Federal Energy Regulatory Commission Update

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Federal Energy Regulatory CommissionUpdate

• Presented at
• Fall 2005 meting of the NARUC Staff Subcommittee
  on Accounting and Finance
• by
• James Guest
• Chief Accountant
• Federal Energy Regulatory Commission

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DISCLAIMER

• The views and comments presented are mine alone
  and do not represent, nor are they to be
  interpreted to represent the views, comments, or
  positions of the Federal Energy Regulatory
  Commission, individual Commissioners or other
  members of the Commissions staff.

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Table of Contents

• Organizational Changes
• FERC Quarterly Financial Reporting
• Pipeline Integrity Management Programs
• ISO/RTO Accounting
• Income Tax Matters
• Energy Policy Act of 2005
• Other Initiatives

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Organizational Update

• New FERC Chairman - Joseph Kelliher
• Chief of Staff Daniel Larcamp
• Director of OMTR Shelton Cannon
• Initial Agenda

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Order 646 Quarterly Financial Reporting
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Quarterly Financial Reporting

• Established quarterly financial reports for
  jurisdictional utilities beginning with first
  quarter 2004
• Compliance
• 207 of the 213 Major Utilities filed
• 104 of the 115 gas pipelines filed
• 129 of the 137 oil pipelines filed
• Pending waiver requests

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Quarterly Financial Reporting

• Corporate Officer Certification Statement
• Internal accounting controls
• Significant weaknesses
• Significant changes to internal accounting
  controls

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Quarterly Financial Reporting

• Certification Statement
• Requests from EEI, INGAA, and AOPL to delay
  implementation and modify statement
• Commission Order issued March 23, 2005 delayed
  implementing the Corporate Officers
  Certification for the FERC Annual Report Forms
  until further notice

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Pipeline Assessment Costs
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Accounting for Pipeline Assessment Costs

• Notice of Proposed Accounting Release
• Issued November 5, 2004
• Docket No. AI05-1-000
• 30 comment period
• Effective January 1, 2005
• Purpose
• To clarify that the pipeline assessment costs of
  a pipeline integrity management program are
  properly accounted for as maintenance expense in
  the period incurred.

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Accounting for Pipeline Assessment Costs

• Background
• Natural gas and oil pipelines must comply with
  new federal regulations regarding pipeline
  integrity management programs issued by the
  Office of Pipeline Safety.
• Companies must develop, implement, and follow an
  integrity management program for segments of
  pipeline in high consequence areas.

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Accounting for Pipeline Assessment Costs

• Why needed
• A diversity in accounting practices for pipeline
  assessment activities.
• Some companies capitalize some or all assessment
  costs if it leads to a capital replacement or
  addition.
• Other companies expense all assessment costs even
  if it leads to a capital replacement or addition.
• Inaccurate interpretations of prior accounting
  letters and Account Release No. AR-8.

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Accounting for Pipeline Assessment Costs

• Basis for Conclusion
• Operating Expense Instruction No. 2, 18 CFR Parts
  101 and 201.
• Inspecting, testing, and reporting on the
  condition of existing plant
• The assessment activities required under a
  pipeline integrity management program constitute
  steps performed as part of an on-going inspection
  and testing program.

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Accounting for Pipeline Assessment Costs

• Comments Received
• Agreed with our conclusion
• Agreed with our conclusion except for certain
  situations
• Disagreed with our conclusion
• Integrity management program requires front end
  costs in addition to the ongoing assessment

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Order on Accounting for Pipeline Assessment Costs

• Issued June 30, 2005
• Expanded scope of PAR
• Integrity Management Plan (Expense)
• ID High Consequence Areas (Expense)
• Recordkeeping System (Expense/Capitalize)
• Pipeline Assessments (Expense)
• Pipeline Modifications Additions (Capitalize)

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Order on Accounting for Pipeline Assessment Costs

• Effective January 1, 2006 Prospective
• Significant portion of costs are capitalized
• Requests for rehearing and clarification

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Requests for Rehearing and/or Clarification

• INGAA (Rehearing)
• The baseline assessment, development of integrity
  pans and data integration produce public benefits
  that justify capitalization
• The IM Regulations are distinct from ordinary
  maintenance
• The Commission under-estimated the cost of
  baseline assessments
• Capitalization of baseline is supported by EITF
  89-13

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Requests for Rehearing and/or Clarification

• Various Shippers (Clarification/Rehearing)
• Clarification The Order did not intend
  pipelines that have properly expensed IM costs to
  switch their accounting to capitalize such costs
  prior to January 1, 2006
• Rehearing The Commission should narrow its
  ruling to restrict a pipeline from changing its
  accounting for IM costs solely for its financial
  benefit prior to January 1, 2006
• El Paso Natural Gas Company (Clarification)
• The Commission allow early implementation of
  requirements of the Order

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Order on Rehearing

• Issued September 15, 2005
• Denied Rehearing
• Conceptual link to future benefits not enough
• IMP results in increase in level of required
  maintenance but it doesnt change the nature of
  the activity
• Did not agree that EITF 89-13 supports
  capitalization

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Order on Rehearing

• Granted Clarification
• Early adoption of the required accounting
  permitted but only if adequate internal controls
  exists to properly implement
• Not the Commissions intent to permit pipelines
  that expensed integrity management costs prior to
  the June 30 Order to change their accounting and
  capitalize these costs prior to the Januray 1,
  2006 effective date

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RTO Accounting and Reporting
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ISO/RTO Reporting, Cost Accounting, Oversight and
Recovery Practices

• Notice of Inquiry Issued September 16, 2004
• RM04-12-000, Financial Reporting and Cost
  Accounting, Oversight and Recovery Practices for
  Regional Transmission Organizations and
  Independent System Operators
• Received over 50 comments

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RTO Accounting and Reporting

• Uniform System of Accounts
• Developed for vertically integrated business
  model
• Used by all forms of business organizations
• Revising to better identify assets, costs
  incurred, and revenues earned for RTOs and other
  public utilities

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RTO Accounting Reporting

• RM04-12-000, Accounting and Reporting for Public
  Utilities Including RTOs
• NOPR issued June 2, 2005
• Comments filed August 26, 2005
• Accounting only first step

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RTO Accounting Reporting

• RTOs
• Expanded reporting
• New functional classification
• Compare costs between RTOs
• Traditional Public Utilities
• Transparency in costs billed from RTOs and
  expanded reporting

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RTO Accounting Reporting

• RTOs
• New Asset Function
• Computer hardware
• Computer software
• Structure and improvements

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RTO Accounting Reporting

• RTOs
• New Expense Function
• Dispatching, System Control, Scheduling
• Long Term Reliability Planning, Standards
  Development
• Market Accounts
• Day-Ahead and Real Time
• Transmission Rights
• Capacity
• Monitoring and Facilitation
• Maintenance Expense Accounts

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RTO Accounting Reporting

• RTOs
• Existing USofA can accommodate
• Customer service costs
• Officer salaries and expenses
• Administrative and general salaries
• Pension and benefits
• Interest expense, property insurance, taxes

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RTO Accounting Reporting

• Traditional Public Utilities
• New Expense Accounts for RTO Billings
• Dispatching, System Control, and Scheduling
• Long Term Reliability Planning, and Standards
  Development
• Market Monitoring and Compliance
• Settlement Amounts

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RM04-12 NOPR Comments

• Received 25 comments
• Proposal important first step
• Support for the Commissions goal Sound and
  uniform accounting reporting
• Different views on how best to attain it
• Scope too broad Apply to only RTOs
• Scope too narrow need more info

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RM04-12 NOPR Comments

• General
• Requests that the Commission provide clarity
• which accounts are to be filled out by whom
• what amounts should be put in which accounts
• Requests to modify effective date
• Request the Commission accept ministerial changes
  to formula rates

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RM04-12 NOPR Comments

• Specific
• Traditional utilities question need for new plant
  accounts for computer hardware, software and
  communication equipment used for transmission
• Non-RTO public utilities disagreed with need for
  new expense accounts to capture separately the
  costs of load dispatching, scheduling, system
  planning and standards development rather using
  one account for all costs

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RM04-12 NOPR Comments

• Specific
• Should require segregation of cost incurred by
  utilities to participate in RTO with breakdown
  between transmission and market/generator
• Utilities supported netting power purchases and
  sales transacted through centralized RTO markets
  in Account 555/447. Clarify how hourly/ daily
  /monthly?
• APPA - no netting

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RM04-12 NOPR Comments

• Specific
• Require RTOs to record on their books the costs
  and revenues related to managed market services
• Clarify how RTOs should account for costs and
  revenues related to non-tariff services

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RM04-12 NOPR Comments

• Specifics
• How do the proposed sub-accounts 561.6 and 561.7
  impact a companys ability to capitalize the
  costs?
• Are these accounts necessary since the amounts
  are likely to be small since most of the costs
  are reimbursable?

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RM04-12 NOPR Comments

• Specifics
• Transmission for Others Schedule
• Is the schedule appropriate for capturing costs?
  
• Do the utilities capture information in a way
  that provides for reporting?
• Is this information duplicative to other reports
  the Commission receives?

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Income Taxes
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Policy Statement Income Tax Allowances for
Regulated Entities

• Entities owning public utility assets would get
  tax allowance on the income from the assets
• provided actual or potential income tax liability
  on that public utility income
• Taxpaying entities are permitted an income tax
  allowance on the income imputed
• provided actual or potential income tax liability
  on that income

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Policy Statement Income Tax Allowances for
Regulated Entities

• Where partners or members do not have such an
  actual or potential income tax obligation the
  amount of any income tax allowance will be
  reduced accordingly to reflect the weighted
  income tax liability of the entitys partners or
  members

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American Jobs Creation Act of 2004

• Tax deduction for manufacturing activities (TDMA)
  
• Reduces the effective federal income tax rate on
  profit from the sale of electricity and natural
  gas from 35 to 32
• Accounting implications
• Ratemaking implications

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American Jobs Creation Act of 2004

• Accounting Treat as special Deduction not
  reduction in effective tax rate
• Ratemaking - Commission Guidance Order

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Energy Policy Act of 2005

• Signed into Law August 8, 2005
• Repeals PUHCA of 1935
• Establishes PUHCA of 2005
• Gives FERC some accounting and recordkeeping
  authority over holding companies and assoc
  companies
• Requires number of rulemakings

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Dkt No. RM05-32

• Proposed rules implementing the repeal of the
  PUHCA of 1935 and the enactment of the PUHCA of
  2005.

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Other Actions or Initiatives
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Other Initiatives

• Business Combinations, Goodwill and Other
  Intangibles NOPR
• Omnibus NOPR
• Oil Pipeline Accounting NOPR
• FASB Statement 154 under analysis