FERC Accounting and Financial Reporting Update

September 13, 2004 FERC 1

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 Accounting and Financial Reporting Update

September 13, 2004 FERC 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.

September 13, 2004 FERC3

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


Recent Accounting and Financial Reporting

Purchase Accounting Pipeline Integrity Management Costs Accounting for Incentive Rate Plans


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


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


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


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 Purchasing Company

Jurisdictional Company

Sub1 Sub2

Purchase Price


Purchase Accounting

Parent Company

Company A

Sub1 Sub2

Parent Company

Company A

Sub1 Sub2

Purchase PricePurchase Price

For FERC Reporting For SEC Reporting


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


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



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



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



Accounting Guidance may be needed– When to capitalize assessment costs

Uprate project to increase capacity Increased safety Increased useful life Re-occurring planned maintenance


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



American Transmission Company– Request for Clarification/Rehearing

Clarification Rehearing

– Accounting requirements does not comply with GAAP– Accounting significantly increases administrative costs



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







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



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



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


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


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


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


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


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.


ORDER 646

Quarterly Filing Dates for 2004

Major Electric and Major Natural Gas Filers

Non-Major Electric and Non-Major Natural Gas

1/1/04-3/31/04 August 23, 2004 September 3, 2004

4/1/04-6/30/04 September 23, 2004 October 7, 2004

7/1/04-9/30/04 December 9, 2004 December 23, 2004


ORDER 646

Quarterly Filing Dates for 2004

Oil Pipelines

1/1/04-3/31/04 October 21, 2004

4/1/04-6/30/04 October 29, 2004

7/1/04-9/30/04 December 23, 2004


ORDER 646

Annual Filing Dates for Calendar Year Ending

Proposed in NOPR

Final Order

1 December 31, 2004 March 1, 2005 April 25, 2005

2 Subsequent years March 1 April 18,


ORDER 646

Waiver/Exemption Requests from Electric Cooperatives– Small size and limited resources as basis for

waiver







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




Revisions to the Annual Reports Order 634, Cash Management Rule Ongoing Accounting and Financial

Reporting Projects Recent Accounting Guidance


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


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?



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?



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?



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?



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



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


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


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







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


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


Questions?

Contacts:

[email protected]

(202) 502-8283

[email protected]

(202) 502-6084

Documents

FERC Accounting and Financial Reporting Update