Federal Energy Regulatory Commission Update

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Federal Energy Regulatory CommissionUpdate

• 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
• Other Initiatives

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Organizational Update

• Chairmans term June 30, 2005
• Regulatory Accounting Policy resides in OMTR
  (Office of Markets, Tariffs and Rates)
• James Guest, Chief Accountant
• [phone]
• Financial Audit Division resides in OMOI (Office
  of Market Oversight and Investigations)
• Janice Garrison Nicholas, Director of Financial
  Audits
• [phone]

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Order 646 Quarterly Financial Reporting
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Quarterly Financial Reporting

• Result of Order No. 646
• Issued February 11, 2004
• Established quarterly financial reports for
  jurisdictional utilities beginning with first
  quarter 2004

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Quarterly Financial Reporting

• Compliance 207 of the 213 Major Utilities (Form
  1) filed quarterly reports
• Others have pending waiver requests

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Quarterly Financial Reporting

• First year implementation
• Positive responses
• Extensive outreach with industry
• Numerous software questions
• Able to work out many glitches

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Quarterly Financial Reporting

• Extended filing dates
• Generous with individual requests for extensions
• Current filing dates
• 60 days for Form 1 companies
• 70 days for Form 1-F companies

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Quarterly Financial Reporting

• 21 requests for waiver
• 20 cooperatives
• 1 major traditional utility
• 5 Form 1 companies
• 16 Form 1-F companies

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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

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Quarterly Financial Reporting

• COMMISSION RESPONSE
• Delayed implementing the Corporate Officers
  Certification for the FERC Annual Report Forms
• RM03-8-002 issued March 23, 2005

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Pipeline Integrity Management Costs
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Pipeline Integrity Management Costs

• Office of Pipeline Safety - Pipeline Safety
  Pipeline Integrity Management in High Consequence
  Areas
• Effective January 4, 2004 for Natural Gas Cos.
• Effective February 15, 2002 for Oil Pipeline Cos.
• Requires pipeline operators to develop,
  implement, and follow an integrity management
  program (IMP) for areas of pipe located in a HCA
• Includes minimum requirements for conducting
  ongoing assessments of the integrity of pipe in a
  HCA
• Hydrostatic testing
• Smart pigging
• Direct assessment

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Pipeline Integrity Management Costs

• Dkt AI05-1-000 (November 5, 2004) Notice of
  Proposed Accounting Release No. 18, Accounting
  for Pipeline Assessment Costs
• Need for AR
• Diversity in accounting for pipeline assessment
  activities
• Prior authorizations allowing capitalization of
  assessments in a one-time major pipeline
  rehabilitation program

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Pipeline Integrity Management Costs

• Diversity in accounting for pipeline assessment
  activities
• Operating Expense Instructions No. 2 - costs
  incurred to inspect, test and report on the
  condition of plant to determine the need for
  repairs or replacements are to be charged to
  maintenance expense in the period the costs are
  incurred

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Pipeline Integrity Management Costs

• Conclusion
• Pipeline assessments in an IMP are a part of an
  ongoing inspection program
• Not a one-time rehabilitation program
• Pipeline assessment should be accounted for as
  maintenance expense as incurred
• Proposed effective date 1/1/2005

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Pipeline Integrity Management Costs

• Comments Received on Accounting for Assessments
• Agreed with our conclusion
• Agreed with our conclusion except for certain
  situations
• Capitalize assessments that leads to a repair of
  defects that existed from the time of
  construction or acquisition
• Capitalize assessments that leads to any capital
  expenditure
• Disagreed with our conclusion
• GAAP permits capitalization if it extends the
  life, increase capacity, or improve safety or
  efficiency
• Creates a quantifiable knowledge base which has
  value
• Prior precedent
• Baseline tests are one time rather than on-going
  expenses
• Integrity management program requires front end
  costs in addition to the ongoing assessment

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Pipeline Integrity Management Costs

• Comments Received on the Effective Date
• More time is needed to develop controls and
  procedures implement new rule
• More time is needed to allow for more discussion
  and consideration of the complexities of all the
  issues and allow for petitions for rehearing
• Other accounting authorities usually apply
  accounting changes prospectively
• Retroactive accounting treatment would have
  unfair rate consequences

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RTO Accounting and Reporting
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ISO/RTO Accounting and Reporting

• 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 Reporting

• RM04-12-000, Accounting and Reporting for Public
  Utilities Including RTOs
• NOPR issued May 25, 2005
• Comments due (60 days after published in Federal
  Register)

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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

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

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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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ISO/RTO Accounting and Reporting

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

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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

• What happens if the 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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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