PSC Opens Another Con Edison Prudence Proceeding to Assess Rate Impact of Alleged Crimes

Recently federal prosecutors announced the arrest of 13 Con Edison employees accused of bribes and kickbacks in connection with Con Edison projects ultimately paid for by customers. Today the PSC issued an order commencing a prudence proceeding to investigate the matter, stating:

The conduct described by the ICE agents’ affidavits, unless disproved, has resulted in unwarranted payments by the Company to contractors to the detriment of the Company’s customers. Such unwarranted expenditures would have been included in the costs of the Company’s capital projects, as well as in its operation and maintenance expenses. Because such expenditures are an integral part of the Company’s rate case filings, such costs would have been, and continue to be, collected in end user electric, gas or steam rates. To the extent that Con Edison’s rates included charges for payments to contractors that were illegal and unwarranted, they would by definition be unjust and unreasonable.

Moreover, the Company’s conduct in connection with these contracts could be deemed imprudent. * * * * The affidavits made public by the US Attorney's investigation raise a concern that there may be deficiencies in the Company's oversight of its construction and bidding processes. While these affidavits justify the prudence case with respect to the indictment capital project contracts which we are beginning today, the affidavits also raise the possibility that the scope of our prudence inquiry should extend to other contracts or projects not identified in the affidavits filed thus far in connection with the US Attorney's investigation. In particular, we note that the 13 Con Edison employees asserted to have engaged in illegal bribe taking and kickback conduct were in managerial and oversight positions for large portions of the Company's service territory. Moreover, there is some evidence in these affidavits that the scope of misconduct may have included bid rigging or other behaviors inimical to the best interests of Con Edison, its customers and other contractors. These facts raise serious questions as to whether Con Edison's internal controls were inadequate or were inadequately enforced to protect the Company from excessive payments and illegal conduct by its employees. Accordingly, this proceeding will include an investigation of the Company's internal controls and the consideration of appropriate remedies, including consideration of whether the scope of the prudence inquiry should be expanded to include capital or operation and maintenance project contracts or expenditures other than those addressed in the US Attorney's allegations.

It is heartening to see that the PSC is also looking at the conduct alleged in the federal criminal investigation and at Con Edison's "system of internal controls." While no system of either Con Edison or the PSC can be expected to thwart all concerted criminal behavior, we note that for many years - including the years during which the alleged fraud occurred - the Commission did not perform the statutorily required management audits the Legislature mandated the PSC to conduct every five years. As stated in a 2007 recommended decision of administrative law judges in 2007:

PSL 66(19) states that management and operations audits “shall be performed at least once every five years” and shall include "an investigation of the company’s construction program planning in relation to the needs of its customers for reliable service and an evaluation of the efficiency of the company’s operations. The commission shall have discretion to have such audits performed by its staff, or by independent auditors." In every"[major rate case] the commission shall review that corporation’s compliance with … the most recently completed management and operations audit." CPB asserts that the Commission has not performed the management and operation audits required by PSL 66(19) in over fifteen years. CPB’s claim was not rebutted by either Staff or the Company.

A statutory management and operations audit process was begun in 2008, to be performed by an outside auditor, is now underway. The first such report in what will now be more than 17 years is due later in 2009.