REPORT DIGEST

ILLINOIS POWER AGENCY

FINANCIAL AUDIT AND COMPLIANCE EXAMINATION
FOR THE YEAR ENDED JUNE 30, 2011

Release Date:  August 23, 2012

Summary of Findings:
Total this audit: 23
Total last audit:  35
Repeated from last audit: 22

State of Illinois, Office of the Auditor General
WILLIAM G. HOLLAND, AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park Plaza, 740 E.
Ash Street, Springfield, IL 62703
(217)  782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are also available on
the worldwide web at www.auditor.illinois.gov

SYNOPSIS

• The Illinois Power Agency did not establish controls
to properly record receivables and ensure the accuracy
of Alternative Compliance Payments remitted by
Alternative Retail Electric Suppliers.

• The Illinois Power Agency did not establish adequate
accounting procedures and internal controls.

• The Illinois Power Agency improperly allowed State
funds to be held in accounts outside the State Treasury
without proper statutory authority.

• The Illinois Power Agency did not assess adequate fees
to ensure the costs of the preparation of the annual
procurement plan were covered.

• The Illinois Power Agency did not timely deposit
agency funds.

• The Illinois Power Agency had not developed and
documented a methodology in order to bill the utilities
for reimbursement of consulting fees.

• The Illinois Power Agency did not maintain adequate
controls over evaluations of vendor proposals related to
the Request for Qualifications and subsequent Request
for Proposals of the Procurement Administrators.

• The Illinois Power Agency did not establish a Planning
and Procurement Bureau or a Resource Development Bureau
as required by its enabling statute.  In addition,
various Agency administrative requirements were not
completed by Agency personnel.

• The Illinois Power Agency did not adopt rules for
operation, administration, accounting and reporting as
specified in the Illinois Power Agency Act.

• The Illinois Power Agency entered into a consulting
contract for a term exceeding the time period allowed by
State statute.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

LACK OF CONTROLS OVER ALTERNATIVE COMPLIANCE PAYMENTS

The Agency did not establish controls to properly record
receivables and ensure the accuracy of Alternative
Compliance Payments remitted by Alternative Retail
Electric Suppliers.  According to the Agency’s financial
statements, the Agency recognized revenue of $7.7
million during fiscal year 2011 and had accounts
receivable of $5.6 million at June 30, 2011.

In order to determine the accuracy of accounts
receivable and revenues related to the Alternative
Compliance Payments, the auditors requested the Agency
to provide supporting documentation.  In response to
this request, the Agency indicated the Alternative
Compliance Payment process was administered by the
Illinois Commerce Commission (Commission) and the Agency
did not receive any information relative to the
Alternative Compliance Payments from the Commission.

As the Agency and the Commission did not have an
agreement to document each party’s responsibilities for
processing Alternative Compliance Payments, the auditors
inquired with the Commission regarding its role in this
process.  The auditors determined the Alternative
Compliance Payments were self reported by the
Alternative Retail Electric Suppliers with their annual
report submission due to the Commission on September 1.
Upon receipt of an Alternative Compliance Payment, the
Commission deposited the remittance into the Illinois
Power Agency Renewable Energy Resource Fund (Fund 836).
Further, the auditors determined that the Agency did not
review the Alternative Compliance Payments received for
accuracy or compliance with State law.

We noted the following internal control weaknesses and
noncompliance:

• The Agency did not administer the Illinois Power
Agency Renewable Energy Resource Fund by ensuring
revenues and receipts due to the State from Alternative
Compliance Payments were collected and remitted to the
proper fund in the State Treasury.

• The Agency does not have an interagency agreement with
the Commission detailing the specific functions, duties,
and responsibilities of both the Agency and Commission
for the accounting, recordkeeping, and deposit of
Alternative Compliance Payments.

• The Agency does not perform a review of Alternative
Compliance Payments to ensure the amounts remitted by
the Alternative Retail Electric Suppliers were in
accordance with State law.

• The Agency failed to identify three Alternative Retail
Energy Suppliers who failed to make alternative
compliance payments during the compliance period.

Failure to establish controls over Alternative
Compliance Payments limits the Agency’s ability to
prepare accurate financial reports and may have resulted
in the Agency not collecting all amounts due to the
State from Alternative Retail Electric Suppliers.
(Finding Code No. 11-1, pages 19-20)

We recommended the Agency implement controls to ensure
accurate payments are received.  In addition, the Agency
and the Commission should develop an interagency
agreement outlining the duties and responsibilities of
each entity.

Agency management agrees with the finding and
recommendation.

LACK OF APPROPRIATE INTERNAL CONTROLS

The Agency did not establish adequate accounting
procedures and internal controls.

During our audit, we noted the Agency did not have a
general ledger accounting system.  Further, the Agency
did not have any procedures in place to record and
deposit receipts, pay bills when due, track accounts
receivable or accounts payable, or track and monitor
complaints related to billings.

Failure to implement adequate internal controls over
accounting procedures and internal controls increases
the risk that errors and irregularities could occur and
not be detected.  (Finding Code No. 11-2, pages 21-22)
This finding was first reported in 2009.

We recommended the Agency develop adequate procedures
over cash receipts, cash disbursements, accounts
receivable and accounts payable to ensure fiscal
responsibility.

Agency management agrees with finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #1.)

STATE FUNDS IMPROPERLY HELD OUTSIDE THE STATE TREASURY

The Agency improperly allowed State funds to be held in
accounts outside the State Treasury without proper
statutory authority.

In order to determine the activities conducted by the
Agency outside of the State treasury, we requested
information from the Procurement Administrators and the
Utilities.  As a result, we determined: as instructed by
the Director; an estimated $497,000 of State funds were
held by a Procurement Administrator as of June 30, 2011
and 2010.

Failure to properly deposit State funds into a Treasury
held account could result in a loss of State resources.
(Finding Code No. 11-4, page 24)  This finding was first
reported in 2009.

We recommended the Agency implement the appropriate
procedures to receive and deposit State revenues and
collect interest.  Additionally, we recommended the
Agency obtain and properly deposit all funds held by the
procurement administrators, on behalf of the Agency, as
soon as possible.

Agency management agrees with the finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #2.)

INADEQUATE FEE ASSESSMENT

The Agency did not assess adequate fees to ensure the
costs of the preparation of the annual procurement plan
were covered.

During our audit, we noted the Agency did not assess an
adequate fee to each utility to ensure the cost of the
preparation of the annual procurement plan was covered.
Based on information provided by the Agency, the
indirect costs plus the costs of the procurement
planning consultants exceeds the amount assessed to the
utilities.  For 2011, the total cost of the preparation
of the annual procurement plan was estimated at $
1,273,963 while the fees assessed were $ 930,403.

Failure to assess adequate fees to cover the preparation
of the annual procurement plan is a violation of State
statute.  Additionally, this is poor management from a
fiscal standpoint. (Finding Code No. 11-6, page 26)
This finding was first reported in 2009.

We recommended the Agency consider both the direct and
indirect costs related to the preparation of the annual
procurement plan in order to ensure the appropriate fees
are assessed to cover the costs.

Agency management agrees with the finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #3.)

FAILURE TO TIMELY DEPOSIT FUNDS

The Agency did not timely deposit agency funds.

During our testing, we noted 80 checks received between
November 5, 2009 and July 14, 2010, totaling $
1,500,416, were not deposited until August 8, 2010.
This ranged from 25 days late to 255 days late.

Without the proper procedures to ensure receipts are
deposited timely, the Agency risks losing checks or
checks not clearing, which would result in a loss of
State revenue. (Finding Code No. 11-8, page 29)

We recommended the Agency have policies and procedures
in place to ensure deposits of Agency funds are made
promptly.

Agency management agrees with the finding and
recommendation.

LACK OF METHODOLOGY RELATED TO BILLINGS

The Agency had not developed and documented a
methodology in order to bill the utilities for
reimbursement of consulting fees.

The Agency had not developed and documented a
methodology to determine the applicable reimbursements
from the utilities.  As a result, the utilities did not
reimburse the Agency on a timely basis.

During our testing, one of the utilities had informed
the auditors that it had requested supporting
documentation from the Agency over the past two years
and had not received it.  Additionally, the Agency had
not entered into an agreement or otherwise set forth its
calculation for agreement of fees.

During fiscal years 2010 and 2011, the Agency expended
$1,466,903 in direct payment to the procurement planning
consultant. The money was expended for the development
of the procurement plan which was to be reimbursed by
the utilities.

The lack of a methodology could result in inappropriate
reimbursement from the utilities.  (Finding Code 11-9,
pages 30-31)

We recommended the Agency develop a methodology for
determining the proper billings to the utilities.
Additionally, the Agency should enter into agreements
with the utilities to ensure proper reimbursement.

Agency management agrees in part with the finding and
recommendation.  The Agency believes no formal agreement
is required, because the Illinois Power Agency Act
mandates that participating utilities cover costs
incurred in support of the Procurement Planning process.

INADEQUATE CONTROLS OVER VENDOR EVALUATIONS

The Agency did not maintain adequate controls over
evaluations of vendor proposals related to the Request
for Qualifications (RFQ) and subsequent Request for
Proposals (RFP) of the Procurement Administrators.

During our review of the three vendor’s proposals to an
RFQ:

• We were provided "Scoring Sheets" which evaluated each
vendor’s proposal.  The "Scoring Sheets" documented the
evaluation of the "Administrative Compliance" and the
vendor’s "Capabilities" as outlined in the RFQ.
However, the "Scoring Sheet" for one vendor was
incomplete.  The technical section was not scored and a
final scoring was not completed.

• The "Scoring Sheets" had handwritten notes, indicating
if the vendor was qualified or not, and were signed and
dated by the Director.  Although the RFQ stated the
vendor’s proposal would be evaluated by the Evaluation
Committee, the Director was the only evaluator.

During our review of the four vendor’s proposals to an
RFP, we noted:

• The vendor’s proposals were not evaluated based on the
criteria outlined in the RFP; Administrative Compliance,
Technical Capability and Pricing Proposal.

• The "Overall Ranking" spreadsheet contained errors,
and did not indicate the "Overall Ranking" of the vendor
proposals.  In fact, we could not determine the actual
"Overall Ranking" of the vendor proposals due to the
errors and incomplete information.

In addition, during our review of the RFP for legal
services:

• We noted the vendor’s proposals were not evaluated
based on the criteria outlined in the RFP;
Administrative Compliance, Technical Capability and
Pricing Proposal.

• We received one "Scoring Sheets" per vendor.  Our
review noted the "Scoring Sheets" were all handwritten
and were not signed or dated by the evaluator.

• The "Overall Ranking" spreadsheet, which was
handwritten, indicated two proposals had been
disqualified.  As for the remaining three proposals, we
were unable to determine the actual "Overall Ranking" of
the vendor’s proposals due to incomplete information.

• Although the RFP stated the vendor’s proposal would be
evaluated by the Evaluation Committee, we were only
provided one evaluation per vendor proposal.

Failure to evaluate vendor proposals as documented in
the RFQ and RFP increases the likelihood the vendors and
public will not view the proposal evaluation process as
being fair and conducted in accordance with the
requirements outlined in the solicitations.  (Finding
Code No. 11-12, pages 34-35)

We recommended the Agency ensure proposals are evaluated
as documented in the solicitations.  Additionally, the
Agency should ensure all evaluations are appropriately
documented and conducted by an Evaluation Committee.

Agency management agrees with the finding and
recommendation.

ESTABLISHMENT OF REQUIRED BUREAUS AND LACK OF ADEQUATE
STAFFING

The Agency did not establish a Planning and Procurement
Bureau or a Resource Development Bureau as required by
its enabling statute. In addition, various Agency
administrative requirements were not complete by Agency
personnel.

Although the Agency was established in fiscal year 2008,
the Director continued to be the sole employee until
January of 2011.  Specifically, we noted the Agency had
not established a Planning and Procurement Bureau or a
Resource Development Bureau.  Additionally, within each
bureau there was to be a chief appointed.  Further, the
Agency lacked adequate staffing in order to carry out
administrative tasks.

Failure to create these required bureaus is a violation
of State statute.  In addition, because these bureaus
were not created, the Director had the sole
responsibility for scoring all proposals and selecting
winners for the procurement process, which could result
in an abuse of power.  Further, as a result of failure
to hire appropriate personnel, the Agency has hired
outside consultants who may not be cost effective and
administrative tasks have not been appropriately and
effectively completed. (Finding Code No. 11-17, pages
40-41)  This finding was first reported in 2009.

We recommended the Agency establish the required bureaus
and appoint chiefs to these bureaus who meet the
qualifications of the statute in order to ensure the
Agency functions properly and in a cost-effective
manner.  We further recommended the Agency hire the
staff needed to carry out administrative tasks.

Agency management agrees with finding and
recommendation.  (For the previous agency response, see
Digest Footnote #4.)

FORMAL AGENCY RULES NOT ADOPTED

The Agency did not adopt rules for the operation,
administration, accounting and reporting as specified in
the Illinois Power Agency Act.

During our audit, we noted the Agency had not drafted or
adopted formal agency rules, established procedures for
monitoring the administration of contracts, established
procedures for the recovery of costs incurred in
connection with the development and construction of a
facility, or implemented accounting rules and a system
of accounts.

Formal administrative rules provide a basis for a proper
accounting of the transactions of the agency, protect
agencies from legal challenges and give additional
legitimacy to agency actions and agency requests of
external parties.  Failure to adopt appropriate rules
and procedures could result in a lack of proper
reporting and failure to establish and adequately
monitor internal controls. (Finding Code No. 11-18,
pages 42-43)  This finding was first reported in 2009.

We recommended the Agency draft and adopt formal agency
rules, establish procedures for monitoring the
administration of contracts, establish procedures for
the recovery of costs incurred in connection with the
development and construction of a facility, and
implement accounting rules and a system of accounts as
required by State statute.

Agency management agrees with the finding and
recommendation.  (For the previous Agency response, see
Digest Footnote #5.)

CONSULTING CONTRACT TERM IN VIOLATION OF STATE STATUTE

The Agency entered into a consulting contract for a term
exceeding the time period allowed by State statute.

During our testing, we noted a contract entered into
with the firm to develop the procurement plan was for
one year and nine days with an option for a one year
extension, which exceeds the allotted terms as mandated.
The total contract amount is $ 1,116,902.

Additionally, the Agency filed the contract obligation
document which stated a five year contract totaling
$5,106,903.

Entering into a consulting procurement plan contract
with terms exceeding those allowed by the mandate is a
violation of State statute. (Finding Code No. 11-20,
page 46)

We recommended the Agency follow the terms as prescribed
by State statute when executing consulting procurement
plan contracts.

Agency management agrees with the finding and
recommendation.

OTHER FINDINGS

The remaining findings were reportedly being given
attention by the Agency.  We will review the Agency’s
progress towards implementation of our recommendations
in our next engagement.

AUDITORS’ OPINION

The auditors stated the Illinois Power Agency financial
statements as of June 30, 2011 and for the year then
ended were fairly presented in all material respects.

A compliance examination of the Illinois Power Agency
was conducted as required by the Illinois State Auditing
Act.  The Accountant’s Report noted the Illinois Power
Agency did not comply in all material respects with
numerous State mandates, the SAMS Manual, general
internal control procedures, and other required rules.

WILLIAM G. HOLLAND
Auditor General

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SPECIAL ASSISTANT AUDITORS

Kerber, Eck & Braeckel, LLP were our Special Assistant
Auditors for this engagement.

DIGEST FOOTNOTES

#1-LACK OF APPROPRIATE INTERNAL CONTROLS-Previous Agency
Response

2010- The Agency agrees with the finding.  To establish
adequate procedures over cash receipts, cash
disbursements, accounts receivable, accounts payable and
ensure fiscal responsibility, the Agency is developing
internal controls structures with the assistance of the
Office of Accountability.  Processes and procedures to
ensure appropriate oversight and recording of
interactions and transactions between the Agency and
vendors, utilities, the Administrative and Regulatory
Shared Services Center are the primary focus of the
control development process.

Controls utilized by other agencies are being reviewed
for use and application to the IPA.  The Agency plans to
obtain outside assistance from a public accounting firm
familiar with utility regulation to assist the CFO in
completing a forensic recovery of documentation to
support Agency financial records and reports for the FY
2009 and 2010 periods.  An additional task for the
vendor will be to assist the Agency by recommending
appropriate controls specific to the Agency’s accounting
functions.

#2-STATE FUNDS IMPROPERLY HELD OUTSIDE THE STATE
TREASURY-Previous Agency Response
2010- The Agency agrees with the finding.  During the
2009 procurement cycle, one utility collected
$657,031.20 in bidder fees on behalf of the Agency, one
procurement administrator collected $488,325, and a
second procurement administrator collected $496,988.
The fees due to the Agency were paid by vendors to
register in the IPA-managed procurements (Bidder
Registration Fees), and if they were successful in
winning bids (Contract Award Fees).  The utility and the
first procurement administrator transferred their
collected fees to the Agency, and the Agency deposited
those funds into the State Treasury.
The second procurement administrator in the 2009
procurement has held the fees in lieu of payments on
$490,000 in invoices issued by the procurement
administrator to the Agency for services rendered during
the 2009 procurement cycle.  This was an incorrect
treatment of the funds, and the Agency has requested
that the funds be reimbursed.  This procurement
administrator has filed a claim against the Agency in
the Court of Claims to secure payment from the Agency on
the invoices due.  The vendor will return the collected
funds when their claim is settled in the Court of
Claims.

#3-INADEQUATE FEE ASSESSMENT-Previous Agency Response

2010-The Agency agrees with the finding.  The CFO and
the Director have adjusted the Agency’s budget planning
to anticipate little to no revenue from the IPA Trust
Fund, and to cover Agency operating costs through higher
fees assessments on Agency managed wholesale power
procurements.  Once hired, the Agency’s General Counsel
will be tasked with rules drafting to reflect the fees
assessment methods and practices proposed by the Agency
CFO.  Anticipated Procurement Bureau staff will assist
the CFO with estimating procurement costs (both direct
and indirect), and tracking expenses related to
procurement events and planning.   The Office of
Accountability will assist in the creation of processes
and controls that establish appropriate fee estimation,
assessment, and reporting.

#4-ESTABLISHMENT OF REQUIRED BUREAUS AND LACK OF
ADEQUATE STAFFING-Previous Agency Response

2010- The Agency agrees with the finding.  To establish
the required bureaus, the Agency has prepared position
descriptions for the Procurement and Development bureau
chiefs and support staff.  These positions will be
submitted for review by the Civil Service Commission in
FY 2011.  Research and outreach to locate individuals
meeting the statutory requirements of the bureau chiefs
is ongoing.

#5-FORMAL AGENCY RULES NOT ADOPTED-Previous Agency
Response

2010- The Agency agrees with the finding.  The Agency
hired a Chief Financial Officer who started working at
the Agency in January 2011 with primary responsibilities
of managing Agency Budgeting, Accounting, and Financial
Reporting functions.  The CFO is supported in her work
by the Administrative and Regulatory Shared Services
Center through an interagency agreement entered into in
December 2010.  Additionally, the CFO has contacted
CFO’s in other Agency’s to request information regarding
appropriate fiscal rules and systems.   Planned hires of
Procurement and Development Bureau staff will be tasked
with identifying and drafting process descriptions and
rules regarding their key mission and administrative
tasks.

The Office of Accountability which will assist in the
review and formalizing of rules with the planned General
Counsel hire.  The General Counsel will be responsible
for managing the formal submittal of agency rules and
ensuring that compliance measurements are taken and
evaluated.