Kinder Morgan Owns FERC in Audit Fail

A friend sent me a copy of this recent FERC OE audit of Kinder Morgan, Inc.  He found it unusual because there was no dollar amount of refund in it anywhere.  What was the point?

FERC has never met a utility merger it didn't like.  In exchange for some divestiture and a promise not to charge ratepayers for merger costs, FERC approves every merger I've ever read about.

The divestiture is what it is.  It happens, and then it's over.  However, merger costs happen over a period of several years, and may not appear in rates until after the fact.  How does FERC know that the utility has kept its promise and not passed on merger costs to ratepayers?

It audits them.  It's happening a lot more frequently lately, as the Commission has realized that nobody minds their merger cost promise.  "Mistakes" happen.  If an audit doesn't happen, then the utility keeps the money.  If an audit does happen, then the utility says, "Oooops!  My bad!" and refunds the amount FERC recommends.  No penalties happen.

So, it was really no surprise that FERC's OE commenced an audit of Kinder Morgan a couple years after the merger happened.  FERC audits routinely turn up merger costs "accidentally" included in rates.

But what's interesting in Kinder Morgan's case is that although FERC found four different violations of its accounting rules, the corrective action was prospective.

FERC found that Kinder Morgan had incorrectly recorded some maintenance expenses and incorrectly expensed some abandoned projects.  That ended up pretty much being a wash.  No big deal.  Nobody but a bean counter cares.

But then FERC discovered that Kinder Morgan had not correctly recorded its merger labor costs in special merger accounts. 

KMI stated that it made a corporate decision not to track merger-related labor costs not due to the lack of process or system, but rather due to the fact that management did not consider the labor-related costs to be incremental costs. Also, KMI asserted that no existing employee costs were shifted to merger activities, since all pipelines continued to receive the same level of service before the
merger and all merger activities were completed as well as employees' regular tasks. KMI stated that more than 300 employees made meaningful contributions to merger activities and received a bonus for their efforts.

Audit staff noted that KMI had the requisite processes, accounting practices, and systems to track the cost of labor for merger activities. However, audit staff found written communication specifically instructing employees not to record any labor costs as a cost related to the merger. By not tracking merger-related labor expenses for more than 300 employees, the KMI jurisdictional entities were unable to accurately record the allocation of labor costs to various USofA accounts based on the time engaged in various classes of work during the period of merger activity.

Audit staff also noted that activities for pursuing, considering, and consummating a corporate merger are nonoperating, so their costs should be recorded in Account 426.5, which includes miscellaneous items that are nonoperating in nature. For accounting purposes, the Commission has consistently stated that costs involving mergers of public utilities are nonoperating and are to be recorded in Account 426.5. By not tracking the cost of employees involved in merger activity, the KMI jurisdictional entities could not distinguish the cost of labor related to the merger from labor costs for pipeline operations. As a result, the KMI jurisdictional entities failed to record such costs consistent with their nature, and the entities were unable to properly allocate labor costs to utility and nonutility operations as required by General Instruction No. 10. This resulted in the KMI jurisdictional entities recording internal labor costs in operating expense accounts that should have been recorded in Account 426.5.
While audit staff believes that the KMI jurisdictional entities should have recorded merger-related labor costs in a nonoperating expense account, KMI stated that the accounting misclassification did not affect customers' rates. Audit staff also did not find that this misclassification affected rates for jurisdictional customers.

So, apparently now it's okay for a merging utility to fail to record its merger labor separately, causing a massive transparency fail that not even FERC can figure out?  What was the point of this audit?  Was FERC trying to make KMI admit to certain dollar amount of merger labor cost and failed?  This is clear as mud, but it looks like KMI's deliberate failure to separate its merger labor costs made it impossible for FERC to determine how much labor cost there was, and where it ended up.  I'm not buying that the merger duties didn't cause any additional labor on the part of the employees.  FERC came away empty-handed.  What a waste of time and money!

But wait.. FERC also discovered "several" accounting misclassifications in their dig for merger costs.  Some of the misclassifications were a wash, rate-wise, but FERC still felt the reclass was necessary to bring KMI into compliance.  Some of them, however, were not.  FERC found donations, civil penalties, and environmental legal reserve in accounts that are recovered from ratepayers.  These transactions should always be recorded in accounts that are not recovered from ratepayers.  So, did FERC dig deeper to at least correct this violation and come away with something for ratepayers? 

Nope.  They recommended that KMI "[e]stablish and implement procedures to ensure proper coding and accounting of expenses under Commission regulations."

So, there was a big stare down about merger labor where FERC blinked first, but when FERC actually found some real money here, it didn't bother to correct it.  It gave KMI a pass, as long as it pretended to do better next time.

I hope future audits do better for ratepayers than this one.  FERC's OE isn't helping ratepayers, it's apparently too busy making headlines with banks and traders.