United States: New FERC Financial Reporting Requirements Begin April 2004

In a final rule adopted February 11, 2004, the Federal Energy Regulatory Commission ("FERC") now requires quarterly reporting of financial and operating data by electric public utilities, natural gas companies, and pipeline companies. The first of these new quarterly reports will be due in July 2004. The sweeping new reporting requirements for FERC-regulated entities, which also include changes to the required information in existing annual reports due in April 2004, are to improve the usefulness and transparency of financial information provided to FERC. The final rule drops some of the new reporting requirements proposed in June 2003 and modifies others.

FERC asserted in its June 2003 proposal 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. For background of the proposal and more discussion of FERC’s reasons for proposing the new requirements, see Energy Bulletin, July 2003, Vol. 34 (available on Jones Day's Web site, www.jonesday.com).

The new quarterly reports will require jurisdictional companies to file with the commission a complete set of quarterly financial statements including appropriate notes to financial statements and ancillary service purchase and sales information. FERC emphasized in adopting its final rules that certain of this quarterly information, especially in the format and detail required by the new FERC reports, would otherwise not be publicly available. This fact convinced FERC of the need for it to adopt its new rules. In addition to basic financial statements, supplementary information must be included regarding revenues and the related quantities of product sold or transported, account balances for various operating and maintenance expenses, selected plant cost data, and information concerning the nature of regulatory assets and liabilities being created or amortized during the period.

Quarterly reports will be required only for the first three quarters of the year. FERC dropped its proposal to also require separate information for the fourth quarter of the year. Only an annual report summarizing the full year’s activities will be required.

The original proposed rules would have required inclusion of a management's discussion and analysis of financial condition and results of operations (commonly referred to as an "MD&A") in each quarterly report and in the annual report. The commission received numerous comments on this proposal. Some noted that many companies required to make the FERC reports are not otherwise subject to public reporting, such as the SEC’s Forms 10-K and 10-Q. These companies were concerned that the elaborate guidelines and safeguards applicable to SEC reports would not be available to them for FERC reports. More importantly, concern was expressed that FERC did not have the ability to establish "safe harbors" to provide any protection against liability that could result from making "forward-looking statements" in the MD&A. Based on this concern and others expressed in comments, FERC decided to drop the requirement for an MD&A report, both in the quarterly reports and in the annual report. Consequently, the new rules have no requirement for an MD&A report.

The financial statements that must be included in the new quarterly reports must include accompanying notes. However, the commission did adopt commenters’ recommendations that only abbreviated notes be required. Disclosure contained in the notes to the annual financial statements need not be repeated in quarterly notes. However, quarterly disclosure must be provided where events subsequent to the end of the most recent year have occurred that have a material effect on the reporting company. Consistent with SEC practice, FERC stated that its rules require updated discussion of significant changes since the most recent annual report in such items as accounting principles and practices, estimates inherent in the preparation of financial statements, status of long-term contracts, capitalization, significant new borrowings or modifications of existing financing agreements, and changes resulting from business combinations or dispositions. A description of material contingencies must also be included in every quarterly report, even if no significant change has occurred since the last annual report.

FERC’s 2003 announcement proposed accelerated dates for filing the quarterly reports. Many commenters objected to the short time allowed to prepare reports following the end of the quarter (reports were to be due in 35 days). In a compromise, the final rule grants additional time and establishes a later deadline for non-major electric, non-major natural gas, and all oil pipeline companies. After a phase-in period ending with the quarter ending September 30, 2005, the rules require quarterly reports to be filed within 60 days of the end of the quarter for the major filers. Non-major filers will have 70 days. The first report under the new rule for "major" filers is due July 9, 2004 and for "non-major" filers is due July 23, 2004.

Company officers will be required to sign a certification statement attesting to the reliability of the filed information. The final rule clarified that the "chief financial officer" or equivalent must make the certification. The FERC’s proposed expanded certification requirement, which was modified by FERC in response to comments, will only apply to the annual report.

The commission dropped a proposal that would have required certified public accountants who had reviewed the quarterly report to file a certification with the commission. The final rule has no requirement for accountants’ certifications for quarterly reports.

In addition to financial information, the quarterly reports will include, as originally proposed, 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 FERC adopted its proposal 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.

The final rule scales back the changes originally proposed for annual reports. It will not be necessary to break out fourth quarter data or include an MD&A. FERC kept the requirement to provide new statistical information regarding ancillary services, electric peak load, and other items, but it is allowing a phase-in so that this information will not be required in the reports filed in 2004 in respect of year 2003 activities. The first expanded annual report will have a deadline of April 25, 2004. In subsequent years, annual reports will be due by April 18.

FERC adopted its final rule on regulation of cash management practices in October 2003 (see Energy Bulletin, November 2003, No. 36, available at www.jonesday.com). Under that rule, jurisdictional entities were required to report to the FERC if the common equity component of the proprietary capital fell below 30 percent. In this most recent rule, FERC noted that the quarterly information now required to be filed by each entity subject to its jurisdiction will allow FERC to calculate this 30 percent test. Accordingly, to ease reporting burdens, FERC modified the cash management rule to eliminate the separate requirement to file a notice when proprietary capital contains less than 30 percent equity. However, the supplemental information that was required along with the special report must now be included in the quarterly or annual schedule outlining important changes during the quarter or year, as appropriate.

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