25-M-0043 Order Initiating Audit.pdf

STATE OF NEW YORK

PUBLIC SERVICE COMMISSION

At a session of the Public Service Commission held in the City of Albany on February 13, 2025

COMMISSIONERS PRESENT:

Rory M. Christian, Chair James S. Alesi David J. Valesky John B. Maggiore Uchenna S. Bright Denise M. Sheehan Radina R. Valova

CASE 25-M-0043 - In the Matter of a Focused Operations Audit to

Examine Management Incentive Compensation Programs at Electric, Gas, and Water Utilities.

ORDER INITIATING AN OPERATIONS AUDIT

(Issued and Effective February 13, 2025)

BY THE COMMISSION:

INTRODUCTION

By this Order, the Commission initiates a focused operations audit to examine the management incentive compensation programs of electric, gas, and water utilities.

The subject utilities include Consolidated Edison Company of New

York, Inc. (Con Edison); Orange and Rockland Utilities, Inc.

(O&R); Niagara Mohawk Power Corporation d/b/a National Grid

(NMPC); The Brooklyn Union Gas Company d/b/a National Grid NY

(KEDNY); Key Span Gas East Corporation d/b/a National Grid

(KEDLI); Central Hudson Gas & Electric Corporation (Central

Hudson); National Fuel Gas Distribution Corporation (NFGDC);

Rochester Gas and Electric Corporation (RG&E); New York State

Electric & Gas Corporation (NYSEG); Liberty Utilities (New York

Water) Corp. (LNYW); Liberty Utilities (St. Lawrence Gas) Corp.

CASE 25-M-0043

-2-

(SLG); Corning Natural Gas Corporation (Corning); and Veolia

Water New York, Inc. (Veolia) (collectively, the Utilities).

Furthermore, the Commission directs Department of Public Service staff (Staff) to issue a request for proposals (RFP) seeking an independent auditor to conduct the audit and to evaluate the proposals received in response to the RFP.

BACKGROUND

The Commission discussed two scenarios under which a utility could obtain ratepayer funding for incentive compensation programs in the resolution of a 2011 rate proceeding regarding O&R.1 The 2011 O&R Rate Order explained that the Commission would find above base pay incentive compensation programs to be an ordinary and necessary business expense if such programs “are designed to return quantifiable or demonstrable benefits to ratepayers in a financial sense or in terms of reliability, environmental impact, or customer service.”2

As an alternative to a demonstration of quantifiable benefits that would offset the cost of such programs, the 2011

O&R Rate Order stated that a utility could justify rate recovery if it could demonstrate that its overall management compensation levels, including incentive pay and benefits, are reasonable relative to peer companies, so long as the program would

“support the provision of safe and adequate service and will have no potential to adversely affect ratepayer interest or to promote results that are inconsistent with Commission policies.”

The 2011 O&R Rate Order further explained that these two

1 Case 10-E-0362, Orange & Rockland Utilities, Inc. – Rates.

2 Case 10-E-0362, supra, Order Establishing Rates for Electric

Service (issued June 17, 2011) (2011 O&R Rate Order), pp. 38- 41.

-3-conditions would best be satisfied by the utility providing a compensation study and a full presentation of the program’s design, intent, performance goals, and underlying corporate objectives.

LEGAL AUTHORITY

The Public Service Law (PSL) grants the Commission the authority to conduct management and operations audits of investor-owned gas, electric, and water utilities. Such audits may be performed by Staff or by independent auditors and result in recommendations for improvements where identified.

Specifically, PSL §66(19) authorizes the Commission to conduct such audits of gas and electric utilities and PSL §89-c(15) authorizes the Commission to conduct management and operations audits of water utilities.

DISCUSSION

The Commission operates a robust management and operations audit program, including regular comprehensive management and operations audits, focused operations audits, and statewide utility comparisons. Numerous recent comprehensive management and operations audits of large, investor-owned electric and gas utilities have reviewed the extent to which a single utility’s performance management processes promote

Commission objectives, including safety and reliability standards, grid modernization, and Climate Leadership and

Community Protection Act objectives.

Some recent comprehensive audits have highlighted meaningful concerns with how utilities administer their programs. For example, in the recent comprehensive management

-4-and operations audit of Central Hudson,3 the auditor concluded that Central Hudson used its incentive compensation program to seek continuous improvement in financial performance, but for performance metrics beneficial to ratepayers, it set incentive payout targets to reward achievement of the minimum expectations established in rate plans. The auditor completing the most recent audit of NYSEG and RG&E also recommended that those companies set performance targets to encourage continuous improvement.4 Recent audit reports concerning Con Edison and

O&R,5 and NMPC, KEDNY, and KEDLI,6 noted that those companies could include more leading indicators to better monitor progress in achieving ratepayer-focused goals. Because LNYW, Veolia, Corning, and SLG are not reviewed regularly as part of the comprehensive audit program, this operations audit will provide the Commission with significant insight into those companies’ incentive compensation programs that we currently do not have.

The audit will further allow the Commission to review each of the utilities’ incentive compensation programs concurrently, which will help us ensure that utilities statewide are using these programs to seek improved performance that benefits

3 Case 21-M-0541, Central Hudson – Management Audit, Comprehensive Management and Operations Audit of Central Hudson Gas & Electric Corporation (issued April 20, 2023).

4 Case 16-M-0610, NYSEG and RG&E – Management Audit, Comprehensive Management and Operations Audit Of New York State Electric & Gas Corporation and Rochester Gas and Electric Corporation (issued February 7, 2019).

5 Case 21-M-0193, Con Edison and O&R – Management Audit, A Comprehensive Management and Operations Audit of Consolidated Edison Company of New York, Inc. and Orange and Rockland Utilities, Inc. (issued February 16, 2023).

6 Case 18-M-0195, NMPC, KEDLI, and KEDNY – Management Audit, Final Audit Report (issued November 19, 2020).

-5-ratepayers where practical and to proactively monitor that performance.

As we explained in the 2011 O&R Rate Order, compensation studies are the preferred method for demonstrating that overall compensation levels align with similarly situated companies. We have not reviewed these compensation studies regularly in audits, but we have observed a great deal of variability among the compensation studies presented in rate proceedings. Some companies perform comprehensive studies, while others utilize multiple studies for different components of compensation. Those compensation studies can be costly, and the Utilities usually request recovery of the cost of the studies in rates. Some smaller companies have relied on less expensive survey data to justify their compensation levels. Our previous guidance has not prescribed any particular approach.

Rather, we have considered each utility’s proffered support for its compensation program in the context of its relevant rate proceeding. This audit will provide the Commission with insight into current best practices for setting compensation levels and an opportunity to evaluate what information should be considered during rate proceedings to ensure an adequate review of compensation programs.

The scope of this audit includes a focused assessment of each utility’s management compensation structures and incentive programs, including a multi-utility comparison to identify best practices and improvement opportunities. This operations audit will focus on the short- and long-term incentive compensation available to utility non-union management employees. The audit will assess each company’s approach to setting management compensation levels and the impacts on attraction and retention outcomes for these employees. In addition, this audit will assess the performance targets

-6-comprising the incentive programs and how those targets drive and improve performance in the Utilities’ New York operations.

The RFP contains a detailed description of the scope of work the independent auditor will perform as part of the audit. In addition, the RFP identifies deliverables required of the selected auditor, sets forth targeted dates of significant events, and provides other necessary information for potential bidders.

CONCLUSION

Pursuant to PSL §66(19)(a) and §89-c(15), the

Commission initiates a focused operations audit of the

Utilities. The Commission elects to have an independent auditor conduct this audit. Accordingly, we direct Staff to distribute the RFP appended to this Order to potential bidders and post it to the Department’s website. Staff will evaluate proposals received in response to the RFP and provide a recommendation to the Commission. Consistent with the reserved rights detailed in

Section 2.5 of the RFP appended to this Order, Staff may negotiate with a bidder, reissue the RFP with modified terms, or take other steps to ensure value for ratepayers. The Commission will determine which independent auditor shall perform the audit. The Commission expects to select an auditor as soon as practicable. The Commission expects the selected auditor to begin field work shortly thereafter.

The Commission orders:

1. A proceeding is instituted to conduct a focused operations audit to examine the management incentive compensation programs of Consolidated Edison Company of New

York, Inc.; Orange and Rockland Utilities, Inc.; Niagara Mohawk

Power Corporation d/b/a National Grid; The Brooklyn Union Gas

Company d/b/a National Grid NY; Key Span Gas East Corporation

-7-d/b/a National Grid; Central Hudson Gas & Electric Corporation;

National Fuel Gas Distribution Corporation; Rochester Gas and

Electric Corporation; New York State Electric & Gas Corporation;

Liberty Utilities (New York Water) Corp.; Liberty Utilities (St.

Lawrence Gas) Corp.; Corning Natural Gas Corporation; and Veolia

Water New York, Inc.

2. Department of Public Service staff is directed to issue the Request for Proposals appended to this Order to prospective bidders.

3. This proceeding is continued.

By the Commission, (SIGNED) MICHELLE L. PHILLIPS

Secretary