Financial Regulatory Audit Policy of the National Energy Board

On 1 December 1994, the National Energy Board ("Board") issued a revised Financial Regulatory Audit Policy which was applicable to all regulated pipeline companies. After several companies under the Board's jurisdiction negotiated incentive toll settlements, the Board issued letters to those companies indicating that its audits would thereafter be focussed on ensuring compliance with the Oil / Gas Pipeline Uniform Accounting Regulations. However, the Board has decided that this limitation on companies that have negotiated incentive toll settlements could affect its ability to meet its mandated regulatory responsibilities.

For example, the Report of the Auditor General of Canada to the House of Commons dated September 1998 noted in paragraph 13.21 that "the NEB has exempted companies from having to provide information on their financial and operational performance pursuant to Toll Information Regulations. To protect the public interest, however, it does need to monitor the effectiveness of its new processes." In this regard, the Board's primary means of assessing the effectiveness of negotiated incentive settlements is through shipper complaints. However, the absence of formal complaints does not necessarily indicate that interested parties are satisfied with the settlement as parties may lack the information and/or resources required to make such an assessment.

As well, since the introduction of incentive settlements, the Board has concerns about whether it is maintaining an in-depth knowledge of the operations of pipeline companies sufficient to ensure that it is able to meet its responsibilities under the National Energy Board Act. The Board relies on its staff to provide independent, expert advice on matters that come before it. With fewer toll hearings there is less opportunity for the Board's staff to access detailed information and to update its understanding of the operations of the regulated companies.

Finally, based on discussions with some industry representatives, the Board believes that it has a role to play in auditing settlements to ensure that they are working as intended.

Therefore, the Board has decided to expand its current Audit Policy for those companies that have negotiated incentive toll settlements to allow its staff to examine areas that are outside the scope of compliance audits.

The Board will provide a summary of the information examined and report any substantive findings and conclusions in its draft audit report. The Company will then have an opportunity to comment on these matters before the Board issues its final report which would then be a public document to be served upon interested parties. The final report will either reflect the Company's comments through amendment of the draft report or incorporate the Company's comments with a final comment from the Board.

In the interest of promoting efficiency and transparency, the Board may also examine items apart from those normally included in its financial regulatory audits. For example, the Board may wish to examine processes maintained by companies to ensure certificate conditions are satisfied or to ascertain the level of safety-related information being maintained by companies. However, prior to examining any such information, companies will be notified through the audit plan which is sent to companies prior to the commencement of a Board audit. The reporting of any findings on these matters will be done separately and excluded from the audit report.

The Board's revised Audit Policy is set out in the attachment. Financial regulatory audits will be carried out on the basis of the described objectives, confidentiality guidelines, approach and procedure. Pipeline companies are directed to serve a copy of this letter on all their shippers and interested parties.

Yours truly,

Michel L. Mantha
Secretary

Attachment to NEB letter
Dated 23 February 1999

Financial Regulatory Audit Policy of the National Energy Board

On 1 December 1994, the Board issued a revised Financial Regulatory Audit Policy which was applicable to all regulated pipeline companies. In the latter part of 1996, the Board issued letters to companies with incentive toll settlements indicating that the Board's audits of these companies would be focussed on ensuring compliance with the Oil / Gas Pipeline Uniform Accounting Regulations. However, the Board has found that this restricts its ability to satisfactorily meet its regulatory responsibilities. The Board considers financial audits to be an important regulatory tool for the purposes of ensuring compliance with regulations, orders, and decisions, as well as documenting the extent to which companies operate with due regard for economy and efficiency. Accordingly, the Board is issuing a further revised audit policy as set out below. Financial regulatory audits will be carried out on the basis of the following objectives, confidentiality guidelines, approach and procedure.

A. Objectives

To determine if the company's system of accounts has been maintained in accordance with the Board's Gas and Oil Pipeline Uniform Accounting Regulations.
To determine whether the company has complied with the National Energy Board Act, decisions, tariff orders and other accounting and reporting directives.
To verify that the financial information contained in various company applications or submissions to the Board agrees with the company's records.
To examine whether cross-subsidies have been made at the expense of tollpayers.
To maintain up-to-date knowledge of the company, including its regard for economy and efficiency.

B. Audit Confidentiality

While the Board will continue to make its audit reports public, the following guidelines on audit confidentiality will be observed.

Documents, or copies thereof, obtained from the company during an audit will not be placed on the public record.
For documents containing information of a sensitive nature, a company may request that only senior officers of the Board shall have access.
Should the Board wish to raise a matter arising out of an audit in a public proceeding, the Board will not use documents obtained during the audit as direct evidence. Rather, the Board will request such information directly from the company so that it would have an opportunity to respond as it sees fit.

C. Approach

In carrying out its audits, the Board relies on the opinions expressed by the external auditors on the financial statements of the company. The Board will not normally duplicate the work of the external auditors.

The Board considers audits to be an important regulatory tool to ensure compliance with its regulations, orders, and decisions. For companies without incentive settlements, the Board will examine information related to issues raised by interested persons in Board proceedings and matters of concern to the Board. This includes an examination of the extent to which the company has regard for economy and efficiency. The Board will also observe the extent to which such companies have put in place policy and procedures for establishing performance objectives and for evaluating the results. These observations could facilitate further examination of the subject matter in a toll proceeding.

With respect to those companies that operate under incentive toll settlements, Board staff will also examine information in other areas for the purposes of maintaining in-depth and up-to-date knowledge of the companies' regulated operations and assessing the effectiveness of the incentive settlements.

D. Procedure

Before field work commences, each audit plan is approved by the Board, the company is notified of the scope of the examination, and is consulted on timing.
An investigation will be initiated should the Board become aware of any violation of an act, regulation, decision, tariff order or other accounting and reporting directive.
Best efforts will be made to conduct audits when there are no tolls applications pending. However, should the Board find it necessary to conduct audits during these times, it would not be the Board's intention to examine issues that had been raised in the tolls applications.
In instances of non-compliance, if voluntary compliance cannot be obtained from the company, the matter shall be referred to the Board for enforcement.
A draft audit report, which describes all significant observations is issued by the Board in confidence to the regulated company for comment.
After considering any comments received from the company, the Board issues its final audit report which is placed on the public record and served on interested parties.

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