United States: FERC Issues Rule Regulating Utility Inter-Company Financing Transactions

Finalizing financial transparency rules proposed in August 2002, the Federal Energy Regulatory Commission ("FERC") adopted on June 25, 2003 requirements for FERC-regulated entities to maintain specified documentation of cash management or "money pool" programs. FERC did not adopt a controversial provision that would have banned inter-company borrowings if the FERC-regulated entity’s proprietary capital ratio fell below 30 percent or if the FERC-regulated entity and its parent did not maintain investment grade credit ratings. Instead, FERC has asked for comments on a new proposal to require jurisdictional entities to make prompt public reports of changes in their capital ratio above or below the 30 percent level.

FERC found that entities subject to its jurisdiction used cash management arrangements involving significant amounts of money – estimated by FERC to be up to $16 billion – with little or no public disclosure, transparency, or controls. The goal of the new requirements is to protect ratepaying customers through implementation of documentation standards for these activities that will ensure appropriate data are maintained. The availability of such information, FERC asserted, will also allow FERC audit staff ready access to consistent data.

FERC asserts that the new documentation standards and, if adopted, the filing of the cash management agreements and the notification requirements, will achieve additional transparency with respect to the financial conditions and financial dealings of FERC-regulated entities and their corporate financial transactions. The public availability of the information will, in the commission’s view, allow all users of financial information to make informed decisions based on relevant and accurate information.

Transactions subject to the new documentation and disclosure requirements include several different types of "cash management programs." Some programs concentrate and transfer funds from multiple accounts into a single bank account in the parent company's name. Another type is known as "cash pooling" or "money pooling." This system uses a single summary account with interest earned or charged on the net cash balance position. A third type, known as a "zero balance account," empties or fills the balances in an affiliated company's account at a bank into or out of a parent's account each day. These and similar arrangements are subject to the new requirements.

The principal changes adopted are amendments to FERC’s Uniform Systems of Accounts (18 CFR Parts 101, 201, and 352) to provide documentation requirements for cash management programs, to require that cash management agreements be in writing, that the agreements specify the duties and responsibilities of cash management program participants and administrators, specify the methods for calculating interest and for allocating interest income and expenses, and specify any restrictions on deposits or borrowings by participants. FERC made it clear that the new requirements did not dictate the terms of these agreements or mandate any particular provisions.

The adopted rules do not require regulated companies to file copies of their cash management arrangements with the commission. Regulated entities must comply with other applicable FERC rules regarding the form of the media to be utilized for maintaining the records including paper, electronic, optical, or other new and evolving media, as well as the retention period for the records.

FERC is asking for comments on a proposal to mandate the filing of the required documentation. Comment is also sought on a further proposal that would require a jurisdictional entity to report to FERC within five days if it fell below a 30 percent common equity ratio. The report would describe the significant event(s) or transaction(s) that contributed to the proprietary capital ratio falling below 30 percent, the extent to which the entity has amounts loaned or advanced to others within its corporate group through its cash management program, and plans, if any, to raise its proprietary capital ratio. Likewise, a report would be due when the entity again rose to or above 30 percent equity.

The deadline for submitting comments on the additional proposals is August 7, 2003.

The new requirements, as originally proposed, stated that "cash deposits and borrowings may not be netted" in order to provide better transparency of inter-company payables or receivables resulting from cash management agreements. Prior to proposing the new rules, the commission examined a number of FERC regulated entities' cash management accounts. That examination revealed numerous instances in which amounts reported in receivables accounts (FERC Accounts 146 and 13) had negative balances. FERC emphasized that it views the reporting of negative balances in these receivables accounts rather than in payable accounts as inappropriate and potentially misleading.

Consequently, the final rules clarify that cash management programs operate essentially as ordinary checking accounts and that transactions within an account are netted against each other. The commission therefore decided to drop the prohibition on "netting" from the adopted rule. However, FERC made it clear that the balances in the FERC accounts that record cash management activities must be properly classified. It stated that debit balances must be reported in the appropriate accounts receivable account and credit balances must be reported in the appropriate accounts payable account at the end of each accounting period.

The provisions of the rules adopted on June 25, 2003 apply to all FERC-regulated entities (electric public utilities and licensees, natural gas and oil pipeline companies) that have not been granted waivers of the commission's accounting and the FERC Annual Report Forms 1, 1-F, 2, 2-A, or 6 filing requirements. Objections by holding companies registered under the Public Utility Holding Company Act ("PUHCA") that the FERC rules were inconsistent with PUHCA rules were rejected. FERC stated that the new mandates were in addition to, not in conflict with, the requirements of PUHCA.

The FERC also recently announced proposed new rules to expand reporting of financial and operating data of electric utilities and pipeline companies. (See Energy Bulletin, July 2003, Vol. 34). That proposal if adopted, together with the adopted cash management rules and the proposed additional reporting and filing requirements described in this Bulletin, will involve FERC more than in the past with routine corporate activities of the entities it regulates.