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California State Auditor Report Number : 2016-104

California Public Utilities Commission
It Should Reform Its Rules to Increase Transparency and Accountability, and Its Contracting Practices Do Not Align With Requirements or Best Practices



Privately owned energy utilities subject to the CPUC’s authority are not state agencies and therefore are not subject to the requirements in the Public Contract Code and the State Contracting Manual when they contract with private third‑parties. However, the CPUC has broad authority under state law to oversee energy utilities’ agreements with third parties to help ensure that state policy goals are met and that utility ratepayer interests are protected. This oversight includes approving agreements that energy utilities propose and, in other instances, directing the utilities to contract with third parties.

One key type of agreement that energy utilities propose for CPUC approval is a power purchase agreement. To submit power purchase agreements for approval, energy utilities submit an advice letter or an application to the CPUC describing the terms of the proposed agreement and how it complies with CPUC requirements. Although the CPUC allows its energy division to approve some agreements if they conform to an existing CPUC order, the CPUC contract review process for power purchase agreements involves participation by multiple entities as shown in Figure A. Each energy utility has its own procurement review group that reviews the utility’s proposed agreements. These procurement review groups include CPUC energy division representatives, representatives from the Office of Ratepayer Advocates—an entity housed within the CPUC that represents the interests of public utility customers and subscribers with the goal of obtaining the lowest possible rates for service consistent with reliable and safe service levels—and parties that are not market participants. Additionally, an independent evaluator retained by the utility monitors some of the negotiations and reviews the cost‑effectiveness and overall appropriateness of the agreements. Finally, CPUC staff reviews the proposed agreements for compliance with CPUC requirements before the agreements are approved or denied through a CPUC resolution.

The CPUC also has the authority to approve and oversee other agreements between energy utilities and third parties—such as agreements to establish research and development programs. State law establishes guidelines for the CPUC’s review of energy utility research, development, and demonstration programs. These statutory guidelines require the CPUC to consider whether the projects provide a reasonable probability of providing benefits to ratepayers and whether the projects unnecessarily duplicate research that other entities are undertaking. State law also requires the CPUC to consider whether a project supports a specific objective, such as environmental improvement, public and employee safety, or development of new resources and processes.

Figure A
The California Public Utilities Commission’s Process for Overseeing and Approving Power Purchase Agreements

A flow chart demonstrating California Public Utilities Commission's process for overseeing and approving power purchase agreements.

Sources: California State Auditor’s analysis of CPUC decisions D.15‑11‑041, D.06‑05‑039, D.02‑08‑071; Advice Letters AL 2273‑E and AL 3449‑E; CPUC resolutions E‑4425 and E‑4286; and independent evaluator reports.

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