Establish a Centralized Utility Audit Process

The Legislature should require periodic, routine audits of state government utility bills by the Attorney General s office and/or private contractors.


Background
The first Texas Performance Review (TPR) recommended that state agencies be required to better manage their local telecommunication contracts for equipment and services. Three alternatives were suggested:
each agency could verify its monthly bill and ensure that any corrections are reflected in their next bill;
a centralized statewide telecommunications authority could perform contract management services for all agencies; or
the state could employ outside consulting firms specializing in lowering utility bills. 1

Although the Legislature gave the Department of Information Resources authority to negotiate telecommunications contracts for agencies, none of the above recommendations were fully adopted. Moreover, the original recommendations applied only to telecommun ications, but all state utility expenditures including electric, gas, water and telephone charges would benefit from better management practices.

Utility bills are complex, primarily because of the tariffs governing the calculation of each customer s monthly bill. Multiple surcharges or fees often are added to each bill, and bills usually feature multiple service categories. State agencies often lac k the time or expertise to verify that vouchers submitted by utility vendors are correct; most agencies do not even attempt to do so. Also, state regulating authorities do not make rate information easily a ccessible or usable. Due primarily to a lack of in-house expertise and information, most agencies do little to understand or question the intricacies of the utilities billing structures.

Tw o or more services or rate schedules often apply to electric and telephone utility charges, but utilities rarely inform users of services available at a less expensive price. In addition, although utilities have automated their billing, which tends to redu ce the possibility of mathematical errors, incorrect billings are still fairly common. Finally, utility bills, especially telephone bills, sometimes contain surcharges or taxes from which state government is statutorily exempt.

Some specific problem areas with utility bills include the following.

First, medium-sized agencies generally pay for electric service under a general or miscellaneous service (MGS) tariff. Most utilities, however, also use a large general service (LGS) tariff. While LGS tariffs usually have minimum use requirements, there is almost always some overlap between MGS and LGS. When this occurs, a customer can receive service under either tariff. To determine the most economical rate, an agency would examine its consumption history. Agencies have rarely made this comparison.

In the context of litigated rate cases, the Attorney General s office has discovered many instances in which an agency could benefit by subscribing to another tariff, without any compromise in service. However, the state has no ongoing program to compare agency consumption pa tterns to available tariffs to ensure that the agency is on the most economical rate schedule.

Second, agencies sometimes simply receive service from the wrong schedule. Currently, the Attorney General s office is assisting the Department of Transportation (TxDOT) in inventorying its highway lighting accounts to ensure that the agency subscribes to utility lighting tariffs when possible, rather than general service, which is more expensive. 2

Third, with some rate schedules, overcharges can be detected sim ply by ensuring that the meter-reading date corresponds with the billing period. Large general service customers are billed separately for demand and energy. The demand portion of the bill represents the maximum demand during the period between meter readi ngs. If meters are not consistently read on the same day of each month, customers may be charged for a peak demand level actually occurring in the next month. If the actual peak demand in the prior month was not as high, the agency will be overcharged.

Fourth, gas utilities sometimes offer governmental customers a public authority tariff with considerably lower rates. However, utility personnel may not notice that a new account is for a governmental entity and establish a higher account rate. The agency, in turn, may not be aware of the availability of less expensive service.

Fifth, telephone companies often have several tariff offerings suitable for an agency s technical requirements. For example, a simple voice-grade private line to connect two agency locations can be charged via the private-line tariff, the intrastate special-access tariff and, sometimes, the interstate special-access tariff. No single tariff is always less expensive because of the variables involved the customer s distance from the serving wire center, the number of wire centers involved, the distance between the exchange area s primary office and the customer and the jurisdictional nature of the traffic flowing over the circuit (local versus long-distance calls, for instance).

Sixth, the rate applied in a telephone area sometimes depends on the type of equipment the customer uses. Agencies owning certain switching systems may subscribe to a single-line or multi-line-hunting business service, while others must pay the higher PBX trunk rate. Users familiar with tariff terms and Federal Communications Commission requirements can sometimes avoid the higher rate.

Seventh, many companies still bill state agencies for certain services, despite the existence of specific exemptions for state government. The Attorney General s office works with some agencies to remove erroneous billings for state and federal taxes and 911 charges from agency bills. AT&T, for example, recently refunded more than $4,000 for incorrect billings of 911 surcharges and fees to state agencies. A 1991 settlement of a lawsuit recovered $200,000 for state agencies from a $10 million refund pool for statewide overcharging involving toll-free WATS and 800 lines.

The Attorney General s Public Representation Section represents the state as a utility customer in legal matters. The section has discovered and corrected many errors, incorrect billings and improper classifications in state agency utility billings. The section s primary duty, however, is to represent the state in utility rate cases before the Public Utility Commission (PUC) and Railroad Commission (RRC). Due to insufficient staff resources, routine audits of all agencies bills are not performed. The Attorney General s office estimates that at least five experts in utility tariffs would be needed on a full-time basis to audit agency bills.


Recommendations
A. The Legislature should require routine audits of telephone, gas, electric and water utility bills incurred by state agencies and institutions of higher education to ensure proper classification, subscription and billing. This function could be performed by private contractors or the Attorney General s office, whichever is more cost effective. These audits should be scheduled every four years and cover a four-year time period for maximum cost effectiveness.

Audit functions would be funded through competitive bid or interagency contracts. The audits should be performed only when there is reasonable expectation that savings produced by the audits will substantially exceed their cost.

Legal and technical expertise at the Attorney General s office make that agency the most likely location for this audit function. The Attorney General s office would be required to use the most cost-effective means, whether through the use of internal staff or intermittent contracts with outside consulting groups.

B. The Legislature should authorize the Attorney General s office to perform utility audits and to fund the effort from utility audit savings.

Costs for services should be limited to the audits actual costs. Future biennial savings and refunds of past overcharges net of audit costs should be returned to the General Revenue Fund, except in cases where a portion must be legally returned to a special or dedicated fund, such as federal funds or the state s highway fund. In addition, independent school districts should be required to audit utility bills using either a private contractor or the Attorney General s office, whichever is most cost effective.

C. The Legislature should direct the Attorney General s office to file a semi-annual status report to the Governor, the Legislative Budget Board (LBB), and the Comptroller on the implementation and operation of utility audit functions.

Agencies or institutions of higher ed ucation using an outside contractor should report audit savings, costs and the source of funds to the Governor, the LBB and the Comptroller 30 days following the completion of a utility audit. School districts should file reports audit savings, costs and source of funds with the Texas Education Agency (TEA) 30 days after completing an audit.

TEA should summarize school district reports and report its findings to the Governor, the LBB and the Comptroller 30 days after the end of each fiscal year.

These status reports should include a summary of total cost of operations, contracts negotiated and pending, audit schedule, audit recommendations and other results, and pending and recovered refunds. In addition, the Attorney General s office should be required to develop a manual and training for state agencies for reviewing utility bills.

D. The Legislature should require the Public Utility Commission (PUC) and the Railroad Commission (RRC) to develop and maintain a system that would allow agencies and the public to monitor and check rates for all industries they regulate.

These systems should be as user-friendly as possible, using language and terms that are easily understood and clearly defined. These regulatory agencies should be required to establish an interagency working group to determine how agencies needs can best be met in designing such systems.


Implications
In fiscal 1992, state expenditures for electric, telephone, water and gas utility services were about $212 million. 3 Each year, utility service represents more than 25 percent of the state s annual and recurring operating costs. 4 Auditing utility services used by state agencies would ensure that the state receives the right service at the correct rate schedule, that the bill is calculated properly, and that all exemptions from taxes and surcharges are taken into account.


Fiscal Impact
Precise savings from this recommendation cannot be determined until actual audits are conducted. However, preliminary analysis by the Attorney General s office and the Comptroller s office indicates that substantial savings could be expected, particularly for accounts with more than $1 million in annual utility costs. 5 Assuming that audits would yield a modest 2 percent decrease in total utility bills, savings of about $4 million annually would be achieved (based on fiscal 1992 expenditures).

The Comptroller s office currently is in the process of issuing a request for proposals to audit the utility bills of agencies and facilities within the inventory of th e General Services Commission. This audit will include telecommunications, gas, water, electricity and wastewater bills for the last four years. The results of this audit should determine more precisely the expected savings of future audits conducted or ar ranged by the Attorney General s office.



Endnotes
1 Comptroller of Public Accounts, Breaking the Mold: New Ways to Govern Texas (1991), p. CG 85.
2 Even in the lighting tariffs, one must be careful to subscribe to the proper category. Many of TxDOT s li ghts are state-owned, and photocell-controlled. Yet several accounts were discovered in which, although TxDOT subscribed to the public lighting tariff, it was billed in a higher-priced category than appropriate. For example, TxDOT was charged from a tarif f for utility-owned and maintained lights, or for metering, which is not required with photocell-controlled lights.
3 The Comptroller s figure for gas utility service includes liquid petroleum gas, which is not subject to the same taxes and surcharges as a re utility services. In this respect, the gas/LP figure is high. The total gas/LP amount was $30,984,920, and it is not possible to segregate the two, since expenditures for these items are booked to the same account (accounting object code 7502).
4 Interview with Scott McCollough, Public Representation Section, Office of Attorney General, December 2, 1992. This percent is composed of annual and recurring operating costs that exclude salaries and benefits, direct program contracts and capital expendit ures.
5 Ibid.