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

Introduction

Background

The mission of the CPUC is to serve the public interest by protecting consumers and ensuring the provision of safe, reliable utility service and infrastructure at reasonable rates, with a commitment to enhancing the environment and promoting a healthy California economy. The CPUC was established by a constitutional amendment and has broad regulatory authority over privately owned electric, natural gas, telecommunications, water, railroad, rail transit, and passenger transportation companies. The CPUC consists of five commissioners who are appointed by the Governor and approved by the Senate. It employs a supporting staff and is funded by fees imposed on the public utilities it regulates. Its staff is organized into an administrative division as well as divisions for each subject matter the CPUC regulates. This audit focused on the CPUC’s practices for contracting for consultant services and the contracting that the CPUC directs or approves for four energy utilities—Pacific Gas and Electric, San Diego Gas and Electric, Southern California Edison, and Southern California Gas—to enter into.¹

State Contracting Requirements and the CPUC’s Contracting Practices

Each state agency is responsible for its own contracting program. These responsibilities include ensuring the necessity of services, securing appropriate funding, complying with laws and policies, writing contracts in a manner that safeguards the State’s interest, and obtaining required approvals, including approvals from the Department of General Services (General Services). General Services serves as a business manager for the State. It maintains the State Contracting Manual. The State Contracting Manual provides policies, procedures, and guidelines to promote sound business decisions and practices in securing necessary services for the State, and it includes guidance regarding contracting requirements found in state law, as a resource for persons involved in the State’s contracting process.

State law and the State Contracting Manual establish baseline requirements for how agencies must contract for services, and the CPUC also has internal policies for how it will ensure that its contracts represent the best possible value. Figure 1 shows the general process required by state law, by the State Contracting Manual, and by the CPUC’s policies for contracting for a service. State law generally requires a competitive bidding process for service contracts unless the law or General Services’ policies make these contracts exempt from competition (exempt contracts). Examples of exempt contracts include contracts for legal services, expert witness contracts for litigation, interagency agreements, and emergency contracts; these types of contracts are all exempt from competitive bidding requirements regardless of their total dollar value. Although such contracts do not have to be competitively bid, for almost all types of exempt contracts CPUC policy requires that CPUC staff conduct a market survey so as to identify the contractor that will provide the best value.

Figure 1
Overview of the State’s and the California Public Utilities Commission’s Processes for Obtaining Services Contracts

Sources: California State Auditor’s analysis of the State Contracting Manual and the California Public Utilities Commission Policies and Procedures Manual: Personal Services Consultant Contracts.

* Emergency contracts and interagency agreements do not require a market survey.

^† Emergency contracts do not require General Services’ approval before taking effect. In addition, some service contracts are exempt from General Services’ approval, such as contracts that are specifically exempt by statute or by an exemption letter issued by General Services.

A contract’s dollar value is also a determining factor in whether the contract must be competitively bid and approved by General Services. Table 1 shows the cumulative dollar thresholds at which requirements change for competitive bidding and General Services’ approval. CPUC contracts valued at more than $50,000, and any amendments to such contracts, generally must be approved by General Services before the contract or contract amendment is effective. If the CPUC enters into a contract for $50,000 or less and subsequently amends that contract to an amount above that threshold, it must submit to General Services for approval the amendment that increased the value to more than $50,000 and any subsequent amendments. Agencies may use sole‑source contracts to obtain services that would have normally been obtained through a competitive bidding process if the agency has established that only one vendor can provide the service the agency needs.² The CPUC’s policy requires staff to conduct the same type of market survey for sole‑source contracts as staff does for exempt contracts. However, agencies must obtain approval from General Services in a two‑step process for sole‑source contracts that are more than $50,000. Before an agency can execute a sole‑source contract for more than $50,000, it must first obtain General Services’ approval of the sole‑source procurement and then seek General Services’ approval of the actual contract.

Table 1
Dollar Threshold for Competitive Bidding and Department of General Services’ Approval for California Public Utilities Commission Contracts

Contract Value	Competitive Bidding Required?	General Services’ Approval Required?*
Under $5,000	No	No
$5,000–$50,000	Yes, but some contracts are exempt†	No
$50,001 or higher	Yes, but some contracts are exempt†	Yes, but some contracts are exempt‡

Source: California State Auditor’s analysis of the State Contracting Manual, Volume 1.

* If an amendment increases a contract’s funding to more than the $50,000 threshold, the amendment is subject to General Services’ approval.

^† Contracts for legal services or expert witness services for litigation, interagency agreements, and emergency contracts are exempt by statute from competitive bidding requirements regardless of their dollar value.

^‡ Some contracts are exempt from General Services’ approval. For example, some contracts are exempt from approval because of statute or because of exemption letters issued by General Services.

The CPUC is subject to all contracting requirements in state law and the State Contracting Manual with one exception: state law allows the CPUC to bypass approval from General Services for consultant or advisory service contracts if the CPUC makes a finding that extraordinary circumstances exist. State law does not define extraordinary circumstances or identify a time limit on this exemption, and we identified no information in state law that explains why the CPUC is allowed this exemption from contracting requirements. However, the history of the legislation that established the exemption indicates that the intent of the Legislature was to enable the CPUC to hire expert consultants in major ratesetting proceedings without missing deadlines.

To manage different components of its contracting process, the CPUC separates contract duties between project managers and contract analysts. A project manager is the program expert and overall manager for a CPUC contract. He or she identifies the need for the contract or for an amendment to an existing contract and determines, with the assistance of the contract analyst, the procurement method the CPUC will use to obtain the service. If the contract is competitively bid, a team of individuals at the CPUC collaborates to score bids and chooses a vendor.³ In situations where the CPUC does not use a competitive bidding process for a contract, the project manager identifies and selects the vendor that will be awarded the contract. Regardless of procurement method, the project manager is responsible for monitoring the progress of the work that the contractor performs. The CPUC employs a contract manager and three contract analysts to ensure that contracts comply with and are administered according to state requirements from the time that a project manager proposes the contract through the conclusion of the contract’s terms. The contract analyst advises the project manager on contracting options as well as policy and procedural requirements, and he or she serves as the CPUC liaison with General Services.

The CPUC’s Oversight of Energy Utility Contracting

The CPUC has broad authority under state law to oversee energy utilities, including the authority to direct those utilities to contract with other entities. Generally, the CPUC issues these directions through its decisions, which are the product of CPUC proceedings. The three categories of formal CPUC proceedings—adjudicatory, ratesetting, and quasi‑legislative—are described in more detail in the text box. At the outset of certain proceedings, the CPUC issues a scoping memo that describes the scope of issues to be considered in the proceeding.

Interested persons and entities may formally participate in CPUC proceedings by becoming a party to the proceeding. Contractors interested in CPUC‑directed contracts are not prohibited from becoming parties to CPUC proceedings. Parties must adhere to certain rules, such as those related to communications between parties and decision makers. As a party, a person or organization can present evidence and witnesses, obtain information from other parties, and submit relevant motions, petitions, objections, and briefs to the CPUC. This participation can affect the eventual decisions that the CPUC makes as a result of its proceedings. For example, parties can advance arguments either for or against contract awards. However, because the ultimate decision‑making authority rests with the commissioners, no conflict of interest can be attributed to decision makers by having contractors participating and advocating for their own interests.

After a comment or hearing process, the CPUC issues a proposed decision based on the evidence presented. Parties and the public are given an opportunity to review and comment on the proposed decision and, after this comment period closes, the CPUC commissioners vote on whether to approve a final version of the proposed decision. CPUC decisions generally include a discussion of the arguments or comments the parties submitted to the proceeding. These decisions may include orders that direct energy utilities to contract with third parties or approve contracts that the utilities propose.

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Footnotes

¹ Consistent with our audit objectives, our review focused on contracts for services not specifically related to information technology, and this report refers to those agreements as CPUC contracts. We did not review contracts for goods or for information technology services. Go back to text

² This report refers to what the State Contracting Manual calls noncompetitively bid contracts as sole‑source contracts in order to avoid confusion between noncompetitively bid contracts and contracts that are exempt from competitive bidding. Go back to text

³ For a certain type of competitively bid contract, the CPUC must award the contract to the vendor with the lowest bid. Go back to text

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