In June, FERC extended its jurisdiction to mandate new documentation and disclosure requirements for 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 have been subject to the new requirements since August of 2003. See Energy Bulletin, July 2003, Vol. 35 for a summary of the first round of new requirements.
The modified rules are effective December 1, 2003.
Notice Regarding Capitalization Ratio
The rules now require each jurisdictional entity, if it participates in a cash management program, to calculate its "proprietary capital" ratio quarterly and notify FERC within 45 days following the quarter if the proprietary capital component of its capitalization falls below 30 percent of total capitalization. Proprietary capital is, in general, equity capital. The rules specify the formula for calculating the ratio by reference to the Uniform System of Accounts. The time periods for compliance reflect a change from those proposed, which would have required monthly calculations and allowed only five days to give the notice of a decline of the ratio below 30 percent.
The notice must 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 notice is now due within 45 days following the end of the calendar quarter during which the entity’s equity ratio again rises to or above 30 percent.
The commission found that a 30 percent proprietary capital threshold remains a reasonable and important indicator of a company’s financial health. Reporting of the ratio will also inform FERC of the extent to which a FERC-regulated entity has taken on debt to finance its assets or operations. FERC noted that more than 90 percent of FERC-regulated entities have proprietary capitalization of 30 percent or more and also noted that the SEC continues to rely on this measure for various purposes. In response to comments requesting the ratio be calculated excluding "transition" or "securitization" bonds or other non-recourse debt, FERC held that it would not allow these securities to be excluded from the calculation. Rather, FERC stated that any reporting company that experienced a drop in its proprietary capitalization because of the impact of these securities was free to include a description of that fact in its notice to the commission.
The commission emphasized that the purpose of the capitalization ratio notification was informational and to assist it in its regulatory duties. There is no penalty or other consequence specified in the final rules in the event a jurisdictional company gives notice that it has fallen below the 30 percent equity capital level. The discussion of these rules by the commission makes no reference to any other consequence it might impose in other matters. FERC would presumably give the fact appropriate consideration in any pending or future rate proceeding. FERC does have jurisdiction over certain securities issuances under Section 204 of the Federal Power Act. It is possible that future orders under that section could impose conditions surrounding the 30 percent equity requirement similar to the SEC’s approach under the Public Utility Holding Company Act of 1935 (PUHCA). Under PUHCA, the SEC generally prohibits additional debt issuance if the regulated entity’s equity ratio is below 30 percent, unless specific approval is obtained.
The FERC rules do not specify a form for the required notice regarding changes in equity ratio. Presumably a letter to the Chief Accountant would be an appropriate format. Regulated entities should take note that this notice will be made public by FERC. Jurisdictional companies may request confidential treatment of information filed with FERC under Section 338.112 of its regulations. However, FERC warned that unsubstantiated assertions of future harm resulting from disclosure would be insufficient for a specific company to acquire confidential status for its filing. Entities that have reporting obligations under Federal securities laws should take appropriate steps to make necessary filings with the SEC as well.
Filing Copies of Cash Management Agreements
The interim rule adopted in June 2003 did not require regulated companies to file copies of their cash management arrangements with the commission. With its October action, FERC now mandates the filing of the required documentation.
A copy of all existing cash management arrangements of jurisdictional entities must be filed with FERC by December 11, 2003 — 10 days following effectiveness of the revised rule. Any new or modified cash management arrangement of a jurisdictional entity must also be filed within 10 days following the adoption or change. Filed cash management agreements will be made public, subject to the usual procedures for seeking confidential status.
FERC emphasized that cash management agreements are filed for informational purposes of the commission only. FERC will not entertain public comments on the filings. Further, FERC noted that the rules do not require that any jurisdictional entity alter its existing cash management agreement and emphasized that FERC will not alter any agreement after it is filed.
Modifications to Interim Rule
The latest action made changes to the existing rules regarding the record-keeping requirements for cash management programs. The following clarifications or modifications are effective December 1, 2003:
- Clarified that the rules only require information be maintained related to the FERC-regulated entity and any "administrator" of a cash management program. Jurisdictional entities are not required to keep information regarding other nonregulated participants in a cash management arrangement.
- Modified the rule to eliminate the need to keep records of the interest rate applicable to each transaction. Rather, the documentation of a cash management program must either indicate the applicable interest rate or the method of determining the interest rate.
- Modified the rule to require records of only the monthly balances of the jurisdictional entity in the cash management program rather than previous requirement for daily balances.
- Clarified that if any of the rules’ specified record-keeping items for a cash management program are inapplicable to an entity’s arrangement, it must nevertheless state that the requirement is inapplicable in its documentation that is filed with the FERC. For example, the rules require the documentation to specify the duties and responsibilities of the "administrator" of a cash management program. If there is no administrator, such as in a bilateral agreement between a jurisdictional entity and its parent, the agreement must specify that the provisions of the rule regarding such duties and responsibilities are inapplicable to the agreement.
Applicability
The provisions of the rules adopted effective December 1, 2003 apply to all FERC-regulated entities (electric public utilities and licensees and 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. Given their special circumstances, however, in the October 2003 ruling, FERC exempted electric cooperatives from the requirement to report changes in their proprietary capital above and below the 30 percent level. Electric cooperatives are subject to all the other requirements.
Conclusion
The FERC justified its final rule by finding that it must examine the financial structure of the entities it regulated in order to better ensure that rates for jurisdictional services are just and reasonable. FERC emphasized that it is not dictating the content of, or terms for, participating in a cash management program, and it noted that it is not regulating the issuance of any security by means of the new rules. Finally, FERC rejected contentions that its revised rules were preempted by, or inconsistent with, the PUHCA or state public utility regulations applicable to securities issuances. The new requirements show an increased activism by FERC in financial reporting and monitoring. It remains to be seen what FERC will do with the new information it will be gathering.
Further Information
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