Federal Energy Regulatory Commission Update

1. Federal Energy Regulatory Commission Update Janice Garrison Nicholas Chief Accountant and Director, Division of Financial Regulation Federal Energy Regulatory Commission

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. Discussion Topics • Organizational Changes at FERC • Repeal PUHCA 1935 & Enactment PUHCA 2005 • PUHCA 2005 - Proposed Accounting, Reporting and Records Requirements – Service Companies and Holding Companies (PUHCA II) • New RTO/ISO Accounting and Reporting Rules • Other key Commission actions

4. Organizational Changes April 17, established new Office of Enforcement (formerly Office of Market Oversight and Investigations) Mostly the same functions Name changed because of increase in the agency’s enforcement authority under EPAct 2005 Reorganized along functional responsibilities of the office

5. FERC’s Office of Enforcement

6. Energy Policy Act of 2005 (EPAct 2005) • Public Law 109-58 signed into law August 8, 2005 • Affects FPA, PURPA, PUHCA, NGA, NGPA • Imposes deadlines for mandatory rulemakings, reports, studies, and MOUs (8 RMs, 9 reports, 7 discretionary RMs or generic actions, & 6 required consultations) • Mandatory action deadlines – 60 days to 18 months • Repeals PUHCA 1935/enacts PUHCA 2005 • Gives FERC additional civil penalty authority

7. PUHCA 2005 • Primarily a “books and records access” statute • Retains definitions of PUHCA 1935 • Provides FERC and state access to books and records of holding companies and their members • Upon request, FERC can determine appropriate cost allocations for non-power goods and services provided by an associate company to public utility members

8. Repeal PUHCA 1935 & Enact PUHCA 2005 • Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005, Docket No. RM05-32-000, Order Nos. 667 and 667-A, reh’g pending • FERC’s implementation recognized clear intent of Congress • Limited filing requirements to those needed to protect against inappropriate cross-subsidization and provided for exemptions and waivers for persons or transactions

9. Repeal PUHCA 1935 & Enact PUHCA 2005 (Cont’d) • Did not affect FERC’s primary means of protecting customers of jurisdictional companies that are members of holding company systems: FPA & NGA • Gave holding companies until 1/1/07 to comply with new FERC record retention requirements • Did not re-create PUHCA 1935 distinction between “exempt” and “registered” holding companies • Gave centralized service companies until 1/1/07 to comply with new FERC record retention and accounting rules

10. Repeal PUHCA 1935 & Enact PUHCA 2005 (Cont’d) • Adopted a streamlined process to exempt certain persons and classes of transactions from the books and records regulations • Other exemptions and waivers will be considered on a case-by case basis • Committed to hold a technical conference within one year on implementation issues • Directed a separate rulemaking (PUHCA II) to address how FERC’s accounting and record retention rules can be modified to integrate SEC requirements with rule issued prior to 1/1/07

11. Repeal PUHCA 1935 & Enact PUHCA 2005 (Cont’d) • Cost allocation agreements: • FERC did not require filing of cost allocation agreements • Traditional centralized service companies: • Can continue to use SEC’s “at-cost” standard for pricing non-power goods and services • Presumption that “at cost” standard is reasonable • Persons may file complaints if “at cost” pricing results in costs above market • Special purpose service companies – continue to apply FERC market standard

12. Repeal PUHCA 1935 & Enact PUHCA 2005 (Cont’d) • Entities can continue to rely on SEC orders • Adopted new information requirements: • FERC Form 60, annual report of centralized service companies • FERC 61, all other service companies annually submit narrative statement of functions • FERC 65, notification of holding company status • FERC 65-A, request for exemption from PUHCA 2005 regulations • FERC 65-B, request for waiver of PUHCA 2005 regulations

13. NOPR – PUHCA II • Financial Accounting, Reporting and Records Retention Requirements under the Public Utility Holding Company Act of 2005, Docket No. RM06-11-000 • NOPR issued 4/24/06 with comments due 6/15/06 • Proposed effective date 1/1/07 • NOPR directs staff to hold a technical conference on proposed rules; scheduled for July 11

14. NOPR – PUHCA II (Cont’d) • Uniform System of Accounts for centralized service companies (new Part 367) • Records Retention requirements for holding companies and service companies (new Part 368) • Revises Form 60 and changes filing date to April 18 (new Part 369) • Proposes electronic filing of Form 60 (new Part 369)

15. NOPR – PUHCA II (Cont’d) • NOPR guided by three overarching objectives. New requirements should: • Mirror existing FERC rules for public utilities and natural gas companies • Allow for consolidation of service company financial information with that of associate companies • Reflect unique aspects of service company operations

16. NOPR – PUHCA II (Cont’d) • NOPR notes the appearance of a regulatory gap in FERC jurisdiction over service companies that only have associate natural gas companies • NOPR seeks comments on: • Whether there is a regulatory gap? • If so, is there a need to address the gap? • If so, how should FERC address the gap under the NGA?

17. Final Rule – RTO/ISO Transactions • Accounting and Reporting for Public Utilities Including RTOs, Docket No. RM04-12-000, Order Nos. 668 and 668-A, reh’g pending • New rule adopted to provide greater transparency and uniformity regarding costs incurred by public utilities, including RTOs and ISOs • Expect improvements in cost recovery practices • Order No. 668 effective 4/1/06 • Made corresponding changes to annual report forms (Forms 1 and 1-F) and quarterly report Form 3-Q

18. Final Rule – RTO/ISO Transactions (Cont’d) • Changes adopted in the final rule: • New regional transmission and market operation asset function • New RTO revenue accounts: 457.1 and 457.2 • New regional market expense function and accounts • Expanded Account 561 to make it more transparent for reliability, scheduling & system control

19. Final Rule – RTO/ISO Transactions (Cont’d) • New Account 561.5 for costs incurred by RTOs performing long-term system planning & standards development • New Accounts 561.6 & 561.7 for transmission and generator study costs • Three new accounts for RTO billings (561.4, 561.8 and 575.7) • New account for transmission revenues (456.1) • Requires netting of RTO energy market transactions

20. Other Key Commission Actions • Final Rule, Transactions Subject to FPA Section 203, Docket No. RM05-34-000, Order Nos. 669 and 669-A, reh’g pending • Final Rule implements amended FPA section 203: • Increased threshold for FPA 203 transactions to $10 million • Extended the scope of FPA 203 to transfers of generation facilities and certain holding company transactions in excess of $10 million • Limits FERC review of a public utility’s acquisition of securities of another public utility to transactions in excess of $10 million

21. Other Key Commission Actions (Cont’d) • Requires FERC to examine cross-subsidization and pledges or encumbrances of utility assets • Requires FERC to expeditiously consider FPA 203 filings • Granted blanket authorization for certain types of transactions, including foreign utility acquisitions by holding companies, intra-holding company system financing and cash management agreements, internal corporate reorganizations and certain investments in transmitting utilities and electric utility companies

22. Other Key Commission Actions (Cont’d) • Adopted market value as the appropriate measure of value for transfers of physical facilities (transmission and generation facilities) • Where transactions involve FPA 203 and non-FPA 203 facilities and no separate valuations of the physical assets were performed, companies should use original cost undepreciated • Transactions between affiliates measured on original cost undepreciated

23. Other Key Commission Actions (Cont’d) • FERC will rebuttably presume that market value for wholesale contracts between non-affiliates is the transaction price • FERC will value jurisdictional contracts between affiliates based on nominal revenues over remaining contract life • Securities transactions between non-affiliates will be based on transaction price • Securities transactions between affiliates will be valued on market price if widely traded; otherwise use a three part method to determine value

24. Other Key Commission Actions (Cont’d) • For holding company mergers and acquisitions between non-affiliates, market value will be transaction price or consideration paid • For mergers and acquisitions involving affiliates, FERC will use the book cost of all of a company’s assets to measure the value

25. Other Key Commission Actions (Cont’d) • Set forth applicant’s obligation to demonstrate that a proposed FPA 203 transaction does not result in cross-subsidization or a non-utility associate company or the pledge or encumbrance of utility assets for the benefit of the associate company • Provided for expeditious consideration of completed applications • Technical conference on PUHCA 2005 implementation will also consider issues from this proceeding

26. Other Key Commission Actions (Cont’d) • NOPR, Preventing Undue Discrimination and Preference in Transmission Service, Docket Nos. RM05-25-000 and RM05-17-000 • NOPR issued 5/19/06; comments due 60 days after publication in the Federal Register • Proposed changes to OATT rules adopted in Order Nos. 888 and 889. • FERC seeks to increase transparency while addressing ambiguities in original pro forma tariff

27. Other Key Commission Actions (Cont’d) • NOPR, Market-Based Rates for Wholesale Sales of Electric Energy, Capacity and Ancillary Services by Public Utilities, Docket No. RM04-7-000 • NOPR issued 5/19/06; comments due 60 days after publication in Federal Register with reply comments due 30 days later. • Proposed reforms to FERC’s four-prong market power test

28. Other Key Commission Actions (Cont’d) • Final Rule, Procedures for Disposition of Contested Audit Matters, Order Nos. 675 & 675-A, Docket No. RM06-2-000 • Expands procedural rights of persons subject to audits under the FPA, NGA, NGPA and ICA to all types of audits (does not apply to reliability audits) • Spells out process for cases where an audit person contests an audit finding, the proposed remedy or both

29. Other Key Commission Actions (Cont’d) • NOPR, Promoting Transmission Investment through Pricing Reform, Docket No. RM06-4-000 • NOPR issued 11/18/06 • EPAct 2005 directed FERC to develop incentive-based rate treatments for transmission of electric energy in interstate commerce • NOPR designed to implement those incentives, provide regulatory certainty and support expanded and improved transmission infrastructure while ensuing just and reasonable transmission rates

30. Questions? Contact Information: janice.garrisonnicholas@ferc.gov (202) 502-6602