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FERC Accounting and Financial Reporting Update

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FERC Accounting and Financial Reporting Update Presented to the NARUC Subcommittee on Accounting and Finance St. Louis, Missouri September 13, 2004 – PowerPoint PPT presentation

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Title: FERC Accounting and Financial Reporting Update


1
FERC Accounting and Financial Reporting Update

Presented to the NARUC Subcommittee
on Accounting and Finance St. Louis, Missouri
September 13, 2004 Mark Klose Steven Hunt
Regulatory Accounting Policy Office of Markets,
Tariffs and Rates
2
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.

3
FERC Accounting Update
  • Recent Accounting and Financial Reporting
  • Audit and Accounting Policy Reorganization
  • Order 646, Quarterly Financial Reporting and
    Revisions to the Annual Reports
  • Order 634, Cash Management Rule
  • Ongoing Accounting and Financial Reporting
    Projects
  • Recent Accounting Guidance

4
Recent Accounting and Financial Reporting
  • Purchase Accounting
  • Pipeline Integrity Management Costs
  • Accounting for Incentive Rate Plans

5
Purchase Accounting
  • Current Guidance
  • Generally follow GAAP
  • AC03-50-000
  • Amount allocated to plant over depreciated
    original cost
  • Account 114
  • Cost of the acquired company over the sum of
    amounts allocated to all identifiable assets and
    liabilities
  • Account 186

6
Purchase Accounting
  • Purchase Price Allocation (AC03-33-000)
  • Commission approved deferral and recovery of a
    59 million adjustment
  • Purchase price paid included an incentive amount
    - 59 million
  • Proposed to record the incentive amount as a
    regulatory asset
  • Commission denied the proposal
  • The incentive amount was recorded in Account 114
  • Not a regulatory asset

7
Purchase Accounting
  • Deferred Income Taxes
  • A jurisdictional company and its two
    jurisdictional subsidiaries were purchased
  • A tax election was made under Section 338 of the
    IRC
  • Treated as a sale of assets for tax purposes
  • Pre-acquisition ADIT are eliminated
  • Tax basis equals purchase price

8
Purchase Accounting
  • Purchasing Company pushed down purchase price to
    the Jurisdictional Company
  • Jurisdictional Company
  • Tax basis purchase price
  • FERC basis depreciated original cost
    acquisition adjustment
  • SEC basis purchase price
  • Sub1 Sub2
  • Tax basis purchase price
  • FERC basis depreciated original cost
  • SEC basis purchase price

Purchase Price
9
Purchase Accounting
For FERC Reporting
For SEC Reporting
Purchase Price
Purchase Price
10
Purchase Accounting
  • Sub1 and Sub2 proposed to debit Account 190 for
    the difference between the FERC and tax basis in
    plant assets
  • No future tax effects attributable to the basis
    difference
  • Matter under study

11
Pipeline Integrity Management Costs
  • Office of Pipeline Safety - Pipeline Safety
    Pipeline Integrity Management in High Consequence
    Areas, 49 CFR 192
  • Effective December 15, 2003
  • Establishes minimum requirements for pipeline
    operators to perform ongoing assessments of their
    system
  • Hydrostatic testing
  • Smart pigging

12
Pipeline Integrity Management Costs
  • Operating Expense Instructions No. 2
  • Item 2 - Inspecting, testing and reporting on the
    condition of plant to determine the need for
    repairs or replacements
  • Item 3 Work performed specifically for the
    purpose of preventing failure, restoring
    service-ability, or maintaining life of plant

13
Pipeline Integrity Management Costs
  • Diverse accounting interpretations
  • Accounting Release No. AR-8
  • Planned Maintenance Maintenance Expense
  • Retest to increase capacity Capitalize
  • Accounting Letter Orders
  • Major pipeline rehabilitation projects -
    Capitalize

14
Pipeline Integrity Management Costs
  • Accounting Guidance may be needed
  • When to capitalize assessment costs
  • Uprate project to increase capacity
  • Increased safety
  • Increased useful life
  • Re-occurring planned maintenance

15
Accounting for Incentive Rate Plans
  • American Transmission Company (ER04-108-000)
  • Incentive Rate Plan
  • CWIP in rate base
  • Expense pre-certification costs as incurred
  • Commission Order
  • Goal Consistency and Comparability
  • Capitalize pre-certification costs and AFUDC on
    the CWIP in rate base
  • Recognize economic effects of rate plan using
    regulatory assets and liabilities

16
Accounting for Incentive Rate Plans
  • American Transmission Company
  • Request for Clarification/Rehearing
  • Clarification
  • Rehearing
  • Accounting requirements does not comply with GAAP
  • Accounting significantly increases administrative
    costs

17
Accounting for Incentive Rate Plans
  • American Transmission Company
  • Clarification was granted
  • Not required to use regulatory liabilities
  • Required footnote disclosures
  • Detail amounts not capitalized due to the changes
  • Provide a partial balance sheet

18
FERC Accounting Update
  • Recent Accounting and Financial Reporting
  • Audit and Accounting Policy Reorganization
  • Order 646, Quarterly Financial Reporting and
    Revisions to the Annual Reports
  • Order 634, Cash Management Rule
  • Ongoing Accounting and Financial Reporting
    Projects
  • Recent Accounting Guidance

19
Audit and Accounting Policy Reorganization
  • Audit Division resides in OMOI (Office of Market
    Oversight and Investigations)
  • Janice Garrison-Nicholas, Director of Financial
    Audits
  • Regulatory Accounting Policy resides in OMTR
    (Office of Markets, Tariffs and Rates)
  • James Guest, Senior Regulatory Accounting Policy
    Advisor

20
FERC Accounting Update
  • Recent Accounting and Financial Reporting
  • Audit and Accounting Policy Reorganization
  • Order 646, Quarterly Financial Reporting and
    Revisions to the Annual Reports
  • Order 634, Cash Management Rule
  • Ongoing Accounting and Financial Reporting
    Projects
  • Recent Accounting Guidance

21
ORDER 646
  • Why is ORDER 646 necessary?
  • Provides for more timely, relevant, and
    transparent financial reporting
  • Aids in achieving Commissions goal of vigilant
    oversight
  • Identifies and evaluating emerging trends,
    business conditions, and financial issues
  • Assessing the economic consequences of
    transactions and events on jurisdictional
    entities
  • Measuring the effects of regulatory initiatives
  • Evaluating the adequacy of existing traditional
    cost-based rates

22
ORDER 646
  • Establishes 2 new quarterly financial reports
  • Form 3-Q, Quarterly Financial Report of Electric
    Companies, Licensees, and Natural Gas Pipeline
    Companies
  • Form 6-Q, Quarterly Financial Report of Oil
    Pipeline Companies

23
ORDER 646
  • Quarterly Financial Reports
  • A basic set of financial statements
  • Comparative balance sheet
  • Statement of income and retained earnings
  • Statement of Cash Flows
  • Statement of accumulated comprehensive income and
    hedging activities
  • Notes to financial statements
  • Important changes during the quarter

24
ORDER 646
  • Supporting Schedules
  • Summary of Utility Plant and Accumulated
    Depreciation
  • Plant in Service by function
  • Production and other expenses
  • Customer Accounts, Service, Sales, AG Expenses
  • Other regulatory assets and regulatory
    liabilities

25
ORDER 646
  • Electric Supporting Schedules
  • Transmission of Electricity for Others
  • Transmission of Electricity by Others
  • Monthly Peak Load and Energy Output
  • Monthly Transmission System Peak Load

26
ORDER 646
  • Corporate Officer Certification for the Quarterly
    Financial Reports
  • I have examined this report and to the best of
    my knowledge, information, and belief all
    statements of material fact contained in this
    report are correct statements of the business
    affairs of the respondent and the financial
    statements, and other financial information
    contained in this report, conform in all material
    respects to the Uniform System of Accounts.

27
ORDER 646
28
ORDER 646
29
ORDER 646
30
ORDER 646
  • Waiver/Exemption Requests from Electric
    Cooperatives
  • Small size and limited resources as basis for
    waiver

31
FERC Accounting Update
  • Recent Accounting and Financial Reporting
  • Audit and Accounting Policy Reorganization
  • Order 646, Quarterly Financial Reporting and
    Revisions to the Annual Reports
  • Order 634, Cash Management Rule
  • Ongoing Accounting and Financial Reporting
    Projects
  • Recent Accounting Guidance

32
Cash Management Practices
  • Interim Order 634 issued July 8, 2003
  • Final Rule Order 634-A issued October 23, 2003
  • Filing requirement of Cash Management Agreements
    and all revisions
  • Equity falls below 30-description of any
    significant events that caused such a reduction
    and plans to increase equity
  • Exempted electric cooperatives from 30 equity
    requirement

33
FERC Accounting Update
  • Recent Accounting and Financial Reporting
  • Audit and Accounting Policy Reorganization
  • Order 646, Quarterly Financial Reporting and
    Revisions to the Annual Reports
  • Order 634, Cash Management Rule
  • Ongoing Accounting and Financial Reporting
    Projects
  • Recent Accounting Guidance

34
Ongoing Accounting and Financial Reporting
Projects
  • ISO/RTO Accounting and Reporting
  • Accounting Guidance for Non-Legal Obligations
  • Business Combinations and Intangible Assets (SFAS
    141 and SFAS 142)
  • Asset Impairments (SFAS 144)
  • General Review and Update of the Uniform System
    of Accounts

35
ISO/RTO Accounting and Reporting
  • Whether changes are needed to USofA to provide
    greater transparency of transactions and events
    affecting these entities and their members?
  • What other changes may be necessary to be monitor
    the activities of ISO/RTOs?

36
ISO/RTO Accounting and Reporting
  • Areas for further review and consideration for
    ISO/RTO entities
  • New functional accounts?
  • New accounting format?
  • New financial reporting format?
  • Transactions and events that require additional
    accounting and financial reporting guidance?
  • Sufficient detail to users of the data?

37
ISO/RTO Accounting and Reporting
  • Areas for further review and consideration for
    jurisdictional entities that participate in
    ISO/RTOs
  • Are the individual account descriptions and
    instructions sufficient?
  • What additional detailed information should be
    collected or disclosed?

38
ISO/RTO Accounting and Reporting
  • Areas for further review and consideration for
    jurisdictional entities that participate in
    ISO/RTOs
  • Does the USofA and existing financial reporting
    provide regulators with adequate information to
    ensure that costs are not being double recovered?

39
ISO/RTO Accounting and Reporting
  • From a cost management perspective, how best to
    oversee costs that ISO/RTO incur such as software
    development?

40
ISO/RTO Accounting and Reporting
  • September 8, 2004 Sunshine Act Notice
  • Commission Agenda Item E-6
  • RM04-12-000, Financial Reporting and Cost
    Accounting, Oversight and Recovery Practices for
    Regional Transmission Organizations and
    Independent System Operators

41
Ongoing Initiatives
  • Non-Legal Obligation Issues
  • Considered a component of depreciation under FERC
    rules
  • FERC Final Rule on ARO declined to modify
    existing rules for this item
  • SEC requiring cost of removal to be reclassified
    from accumulated depreciation to either income or
    regulatory liability
  • Current staff view is to continue with existing
    FERC rules

42
Ongoing Initiatives
  • Business Combinations and Intangible Assets (SFAS
    141 and SFAS 142)
  • Asset Impairments (SFAS 144)
  • General Review and Update of the Uniform System
    of Accounts

43
FERC Accounting Update
  • Recent Accounting and Financial Reporting
  • Audit and Accounting Policy Reorganization
  • Order 646, Quarterly Financial Reporting and
    Revisions to the Annual Reports
  • Order 634, Cash Management Rule
  • Ongoing Accounting and Financial Reporting
    Projects
  • Recent Accounting Guidance

44
Recent Accounting Guidance
  • Minimum Pension Liability Guidance Letter
  • Issued by Chief Accountant on March 29, 2004
  • Responded to request for guidance as to whether
    companies that determined pension allowance in
    rates based on SFAS 87 could record a regulatory
    asset equal to the minimum pension liability
  • Letter states regulatory asset should be recorded
    in this circumstance provided that it is probable
    that a pension allowance to be included in rates
    will continue to be determined under SFAS 87

45
Recent Accounting Guidance
  • Minimum Pension Liability Guidance Letter
  • Did not address implication of SFAS 88
  • SFAS 88 deals with settlements and curtailments
    of defined benefit pension plans
  • Some believe that probability test can not be met
    for recognition of a regulatory asset for minimum
    pension liability unless an order from a
    regulator exists stating that it would allow rate
    recovery of a curtailment loss if such an event
    were to occur in the future

46
Questions?
  • Contacts
  • Mark.Klose_at_ferc.gov
  • (202) 502-8283
  • Steven.Hunt_at_ferc.gov
  • (202) 502-6084
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