OVERALL

CONCLUSION:

The Program’s contracting procedures need to be strengthened to protect the State’s financial interests by ensuring that all transactions are supported by written contracts with the appropriate authorizations.  Financial management needs to be enhanced to increase the accuracy and completeness of Program data and to decrease the risk of errors and irregularities.  The Program needs to develop a formal process for tracking and accounting for gas volume imbalances with external parties.  Improvements are needed to ensure that the results of performance measures and the amount of gas enhancement are reported accurately.  Program policies and procedures need to be updated and followed consistently.  In addition, criteria need to be established for assessing the Contract Maintenance Fee.

SUMMARY OF

RECOMMENDATIONS:

Strengthen contracting procedures by ensuring that all contracts are documented and approved by appropriate levels of management before any transactions occur.  Improve the accuracy of financial data by ensuring that all transactions are recorded accurately and consistently.  Enhance financial management by monitoring the Program’s cash flow, reviewing transactions prior to payment, and ensuring appropriate separation of duties.

Ensure proper accounting for gas imbalances by formally tracking the variances, reconciling gas volumes to external statements, and recording the differences in the accounting records.  Improve performance measure reporting by ensuring that measures are clearly defined, consistently calculated, and accurately reported.  Increase the reliability of the reported gas enhancement by ensuring that the appropriate rate and cost basis are used in the calculations.  Strengthen Program policies and procedures by removing outdated procedures, addressing all key activities, and enforcing compliance.  Ensure proper assessment of the Contract Maintenance Fee by establishing and applying clear criteria for its use.

MANAGEMENT’S

SUMMARY RESPONSE:

Since these audit issues were identified, the State Energy Marketing Program (SEMP) has taken several steps to improve our business practices.  Some of the corrective action that has already occurred includes:  Purchase of a Gas Management and Accounting System to help manage our physical and financial data, hiring of a Financial Manager to provide supervisory oversight, and creation of escrow accounts to facilitate gas purchases and improve the accuracy of revenues.  We believe our business practices have improved significantly and we are working diligently to ensure additional progress.

OBJECTIVES:

The objectives of the audit were to:

·        Assess whether contracts for transportation and gas purchases were appropriately documented and authorized, and whether they contained provisions to protect the State’s financial interests.

·        Determine whether the Program produces complete and accurate financial and operating information for management decision-making.

·        Evaluate the accuracy of performance measure results, including amounts the Program reported as enhancement and savings.

SCOPE AND METHODOLOGY:

The audit covered current policies and procedures, and fiscal year 2002 and 2003 State Energy Marketing Program transactions.  The methodology included observing processes, interviewing employees, reviewing information, and performing tests and analyses.  The audit was conducted in accordance with Government Auditing Standards and International Standards for the Professional Practice of Internal Auditing.

DESCRIPTION OF PROGRAM:

The objectives of the State Energy Marketing Program (“Program”) are to provide additional revenues, or “enhancements,” to the Permanent School Fund and to provide savings to public customers by offering utility services at a below-market cost.  The Program operates by taking royalty payments due to the State on certain leases in the form of mineral production instead of receiving monetary royalty payments.  It then sells the oil and gas to public retail customers.  These customers include public school districts, state institutions of higher education, state agencies, and political subdivisions.

The 76^th Legislature passed Senate Bill 7, which authorized the Commissioner of the General Land Office (GLO) to convert royalties taken in-kind from state lands to other forms of energy, including electricity.  The legislation also authorized the Commissioner to execute contracts to purchase gas and to exchange oil for gas.

The Program reported revenues of approximately $125 million during the fiscal year ending August 31, 2003. 

SUBJECT:

Ensure the Contracting Process Protects State Interests

OBSERVATIONS:

Our review of sixteen contracts for oil and gas sales, gas purchases, and transportation identified issues regarding compliance with the contract approval process, contract terms, and bid requirements.  Compliance with state laws and agency policies is needed to ensure that transactions are properly authorized and that the financial interests of the State and the Permanent School Fund (PSF) are adequately protected.  Agency policy requires contracts to be submitted to the Legal Services Division and to the Deputy Land Commissioner/ Chief Clerk for review and sign-off.  In addition, state law requires agencies to post procurements exceeding $25,000 on the Texas Marketplace via the Internet. 

The Program has not consistently complied with state and agency contracting requirements.  Our review identified instances of contracts not being signed, not receiving the proper approvals, and not being executed in a timely manner.  Two contracts covering approximately $1.5 million of transactions were not signed.  Also, two contracts for more than $14 million were not approved by the Commissioner or Deputy Land Commissioner/Chief Clerk and did not have evidence of review by the Legal Services Division.  In addition, $10.8 million of transactions occurred before the four underlying contracts were executed.

The audit also indicated that the terms of some contracts did not include adequate assurance provisions intended to protect the financial interests of the State and the PSF.  The terms of two contracts allowed the purchasers of crude oil to retain sales proceeds and pay third parties at the Program’s request without the proceeds being remitted to the GLO.  Also, oil contracts do not contain “adequate assurance” provisions that address the financial stability of contractors, although gas contracts contain such provisions to help protect the State’s financial interest.

In addition, the audit revealed that the Program has not consistently adhered to state and agency bid procedures.  Procurements have not been posted on the Texas Marketplace, and transactions have not been competitively bid in accordance with state requirements. 

Finally, the Program has not followed its procedures regarding oil sales, which amounted to approximately $16.1 million in fiscal year 2003.  Specifically, the sealed bid process was not used, and School Land Board approval for awarding bids was not obtained.  Also, monthly bids were not obtained for spot gas sales, as required by the Program’s policies and procedures.

RECOMMENDATIONS:

To strengthen contracting procedures, the Program should:

·        Perform an inventory of its contracts to ensure they are signed and in the GLO’s possession.

·        Route all new contracts to the Legal Services Division for review and to the Deputy Land Commissioner/Chief Clerk for approval.

·        Ensure that contracts are executed before any transactions occur.

·        Remove provisions from oil purchase contracts that allow third parties to retain proceeds from oil sales or any other transactions and use them to purchase gas on behalf of the GLO.

·        Include “adequate assurance” provisions in oil purchase contracts similar to those in gas contracts that help protect the state’s financial interests.

·        Establish minimum credit ratings for contractors and include them in contracts.

·        Follow Program procedures for oil and gas sales by requiring bids and School Land Board approval.

·        Comply with State requirements for competitively bidding transactions and posting procurements on the Texas Marketplace, or document the justification for not following the regulations.

MANAGEMENT’S

RESPONSE:

Corrective Action:  Although we believe that the program’s contracting practices were acceptable and that they protected the state and agency’s interests, we have taken the following measures to ensure compliance with agency policies.

·        Of the two unsigned contracts ($1.5 million) mentioned in the audit report, the Commissioner on signed one contract on December 1, 2003, totaling $1.4 million.  We are in the process of negotiating execution of the second agreement ($102,000).

·        We performed an inventory of our contracts to ensure they were signed and in the GLO’s possession.  An inventory report of all contracts, including contract terms and prices, is available in GMS.   We are currently documenting the inventory process that has already occurred, and we are incorporating this process into our Procedures.

·        In July of 2003, we adopted the practice of routing all new contracts to the Legal Services Division and to the Deputy Land Commissioner/ Chief Clerk for approval. 

·        Escrow accounts were created in October 2003, and we have removed the provisions allowing third parties to retain proceeds from all oil contracts.

·        For all oil and gas transactions, we will ensure that contracts are signed before any transactions occur.

Our current practice for assurance of customers’ credit worthiness is to perform credit checks and to request letters of credit equivalent to one month’s business if the customer was not credit worthy.  Going forward, we will request that our Legal Department include “adequate assurance” provisions in oil purchase contracts to help protect the state’s financial interests.

Regarding compliance with the bidding process, we believe that we are not required to obtain bids.  This belief reflects preliminary legal guidance based on NRC 52.133 (c) (d), which says the Commissioner may negotiate and execute contracts or any other instruments or agreements necessary to convert that portion of the royalty taken in kind into other forms of energy, including electricity.  We plan to obtain a written legal interpretation from the agency’s General Counsel and will update our Program procedures accordingly.

Person Responsible for Planned Action:  Linda Roberts

Date of completion of planned action:  August 2004

SUBJECT:

Improve the Reliability and Accuracy of Financial Data

OBSERVATIONS:

The Program needs to improve the accuracy and completeness of its financial information to reduce the occurrence of errors in reported financial and performance measure results.  The audit identified inaccuracies in the Program’s financial data, including overstatement of revenues, understatement of expenditures, and misclassification of some transactions.  The inaccuracies in the data reduced the reliability of information needed for management decision-making.  We observed that actions to address some of the issues with data accuracy were initiated during the audit.

For the time period reviewed, incomplete or inaccurate recording of information about gas purchases resulted in Program expenditures being understated.  When gas exchanges occurred on pipelines, the net payments were recorded rather than the total payments, which resulted in $6 million of gas purchases not being recorded in the accounting system.  Also, three companies were allowed to purchase oil from the Program and buy gas for its customers instead of paying the agency for the oil.  The Program did not report $12 million of the gas purchases to the Financial Reporting Division for inclusion in the agency’s accounting system.  However, during the audit, we were informed that management directed the companies to begin remitting payment to the GLO when they purchase oil from the Program instead of retaining the funds.

The audit also indicated that the Program processed some revenues and expenditures inaccurately.  In fiscal year 2003, the Program used the Transportation account to process approximately $19.7 million of oil and gas transactions that were not related to transportation.  This caused inaccuracies in the Program’s reported revenues and expenditures.  These inaccuracies occurred primarily because accounts were not available to accommodate some of the Program’s transactions.  New accounts were created during the audit that should help facilitate the proper recording of transactions as they occur.

In addition, the revenues from some transactions were recorded differently in the Program’s financial records and in the agency’s general ledger.  For example, revenues of $7.25 million that resulted from a series of oil and gas swaps were counted as both oil and gas revenues in the Program’s financial records but were reported correctly in the agency’s general ledger.  The differences caused revenues to be overstated in the Program’s management reports.  However, the Program indicated it has started reconciling its accounts to the agency’s general ledger, which should help improve the accuracy of the Program’s financial data.

RECOMMENDATIONS:

To improve the accuracy of its financial data, the Program should:

·        Develop and document procedures to ensure that transactions are recorded accurately and consistently and cleared to the proper accounts.

·        Develop policies and procedures for using the new accounts appropriately, including details regarding clearing the accounts in a timely manner.

·        Ensure the reconciliation process is thoroughly documented, and continue performing monthly reconciliation’s between the program’s financial data and the agency’s general ledger.  Resolve any discrepancies or reconciling items promptly. 

·        Ensure that revenue from oil and gas exchanges is properly recorded in the Program’s financial records and reported to the Financial Reporting Division. 

MANAGEMENT’S

RESPONSE:

Corrective Action Taken:   We have made the following changes aimed at improving the reliability and accuracy of financial data:

·        We purchased a Gas Management and Accounting System to help manage our physical and financial data.  This product is an integrated database and delivery system that provides real-time data that will be used to manage and analyze business transactions.  We believe the implementation of this new system will improve the accuracy and completeness of financial data since it provides integration of data in an electronic format.

·        We hired a Financial Manager who reviews all financial transactions and performs monthly reviews of revenues and expenses to ensure they are reported accurately.

·        We updated the clearance procedure to ensure written documentation is available to enable accurate and consistent clearing of suspense dollars.

·        Escrow accounts have been created to facilitate gas purchases and improve the accuracy of transportation revenues.

Corrective Action Planned: We will continue to make efforts to develop and document procedures that will enable accurate and consistent recording of transactions.  We will also continue to reconcile data, ensure proper recording of exchanges, and ensure timely clearances of money held in suspense.  

Person Responsible for Planned Action:  Nancy Himebaugh, Rick Santerre (GMS portion)

Date of completion of planned action:  August 2004

SUBJECT:

Enhance the Program’s Financial Management

OBSERVATIONS:

The audit indicated that financial management of the Program needs to be enhanced through improved cash management, supervisory oversight, separation of duties, and cross-training.  Adequate cash monitoring is necessary for effective Program operations and strategic planning.  Management oversight is necessary for preventing errors and irregularities.

During the audit, we observed that the Program did not have a method to monitor and manage its cash flow and that it was unable to determine its cash requirements.  As it started purchasing more gas to serve its customers, the need for effective cash management increased.  However, the Program did not prepare management reports to project the committed gas volumes or to forecast revenues, expenses, and the resulting cash flows.  In addition, no comparison was performed of forecasted and actual cash flows.

Additional financial oversight is also needed in the Program.  For example, we found that authorizations for payments of gas purchases were not reviewed before being sent to Administration for payment.  In one case, the Program submitted three different invoices to Accounts Payable for payment of the same transactions with the same vendor during the same time period.  The invoice amounts varied from $162,767 to $2,961,933.  Without supervisory review and resolution of the issue before the invoices were sent for payment, Accounts Payable was unable to determine the actual amount owed.  During the audit, a manager was hired to help improve the Program’s financial operations. 

The audit also identified a lack of separation of duties in the Program’s accounting function.  One employee has been responsible for reviewing invoices from vendors, approving invoices for payment, preparing billings for customers, and applying payments to customer accounts.  Other employees were not cross-trained to perform these tasks.

RECOMMENDATIONS:

To improve its financial management, the Program should:

·        Develop a method to monitor and manage cash flow, including projecting gas volumes and estimating revenues, expenses, and cash flows. 

·        Periodically compare actual cash flow to forecasts and revise estimates as needed.

·        Perform supervisory review of invoices for payments before they are sent to the Accounts Payable Division for payment.

·        Separate the billing, collection, and payment functions, and cross-train employees on performing these activities.

MANAGEMENT’S

RESPONSE:

Corrective Actions Taken:  We agree with the audit finding and have made the following changes aimed at improving our financial management:

• Financial management of the Program has been enhanced through supervisory oversight.  We have implemented supervisory reviews on all Accounts Payable, Accounts Receivable, and suspense clearance functions.  Such reviews include verification of contractual source documents to ensure accurate payment of invoices, verification of mathematical accuracy of invoices, and examination of suspense clearances to ensure accuracy. 
• We have developed a payment request form that requires identification of the vendor name, payment type, account number, payment amount and positive general ledger account balances prior to payment.  This form is required to be completed by the SEMP accounts payable clerk requestor, and approved by the SEMP Finance Manager prior to submitting a payment request to Accounts Payable.  The form will facilitate cash flow monitoring, ensure authorization for payment of gas purchases, and will enable Accounts Payable to easily identify the amount owed.
• We have developed a method to quickly identify account balances through the use of ANPS general ledger summary reports. This new method allows us to quickly perform periodic reviews of our cash balances.  Prior to the Financial Manager’s request of the data, summary account balances were not readily available.
• We have structurally separated the billing, collection, and payment functions by segregating job responsibilities.  In December of 2003, we hired a Program Specialist for the Accounts Payable function.  However, in March of 2004, this person accepted another position outside of the agency.  We currently have one Program Specialist responsible for Accounts Receivable functions and are in the process of hiring a second Program Specialist that will be responsible for the Accounts Payable and clearance functions.  In the interim, a separate temporary employee has been assigned the Accounts Payable function to maintain the separation of duties requirement.
• We have begun cross-training efforts to minimize the risk of having limited trained resources.

Corrective Action Planned:  We are also working on the following improvements:

• Developing revenue and expense forecast methods so that comparisons of actual to forecasted estimates can be performed. 
• Developing methods aimed at projecting future gas volumes.

Person Responsible for Action:  Nancy Himebaugh, Richard Bone

Date of completion of planned action:  August 2004

SUBJECT:

Improve Accounting for Gas Imbalances

OBSERVATIONS:

The Program has not systematically reconciled the differences between the in-kind or purchased gas volumes recorded internally and the gas volumes reported on statements from external parties.  At many points in the Program’s operations, such as production, purchase, distribution, or sales, imbalances routinely occur between gas volumes recorded internally and the volumes reported by producers, pipelines, or local distribution companies.  However, the Program has not formally compared its internal records of gas volumes with the amounts reported by external parties to ensure the volumes are accurate.  It also has not recorded the variances in the Program and agency’s accounting records to ensure complete and accurate financial reporting.

The amount of gas the Program purchased for some of its customers exceeded the volumes the customers used.  For example, during October 2002 through March 2003, customers in one service area did not use at least $730,000 of gas the Program purchased for them.

When asked to quantify the total amount of gas imbalances for all customers as of August 31, 2003, the Program relied on amounts reported by pipelines and local distribution companies.  The imbalances ranged from approximately $351,000 to ($754,000), resulting in a total net imbalance of ($57,000).

Interviews with a gas supplier and a local distribution company indicated that their companies reconcile gas imbalances monthly, follow-up on any differences, and record the amounts in their accounting systems.  The Program is implementing a gas management system that is expected to provide a method for formally reconciling the volumes at various points in the process.

RECOMMENDATIONS:

To ensure proper accounting for gas imbalances, the Program should:

·        Formally track the gas imbalances.

·        Reconcile the monthly imbalances to external party statements, and record the amounts in the Program’s accounting records.

·        Report year-end balances to the Financial Reporting Division for inclusion in the Annual Financial Report.

MANAGEMENT’S

RESPONSE:

Corrective Action Taken & Planned: Although we have informally tracked the volume information using statements from external parties, we have not previously had all the necessary information from producers or the staff resources to formally reconcile the amounts to our internal records.  We are working to develop strategies for obtaining the necessary information from all producers.  In addition, the new gas management system will enable us to compare internal records of gas volumes with statements from external parties and record the differences in our accounting records.  We will report imbalances at year-end for inclusion in the agency’s Annual Financial Report.

Person Responsible for Planned Action:  Linda Roberts and Rick Santerre (GMS issues)

Date of completion of planned action:   November 2004

SUBJECT:

Ensure the Accuracy of Performance Measure Reporting

OBSERVATIONS:

The audit identified inaccuracies or inconsistencies in the Program’s reported results for six of the eight performance measures reviewed.  The inaccuracies included overstatement of the results of three measures and the use of an outdated rate for calculating customers’ savings from the Electric Program.  Also, the Program calculated two measures inconsistently.  Performance measures provide important information to agency management and oversight entities about the results of Program activities. 

Miscalculations of performance measures resulted in the Program reporting it exceeded three performance targets that it actually did not meet.  For the 2003 performance measure entitled “Annual Revenue from Electric Marketing,” only $3.7 million of the $8.4 million of reported revenue met the measure’s definition of electricity revenue received from electric customers.  The overstated amount represented gas sales to the electricity provider.

Also, the “Average Monthly Volumes of In-Kind Gas Sold” was overstated by 13 percent due to some gas volumes being counted both when purchased and when sold.  In addition, the Program rounded the “Percentage of Revenue from In-Kind Oil and Gas Sales” from 2.68 to 3.0 percent.  With a target of 2.9, the measure should have been rounded to 2.7 percent.

The audit also raised a concern about the reliability of the rates that the Program used in calculating electric savings.  Rates from 2001 were used to calculate the $61.3 million of electricity savings reported as part of the “Utility Savings Generated by the State Power Program.”  Due to deregulation becoming effective in January 2002, the rates the Program used in calculating the savings may not reflect what customers would have paid for electricity in 2003.

In addition, inconsistencies were identified in two of the Program’s calculations.  The measure for “Program Cost as a Percentage of Utility Savings and Permanent School Fund Revenue” was not consistently calculated in 2002 and 2003, although the definition of the measure did not change.  In addition, the amount of electric revenue was inconsistent in calculations of the “Percent of Revenue Generated by the State Power Program” and “Annual Revenue from Electric Marketing.”

RECOMMENDATIONS:

To improve its performance measure reporting, the Program should:

·        Ensure that each measure has a clear definition and method of calculation and that the results are reported consistently and accurately.

·        Develop written procedures for compiling and reviewing the performance measure results and supporting data.

MANAGEMENT’S

RESPONSE:

Corrective Action Taken:  In an effort to improve performance measure reporting, we have already taken the following actions to implement your recommendations: 

·        We have reviewed all State Energy Marketing Program (SEMP) performance measure definitions and calculations.  In cases where the performance measure definition was not clear or did not accurately reflect the stated or actual calculation method, we have requested changes.

·        We purchased a Gas Management and Accounting System to help manage our operational and financial data.  This system will be used to identify the source of the gas and ensure accurate enhancement calculations.

Corrective Action Planned:  As stated in your recommendation, we are developing written procedures for compiling and reviewing performance measure results and supporting data.  We will also perform supervisory reviews of all financial data that used for enhancement calculations to ensure that results are reported consistently and accurately.

Person Responsible for Planned Action:  Nancy Himebaugh and Richard Bone

Date of completion of planned action:  August 2004

SUBJECT:

Improve the Reliability of Reported Gas Enhancement

OBSERVATIONS:

The Program’s calculations of Permanent School Fund (PSF) revenue enhancement need to be improved to ensure they accurately measure the amount of additional royalty revenue contributed to the PSF.  A primary goal of the Program is to enhance PSF revenue, which makes the calculation of enhancement a critical component for measuring the Program’s success.  The gas “enhancement” has typically been considered the additional amount of PSF revenue generated by taking royalty payments as in-kind gas and marketing it instead of taking the royalty payments in cash.  Issues were identified in the rate used to approximate the cash royalty value of the gas and the cost basis used for some enhancement calculations.

The audit raised concerns about the cash royalty value of gas used in the Program’s calculations of revenue enhancement.  For gas taken in-kind, the Program used the “Weighted Average Cost of Gas” (WACOG) to represent the average cash royalty value of the gas.  The WACOG rate is based on the Houston Ship Channel index price minus a calculated differential.  Program management was unable to provide documentation to support the differential used.  Also, data from producers’ reports indicated that the rate the Program used was lower than the average cash royalty, which overstated the Program’s reported gas enhancement.

In addition, the Program did not calculate the revenue enhancement accurately for some of its purchased gas.  It used an estimate instead of the actual cost of gas in some of its calculations, which overstated the amount of enhancement.  The inaccuracies resulted from the Program not clearly identifying the source of the gas as taken in-kind or acquired and not using the related cost basis to calculate the enhancement.

RECOMMENDATIONS:

To improve the reliability of the gas enhancement, the Program should:

·        Develop procedures for calculating the Weighted Average Cost of Gas (WACOG) to ensure it provides a reliable estimate of the average cash royalty value of the gas.

·        Document the WACOG calculation, including support for any differential.

·        Identify the source of the gas, such as taken in-kind from a state lease, acquired in an exchange, or purchased, and use the appropriate cost basis in calculating the enhancement.

MANAGEMENT’S

RESPONSE:

Corrective Action Taken:  We have begun conversations to discuss Weighted Average Cost of Gas (WACOG) issues.  We have also prepared the following analysis: 

·        Comparison of Fiscal Year 2003 In-Kind gas revenue to Fiscal Year 2003 gas royalty revenue.

We are currently in the process of documenting the results of our review.

Corrective Action Planned:  We will continue to make efforts to improve the reliability of gas enhancements by developing procedures for calculating WACOG, and documenting the WACOG calculation.  We will also ensure the appropriate cost basis is used in calculating enhancements.

Person Responsible for Planned Action:  Nancy Himebaugh and Richard Bone

Date of completion of planned action:  August 2004

SUBJECT:

Update and Adhere to Program Policies and Procedures

OBSERVATIONS:

The Program does not have current, documented policies and procedures for all of its key activities and is not following some existing procedures.  Also, many of its documented procedures are no longer relevant.  Policies and procedures provide employees at all levels of the organization with an understanding of expected performance.  They also promote proper management and provide important criteria for measuring Program results.

The Program’s policies and procedures, which were last updated in 1996, do not address substantial changes in the Program since that time.  Procedures do not currently address purchasing gas for customers, exchanging oil for gas, operating the Electric Marketing Program, reporting performance measure results, or using the new accounts. 

Also, the Program is not following some of its documented procedures, including accounting for gas imbalances, routing contract documents, and computing the WACOG.  In addition, it has not been performing spot gas sales, conducting sealed bid sales for oil, or borrowing from the Transportation account according to its documented policies.

RECOMMENDATIONS:

To strengthen its policies and procedures, the Program should:

·        Update its policies and procedures manual by removing outdated policies, revising procedures that have changed, and addressing all key Program activities.

·        Enforce compliance with documented policies and procedures.

MANAGEMENT’S

RESPONSE:

Corrective Action Taken:  Updating policies and procedures has become a key focus for State Energy Marketing Program (SEMP).  On January 15, 2004, SEMP hired a Finance Manager who was given the task of updating SEMP policies and procedures and enforcing compliance.  To date, several policies and procedures have already been updated and are currently in draft form.  We recognize the need for updating policies and procedures and we will continue to make progress in this area. 

Person Responsible for Planned Action:  Nancy Himebaugh

Date of completion of planned action:  May 2004

SUBJECT:

Establish Criteria For Assessing the Contract Maintenance Fee

OBSERVATIONS:

During fiscal year 2003, the Program was required to assess a Contract Maintenance Fee, but it did not charge the fee to some customers.  It has not developed written criteria to use in determining when the fee will be assessed or waived.  The Program is authorized to assess customers $0.03 per unit for gas sales, and $0.05 per barrel for oil sales.  The fee contributes to funding Program administrative expenses.

Effective December 2003, a rule change made the Contract Maintenance Fee discretionary rather than mandatory.  The change requires the GLO to develop guidelines for determining when the fee will be imposed.  Written guidelines have not yet been established.

RECOMMENDATION:

To ensure the Contract Maintenance Fee is assessed properly, the Program should develop written criteria and charge the fee accordingly.

MANAGEMENT’S

RESPONSE:

Corrective Action Taken:  We are in the process of preparing a written policy and procedure related to Contract Maintenance Fees.  The purpose of this policy is to ensure we have a consistent practice that is based on documented criteria.

Person Responsible for Planned Action:  Nancy Himebaugh

Date of completion of planned action:  Completed