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- The CPUC Has Not Effectively Guarded Against the Appearance of Improper Influence in Its Public Decision Making
- The CPUC Has Failed to Fully Disclose Important Communications Between Commissioners and External Parties
- The CPUC's Contracting Activity Has Not Been Consistent With State Requirements or Best Practices
- Other Areas We Reviewed
- Scope and Methodology
The CPUC Has Not Effectively Guarded Against the Appearance of Improper Influence in Its Public Decision Making
Key Points:
- Although the CPUC can direct utilities to contract with specific vendors, it did not adequately support one decision to do so. As a result, it appears that the choice of that contractor was inappropriately influenced by the contractor’s participation in the CPUC proceeding.
- The standard that the CPUC applies to questions of bias in decision making makes it more difficult in California than it is in other states to disqualify a commissioner from participating in decision making. Because of this standard, the CPUC allowed one of its commissioners to participate in a decision when there was evidence that reasonably suggested he had been influenced by off‑the‑record conversations with utilities.
The CPUC’s Direction of Sole‑Source Contracts
The CPUC directs energy utilities to enter into contracts with third‑party vendors, and this direction generally comes from CPUC decisions. In many cases, before the CPUC issues a decision, it holds related proceedings. We asked the energy utilities to report the number of contracts the CPUC directed them to enter into from 2010 through 2015 and the method the CPUC used to order each contract. Using the information the energy utilities reported to us, we determined that the CPUC ordered a total of 25 contracts. Table 2 shows the distribution of contracts among the different utilities. We reviewed 18 of these contracts and found that all but two were funded through ratepayer funds. For 12 of the 18 contracts, the CPUC named the specific entities with which the utilities were required to contract. We reviewed the CPUC decisions or other actions that led to all 18 contracts and found that for eight contracts, the entities that received contracts formally participated in the related proceedings.
Table 2
Total Number of Contracts the California Public Utilities Commission Directed Energy Utilities to Enter Into From 2010 Through 2015
Sources: California State Auditor’s analysis of information provided by Pacific Gas and Electric, San Diego Gas and Electric, Southern California Edison, and Southern California Gas.
Note: In some instances, the CPUC directed multiple energy utilities to enter into a joint contract. For these cases, this table includes the contract under the name of the utility that we determined, through review of CPUC decisions and contract documents, was the lead entity in the contract.
In one of those eight instances, a participating entity offered to administer a program and appeared to influence the CPUC decision to award the contract to that entity despite opposition from other interested parties. In an October 2011 ruling, the CPUC asked parties how a statewide outreach program for energy efficiency should be administered. The four energy utilities commented that they should collectively administer the outreach program. In contrast, a San Diego‑based nonprofit entity—the California Center for Sustainable Energy (Center)—commented that a network of local energy nonprofits should share ownership of the energy efficiency outreach program. The Center then suggested that because of its experience, it should act as the coordinating entity for that network.
The CPUC appeared to find the Center’s suggestion persuasive. In March 2012—four months after the Center’s comments—the CPUC released a proposed decision stating that it was intrigued by the suggestion and that the Center had the experience and vision to execute the statewide campaign. The proposed decision indicated that the CPUC planned to direct the energy utilities to enter into a contract with the Center to administer the program. In response to this proposed decision, the energy utilities all submitted comments stating that a competitive bidding process should be used to select the outreach program’s administrator. San Diego Gas and Electric and Southern California Gas jointly commented that there was no proof that the Center had the experience to execute the statewide campaign.
Despite the objections from all four energy utilities, the CPUC’s final decision directed the utilities to enter into a sole‑source contract with the Center to administer the outreach program. This contract was budgeted at about $3.8 million for 2012. The CPUC’s final decision explained that although it prefers to conduct competitive solicitations, competition was not required. The CPUC further specified that the Center would select any subcontractors through a competitive process, that time was of the essence, and that the CPUC was not aware of any organization similar to the Center in the State.
Nonetheless, the CPUC could have better justified its choice of the contractor and avoided the appearance of improper influence. As it did in this case, the CPUC has the authority to direct utilities to contract with a specific entity, and it is not required to choose that entity through a competitive process. However, when it does not select a vendor competitively, the CPUC is directing contracts that are similar in nature to the sole‑source contracts that state agencies may choose to enter into. General Services requires agencies to justify a sole‑source contract by explaining how they determined that no other vendor could meet the business need. In the case of the contract for program administration, the CPUC decision to direct the contract to a specific entity would have been justified had the CPUC provided such an explanation. This is especially true given that the entity ultimately awarded the contract was the one that proposed the idea for establishing the contract in the first place. Without an explanation to support its decision, the CPUC risked appearing improperly influenced by the Center’s participation in the proceeding. Further, it did not consider other vendors that may have provided better value before directing the energy utilities to contract with this vendor using ratepayer funds.
Although one commissioner concurred with the decision that directed the contract for the outreach program, he wrote that he was deeply troubled that the CPUC awarded the contract to the Center without competitive solicitation. In his view, awarding the contract in this way suggested that the CPUC considers itself above the rules it imposes on others. In this respect, the commissioner stated, the decision was crucially deficient. Subsequent CPUC decisions also demonstrate the prolonged effect of this sole‑source selection: after the CPUC chose the Center for the $3.8 million contract, it continued to direct the utilities to contract with the Center as the outreach program administrator. According to information provided to us by Pacific Gas and Electric, the lead utility responsible for contracting with the Center, the cumulative contract value the Center received because of the CPUC’s sole‑source selection was about $74 million through 2016. In March 2016, the CPUC issued a decision that ordered its staff to lead a competitive solicitation to determine the entity that should administer the program beginning in October 2016.
In the remaining seven instances in which contractors formally participated in proceedings related to the decisions in which they received contracts, we found no evidence that the participation improperly influenced the CPUC. This absence of inappropriate influence was true even though contractors sometimes advocated or suggested outcomes that would financially benefit themselves. For example, in one instance, a contractor suggested that the contract it held to administer a solar energy program should not be reopened for bidding when it expired. Instead, the contractor argued that it should be directly awarded the new contract for program administration. A significant number of other participants—including those with competing interests, such as other nonprofit entities and the energy utilities—supported the contractor’s position that it should remain as program administrator and that the CPUC should not reopen the contract for competitive bidding because they believed the contractor was administering the program well. The CPUC agreed and awarded the new contract directly to this entity.
Standard for Recusal of a Commissioner
In addition to directing contracts, the CPUC also approves contracts that utilities propose. We found that the CPUC can improve its rules concerning when its commissioners can participate in those approval decisions. We reviewed a selection of 20 sole‑source contracts that the energy utilities submitted to the CPUC for approval. One of those contracts was submitted in July 2011 by Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison as a joint application for a $152 million research and development agreement with Lawrence Livermore National Laboratory (Lawrence Livermore). In March 2012, The Utility Reform Network (TURN), a utility consumer advocacy organization, requested that the CPUC prohibit the then‑president (former president) of the CPUC from participating in the CPUC decision about that application. TURN argued that the former president could not participate in the CPUC proceeding in an unbiased manner because he had engaged in discussions about the contract before the utilities submitted their application.
In an attachment to its request, TURN submitted emails that had been sent to and from the former president of the CPUC and representatives of Pacific Gas and Electric, Lawrence Livermore, and an energy sector consultant during the year before the utilities submitted their application. The content of these emails strongly suggests that the former president of the CPUC participated in early discussions regarding the research and development agreement, made multiple inquiries about the agreement’s status, and saw a draft version of the agreement before the utilities submitted it to the CPUC. Even after the utilities submitted the application, the former president of the CPUC continued to inquire about the status of the agreement. In its request, TURN noted that the emails showed that the former president played a significant role in the development of the application. It concluded that given the actions he took to initiate and foster the agreement, the only reasonable conclusion would be that the former president was unable to act in an unbiased manner towards TURN’s proposal that the CPUC reject the agreement.
However, the CPUC standard for recusal of a commissioner from a proceeding requires more than the appearance of bias. Instead of considering whether there is an appearance of bias, the CPUC considers whether the evidence clearly and convincingly shows that a commissioner has an unalterably closed state of mind regarding the matter the CPUC is considering. Accordingly, in the same decision in which it approved the proposed contract, the CPUC dismissed TURN’s request to remove the former president from the proceeding. The former president participated in the CPUC decision, which held that TURN had not presented convincing evidence that he had an unalterable state of mind and that TURN’s conclusions had no basis in fact.
The CPUC standard is a more difficult standard for parties to challenge than the standards used by other states’ public utilities commissions, and it does not demonstrate a commitment by the CPUC to avoid apparent bias. For example, the standards of conduct for commissioners of the Public Utility Commission of Texas state that a commissioner must remove himself or herself from a proceeding if the commissioner’s impartiality has been reasonably questioned.
Additionally, the standard for CPUC commissioners is a more difficult standard for parties to challenge than the standard for disqualification of CPUC administrative law judges. According to the chief administrative law judge at the CPUC, when the CPUC determines whether an assigned administrative law judge has bias, it assesses whether a person who is aware of the facts may reasonably entertain doubt as to whether the judge would be able to act impartially. In the Lawrence Livermore proceeding, TURN submitted an argument and evidence that could lead a reasonable person to doubt the former president of the CPUC’s ability to review TURN’s position in an impartial manner. If standards similar to those of other agencies had been in place at the CPUC, TURN’s argument would likely have resulted in the former president’s having to recuse himself from the proceeding. Instead, by dismissing TURN’s request, the CPUC allowed a commissioner—in this case, the former president—to participate in a decision when there was evidence that reasonably suggested he had been influenced by off‑the‑record conversations with utilities.
Recommendations
Legislature
The Legislature should amend state law to direct the CPUC to adopt a standard that requires commissioners to recuse themselves from proceedings if a person who is aware of the facts may reasonably question whether a commissioner is able to act impartially.
CPUC
To ensure that the choice of a vendor is sufficiently justified and that the vendor represents the best value, the CPUC should explain in its final decision how the vendor was the most qualified in all cases when the CPUC does not competitively select the vendor it directs utilities to contract with.
The CPUC Has Failed to Fully Disclose Important Communications Between Commissioners and External Parties
Key Points:
- CPUC rules do not require commissioners to report private communications with parties to CPUC proceedings. These rules do not align with best practices and have resulted in conversations concerning a critical CPUC proceeding to go unreported.
- The former president of the CPUC participated in private conversations related to the San Onofre Nuclear Generating Station (SONGS) decommissioning settlement but was not required to make those conversations a matter of public record. After the CPUC approved the settlement agreement, others disclosed that these conversations had occurred, which led to questions about the integrity of the settlement.
- Commissioners received 19 international trips funded by nonprofit organizations from 2010 through 2015. Six of these trips were paid for by a nonprofit with strong ties to entities that the CPUC regulates or financially affects through its decisions.
Ex Parte Communications
Rules for Ex Parte Communications For Each Category of California Public Utilities Commission Proceeding
Adjudicatory proceedings: Ex parte communications are prohibited.
Ratesetting proceedings: Ex parte communications are permitted with restrictions, and interested persons must disclose the contents of their communications but not those of the CPUC decision maker.
Quasi-legislative proceedings: Ex parte communications are allowed without restriction or reporting requirement.
Sources: California State Auditor’s analysis of Public Utilities Code, sections 1701.2, 1701.3, and 1701.4 as well as California Code of Regulations, title 20, sections 8.3 and 8.4.
The former president of the CPUC engaged in private discussions that were not disclosed in a timely manner and that have cast doubt on a key CPUC decision. These occurrences demonstrate a need for changes in the way such conversations are disclosed to the public. As discussed earlier, the energy utilities reported that the CPUC directed them to enter into 25 contracts from 2010 through 2015. One of those was a $25 million joint contract between Southern California Edison, San Diego Gas and Electric, and the University of California as part of a multibillion‑dollar settlement agreement regarding the closing of SONGS. The settlement provided consumer refunds and credits because of the premature shutdown of SONGS, and it directed the development of a research program with the University of California to reduce emissions at current and future power plants. The CPUC approved this settlement agreement in 2014, but the agreement has been the subject of widespread media attention because of undisclosed negotiations between the former president of the CPUC and an executive from Southern California Edison that occurred during a trip they both took to Poland in 2013. Multiple news outlets later reported that while on the trip, the former president and the executive from Southern California Edison privately discussed the details of the agreement, which was active business before the CPUC at the time of the trip.
CPUC rules govern under what circumstances such communications, known as ex parte communications, are allowed and who is responsible for disclosing them. CPUC regulations define ex parte communication as a written or oral communication between an interested person and a CPUC decision maker concerning any substantive issue in a formal proceeding before the CPUC that does not occur in a public forum or on the record of the proceeding. As discussed in the Introduction, there are three different categories of CPUC proceedings. Each of these categories of proceedings has different rules regarding ex parte communications, which are shown in the text box. Interested parties in a ratesetting proceeding are required to report ex parte communications regardless of who initiated the communication, and these reports must describe the communications the interested party makes and their content but not those made by the CPUC decision maker.
Because the SONGS settlement resulted from a ratesetting proceeding, under CPUC disclosure rules Southern California Edison, not the former president of the CPUC, was required to disclose within three working days the communication its executive had in Poland with the former president. However, the utility did not file a timely disclosure of the conversation; instead, Southern California Edison filed its notice of ex parte communication almost two years after the conversation took place and three months after the CPUC approved the SONGS settlement agreement. In its notice of ex parte communication, Southern California Edison indicated that it was the former CPUC president who had initiated the conversation about SONGS while on the trip to Poland.
This conversation was not the only private discussion the former president had that went undisclosed until after the CPUC had already approved the SONGS settlement. According to a disclosure that the University of California filed more than a year late, the former president of the CPUC also engaged in several communications with representatives of the University of California about the $25 million contract that, with later modifications, became part of the settlement agreement. The University of California submitted email records showing that the former president reviewed a proposal for the contract arrangement and relayed comments he had received from Southern California Edison on the proposal. The disclosure also mentions that the former president and a University of California representative had discussed the proposal during a trip to Spain in May 2014.
The fact that these conversations were not disclosed before the CPUC issued its decision on the SONGS settlement also casts doubt on how well the settlement protects ratepayers and on the selection of the University of California as the recipient of the $25 million contract as part of the settlement. After the ex parte communication from the trip to Poland was disclosed, the CPUC’s independent consumer advocate questioned the integrity of the SONGS settlement, stating that the Poland conversation may have impaired the advocate’s ability to negotiate on behalf of ratepayers. One news outlet reported that a lawyer who analyzed notes from the Poland meeting believed that the private discussions allowed Southern California Edison to strengthen its negotiating stance, which may have cost customers as much as $1.3 billion. In May 2016, the CPUC reopened the record of the proceeding to reassess the settlement. The California State University filed a motion to become a party to the reopened proceeding and stated that it will contend that the University of California should not be the sole recipient of the $25 million contract.
These criticisms of the SONGS decision might have been avoided if the former president of the CPUC had ensured that the public was promptly made aware of his conversations with Southern California Edison and the University of California. Although Southern California Edison and the University of California disclosed these ex parte communications months after the settlement was approved, the former president of the CPUC was an integral participant in these conversations and could have made them a matter of public record before the CPUC approved the settlement agreement. Instead, he voted to approve the SONGS settlement without disclosing the conversations.
CPUC disclosure rules are not aligned with best practices because they do not require CPUC decision makers to take responsibility for disclosing ex parte communications. In 2014 the CPUC contracted with a consultant to recommend ways the CPUC could guard against future inappropriate contact between CPUC employees and entities that are parties to CPUC proceedings. In its resulting report issued in June 2015, the consultant observed that it is common practice among agencies similar to the CPUC to require the agency decision maker or both the agency decision maker and the interested party to disclose ex parte communications. The consultant’s report also noted that unlike the CPUC, most agencies it reviewed require disclosure of the agency decision maker’s statements, or at least disclosure of any response to the ex parte communication, and that only the CPUC specifically exempts decision makers’ statements from disclosure.
If the CPUC had disclosure requirements similar to those of other agencies, ex parte communications would be disclosed comprehensively, and the CPUC’s decision‑making process would be more transparent and its decision makers would be more accountable. For example, the disclosure of the ex parte communications with the University of California would have provided crucial context on how the university was chosen to receive the $25 million contract as part of the SONGS settlement.
Gifts of International Travel
The two examples of ex parte communications discussed in this section both took place while the former president of the CPUC was on international trips. Such travel is not uncommon among CPUC commissioners. We reviewed the economic interest disclosures for commissioners who served from 2010 through 2015, and of the 11 commissioners who served during this period, seven disclosed that they went on international trips that were gifts from nonprofit organizations. These seven commissioners participated in 19 international trips from 2010 through 2015 that totaled more than $150,000 in value. Figure 2 shows the destinations of these trips. The Political Reform Act of 1974, which is a foundational component of the State’s conflict‑of‑interest requirements, allows for reimbursements for travel expenses reasonably related to a governmental purpose that certain nonprofits provide to state officials. According to information the commissioners reported, all of the trips they took were allowed under these rules because they were gifts from qualified nonprofits.
Figure 2
The Number of Times Nonprofits Funded International Trips for Commissioners From 2010 Through 2015
Sources: California State Auditor’s analysis of commissioners’ 2010 through 2015 economic interest disclosures and the membership roster of the California Foundation on the Environment and the Economy (CFEE).
= Number of trips funded by CFEE, a nonprofit with a significant number of board members who are employees of entities that are regulated by, or have financial interest in, CPUC proceedings.
= Number of trips funded by other nonprofits.
* One trip to Sweden also involved the commissioner’s traveling to the Czech Republic.
However, one of these nonprofits, the California Foundation on the Environment and the Economy, which paid for six of the 19 trips, including the Poland trip mentioned previously, has a significant number of board members who are employees of entities that had a financial interest in CPUC proceedings, including some individuals who represent energy utilities the CPUC regulates. Figure 3 shows some of the entities with employees who are board members of this nonprofit and how they are connected to the CPUC. Information about the board membership for the nonprofits that paid for the other trips was unavailable online, or the nonprofits’ websites did not list any board members who were employees of regulated entities or entities with a financial interest in CPUC proceedings. However, it is possible that nonpublic information about these nonprofits would show a close tie to utilities or to other entities with a financial interest in CPUC proceedings.
Figure 3
Members of the California Foundation on the Environment and the Economy That Have Had a Financial Interest in California Public Utilities Commission Proceedings
Sources: California State Auditor’s analysis of California Foundation on the Environment and the Economy’s membership roster, websites of entities listed on the membership roster, the CPUC website, and various CPUC decisions and resolutions.
* Edison International is the parent of Southern California Edison.
Advisors to the commissioners who went on these nonprofit‑funded trips had differing opinions about their usefulness. For example, according to one advisor, international travel helps educate commissioners about new projects and cutting‑edge technologies, and the office of the Governor would likely not approve of such trips if they were funded solely by the CPUC. We also noted that commissioners reported that they made speeches or participated in panel discussions on some of these trips. However, another advisor stated that he believed that international travel was not essential to the duties of a commissioner and that there may be increased opportunity for discussion about CPUC business on these trips. In the consultant report mentioned previously, the consultant advised the CPUC to consider prohibiting commissioners from receiving free travel, lodging, and meals from organizations affiliated with regulated utilities and from other parties to proceedings before the CPUC.
When we discussed these trips with the CPUC, it acknowledged the appearance of inappropriate relationships that could come from these gifts. According to the assistant general counsel who supervises the CPUC’s conflict‑of‑interest legal team, the advice her team gives to staff and commissioners is not limited to a review of the legality of accepting a gift, but the advice also focuses on the appearance of accepting a gift. For example, a commissioner can legally receive a gift of a meal from a regulated utility so long as the total value of all gifts from that utility does not exceed a specific dollar amount in a calendar year; however, such meals can still carry the appearance of inappropriate influence. Our review of commissioners’ economic interest disclosures shows that from 2010 through 2015, five commissioners also received gifts, unrelated to the trips mentioned previously, from regulated utilities or other energy companies with a combined total value of about $1,600.
Although some gifts are allowed legally, such gifts as travel that come from entities with close ties to those with a financial stake in the outcomes of CPUC proceedings create the appearance of inappropriate relationships between the CPUC and those it regulates. In its report, the CPUC consultant referred to allegations of improper private meetings between commissioners and regulated utilities and discussed the public’s interest in whether utility‑related organizations sponsor travel for CPUC decision makers in exchange for greater opportunities for direct contact. Widespread media reports also describe the public’s distrust of the CPUC because of accounts of a culture of improper access and influence granted to utilities. To help restore its image as a trustworthy, unbiased regulatory agency, the CPUC would benefit from establishing a prohibition against accepting travel, meals, or other gifts from individuals or entities that have a strong or direct connection to the utilities it regulates.
Recommendations
Legislature
The Legislature should amend state law to direct the CPUC to adopt rules for ex parte communications between CPUC commissioners and interested parties that include the following:
- A requirement for CPUC commissioners to disclose any ex parte communications in which they participate, in addition to the existing requirement for interested party disclosure. This disclosure should occur within the same time frame as the interested party disclosure.
- A requirement that commissioners’ disclosures include a description of the commissioners’ communications and their contents.
CPUC
To avoid the appearance of inappropriate relationships, the CPUC should adopt a policy to prohibit commissioners from accepting gifts from regulated utilities and energy companies and free travel from organizations with significant ties to regulated utilities and other parties with financial interests in CPUC proceedings.
The CPUC’s Contracting Activity Has Not Been Consistent With State Requirements or Best Practices
Key Points:
- In many of the 60 contracts for services that we reviewed, the CPUC failed to meet state requirements and did not align its actions with good business practices. Table 3 shows a summary of the deficiencies we observed in the contracts we reviewed.
- The shortcomings we noted in CPUC contracting practices resulted from a lax control environment that the CPUC has allowed to persist. This lax environment is characterized by outdated guidance to staff, the absence of supervisory review, and a lack of training for key staff members.
Table 3
Summary of the Results of the State Auditor’s Review of the California Public Utilities Commission’s Contracts for Services
| Contract Aspects Reviewed | Summary of Results |
|---|---|
Civil service exemption |
For personal service contracts, regulations require the CPUC to include with a request for contract approval detailed and specific information explaining why services cannot be obtained through the civil service. Of the 40 contracts we reviewed that were sent to General Services for approval, 23 did not contain this specific and detailed information. |
Market survey |
CPUC policy requires staff to complete a market survey for some contracts that are exempt from competitive bidding.*
We reviewed 35 contracts subject to this policy and found no evidence that the CPUC conducted complete market surveys for 24 of these contracts. |
Adding dollar value |
To follow best practices, the CPUC should explain its rationale for adding funds to contracts when the scope of work for those contracts does not change.
The CPUC did not document the reasons additional funds were necessary for 12 of 24 contracts we reviewed in which it increased contract funding but did not change the scope of work. |
Changes to scope of work |
We expected, as a best practice, that any amendments to the scope of work for a contract would include additional work that is closely related to the original scope.
For 3 of 14 contracts in which the CPUC significantly changed the scope of work through an amendment, the CPUC did not justify why the existing contracts were the optimal way to obtain the new services. |
Monitoring performance |
The State Contracting Manual states that a contract manager’s responsibilities typically include monitoring the progress of contracted work. Also, state law requires that agencies complete contractor evaluations at the expiration of all consultant services contracts of $5,000 or more. For 19 of the 60 contracts we reviewed, the CPUC did not maintain evidence that the contract manager monitored the contractor’s progress during the life of the contract. Further, in the 38 contracts valued at $5,000 or more, although end‑of‑contract performance evaluations were required, the CPUC did not complete any evaluations. |
Performance criteria |
The State Contracting Manual requires consultant services contracts of $5,000 or more to contain detailed performance criteria. However, 9 of the 56 contracts we reviewed for an amount more than $5,000 did not contain detailed performance criteria. |
Sources: California State Auditor’s analysis of selected CPUC contract files, state regulations, the State Contracting Manual, and the CPUC’s Policies and Procedures Manual: Personal Services Consultant Contracts.
* The CPUC does not require market surveys for contracts with other government entities or emergency contracts. These types of contracts are not included in our count of 35.
Exemptions From Using Civil Service
The CPUC has consistently failed to explain in a sufficient manner why it contracted outside the state civil service for a majority of the contracts we tested. The state constitution generally requires that services conducted on behalf of state government be performed by civil service employees, although state law does provide specific exemptions that agencies can use to bypass this requirement appropriately. For each contract that requires General Services’ approval—generally most services contracts for more than $50,000—state regulations require agencies to submit a written justification to General Services that includes specific and detailed information demonstrating how the contract meets one or more of the exemptions from civil service requirements. The CPUC sent 40 of the 60 contracts we reviewed to General Services for approval, but more than half—23 of these contracts—did not contain specific and detailed information to support the civil service exemption the CPUC claimed. When we asked why the CPUC was not adequately supporting the civil service exemptions, the chief of the management services branch (management services branch chief), who oversees the contracts office, stated that the CPUC has never had any issue with General Services’ approving the contracts because of inadequately supported civil service exemptions; therefore, she did not believe its exemptions were unsupported.
Nonetheless, for 12 of the 23 contracts, the only information the CPUC included to support its exemptions was text taken verbatim from state law without additional explanations to support its claims to the exemptions for those specific contracts. This citation of state law is clearly not the type of detailed information the regulation requires. In the remaining 11 cases, the CPUC provided explanations that went beyond merely quoting state law, but the content still fell short of specific and detailed justifications. Further, we note that the requirement to include specific and detailed factual information is a requirement that state regulations place on the contracting agency, not on General Services. We expected the CPUC to be aware of and meet this requirement independent of whether General Services eventually approved its contracts.
In addition, we believe that it is reasonable to expect the CPUC to sufficiently justify its need to contract outside the civil service regardless of whether the contract requires General Services’ approval. We reviewed the remaining 20 contracts that did not require such approval and found that the CPUC did not adequately support the civil service exemption for 13 of those contracts. In each of these cases, the CPUC could not demonstrate that it was complying with state law because it did not prepare detailed and specific information for its decision to contract for the service. Fully supported civil service exemptions serve as evidence that the CPUC considered whether it needed to contract for services. When it does not fully document its rationale when contracting for outside assistance, the CPUC leaves itself open to challenges that its contracts are not necessary and that the State may incur unwarranted costs as a result.
Market Surveys
Testimony by California Public Utilities Commission at an August 2015 Legislative Hearing
“. . . the CPUC, as part of its internal business process, requires the project manager that requests the contract to conduct some level of market analysis—we call it a market survey—of potential vendors in order to assure ourselves that the rates for the requested services are fair for the ratepayers to pay.” (Emphasis added.)
Source: Testimony by the former deputy executive director of administrative services for the CPUC at an August 17, 2015, Assembly Utilities and Commerce committee hearing.
The CPUC did not consistently conduct market research to ensure that it obtained the best value when contracts it issued were exempt from competitive bidding requirements. The CPUC contracting manual requires its staff to conduct a market survey for some exempt contracts to help the CPUC choose the most qualified contractor for the service. As shown in the text box, the CPUC highlighted this policy in a legislative hearing in August 2015. However, Figure 4 shows that for nearly 70 percent of the contracts we reviewed that required such a survey, the CPUC could not provide documentation that a market survey took place or that it conducted a complete survey by contacting the minimum number of potential contractors its contracting manual requires. For example, in one $75,000 contract for expert witness services, contract documents state that the contractor was selected because he was known by CPUC staff members and because he offered to provide his services at a reduced rate. According to the former deputy executive director of administrative services (deputy director), the CPUC is not legally required to conduct a market survey for exempt contracts. However, since 2007 the CPUC has had a policy requiring market surveys, including in cases where the CPUC was seeking expert witness services. Without conducting market research, the CPUC cannot ensure that it is obtaining the best value for services it acquires outside of competitive bidding.
Figure 4
Percentage of Contracts for Which the California Public Utilities Commission Required but Did Not Perform a Market Survey to Assess Best Value
Source: California State Auditor’s analysis of selected CPUC contract files and the CPUC’s Policies and Procedures Manual: Personal Services Consultant Contracts.
We identified another instance in which the CPUC did not conduct a market survey and in which it has continued to rely on that selected contractor for years without knowing whether the State is truly receiving the best value. In June 2009, the CPUC entered into a contract to obtain legal advice and counsel for various bankruptcy and bond securitization questions. Although legal services contracts are exempt from competitive bidding requirements, the CPUC requires its staff to conduct a market survey before it awards a legal services contract. However, the CPUC did not document that it conducted a market survey for this contract. Therefore, it is unable to demonstrate how it knew that it obtained the best value for these services. Further, as of August 2016, the CPUC continued to use the same contractor’s services under the same contract. Therefore, for more than seven years, the CPUC has used the same contractor without originally establishing that the contractor offered the best value for the service. When we asked why the CPUC did not conduct a market survey for this contract, the former project manager stated that the contractor already had a positive working relationship with the CPUC and was very experienced with bankruptcy proceedings and bond financing issues.
Funds Added to Contracts
The CPUC did not always clearly document why it needed to add funds to some of its contracts. For the contracts we reviewed, the CPUC amended 24 of them to add funding without changing the scope of work for the contracts. To follow best practices, the CPUC should have explained the rationale for adding funds to contracts when the scope of work for those contracts had not changed. However, in 12 of these cases, we did not find adequate explanations within the contract documents to describe why additional funding was necessary. These cases included five contracts with amendments that more than doubled the original contract value. The CPUC did not document why it needed a total of about $2.4 million in additional funding for these 12 contracts. According to the management services branch chief, the contracts office staff was not consistently ensuring that the amendments contained sufficient explanations for why the amendments were necessary.
One of these 12 contracts was an agreement for legal representation that the CPUC amended to add $460,000 in unsupported additional funding. In March 2010, the CPUC entered into a $500,000 agreement for representation in employment‑related litigation. In January 2013, the CPUC added another $200,000 to this contract. A contract request document in the CPUC’s contract file indicates the reason the funds were necessary was that the CPUC had expected that the employment case would settle, but the case instead went to trial. However, four months later, the CPUC amended this contract again to add another $460,000 to the contract value. The CPUC provided no explanation in contract documents it sent to General Services for why these additional funds were necessary, and its contract request document merely repeated the statement from the previous amendment about the case going to trial.
In addition to these 12 cases, we noted another contract the CPUC amended without initially providing an adequate explanation for why it needed $5.1 million in additional funding. In November 2014, the CPUC entered into a $49,000 contract for legal representation. The scope of this contract stated that the contractor would represent the CPUC in all criminal, civil, and administrative proceedings and investigations undertaken by any federal, state, or local agency involving any allegations of inappropriate interactions by CPUC personnel with any utility from 2009 through 2014. According to the project manager at the time it entered into this contract, the CPUC anticipated that the contract would require additional funding, but it needed immediate assistance in responding to investigations. Therefore, by entering into a contract for $49,000, the CPUC was able to obtain legal services without waiting for General Services’ approval. As explained in the Introduction, contracts for legal services do not require competitive bidding regardless of dollar value, and contracts valued at $50,000 or less do not need General Services’ approval.
However, within five months of entering into this $49,000 contract, the CPUC amended the contract to extend the contract’s term by one year and to add $5.1 million in funds. The CPUC sent the contract amendment to General Services for approval, but the contract documents that it submitted to General Services did not explain the need for additional funding. Instead, those contract documents repeated the exact scope of work contained in the original $49,000 contract. According to the attorney at General Services who reviews CPUC contracts, it was highly unusual to see a contract amendment raise the total value of the contract by this magnitude. After receiving additional information from the CPUC, General Services’ deputy director of legal services approved the amendment. That additional information for this contract included a separate letter from the CPUC project manager in which the CPUC explained that the contract amendment was necessary because the scope of investigations at the CPUC was expanding and the number of witnesses to be interviewed and the documents the CPUC needed to provide were growing. Further, the letter acknowledged that the original contract dollar amount was insufficient.
Although the letter that the CPUC’s project manager sent to General Services explains why the CPUC needed additional funding for this contract, the CPUC did not provide us with a copy of this letter when we discussed this contract. We obtained the letter by asking General Services for any additional documentation that the CPUC submitted to support the need for the additional funds. However, the information contained in the letter could have easily been included in the contract documents that the CPUC sent to General Services, and this inclusion would have eliminated the need to send subsequent additional information. As shown by this contract and the other 12 contracts for which we did not find adequate support for additional funds, the CPUC can improve in the area of explaining adequately its need for additional funds.
Changes to Contracts’ Scope of Work
The CPUC amended some of the contracts we reviewed to add activities that significantly differed from those in the contracts’ original scope of work. The CPUC’s initial determination that a particular vendor provided the best possible value was based on a specific service that the vendor could provide; therefore, we expected as a best practice, that any amendments to the scope of work for a contract would include additional work that was related closely to the contract’s original scope. We reviewed 14 contracts that the CPUC amended to add services and determined that three were amended to add services that were unrelated to the original scope of work. For example, the CPUC contracted with a vendor to provide training to its supervisory staff but later amended the contract to add additional training courses for other staff levels. The CPUC allocated about $34,000 to provide training for its supervisory staff and added about $193,600 for the additional training courses. According to the project manager for this contract, the contract was amended because of the contractor’s expertise and the quality of training courses as well as staff satisfaction with the contractor’s initial performance. However, the training courses the CPUC added, which included a course on strategy for analyzing data and research methods, differed from the basic supervision course it originally solicited. Therefore, the CPUC did not justify that the contractor it chose for the supervision training still represented the best choice for providing the additional training courses.
In another example, the CPUC entered into a contract for legal representation to defend itself against a lawsuit related to its compliance with the California Public Records Act (Public Records Act). After it settled the lawsuit, the CPUC amended this contract so that the contractor could assist the CPUC in responding to Public Records Act requests. To obtain legal representation, the CPUC allocated $99,000 and then added approximately $1 million to the contract for responding to Public Records Act requests. According to the former project manager for this contract, this contractor was the best choice for the additional service because the contractor had experience with Public Records Act requests and was familiar with CPUC staff. However, responding to Public Records Act requests and providing defense in a court proceeding are two significantly different services. The factors an agency should consider when choosing a contractor likely vary based on the type of service it needs. For example, when contracting for legal representation in civil litigation, the CPUC might want someone with experience in similar court cases, which would not be a necessary prerequisite for responding to Public Records Act requests. Because it did not conduct a new procurement for these services, the CPUC cannot demonstrate that the contractor it selected for the original contract represents the best value for responding to Public Records Act requests.
According to the management services branch chief, contract analysts were not monitoring whether contract amendments related to the original scope of work. However, such monitoring is crucial to ensuring that the CPUC obtains the best value for new services it contracts to obtain. Moreover, the CPUC contracting manual does not provide guidance regarding contract amendments. It is important that the CPUC provide such guidance to its project managers and contract analysts so that they can implement prudent business practices when contracting for services.
Monitoring and Evaluating Contractors’ Performance
Despite a requirement in the State Contracting Manual, the CPUC has not been consistently monitoring the progress of its contractors’ performance. The manual states that a contract manager’s responsibilities typically include monitoring the progress of contracted work to ensure that services are performed according to the quality, quantity, objectives, time frames, and manner specified in the contract and ensuring that all work is completed and accepted before the contract expires. To monitor the progress of work, the CPUC requires project managers to complete an invoice review form before issuing a payment to the contractor. To verify that the project managers completed invoice review forms, we first checked the contract files. In instances where the contract files did not contain any completed invoice review forms, we searched records maintained by the CPUC fiscal unit. At the fiscal unit, we selected up to five payments per contract and determined whether the CPUC completed invoice review forms. However, for nearly one‑third—19 of the 60 contracts we reviewed—we were unable to find invoice review forms in either the contract file or in the records kept by the CPUC fiscal unit. As a result, the CPUC cannot demonstrate that its contract or fiscal offices were aware of whether project managers were monitoring the progress of work or ensuring that the services met the quality and needs specified in these contracts. It is critical that the contract and fiscal offices, as the two offices responsible for ensuring that invoices are correct before issuing payment, are aware of whether project managers are adequately monitoring contractor performance. Without this knowledge, the CPUC risks paying a contractor for services that it did not perform or that did not meet minimum standards.
Further, we identified three instances in which the CPUC completed invoice review forms but the contractors appeared to be working beyond the scope or dollar limit of the contract. The CPUC subsequently amended these contracts to account for work that had already been performed. For example, for one of these contracts, a contractor submitted an invoice for about $88,600 more than the balance of funding remaining on the contract. When the CPUC received the invoice, the project manager advised the assigned contract analyst to postpone its processing until the CPUC could amend the contract to cover these additional charges. According to that project manager, the contractor had completed work at the request of another staff member at the CPUC without the project manager’s knowledge, and this new work, although within the scope of the original contract, was not accounted for in the contract budget. In all three of these cases, although the project managers completed the invoice review forms, the project managers did not appear to have been actively monitoring the contracts. The CPUC’s practice of allowing contractors to perform additional work before approving contract amendments places it at greater risk for disputes with contractors over payment or delivery of work products.
In addition to not monitoring the progress of work during the contract term, the CPUC also has not evaluated contractor performance at the end of a contract. State law requires that agencies complete contractor evaluations at the expiration of all consultant services contracts of $5,000 or more. However, the CPUC did not conduct these evaluations for any of the 38 contracts from our selection that were valued at $5,000 or more and that were completed at the time of our review in April 2016. The management services branch chief confirmed that project managers were not completing the contractor evaluations at the end of contracts; she explained that the contracts office is understaffed and that its contract analysts do not have time to ensure that project managers are completing this task. Nevertheless, if the CPUC is not evaluating contractor performance at the end of a contract, it cannot determine whether it received the quality of work that it expected and may unknowingly enter into subsequent contracts with poorly performing vendors.
However, the CPUC may find it difficult to monitor contractor performance without improving the level of detail in its contracts. Although the State Contracting Manual requires consultant services contracts of $5,000 or more to contain detailed performance criteria and a schedule of performance, nine of the 56 applicable contracts we reviewed did not contain such detailed criteria. For example, in one case we reviewed, the CPUC entered into a contract with some portions of the scope of work written in an open‑ended format that allowed the contractor to perform special projects for the CPUC as needed. It is unclear how the CPUC would be able to monitor the contractor’s performance and progress in fulfilling his duties in these contract areas. In addition, we found that 17 of the contracts we reviewed did not contain a schedule of performance.4 For example, one contract to provide training services did not contain a description of the period when the CPUC wanted the training to occur. Without providing a timeline for provision of the services, the CPUC could find it difficult to hold the contractor accountable for meeting the CPUC’s needs in a timely manner.
Lax Control Environment
We observed a few key deficiencies indicative of a lax control environment over CPUC contracting activity, and that lax control environment likely contributed to many of the issues we noted with CPUC service contracts. One of these deficiencies is the outdated contracting manual, which was last updated in 2007. We compared the CPUC manual to state contracting requirements and found that it does not provide staff with any guidance about contract amendments and does not include direction about a specific conflict‑of‑interest rule from the State Contracting Manual. Specifically, the CPUC manual does not specify that a consultant under contract should not be awarded any subsequent contract that the consultant recommends in its previous consulting contract. According to the management services branch chief, contract analysts do not consult the manual for guidance because it is outdated. She also said that the task of updating the contracting manual is time‑consuming, and staff has prioritized processing contracts and amendments over spending time on the manual. However, she stated that the staff is currently working on revising the manual and is expected to complete it in December 2016. Having an up‑to‑date contracting manual that describes CPUC contracting policies and procedures will provide staff with the needed guidance to properly process contracts that comply with state requirements and best practices.
Furthermore, the contracts office manager (manager) has not been reviewing contracts before they are sent for signature. According to the management services branch chief, in 2011 the manager no longer reviewed contracts before the contract analysts sent them for executive director approval. She stated that the manager’s review was officially discontinued when a former deputy director instructed the office that the manager should stop conducting this review. When we spoke with the deputy director who succeeded the deputy director who ordered the manager’s review discontinued, she informed us that although there was no longer any formal review of the contracts before they were sent to her for approval, she believed that it was adequate that the contract analysts worked together with the manager when they faced more complicated tasks. Although the manager and contract analysts may be working together on a case‑by‑case basis when dealing with difficult contracts, formalizing a review of all contracts would be beneficial to the CPUC because—based on the variety of issues we found—it is clear that the contract analysts’ work alone does not ensure that the CPUC complies with state requirements and best practices. Additionally, when we asked the management services branch chief about many of the deficiencies we identified, her response was that staff was simply not performing work that would prevent the problems we identified. Nonetheless, we expected the supervisory personnel at the CPUC to be actively overseeing the work its staff performs and thus preventing the frequency of the issues we found.
Another deficiency that contributes to the lax control environment at the CPUC is the lack of training for contract analysts and project managers. According to the management services branch chief, contract analysts are certified by General Services at the intermediate level in contract procurement, which is the highest level of procurement training that General Services offers. However, the management services branch chief stated that the contract analysts have not attended trainings routinely to refresh their knowledge because the staff’s priority is to process contracts and amendments. Although she hopes to establish a policy for routine training, she believes that the workload of the contract analysts does not provide time to attend trainings. Also, she and the project managers we spoke with confirmed that project managers do not receive formal training on their contract‑related responsibilities. Specifically, the management services branch chief stated that the project managers do not receive such training because the contracts office does not have the staff to provide it. We also noted that the CPUC does not have any parameters limiting the number of project managers assigned within divisions. Establishing a maximum number of project managers could help the CPUC ensure that it trains all project managers, particularly when individuals are newly appointed to do that work. Because training is an essential part of ensuring that staff members are equipped to perform well at their jobs, it is important for the CPUC to provide regular training to those who oversee contracts. Without this training, contract analysts may not be consistent in conducting their reviews, and project managers may be unaware of their duties to conduct market surveys or to monitor contractor performance.
Sole‑Source Contracts
Most of the CPUC sole‑source contracts we reviewed—13 out of 15—complied with key criteria related to sole‑source contracting. For the first of the two noncompliant contracts, the CPUC did not follow the State Contracting Manual requirements for amending such contracts. The manual requires agencies to obtain new sole‑source contract approval from General Services when they amend sole‑source contracts to expand beyond the originally approved amount, term, and scope of work. In February 2013, the CPUC amended a sole‑source contract for court reporting services and increased the contract funding by $12,000 but did not seek new sole‑source approval from General Services to add this funding. Because it added funding that was not included under the original approval, the CPUC should have obtained General Services’ approval to use sole source as the method for obtaining the additional services. This was the only sole‑source contract we reviewed that the CPUC amended to add additional funding.
For the second contract, which was related to the first, the CPUC did not plan effectively to avoid sole‑source contracting. One month before the contract for court reporting services was set to expire, the CPUC entered into a new sole‑source contract with the same vendor for the same services. In the request for sole‑source approval that the CPUC submitted to General Services, it stated that it had planned to solicit bids for these services but was requesting a sole‑source contract because time and staff availability were constrained. Although General Services gave the CPUC authority to procure these services through a sole‑source contract, it is unclear why the CPUC did not solicit competitive bids for these services, given that these were services the CPUC had a predictable need to acquire and had at least one year’s notice that it would need to execute a new contract. The CPUC’s chief hearing reporter stated that she was not involved with the contract, but because her unit is extremely busy, she can understand why her predecessor may not have had time to solicit bids. She explained that her unit has not received much guidance on the contracting process. However, the chief hearing reporter agreed that the CPUC knew in advance that the services were needed and could have solicited bids for the services during a less busy period. She stated that she anticipates using a bid process when the CPUC contracts for these services in the future.
Attorney General Approval
To enhance the overall efficiency and economy of state government, state law generally requires agencies to employ the Office of the Attorney General (Attorney General) as legal counsel or to obtain the Attorney General’s written consent to employ other legal counsel. However, the CPUC has not consistently contacted the Attorney General before it has contracted for outside legal assistance. Of the 12 legal services contracts we reviewed, only one documented that the CPUC had requested assistance from the Attorney General. In this case, the Attorney General declined to represent the CPUC because of a potential conflict of interest, and the CPUC therefore contracted for the service. In the other 11 cases in which the CPUC did not contact the Attorney General, the CPUC may have obtained legal services that the Attorney General could have provided at a lesser cost.
The CPUC did not contact the Attorney General in most cases we reviewed because it believes that state law exempts it from the requirement to use the Attorney General. An assistant general counsel at the CPUC claimed that the CPUC has often asked the Attorney General to represent it in matters that involve expertise and resources that the CPUC does not possess; however, this did not appear to be the case among the contracts we reviewed. In addition, the assistant general counsel explained that the CPUC believes that state law, specifically section 11041 of the Government Code, exempts it from having to use the Attorney General for all legal needs. This section of law does list selected agencies, including the CPUC, and states that they are exempt from the requirement to employ the Attorney General as legal counsel.
However, section 632 of the Public Utilities Code states that the requirement to use the Attorney General applies to the CPUC for consultant or advisory services contracts, which include contracts for legal services, except when the CPUC makes a finding that extraordinary circumstances justify expedited contracting. In response to our questions about these two statutes, the general counsel at the CPUC stated that the CPUC believes that section 11041 of the Government Code clearly exempts the CPUC from obtaining legal services from the Attorney General. However, after reviewing the legislative history of section 632 of the Public Utilities Code, including legislative committee analyses, we concluded that the Legislature intended to limit the CPUC’s exemption from using the Attorney General in cases where the CPUC decides to contract for legal services. Further, the general counsel stated that Public Utilities Code section 307 gives the CPUC the authority to represent the people of California in all matters relating to the Public Utilities Code and to any act or order of the CPUC. Although we acknowledge the authority that state law grants the CPUC under this additional section, we believe section 632 requires the CPUC to use the Attorney General or obtain its written consent before contracting for legal services without making a finding that extraordinary circumstances exist. To ensure the CPUC acts as the Legislature intends, a change to state law is needed.
Recommendations
Legislature
The Legislature should amend Public Utilities Code section 632 to clarify that its provisions related to the Attorney General apply to the CPUC regardless of Government Code section 11041 and Public Utilities Code section 307.
CPUC
To ensure that its contracting practices align with state requirements and best practices, the CPUC should take the following actions:
- Update, distribute, and follow its contracting procedures manual. The manual should identify specific responsibilities for both contracts office staff and project managers, and it should provide specific guidance about the processes the CPUC will employ to do the following:
- Fully justify civil service exemptions.
- Conduct market research for exempt contracts.
- Fully support the need for additional funding.
- Ensure that it does not change the scope of work too significantly from the original.
- Monitor contractor performance against criteria included in its contracts.
- Avoid sole‑source contracts when it is able to solicit competitive bids for services.
- Provide immediate refresher training to its contract analysts and contracts office manager, and establish a regular schedule of annual training for them to attend.
- Designate a limited number of project managers for each division at the CPUC, and provide those individuals with training on the CPUC’s processes related to contracting, including how to monitor progress of a contractor’s work.
- Implement a supervisory review by the contracts office manager of proposed contracts and contract amendments to occur before contracts and amendments go to vendors for signature.
Other Areas We Reviewed
To address the audit objectives that the Joint Legislative Audit Committee approved, we reviewed the subject areas shown in Table 4. In the table, we indicate the results of our review and any associated recommendations we made that are not discussed in other sections of this report.
Table 4
Other Areas Reviewed as Part of This Audit
| CPUC Response to Public Records Act Requests |
Recommendations |
| Tracking of Sole‑Source Contracts |
Recommendation |
| Contracts Below Competitive Bidding and Delegated Purchasing Authority Thresholds |
Recommendation |
| General Business Practices at the CPUC |
|
| Parties Disclosing Interests in Proceedings |
|
| Contracts That Utilities Proposed |
Recommendation |
| Contracts That the CPUC Directed Utilities to Enter Into |
|
| Conflicts of Interest Related to CPUC Contracts and Utilities’ Contracts |
Recommendations |
Sources: California State Auditor’s analysis of CPUC records and interviews with key CPUC staff members about the subject areas identified in the table.
Scope and Methodology
The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to review the CPUC’s contracting practices and procedures. Specifically, we were directed to review the practices related to the CPUC’s own contracts and the regulated utilities’ contracts that it directs or approves to determine how it ensures best value, meets competitive bidding requirements, avoids conflicts of interest, and monitors contractor performance. Table 5 lists the objectives that the Audit Committee approved and the methods used to address those objectives.
| Audit Objective | Method | |
|---|---|---|
| 1 | Review and evaluate the laws, rules, and regulations significant to the audit objectives. | Reviewed relevant laws, rules, regulations, CPUC decisions, and resolutions. |
| 2 | Determine the extent to which state contracting requirements, including those in state statute and the State Contracting Manual, apply to the CPUC. Note any areas in which the CPUC is exempt from state requirements, the reasons, and any time limits for the exemptions. |
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| 3 | Review the CPUC’s contracting policies, procedures, and practices to determine whether and how they ensure best value, address competitive bidding, avoid conflicts of interest, and ensure that deliverables and costs meet requirements. Note any ways these policies differ from state contracting requirements. |
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| 4 | For a selection of contracts for services, including but not limited to legal and other consulting services that the CPUC entered into or amended between 2010 and 2014, determine the following: |
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| a. Whether the CPUC solicited and awarded the contracts in accordance with applicable laws, rules, policies, and best practices, including those relating to contract approval, bidding, competition, justification for noncompetition, and cost/price reasonableness, and whether they contained appropriate requirements, such as detailed performance criteria and adequate controls for monitoring and ensuring contractor performance. |
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| b. Whether the CPUC complied with applicable contracting laws, rules, and policies intended to avoid conflicts of interest, such as the participation of outside contractors or other individuals with financial interests in the contract. |
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| c. Whether the CPUC awarded the contract for an amount beneath the competitive bidding threshold or within its delegated purchasing authority but then amended the contract to exceed the initially authorized amount. |
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| 5 | Determine the number of sole‑source contracts for services the CPUC entered into or amended between 2010 and 2014. For a selection of those sole‑source contracts, determine the following: |
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| a. Assess whether sole‑source contracts were sufficiently justified and complied with state law and contracting policies. Determine whether any of those sole‑source contracts were subsequently amended to increase their amount without any changes in scope, and whether such actions complied with state law and contracting policies. |
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| b. Determine whether the practice of including contractors as advocates in CPUC proceedings complies with state law and contracting policies, and whether it creates a conflict of interest or is in the best interest of ratepayers. |
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| c. To the extent possible, determine the number of times contractors have participated as advocates in CPUC proceedings and whether they had any influence on contract award decisions. |
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| 6 | Determine the extent, if any, to which private utility entities regulated by the CPUC are required to follow state requirements related to competitive bidding, avoiding conflicts of interest, and ensuring that contract deliverables and costs meet requirements. | Reviewed key sections of state law to determine whether the utilities regulated by the CPUC are required to follow any state contracting requirements related to competitive bidding, avoiding conflicts of interest, and ensuring that contract deliverables and costs meet requirements. |
| 7 | Identify any CPUC policies or procedures for overseeing the contracting processes of regulated utility entities. |
|
| 8 | To the extent possible, determine how many contracts the CPUC directed regulated utility entities to enter into with other companies between 2010 and 2014. For a selection of those contracts, to the extent possible, determine the following: | The CPUC did not track the contracts it ordered the energy utilities—Pacific Gas and Electric, San Diego Gas and Electric, Southern California Edison, and Southern California Gas—to enter into in a manner that was cost‑effective for us to review. Therefore, we asked the energy utilities for a listing of the contracts that the CPUC directed them to enter into from 2010 through 2015 and the related CPUC decisions or resolutions that directed the contracts. We reviewed the responses from the energy utilities, verified their accuracy, and identified additional contracts after following up with the utilities and with CPUC staff. We determined that the CPUC directed the utilities to enter into 25 contracts during our audit period. We selected 18 contracts for further review. |
| a. Whether the contracts were paid from ratepayer funds. | Reviewed the CPUC decisions or resolutions that directed the 18 contracts we selected to determine whether the CPUC authorized the utilities to use ratepayer funds for these contracts. | |
| b. Whether the CPUC ensured that the contracts complied with applicable requirements related to competitive bidding, avoiding conflicts of interest, and ensuring that the contract deliverables and costs meet requirements. |
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| 9 | Determine how many sole‑source contracts proposed by regulated entities the CPUC approved between 2010 and 2014. For a selection of those contracts, determine the following: | The CPUC did not comprehensively track the sole‑source contracts that the energy utilities requested that the CPUC approve. Therefore, we asked the energy utilities for a listing of the sole‑source contracts that they proposed and the CPUC approved from 2010 through 2015 and the related CPUC decision or resolution that approved each contract. We reviewed the responses from the energy utilities, verified their accuracy, and selected 20 sole‑source contracts for further review. We focused our review on sole‑source contracts that the utilities proposed and that the CPUC approved as discrete contracts. We did not include in our review any contracts that were a component of a larger program the utilities proposed, such as an energy efficiency program. |
| a. Whether the contract complied with applicable requirements for sole‑source contracts. |
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| b. Whether the contracts complied with applicable requirements or best practices related to achieving best value, avoiding conflicts of interest, and ensuring that the contract deliverables and costs meet requirements. |
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| 10 | Identify any CPUC policies and procedures for responding to requests for public records regarding its contracts and contracts between regulated entities and other parties and determine the following: | Reviewed CPUC policies and procedures related to record requests. |
| a. Whether the CPUC’s policies and procedures for responding to these requests are consistent with state law. |
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| b. To the extent possible, determine whether the CPUC complies with its policies and state law when receiving requests for public documents related to contracts and contract deliverables. |
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| 11 | Review and assess any other issues that are significant to the audit. |
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Sources: California State Auditor's analysis of Joint Legislative Audit Committee audit request number 2016-104 as well as information and documentation identified in the column titled Method.
Assessment of Data Reliability
The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of the computer‑processed information that we use to materially support our findings, conclusions, or recommendations. In performing this audit, we obtained contract data from the CPUC’s Microsoft Dynamics Customer Relationship Management system (contract database) to determine the number of sole‑source contracts that the CPUC entered into or amended from 2010 through 2015 and to make a selection of sole‑source contracts and contracts that were not sole‑source that the CPUC entered into or amended in the same period. We performed data‑set verification procedures and electronic testing of key data elements and did not identify any significant issues. However, as discussed in greater detail in the Other Areas We Reviewed section of this report, the CPUC’s contract database does not identify the type of procurement method used for a contract, such as sole‑source. Because we were only able to use the data to make a selection of active CPUC contracts from 2010 through 2015, a data reliability assessment was not required. Instead, we needed to gain assurance that the population was complete.
We also used data from the CPUC’s Legal Information Request database to select requests for public documents related to contracts and contract deliverables from 2012 through 2015. Because we were only using the data to make a selection of requests, a data reliability assessment was not required. Instead, we needed to gain assurance that the population was complete.
We previously audited the CPUC and found pervasive weaknesses in the general controls it has implemented over its information systems. We noted in a report we issued in April 2015 that although the CPUC had certified to the California Department of Technology that it complied with all policy requirements in Chapter 5300 of the State Administrative Manual (security standards), we found that key information security documents were nonexistent or lacked critical components.5 Specifically, the CPUC had yet to inventory all of its information assets, assess the risk to those assets, and develop an information security plan for mitigating those risks. Further, we reported that the CPUC did not have an incident response plan to ensure its timely response to and recovery from information security incidents such as malicious cyberattacks. Finally, although the CPUC had a current technology recovery plan, we questioned the plan’s usefulness because it failed to consistently identify critical applications, establish acceptable outage time frames for these applications, and develop strategies for recovery. We concluded that the CPUC had poor general controls over its information systems, compromising the confidentiality, integrity, and availability of the information systems it uses to perform its day‑to‑day operations.
To rectify these control weaknesses, we recommended that the CPUC ensure compliance with all security standards no later than April 2016. When we initially followed up with the CPUC in April 2016 about the status of its general controls, it asserted that it had made progress toward implementing our recommendation and estimated that it would achieve full compliance with all security standards by the end of May 2016. When we again followed up with the CPUC to verify its compliance status, we expected, at a minimum, that it would have achieved full compliance with nearly all of the security standards. However, we found that the CPUC significantly overstated its progress toward addressing our recommendation. Although it submitted copies of various information security documents for our review, it was substantially out of compliance with the majority of the security standards. When we questioned the CPUC about the disconnect between its asserted level of compliance and its actual level of compliance, it explained that it did not fully understand the depth of the security standards when it provided the April 2016 status update. However, the CPUC explained that as a result of our follow‑up work, it now believes it has a much clearer understanding of the requirements. The CPUC also cited limited staff resources as a barrier to its ability to achieve full compliance with the security standards. According to the CPUC, it recently received authorization to hire two more individuals for its information security team. As of August 2016, the CPUC asserted that it was actively trying to fill these two positions.
Nonetheless, the CPUC estimates it will not achieve full compliance with the security standards until December 2019. Until the CPUC improves the controls it has implemented over its information systems, the confidentiality, integrity, and availability of its information systems will continue to be at risk. Although we determined there is an unacceptably high risk that the population of contracts and the population of requests for public documents related to contracts and contract deliverables were not complete, there was sufficient evidence in total to support our audit findings, conclusions, and recommendations.
We conducted this audit under the authority vested in the California State Auditor by section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
State Auditor
Date: September 22, 2016
Staff:
Linus Li, CPA, CIA, Audit Principal
Bob Harris, MPP
Brian D. Boone, CIA, CFE
Nisha Chandra
Jessica Derebenskiy
Derek J. Sinutko, PhD
IT Audit Support:
Michelle J. Baur, CISA, Audit Principal
Lindsay M. Harris, MBA, CISA
Sarah Rachael Black, MBA, ACDA
Sean M. Harrison
Legal Counsel:
Joseph L. Porche, Staff Counsel
For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255.
Footnotes
4 In reviewing the 56 consultant services contracts of $5,000 or more, we determined that it was reasonable that 13 of the contracts did not contain schedules of performance because the nature of the services provided under these contracts, such as representation in pending litigation, made it difficult to establish set schedules of performance. Go back to text
5 The April 2015 report is titled California Public Utilities Commission: It Needs to Improve the Quality of Its Consumer Complaint Data and the Controls Over Its Information Systems, Report 2014‑120. Go back to text