A U D I T R E Audit of Lee County Utilities P O R T Internal Audit Department Audit Number 2012.17 October 2012
October 04, 2012 Linda Doggett, COO Re: Audit of Lee County Utilities Dear Mrs. Linda Doggett: The Internal Audit Department has conducted an audit of Lee County Utilities, Keith Buonocore, CPA has completed this review. The response to the auditor s conclusions, issues and recommendations are attached to this report. The auditor wishes to thank the Lee County Utilities employees for their assistance and cooperation during the review. This Report has been posted to the Clerk of Courts website www.leeclerk.org under Internal Audit, Audit Reports. The hyperlink to the report has been sent to the Lee County Board of County Commissioners and appropriate parties. Sincerely, Chuck Short, Chief Internal Audit Operating Officer Internal Audit Department CTS/mf Cc: Charlie Green
Table of Contents Audit of Lee County Utilities Page Introduction 1 Conclusions 1-2 Findings 2 Scope 3 Observations 4-7 Exhibits 1-10 8-15 Response 16-17
Audit of Lee County Utilities Introduction The Clerk of Court Audit Department conducted an audit of the Lee County Utilities (LCU) Division, water production and distribution, sewer collection and processing, revenue recording and reporting activities. LCU is required to develop and maintain controls that enable and support the preparation of accurate reports in accordance with ordinances, statutes, laws, rules and accepted accounting principles. LCU administration remains firmly committed to accurate, complete, and timely financial recording and operational reporting in all aspects of its utility business. The LCU s current commitment includes assurance to management that resources are safeguarded, reports are accurate and reliable, policies and procedures are comprehensive and followed, and utility operations are conducted safely, ethically, economically and effectively. The audit was performed in accordance with general auditing standards for the professional practice of Internal Auditing. Audit work paper files contain details supporting the findings, conclusions and any recommendations in this report. (Audit Hours 624, Cost $33,386.99) Conclusions LCU realizes actual results may vary from estimates and projected results so continual monitoring takes place by management to make timely adjustments when necessary. The projected growth in customers and utilization of the system and the corresponding revenues derived from the application of the existing and projected rates applied to such customers and utilization represent reasonable and attainable projections. The projections of the LCU operating and maintenance expenses appear reasonable. The water and wastewater systems, after taking into account recent capacity-expansion related capital improvements, should have sufficient capacity to meet the anticipated service area needs for the future based on the LCU customer sales and usage projections. The system revenues projected for the next five years under the County-approved rate structure with the additional rate adjustments should be sufficient to fund the operating expenses of the system, finance the required ongoing maintenance and capital expenditures, and fund the annual debt service coming due in future years on the outstanding bonds and other outstanding subordinated indebtedness. Rate studies have historically led to implemented rate adjustments to meet system expenditure requirements and for compliance with the rate covenant as outlined in the current bond resolutions. It is anticipated by the LCU that the current and adopted rates for water and wastewater service will be sufficient, although there is no assurance that projected rate 1
increases will be approved by the powers that be. If the required future rate adjustments are not implemented, the LCU will need to adjust operations and outlays accordingly through the annual budget process, updated financial forecasts, and strategic planning. The existing rates for water and wastewater service are generally competitive with charges for similar service provided by other utilities located in or near Southwest Florida. The anticipated utility rate adjustments are not expected by the LCU to negatively affect the customer growth or billed water and wastewater services in the near future. The existing water and sewer connection fees are comparable to the fees charged by similar utilities located in the Southwest Florida area. LCU management believes the continued imposition of the connection fees is not expected to negatively affect system growth. Findings Through this review, LCU continues to be properly and accurately reading meters, organizing data, invoicing and collecting the approved fees for various services provided to its customers. The customer account procedures were well documented and the required deposits for customer accounts were consistently calculated and recorded. Security was found adequate for access to the Utility Water system application and preventing unauthorized changing of the fees and customer payment data. Multiple exception reports were produced and reviewed by the appropriate levels of management prior to billing and posting account adjustments. Performance measurement was found to take place at appropriate management levels. Various controls were inspected during the audit and determined to be operating as intended. 1) Duties for employees and the organization operations are well defined. 2) The organization s structure clearly sets forth the lines of responsibility. 3) Written procedures are maintained covering operations and data recording. 4) Physical access is restricted through doors, partitions, and locks. 5) The plant operating systems effectively provide for hands-on process monitoring. 6) The new Lucity system provides for enhanced tracking, monitoring, coordination, and decision making. 7) The accounting system efficiently provides for recording readings, creating accounts receivable, invoicing, and reconciling cash receipts. 8) Cash receipts are accurately and promptly recorded and deposited. 9) Journal entries are supported by detail that is reviewed and approved. 10) Detailed receivable records are balanced with the GL and control accounts. 11) An aged accounts receivable is periodically reviewed and an appropriate follow up action is taken on overdue balances. 12) Financial and statistical reports are prepared and reviewed for accounting, required debt coverage, and for monitoring with the BoCC approved budget. Continued LCU investment in and use of current smart meter technology for the meter replacement program has the potential to produce long term savings in time and money. LCU s continued investment in developing countywide reuse systems enhances utility revenue as well as lessens the burden on the limited potable supplies. 2
Scope The audit scope covered billing for water and sewer services, receipt of payments from retail and wholesale customers, utilities system application security, aging reports, exception and edit reports and account opening and closing processes. Plant facility inspections were conducted as were detailed reviews of the progress of CIP, maintenance, and future utility planning efforts. An example of the Customer Service objectives portion of the audit were to: Determine if LCU is properly billing the approved rates and collecting fees and charges for services provided to all customers. Determine that application security is adequate for access to the fee tables and system authorities prevent unauthorized changing of the fee amounts due and customer payment data. Determine if exception reports are properly processed, timely reviewed by the appropriate level of management, and appropriate actions taken. Determine if account opening and closing procedures are adequate and that required deposits for customer accounts are properly calculated and applied. Determine if monitoring reports are produced and reviewed by appropriate levels of management. To meet these objectives, department personnel and LCU management were interviewed to obtain a clear understanding of the processes and procedures covering the services rendered by LCU and assess the related internal control environment. Invoices and subsequent payments received were sampled to determine if LCU is calculating, receiving, and accurately reporting fees for the services provided. For the scope of this audit concerning the billings segment, the starting points were the system customer master records and related cycle meter readings. Background LCU The utility system was last audited by the Clerk of Courts Audit Department in 2009. LCU provides for the necessary in-house operations and maintenance to ensure quality product and services for approximately 74,500 water customers (81,700 premises), 53,000 sewer customers (56,100 premises) and 69 reuse accounts (see Exhibit 1 on pg. 8) with collections sufficient for operations and scheduled utility infrastructure maintenance. LCU operations are routinely reviewed and monitored by multiple consultants and regulators for compliance, fiscal, environmental, and health safety purposes. Utility rate studies are conducted by consultants periodically to ensure utility business continuity, capacity, and adequate plant maintenance. An annual outside audit is conducted for financial statement and debt coverage purposes (see Exhibit 2 on pg. 9). All of these documents and studies are readily available on-line or in hard copy for administrative or public inspection and were also reviewed as part of the audit process. 3
Observations Use of Third- Party Billing Service LCU customer utility bills are printed and mailed at U.S. postage automation rates and maintain compliance with the U.S. Postal Service Bar-coding requirements. The contractor continues printing and mailing most all utility bills to the satisfaction of LCU administrators. Expanded Consumer Use of E-Pay LCU continues to maximize the use of electronic billing and payment options for various customers throughout the County. This entails continued monitoring and upgrading the systems and utilized software. Cooperation from providers and software developers is necessary to ensure the necessary safety is created and maintained for all of the electronic communications used in all the processes. LCU still can provide printed copies of all e-pay documents upon request. Meter Replacement Program The LCU has been reviewing the annual aged meter change-out report and selected areas that are coming up for change-outs and were built at similar times. LCU will install AMR meters in such areas instead of direct read meters. The continued placement of these AMR smart meters would enhance the County s utility program, save on manpower and related equipment currently required for meter reading. Meanwhile, LCU continues to take advantage of the latest meter technologies. Expanded Consumer Use of Effluent The County continues to maximize the use of effluent for various applications throughout the County. This entails continued cooperation from planners and developers to ensure the necessary infrastructure is created and maintained for effluent use in all future planned developments. Processed effluent enhances LCU revenue as well as offset current potable water usage in Southwest Florida. 4
Plant & Asset maintenance The latest consultant engineer review of LCU suggests a number of physical plant enhancements and recommended maintenance items. LCU efforts require the allocation of time with money and conditions vary amongst the individual plants. LCU continues to enhance their current efforts in preventing even more costs or impediments to plant operations in the future. LCU has recently implemented a new rate structure that incorporates needed capital and maintenance components. Auditor Review Processes and Risk Assessment Auditor reviewed the various administrative set up and maintenance of utility accounts based on premise, location, customer, meter I.D., owner and tenant relationships, etc. Accuracy saves time and money. Auditor reviewed meter read and upload processes as the start to revenue generation. Risk, is improper or inaccurate reads, but risk remains low on system misreads or no-reads through software edit reports that are reviewed and rectified resulting in low billing errors. Auditor reviewed posting of meter reads to customer accounts where usage is converted to monthly revenues. Risk of errors on account posting and related billings continues low. Auditor reviewed the service order process as initiated from the field and customer service. The process generates an immediate response from real-time system documentation. Risk remains low for rework through accurate and timely communication and cooperation. Auditor reviewed cash receipt and payment posting processes. Typical cash procedures are strictly followed to mitigate any inherent risk with cash handling of transactions. Multi-level controls are monitored by supervisors and are operating as intended. Auditor reviewed the process of posting daily accounts receivable from the cycle meter reads and inspected summary reports to verify the detail batch activity and deposit activity matched. Routine operating controls are in place to consistently balance the receivable accounts. Auditor reviewed the collection and application of deposits through transfer and cross-reference prior to check disbursement of a customer refund. Risk is account credits not being enough to off-set any remaining account charges requiring collection efforts. It appears the sewer only accounts still present a challenge to LCU, but progress is being made. 5
Auditor reviewed software system authorities and access. Risk is in unauthorized changes to accounts or processes, but risk is low as required authorities were found in place and operating as intended. Auditor reviewed the e-pay procedures and the uploading of such files. Check lists and system data checks exist for completeness. Auditor discussed 100% customer base, missing meters, unauthorized use, tap-ins, 100% reads, over-usage, under-usage, leaks and disconnects. Risk remains with sewer-only accounts as there is no shutoff mechanism which equates to possible collection issues. Auditor discussed adjustments for unexplained use and leaks. Risk is a reduction in billable revenue. The adjustment calculations reviewed fluctuate, but appear acceptable to LCU management. Auditor reviewed use of estimated reads and the philosophy on no-reads and misreads. Exception reports were produced after each upload for immediate review and follow up that included any requests for re-reads. The use of estimated meter readings appears minimal. Auditor reviewed Sales Ledger and Cash Journal for various months. Steps included tracing deposits to the sales ledger through the journal entries to the accounting system. No material exceptions were noted. Auditor reviewed monthly activity statistics and trending of key performance indicator (KPI s) data for the last few years. All KPI s were relevant to management and all appeared reasonable. (See select Exhibits of interest in this report. More can be found in the LCU files.) Auditor discussed the use of AMR smart meters and the general meter upgrade program. LCU expanded AMR areas including difficult access and areas where safety is an issue. The conversion program has progressed to 11,885 AMRs. The Cost / Benefit study was discussed. Auditor discussed the enhanced effluent usage and related revenue. Planners and developers make continued progress in this area. Auditor inspected various plants for security and safety components. There are inherent risks with processing raw water and raw sewage. Each facility was found to be well maintained, compliant and secure. Auditor reviewed current quality components. LCU maintains the highest quality production and processing standards. Related documents are made available by LCU for administrative or public inspection, if desired. 6
Auditor reviewed LCU planning, coordinating, and monitoring efforts. The new Lucity software was demonstrated and reviewed. Progress is being made with the software usage as a management monitoring, evaluation, decision making and planning tool. Auditor reviewed ongoing CIP progress, project coordination and project budget status. Projects were found to be progressing within established timeframes and with sufficient dedicated funding. 7
Accounts Exhibit 1 LCU Customer History 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2006 2007 2008 2009 2010 2011 2012 Fiscal Water Wastewater Source: Lee County Utilities Customer Service Reports The Exhibit shows the steady trend of LCU customers over the years. 8
Exhibit 2 The Exhibit reveals LCU s consistent and sufficient debt coverage ratios. 9
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Exhibit 3 Percentage Electronic Payments to All Payments 45% 55% Electronic Payments All Other Payments The Exhibit shows the percentage of e-payments received. 11
Exhibit 4 Total Electronic Payments 14% 10% 3% 68% 5% ACH Payments via Web/IVR WEB Payments - taken by CST EFT & Third Party Vendor Payments WEB Payments - made by customer IVR Payments The Exhibit shows the type of e-payments received. Exhibit 5 Delinquent Disconnects 2,000 1,500 1,000 500 - Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Number of Delinquent Disconnect Orders Number of Delinquent Disconnects Source: Lee County Utilities Report Key Performance Indicator Report The Exhibit shows the recent trends in orders and related cut-offs. 12
Exhibit 6 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 $$ Amount of LCU Cust. To Collection Agency Total $$ Received from Collection Agency Source: Lee County Utilities Report Key Performance Indicator Report The Exhibit shows the recent trends in past-due revenue collection activities. 13
Gallons Exhibit 7 LCU Water (000s) 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2006 2007 2008 2009 2010 2011 est2012 Fiscal Finished Sold Source: Lee County Utilities Report LCU Unaccounted for Water The Exhibit shows the trend in volume of water finished (treated) and sold. Exhibit 8 Year To Date Sales Revenue $5,000,000 $4,500,000 $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 WATER REVENUE FISCAL 2012 WATER REVENUE FISCAL 2011 SEWER REVENUE FISCAL 2012 SEWER REVENUE FISCAL 2011 Source: Lee County Utilities Report LCU Sales Revenue The Exhibit indicates the comparison of Water and Sewer revenue fiscal year-to-date. 14
Exhibit 9 WATER $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Green Meadows Corkscrew Pinewoods North Lee County Waterway Olga Total Cost per 1,000 Gallons Treated Source: Lee County Utilities Report Key Performance Report The Exhibit shows the Water Treatment Facilities Cost per 1,000 gallons Treated Exhibit 10 WASTEWATER $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Fiesta Village Fort Myers Beach San Carlos Waterw ay Pine Island Three Oaks Gatew ay Cost per thousand gallons treated Source: Lee County Utilities Report Key Performance Report The Exhibit shows the Wastewater Treatment Facilities Cost per 1,000 gallons treated 15