Federal Energy Regulatory Commission Update

1. Federal Energy Regulatory Commission Update Steven D. Hunt, CPA Office of Enforcement, Division of Financial Regulation Federal Energy Regulatory Commission NARUC Staff Subcommittee on Accounting and Finance Phoenix, Arizona

2. Disclaimer The views and comments presented are my own and do not represent, nor are they to be interpreted to represent the views, comments, or positions of the Federal Energy Regulatory Commission.

3. AGENDA Commission Members Accounting Actions Enforcement Actions Commission Actions

4. Chairman Wellinghoff Jon Wellinghoff was named Chairman by President Barack Obama on March 19, 2009.A member of the Commission since 2006, the U.S. Senate reconfirmed him to a full, five-year FERC term in December 2007. Chairman Wellinghoff is an energy law specialist with more than 30 years experience in the field. Before joining FERC, he was in private practice and focused exclusively on client matters related to renewable energy, energy efficiency and distributed generation. Served two terms as the State of Nevada’s first Consumer Advocate for Customers of Public Utilities. While serving in that role, Chairman Wellinghoff represented Nevada’s utility consumers before the Public Utilities Commission of Nevada, the FERC, and in appeals before the Nevada Supreme Court. While Consumer Advocate, he authored the first comprehensive state utility integrated planning statute. Education: Antioch School of Law, Washington, D.C., JD, 1975; Howard University, Washington, D.C., M.A.T., Mathematics, 1972; and University of Nevada, Reno, Nevada, BS, Mathematics, 1971.

5. Commissioner Kelly Suedeen G. Kelly is a Commissioner at the Federal Energy Regulatory Commission, confirmed to a term that expires June 30, 2009. Previously she was a Professor of Law at the University of New Mexico School of Law, where she taught energy law, public utility regulation, administrative law and legislative process. She also worked with the law firm of Modrall, Sperling, Roehl, Harris & Sisk in Albuquerque from 2000 through 2003. In 2000, Ms. Kelly served as counsel to the California Independent System Operator. In 1999, she worked as a Legislative Aide to U.S. Senator Jeff Bingaman. She received a B.A. With Distinction in Chemistry from the University of Rochester and a J.D. cum laude from Cornell Law School. She is admitted to the bars of New Mexico and the District of Columbia.

6. Commissioner Moeller Commissioner Philip D. Moeller was nominated by President Bush, and sworn into office on July 24, 2006, by Chief Justice of the United States John Roberts, for a term expiring June 30, 2010. From 1997 through 2000, Mr. Moeller served as an energy policy advisor to U.S. Senator Slade Gorton (R-Washington) where he worked on electricity policy, electric system reliability, hydropower, energy efficiency, nuclear waste, energy and water appropriations and other energy legislation. Prior to joining Senator Gorton’s staff, he served as the Staff Coordinator for the Washington State Senate Committee on Energy, Utilities and Telecommunications, where he was responsible for a wide range of policy areas that included energy, telecommunications, conservation, water, and nuclear waste. Mr. Moeller received a B.A. in Political Science from Stanford University.

7. Commissioner Spitzer Marc Spitzer was nominated by President Bush to the Federal Energy Regulatory Commission and confirmed by the U.S. Senate for a term expiring June 30, 2011. Mr. Spitzer was elected in 2000 to the Arizona Corporation Commission (ACC) and in 2002 was elected ACC Chairman by his colleagues. As ACC Chairman, he focused on policies encouraging expansion of natural gas infrastructure, specifically distribution and storage; creating a demand side management policy; enhancing the ACC’s renewables standard; and advancing consumer privacy concerns in telecommunications. As ACC Chairman, he established a legacy of balancing competing interests, while ensuring Arizonans receive safe, economical and reliable utility services. After graduating from Dickinson College in Carlisle, Pennsylvania, he attended the University of Michigan School of Law.

9. AGENDA Commission Members Accounting Actions Enforcement Actions Commission Actions

10. FERC Staff’s Comments to the SEC IFRS Roadmap • Request the SEC to encourage the IASB to adopt an accounting standard similar to SFAS No. 71 • SFAS No. 71 necessary for cost-based, rate regulated entities because of the degree of reliance on financial statements for cost-based ratemaking • SFAS No. 71 resolves conflicts between regulatory and SEC financial reporting

11. FERC Staff’s Comments to the SEC IFRS Roadmap • Without SFAS No. 71 • Economic substance of a regulator’s actions on the regulated entity are not shown in the financial statements • Regulated entities may be required to derecognize reported deferrals • Results of operations reported to regulators may differ greatly from those reported to publicly issued

12. Capitalization of Underground Cable Assessment Costs • IMCORP, Docket No. AC09-27-000 • Filed December 23, 2008 • Request for confirmation that the cost of underground cable assessment technology may be capitalized when it is used in connection with rehabilitation projects • Costs incurred to extend the useful life of the system in the context of a one-time rehabilitation program, as illustrated in the Commission’s Notice of Proposed Accounting Release, Accounting for Pipeline Assessment Costs (Docket No. AI05-1-000)

13. Capitalization of Underground Cable Assessment Costs • Notice of Proposed Accounting Release • Clarifies and illustrates the proper accounting for pipeline assessment costs • Costs related to an ongoing integrity management programs are expensed • Cost related to a major rehabilitation project may be capitalized • Project results in significant replacements and modifications • Project extends the overall pipeline system’s useful life • Example No. 3 illustrates these concepts

14. Capitalization of Underground Cable Assessment Costs • Chief Accountant Determination • Principles applied to pipeline assessment costs may also be applied to underground cable assessments • Capitalization Principles • Part of a one-time major rehabilitation project resulting in significant repairs and replacements • Enhance and increase the life of the electric cable system beyond its original useful life • Incurred subsequent to determining the need for a major rehabilitation program

15. Capitalization of Underground Cable Assessment Costs • Capitalization Principles, continued • General purpose of the assessments to determine the specific location of cables needed to be repaired • Internal controls to distinguish between costs incurred related to ongoing assessment activities and those related to the rehabilitation project • Expense • Ongoing assessment activities • Assessment costs prior to determining the need for a rehabilitation project • Letter Order issued March 9, 2009

16. Accounting for Emission Allowances • National Grid plc, Docket No. AC08-146-000 • Filed July 11, 2008 (Amended August 22, 2008 & October 24, 2008) • Proposed journal entries on the merger of KeySpan Corporation into National Grid • National Grid used the purchase method of accounting and pushed down purchase accounting adjustments to the books of KeySpan’s jurisdictional subsidiaries • KeySpan Generation, LLC (Genco) & KeySpan LNG, LP

17. Accounting for Emission Allowances • National Grid, continued • Push down accounting adjusted Genco’s emission allowances to fair value • Recognized $296.2 million for allowances held and future allowances through 2027 • Account 158.1, Allowance Inventory • Recognized $251.5 million liability for allowances to be used by Genco or payable to Long Island Power Authority from the sale of any excess emission allowances • Account 253, Other Deferred Credits

18. Accounting for Emission Allowances • National Grid, continued • Chief Accountant determination • Emission allowances in Account 158.1 should be recorded at historical cost, i.e., the amount Genco paid for its allowances • Difference between fair value of allowances and historical cost may be recorded in Account 186, Miscellaneous Deferred Debits • Purchase accounting entries should only recognize allowances Genco owned at the merger date • Letter order issued December 23, 2008

19. Allowance For Funds Used During Construction (AFUDC) Rate • Pacific Gas and Electric Company, Docket No. AC09-29-000 • Filed January 9, 2009 • Request to exclude short-term debt used to finance nuclear fuel from the formula used to calculate AFUDC rate • CPUC requires Pacific to use short-term debt to finance nuclear fuel • Chief Accountant authorized Pacific’s request on March 3, 2009.

20. Income Tax Accounting for Pass-Through Entities • PATH West Virginia, LLC and PATH Allegheny, LLC (PATH Companies), Docket No. AC09-3-000 • Filed October 8, 2008, supplemented December 15, 2008 • Request approval to clear to Retained Earnings • Current amount of income taxes payable • Current amount of deferred tax assets created in the current tax year and recognized on the income tax return of its members

21. Income Tax Accounting for Pass-Through Entities • PATH Companies continued, • PATH Companies are start-up limited liability companies organized to finance, construct, own, operate, and maintain a segment of a 290-mile transmission line, scheduled to be completed in 2013 • Recover a return on 100 percent of construction work in progress in rate base during the construction of the transmission line • Treated as corporations for ratemaking purposes and collects an income tax allowance for the tax liability ultimately paid • Must maintain books of account based on the Commission’s Uniform System of Accounts (USofA) as if they were a corporation, including the income tax accounting requirements of the Commission’s USofA

22. Income Tax Accounting for Pass-Through Entities • PATH Companies’ Support • Tax liabilities and assets are recognized directly by owners (AEP and Allegheny) • A contribution of capital by the members in the case of the assumption of the tax liability • A distribution of retained earnings in the case of the receipt a tax benefit arising from a deferred tax asset • PATH Companies are not required to make tax payments to members or entitled to receive tax benefits • A refinement of a Commission letter order issued to High Island Offshore System

23. Income Tax Accounting for Pass-Through Entities • High Island Offshore System (HIOS) Order • Required HIOS to discontinue the procedure whereby accrued taxes was transferred to retained earnings and distributed to partners as a dividend • Required HIOS to stop recording deferred taxes on its books and subsequently transferring the balance to retained earnings • High Island Offshore System, 27 FERC ¶61,387 (1984)

24. AGENDA Commission Members Accounting Actions Enforcement Actions Commission Actions

25. Organizational Changes

26. Testimony before the Senate Energy and Natural Resources Committee • Testimony by Anna Cochrane on March 25, 2009 • Additional legislative changes that can improve energy market transparency and regulation • “Cease and Desist” authority under the FPA and NGA • Authority to prevent the dissipation of assets by a company under investigation for violating market manipulation rules under the FPA or NGA • Authority to temporarily modify or suspend market rules on file under the FPA • http://www.ferc.gov/enforcement/enforcement.asp

27. Enforcement Activities • Updated Enforcement Webpage • http://www.ferc.gov/enforcement/enforcement.asp • Division of Investigations • Investigates potential violations of the Commission’s statutes, orders, rules, and regulations • Self Reporting – Received 68 reports in 2008 • Opened 48 investigations in 2008 • 7 Commission approved settlement agreements ($19.95 million total civil penalty payments)

28. Enforcement Activities • Division of Audits • Helps ensure compliance with the Commission’s statutes, rules, regulations, and orders by conducting a wide array of audits of jurisdictional entities • Completed 60 audits of public utilities and natural gas pipeline and storage companies • 156 recommendations for corrective action • $1 million in recoveries from accounting and billing adjustments • $8.7 million in reductions to utility plant

29. Enforcement Activities • Division of Energy Market Oversight • Oversees the nation’s natural gas and electric power markets and related energy and financial markets, identifying problems and opportunities for those markets, reporting its findings and recommendations to the Commission and, where appropriate, to the public, and proposes policy options and regulatory strategies for addressing the issues identified • Presentations at Commission meetings • Conference calls with state energy officials • RTO/ISO Market Monitors

30. Enforcement Activities • Division of Financial Regulation • Support the Commission’s market monitoring activities, the development and monitoring of cost-based rates, and the Commission’s enforcement efforts by requiring that important financial and market information is recorded in a useful form and is transparent to the Commission and the public • Reviews Electronic Quarterly Reports • Reviews Annual and Quarterly Financial Reports • Provides expert accounting advise to the Commission and to the industry regarding the Commission’s accounting requirements

31. AGENDA Commission Members Accounting Actions Enforcement Actions Commission Actions

32. Top Commission Priorities • Goal 1: Energy Infrastructure - Promote the Development of a Strong Energy Infrastructure • Implement infrastructure provisions of Energy Policy Act of 2005 • Oversee development of mandatory Electric Reliability standards to protect bulk power supply • Encourage the development of new natural Gas Storage capacity • Maintain an environmentally safe infrastructure: Hydropower, Gas, LNG • Promote pre-filing processes for all Liquefied Natural Gas (LNG) terminals and Gas Pipelines • Process expeditiously Alaska Natural Gas Transportation Projects • Goal 2: Competitive Markets - Support Competitive Markets • Open Access Transmission Tariff (OATT) Reform • Support voluntary Regional Transmission Organizations and ISOs • Act timely on Complaints • Merger and Acquisition Review • Regional review of market-based rates • Goal 3: Enforcement - Prevent Market Manipulation • Provide guidance to Transmission Providers on complying with the Standards of Conduct • Implement market power and enforcement provisions of the Energy Policy Act of 2005 • Employ a comprehensive energy market oversight program • Assist regulated entities by providing guidance by using the process of No-Action letters • Prohibit Market Manipulation through Order 670, Prohibition of Energy Market Manipulation • http://www.ferc.gov/about/top-priorities.asp

33. Smart Grid Policy • Proposed Policy Statement and Action Plan • Docket No. PL09-4-000, issued March 19, 2009 • Smart Grid Advancements – Apply digital technologies to the grid, enable real-time coordination of information from generation supply resources, demand resources, and distributed energy resources • Purpose: To prioritize the development of key interoperability standards, provide guidance to the electric industry regarding the need for full cyber security for Smart Grid projects, and provide interim rate to recover the costs of Smart Grid deployments before relevant standards are adopted through a Commission rulemaking

34. Other Commission Activities • Transmission Investment • Green Power Express LP (ER09-681-000) • Pioneer Transmission (ER09-75-000 and ER09-75-001) • ITC Great Plains (ER09-548-000) • Public Service Electric and Gas Company (ER09-249-000) • Tallgrass Transmission and Prairie Wind Transmission (ER09-35-000 and ER09-36-000) • Northeast Utilities Service Company and National Grid USA (ER08-1548-000) • Pepco Holdings, Inc. (ER08-1423-000) • Transmission Siting • Testimony before the Senate Committee on Energy and Natural Resources by Chairman Wellinghoff

35. Other Commission Activities • Offshore Renewable Energy Development • Memorandum of Understanding with U.S. Department of the Interior • Establishes a cohesive, streamlined process through which Interior’s Minerals Management Service and the FERC will lease, license and regulate all renewable energy development activities on the Outer Continental Shelf, including hydrokinetic sources (wave, tidal and ocean current)

36. Where to Find More Information

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40. Where to Find More Information

41. Thank you for your attention! • Steven D. Hunt • Federal Energy Regulatory Commission • 888 First Street, NE • Washington, DC 20426 • (202) 502-6084 • steven.hunt@ferc.gov