«Michael Canales, Complainant, v. Docket No. EL14-11-000 Edison International, EIX and Southern California Edison Company, Respondents ORDER ON COMPLAINT ...»
147 FERC 61,020
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Cheryl A. LaFleur, Acting Chairman;
Philip D. Moeller, John R. Norris,
and Tony Clark.
v. Docket No. EL14-11-000
Edison International, EIX and
Southern California Edison Company, Respondents
ORDER ON COMPLAINT(Issued April 7, 2014)
1. On November 12, 2013, Michael Canales filed a complaint against Edison International, EIX and Southern California Edison Company (collectively, SoCal Edison) under section 206 of the Federal Power Act (FPA). 1 Mr. Canales alleges that, since 2009, SoCal Edison has been fraudulently misrepresenting its finances to the detriment of shareholders and also manipulating the energy market. This order finds that Mr. Canales has failed to present a prima facie case in support of his allegations and denies the complaint.
I. Background and Complaint
2. Mr. Canales represents that he is an accounting supervisor at SoCal Edison. He claims that, since 2009, SoCal Edison has been fraudulently misrepresenting its finances to the detriment of shareholders and also manipulating the energy market to cause unjust market rates for electricity in southern California. Mr. Canales contends that SoCal Edison knowingly violated federal statutes and regulations amounting to fraud against shareholders and market manipulation. Mr. Canales indicates that the issues presented in the complaint are pending “with the California Public Utilities Commission related to 16 U.S.C. § 824e (2012).
Docket No. EL14-11-000 -2electricity Construction Field Forces, Substation Construction (Alhambra Combined Facility), and Distribution that the State of California has jurisdiction over.” 2
3. Mr. Canales alleges that SoCal Edison is circumventing 18 C.F.R. Part 101, the Uniform System of Accounts (USofA), through certain practices, actions, and inactions.
Specifically, Mr. Canales claims that: (1) “Tens of thousands upon thousands of assets have been reported missing (via notifications from field personnel), while they remain on the books as financial assets for months or years”; 3 (2) material value is not correctly stated and automated “functionality in SAP computer software can be overridden by accountants to change percentages of material and labor that are charged in a work order”; 4 (3) inventory items in the material management system are not correctly conveyed and recorded in the SAP accounting system; 5 (4) assets are not safeguarded; 6 (5) reporting of material events is untimely; 7 and (6) independent audit committees have not been utilized. 8
4. Mr. Canales contends that, because SoCal Edison is not adhering to the USofA, SoCal Edison cannot accurately certify its quarterly financial reporting in the FERC Annual Report Form Nos. 1, 1-F, 2, 2-A and 6. 9 In addition, Mr. Canales claims that without reliable financial information prepared in accordance with the USofA: (1) the Commission is unable to accurately determine the costs that relate to a particular time period, service, or line of business; (2) it is difficult to determine whether an entity has previously been given the opportunity to recover its costs through rates; and (3) it is difficult to compare how the financial performance and results of operations of one regulated entity relates to that of another. 10
5. Mr. Canales claims that SoCal Edison violates various other statutes. For example, he states that “Records and accounts are not being kept in accordance with 16 U.S.C. § 825.” 11 He further alleges that SoCal Edison's “actions/inactions violate federal statutes, the Commodity Exchange Act (CEA), the Energy Policy Act of 2005 (EPAct 2005), and the Energy Independence and Security Act of 2007 (EISA) all prohibit manipulation of various energy commodities in order to prevent fraud against shareholders and investors.” 12
6. Mr. Canales claims that he (as both an investor and a ratepayer), shareholders, and all California ratepayers “are now shouldering the burden from Edison's deception in the form of higher electrical bills, and inflated market value.” 13 Mr. Canales explains that “[d]eceiving shareholders and investors about the valuation, inflates stock value and price movements.” 14 According to Mr. Canales, “[b]y not presenting completely accurate financials, markets can be manipulated due to distortions in valuation, O&M, expense, write off/down affecting price per share of Edison International (EIX) stock.” 15 He further claims that “[s]hareholders may prematurely sell or purchase electricity futures at prices higher than the prevailing price.” 16 Further, according to Mr. Canales, “by distorting market prices, this manipulation interferes with the price discovery of derivatives markets: rather than serving as beacons of competitive supply and demand conditions, manipulated prices reflect unethical behavior.” 17
California.” 19 He further claims that the amount will be “more if Southern California Edison’s current 2013-2015 General Rate Case is approved” by the California Public Utilities Commission. 20
8. Mr. Canales explains that the remedy sought is as follows: (1) “Notify the shareholders, and the public, the state of accounting deficiencies regarding policies and procedures of the company”; (2) “Issue refunds to the California rate payer, if applicable, and insure that the California ratepayer is not burdened with any of the costs associated with these suggested remedies”; (3) “Restate financials; notify Internal Revenue Service, Securities Exchange Commission, and EEI”; (4) employ an outside forensic accounting firm to review the adequacy of SAP accounting systems 21 for purposes of supplying information to the Commission”; (5) determine whether the company acted in good faith and had proper standards in place to prohibit retaliation from whistleblowers; and (6) review criteria for financial certification policies and procedures for submittal of financials to the Commission. 22
9. Mr. Canales indicates that the Commission’s Enforcement Hotline was utilized to express his allegations. He also represents that, in his opinion, alternative dispute resolution procedures would not be successful because of the historical demonstration of bad faith by SoCal Edison. 23
II. Notice of Filing and Responsive Pleadings
10. Notice of the complaint was published in the Federal Register, 78 Fed.
Reg. 69,661 (2013) with answers, interventions and protests due on or before December 2, 2013. On November 21, 2013 and January 3, 2014, SoCal Edison filed unopposed motions for extension of time. On November 27, 2013, the Commission issued a notice extending the time for all parties to submit answers to January 10, 2014 Id.
SAP refers to systems applications and products, which is an integrated software program SoCal Edison purchased from a private company and customized for its business. The general ledger, which captures all financial transactions recorded throughout the life of a company, is a focal point of the SAP system and interfaces with other systems, such as PowerPlant, a sub-ledger that supports all fixed asset accounting activities.
See Complaint at 10-11.
Id. at 12-13.
Docket No. EL14-11-000 -5and on January 9, 2014, the Commission issued a notice further extending the time for all parties to submit answers to January 24, 2014.
11. Timely motions to intervene were filed by San Diego Gas & Electric Company, M-S-R Public Power Agency, the Los Angeles Department of Water and Power, and the Cities of Anaheim, Azusa, Banning, Colton, Pasadena and Riverside, California. The California Public Utilities Commission (CPUC) filed a motion to intervene out of time.
12. On January 24, 2014, SoCal Edison filed an answer to the complaint.
III. SoCal Edison’s Answer
13. SoCal Edison argues that Mr. Canales’ complaint fails both procedurally and legally. Notwithstanding, SoCal Edison contends that Mr. Canales’ allegations are false. 24 SoCal Edison states in its answer how it is committed to regulatory and ethical compliance in all respects. 25
14. SoCal Edison argues that the complaint should be rejected due to procedural deficiencies. First, SoCal Edison points out that Mr. Canales did not sign the complaint as required by 18 C.F.R. § 385.2005(a)(1). SoCal Edison also contends that the complaint fails to address the requirements of 18 C.F.R. § 385.206(b)(5), specifically, the requirements for a good faith quantification of the financial impact or burden for the complainant, operational or non-financial impacts as a result of the action or inaction, and a statement whether the issues are pending in another proceeding.
15. In addition, SoCal Edison claims that Mr. Canales has failed to support his case, and there is no legal support for the claims Mr. Canales has made. SoCal Edison asserts that Mr. Canales makes conclusory allegations of fraud and manipulation and does not explain these claims or provide any comprehensible connection between these allegations and the rest of his complaint. SoCal Edison also argues that Mr. Canales fails to meet the Commission’s standards for a prima facie complaint—i.e., he does not explain how the actions or inactions he identifies in the areas of accounting for work orders, assets, materials, and inventory violate applicable standards. 26
SoCal Edison has violated. 27 Furthermore, according to SoCal Edison, the complaint does not identify any specific rate or any specific tariff, regulation, rule, practice or contract affecting any rate as unjust, unreasonable or unduly discriminatory and consequently, the complaint fails to meet the most minimal of burdens under FPA section
206. Finally, SoCal Edison asserts that Mr. Canales offers no facts, law, or analysis relating to the three elements of a market manipulation claim: (1) a scheme or artifice to defraud; (2) made with scienter; and (3) in connection with a transaction subject to the Commission’s jurisdiction.
17. In addition to the procedural failures, SoCal Edison contends that Mr. Canales’ allegations are false and lack factual support. 28 According to SoCal Edison, although Mr. Canales alleges fraud, intentional misreporting, inflated rates, and market manipulation, the portion of the complaint in which Mr. Canales identifies “the action or inaction which is alleged to violate applicable statutory standards or regulatory requirements” presents a list of particular claims relating to SoCal Edison’s accounting policies in the areas of work order processing and the management of assets, materials, and inventory. SoCal Edison argues that the factual claims of the complaint relate to these particular accounting issues, rather than allegations of excessive rates and fraudulent market manipulation.
18. SoCal Edison contends that Mr. Canales’ claims fall into two categories:
(1) SoCal Edison’s closing of certain work orders in the SAP system; or (2) SoCal Edison’s policies for managing assets, materials and inventory. Regardless of the category, SoCal Edison argues that Mr. Canales fails to show that Edison’s policies in either category are inappropriate. SoCal Edison argues that the complaint fails to describe how the particular issues Mr. Canales raises relate to SoCal Edison’s overall processes for work orders and inventory. SoCal Edison instead claims that its processes for both capital-related work orders and for managing assets, materials and inventory are appropriate. 29 SoCal Edison asserts that it contracted with KPMG to act as an “objective third party” in an investigation into the claims contained in the complaint. 30 The scope of KPMG’s work focused on the processes and associated internal controls relating to Mr. Canales’ claims. SoCal Edison states that KPMG did not find any evidence to support Mr. Canales’ allegations of fraud and manipulation or any other “inappropriate” Id. at 38.
Id. at 1, 19-20.
Id. at 20-34.
KPMG is an audit, tax and advisory firm engaged by SoCal Edison’s Office of General Counsel to conduct the investigation. KPMG is not engaged to serve as SoCal Edison’s external auditor of its financial statements.
Docket No. EL14-11-000 -7behavior and provided a report from KPMG documenting the results of the investigation. 31
19. SoCal Edison explains that it employs dozens of controls with respect to capital related work orders and management of assets, materials and inventory. According to SoCal Edison hundreds of employees process thousands of work orders each day, each involving numerous documents and forms. 32
20. SoCal Edison states that a process involving so many people, transactions and documents will be subject to both human and computer errors. SoCal Edison explains that it has a multi-step process to track capital related work orders that builds in several layers of controls designed to ensure that its books and records reflect the cost of completing each work order and describes the processes. 33
21. SoCal Edison asserts that the claims contained in the complaint are misleading.
According to SoCal Edison, the most specific criticism of its processes involves the closing of work orders with missing requirements. SoCal Edison argues that Mr. Canales mischaracterizes its process for closing work orders and that the work orders questioned by Mr. Canales are following an established and appropriate protocol for closing backlogged work orders from 2010 and 2011 that persisted after changing accounting systems to an SAP system. According to SoCal Edison, the complaint does not identify a “real problem” or prove that any assets are missing. 34
22. SoCal Edison further states that it maintains a strong culture of compliance throughout its organization including its employees, managers and officers. SoCal Edison states that it has five key groups that oversee and foster a commitment of the entire company to ethics and compliance. According to SoCal Edison, the centerpiece of its Ethics and Compliance Program is a code that requires all employees to act in compliance with applicable laws, regulations, and company policies. 35
its financial reporting. 36 SoCal Edison further asserts that it solicits external reviews of its ethics and compliance program on a regular basis. 37 Further, SoCal Edison indicates that the Commission audited SoCal Edison in 2012, which audit included testing and verification of whether SoCal Edison’s accounting conformed to the Commission’s USofA. 38 IV. Discussion
Pursuant to Rule 214 of the Commission’s Rules of Practice and Procedure, 39 the 24.
timely, unopposed motions to intervene serve to make the entities that filed them parties to this proceeding. We will grant CPUC’s late-filed motion to intervene, given CPUC’s interest in the proceeding, the early stage of the proceeding and the absence of undue prejudice or delay.
25. We find that Mr. Canales has substantially complied with the procedural requirements for filing a complaint, such that the complaint does not warrant rejection on procedural grounds.
26. To prevail in a proceeding under section 206 of the FPA, a complainant must first demonstrate that an existing practice is unjust, unreasonable, unduly discriminatory or preferential. 40 A complaint must present a prima facie case demonstrating the unjustness,
unreasonableness, or discriminatory nature of the existing practice before the Commission will grant relief under FPA section 206. 41
27. Mr. Canales has not met the burden of presenting a prima facie case to support his complaint and we will, accordingly, deny the complaint. The denial is without prejudice to Mr. Canales developing additional facts that would support the broad allegations made in this complaint and presenting them in a new complaint for the Commission’s consideration.