FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON ACCOUNTING AND REPORTING OF FINANCIAL INSTRUMENTS, COMPREHENSIVE INCOME, DERIVATIVE AND HEDGING ACTIVITIES
DISCUSSION
In the NOPR, the Commission proposes to:
- Change the Uniform System of Accounts to track general accounting requirements imposed by FASB and to revise the format of its annual reports (e.g., FERC Form No. 1 which applies to major electric utilities) to accommodate these changes.
- Change its accounting regulations to establish uniform accounting requirements for the recognition of changes in fair value of certain security instruments, items of other comprehensive income, derivative instruments, and hedging activities.
The Commission’s objective is to provide sound and uniform accounting and financial reporting for these types of transactions and events by entities with cost-of-service rates. The Commission believes that such requirements are needed at this time because these types of transactions and events are not specifically addressed in the existing Uniform Systems of Accounts or in FERC Forms No. 1 and 1-F. The NOPR suggests that the new accounting regulations will not be a burden on public utilities because they are already required to adhere to the FASB rules for general accounting requirements and the Chief Accountant has issued interim guidance on the FASB standards. In addition, the NOPR states that these new accounts and related reporting requirements will minimize regulatory uncertainty as to the proper accounting and reporting for these items and minimize regulatory burden by reducing the potential differences in the manner in which these amounts are reported to the Commission. Finally, the NOPR suggests that the reporting of derivatives and hedging activities by jurisdictional entities will assist the Commission in its analysis of profitability, efficiency, risk management and in its overall monitoring effort.
Heretofore, jurisdictional marketers and generators with market-based rates have been exempt from the Uniform System of Accounts (Parts 41 and 101 of the regulations) and the filing of the Form No. 1 and Form No. 1-F (Part 141 of the regulations). In addition, such entities have routinely been granted blanket authorization under Section 204 of the Federal Power Act (Part 34 of the regulations) relating to the issuances of securities and the assumption of liabilities. As such, the NOPR would have had no impact on entities with market-based rates. The NOPR, though explicitly designed to conform the Uniform System of Accounts to recent changes by FASB, calls into question whether such waivers and authorizations are still appropriate:
There are, however, a number of entities with market-based rates that have been exempted from the Commission’s Uniform System of Accounts, and thus would not be subject to the proposed rule. For instance, Parts 41, 101, and 141 of the Commission’s regulations prescribe certain informational requirements that focus on the assets that a public utility owns. For market-based applications, the Commission has taken the position that since a marketer does not own any electric power generation or transmission facilities, its jurisdictional facilities would be only corporate and documentary, its costs would be determined by utilities that sell power to it, and its earnings would not be defined and regulated in terms of an authorized return on invested capital, and that, accordingly, it would grant waivers to marketers of the requirements of these Parts. The Commission has also granted power marketers’ requests for blanket approval under Part 34 of the Commission’s regulations for all future issuances of securities and assumptions of liability, assuming that no party objects to such treatment during a notice period which the Commission provides. The purpose of section 204 of the Federal Power Act, which Part 34 implements, is to ensure the financial viability of public utilities obligated to serve electric consumers. The Commission concluded that since marketers do not obligate themselves to serve electric consumers, the requirements are inapplicable.
As the development of competitive wholesale power markets continues, however, independent and affiliated power marketers and power producers are playing more significant roles in the electric power industry. In light of the evolving nature of the electric power industry, the Commission seeks comment on the extent to which these entities should be required to follow the Uniform System of Accounts, what financial information, if any should be reported by these entities, how frequently it should be reported, and, in particular, whether these exempted entities should be subject to reporting the information required in the proposed regulations. Furthermore the Commission seeks comments on whether it should rescind the Part 34 blanket authorizations granted to these entities and require these entities to comply with the filing requirements for all future issuances of securities and assumptions of liabilities.
EPSA does not support the change in longstanding Commission precedent being contemplated and submits the following issues for the Commission’s consideration.
1. Applying the Proposed Accounting and Reporting Requirements, As Well As The Requirements Of Part 34, To Marketers and Generators With Market-Based Rate Authority, Is Contrary To Longstanding Commission Precedent.
Section 301(a) of the Federal Power Act (FPA), 16 U.S.C. § 825(a), authorizes the Commission to prescribe rules and regulations concerning accounts, records, and memoranda as necessary or appropriate for jurisdictional entities for the purposes of administering the FPA. However, the Commission has routinely waived accounting and reporting requirements for jurisdictional entities with market-based rate authority. This is because the Commission has found no compelling reason to subject entities with market-based rate authority to the traditional regulatory requirements of the Uniform System of Accounts that are more appropriate in a cost-of service regulatory regime.
In Citizens Power, the seminal case governing waivers of Commission accounting and reporting requirements, the Commission granted the waivers by finding that the entity did not intend to own any electric power generation or transmission facilities, and its jurisdictional activities would only be purchase and resale transactions for profit. Parts 41, 101, and 141 of the Commission’s regulations prescribe certain accounting and reporting requirements that focus on the assets that a utility owns. As the entity would not own any such assets, its jurisdictional facilities would be only corporate and documentary, its costs would be determined by utilities that sell power to it, and its earnings would not be defined and regulated in terms of an authorized return on invested capital. Thus, the requirements in Sections 41, 101, and 141 were not relevant and accordingly the Commission granted waivers of these sections that pertain to accounting and reporting in the context of cost-of-service based rates. The Commission subsequently carried forward the rationale in Citizens Power to entities owning generating plants and selling power competitively under market-based rate authority.
Likewise, under longstanding Commission precedent, the Commission has concluded that FPA Section 204 application and authorization requirements for issuance of securities or assumption of liabilities are not applicable to entities with market-based rate authority. The Commission has granted requests for blanket approval under Part 34 of the Commission’s regulations for all future issuances of securities and assumptions of liability. The Commission reasoned that the purpose of Section 204 of the Federal Power Act (which Part 34 implements) is to ensure the financial viability of public utilities obligated to serve electric customers pursuant to statutory and regulatory requirements. The requirements are inapplicable to entities with market-based rate authority since the entities’ obligations are governed by contract and parties can protect themselves by contracts freely entered into.
2. The NOPR Does Not Provide Any Reasoning for Subjecting Marketers and Generators With Market-Based Rate Authority To The Proposed Accounting and Reporting Requirements
The NOPR lacks justification for reversing longstanding Commission precedent on the waivers set forth above. For example, the NOPR does not explain how applying these additional proposed requirements to entities with market-based rates will further the Commission’s statutory mission. The NOPR states that the reporting of derivatives and hedging activities will assist the Commission in its analysis of profitability and efficiency, in addition to other factors. However, neither the FPA nor Commission precedent vests the Commission with any interest in the profitability or efficiency of entities which have market-based rate authority. In the competitive market, each holder of market-based rates accepts the risk that it may lose money or make money. Its ability to manage that risk in the marketplace, rather than Commission regulation or Commission rate-setting, is what will determine its level of its profitability. In short, an analysis of profitability and costs is intimately associated with cost-of-service regulation, but is inappropriate in the context of market-based rate authority.
A. The Rationale For Granting The Original Waivers Remains Fully Applicable
Simply put, the rationale for granting the original waivers from the Uniform System of Accounts and the reporting under the Form No. 1 remain the same, i.e., the focus on costs in the Uniform System of Accounts and the Form No. 1 is not relevant to entities with market based rates. Such entities do not price their services on the basis of costs but rather, much like any commodity, based on the market value and the law of supply and demand. Moreover, such entities do not price their services on the basis of the cost of an individual purchase contract or the cost of producing power at an individual generating facility. Rather, such entities price their services on the basis of a portfolio of supply sources, product offerings, risk premiums, opportunity costs and buyer preferences.
In any event, if the Commission has concerns about the rates that a jurisdictional entity is charging under its market-based rate authority or the financial viability of an entity with market-based rates, it can, under Section 309, always investigate the matter and obtain any cost data appropriate to its investigation.
B. EPSA Has Concerns With the Applicability Of These Requirements
EPSA has two concerns with the removing the exemptions and thus applying the accounting and reporting requirements to competitive suppliers. First, EPSA has concerns about the cost information that the Commission would require to be disclosed in the Form No. 1. EPSA has continually warned the Commission that rather than furthering its goal of a competitive market, the disclosure of such information will stifle the development of the competitive bulk power markets.
Second, EPSA is concerned that eliminating the exemptions would result in substantial changes in the accounting systems of individual members. As set forth above, jurisdictional entities with market-based rates usually price their services on a portfolio basis. Likewise, such entities account for their assets on a portfolio basis. If the Commission would require the filing of Form No. 1 by an individual unit, this could result in a major modification to individual accounting systems. These companies would be forced to reformat their existing accounting systems to adhere to regulated cost-based formats that are largely irrelevant to their internal management as well as external investors. The cost of changing these systems would be much greater for market-based companies than is contemplated in the NOPR. The time estimates contained in the NOPR are based on cost-based rate companies that would need to make minimal changes to their existing systems. Companies with market-based rates would have to completely overhaul their systems at considerable cost.
C. EPSA Members Already Comply With The Requirements Of The Securities and Exchange Commission
EPSA members already comply with accounting aspects of the proposed rulemaking under Generally Accepted Accounting Principles in their financial reporting and legal requirements promulgated by the SEC. In fact, the Commission’s proposal would duplicate information already provided to the SEC in a different format—this would not assist investors and might actually cause confusion among investors since the final presentations might differ. For example many EPSA members with foreign investments have associated derivative contracts that are reported on their consolidated financial statements. These same disclosures would not be required by the NOPR if market-based entities have to report Form No. 1 information. Investors attempting to rely on the corporate financial statements would be left with gaps between the consolidated statements and Commission jurisdictional statements. In order to make Form No. 1 information more useful, these investors would be forced to reconcile requirements of differing federal government reporting standards.
Moreover, these requirements are changing. Indeed, as recently as January 22, 2002, the SEC issued a statement providing additional guidance regarding disclosure requirements for annual reports for the year just ended. The SEC’s quarterly and annual disclosures relate to liquidity and capital resources, including off-balance sheet arrangements; certain trading activities for non-exchange traded contracts accounted for at fair value; and relationships or transactions that do not involve clearly independent third parties, dealing at arm’s length. Regarding the trading activities to be disclosed, the SEC stated that entities should consider furnishing information that: disaggregates realized (and unrealized) changes in fair market value; identifies changes in fair value when valuation techniques change; disaggregates estimated fair market values depending on whether fair values are based on quoted market prices, prices from external sources or from prices based on models and other valuation methods; and indicates the maturities of contracts at the latest balance sheet date. Finally, entities are directed to consider disclosures regarding risk management for trading activities related to changes in credit quality or market fluctuations of underlying, linked or indexed assets or liabilities.
The SEC also indicated that it is considering whether to propose rules in the future designed to improve the consistency and completeness of disclosure regarding: 1) liquidity and capital resources, including off-balance sheet arrangements; 2) certain trading activities that include non-exchange traded contracts accounted for at fair value, and; 3) effects of transactions with related and certain other parties. It is the SEC, rather than the Commission, which has the authority to make changes in disclosure-related financial reporting requirements not only for energy industries but also for all industries. The SEC is also well-positioned to oversee the consistent accounting and reporting of changes in the fair value of financial investments, derivatives, and hedging activities. The Commission’s focus should remain on the impact of such instruments on jurisdictional ratemaking for cost-of-service facilities.
3. Rescinding Blanket Authorization Under Part 34 Would Disserve the Commission’s Goals
As noted above, the NOPR solicits comments on, but does not propose, reversal of its longstanding policy of granting blanket approval for marketers and power producers under Part 34 of its regulations. Such blanket approval authorizes those entities to issue securities and guaranty liabilities without applying for prior Commission approval on a case-by-case base.
Reversal or modification of the existing policy would serve no useful end. The primary purpose for regulating the issuance of securities is to ensure that those public utilities that are obligated by law to serve the general public do not, by the issuance of such securities or the assumption of liabilities, put at risk their service to the public. Such concerns do not come into play in the case of marketers or independent power producers, which have no such obligation to serve.
To be sure, as the NOPR points out, marketers and power producers play more significant roles in the electric power industry than they did when the Commission began issuing blanket authorizations under Part 34. The justification for such blanket authorizations is not thereby diminished, however. The financial health of individual marketers or power producers does not bear significantly on the Commission’s overarching responsibility under Title II of the Federal Power Act, which is to protect the interest of consumers. Indeed, as Chairman Wood has pointed out, even the collapse of the largest energy marketer and trader, Enron Corp., whatever its consequences for investors and employees, led to remarkably little disruption of energy markets. Consumers of electricity and natural gas have not been significantly affected.
The Commission has ample means of protecting the interest of consumers and the competitiveness of electricity markets without extending Section 204 filing and approval requirements to marketers or power producers. Most obviously, it has broad powers under Sections 205 and 206 to ensure that such suppliers do not exercise market power or engage in other competitive abuses. The same provisions enable the Commission to protect, as it has, against affiliate abuses in dealings between marketers and traditional utilities or pipelines. Similarly, Section 309 affords the Commission authority to require reports by marketers and power producers of jurisdictional transactions. In short, in areas where the growing significance of marketers and independent power producers really matters, case-by-case approval under Section 204 would add nothing useful to the Commission powers under other provisions of the statute.
Nor, or course, is Commission regulation of individual securities issuances by marketers or generators needed to protect investors. That responsibility falls to the SEC under the federal securities laws.
Reversing existing Commission policy with respect to blanket authorization under Part 34 is not accompanied with any specific reasoning in the NOPR and yet any reversal would impede attainment of the very objectives the Commission has embraced. It would make it more costly and, in some cases, inevitably delay, the issuance of securities or assumption of liabilities, thereby diminishing the efficiency of capital markets and the attractiveness of the U.S. market.