Federal Energy Regulatory Commission General Accounting, Finance & Audit Spring Meeting

A Primer on the Uniform System of Accounts

April 20, 2007 Washington, D.C.

Federal Energy Regulatory Commission

A Primer on the Uniform System of Accounts

Scott P. Molony Branch Chief, Regulatory Accounting Branch Office of Enforcement Washington, DC

Federal Energy Regulatory Commission

Disclaimer

The views and comments presented are my own and do not represent, nor are they to be interpreted to represent the views, comments, or positions of the Federal Energy Regulatory Commission.

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Federal Energy Regulatory Commission

FERC Organizational Chart

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Federal Energy Regulatory Commission

Office of Enforcement (OE)

Director Susan Court Deputy Director Anna Cochrane Division of Investigations Division of Audits Division of Financial Regulation Chief Acct. and Director Janice Garrision Nicholas Deputy Director Mark Klose Reg. Acct. Branch Chief, Scott Molony Division of Energy Market Oversight APPA 2007 Forms & Data Branch Chief, Michelle Veloso 5

Federal Energy Regulatory Commission

History of Uniform System of Accounts

• Federal – Congress amended the Interstate Commerce Act to include jurisdictional control over common carrier oil pipelines in 1906. As a result the Interstate Commerce Commission (ICC) established a Uniform System of Accounts (US of Acc’ts) for oil pipelines APPA 2007 6

Federal Energy Regulatory Commission

ICC v. Goodrich Transit Co.

• United States Supreme Court said in 1912: – 224 U.S.194 (1912) “If the Commission is to successfully perform its duties in respect to reasonable rates, undue discrimination, and favoritism, it must be informed as to the business of the carriers by a system of accounting which will not permit the possible concealment of forbidden practices…” APPA 2007 7

Federal Energy Regulatory Commission

Kansas City So. Ry. Co. v. United States

231 U.S. 423 (1913) • United States Supreme Court said a year later: – “…… no system of supervision and regulation would be complete without requiring the accounts of all the carriers to speak a common language.” APPA 2007 8

Federal Energy Regulatory Commission

History of Uniform System of Accounts

• Massachusetts was first state to adopt: – For railroads in 1876 – For gas companies in 1885 – For electric utilities in 1887 • New York and Wisconsin: – For public utilities: 1905 (NY), 1907 (Wisc) – For electric and gas companies in 1909 APPA 2007 9

Federal Energy Regulatory Commission

Private Organizations Attempt

• National Electric Light Association (1907) – An organization of private electric utilities devised the first standard classification of electric accounts • Association of American Railway Accountants – Together with the Interstate Commerce Commission developed a similar system • NARUC (1922) – Uniform System of Accounts for electric and gas APPA 2007 10

Federal Energy Regulatory Commission

Early Governmental Efforts

• Federal Communications Commission – 1935 U.S. of Acc’ts. for telephone companies • Federal Power Commission – 1935 U.S. of Acc’ts. for electric companies – 1938 U.S. of Acc’ts. for natural gas companies • Securities and Exchange Commission – 1936 U.S. of Acc’ts. for service companies APPA 2007 11

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FERC Specifics - Electric Authority

• Section 203 of the FPA – Imposes minimum values for filing requirements for companies under the Commission’s jurisdiction – Requires companies to record all transactions under the Uniform System of Accounts • Section 301 of the FPA – gives the Commission authority to prescribe the manner in which accounts and records are to be maintained by jurisdictional utilities • Section 304 of the FPA – gives the Commission authority to require the filing of financial statements with the FERC APPA 2007 12

Federal Energy Regulatory Commission

FERC Specifics - Gas Authority

• Section 8 of the Natural Gas Act – gives the Commission authority to prescribe the manner in which accounts and records are to be maintained by jurisdictional utilities • Section 10 of the Natural Gas Act – gives the Commission authority to require the filing of financial statements with the FERC APPA 2007 13

Federal Energy Regulatory Commission

Purpose of Uniform System of Accounts

• To provide useful financial information about the financial condition of an organization – Useful in rate regulated processes – Useful in credit and investment decision making – Useful in assessing future cash flow prospects – Useful in assessing an entity’s resources, the debt and equity claims on those resources, and changes in them • To benchmark anything you need a uniform and consistent starting point APPA 2007 14

Federal Energy Regulatory Commission

Objectives of Uniform System of Accounts

• Accuracy: Rate regulation requires accurate records of revenues, operating costs, depreciation, expenses and investment in plant and equipment – Need to distinguish between expenditures which should be charged to capital and those charged to income APPA 2007 15

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Objectives -- continued….

– Utility business must be separated from non-utility business – Accounting regulation is necessary to evaluate the reasonableness of rates – Accounting regulation is necessary to keep investors from being deceived APPA 2007 16

Federal Energy Regulatory Commission

Benefits of a Uniform System

• Information is Reliable – Neutrality, Representational, Faithful, Verifiable • Information is Comparable – Information that can be compared across businesses • Information is Consistent – Information that can be compared over time APPA 2007 17

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Regulatory Accounting and Reporting

• Authoritative accounting and reporting rules and procedures that regulated entities must follow in keeping their books and records and for preparing financial statements for submission to FERC.

• Focuses on providing information that is useful in determining proper rates and monitoring markets.

• Accounting rules established and maintained by FERC’s Chief Accountant APPA 2007 18

Federal Energy Regulatory Commission

Uniform System of Accounts

• Prescribes accounting classifications and instructions to achieve uniform accounting treatment • Maintains consistent application among companies • Used as the basis for preparing FERC Forms No. 1, 1-F, 2, 2-F and 6 Annual Report and 3 Q and 6-Q, Quarterly Reports APPA 2007 19

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Uniform System of Accounts

• Structure – Definitions – Accounting Instructions • General • Plant • Operations and Maintenance Expense APPA 2007 20

Federal Energy Regulatory Commission

Uniform System of Accounts

• Listing of Accounts – Account Numbers – Account Titles – Instructions on transactions to be recorded in the account – Listing of items to be recorded in the account APPA 2007 21

Federal Energy Regulatory Commission

Account Numbering System

• 100-199 Assets and other debits • 200-299 Liabilities and other credits • 300-399 Plant accounts • 400-432, 434-435 Income accounts • 433, 436-439 Retained earnings accounts • 440-459 Revenue accounts • 500-599 Production, transmission, regional market and distribution expenses • 900-949 Customer accounts, customer service and informational, sales, and administrative and general expenses APPA 2007 22

Federal Energy Regulatory Commission

Uniform System of Accounts

Balance Sheet Accounts Utility plant Other property and investments Current and accrued assets Deferred debits Proprietary capital Long-term debt Other noncurrent liabilities Current and accrued liabilities Deferred credits APPA 2007 23

Federal Energy Regulatory Commission

Uniform System of Accounts

Operating Revenues Sales Other operating revenues Operation and Maintenance Expense Accounts Production expenses Gas storage, terminating and processing expenses Transmission expenses Distribution expenses Customer accounts expense Customer service expenses Administrative and general expenses APPA 2007 24

Federal Energy Regulatory Commission

Uniform System of Accounts

Income Accounts Operating revenues Operating expense Maintenance expense Depreciation expense Amortization expense Regulatory debits and credits Retained Earnings Accounts Balance transferred from income Appropriations of retained earnings Dividends Adjustments to retained earnings APPA 2007 25

Federal Energy Regulatory Commission

USofA & GAAP

• Generally follows US GAAP except when there are conflicts with sound ratemaking principles.

– Acquisition Adjustments – Allowance for Funds Used During Construction – Regulatory Assets/Liabilities – Investments in Subsidiary Companies APPA 2007 26

Federal Energy Regulatory Commission

Changes to the USofA

• The Commission makes accounting changes to the Uniform System of Accounts through a public notice and comment process (i.e. Notices of Proposed Rulemaking (NOPR) • Parties such as electric and gas utilities, state commissions, public accounting firms, industry organizations among others are invited to comment on the proposed rule • The Commission reviews the comments and modifies the proposed rule before it issues the final rule APPA 2007 27

Federal Energy Regulatory Commission

Order

No

. 668

• Final rule issued December 16, 2005.

• Changes to operations.

the 576.1-576.5) USofA and forms to provide greater transparency for RTO/ISO costs and • Specific accounts: – Electric Plant (380-386) – Revenues (456.1; 457.1-457.2) – O&M – Regional Market Expenses (575.1-575.8; – Transmission Expenses (561.1-561.8) APPA 2007 28

Federal Energy Regulatory Commission

Order Nos. 667 & 684

• Final rules issued December 8, 2005 and October 19, 2006.

• Implemented provisions of the Public Utility Holding Company Act of 2005.

• Established a USofA for centralized service companies (18 C.F.R. Part 367).

• Prescribed records retention requirements for public utility holding companies, centralized service companies, and special purpose service companies (18 C.F.R. Part 368).

• Established FERC Form 60 (Annual Report for Service Companies) and FERC-65 (Notification).

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Federal Energy Regulatory Commission

The Basis for FERC Forms

• The USofA contributes to the understanding of financial statements and reports such as: Form Nos. 1, 2, 3-Q, 6, and 6-Q • Contains balance sheet accounts, income statement accounts, and plant accounts • Contains definitions followed by general, plant, and operating expense instructions • Used by state commissions, customers, municipalities, and other government agencies APPA 2007 30

Federal Energy Regulatory Commission

FERC Forms Based on USofA

• Electric Public Utilities and Licensees – Annual Report Form No. 1 (or 1-F) – Quarterly Report Form No. 3-Q • Natural gas pipelines – Annual Report Form No. 2 (or 2-A) – Quarterly Report Form No. 3-Q • Oil pipelines – Annual Report Form No. 6 – Quarterly Report Form No. 6-Q APPA 2007 31

Federal Energy Regulatory Commission

Annual Report of Major Electric Utility

• Form No. 1 is a comprehensive financial and operating report submitted for Electric Rate regulation and financial audits.

• Contains information based on calendar year reporting.

• Among other things, the form contains – Comparative Balance Sheet – Statement of Income – Statement of Retained Earnings – Statement of Cash Flows – Notes to Financial Statements – Operational Data APPA 2007 32

Federal Energy Regulatory Commission

Annual Report Major Electric Utility

• Major is defined as having – (1) one million Megawatt hours or more; – (2) 100 megawatt hours of annual sales for resale; – (3) 500 megawatt hours of annual power exchange delivered; or – (4) 500 megawatt hours of annual wheeling for others (deliveries plus losses).

• Order No. 694 (RM07-2) expanded filing requirement to non-operating utilities who continue to collect rates pursuant to a Commission approved tariff.

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Federal Energy Regulatory Commission

Quarterly Financial Report of Electric Utilities, Licensees, and Natural Gas

• Form No. 3-Q

Companies

is a comprehensive quarterly financial and operating report which supplements Form 1 (and Form 2) and is submitted for all Major and Non Major: – Electric Utilities – Licensees – Natural Gas Companies APPA 2007 34

Federal Energy Regulatory Commission

Forms and Data Initiatives

• Notice of Inquiry (NOI) –

Assessment of Information Requirements for FERC Financial Forms,

Docket No. RM07-9-000 – Covers FERC Forms 1, 1-F, 2, 2-A, 3-Q, 6, and 6-Q APPA 2007 35

Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Notice of Inquiry (NOI) (cont.) – Office of Enforcement (OE) staff held 5 informal sessions with various entities to reexamine the information in the FERC Forms 1 and 2 and determine whether these forms should be modified to improve their usefulness. The entities included: • Filers • FERC Offices • Trade Organizations • State Public Utility Commissions • Federal Agencies • Financial/ Information Reporting Entities APPA 2007 36

Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Notice of Inquiry (NOI) (cont.) – Not all participants in the informal review had an opportunity to submit written comments or to respond to comments submitted by other parties – NOI gave those entities, and all other interested persons, the opportunity to comment formally with the Commission on any of the issues raised therein APPA 2007 37

Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Notice of Inquiry (NOI) (cont.) – Invited all interested person to participate and submit answers to specific questions: • (1) Do the annual and quarterly Financial Forms provide sufficient data to the public to permit an evaluation of the filers’ jurisdictional rates?

• (2) If not, what additional data is needed to conduct such an evaluation? Please specify the form (or forms) to which your suggestions pertain.

• (3) Do the financial reports provide sufficient data to the public to determine revenues attributable to the sale of excess fuel retention? If not, what additional data is needed to conduct such an evaluation?

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Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Notice of Inquiry (NOI) (cont.) – Invited all interested person to participate and submit answers to specific questions: (cont.) • (4) Is the information included in the financial reports sufficient to audit formulaic rates?

• (5) Should the Commission require reporting of information on demand response initiatives (interruptible, load control, etc.), including demand and peak demand impacts, associated cost and savings, and the number of advanced meters installed?

• (6) Please explain how this additional data will be useful to users of the Financial Forms.

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Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Notice of Inquiry (NOI) (cont.) – Invited all interested person to participate and submit answers to specific questions: (cont.) • (7) How burdensome would any requirement for additional information be to filers of Financial Forms?

• (8) Are there specific reporting requirements that are no longer necessary or unduly burdensome that should be deleted?

• (9) What technical revisions, if any, need to be made to the Financial Forms? For example, identify any suggested changes in instructions, desirable software upgrades, and whether there are errors embedded in the forms which need to be corrected.

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Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Notice of Inquiry (NOI) (cont.) – Invited all interested person to participate and submit answers to specific questions: (cont.) • (10) Should the Commission require electric utilities, licensees and interstate natural gas and oil pipeline companies to provide notification when their total sales or transactions fall below the minimum thresholds established in the Commission’s regulations such that they are no longer subject to these filing requirements?

• (11) Should the Commission require a showing of good cause before granting an extension of time in which to file the required forms?

• (12) Are these concerns of sufficient importance to warrant a rulemaking and, if so, what rules should the Commission promulgate? Commenters are encouraged to be as specific as possible.

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Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Show Cause Order –

Compliance with Financial Forms Filing Requirements,

Docket No. IN07-7-000, et al.

– Order covered FERC Forms 1, 1-F, 2, 2-A, 3-Q, 6, and 6-Q going back to 2005 reporting year – Order required each listed company to respond in 30 days from the date of the Order APPA 2007 42

Federal Energy Regulatory Commission

Forms and Data Initiatives (cont.)

• Show Cause Order (cont.) – Follows staff review of compliance with Commission financial reporting requirements • Initially identified 144 filers who were out of compliance • Contacted each filer and was able to narrow the list to 14 filers APPA 2007 43

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Where to Find More Information

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Federal Energy Regulatory Commission

Where to Find More Information

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Compliance and Clarification Filings

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Thank you for your attention!

• •

Scott P. Molony

• Federal Energy Regulatory Commission • 888 First Street, NE • Washington, DC 20426 • (202) 502-8919

[email protected]

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