Frequently Asked Questions About the Florida Auditor General’s Audit of FMPA
What kind of audit was performed?
The Florida Auditor General’s Office performed an operational audit of FMPA, as defined in section 11.45(l)(g) of Florida Statutes. The objectives of this type of audit are, in general, to evaluate management’s performance in establishing and maintaining internal controls, including controls designed to detect fraud, waste and abuse, as well as to evaluate management’s performance in administering assigned responsibilities in accordance with applicable laws, rules, regulations, contracts and other guidelines. The Auditor General’s staff was given unrestricted access to FMPA’s records and personnel.
What did the audit find?
One of the purposes of an operational audit is to identify areas in which an organization can improve its efficiency and effectiveness. Like any audit, the Auditor General’s report highlighted areas where FMPA could improve and provided recommendations for FMPA to enhance its operations and strengthen its policies.
What has been done to respond to the audit findings and what immediate action has FMPA taken?
As a steward of customer dollars, we take these audit recommendations and the opportunity to improve very seriously. In response to the preliminary and tentative audit report (released in January 2015), FMPA’s governing bodies took immediate action by discontinuing expenses for basketball tickets, an indoor plant service, Christmas tree rental and a business dinner associated with an annual legislative rally attended by members. FMPA’s governing boards are now preparing for further action. Additionally, some policies criticized in the preliminary report had already been changed years prior to the audit being initiated.
What is fuel hedging?
Hedging enables an organization to lock in prices for a commodity in order to keep prices stable over a period of time. Many industries engage in hedging for different types of commodities. For example, electric utilities, airlines, cruise lines, mining companies and agribusinesses are examples of industries that hedge commodities. Fuel hedging is a common practice among industries that rely on fuel for their operations, especially generating electric utilities. The practice of fuel hedging is not necessarily employed to lock in the lowest available price but to ensure stable prices and protect customers from extreme price fluctuations that would occur if fuel was purchased at the variable market price. In 2008, the Florida Public Service Commission stated that fuel hedging was “a reasonable trade-off for reducing customers’ exposure to fuel cost increases that would result if fuel prices actually settle at higher levels than when the hedges were placed.”
Explain FMPA’s fuel hedging practices and the impacts on customers.
As natural gas prices were rapidly rising in the first half of 2008, the agency decided to stabilize prices by hedging. When our country went into a recession later that year and fuel prices suddenly dropped, FMPA found itself in a situation where it was locked into pre-recession prices for a time. Many other electric utilities and businesses that rely on commodities subject to price fluctuation found themselves in a similar situation. The National Regulatory Research Institute reports several examples of hedging losses sustained by electric utilities, including one California utility that lost almost $60 million during 2007-2008 and one North Carolina utility had losses of more than $156 million. Florida Power & Light, under the guidance of the Florida Public Service Commission, reported a net hedging loss of nearly $3.6 billion for the period between 2003 and 2013.
In 2009, FMPA changed its fuel hedging policy to reflect a much more conservative approach. Today, natural gas hedging of the type discussed in the Auditor General’s report is no longer FMPA’s practice and no longer impacting electricity rates. FMPA’s power costs have decreased more than 20 percent from the peak in 2009, and today rates are competitive with the average wholesale rates of Florida’s investor-owned utilities.
What are FMPA’s concerns with the audit report?
While FMPA appreciates the Auditor General’s extensive, six-month review process that led up to the audit report, there are elements of this report with which we do not agree. The Auditor General does not have experience auditing joint action agencies, which is why they hired a consultant for assistance with some parts of the audit. Our main areas of concern center on:
- Sample Size: The Auditor General compared FMPA policies with those of a very small sample size – eight or sometimes 17 other Joint Action Agencies (JAAs). When it came to comparing our hedging policies, the Auditor General used a sample size of only eight. With more than 75 JAAs in the United States and approximately 3,000 electric utilities of all types, a larger sample size would have been more appropriate and would have provided a more representative and realistic sample to compare to FMPA. As a result, the findings are based on extremely narrow comparisons with limited value.
- Determination of Common Industry Practice: The small sample size used by the Auditor General also led to an inaccurate determination of industry standards. Of the eight JAAs that the Auditor General used for the fuel hedging comparison, only four had any significant natural gas generation, further diminishing the value of the comparison with FMPA since our power generation is approximately 80 percent reliant on natural gas. FMPA’s reliance on natural gas requires it to take actions that will stabilize the cost of natural gas and avoid risk. A sample of four cannot be said to represent an “industry standard.”
What will happen next?
FMPA’s members are committed to addressing all of the Auditor General’s findings and recommendations. FMPA’s members are putting their energy into improvements that will better serve the members and their customers. Having already eliminated several expenditures highlighted in the preliminary and tentative report, FMPA is turning its attention to addressing the remaining audit recommendations. FMPA plans to retain an independent management consulting firm to advise the Executive Committee concerning some findings, including fuel hedging, natural gas supply participation, interest rate swaps, peak shaving and All-Requirements Project termination provisions. A third-party management consulting firm is expected to help the agency institute further enhancements that will increase efficiency, enhance effectiveness and control costs.
How will a management consulting firm be selected?
A management consulting firm will be selected through a competitive process. FMPA’s Executive Committee will issue a request for qualifications and will select the firm that best meets the agency’s needs.