THE MISSISSIPPI LEGISLATURE

PEER sought to determine whether the Chickasawhay Natural Gas District’s Board of Directors manages and operates the district in a manner that provides gas services to its customers at a reasonable cost.

To accomplish this objective, PEER assessed the district’s compliance with state statutes, its financial viability to support operational and long-term system requirements, its financial management and inventory internal controls and practices, and the reasonableness of its prices relative to those of other public and private for-profit gas operations in Mississippi. PEER also conducted a follow-up review of findings in the 1988 PEER reportA Review of the Chickasawhay Natural Gas District.

The rates that the CNGD charges its customers play a major role in the district’s financial viability. However, as PEER first reported in 1988, the district does not adjust residential and commercial customers’ rates on a monthly basis to reflect changes in the district’s costs of natural gas. Also, according to PEER’s survey of rates charged by Mississippi natural gas distributors, the district’s rates may not be competitive; the CNGD’s residential and commercial rates are high in comparison to those charged by two municipal natural gas districts and one privately held natural gas utility company.

The CNGD’s debt-related financial ratios are good because the district has very little debt outstanding. However, the CNGD’s cash has declined since FY 1995, due primarily to use of a portion of its cash reserve for capital expenditures. The district’s decreasing profitability has also negatively affected its cash and financial positions. Other factors that could threaten the CNGD’s cash position are the declining customer base and projected significant increases in the price of natural gas. Also, two highway construction projects planned within the CNGD’s service area during 2004 will force the district to relocate portions of its gas lines at district expense. According to the preliminary construction budgets of the CNGD engineering firm, the two projects are estimated to cost $95,385.

Deficiencies in the CNGD’s management have prevented the district from operating at its maximum level of efficiency. The CNGD Board of Directors does not use standard business practices such as budgets, a capital improvement plan, or a vehicle fleet management program to manage its administrative functions and assets. The district does not use basic accounting controls such as prenumbered receipts, petty cash controls, or segregation of duties to detect and prevent misappropriation of cash.

Although not required by law, the district provides extra compensation to three members of its board who are mayors of municipalities within district boundaries. By eliminating this unnecessary expense, the board could possibly reduce its monthly bills to customers.

Until October 2002, the CNGD sold gas appliances to customers without direct or implicit statutory authority to do so. In making these sales, the district did not establish adequate financial management controls, allowing some customers to receive appliances without paying for them. The district also exercised little control over its appliance inventory.

The CNGD Board of Directors and district staff have not complied with applicable state laws regarding distribution of revenues, purchasing, ethics, and public trust, as described below.

Without statutory authority, since July 1, 1986, the CNGD Board of Directors has distributed $3,663,192 of its monthly operational revenues to Quitman, Shubuta, and Waynesboro. Not only are the distributions not authorized by law, they also have a harmful effect on the customers of the district and on the long-term cash position of the CNGD.

Some of the district’s recent purchases of vehicles and interior construction services did not comply with applicable state purchasing laws. Also, the district has obtained credit cards for employees without statutory authority.

Concerning ethics laws, the Mayor of Waynesboro, a member of the CNGD Board of Directors, did not file annual Statement of Economic Interest reports for calendar years 1999, 2002, and 2003, which is required by MISS. CODE ANN. § 25-4-25 (a).

Finally, the CNGD District Director created the appearance of impropriety through his relationship with a contractor who was working for the gas district. MISS. CODE ANN. § 25-4-101 (1972) strongly advises against behavior of a public servant that creates the appearance of impropriety.

1. The Legislature should amend MISS. CODE ANN. § 7-7-211 to require the State Auditor to perform annual financial audits of all local natural gas districts. Further, the Legislature should repeal MISS. CODE ANN. §77-15-1 and 77-15-3 that address governance and oversight of certain natural gas districts.

2. The Legislature should consider amending Chapter 666, Laws of 1950:

   -- to remove the mayors from the CNGD Board of Directors and to replace them with a system user member elected from each municipality;

   -- to provide for two additional elected board members, one elected by gas district users residing outside of the municipalities in Clarke County and one elected by the gas district users residing outside of the municipalities in Wayne County; and,

   -- to provide for a fair annual compensation for each of the five board members.

3. The Legislature should amend MISS. CODE ANN. § 31-7-9 to allow all local natural gas districts to use commercial credit cards in accordance with the published regulations of the Department of Finance and Administration.

4. The Legislature should amend MISS. CODE ANN. § 65-1-8 to authorize the Mississippi Department of Transportation to pay system relocation expenses for any local natural gas district construction project that has to be accomplished due to MDOT construction or maintenance projects.

5. The Legislature should direct the Public Staff of the Public Service Commission to conduct a feasibility study of selling the CNGD system to a private natural gas company and report the study’s results to the Legislature no later than December 1, 2004. If the study determines it is more beneficial to the customer from a gas cost and service viewpoint to sell the CNGD system, a draft bill to accomplish such should be submitted with the study.

6. The State Auditor should consider whether the board of directors and/or district staff should repay the CNGD for:

   -- missing appliance inventory items (i.e., $2,889 in items not paid for by customers and $6,329 in items unaccounted for by physical count);

   -- missing funds for documented sales and delivery transactions where the district has not collected the total retail cost (i.e., $544); and,

   -- funds related to other matters identified in the report (e.g., the District Director signing the 1998 communication services agreements before the Board of Directors approved them).

7. The CNGD Board should prepare and maintain an administrative policies and procedures manual for the use of the district staff.

   One of these policies should implement internal controls for cash, petty cash funds, and purchasing such as those required of state entities in the Mississippi Agency Accounting Policies and Procedures (MAAPP) Manual of the Department of Finance and Administration. Some examples of these controls are:

   -- prenumbered customer charge tickets, cash receipt books, customer service orders, meter orders, and petty cash forms;

   -- segregation of clerk duties;

   -- pre-audit of amounts billed to individual customers; and,

   -- a standard bid quote form.

8. The CNGD Board should revise its monthly pricing formula for residential and commercial customers to include a purchased gas adjustment factor.

9. The CNGD Board of Directors should implement standard business practices, including annual budgets, a capital improvement plan, and a vehicle fleet management program, to manage its administrative functions and assets.

10. The CNGD should comply with Internal Revenue Service Regulation 26 CFR Section 1.61 governing reporting of personal use of vehicles.

11. The CNGD Board should request instructions from the State Auditor as to how to legally conduct a bulk sale of its remaining gas appliance inventory. Upon receipt of the instructions, the district should conduct the sale as soon as possible in order to recoup some of its investment in the appliances.

12. The CNGD Board should consider contracting with an individual or firm for a performance audit every three to five years.

13. The District Director should comply with all state purchasing laws, including those regarding construction projects.

14. All members of the CNGD Board should comply with MISS. CODE ANN. § 25-4-25 (a), which requires the filing of annual Statement of Economic Interest reports.

15. The board should adopt a board policy that clearly describes the acceptable and unacceptable practices for business relationships between the CNGD staff and the district’s vendors and contractors. This policy should also include disciplinary actions for violations up to termination depending on the severity of a policy violation.