Internal Audit Report

Comprehensive Operational Audit

SeaTac Utilities

January 1, 2010 to December 31, 2010

Issue Date: June 7, 2011

Report No. 2011-10

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

Table of Contents

Transmittal Letter .................................................................................................................................... 3

Executive Summary ................................................................................................................................ 4

Audit Report ............................................................................................................................................. 5

Background .............................................................................................................................................. 5

Department Highlights and Accomplishments .................................................................................... 6

Audit Scope and Methodology ............................................................................................................... 6

Conclusion ............................................................................................................................................... 8

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

Transmittal Letter

We have completed a comprehensive operational audit of the Sea-Tac Utilities. The purpose of

the audit was to determine if management has adequate controls to assure effective operations

in compliance with applicable rules and regulations. We reviewed information relating to

calendar year 2010.

Management has the primary responsibility to establish and implement effective controls. Our

role was to assess and test those controls in order to establish whether the controls were

adequate and operating effectively.

We conducted the audit using due professional care. The audit was planned and performed to

obtain reasonable assurance that department controls are adequate and operating effectively as

intended in the aforementioned areas.

Sea-Tac Utilities has adequate and effective controls to ensure operations are effective and in

compliance with applicable requirements.

We extend our appreciation to the management and staff of the Sea-Tac Utilities, Aviation

Business Development, and Aviation Finance & Budget for their assistance and cooperation

during the audit.

Joyce Kirangi, CPA

Internal Audit, Director

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

Executive Summary

Audit Scope and Objective The purpose of the audit was to determine if management has

implemented adequate controls to assure that:

1. Utility billing is complete, accurate and in accordance with the tariff.

2. Costs in the utility rate calculation are relevant, reasonable and complete.

We reviewed information relating to fiscal year 2010.

Background The Aviation Sea-Tac Utilities was created in 2001 and currently serves electric,

water, natural gas, heating oil, sewer, and solid waste utilities. There are two classes of

customers, namely internal (e.g., Port departments) and external (e.g., tenants) customers. The

department generates approximately $6 million in annual tenant direct billing revenues and

incurs approximately $14 million per year in operating expenses. Expenses not covered by

direct billing are recovered through internal billings.

The Sea-Tac Utilities is responsible for establishing rates and paying bills. It develops short

and long-term strategies for cost management in coordination with airport development plans.

Rates for utilities are developed to recover operating, capital and cost of capital expenses.

The department takes the lead role in the management and administration of utilities

conservation projects in order to reduce energy and utility costs. It is also the responsibility of

the department to ensure that utilities needs are fully integrated into all airport planning.

Audit Result Summary Based on the audit procedures performed, Sea-Tac Utilities has

adequate and effective controls to ensure complete and accurate billings in compliance with the

tariff. We found the costs in the tariff calculation to be relevant, reasonable and complete.

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

Audit Report

Background

The Aviation Sea-Tac Utilities was created in 2001. The department currently serves the

following utilities to internal (e.g., Port departments) and external (e.g., tenants) customers:

Electricity

Sewer

Natural Gas

Water

Solid Waste

Heating Oil

The following departments provide support to Sea-Tac Utilities Department:

Aviation Maintenance for meter installation, maintenance and readings

Aviation Business Development for calculating billing amount

Aviation Finance and Budget for allocations and cost of capital components of Utility

rates

Sea-Tac Utilities department has over 100 customers and generates direct billing to tenants of

approximately $6 million in revenues annually while incurring approximately $14 million in

operating expenses. Operating expenses not directly billed are recovered through the Landing

Fee and Terminal Fee charges. The department also has internal (indirect) billing to the Port

departments for their own consumption.

Sea-Tac Utilities Department is responsible for establishing rates, paying bills, customer

service and communication with tenants and utility providers. Developing short and long-term

strategies for cost management and coordination with airport development plans is also part

of its responsibility. Rates for utilities are developed by the department to recover operating,

capital and cost of capital expenses. The department takes the lead role in the management

and administration of utilities conservation projects in order to reduce energy and utility costs.

The department is tasked to ensure that utilities needs are fully integrated into all airport

planning.

Audit Objective

The purpose of the audit was to determine if management has implemented adequate controls

to assure that:

1. Utility billing is complete, accurate and in accordance with the tariff.

2. Costs in the utility rate calculation are relevant, reasonable and complete.

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

Department Highlights and Accomplishments

Management has placed an emphasis on economic and environmental stewardship with

efforts to reduce energy costs and increase energy efficiency.

Energy Cost Reduction

The Port was paying retail prices for electricity until management secured an

agreement with the Bonneville Power Administration (BPA). As a preferential

customer, the department can acquire electricity at BPA’s cost or in other words

wholesale prices.

Energy Efficiency

Management initiated a number of projects to enhance energy efficiency. Some

examples include: new lighting technologies, upgrading mechanical systems for

heating and cooling as well as installation of charging stations for electrical ground

service equipment.

Audit Scope and Methodology

We utilized a risk-based audit approach from planning to test sampling. We performed a

multitude of information gathering methods including research, interviews, observations, and

analytical review in order to obtain a complete understanding of the Sea-Tac Utility operations.

We conducted a risk assessment of the significant risks associated with SeaTac Utilities, and

identified the controls that have been implemented to mitigate those risks. We also evaluated

whether the established controls were carried out as intended. Based on this risk assessment,

we determined the area of audit focus.

Our additional detailed audit procedures can be grouped and summarized into two categories

as follows:

1) Direct & internal (indirect) billing

2) Tariff calculation.

We approached each audit area with the following methodology:

1.) Direct & Internal (indirect) Billing

The Aviation SeaTac Utility has two classes of customers:

Tenants with meters or minimum monthly charges; these tenants are billed directly.

Port departments for their own consumption, and tenant consumption of non-metered,

common area utility usage (e.g., ticketing areas that are billed internally or indirectly).

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

a. Direct Billing

To determine the completeness of direct utility billing, we reviewed utility connections

at the point of application for connection to the Port utility system. We selected a

sample of 22 electrical, water, and gas meter applications at random and traced

them to Maximo where a list of utility meters is maintained for monthly meter

readings.

For accuracy and tariff rate compliance, we selected a sample meter readings from

electric and water utilities. The two utilities consist of approximately 68% of the total

revenue from direct billings. The meter reading sample represented 17% and 12% of

electric and water customers from the month of July 2010. We traced the sample

through the following systems:

 PROPWorks--where meter reads are calculated into billing amounts.

 PeopleSoft--where billing and receivable transactions are recorded.

We recalculated billing amounts from sampled meter reads. The result was

compared to billed amounts to ensure that billings were correct and in accordance

with the Commission approved tariff.

b. Internal Billing

Internal billings were reviewed for completeness and to ensure that the areas of non-

metered electric and water utilities were included.

Our objective was two-fold:

To ensure that individual departments were properly charged for their own consumption.

To ensure that costs associated with non-metered utility were ultimately recovered

through secondary mechanisms (i.e., Landing Fees). We traced billed departments to

the cost pools of the secondary cost recovery mechanisms.

2) Tariff Rate Calculation

A tariff is a Commission approved document that includes, but is not limited to, a schedule of

utility rates and charges at the airport.

To determine the completeness, reasonableness, and relevancy of utility costs in the tariff

calculation, we reviewed the following costs in 2011 tariff rate calculations:

Direct charges from departments to the Sea-Tac Utilities (approximately 60% of the total

utility costs)

Internal Audit Report

Sea-Tac Utilities

January 1, 2010 Through December 31, 2010

Departments directly charging into the utility costs were reviewed to ensure that those

charges were appropriate. We reviewed the departments who support the utilities to

ensure that their related costs were included in the tariff rate calculations.

Allocated costs (approximately 8% of the total utility costs)

We compared allocated costs in the tariff rate calculation to the same costs in the

approved budget.

Depreciation (approximately 20% of the total utility costs)

We conducted a two way match from the asset listing used in the tariff rate calculation to

a separate download from PeopleSoft financial system. We also reviewed the asset

listing for proper inclusion of utility assets and exclusion of non-utility assets. We also

recalculated the deprecation based on the Cost of Capital and compared it to the

deprecation in the tariff rate calculation.

Cost of capital (approximately 10% of the total utility costs)

The cost of capital is based on an expected rate of return on the utility assets. It is

derived from the net book value of the assets multiplied by the expected rate of return.

In addition to recalculating the depreciation, we also reviewed the Cost of Capital for the

past five years to determine if the expected increase/decrease in the account correlated

to the increase/decrease in assets acquired. We also compared the expected rate of

return used by the Port to the utilities industry for reasonableness.

Conclusion

Based on the audit procedures performed, Sea-Tac Utilities department has adequate and

effective controls to ensure complete and accurate billings in compliance with the tariff. We

found the costs in the tariff rate calculation to be relevant, reasonable, and complete.