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California Public Utilities Commission

Internal Audit Unit

Energy Savings Assistance (ESA) Program

October 2017

STATE OF CALIFORNIA EDMUND G. BROWN JR., Governor

PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE

SAN FRANCISCO, CA 94102-3298

October 11, 2017

Finance and Administration Committee

California Public Utilities Commission

505 Van Ness Avenue

San Francisco, CA 94102

Final Audit Report – CPUC Internal Audit Unit (IAU) Report of the Energy Savings Assistance (ESA)

Program

Dear President Picker:

The Internal Audit Unit has completed its review of the CPUC’s ESA Program as of June, 2016. This

report represents the IAU’s findings regarding risks and controls associated with the CPUC staff’s

management and oversight of this energy efficiency program.

We wish to credit the full assistance and cooperation of the Energy Division staff assigned to this

important program. They agreed with our findings and their responses are included in the audit report.

We appreciate their willingness to incorporate our recommendations to improve the effectiveness of

staff’s management and oversight of the program, as well as increase overall transparency of its finances.

This audit report is for the information and use of you and your colleagues on the Commission. If you

have any questions regarding this report, please feel free to contact me at 415-703-1823 or

[email protected].

Sincerely,

Carl Danner

Carl Danner

Chief Internal Auditor, California Public Utilities Commission

Enclosure

cc: Commissioners

Timothy J. Sullivan, Executive Director

Arocles Aguilar, General Counsel

Maryam Ebke, Deputy Executive Director

Barbara Owens, Risk and Compliance Officer

mailto:[email protected]

CPUC Internal Audit Unit • Energy Savings Assistance (ESA) Program

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TABLE OF CONTENTS

EXECUTIVE SUMMARY .............................................................................................................. II Introduction .................................................................................................................................................... ii Background and Criteria ............................................................................................................................. ii Objectives ....................................................................................................................................................... ii Methodology.................................................................................................................................................. iii Results .............................................................................................................................................................. iii Conclusion / Next Steps ............................................................................................................................... iii

INTRODUCTION ......................................................................................................................... 1 Audit Objective ............................................................................................................................................. 1 Qualifications/Limitations ............................................................................................................................. 2 Detailed Audit Results ................................................................................................................................... 2 Program Areas Considered ......................................................................................................................... 2

INTERNAL AUDIT FINDINGS ....................................................................................................... 4 SUMMARY EVALUATION ................................................................................................................................ 4 FINDING No. 1 – Verification of ESA Program Finances and PPP Surcharge Expenditures ............. 5 FINDING No. 2 - Lack of Regular Financial and Compliance Audits (PU Code §900)..................... 5 FINDING No. 3 - Limited Review of LIEE and ESA Program -Specific Balancing Accounts ............. 6 FINDING No. 4 – Verification of IOU's Fraud Prevention Controls ......................................................... 7 ADDITIONAL ISSUE – Significant Unspent and/or Underspent ESA Program Fund Balances ........... 9

MANAGEMENT RESPONSE TO THE IAU’S ESA PROGRAM AUDIT .......................................... 10 Internal Memo from Ed Randolph - dated May 5, 2017 ...................................................................... 10

APPENDIX A .......................................................................................................................... A-1 Description of the ESA Program .............................................................................................................. A-1

Background and History of ESA Program ............................................................................................. A-2 Program Enrollment and Funding.......................................................................................................... A-3 Energy Savings and Compliance with PU Code § 382(e) .................................................................. A-3 Energy Division Management and Oversight ...................................................................................... A-4 Low Income Oversight Board (LIOB) ..................................................................................................... A-4

Final – October 2017


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EXECUTIVE SUMMARY

Introduction

This following report presents the conclusions of the Internal Audit Unit’s (IAU) review of the

Energy Savings Assistance (ESA) Program previously known as and referred to as the Low Income

Energy Efficiency (LIEE) program. It is a program that provides no-cost weatherization services to

low-income households that meet certain income guidelines. A detailed description of the ESA

Program is included in Appendix A. ESA is one of a number of public purpose programs funded

by a rate surcharge applicable to all customers. The day-to-day operations of the ESA Program

are managed by the investor-owned utilities (IOUs) themselves; the Commission does not

manage the finances of the program directly. The Commission and its staff maintain primarily an

oversight and policymaking role, approving program attributes and budgets typically on a

three-year cycle. It was the intent of the IAU to evaluate the CPUC staff’s management of the

program, identify any risks that currently exist regarding compliance with the Public Utilities Code

and supporting decisions, and evaluate the effectiveness of control measures to mitigate these

risks. Where significant residual risks were determined to be present in the procedural operations

of the program, additional control measures are recommended below.

Background and Criteria

California Public Utility Code Sections 382(e), 386(a)(3), 900, 2790, and the California Energy

Efficiency Strategic Plan (CAEESP) generally require that the CPUC’s low income energy

efficiency program cost effectively produce energy savings while providing an improved quality

of life for low income customers. The CPUC is directed to ensure that all eligible low income

customers are given the opportunity to participate by in the ESA Program by the year 2020 and

that the ESA Program will be an energy resource by delivering increasingly cost-effective and

longer-term energy savings. Additionally, PU Code Section 900 allows the Commission to

conduct compliance and financial audits of IOU programs to ensure compliance with

Commission orders relating to the implementation of PU Code Section 2790. The IAU also

recognizes that best practice criteria require solid internal controls over management of the ESA

Program and the use of the Public Purpose Program funds. In addition, there should be regular

and pertinent review of the ESA Program finances, with supporting documentation, and regular

oversight and fund balance reconciliation.

Objectives

The overall objectives of this audit included the following:

Verify compliance with relevant codes, regulations, and CPUC decisions;

Establish if existing processes and controls are adequate to assure that program

cost and revenue figures provide an accurate basis for ratemaking purposes, and

for reports and disclosures about the program;

Determine if the program is being managed in an effective and cost-efficient

manner that reasonably addresses areas of program risks, including the use of

best practices where appropriate (including those outlined in the State

Administrative Manual (SAM) and other commonly accepted management and

accounting practices).



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Methodology

The methodology included a review of applicable laws, CPUC decisions, and reports; research

interviews; process flow mapping; and a walkthrough and testing exercises. The Energy Division

– Residential Demand Program Section (ED-RDPS) staff (client) responded to data requests, and

follow-up discussions were conducted. We are pleased to credit the full cooperation of

management with this audit.

Results

In general, we find that the longstanding low-income home weatherization and energy

efficiency (ESA) program is functioning as required according to the established criteria, with a

moderate to low level of risk. Based on our review of program materials, interviews with ED-RDPS

staff, as well as an assessment of the legal requirements for the program (PU Code §§382(e),

386(a)(3), 900, 2790, California Energy Efficiency Strategic Plan) and a review of its general

control environment, we conclude with an overall positive finding regarding the program, with

the exception of the specific items identified in this audit report.

For each of the findings below, the IAU concludes that the application of certain additional

controls would help the program function more effectively and reduce related risks to the CPUC.

Each of these findings is identified in the following table (Table ES-1), and described in detail in

this audit report. While we believe that these recommendations will help the CPUC perform

better with regard to its statutory obligations, in our view none of the findings rise to the level of

non-compliance with any law or rule to which the program is subject.

Conclusion / Next Steps

While it is the conclusion of the IAU that the ED-RDPS appropriately manages the ESA program

within the existing regulatory framework and resource allocation, we also note that with some

minor changes to the control structure the program could function more effectively and present

less risk to the CPUC and ratepayers of California.

Table ES-1 Summary of Internal Audit Findings – ESA Program

FINDING

NO. FINDING TITLE SUMMARY OF ISSUE

ADD’L

CONTROLS?

1. Verification of ESA Program Finances

and PPP Surcharge

Recommend evaluation of IOU

internal controls regarding ESA

Program financial information and

ratepayer supported PPP

expenditures, possible additional

controls based on evaluation

Yes

2. Lack of Regular Financial and

Compliance Audits (P.U. Code § 900)

Last financial and compliance audit of

ESA Program was conducted in 2011;

more regular oversight recommended

Yes

3. Limited Review of the IOU’s ESA

Program Balancing Accounts

More frequent review of ESA Program

balancing accounts would reduce risk

of inefficient use of ratepayer funds

Yes

4. Verification of IOU’s Fraud Prevention

Controls

Program management would benefit

from a better understanding of IOU’s

fraud risks and controls

Yes



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INTRODUCTION

The The purpose of this internal audit was to review and evaluate the CPUC staff’s internal

management and oversight of the Energy Savings Assistance (ESA) Program. In general terms,

the ESA program is a home weatherization and energy efficiency program authorized by the

CPUC for qualifying low income participant households. Both the large investor owned utilities

(IOUs) and smaller multi-jurisdictional utilities (SMJUs) in California are required to maintain ESA or

similar programs to assist qualifying low income residents. The ESA Program is funded by utility

customers of all classes through a Public Purpose Program (PPP) charge on ratepayer energy

bills.

Although the CPUC itself does not actually manage the finances of the ESA Program (since fees

for the program are collected directly by each participating utility as a rate based subsidy), the

agency does review and approve the budget applications which are generally submitted every

three years by the utilities. Staff also submits data requests, analyzes legislative proposals,

reviews advice letter filings related to the program, and advises decision-makers on policy and

program implementation. The staff of the Energy Division – Residential Demand Programs

Section (ED-RDPS) is responsible for budgets, policies and overall administration of the ESA

program for the CPUC.

Disclosure

On February 13, 2017, the lead auditor on this project transferred to a new position within the

CPUC’s Energy Division, dealing with infrastructure permitting and environmental review under

the California Environmental Quality Act. This created a potential for conflict in that the staff

operations reviewed here occur in another section of the Energy Division. However, the

fieldwork and analysis for this audit were completed prior to February 13th, the auditor’s new

position does not report through the supervisor, program manager or deputy director overseeing

the ESA program, and the Chief Internal Auditor reviewed the analysis and work products and is

satisfied that they represent independent analysis. Nonetheless, we are including this note by

way of full disclosure.

Audit Objective

The objectives of this audit included the following:

Verify compliance with relevant codes, regulations, and CPUC decisions;

Establish if existing processes and controls are adequate to assure that program cost and

revenue figures provide an accurate basis for ratemaking purposes, and for reports and

disclosures about the program;

Determine if the program is being managed in an effective and cost-efficient manner that

reasonably addresses areas of program risks, including the use of best practices where

appropriate (including those outlined in the State Administrative Manual (SAM) and other

commonly accepted management and accounting practices).



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Qualifications/Limitations

The intent of this audit is to evaluate the internal risks and controls related to the CPUC staff’s

management of the ESA Program. The IAU has not conducted a financial audit of the ESA

Program, because the Commission itself does not actually handle the program’s finances. The

financial component has not been audited in a number of years, and our review led to

recommendations for financial review that are incorporated into this report – for the verification

of the IOUs’ self-reported ESA budget numbers; and for regular audit of utilities’ ESA balancing

accounts – pursuant to PU Code § 900 which authorizes compliance and financial audits of the

program. This verification would in essence comprise a financial audit of the program going

forward. In addition, the ED-RDPS has reported that the State Controller’s Office (SCO) is in the

process of conducting an audit of the 2013-2015 low income programs, including the ESA

Program. A regular cycle of reconciliation of these accounts would strengthen the credibility of

the CPUC’s oversight and provide added assurance for the best interests of ratepayers. Neither

did the IAU examine internal controls maintained by the utilities.

I. Research and fieldwork was completed during June-August, 2016 and represents

conditions found during that period. It should be noted that the majority of this audit was

completed prior to the recently approved Commission decision on the 2015-2017

CARE/ESA Programs (D.16-011-016), however the decision was reviewed by the IAU prior

to finalization of this audit.

Detailed Audit Results

Initially, the IAU reviewed background information and applicable legislative provisions and

CPUC decisions to identify the requirements of the program, subsequently translating these

requirements into the objectives and goals of the ESA Program. The second step in the audit

process was to identify the various procedural requirements of the program, and to identify the

risks associated with each of these processes. Next, the IAU categorized the risk level for each

process, in terms of the impact of the risk, and the apparent likelihood or velocity of the risk.

Once the risk levels were identified, available management controls were identified and

evaluated to determine their effectiveness. A walkthrough of each process was then

conducted, and control testing objectives were identified to determine the severity of the

observed risks. Findings resulted where compliance with statute or Commission decisions could

be improved, or where significant risks were identified which were not effectively controlled.

Program Areas Considered

Each of the California Public Utilities Code sections (PU Code) which directly apply to the

management and oversight of the ESA Program were identified, along with objectives and/or

procedural steps derived from these provisions. The applicable provisions include PU Code §§

382(e), 386(a)(3), 900 and 2790 and the California Energy Efficiency Strategic Plan.

In summary, the CPUC staff (referred to as “management” in the audit process) is required to

provide policy development, program implementation oversight, and evaluation support for the

ESA Program. They are also required to review and approve budget applications, typically

submitted every three years by IOU program administrators. In addition, management oversee

program administrators, oversee components of the measurement and evaluation work, submit



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data requests, review advice letters, analyze legislative proposals, and advise decision makers

on policy and program implementation. Table 1 summarizes the IAU’s assessment of the current

level of program consistency with each PU Code section, along with the related audit findings.

Table 1

Assessment of Program Consistency with Public Utilities Code Sections

Public Utility

Code Section (§) Summary

Program Consistency

Assessment

(Full, Partial, Non)

Related Audit

Finding No.

382 (e)

Provide all eligible customers the

opportunity to participate in ESA by

2020; ESA should result in long-term

reductions in consumption through

efficiency upgrades

Partial; Ongoing 2, 4

386 (a)(3)

Each IOU shall provide low or no-cost

energy efficiency measures to reduce

energy consumption

Full 2, 4

2790 (a) Weatherization program Full 3, 4

2790 (b) Types of measures Full 3, 4

2790 (c) Other measures Full 3, 4

2790 (d) Needs assessment Full 3, 4

2790 (e) Energy management Full 3, 4

900

Provide efficient and cost effective ESA

program; Conduct financial and

compliance audits to ensure consistency

Partial 1, 2, 3, 4

CA Energy

Efficiency

Strategic Plan

Similar to §382(e) requiring eligible

customers the opportunity to participate

by 2020, and that ESA is an energy

resource which delivers cost-effective,

long-term energy savings

Full 2, 4



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INTERNAL AUDIT FINDINGS

The following section presents our audit findings along with the supporting information on which

they are based. For each finding, the topic is identified, followed by the evaluation criteria used

as a review standard, the existing situation related to the ESA Program, why the criteria are not

being met, and the resulting risk. In addition, recommendations are provided to promote

compliance, strengthen controls, and/or mitigate associated risks.

SUMMARY EVALUATION

The IAU has determined that overall, the CPUC staff’s management of the ESA Program is in

compliance with the established criteria in statute (PU Code §§ 382(e), 386(a)(3), 900, 2790 and

the CA Energy Efficiency Strategic Plan) which state that the Commission shall cost effectively

produce energy savings while providing an improved quality of life for all eligible low-income

customers by 2020. The IAU’s review of a variety of program materials, interviews with ED-RDPS

staff, analysis of program documents, and assessment of the general control environment

provided evidence supporting this finding.

While a financial audit of the IOUs’ ESA programs has not been conducted for a number of

years, when last conducted in 2011 there were very few discrepancies identified. The ED-RDPS

staff functions effectively to oversee the ESA Program with limited resources and expanding

responsibilities. Although some risk areas were determined as part of this audit as discussed in

the findings below, no risk areas categorized as “very high” were identified by the IAU.

FINDING No. 1 – Verification of ESA Program Finances and PPP Surcharge

Expenditures

1-A Review Standard/Criteria - Compliance with P.U. Code §382(e), §386(a)(3), §900, §2790 and

the California Energy Efficiency Strategic Plan, which requires that the CPUC cost effectively

produce energy savings while providing an improved quality of life for the low income

ratepayers. The CPUC is directed to ensure that all eligible low income customers are given the

opportunity to participate by in the program by 2020 and that the ESA program will be an

energy resource by delivering increasingly cost-effective and longer-term energy savings.

Additionally, as mandated in PU Code §900, the Commission may conduct compliance and

financial audits to ensure compliance with Commission orders relating to the implementation of

programs related to PU Code § 2790.

Best Practice Criteria - requires solid internal controls over management of the ESA Program and

use of the Public Purpose Program funds. In addition, there should be regular and pertinent

review of the ESA Program finances, with supporting documentation, and regular oversight and

fund balance reconciliation.

1-B Conditions/Existing Situation - Specific to the IOUs’ ESA Program budgets, the participating

utilities self-report running totals and program reconciliations on a monthly and annual basis.

Each utility maintains its own program finances in multiple categories and accounts for each

component of the program. They conduct their own verification and perform proprietary

controls to minimize risk. We did not find any instances where the ED Residential Division staff

independently performed verification of IOU reported figures (such as random checks), or

attempted to verify the internal controls the utilities may maintain in this regard.



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It should be noted that two specific areas of ESA Program finances were considered in this audit.

The first is the ESA Program accounts, i.e., the various accounts maintained by the IOUs for each

aspect of the program. The second distinct account type is the ESA Balancing Accounts, which

are the accounts utilized by each IOU to account for differences between budget estimates

and actual PPP surcharge collections during a program year. The Balancing Account allows the

IOUs to ‘true up” these differences. The first type of account is discussed in this Finding, and the

second is discussed in Finding No. 3.

1-C Causes / Why criteria not met? – The verification or initiation of controls to assure the

accuracy of the utilities’ self-reported ESA Program budget account numbers was not identified

as a priority by the ED unit that administers the ESA and CARE programs (among other duties).

This is primarily due to, an expectation that the utilities report spending accurately, and an

assumption that other controls are present, including retrospective audits.

1-D Effects/Potential Risk - Without some form of regular control or assurance regarding the

accuracy of the self-reported ESA Program budget numbers, the CPUC and its staff are at risk of

errors in reported account numbers and/or inaccuracies in the level of public purpose program

funds collected by the utilities to support the program. Inaccurate ESA budget entries also

present a risk to the CPUC for competent full disclosure, such as in annual reports that address

the program.

1-E Recommendations and/or action plans (Cause focused, corrective, or recovery) Cause

focused recommendation - We recommend that Energy Division staff require each IOU to

provide a detailed explanation of its control measures aimed at reducing the risk of financial or

accounting errors as described above. Based on a review and assessment of the integrity of

those controls within the utilities, we recommend that ED staff further consider whether

additional controls are needed to maintain related risks at an acceptable level, such as

developing a verification program that might periodically sample utility records and test

numbers back to original data or invoices. These proactive steps, coupled with a return to a

regular audit cycle by the CPUC, its sister agency, or a contractor to audit the ESA Program on a

regular cycle (as Finding No. 2 addresses) will help ensure that overall program risks are

minimized.

FINDING No. 2 - Lack of Regular Financial and Compliance Audits

(P.U. Code § 900)




population. The CPUC is directed to ensure that all eligible low income customers are given the



Additionally, as provided in PU Code §900, the Commission may conduct compliance and









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2-B Conditions/Existing Situation – From 2006 - 2011, the CPUC’s Division of Water and Audits

(reorganized in 2016 as the Utility Audits branch) conducted annual Financial and Compliance

Audits of the IOU’s CARE, LIEE and ESA programs. After 2011, the DWA discontinued this practice

and no further audits were conducted. Therefore, from 2011 – 2016 the ESA program was not

utilizing the authority provided by PU Code § 900 to perform audits to verify program accounting

and compliance and increase public confidence in the regulatory process.

2-C Causes / Why criteria not met? - According to the ED-RDPS, the DWA ceased its program

of regular audits of the CARE, LIEE and ESA Program in 2011 due to budget and staffing

limitations. Since there were no financial or compliance audits of the ESA program conducted

for a period of at least 5 years, the CPUC was not exercising its authority under PU Code § 900 to

provide assurance regarding the expenditure of substantial amounts in an important program.

2-D Effects/Potential Risk – Lacking regular financial and compliance audit testing of the self-

reported ESA Program budget numbers, the CPUC is at risk of errors in the accuracy of reported

account balance numbers and/or inaccurate public purpose program funds collected by the

utilities. Inaccurate ESA Program account entries also present a risk to the CPUC for competent

full disclosure, such as in annual reports. Auditing of these accounts presents a useful tool to

minimize the level of risk present with this large dollar value program.

2-E Recommendations and/or action plans (Cause focused, corrective, or recovery) Cause

focused recommendation – At the time this audit data was collected, there was not an ESA

Program audit program in place to ensure the Commission’s consistency with the PU Code and

compliance with state law. Subsequent to data collection, the ED has contracted with the SCO

to conduct a financial and compliance audit of the CARE and ESA Program and that work is

currently underway. The IAU recognizes this initiative and recommends that a program of

regular audits be continued and incorporated into the staff’s ESA planning and review process

to ensure consistency with required regulations, and to minimize the overall risk associated with

ED-RDPS’s management of the program.

FINDING No. 3 - Limited Review of LIEE and ESA Program - specific Balancing

Accounts





opportunity to participate in the program by 2020 and that the ESA program will be an energy

resource by delivering increasingly cost-effective and longer-term energy savings. Additionally,

as mandated in PU Code §900, the Commission may conduct compliance and financial audits

to ensure compliance with Commission orders relating to the implementation of programs

related to PU Code § 2790.





3-B Conditions / Existing Situation - Each of the IOU’s maintain multiple separate program

specific “balancing accounts” to track collection of ESA Program surcharges and expenditures

so that and differences can be recouped in later advice fillings or proceedings. This allows the



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utilities to reconcile any differences between estimated program expenditures and budgeted

administrative costs with the amount of surcharge fee collected in rates. The current practice is

that the ED performs a high level review of the IOUs’ informal filings, and the DWA and ORA

perform more detailed audits of some balancing accounts when the utilities file for a formal or

informal proceeding to refund or recoup some of their balances. However, regular reviews or

financial audits of the ESA Program balancing accounts are not conducted. A series of financial

audits of the CARE, LIEE and ESA program costs were performed by the Division of Water and

Audits for program years 2006-2011, but none have been completed subsequent to those years.

3-C Causes – Why Criteria Not Met? - Since there is no regular review or oversight of the IOU’s

ESA Program-specific balancing accounts, the risk for errors or inaccuracies leading to possible

unfair increases to ratepayers is present. Currently, there does not appear to be any kind of

independent verification or random checking of the utilities self-reported numbers. There are a

variety of possible reasons why additional independent verification of the program specific

balancing accounts does not occur, but regardless, the existing internal controls over the ESA

Program specific balancing account appears to be weak. This finding mirrors an analogous

finding the IAU made with regard to the CARE Program.

3-D Effects / Potential Risk - Ratepayer dollars allocated to the ESA program in any given year

represent a significant component of the CPUC’s Public Purpose Programs dollars. In summary,

the IOUs annually treat approximately 250,000 households with energy efficiency upgrades and

a total of about 375 million dollars is budgeted from ratepayer revenues. Without any review of

the ESA Program-specific balancing accounts, the CPUC and its staff are at risk of errors in the

accuracy of reported funds collected by the utilities. The potential for inaccurate ESA Program

Balancing Account entries also present a risk to the CPUC for competent full disclosure.

3-E Recommendations and/or Action Plans (Cause focused, corrective, or recovery) - Cause

focused recommendation – The IAU notes that the ED Residential Division has negotiated an

agreement with the SCO to regularly audit the ESA (and CARE) programs. In addition, as a result

of the recommendation contained in the 2014 State Auditor’s Report, the legislature has

amended the California Public Utilities Code, Section 792.5, to require the commission to

develop a risk-based approach for reviewing all balancing accounts periodically to ensure that

“the transactions recorded in the balancing accounts are for allowable purposes and

supported by appropriate documentation, such as invoices.” This amended law took effect in

2017. Regular audits of this type for programs like ESA will decrease the likelihood of ratepayers

paying more than required and will increase transparency and public confidence in both the

CPUC and IOUs.

FINDING No. 4 – Verification of IOUs’ Fraud Prevention Controls







Additionally, as mandated in PU Code §900, the Commission may conduct compliance and





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4-B Conditions / Existing Situation - ED-RDPS does not maintain information regarding the IOUs’

internal controls to prevent fraudulent activity) in the ESA program. Due to the number of

contractors and complexity of activities associated with the ESA program, the potential for

fraudulent activity is high, and something that the utilities themselves monitor closely. As

previously mentioned, a series of financial and compliance audits of the CARE, ESA and LIEE

programs were conducted by the Division of Water and Audits for PY’s 2006-2011, but none

have been completed subsequent to those years. In one of these audits, the DWA requested a

list of fraud prevention controls, risks that would trigger a fraud investigation and subsequent

audits, but it does not appear that such information was ever provided to the ED-RDPS.

4-C Causes – Why Criteria Not Met? - The ED staff working on the CARE and ESA programs is not

tasked with monitoring the IOUs fraud prevention and control activities. Since the IOUs

themselves handle the actual finances of the ESA program, this activity is not a procedure which

Commission staff are required to conduct. These activities include fraud prevention controls or

fraud investigation triggers for each utility.

4-D Effects / Potential Risk - Ratepayer dollars flowing through the ESA program in any given year

are a substantial component of the CPUC’s Public Purpose Programs overall budget. Fraud

represents a significant risk to a program of this magnitude and complexity of contractors and

other moving parts. While it needs to be stated clearly that we currently have no evidence of

fraud or malfeasance in any aspect of the ESA program, the implementation of the

recommendations below will reduce this risk even further and increase transparency, which can

only benefit the CPUC. The lack of such documentation and/or working knowledge of the IOUs

fraud prevention controls and list of risks which would trigger a fraud alert limits the ability of the

CPUC’s internal management and oversight of the ESA Program to evaluate these risks and

consider remedial measures where they may be warranted.

4-E Recommendations and/or Action Plans (Cause focused, corrective, or recovery) - Cause

focused recommendation – We recommend that the ED-RDPS follow up on previously

recommended audit findings that require each of the IOUs to file a response to a data request

which summarizes its control measures regarding customer eligibility and the prevention of fraud

in the ESA Program. We recommend that this include a list or description of risks which would

trigger a fraud alert and subsequent investigation. Due to the magnitude and complexity of the

ESA Program along with the number of contractors involved in the installation of retrofits, the

potential for the risk of ineligible beneficiaries or fraud is elevated, and therefore we recommend

that Commission staff maintain a heightened level of awareness of this issue.



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ADDITIONAL ISSUE - Significant Unspent and/or Underspent ESA Program Fund

Balances

In addition to the formal Findings listed above, the IAU identified another issue that merits

comment.

At the time audit data was collected for the ESA program, a total of approximately 400 million

dollars in underspent or unused funds were held by the IOUs. These funds accrued over time

due to a number of programmatic limitations which disallowed treatment of ESA Program

eligible homes. For a variety of reasons, each of the IOUs was unable to spend significant

portions of their ESA Program budgets, resulting in an increase in unspent fund balances.

Maintaining nearly 400 million dollars in unused ESA program funds caused a cost to ratepayers

that did not create a program benefit. However, the disposition of a large carryover balance in

the ESA program is an issue that cannot generally be determined by staff level managers. ED

staff was aware of this situation and had provided some recommendations for how to address

the issue, in keeping with good management practice. We note that the balance was

addressed in D.16-11-016, which as a Commission policy decision was beyond the scope of this

audit.



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In addition to helpful informal comments, the ED-RDPS provided the following response to the

draft audit report:

MANAGEMENT RESPONSE TO THE IAU’S

ESA PROGRAM AUDIT



11



The IAU appreciates the complete cooperation and responsiveness of the ED-RDPS staff as well

as the time required to review and comment on the audit report. In addition, we thank all others

who have assisted in the preparation of this report. This final audit report contains the revisions

noted in the “Informal Comments and Suggestions” section of the management response letter

shown above.

12 Final – October 2017


A-1

APPENDIX A

Description of the Energy Savings Assistance (ESA) Program

Background and History of ESA Program

The Energy Savings Assistance (ESA) Program was originally instituted by the Commission as the

Low Income Energy Efficiency (LIEE) program in the early 1980’s. The program of energy

efficiency began in response to the energy crisis of the 1970’s. After 1981, the Commission

decided that the utilities programs should include participation by low-income and non-English

speaking persons, renters, and the elderly. The objective of the program was to promote equity

and to help relieve low-income customers of the burden of rising energy prices. It was intended

to cost effectively produce energy savings while providing an improved quality of life for the

low-income population.

Over time, the ESA Program measures expanded from simple weatherization measures to a

much broader array of services which include refrigerator replacement, and providing heating

and air conditioning equipment. The program remains in effect, and continues to install

weatherization and energy efficiency measures, provide minor home repairs, and energy

education “free of charge” to eligible participant households to assist customers in reducing

energy consumption, resulting in bill savings.

The Energy Savings Assistance Program was established and supported via P.U. Code § 2790

which states:

(a) The Commission shall require an electrical or gas corporation to perform home

weatherization services for low income customers, as determined by the Commission under

Section 739, if the Commission determines that a significant need for those services exist in the

corporations service territory, taking into consideration both the cost-effectiveness of the

services and the policy of reducing the hardships facing low-income households.

(b)(1) For purposes of this section, "weatherization" may include, where feasible, any of the

following measures for any dwelling unit:

(A) Attic insulation.

(B) Caulking.

(C) Weather stripping.

(D) Low flow showerhead.

(E) Water heater blanket.

(F) Door and building envelope repairs that reduce air infiltration.

(2) The Commission shall direct any electrical or gas corporation to provide as many of these

measures as are feasible for each eligible low-income dwelling unit.

(c) "Weatherization" may also include other building conservation measures, energy

management technology, energy-efficient appliances, and energy education programs

determined by the commission to be feasible, taking into consideration for all measures both the

cost-effectiveness of the measures as a whole and the policy of reducing energy-related

hardships facing low-income households.



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(d) Weatherization programs shall use the needs assessment pursuant to Section 382.1 to

maximize efficiency of delivery.

(e) For purposes of this section, "energy management technology" may include a product,

service, or software that allows a customer to better understand and manage electricity or gas

use in the customer's home.

The goals of the ESA Program are codified in PU Code § 382 (e) and also outlined in the

California Energy Efficiency Strategic Plan as follows: By 2020, all eligible customers will be given

the opportunity to participate in the LIEE program (now ESA Program ); and the ESA Program will

be an energy resource by delivering increasingly cost-effective and longer-term savings.

California Public Utilities Code § 382 (e) states:

The Commission shall, by no later than December 31, 2020 ensure that all eligible low-income

electricity and gas customers are given the opportunity to participate in low-income energy

efficiency programs, including customers occupying apartments or similar multiunit residential

structures. The commission and electrical corporations and gas corporations shall make all

reasonable efforts to coordinate ratepayer-funded programs with other energy conservation

and efficiency programs and to obtain additional federal funding to support actions undertaken

pursuant to this subdivision. These programs shall be designed to provide long-term reductions in

energy consumption at the dwelling unit based on an audit or assessment of the dwelling unit,

and may include improved insulation, energy efficient appliances, measures that utilize solar

energy, and other improvements to the physical structure.

ESA Program measures have expanded from simple weatherization measures in the early 1980s

to a much broader array of services today which include refrigerator replacement, and

providing heating and air conditioning equipment. New conservation and efficiency measures

are proposed by each of the IOUs with every budget cycle. In addition, research and

development and continued implementation of the Evaluation, Measurement, and Verification

(EM&V) program provide new efficiency measures and regular refinements to the ESA program.

Further, technology pilot programs and programs funded by the general Energy Efficiency

docket (such as the Emerging Technologies Program and the IDEAA 3655 solicitations) also

provide ongoing improvements to energy efficiency program portfolio. Program measures also

vary by the utility service provider or IOU, geographic location, and climate zone. Table 5-1 in

the ESA Policy and Procedure Manual (2013) includes a list of all current upgrade and efficiency

measures.

Program Enrollment and Funding

To qualify for the ESA Program, households must be at or below 200% of federal poverty

guidelines (similar to the CARE program.) There are a set of specific guidelines for program

enrollment based on household size and income. Many low-income households are enrolled in

both the CARE and ESA programs. Customers in geographic areas where at least 80 percent of

the households are at or below 200 percent of the FPG may also be eligible for ESA if they are

already enrolled in one of a number of public assistance programs (Medicaid/Medi-Cal, SSI,

etc.). Certain Commission decisions dictate a mandatory “high usage” policy under the CARE

program which requires that participants with monthly usage at or above 400 percent of

baseline may be required to enroll in the ESA Program and where usage exceeds 600 percent of

baseline the customer must enroll in ESA Program which includes a residential energy

assessment.

The Commission utilizes a particular methodology to estimate the number of participants

qualified to enroll in the ESA program. This process is updated regularly in budget authorization



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decisions, and is informed by the results of the Low Income Needs Assessment (LINA) study which

is prepared every three years as mandated by PU Code § 739.1. Based on a complex series of

calculations the IOUs determine prior year enrollments, a growth percentage, number of

potential participants unwilling to enroll, and number already treated. Ultimately, the number of

eligible households remaining is divided by the years remaining until the legislatively mandated

goal - all eligible homes being treated by 2020. To implement the program, the IOUs utilize

contractors to verify participant’s eligibility, assess homes treated with efficiency upgrades, install

program measures, and conduct final compliance inspections.

At the time the audit evidence was collected, ESA Program participants could not be receiving

program measures since 2002 (the Go Back Rule) and be eligible for at least three program

measures or meeting the modified Three Measure Minimum (3MM) rule which allows less than

three program measures if total energy savings yield 125 kWh annually or 25 therms /annually.

Since this time, it should be noted that many changes to the programs have subsequently been

instituted in D.16-11-016, which recently extended the ESA Program and CARE programs through

2020 and incorporated many revisions to the programs intended to increase overall energy

efficiency, address current issues and events such as the shutdown of SONGS and gas leak at

Aliso Canyon, and improve the quality of life for the low-income population in the State.

Similar to the CARE program and others, ESA Program is funded via a Public Purpose Program

(PPP) surcharge. The funds are requested and authorized in Commission Application

proceedings and collected by the utilities from ratepayers to fund ESA Program activities

including outreach, enrollment, assessments, installations, inspections, evaluations, etc. Monthly

and annual compliance reports, advice letter filings, and ESA program audits are utilized as

check and control points. Administrative costs for the ESA Program are requested and

authorized within specific budget categories which dictate how the funds can be utilized.

While the IOUs are expected to maintain the program costs within the adopted budgets, the

benefits are considered needs-based, meaning that utilities can recover the full amount of

energy efficiency costs provided. Each year the number of participants and costs fluctuate,

making program cost estimates necessarily uncertain when developing the budget for the

forthcoming year. In general, ESA Program costs are recovered via a two-way balancing

account. Historically, the CPUC authorizes a budget for the ESA (and CARE) program costs

once every three years. These budgets are used to set the PPP surcharge each year. There are

also very specific “fund-shifting” guidelines which the utilities must adhere to in order to shift

authorized funds in or out of the various budget categories.

There are several other programs which are closely related to the ESA program including the

California Alternative Rates for Energy (CARE) program, the Family Electric Rate Assistance

(FERA) program, and the Middle Income Direct Install (MIDI) Program.

Energy Savings and Compliance with PU Code § 382 (e)

As previously stated, the goal of the ESA program (as codified in PU Code § 382(e)) is to create

an energy resource by delivering increasingly cost-effective and long-term energy savings. As

stated, a primary objective of the program is to achieve long term reduction in energy

consumption for low-income households. To evaluate the program’s consistency with these

goals, the Commission requires the preparation of an Impact Evaluation every program cycle to

estimate the energy savings resulting from the implementation of ESA program measures. A

copy of the most recent Impact Evaluation was reviewed as audit evidence for this report. The



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primary objective of the Impact Evaluation is to estimate program year savings in the following

manner:

1. Calculate first year gas and electric energy savings and resulting peak demand

reduction;

2. Calculate overall energy savings as well as the levels of savings calculated as a result of

each ESA installed program measure and savings by housing type;

3. Conduct billing regression models to improve the energy savings for each installed

measure, including evaporative coolers, furnace repairs, and furnace replacements

Although there is much debate regarding the overall effectiveness of these public purpose

programs and their ability to achieve stated goals, the most recent (2011) Impact Evaluation

determined that ESA measures had averaged a total of 3 percent savings for electricity

households and 4 percent savings for natural gas households.

Energy Division Management and Oversight

Commission staff provides policy development, program implementation oversight, and

evaluation support for the ESA Program. Staff review and approve budget applications as they

are submitted by the IOU’s every three years by the program administrators. In addition,

Commission staff review advice letter filings related to the program, advise decision-makers on

policy and program implementation, submit data requests, and analyze legislative proposals.

Pursuant to CPUC directives contained in D. 01-03-028 and D.02-07-033, each of the IOUs are

required to submit both monthly and annual reports on their respective ESA program. While

each is formatted differently, the reports document program expenditures and penetration

levels. The utilities are required to submit formal filings with the Commission every three years to

request approval of their program budgets, number of homes treated and savings projected,

new/retired program measures and policy updates. While the typical program cycle is three

years, in recent years bridge funding has been issued to continue program activities when

decisions have been delayed.

Low Income Oversight Board (LIOB)

The Low Income Oversight Board (LIOB) is an advisory board established to provide advice on

low-income electric and gas issues and serve as a liaison between the Commission and low

income ratepayers and their representatives. The LOIB was established pursuant to PU Code §

382.1 and its charter was updated in 2007 under Resolution E-4095. The LOIB maintains a website

at www.loib.org. The LIOB hosts quarterly meetings to address low income issues and provide

recommendations to the Commission. The LIOB is comprised of eleven members of the public, a

Commissioner, a gubernatorial appointee, and a variety of utility and industry representatives.

The LOIB website provides information and direct links to the CARE and ESA programs, as well as

other low-income programs.


http://www.loib.org/

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