noted in recent audits.
The Enforcement Report provides helpful guidance for preparers of FERC Reports, whether it be formula rate filings, Form 1 and Form 2 or Page 700 of Form 6. We recommend energy and utility companies use the findings in this report as a check on their compliance with FERC rules and regulations, particularly with respect to the accounting requirements contained in the FERC Uniform System of Accounts.
Our full insights are available for download below in question and answer format. The document is meant to be a helpful tool to highlight some of the key takeaways that energy and utility companies should consider. While the matters observed are organized by the type of audit in which they arose, many are relevant to the other sectors as well. We also provide a checklist that companies may find helpful in assessing their own compliance with common FERC audit findings.
FERC Enforcement at a glance — Division of Audits and Accounting
$
million of findings
$
million refunds/recoveries
$
million avoidance in future rate
required corrective actions
Below are several issues that continually appear as findings in FERC Enforcement Reports. These four will provide a sense of the level that FERC audits delve into. It is suggested that companies use these issues and download the entire Brief to use as a checklist before filings (Formula Rates, Forms 1 and 2, Page 700 of Form 6) with FERC.
Issue: FPC Order 561 provides guidance on how to calculate the AFUDC rate as well as to which work orders it should be applied. The FERC audits have found where such guidance is not followed–starting with companies not recognizing that short-term debt is to be the first source of construction financing. Several other findings are noted and described in the Brief.
AFUDC compliance errors result in recalculating and recording correct balances which could trigger refunds with an impact of future rate base/depreciation consequences.
Comment: Auditing AFUDC appears to be a common approach in every FERC audit. As a result, companies should check both their support for the AFUDC rate as well as the balances to which it is being applied.
Issue: FERC permits capitalization of indirect overheads when such costs relate to capital activities. However, the derivation of the capitalization rate should be based on time cards or periodic time studies. Audits have shown companies capitalizing overheads based on metrics, not on time. As a result, companies have initiated time studies with the resulting percentage applied to both current and prior years resulting in refunds and an impact on future rate base/depreciation.
Comment: If capitalization of overheads is not time-based, a potential audit finding can be expected. Companies should assess the risks on current and future rates resulting from a finding in this area.
Issue: In some instances companies overpay their income taxes, are entitled to a refund and record the overpayment as a prepaid in USoA 130 instead of a receivable. USoA 130 is included in the calculation of rate base in formula rate filings. Findings in this area have resulted in customer refunds.
Comment: To the extent that an overpayment of income taxes has occurred, companies should see that such overpayment is recorded in the correct USoA account.
Issue: Regulated entities have included merger-related transaction and merger-related internal labor costs in operating expense accounts and revenue requirements. FERC approval is required to recover such costs.
Comment: FERC has made it clear that transaction and merger-related costs are generally not recoverable through rates. When a company has been involved in a transaction, it should have processes and controls to keep such costs from being recorded in the incorrect accounts.
How PwC can help
PwC’s Complex Accounting & Regulatory Solutions is dedicated to helping companies in the energy, power and utilities industries manage regulatory risk and help solve complex accounting problems related to regulatory accounting. Our seasoned team has deep experience working with regulated entities and their regulators. We can help companies reduce risk and achieve optimal outcomes related to interactions with regulators.
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