EPB officials said Tuesday that an exhaustive audit of its street light contract with the city showed that it did not overbill the city. Instead, it said it found that the city was underbilled $685,877.
EPB said it only goes back one year on errors so the amount owed by the city would be $178,314. Officials said that would be discussed with the city.
Stan Sewell, the city's internal auditor, said he found that overbillings of energy due to the misclassification of mercury vapor lights were not offset by underbillings of facilities charges. But he said there were other factors found in EPB's favor.
He said, "It appears EPB has not included a five percent additional charge (related to non-metered lights and referenced in the power contract and the rate schedule) to energy billings for a substantial number of years. Further, energy billings have been based on an average of 4,200 hours per year of operation for each street light. Average operation hours per year have been estimated by TVA to be 4,377 for each street light (in our region). We have attached, as Appendix II, the estimated overbillings of energy charges resulting from misclassified mercury vapor street lights for 2010, 2011 and 2012. This schedule includes a separate column detailing an adjustment for what might be considered underbillings related to the excess operation hours and the five percent charge applicable to non-metered lights."
Here is the full EPB statement:
"After seven weeks of intense scrutiny, the independent auditing firm of Mauldin and Jenkins, LLC has provided their findings regarding a purported over-billing of street lighting to the City of Chattanooga. This audit, which was requested by Mayor Andy Berke, indicated that there was no net over-billing found in the seven year study from 2007 until present.
"Research did find some process errors which ultimately resulted in a net under- billing to the city of $685,877 over the seven years. EPB’s policy requires us to bill for one year’s error, which amounts to $178,314. This will be discussed and reconciled with the City, as we do with any other customer.
"Process errors are corrected when discovered, however all processes are under current management review today in order to provide the accuracy and consistency in the street light billing that we demand for our customers.
"Our goal continues to offer the highest level of trust and transparency within our Chattanooga community."
Here is the Sewell memo:
To: City Council
From: Stan Sewell, City Auditor
Date: July 22, 2014
Re: EPB – Offsetting Overbilling of Energy Charges
With Under-billings of Facilities Charges
Background
The Office of Internal Audit (OIA) previously reviewed financial projections and the estimated cost recovery period related to the City’s implementation of an Energy Efficient Lighting project. We provided you with a memo related to that project dated April 25, 2014. An integral component of the cost recovery analysis was related to energy charges by the Electric Power Board of Chattanooga (EPB). Due to discrepancies discovered in EPB’s street light billing classifications, we made an adjustment to energy costs in our baseline month (used for projections) of September 2011. The adjustment was needed because many high pressure sodium street lights were improperly classified as mercury vapor street lights, which have a higher energy consumption. City Council members expressed concern about this discrepancy.
Street Light Billing
Within the context of the issue addressed in this memorandum, the charges billed to the City by EPB for street lights are made up of two components as described below:
1. Energy charges are billed on a flat rate schedule based on the monthly kWh usage for the type of street light (e.g. high pressure sodium or mercury vapor). Due to a higher energy usage, mercury vapor flat rate is greater than high pressure sodium flat rate. Therefore, when a high pressure sodium light is misclassified as a mercury vapor, there is an overbilling.
2. Facilities charges are billed monthly at 1.025% of the installed cost of the street lights (12.3% annually). EPB has not installed mercury vapor light fixtures for several decades. Due to inflationary factors, more recently installed light fixtures, such as high pressure sodium, were more expensive to install (i.e. both labor and materials were more expensive in 2011 than in 1975).
EPB management acknowledged there were overbillings related to energy charges as a result of the misclassified light types. However, they asserted any overbilling of energy was more than offset by an associated under-billing in facilities charges. The fundamental assertion by EPB is that the 12.3% annual rate for facilities charges is being applied to the (lower) installed cost of the mercury vapor lights being erroneously billed to the City for energy charges (i.e. there is a direct and accurate link between the type of light billed for energy purposes and the installed cost to which the facilities charge is being applied). Therefore, they assert an adjustment is needed for the cost difference between those mercury vapor lights and the higher cost high pressure sodium lights.
EPB retained the firm of Mauldin & Jenkins to perform an attestation engagement related to their assertion. Mauldin & Jenkins issued an attestation report on May 5, 2014. EPB provided a copy of this report to City Council members.
We have attached, as Appendix I, a flowchart providing a simplified view of EPB’s process for developing a street light bill. The systems and processes related to accounting for street light costs and billing are complex. This flowchart does not represent all processes or their complexity.
Council Request
During the Council Audit and IT Committee meeting on May 13, 2014, OIA was asked to determine if the second paragraph of the Findings section of the May 5, 2014 Mauldin & Jenkins attestation report was accurate. That paragraph reads:
Based on the information provided, management’s assertion that, within the total streetlight bill to the City of Chattanooga, any overbilling of energy associated with the misclassification of high pressure sodium lights as mercury vapor lights was more than offset by an under-billing of facilities charges is reasonable and supported by the underlying source documents.
We have approached this request from a historical perspective within the scope of street light billings prior to the implementation of the City’s Energy Efficient Lighting project (deployments began April 2013). Adjustments to the light classifications on the billings indicate EPB was aware of the misclassifications by this time (early 2013) and was making efforts to correct the errors. More specifically, our above mentioned memo dated April 25, 2014 adjusted for the error in September 2011. Therefore, we have placed our primary focus on the calendar year 2011. However, we have conducted analysis related to years prior to and after 2011.
Conclusion
Overbillings of energy due to the misclassification of mercury vapor lights were not offset by under-billings of facilities charges. However, we have reviewed documentation provided by EPB and consulted with representatives of TVA regarding other potential compensating factors identified by Mauldin & Jenkins during their current attestation engagement (a report is expected today). It appears EPB has not included a 5% additional charge (related to non-metered lights and referenced in the power contract and the rate schedule) to energy billings for a substantial number of years. Further, energy billings have been based on an average of 4,200 hours per year of operation for each street light. Average operation hours per year have been estimated by TVA to be 4,377 for each street light (in our region). We have attached, as Appendix II, the estimated overbillings of energy charges resulting from misclassified mercury vapor street lights for 2010, 2011 and 2012. This schedule includes a separate column detailing an adjustment for what might be considered under-billings related to the excess operation hours and the 5% charge applicable to non-metered lights.
Attached as Appendix III is a brief overview of our methodology and approach. I look forward to meeting with you to answer any questions related to this project.
The issues discussed in this memorandum are not the result of an audit performed in accordance with generally accepted government auditing standards. Had we performed such an audit, additional issues might have been reported. The purpose of this memorandum is to provide information that may be useful to those charged with governance of the City of Chattanooga.
cc: Mayor Andy Berke
Travis McDonough, Chief of Staff
Wade Hinton, City Attorney
Vicky Gregg, EPB Audit Committee Chair
Harold DePriest, EPB CEO
Audit Committee