United States: FERC Proposes New Financial Reporting Requirements

Jumping on the bandwagon of corporate accountability, financial transparency, and timeliness of reporting of significant developments, the Federal Energy Regulatory Commission ("FERC") on June 25, 2003 proposed sweeping new reporting requirements for FERC-regulated entities. If adopted, the new rule would require quarterly reporting of financial and operating data by public utilities and pipeline companies, the reporting of fourth quarter financial data, adding a management's discussion and analysis schedule, allowing the submission of accountant’s certifications electronically, updating the officer's certification, and accelerating the filing dates. Public comments on the proposed rule are due no later than August 6, 2003.

FERC asserted that the rulemaking would help it achieve the goal of vigilant oversight by providing the commission with more timely, relevant, reliable, and understandable financial information from major participants in the energy market. Citing the passage of the Sarbanes-Oxley Act of 2002, which, among other things, requires public companies to disclose financial information on a rapid and current basis, FERC maintains that more frequent financial reporting will aid the commission and public in several ways. Timely information, FERC stated, will help in assessing the economic consequences of transactions and events on jurisdictional entities, measuring the effects of regulatory initiatives, and evaluating the adequacy of existing traditional cost-based rates, and will aid in the development of needed changes to existing regulatory initiatives. FERC also cited numerous reports regarding problems at Enron that concluded that better, more timely, and more transparent financial reporting by major companies is required to further the public interest.

While FERC recognizes that public companies already provide quarterly financial information under SEC rules, it stated that this information often relates only to the top parent holding company on a consolidated basis. FERC asserts that its proposed rules will make financial and operational data available at the operating company level on a timely basis. The data, all prepared in accordance with FERC’s Uniform System of Accounts, will make comparison among jurisdictional entities easier. While consolidation is appropriate for SEC reporting, FERC stated that it requires more detailed information concerning the results of operations and the financial position of each jurisdictional entity in order to meet its regulatory needs.

FERC promised to make the data filed with it more available to the public. The commission also intends to cooperate with the SEC to establish new Web links between the agencies’ respective Web home pages so that all users can access FERC-held financial information in a timely and efficient manner.

Quarterly Reports

The proposed quarterly reports will require companies to file with the commission a complete set of quarterly financial statements including appropriate notes to the financial statements, a management's discussion and analysis of financial condition and results of operations (commonly referred to as an "MD&A"), and ancillary service purchase and sales information. Company officers will be required to sign a certification statement attesting to the reliability of the filed information. Additionally, when a certified public accountant has reviewed the quarterly report, this certification must also be filed with the commission.

In addition to financial information, the quarterly reports will include revenues and the related quantities sold or transported, the operating and maintenance expenses, selected plant cost data, and regulatory asset and liability data. Public utilities and licensees will report the amount of megawatt hours sold, natural gas companies will report the amount of dekatherms transported, and oil pipeline companies will report the amount of barrels of crude oil and each kind of product delivered during the period.

The quarterly reports will initially be due within 45 days following the end of the quarter. By 2005, the report will be due within 35 days.

Management’s Discussion and Analysis

FERC intends the MD&A schedule to be a forward-looking presentation of management's opinion regarding the probable impact of current and future events on the operations of the company. The reporting objectives of this new MD&A schedule are to disclose information necessary for the users of the financial statements to obtain an understanding of the company's financial condition and results of operation. Importantly, the FERC rule will require that this MD&A relate only to the jurisdictional entity’s business, not the consolidated MD&A that may also be prepared for SEC filings.

FERC wants the proposed MD&A schedule to satisfy three related objectives by providing:

1. a narrative explanation of the jurisdictional entity's financial statements that enable the commission and other users to view the company from management's perspective;

2. overall financial disclosure and providing the context within which financial statements of the jurisdictional entity should be analyzed; and

3. information about the quality of, and potential variability of, a jurisdictional entity's earnings and cash flow, so the commission, as well as other users, can ascertain the likelihood of past performance as an indicator of future performance.

As examples of the information required in an MD&A, the commission included: the probable future effects of regulatory accounting policies; revenue recognition; asset impairment, including goodwill and other intangible assets; environmental contingencies; litigation contingencies; defined benefit pension plans and other post-retirement benefit plans; cost capitalization policies; depreciation expense; decommissioning; asset retirement obligations; self insurance; unique ownership arrangements; guarantees and other assurances; leasing arrangements; related party transactions; and energy trading and other risk management. FERC emphasized that this is not an all-inclusive list.

New Electric Peak Load Information

FERC is proposing to require quarterly and annual reports of electric peak load information of the transmission system including the reporting company’s own use of its transmission system. The commission asserts that this information will aid it in evaluating the adequacy of existing traditional cost-based rates.

Expanded Annual Reports

The annual reports that jurisdictional entities are now required to file will be expanded to include certain fourth quarter financial data, including an MD&A schedule and other additional data to be required in the quarterly reports. This constitutes a significant increase in reporting obligations for most companies. Currently, companies are not required to provide fourth quarter data in SEC filings. The new FERC rule would require fourth quarter financial information and, most importantly, an MD&A discussion that would not be provided publicly elsewhere. Jurisdictional entities that are subject to SEC reporting will likely also have to file this fourth quarter information with the SEC to avoid SEC restrictions on making "selective disclosure," i.e., providing material information selectively to outsiders rather than making it available generally.

In addition, company officers will be required to sign a certification statement attesting to the reliability of the filed annual information. Finally, the Commission is proposing to accelerate the filing dates for the FERC annual reports. The annual report would be due within 75 days for the 2003 fiscal year and must be filed within 60 days after the end of the 2005 fiscal year.

Conclusion

The proposed new annual and quarterly reporting requirements represent a significant increase in the reporting burden for FERC jurisdictional companies. These proposed rules also evidence an increased desire of FERC to regulate more day-to-day activities of regulated companies than in the past. Coupled with the recently adopted rules regarding cash management requirements (see Energy Bulletin, July 2003, Vol. 35), the new rules will involve FERC more than in the past with routine corporate activities of the entities it regulates.