1. Federal Energy Regulatory Commission George Godding Office of Market Oversight and Investigations Federal Energy Regulatory Commission EISG – April 18, 2005 Austin, Texas Audits: Operational & Financial

2. Federal Energy Regulatory Commission 2 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. 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.

3. Federal Energy Regulatory Commission 3 Director Deputy Director Market Oversight & Assessment Stephen Harvey Deputy Director Market Oversight & Assessment Stephen Harvey Deputy Director Investigations & Enforcement Robert Pease Deputy Director Investigations & Enforcement Robert Pease Division of Management & Communication MO-1 MO-2 MO-3 MO-4 William Hederman George Godding Director Division of Energy Market Oversight MO-3.1 Vacant Director Division of Integrated Market Assessment MO-3.3 Thomas Rieley Acting Director Division of Information Development MO-3.4 Thomas Rieley Director Division of Operational Audits MO-4.2 Bryan Craig Director Division of Financial Market Assessment MO-3.2 Lee Choo Director Division of Enforcement MO-4.1 Lee Ann Watson Director Division of Financial Audits Janice Nicholas Director MO-4.3

4. Federal Energy Regulatory Commission 4 Added Financial Audits Group Support Commission in achieving Strategic Goals Traditional efforts: –Sampling financial statements (forms); Requested company sorted data for analysis –Tariff compliance New activities: –Broader scope & integrated –IT: utility & independent web sites to confirm utility statements; Use gross data to form basis for analysis; E-mail and Voice-mail search capability –Forensic auditing capability being built

5. Federal Energy Regulatory Commission 5 Market Oversight Through Audits Proactive Approach – –Conduct random and targeted audits to establish a market presence –Police energy markets to identify and remedy barriers to competition Reactive Approach – –Participate with the Division of Enforcement in responding to complaints, formal and informal, e.g., investigations involving affiliate abuse, capacity release, physical withholding, etc.

6. Federal Energy Regulatory Commission 6 Annual Audit Plan The annual audit plan (AAP) is a formal plan of action to accomplish audit goals and objectives for a specific year. Individual Audit Assignment The Directors of DOA or DFA assign individual audits and determine the focus of these audits to implement the annual audit plan or address late-breaking issues, such as, hotline calls or referrals from other FERC offices.

7. Federal Energy Regulatory Commission 7 Create Audit Plan Prepare Survey Complete Risk analysis Testing: Request Data Conduct On-Site Testing Process Overview Complete audit report Select Auditee Brief FERC & Auditee Determine Scope

8. Federal Energy Regulatory Commission 8 Project Audit Plan Purpose Objective Scope/Resources Criteria Methods Benefits

9. Federal Energy Regulatory Commission 9 Audit Survey – Limited Review Verification of compliance in various areas, for example: ­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.

10. Federal Energy Regulatory Commission 10 Audit Survey - Steps Gather and review data Review work performed by others Conduct high-level testing Prepare audit survey

11. Federal Energy Regulatory Commission 11 Risk Analysis Summarizes areas of risk detected during the audit survey phase of the audit Provides the basis for planning and conducting further detailed testing

12. Federal Energy Regulatory Commission 12 Conduct Audit Data requests On-site reviews Transaction testing and analysis, and Interviews

13. Federal Energy Regulatory Commission 13 Illustrative Operational Audit Topics Electric Industry –Market Rules and practices –Generator Outages –Stand./Codes of Conduct –Dispatch Practices –Transmission Access –Electric Quarterly Reporting (EQR) –OATT/OASIS –Behavioral Rules Natural Gas Industry –Pipeline Operations –Stand./Codes of Conduct –Capacity Release –Contracting Practices –Filing Requirements –Tariff Compliance –Behavioral Rules

14. Federal Energy Regulatory Commission 14 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

15. Federal Energy Regulatory Commission 15 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

16. Federal Energy Regulatory Commission 16 Operational Audit: Example 1 Improper access to control center Improper posting of ITC 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

17. Federal Energy Regulatory Commission 17 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

18. Federal Energy Regulatory Commission 18 Financial Audit Examples Used incorrect investment base in computing rate base for post 1996 plant investment Customers improperly charged for failed SeTrans RTO