FERC Accounting and Financial Reporting Update

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 FERC

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. FERC

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 FERC

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

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 FERC

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 FERC

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 FERC

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 FERC

Purchase Accounting For FERC Reporting For SEC Reporting Purchase Price Purchase Price FERC

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 FERC

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 FERC

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 FERC

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 FERC

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 FERC

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 FERC

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 FERC

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 FERC

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 FERC

ORDER 646 • Why is ORDER 646 necessary? • Provides for more timely, relevant, and transparent financial reporting • Aids in achieving Commission’s 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 FERC

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 FERC

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 FERC

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

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 FERC

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. FERC

ORDER 646 FERC

ORDER 646 • Waiver/Exemption Requests from Electric Cooperatives • Small size and limited resources as basis for waiver FERC

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 FERC

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 FERC

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? FERC

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? FERC

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? FERC

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? FERC

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

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 FERC

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 FERC

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 FERC

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 FERC

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 FERC

Questions? Contacts: Mark.Klose@ferc.gov (202) 502-8283 Steven.Hunt@ferc.gov (202) 502-6084 FERC

FERC Accounting and Financial Reporting Update