Subject: DEPARTMENT OF ENERGY
[Federal Register: November 6, 2002 (Volume 67, Number 215)]
[Rules and Regulations]
[Page 67691-67739]
>From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06no02-25]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Parts 101, 201 and 352
[Docket No. RM02-3-000; Order No. 627]
Accounting and Reporting of Financial Instruments, Comprehensive
Income, Derivatives and Hedging Activities
October 10, 2002.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Final rule.
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SUMMARY: The Federal Energy Regulatory Commission is amending its
regulations to update the accounting and financial reporting
requirements under its Uniform Systems of Accounts for jurisdictional
public utilities and licensees, natural gas companies and oil pipeline
companies. The Commission is establishing uniform accounting
requirements and related accounts for the recognition of changes in the
fair value of certain security investments, items of other
comprehensive income, derivative instruments, and hedging activities.
The Commission is adding new balance sheet accounts to the Uniform
Systems of Accounts to record items of other comprehensive income and
derivative instruments. The Commission is also adding new general
instructions and revising certain account instructions to incorporate
the above changes in the existing Uniform Systems of Accounts. And, the
Commission is revising the following Annual Reports: FERC Form Nos. 1,
1-F, 2, 2-A and 6 to include the new accounts and a new schedule
contained in the final rule.
The Commission is severing from this rulemaking proceeding the
inquiry on whether independent and affiliated power marketers, and
power producers should continue to be eligible, on a case by case
basis, for waiver of the Commission's Uniform Systems of Accounts and
blanket approval under part 34 of the Commission's regulations for the
issuance of securities and the assumptions of liabilities. The
Commission will consider separately the issue of accounting and
reporting requirements by gas marketers, independent and affiliated
power marketers, and power producers.
An important objective of the rule is to provide sound and uniform
accounting and financial reporting for the above types of transactions
and events. The new accounts and reporting schedule will add
visibility, completeness and consistency of accounting and reporting
changes in the fair value of certain financial instruments, items of
other comprehensive income, derivative instruments and hedging
activities, in the above mentioned FERC Forms.
EFFECTIVE DATE: The rule will become effective January 6, 2003.
FOR FURTHER INFORMATION CONTACT:
Mark Klose (Technical Information), Office of the Executive Director,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426. (202) 502-8283.
Julia A. Lake (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426. (202) 502-8370.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Background
III. Discussion
A. General
B. Inquiry Concerning Waivers Given to Marketers and Others
C. Accounting for Trading and Available-for-Sale Type Securities
D. Accounting for Other Comprehensive Income
E. Accounting for Derivatives and Hedging Activities
1. General
2. General Instructions for Fair Value and Cash Flow Hedges
3. Changes to General Instruction 21 Allowances
4. Accounting for Derivative Assets and Liabilities
a. Balance Sheet Classification for Derivative Assets and
Liabilities
b. Income Statement Classification for Changes in Value of
Derivative Instruments
c. Inclusion of the Normal Purchases and Sales Scope Exception
F. Changes to the FERC Annual Report Forms
G. Disclosure Requirements
H. Miscellaneous Items
IV. Regulatory Flexibility Act Certification
V. Environmental Impact Statement
VI. Information Collection Statement
VII. Document Availability
VIII. Effective Date and Congressional Notification
Regulatory Text
Appendix A--List of Commenters
Appendix B--Revised Schedules for Forms 1, 1-F, 2, 2-A, and 6
Before Commissioners: Pat Wood, III, Chairman; William L. Massey,
Linda Breathitt, and Nora Mead Brownell.
I. Introduction
1. The Federal Energy Regulatory Commission (Commission) is
amending its accounting and financial reporting regulations. In a
notice of proposed rulemaking issued on December 20, 2001, and
published in the Federal Register on January 8, 2002 (67 FR 1025), the
Commission proposed to amend its Uniform Systems of Accounts \1\ for
public utilities and licensees,\2\ natural gas companies \3\ and oil
pipeline companies \4\ by establishing uniform accounting requirements
for the recognition of changes in the fair value of certain security
investments, items of other comprehensive income, derivative
instruments, and hedging activities. The Commission is adding new
balance sheet accounts to the Uniform Systems of Accounts to record
items of other comprehensive income and changes in the fair value of
derivative instruments. The Commission is also adding new general
instructions for the accounting of derivative instruments and hedging
activities along with new instructions for the accounting of items of
other comprehensive income. Revisions to existing investment asset
accounts and general instructions will incorporate fair value
accounting for trading and available-for-sale type security
investments.
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\1\ Section 301(a) of the Federal Power Act (FPA), 16 U.S.C.
825(a), section 8 of the Natural Gas Act (NGA), 15 U.S.C. 717g and
section 20 of the Interstate Commerce Act (ICA), 49 App. U.S.C. 20
(1988), authorize the Commission to prescribe rules and regulations
concerning accounts, records and memoranda as necessary or
appropriate for the purposes of administering the FPA, NGA and the
ICA. The Commission may prescribe a system of accounts for
jurisdictional companies and, after notice and opportunity for
hearing, may determine the accounts in which particular outlays and
receipts will be entered, charged or credited.
\2\ Part 101 Uniform System of Accounts Prescribed for Public
Utilities and Licensees Subject to the Provisions of the Federal
Power Act. 18 CFR part 101 (2002).
\3\ Part 201 Uniform System of Accounts Prescribed for Natural
Gas Companies Subject to the Provisions of the Natural Gas Act. 18
CFR part 201 (2002).
\4\ Part 352 Uniform System of Accounts Prescribed for Oil
Pipeline Companies Subject to the Provisions of the Interstate
Commerce Act. 18 CFR part 352 (2002).
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2. Additionally, the Commission is revising the following Annual
Reports: FERC Form No. 1, Annual Report of Major Public Utilities,
Licensees and Others (Form 1); FERC Form No. 1-F, Annual Report of
Nonmajor Public Utilities and Licensees (Form 1-F); FERC Form No. 2,
Annual Report of Major Natural Gas Companies (Form 2); FERC Form No. 2-
A, Annual Report of Nonmajor Natural Gas Companies (Form 2-A); and Form
No. 6, Annual Report of Oil Pipeline Companies (Form 6) to include the
new accounts and a new schedule.\5\
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\5\ The FERC Annual Reports bear the following OMB approvals:
Form No. 1 has OMB approval number 1902-0021; Form No. 1-F has OMB
approval number 1902-0029; Form No. 2 has OMB approval number 1902-
0028; Form No. 2-A has OMB approval number 1902-0030; and Form No. 6
has OMB approval number 1902-0022.
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[[Page 67693]]
3. These revisions are being made to improve the usefulness of
financial information provided to the Commission and other users of the
FERC Forms by establishing uniform accounting and reporting
requirements for items of other comprehensive income, changes in the
fair value of investment securities, derivatives, and hedging
activities. An important objective of the rule is to provide sound and
uniform accounting and financial reporting for the above types of
transactions and events. The Commission is of the view that such
requirements are needed because these types of transactions and events
are not specifically addressed in the existing Uniform Systems of
Accounts or in FERC Forms 1, 1-F, 2, 2-A, and 6. This final rule is
part of the Commission's ongoing effort to address emerging financial
and accounting developments within the context of the Uniform Systems
of Accounts.
II. Background
4. In recent years, fair value measurements have become useful in
assisting investors, creditors and other users of the financial data in
making rational investment, credit and similar decisions. The use of
fair value as a measurement attribute for financial reporting has grown
in importance and relevance. Despite this fact, the companies that this
Commission regulates traditionally have had only a relatively small
number of transactions for which fair value measurements would be
appropriate. This, however, is changing. As the regulated industries
restructure and a greater percentage of sales are based on other than
cost-of-service, fair value will increasingly provide a relevant
measure of economic effects for a growing number of transactions and
events. The usefulness of fair value information has resulted in the
Financial Accounting Standards Board (FASB) issuing new accounting
pronouncements affecting the manner in which certain types of financial
instruments, derivatives and hedging activities are measured and
reported in the financial statements applicable to entities in
general.\6\
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\6\ The accounting pronouncements issued by FASB were Financial
Accounting Standards (FAS) 115, Accounting for Certain Investments
in Debt and Equity Securities, 130, Reporting Comprehensive Income,
and 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. These accounting
pronouncements may be obtained from FASB at (http://
accounting.rutgers.edu/raw/fasb/ ).
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5. The Commission considers the requirements contained in Financial
Accounting Standards (FAS) 115, 130 and 133 to be an improvement in
financial accounting and reporting practices if properly implemented
and interpreted for filings made with this agency. While some companies
have implemented certain aspects of these pronouncements, the
implementation has not been uniform concerning the accounting and
reporting to the Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6.
6. On August 10, 2001, the Commission's Chief Accountant issued
interim accounting guidance on the proper accounting and reporting
requirements for financial instruments, comprehensive income,
derivatives and hedging activities.\7\ This interim accounting guidance
was subsequently followed by a notice of proposed rulemaking (NOPR)
issued on December 20, 2001, in which the Commission proposed changes
to its accounting and financial reporting requirements to establish
uniform accounting and reporting of the above mentioned items.\8\
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\7\ See, All Jurisdictional Public Utilities and Licensees,
Natural Gas Companies, and Oil Pipeline Companies, 97 FERC 62,147
(2001).
\8\ See 97 FERC 61,321 (2001).
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7. The Commission received numerous comments from interested
parties on its proposed changes to the accounting and financial
reporting requirements. As more fully discussed below, the Commission
is issuing this final rule to provide guidance on the proper
interpretation and implementation of the principles and concepts set
forth in FAS 115, 130 and 133 for accounting and financial reporting to
the FERC.
III. Discussion
A. General
8. As discussed in the NOPR, the current accounting and financial
reporting standards for certain investment securities, derivative
instruments, and hedging activities were developed when companies that
this Commission regulates had only a relatively small number of
transactions for which fair value measurements would be appropriate. As
a result of the increased usage of derivative instruments to manage
risk along with recent developments in the accounting profession, the
Commission proposed revisions to its accounting and financial reporting
requirements to provide greater visibility and transparency of these
transactions and to help minimize inconsistent accounting and reporting
of the above mentioned items.
9. The Commission received 36 comments concerning various aspects
of the proposed rule.\9\ The majority of commenters were supportive of
the Commission's effort to provide interpretative guidance on the
application of generally accepted accounting principles to
jurisdictional entities that presently file financial information to
the Commission in Annual Report Forms 1, 1-F, 2, 2-A, and 6.\10\
Additionally, some commenters did not find the new standards as
reflected in the proposed regulations unduly burdensome and have
already implemented the principles and concepts contained in FAS 115,
130 and 133.\11\
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\9\ See appendix A for Listing of Commenters.
\10\ See for example APGA at p. 1, EEI at p. 3, Dominion at p.
5, Pinnacle West at p. 3, Sempra at p. 1, Portland General at p. 3,
NRECA at p. 6, Ohio PUC at p 2, NYPUC at p. 2, and Williams at p. 2.
\11\ See for example Williams at p. 4.
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10. The addition of new accounts and related general instructions
is intended to improve the visibility, completeness and consistency of
accounting and reporting of changes in the fair value of certain
investment securities, items of other comprehensive income, derivatives
and hedging activities. The addition of new accounts will enhance the
Commission's understanding of the nature and extent to which
derivatives and hedging activities are used by regulated entities and
the impact these transactions and events have on their financial
condition. With a greater understanding of the financial impact that
derivative instruments have on regulated entities the Commission will
be in a better position to make more informed decisions that affect the
industries it regulates.
11. Also, the addition of the new reporting requirements to the
FERC Forms 1, 1-F, 2, 2-A and 6 will reduce 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 shareholders and to the
Commission.
B. Inquiry Concerning Waivers Given to Marketers and Others
12. There are a number of public utilities with market-based rates
that have received waivers from the Commission's Uniform System of
Accounts, and thus would not be subject to the rule, for as long as the
Commission continues the waivers. For instance, parts 41, 101, and 141
of the Commission's regulations prescribe
[[Page 67694]]
certain informational requirements that focus on the physical assets
that a public utility owns. For market-based rate applications by
public utilities, 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 and others their
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.\12\ The Commission
concluded that since marketers do not obligate themselves to serve
electric consumers, the requirements are inapplicable.\13\
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\12\ We note that the Commission's jurisdiction over issuances
of securities and assumptions of liabilities under section 204 of
the FPA applies only to entities that are public utilities as
defined in the FPA and only where the public utilitity's security
issues are not regulated by a State commission (see FPA section
204(f)).
\13\ See, e.g., St. Joe Minerals Corp, 21 FERC 61,323 (1982);
Cliffs Electric Service Company, 32 FERC 61,372 (1985); Citizens
Energy Corporation, 35 FERC 61,198 (1986); Howell Gas Management
Company, 40 FERC 61,336 (1987); Citizens Power & Light Corporation,
48 FERC 61,210 (1989); National Electric Associates Limited
Partnership, 50 FERC 61,378 (1990); and Nevada Sun-Peak Limited
Partnership, 86 FERC 61,243 (1999).
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13. 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 sought comment in the NOPR 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.
14. Furthermore, the Commission sought comments on whether it
should rescind the part 34 blanket authorizations granted to
independent and affiliated power marketers and power producers and
require these entities to comply with the filing requirement of part 34
for all future issuances of securities and assumptions of liabilities.
The purpose of requiring these marketers and producers to comply with
these regulations would not be to ensure their financial viability
under section 204 of the FPA. Rather, it would be to promote
transparency and facilitate investor risk analysis which in the long
run promotes infrastructure and competition, and makes rates more just
and reasonable.
15. Most commenters stated that the Commission should not revoke
the existing waivers. They argue that the basis for the Commission
initially granting the waivers has not changed. They stated that
marketers do not own any electric power generation or transmission
facilities; their jurisdictional facilities are only corporate and
documentary; their costs are determined by utilities that sell power to
it; and their earnings are not defined and regulated in terms of an
authorized return on invested capital.\14\
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\14\ See for example, EEI at p. 14, Sempra at p. 1, and APX at
p. 8.
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16. They also argue that the marketers would incur substantial
costs if required to add new accounting systems at this time to capture
data required by the Uniform System of Accounts.\15\ Additionally, they
assert that providing the data could place the marketers in a
competitive disadvantage because the information is proprietary in
nature.\16\
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\15\ See for example, Sempra at p. 12.
\16\ See for example, Avista at p. 7, Competitive at p. 16, and
NEM at p. 5.
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17. Furthermore, they argue that the application of the Uniform
System of Accounts, and the approval of the issuance of securities does
not work well with power marketers and power producers, because these
requirements are focused on providing accurate information for the
determination of cost-based rates, and the accounting rules are not
relevant to entities with market-based rate authority.\17\
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\17\ See for example, EEI at p. 15, Dominion at p. 7.
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18. Regarding the filing requirements of part 34, some commenters
stated that this regulation was intended to prevent the issuance of
securities that might impair the company's ability to perform its
public utility responsibilities, however independent and affiliated
power marketers and power producers are not public utilities with such
responsibilities. They state that applying part 34 to power marketers
would be unreasonable because it is unclear how the Commission could
determine whether particular issuances are compatible with the public
interest and could force power marketers out of business.\18\
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\18\ See for example, EEI at p. 16, Dominion at p. 7, Sempra at
p. 13, Avista at p. 7, and Calpine at p. 6.
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19. One commenter stated that there are indications within the NOPR
that the Commission does not intend its proposed rule to apply to gas
marketers. They requested that the Commission clarify its intent to
exempt gas marketers from the Uniform System of Accounts and related
annual reporting requirements, and continue to honor the existing
waivers previously granted to these entities.\19\ Others state that the
new rules should not sweep in qualified facilities and other on-site
generators that primarily serve host facilities.\20\ Finally, some
commenters stated that other government agencies such as the U.S.
Securities and the Exchange Commission (SEC) and the Commodity Futures
Trading Commission (CFTC) are better suited to regulate accounting and
the use of financial derivatives.\21\
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\19\ See Sempra at p. 6 and 7.
\20\ See American Forest at p. 5.
\21\ See Calpine at p. 3.
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20. Some commenters however supported extending the accounting and
reporting requirements to marketers, power producers, and affiliates
with market based rates.\22\ They argue that the events of the last few
months justify these new requirements. In their view, in light of the
public's better understanding of the role derivatives play in energy
security, the need for the Commission to obtain such information
outweighs the reasons for exempting such entities. They state that the
Commission requires a comprehensive picture of the marketplace and that
the picture is incomplete if these entities are exempted from reporting
requirements.\23\ In their view, the requirements would help state
regulators in reviewing financial activities that may subject utilities
to financial risk. Therefore, they recommend that affiliates of
utilities be subject to existing and proposed Uniform System of
Accounts requirements insofar as derivative and hedging transactions
may impact and affect traditional utilities.
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\22\ See NYPSC at p. 2 and 3, Ohio PUC at p. 5, APGA at p. 14,
and NRECA at p. 5.
\23\ See APGA at p. 15.
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21. One commenter suggested the possibility of requiring
independent and affiliated power marketers and power producers to
maintain a translation matrix, certified by the company's ethics
officer, that could quickly convert its current method of maintaining
financial records into the Uniform System of Accounts. Thus,
information
[[Page 67695]]
need not be filed but would be available in a consistent and easily
understandable format if necessary. \24\ Another commenter recommended
that the Commission expand its data collection on derivative
instruments. The purpose for derivative data collection should be not
only to assist the Commission in its monitoring efforts, but also to
further the transparency of the energy derivatives markets. The
Commission should collect and make summary data available to potential
buyers and sellers in the market, and in essence provide market
participants with a forward price curve, allowing them to benchmark
proposed deals.\25\
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\24\ See Ohio PUC at p. 5.
\25\ See NRRECA at p. 5.
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22. Finally, some commenters indicated that the Commission needs to
reform its data resources with regard to monitoring competitive
electric markets and market based sellers. If any changes are to be
considered with regard to information review, the Commission should
employ a thoughtful stakeholder process, such as a technical
conference, to identify its information needs.\26\
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\26\ See for example, Congentrix at p. 10, DENA at p. 10, EPSA
at p. 3, and J. Aron at p. 11.
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23. The Commission has decided to sever from this rulemaking
proceeding the inquiry on whether independent and affiliated power
marketers and power producers should continue to be exempt from the
Commission's Uniform System of Accounts and other reporting
requirements. The Commission thus will consider separately the issue of
what information collection and recordkeeping requirements it may
impose on gas marketers, independent and affiliated power marketers,
and power producers. While the Commission is sensitive to the fact that
independent and affiliated power marketers and power producers and
their use of derivatives are playing a more significant financial role
in this evolving electric power industry, we also recognize the need to
reform the approach used to monitor competitive electric markets and
market based sellers in the context of a number of current and ongoing
Commission initiatives.
24. For example, there are several ongoing investigations that may
impact on the direction the Commission may take vis-a-vis power
marketers and power producers. In addition, the Commission is currently
reviewing its existing reporting requirements to determine what new
information needs to be collected to monitor competitive energy
markets, the sources for that information, how often that information
should be updated, and how the Commission should gain access to
specific information as needed in order to effectively monitor energy
markets. The Commission thus will hold technical conferences and
outreach meetings on these matters.
C. Accounting for Trading and Available-for-Sale Type Securities
25. In May 1993, the FASB issued Financial Accounting Standard
(FAS) 115, Accounting for Certain Investments in Debt and Equity
Securities, effective for fiscal years beginning after December 15,
1993. This statement addressed the accounting and reporting for
investments in equity securities that have a readily determinable fair
value and for all investments in debt securities, and its major
provisions were summarized in the NOPR.
26. Under the Commission's Uniform Systems of Accounts for public
utilities and licensees, and natural gas companies, all types of
securities are recorded at cost and subsequent changes in the fair
value of security investments are normally not recognized in the
financial statements until realized. The Uniform System of Accounts for
oil pipeline companies however, permits the recognition of decreases in
the carrying value of investment securities, but currently would not
permit the carrying value to be increased.
27. The Commission is of the view that fair value measurement of
the trading and available-for-sale type securities presents relevant
and useful information to regulators and others. For example, fair
value measurements provide useful information to the Commission
concerning the status of certain amounts set aside to fund future
obligations such as decommissioning nuclear plants.
28. The Commission therefore proposed to add language to its
security investment accounts for public utilities and licensees,
natural gas companies, and oil pipeline companies to permit the
recognition of changes in the fair value of trading and available-for-
sale types of securities due to unrealized holding gains and
losses.\27\ The Commission also proposed amending its oil pipeline
General Instruction 1-15, accounting for marketable equity securities,
and removing oil pipeline accounts 23, 24, and 75.5 to conform the
regulations to the proposed changes.
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\27\ The security investment accounts for public utilities and
gas pipeline companies are: Account 124, other investments; account
125, sinking funds (major only); account 126, depreciation fund
(major only); account 127, amortization fund (major only); account
128, other special funds (major only); and account 129, special
funds (nonmajor only). The security investment asset accounts for
oil pipelines are account 11, temporary investments; account 21,
other investments; and account 22, sinking and other funds.
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29. The Commission received no objections concerning its proposal
to include unrealized holding gains and losses on certain qualifying
securities in the investment asset accounts, or to its proposal to
amend its oil pipeline General Instruction 1-15 to conform the
regulations to the proposed changes. Therefore the Commission will
revise the instructions to its investment accounts and make conforming
changes to the applicable oil pipeline General Instruction 1-15, to
require the recording of unrealized holding gains and losses on certain
eligible investment securities.
30. As part of the accounting for recording unrealized holding
gains and losses on certain investment securities, the Commission
proposed to include in a separate section of stockholders equity, the
corresponding change in value of these securities. Some commenters
stated that changes in the carrying value of certain securities that
will be ultimately used in the development of future rates, such as
nuclear decommissioning trust funds, are better reflected in a
regulatory asset or a regulatory liability account rather than in
accumulated other comprehensive income when it is probable that the
customer, rather than the stockholder, will be affected by changes in
the value of these securities. They indicated that it is prevailing
practice within the electric industry to record regulatory assets or
liabilities when it is probable that such changes in the fair market
value will be considered by regulators in the setting of rates in
future proceedings.\28\ Such prevailing practice according to the
commenters is in accordance with the provisions of FAS 71, ``Accounting
for the Effects of Certain Types of Regulation.'' In order to implement
this change, the commenters recommended that the final rule should
include revised account descriptions of accounts 182.3 and 254 to
include certain items of other comprehensive and the new General
Instruction for accounting for other comprehensive income should be
revised accordingly.
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\28\ See for example, EEI at p. 12, and NRECA at p. 8.
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31. The Commission agrees that under certain circumstances it may
be appropriate for rate regulated entities to report unrealized holding
gains and losses on certain investment securities as regulatory assets
or regulatory liabilities pursuant to Order 552 which
[[Page 67696]]
adopted the accounting standards set forth in FAS 71.\29\ The
Commission will revise its proposed General Instruction for accounting
of other comprehensive income and its existing regulatory asset and
liability accounts accordingly.
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\29\ See Revisions to Uniform Systems of Accounts to Account for
Allowances Under the Clean Air Act Amendments of 1990 and
Regulatory-Created Assets and Liabilities and to Form Nos. 1, 1-F, 2
and 2-A. Order No. 552, 58 FR17982 (Apr. 7, 1993), FERC Stats &
Regs. Regulations Preambles January 1991-June 1996 30,967 (Mar. 31,
1993).
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D. Accounting for Other Comprehensive Income
32. In June 1997, the FASB issued FAS 130, Reporting Comprehensive
Income. This statement established the standards for reporting
comprehensive income in a full set of general-purpose financial
statements effective for fiscal years beginning after December 15,
1997. Comprehensive income represents the change in equity of an entity
during a period from transactions and other events and circumstances
from nonowner sources. Comprehensive income is composed of traditional
net income plus items of ``other comprehensive income.'' \30\ The major
provisions of this statement were summarized in the NOPR.
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\30\ Comprehensive income is defined by FASB in Concepts
Statement No. 6 as, ``the change in equity [net assets]
of a
business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners.''
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33. The Commission proposed to revise the Uniform Systems of
Accounts for public utilities and licensees, natural gas companies and
oil pipeline companies to provide accounting for items of other
comprehensive income, and proposed the creation of two new equity
accounts to record the activity related to other comprehensive income.
The proposed new accounts would require supporting records be
maintained by each category of other comprehensive income for reporting
the information in the FERC Forms 1, 1-F, 2, 2-A, and 6.
34. The Commission also proposed instructions to the other
comprehensive income accounts for all jurisdictional entities that
would require supporting records be maintained by each category of
other comprehensive income. This level of record keeping is required so
that the entity is able to identify the amounts associated with the
item of other comprehensive income when it enters into the
determination of net income in subsequent periods.
35. Many commenters questioned the need and the benefit of using
two accounts for the recognition of other comprehensive income, along
with the requirement to transfer amounts of other comprehensive income
from account 219.1 to account 219 at the balance sheet date. In their
view this was a duplicative requirement and therefore they recommended
the use of only one equity account for the recognition of other
comprehensive income.\31\
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\31\ See, for example, EEI at p. 5, AEP at p. 2, Dominion at p.
14, Southern at p. 1, and Pinnacle at p. 3.
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36. Based upon the comments received the Commission agrees that one
equity account can accommodate all of the activity provided that
sufficient detailed records are maintained in order to identify and
display current years' activity for items of other comprehensive
income, in addition to providing a year-to-date summary of the
activity. Therefore, the Commission will create only one account for
public utilities and licensees, and natural gas companies entitled
account 219, accumulated other comprehensive income, and one account
for oil pipeline companies entitled account 77, accumulated other
comprehensive income, to record amounts for items of other
comprehensive income in stockholders equity. However, the Commission
will keep the requirements originally set forth in the NOPR that
detailed records be maintained so that the current period activity,
year-to-date activity, and reclassification adjustments related to
items of other comprehensive income can be readily identified.
Maintaining detailed records for items included in accumulated other
comprehensive income are necessary so that an entity can readily
identify amounts when the item is included in net income in subsequent
periods and to periodically report this information in the new
reporting schedule entitled Accumulated Other Comprehensive Income and
Hedging Activities.
37. Finally, the NOPR proposed the need for reclassification
adjustments for items of other comprehensive income to avoid double
counting an item in net income and other comprehensive income. The
proposed instructions would have required that reclassification
adjustments be made directly to other comprehensive income. This
proposed accounting treatment for reclassification adjustments would
minimize the need for creating a new account to capture amounts solely
related to reclassification adjustments.
38. No commenters objected to the proposed accounting for
reclassification adjustments. The Commission will therefore adopt the
proposed accounting for reclassification adjustments.
E. Accounting for Derivatives and Hedging Activities
1. General
39. In June 1998, the FASB issued FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended on June 2000,
by FAS 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities. This pronouncement was issued in a response to an
increased use of derivatives and to resolve problems with the
accounting and reporting practices for derivatives and hedging
activities. These problems included incomplete and inconsistent
accounting guidance on the effects of derivative transactions and
hedging activities. The effects of derivatives were not transparent in
the basic financial statements, and many derivative instruments were
carried ``off-balance-sheet'' regardless of whether they were formally
part of a hedging strategy. The NOPR summarized the key points of the
pronouncement.
2. General Instructions for Fair Value and Cash Flow Hedges
40. The Commission proposed to add a new general instruction that
would require public utilities and licensees, natural gas companies,
and oil pipeline companies to record changes in the fair value of the
derivative instrument designated as a cash flow hedge to other
comprehensive income. The proposed instructions would also require
jurisdictional entities to record changes in the fair value of a
derivative instrument designated as a fair value hedge in the new
derivative asset or liability account with a corresponding adjustment
to a subaccount of the asset or liability that carries the item being
hedged. The ineffective portion of the cash flow and fair value hedges
would be charged to the same income or expense account that will be
used when the hedged item enters into the determination of net income.
41. No commenters objected to the above proposal regarding the use
of a subaccount to adjust the carrying amount of the asset or liability
being hedged under a fair value hedge, or the proposal to include the
ineffective portion of the hedge in the same income or expense account
that will be used when the hedged item enters into the determination of
net income.\32\ Therefore, the Commission will implement this change as
proposed.
---------------------------------------------------------------------------
\32\ See FAS 133 as amended by FAS 138 for definition, examples
and illustrations of assessing effectiveness and measuring
ineffectiveness for fair value and cash flow hedges.
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[[Page 67697]]
3. Changes to General Instruction 21 Allowances
42. The Commission proposed to make technical changes to its
existing general instructions concerning the accounting for hedge
transactions related to exchange traded allowance future contracts.
General Instruction No. 21, allowances, of part 101, directs public
utilities to defer in account 186, miscellaneous deferred debits, or
account 253, other deferred credits, the costs and benefits from
hedging transactions associated with exchange traded allowance future
contracts. The Commission proposed to delete paragraph I to be
consistent with proposed accounting for derivatives. The accounting
framework proposed for derivatives would also include exchange traded
future allowances. No commenters objected to the changes proposed to
General Instruction 21, allowances, therefore, the Commission will
implement the changes as proposed.
4. Accounting for Derivative Assets and Liabilities
a. Balance Sheet Classification for Derivative Assets and Liabilities
43. The NOPR proposed establishing new balance sheet accounts to
record derivative assets and liabilities. Under the proposal,
derivative assets and liabilities would be accounted for and reported
to the Commission based upon their intended use. Derivatives used for
hedging activities would be classified in accounts 176 and 245 for
public utilities and licensees, and natural gas companies, and accounts
47 and 66 for oil pipeline companies.\33\ Derivatives used in non-
hedging activities would be classified in accounts 175 and 244 for
public utilities and licensees, and natural gas companies, and accounts
46 and 65 for oil pipeline companies.
---------------------------------------------------------------------------
\33\ See FAS 133 as amended by FAS 138 for discussion and
examples of hedging activities.
---------------------------------------------------------------------------
44. The Commission also noted in the NOPR that entities are
required to classify derivative assets and liabilities as current or
long-term on their financial statements reported to the U.S. Securities
and Exchange Commission (SEC) and in Annual Reports to Stockholders.
The Commission stated that entities may create current and long-term
subaccounts associated with the proposed new derivative balance sheet
accounts in order to facilitate reporting derivative assets and
liabilities to shareholders in general purpose financial statements.
45. Some commenters responded that the Commission should create
current and long-term accounts to record derivative assets and
liabilities on the balance sheet.\34\ They stated that the Commission's
Uniform System of Accounts includes separate sections for current and
accrued assets and deferred debits, as well as current liabilities and
deferred credits, and that FERC requires that other items be reported
as current or long-term. They also stated that the establishment of
current and long-term accounts would reduce the potential for
misclassifications between current and long-term subaccounts of the
proposed new accounts.
---------------------------------------------------------------------------
\34\ See for example EEI at p. 8 and 9, AEP at p. 2, and
Dominion at p. 13.
---------------------------------------------------------------------------
46. At this time the Commission declines to adopt the commenters'
suggestion that derivative assets and liabilities should be reported to
the Commission based upon a current or long-term balance sheet
distinction. It is important for the Commission to obtain information
concerning the nature of the derivative transactions that
jurisdictional entities have entered into to manage their financial and
other business risks. By reporting to the Commission derivative
instruments used to hedge business risks separately from those
derivative instruments used for non-hedging activities, the Commission
and other regulators will have enhanced information as to the positions
regulated entities have at the balance sheet date related to the
entities' hedging and non-hedging activities. This important
distinction would not be transparent if derivative instruments were
displayed in the FERC Forms 1, 1-F, 2, 2-A and 6 based upon a current
or long-term balance sheet classification. Additionally, reporting
derivative instruments based upon their intended use will assist
regulators in assessing the activities of jurisdictional entities
related to their traditional utility business as compared to their
trading activities.
b. Income Statement Classifications for Changes in the Value of
Derivative Instruments
47. The Commission proposed that public utilities and licensees,
and natural gas companies would use account 421, miscellaneous
nonoperating income, and oil pipeline companies would use account 660,
miscellaneous income charges, to record on the income statement the
change in the fair value of the derivative instruments not used in
hedging activities.
48. One commenter specifically supported the use of account 421 to
record gains and losses on non-hedge activities.\35\ They indicated
that using account 421 to record gains and account 426.5 to record
losses did not provide valuable information and they found it very
difficult to separate gains and losses due to the large volumes of
derivative transactions from power trading activities. However, other
commenters asserted that account 421 is appropriate when there is an
increase in the fair value of a derivative instrument, and account
426.5 is appropriate when there is a decrease in the fair value of the
derivative instrument.\36\
---------------------------------------------------------------------------
\35\ See Cinergy at p. 4.
\36\ See for example Southern Company at p. 3 and EEI at p. 12.
---------------------------------------------------------------------------
49. The Commission concurs with the commenters that a better
accounting and financial presentation is not to net gains and losses in
one income statement account, but rather to record gains from non-
hedging activities in account 421 and losses in account 426.5, for
electric and natural gas companies. The use of separate income
statement accounts to record gains and losses on derivative instruments
used in non-hedging activities follows our existing accounting practice
for exchange traded emission allowances. Finally, the Commission will
also require that oil pipelines record gains in account 640,
miscellaneous income, and losses in account 660, miscellaneous income
charges, to better reflect increases and decreases in the fair value of
derivative instruments not used in hedging activities on the income
statement.
50. This accounting will aid the Commission and other users of the
FERC Forms 1, 1-F, 2, 2-A and 6 to see more clearly the extent to which
gains or losses have been incurred on non-hedging derivative
transactions. And, by separately recording changes in the value of
derivative instruments in separate income and expense accounts, any
subsequent reclassification of amounts will be better displayed if a
regulator chooses to include a portion of the holding gains or losses,
or realized gains or losses, in the development of rates.
51. While respondents did not object to the use of below-the-line
income statement accounts to record both unrealized and realized gains
or losses on derivative instruments used for non-hedging activities,
there were many views on what the appropriate accounting should be in
instances when a regulator incorporates all or part of the actual gain
or loss in the development of rates. The Commission proposed that when
a regulator explicitly approves the inclusion of the changes in fair
value of derivative instruments in the
[[Page 67698]]
development of rates, the company should reclassify those amounts from
the below-the-line income statement accounts to the appropriate utility
operating revenue or expense account that will be charged with the
derivative transaction when it settles.
52. Some commenters indicated that it is inappropriate to record
the changes in the fair value of non-hedge type derivative instruments
in a below-the-line account prior to settlement, only to reclassify
some or all of the amount to the appropriate operating revenue or
expense account when the transaction settles.\37\ They believe that
changes in the fair value that will be included in rates should be
initially recorded in the appropriate operating revenue or expense
account, so reclassification is not necessary. Others support a
position that in situations where it is probable that realized gains
and losses would be included in rates, then unrealized changes in fair
value of the related derivative instrument should be deferred in an
appropriate regulatory asset or regulatory liability account.
---------------------------------------------------------------------------
\37\ See for example, Cinergy at p. 5, Southern at p. 3, and
Pinnacle at p. 4.
---------------------------------------------------------------------------
53. After reviewing the comments, the Commission is of the view
that entities will avail themselves of the special accounting afforded
derivative instruments when these instruments are entered into as part
of a cash flow or fair value hedge transaction. Under the special
accounting afforded qualifying hedges, any unrealized gains and losses
effectively remain on the balance sheet and therefore do not enter into
the determination of net income until the hedged item enters into the
determination of net income. If the derivative instrument is not part
of qualifying hedge, entities will record the unrealized, as well as
realized, gains or losses in accounts 421 and 426.5 as appropriate.
However, if the derivative instrument does not qualify for hedge
accounting, but it is probable under the requirements of Order 552 that
changes in the fair value of the derivative instrument will be used in
the development of rates, the entity must follow the Commission's
existing accounting regulations for the recognition of regulatory
assets and regulatory liabilities.
c. Inclusion of the Normal Purchases and Sales Scope Exception
54. The Commission noted in the NOPR that certain types of
contracts are exempted from the requirements of FAS 133. For example,
normal purchases and normal sales contracts that provided for the
purchase or sale of goods that will be delivered in quantities expected
to be used or sold by the reporting entity over a reasonable period in
the normal course of business are not treated as derivative
instruments. This exception is commonly referred to as the normal
purchases and normal sales scope exception. The exception would include
typical purchases and sales of inventory items, certain insurance
contracts, and employee compensation agreements, and certain electric
power contracts.
55. Some commenters noted that the normal purchases and sales
exception should also be specifically included in the Commission's
regulations.\38\ They indicate that most forward power and electric
option contracts will meet the normal purchase and sales scope
exception and therefore changes in the contracts' fair value will not
be required to be reflected on the financial statements. The Commission
agrees with the commenters that some electric power contracts will meet
this exception and therefore changes in the fair value of those
contracts will not be reflected in the financial statements.
---------------------------------------------------------------------------
\38\ For example see Cinergy at p. 3, Wisconsin Electric at p.
6, and EEI at p. 6.
---------------------------------------------------------------------------
56. It is the Commission's view that the existing normal purchases
and sales accounting exception criteria should also be applied to
transactions that jurisdictional entities account and report to the
Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6. The Commission will
therefore include language in the General Instructions for the
Accounting for Derivative Instruments and Hedging Activities that
provides for the normal purchases and sales exceptions.\39\
---------------------------------------------------------------------------
\39\ See FAS 133 as amended by FAS 138, Derivatives
Implementation Group (DIG) conclusions, and the Emerging Issues Task
Force (EITF) pronouncements. These accounting pronouncements may be
obtained from FASB at (http://accounting.rutgers.edu/raw/fasb/ ).
---------------------------------------------------------------------------
F. Changes to the FERC Annual Report Forms
57. The accounting changes proposed in the NOPR would require one
new schedule and changes to existing balance sheet schedules in the
FERC Forms 1, 1-F, 2, 2-A, and 6 filed with the Commission by public
utilities and licensees, natural gas companies, and oil pipeline
companies. The proposed new schedule was shown in appendix A of the
NOPR.
58. As stated in the NOPR, in order to provide consistent
accounting and reporting of items of other comprehensive income the
Commission proposed to add a new schedule with instructions on the
proper footnote disclosures for the FERC Forms 1, 1-F, 2, 2-A, and 6.
The proposed new schedule would show the components of other
comprehensive income and required:
59. The reporting of categories of other comprehensive income on a
net-of-tax basis, where appropriate, along with the reporting of the
related tax effects allocated to each component, in a footnote to the
schedule.
60. The reporting of accumulated other comprehensive income
balances at year end by category, in a footnote to the schedule.
61. The reporting of fair value hedge balances at year end by
category, in a footnote to the schedule.
62. Some commenters recommended format changes to the proposed new
schedule to better display the items of other comprehensive income. A
roll-forward format was recommended that would show the current years
activity, in addition to the cumulative balances for items of other
comprehensive income.\40\ The revised format would display all of the
information proposed in the NOPR without the use of reporting
accumulated balances for certain items through the use of footnotes.
---------------------------------------------------------------------------
\40\ See for example, Dominion at p. 14, Southern at p. 2, and
EEI's April 1, 2002, supplement to its March 11, 2002 filing.
---------------------------------------------------------------------------
63. The Commission notes that the roll-forward format
recommendation made by the commenters will improve the transparency of
the data displayed and reduce the need for certain year end balances to
be reported in a footnote. The Commission will adopt the roll-forward
format that will display amounts of other comprehensive income during
the current period as well as at the balance sheet date. The new
schedule for reporting derivative information and other comprehensive
income amounts is shown in appendix B entitled Statement of Accumulated
Comprehensive Income and Hedging Activities.
G. Disclosure Requirements
64. For many years financial statements issued to the public have
required the inclusion of a disclosure entitled ``Management's
Discussion and Analysis of Financial Condition and Results of
Operations'' commonly referred to as the MD&A. It requires a discussion
of liquidity, capital resources, results of operations and other
information necessary to understand the financial condition, changes in
financial condition and results of operations of the entity.
65. On January 22, 2002, the U.S. Securities and Exchange
Commission
[[Page 67699]]
(SEC) issued a statement entitled Commission Statement About
Management's Discussion and Analysis of Financial Condition and Results
of Operations.\41\ This statement set forth certain views of the SEC
regarding disclosure that should be considered by registrants that
address matters of liquidity and capital resources including off-
balance sheet arrangements; certain trading activities that include
non-exchange traded contracts accounted for at fair value; and effects
of transactions with related and certain other parties. The SEC's
interpretative guidance related to the MD&A did not create new legal
requirements, but suggested steps that issuers of financial statements
should consider in meeting their current disclosure obligations with
respect to the matters described above.
---------------------------------------------------------------------------
\41\ See SEC release nos. 34-45321; FR-61. This notice may be
obtained from the SEC website at (http://www.sec.gov/rules/other/33-
8056.htm)
---------------------------------------------------------------------------
66. In particular the SEC's interpretative guidance recommended
certain disclosures about trading activities that include non-exchange
traded contracts accounted for at fair value. The recommended
disclosures include information concerning realized and unrealized
changes in fair value of commodity contracts including derivatives, the
source of the fair value price, and the fair value of the contracts at
various maturity dates.
67. The Commission recognizes that there have been some concerns
raised about how the fair value of derivative instruments have been
determined. The information provided by entities in their MD&A will
provide additional insight to regulators, investors, creditors, and
other users of the financial statements into the valuation techniques
and assumptions used to value the outstanding contracts as of the
balance sheet date.
68. The Commission is of the view that the type of information
disclosed by jurisdictional entities in their MD&A related to trading
activities involving material commodity contracts that are accounted
for at fair value is an important part of understanding the financial
condition of entities that report financial information to the
Commission in FERC Forms 1, 1-F, 2, 2-A, and 6. Therefore to the extent
that a jurisdictional entity filing a FERC Form 1, 1-F, 2, 2-A, or 6
includes the above type of information on trading activities in its
MD&A as part of its Annual Report to Shareholders and SEC filing, it
must report the same information reported to the Commission on the
schedule entitled Important Changes During the Year.\42\ The
instructions on this schedule require important information that
appears in their Annual Reports to Shareholders and the SEC to also be
included on this schedule. By including the derivative information
presented in the MD&A to the FERC, the quality of the information
received by this Commission will be no less than that provided by
jurisdictional entities to shareholders and other users of the
financial data.
---------------------------------------------------------------------------
\42\ See FERC Form No. 1 p. 108, FERC Form No. 2 p. 108, and
FERC Form No. 6 p. 108.
---------------------------------------------------------------------------
69. The Commission notes that power marketers and power producers
that file financial information with the SEC will also be subject to
its recent interpretative guidance regarding additional disclosures
concerning their trading activities. The SEC's information reporting
initiatives may impact the Commission's need to require further
reporting from these entities.
H. Miscellaneous Items
70. One commenter recommended that the Commission state it will not
incorporate derivative instruments, hedging activities, and other
comprehensive income into its ratemaking process for utilities, because
the value of these instruments are certain to change over time and the
Commission would set rates incorrectly.\43\
---------------------------------------------------------------------------
\43\ See Sempra at p. 6.
---------------------------------------------------------------------------
71. As stated in the NOPR, the proposed rule was not intended to
prescribe the ratemaking treatment for items of other comprehensive
income or for derivative instruments and hedging activities. The
adoption of any particular rate treatment for these amounts is beyond
the scope of this rulemaking. The Commission will decide the
appropriate treatment, for these transactions on a case-by-case basis
in individual rate proceedings.
72. Some commenters recommended that the Commission delay the
effective date of the proposed changes for one year after the
rulemaking is approved in order to allow for a complete review of the
regulations and their prospective implementation.\44\ One commenter
indicated that the Commission's consideration of this accounting is
premature at this time and delay its review and implementation until
various regulatory bodies review current accounting procedures or until
any reforms are adopted.\45\ However, another commenter requested that
the Commission make the proposed filing requirements retroactive and
effective for 2001 reporting by requiring supplements to the
Commission's Annual Report filings with the new schedules required
under the proposed rule.\46\
---------------------------------------------------------------------------
\44\ See EEI at p. 13, and Dominion at p. 15.
\45\ See Wisconsin Electric at p. 4 and 5.
\46\ See APGA at p. 3.
---------------------------------------------------------------------------
73. The Commission is of the view that jurisdictional entities are
already familiar with the accounting pronouncements contained in this
final rule and have already implemented these requirements in their
Annual Reports to Shareholders and in filings with the SEC. By delaying
proper implementation of these new accounting and reporting standards,
different and inconsistent sets of financial information would be
reported to the Commission, and accounting and reporting guidance would
continue to be required on how these transactions should be reported to
FERC. Consequently, it is the Commission's view that little, if any,
benefit would be gained by delaying the issuance of accounting and
reporting guidance on these matters. In order to provide consistent
accounting and reporting to the Commission on a timely basis, the
Commission declines to postpone implementation for another year. The
accounting and reporting changes will become effective 60 days after
date of publication in the Federal Register.
74. The Commission acknowledges that with any new accounting and
financial reporting standard, implementation issues may arise.
Jurisdictional entities can seek clarification from the Chief
Accountant concerning the proper application or implementation of any
accounting standard under the Commission's existing regulations.
75. Finally, the Chief Accountant had previously issued guidance
concerning the proper accounting for derivative and hedging activities
pending further action by the Commission. That guidance letter provided
for the recording of derivative assets and liabilities in miscellaneous
deferred debit or credit accounts, or in other investment accounts,
based upon the jurisdictional entities rationale for entering into the
derivative transaction. In order to provide for consistent accounting
and reporting treatment for all derivative transactions, the Commission
will require that amounts previously accounted for under the Chief
Accountant's guidance letter using existing asset, liability and equity
accounts, be reclassified to the appropriate new derivative assets,
derivative liabilities, and accumulated other comprehensive income
account, established under this Final Rule.
[[Page 67700]]
IV. Regulatory Flexibility Act Certification
76. The Commission finds that most filing entities regulated by the
Commission do not fall within the Regulatory Flexibility Act's
definition of small entity.\47\ This final rule will promote consistent
reporting practices for all reporting companies and would not be a
significant burden to industry since the information is already being
captured by their accounting systems and generally being reported to
shareholders and others at a company, or at a consolidated business
level. However, if the reporting requirements represent an undue burden
on small businesses, the entity affected may seek a waiver of the
disclosure requirements from the Commission. Accordingly, the
Commission certifies that this Final Rule will not have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\47\ 5 U.S.C. 601(3), citing to section 3 of the Small Business
Act, 15 U.S.C. 632. Section 3 of the Small Business Act defines a
``small-business concern'' as a business which is independently
owned and operated and which is not dominate in its field of
operation.
---------------------------------------------------------------------------
V. Environmental Impact Statement
77. Commission regulations require that an environmental assessment
or an environmental impact statement be prepared for any Commission
action that may have a significant adverse effect on the human
environment.\48\ No environmental consideration is necessary for the
promulgation of a rule that is clarifying, corrective, or procedural or
does not substantially change the effect of legislation or regulations
being amended,\49\ and also for information gathering, analysis, and
dissemination.\50\ The proposed rule updates the parts 101, 201 and 352
of the Commission's regulations, and does not substantially change the
effect of the underlying legislation or the regulations being revised
or eliminated. In addition, the final rule involves information
gathering, analysis and dissemination. Therefore, this final rule falls
within categorical exemptions provided in the Commission's Regulations.
Consequently, neither an environmental impact statement nor an
environmental assessment is required.
---------------------------------------------------------------------------
\48\ Regulations Implementing National Environmental Policy Act,
52 FR 47897 (December 17, 1987), FERC Stats. & Regs. 30,783 (1987).
\49\ 18 CFR 380.4(a)(2)(ii).
\50\ 18 CFR 380.4(a)(5).
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VI. Information Collection Statement
78. The Office of Management and Budget (OMB) regulations require
that OMB approve certain reporting and record keeping (collections of
information) imposed by an agency. The information collection
requirements in this final rule are contained in the following Annual
Reports: FERC Form No. 1, Annual Report of Major Public Utilities,
Licensees and Others (Form 1); FERC Form No. 1-F, Annual Report of
Nonmajor Public Utilities and Licensees (Form 1-F); FERC Form No. 2,
Annual Report of Major Natural Gas Companies (Form 2); FERC Form No. 2-
A, Annual Report of Nonmajor Natural Gas Companies (Form 2-A); and Form
No. 6, Annual Report of Oil Pipeline Companies (Form 6). Form 1 most
recently received OMB approval on March 29, 2002, for the period
through March 2005. Form 1-F received OMB approval on April 2, 2002,
for the period through April 2005. Form 2 received approval on March
29, 2002, for the period through March 2005. Form 2-A received approval
on April 2, 2002, for the period through April 2005. Form 6 was
previously approved March 28, 2001 for the period through March 2004.
OMB declined to take any action at the NOPR stage instead deciding to
make a determination at the final rule stage.
79. Interested persons may obtain information on the reporting
requirements by contacting the Federal Energy Regulatory Commission,
888 First Street, NE., Washington, DC 20426 (Attention: Michael Miller,
Office of the Chief Information Officer, (202) 502-8415) or from the
Office of Management and Budget, Room 10202 NEOB, Washington, DC 20503
(Attention: Desk Officer for the Federal Energy Regulatory Commission,
(202) 395-7318, fax: (202) 395-7285).
80. The regulated entity shall not be penalized for failure to
respond to this collection of information unless the collection of
information displays a valid OMB control number.
81. Titles: FERC Form No. 1, ``Annual Report of Major Public
Utilities, Licensees and Others''; FERC Form No. 1-F, ``Annual Report
of Nonmajor Public Utilities and Licensees''; FERC Form No. 2, ``Annual
Report of Major Natural Gas Companies''; FERC Form No. 2-A, ``Annual
Report of Nonmajor Natural Gas Companies''; and Form No. 6, ``Annual
Report of Oil Pipeline Companies.''
82. Action: Revision of Currently Approved Collections of
Information.
83. OMB Control Nos.: 1902-0021; 1902-0029; 1902-0028; 1902-0030;
and 1902-0022.
84. Respondents: Business or other for profit.
85. Frequency of Responses: Annually.
86. Reporting Burden: The Commission estimated that adoption of the
reporting requirements as identified in the NOPR, would result in an
increase in reporting burden to the information collections identified
above. Those increases were the following:
----------------------------------------------------------------------------------------------------------------
Total hours for data coll.*
Data collection Hours per -------------------------------
respondent NOPR Final rule
----------------------------------------------------------------------------------------------------------------
Form--1......................................................... 2 420 432
Form--1-F....................................................... 2 14 52
Form--2......................................................... 2 114 114
Form-2-A........................................................ 2 114 106
Form--6......................................................... 2 318 318
-----------------
Totals...................................................... .............. 980 1,022
----------------------------------------------------------------------------------------------------------------
* The changes in total hours reflect changes in the number of respondents filing the information collections
based on the most recent submissions to the Commission. Forms 1 & 1-F had increases in the number of
respondents filing while Form 2-A had a decrease in the number of respondents who filed. The Commission did
not receive specific comments concerning its burden estimates and will therefore continue those estimates in
the final rule. Comments on the substantive issues raised in the NOPR are addressed elsewhere in the final
rule.
87. Interested persons may obtain information on the reporting
requirements by contacting the following: Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426. Attention:
[[Page 67701]]
Michael Miller, Office of the Chief Information Officer, Phone: (202)
502-8415, fax: (202) 208-2425, e-mail: mike.miller@ferc.gov.
88. For submitting comments concerning the collections of
information and the associated burden estimate(s), please send your
comments to the contact listed above or to the Office of Management and
Budget, Office of Information and Regulatory Affairs, 725 17th Street,
NW., Washington, DC 20503 (Attention: Desk Officer for the Federal
Energy Regulatory Commission, phone (202) 395-7856, fax: (202) 395-
7285).
VII. Document Availability
89. In addition to publishing the full text of this document in the
Federal Register, the Commission also provides all interested persons
an opportunity to view and/or print the contents of this document via
the Internet through FERC's Home Page (http://www.ferc.gov/) and in
FERC's Public Reference Room during normal business hours (8:30 a.m. to
5 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC
20426.
90. From FERC's Home Page on the Internet, this information is
available in the Federal Energy Regulatory Records Information System
(FERRIS). The full text of this document is available on FERRIS in PDF
and WordPerfect format for viewing, printing, and/or downloading. To
access this document in FERRIS, type the docket number excluding the
last three digits of this document in the docket number field.
91. User assistance is available for FERRIS and the FERC website
during normal business hours from our Help line at (202) 502-8222 or
the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 502-
8659. E-mail the Public Reference Room at
public.referenceroom@ferc.gov.
VIII. Effective Date and Congressional Notification
92. This Final Rule will take effect January 6, 2003. The
Commission has determined, with the concurrence of the Administrator of
the Office of Information and Regulatory Affairs of the Office of
Management and Budget, that this rule is not a ``major rule'' within
the meaning of section 251 of the Small Business Regulatory Enforcement
Fairness Act of 1996.\51\ The Commission will submit the final rule to
both houses of Congress and the General Accounting Office.\52\
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\51\ 5 U.S.C. 804(2).
\52\ 5 U.S.C. 801(a)(1)(A).
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List of Subjects
18 CFR Part 101
Electric power, Electric utilities, Reporting and recordkeeping
requirements, Uniform System of Accounts.
18 CFR Part 201
Natural gas, Reporting and recordkeeping requirements, Uniform
System of Accounts.
18 CFR Part 352
Pipelines, Reporting and recordkeeping requirements, Uniform System
of Accounts.
By the Commission.
Linwood A. Watson, Jr.,
Deputy Secretary.
In consideration of the foregoing, the Commission amends Parts 101,
201, and 352, Title 18 of the Code of Federal Regulations, as follows:
PART 101--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR PUBLIC
UTILITIES AND LICENSEES SUBJECT TO THE PROVISIONS OF THE FEDERAL
POWER ACT
1. The authority citation for part 101 continues to read as
follows:
Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7101-7352, 7651-7651o.
2. Amend part 101 as follows:
a. In General Instructions, section 21. Allowances, paragraph I is
removed, and section 23. Accounting for other comprehensive income, and
24. Accounting for derivative instruments and hedging activities, are
added to read as follows:
General Instructions
* * * * *
23. Accounting for other comprehensive income.
A. Utilities shall record items of other comprehensive income in
account 219, Accumulated other comprehensive income. Amounts included
in this account shall be maintained by each category of other
comprehensive income. Examples of categories of other comprehensive
income include, foreign currency items, minimum pension liability
adjustments, unrealized gains and losses on available-for-sale type
securities and cash flow hedge amounts. Supporting records shall be
maintained for account 219 so that the company can readily identify the
cumulative amount of other comprehensive income for each item included
in this account.
B. When an item of other comprehensive income enters into the
determination of net income in the current or subsequent periods, a
reclassification adjustment shall be recorded in account 219 to avoid
double counting of that amount.
C. When it is probable that an item of other comprehensive income
will be included in the development of cost-of-service rates in
subsequent periods, that amount of unrealized losses or gains will be
recorded in Accounts 182.3 or 254 as appropriate.
24. Accounting for derivative instruments and hedging activities.
A. Utilities shall recognize derivative instruments as either
assets or liabilities in the financial statements and measure those
instruments at fair value, except those falling within recognized
exceptions. Normal purchases or sales are contracts that provide for
the purchase or sale of goods that will be delivered in quantities
expected to be used or sold by the utility over a reasonable period in
the normal course of business. A derivative instrument is a financial
instrument or other contract with all of the following characteristics:
1. It has one or more underlyings and a notional amount or payment
provision. Those terms determine the amount of the settlement or
settlements, and, in some cases, whether or not a settlement is
required.
2. It requires no initial net investment or an initial net
investment that is smaller than would be required for other types of
contracts that would be expected to have a similar response to changes
in market factors.
3. Its terms require or permit net settlement, can readily be
settled net by a means outside the contract, or provides for delivery
of an asset that puts the recipient in a position not substantially
different from net settlement.
B. The accounting for the changes in the fair value of derivative
instruments depends upon its intended use and designation. Changes in
the fair value of derivative instruments not designated as fair value
or cash flow hedges shall be recorded in account 175, derivative
instrument assets, or account 244, derivative instrument liabilities,
as appropriate, with the gains recorded in account 421, miscellaneous
nonoperating income, and losses recorded in account 426.5, other
deductions.
C. A derivative instrument may be specifically designated as a fair
value or cash flow hedge. A hedge is used to manage risk to price,
interest rates, or foreign currency transactions. A company shall
maintain documentation of the hedge relationship at the inception of
the hedge that details the
[[Page 67702]]
risk management objective and strategy for undertaking the hedge, the
nature of the risk being hedged, and how hedge effectiveness will be
determined.
D. If the utility designates the derivative instrument as a fair
value hedge against exposure to changes in the fair value of a
recognized asset, liability, or a firm commitment, it shall record the
change in fair value of the derivative instrument to account 176,
derivative instrument assets-hedges, or account 245, derivative
instrument liabilities-hedges, as appropriate, with a corresponding
adjustment to the subaccount of the item being hedged. The ineffective
portion of the hedge transaction shall be reflected in the same income
or expense account that will be used when the hedged item enters into
the determination of net income. In the case of a fair value hedge of a
firm commitment a new asset or liability is created. As a result of the
hedge relationship, the new asset or liability will become part of the
carrying amount of the item being hedged.
E. If the utility designates the derivative instrument as a cash
flow hedge against exposure to variable cash flows of a probable
forecasted transaction, it shall record changes in the fair value of
the derivative instrument in account 176, derivative instrument assets-
hedges, or account 245, derivative instrument liabilities-hedges, as
appropriate, with a corresponding amount in account 219, accumulated
other comprehensive income, for the effective portion of the hedge. The
ineffective portion of the hedge transaction shall be reflected in the
same income or expense account that will be used when the hedged item
enters into the determination of net income. Amounts recorded in other
comprehensive income shall be reclassified into earnings in the same
period or periods that the hedged forecasted item enters into the
determination of net income.
b. In Balance Sheet Accounts, accounts 124, paragraph A, 125, 126
and 127 are revised to read as follows:
Balance Sheet Accounts
* * * * *
124 Other investments.
A. This account shall include the book cost of investments in
securities issued or assumed by nonassociated companies, investment
advances to such companies, and any investments not accounted for
elsewhere. This account shall also include unrealized holding gains and
losses on trading and available-for-sale types of security investments.
Include also the offsetting entry to the recording of amortization of
discount or premium on interest bearing investments. (See account 419,
interest and dividend income.)
* * * * *
125 Sinking funds (Major only).
This account shall include the amount of cash and book cost of
investments held in sinking funds. This account shall also include
unrealized holding gains and losses on trading and available-for-sale
types of security investments. A separate account, with appropriate
title, shall be kept for each sinking fund. Transfers from this account
to special deposit accounts may be made as necessary for the purpose of
paying matured sinking-fund obligations, or obligations called for
redemption but not presented, or the interest thereon.
126 Depreciation fund (Major only).
This account shall include the amount of cash and book cost of
investments which have been segregated in a special fund for the
purpose of identifying such assets with the accumulated provisions for
depreciation. This account shall also include unrealized holding gains
and losses on trading and available-for-sale types of security
investments.
127 Amortization fund--Federal (Major only).
This account shall include the amount of cash and book cost of
investments of any investments of any fund maintained pursuant to the
requirements of a federal regulatory body, as the cash and investments
segregated for the purpose of identifying the specific assets
associated with account 215.1, appropriated retained earnings--
amortization reserve, federal. This account shall also include
unrealized holding gains and losses on trading and available-for-sale
types of security investments.
* * * * *
c. In Balance Sheet Accounts, account 128, introductory text above
the note is revised to read as follows:
Balance Sheet Accounts
* * * * *
128 Other special funds (Major only).
This account shall include the amount of cash and book cost of
investments which have been segregated in special funds for insurance,
employee pensions, savings, relief, hospital, and other purposes not
provided for elsewhere. This account shall also include unrealized
holding gains and losses on trading and available-for-sale types of
security investments. A separate account with appropriate title, shall
be kept for each fund.
* * * * *
d. In Balance Sheet Accounts, account 129, introductory text
preceding Note A, is revised to read as follows:
Balance Sheet Accounts
* * * * *
129 Special funds (Nonmajor only).
This account shall include the amount of cash and book cost of
investments which have been segregated in special funds for bond
retirements, property additions and replacements, insurance, employees'
pensions, savings, relief, hospital, and other purposes not provided
for elsewhere. This account shall also include unrealized holding gains
and losses on trading and available-for-sale types of security
investments. A separate account, with appropriate title, shall be kept
for each fund.
* * * * *
e. In Balance Sheet Accounts, accounts 175 and 176 are added to
read as follows:
Balance Sheet Accounts
* * * * *
175 Derivative instrument assets.
This account shall include the amounts paid for derivative
instruments, and the change in the fair value of all derivative
instrument assets not designated as cash flow or fair value hedges.
Account 421, miscellaneous nonoperating income, shall be credited or
debited, as appropriate, with the corresponding amount of the change in
the fair value of the derivative instrument.
176 Derivative instrument assets--Hedges.
A. This account shall include the amounts paid for derivative
instruments, and the change in the fair value of derivative instrument
assets designated by the utility as cash flow or fair value hedges.
B. When a utility designates a derivative instrument asset as a
cash flow hedge it will record the change in the fair value of the
derivative instrument in this account with a concurrent charge to
account 219, accumulated other comprehensive income, with the effective
portion of the gain or loss. The ineffective portion of the cash flow
hedge shall be charged to the same income or expense account that will
be used when the hedged item enters into the determination of net
income.
C. When a utility designates a derivative instrument as a fair
value hedge it shall record the change in the fair value of the
derivative instrument in this account with a concurrent charge to a
subaccount of the asset or liability that carries the item being
hedged. The
[[Page 67703]]
ineffective portion of the fair value hedge shall be charged to the
same income or expense account that will be used when the hedged item
enters into the determination of net income.
* * * * *
f. In Balance Sheet Accounts, account 182.3, paragraph B is revised
to read as follows:
Balance Sheet Accounts
* * * * *
182.3 Other regulatory assets.
* * * * *
B. The amounts included in this account are to be established by
those charges which would have been included in net income, or
accumulated other comprehensive income, determinations in the current
period under the general requirements of the Uniform System of Accounts
but for it being probable that such items will be included in a
different period(s) for purposes of developing rates that the utility
is authorized to charge for its utility services. When specific
identification of the particular source of a regulatory asset cannot be
made, such as in plant phase-ins, rate moderation plans, or rate
levelization plans, account 407.4, regulatory credits, shall be
credited. The amounts recorded in this account are generally to be
charged, concurrently with the recovery of the amounts in rates, to the
same account that would have been charged if included in income when
incurred, except all regulatory assets established through the use of
account 407.4 shall be charged to account 407.3, regulatory debits,
concurrent with the recovery in rates.
* * * * *
g. In Balance Sheet Accounts, accounts 219, 244 and 245 are added
to read as follows:
Balance Sheet Accounts
* * * * *
219 Accumulated other comprehensive income.
A. This account shall include revenues, expenses, gains, and losses
that are properly includable in other comprehensive income during the
period. Examples of other comprehensive income include foreign currency
items, minimum pension liability adjustments, unrealized gains and
losses on certain investments in debt and equity securities, and cash
flow hedges. Records supporting the entries to this account shall be
maintained so that the utility can furnish the amount of other
comprehensive income for each item included in this account.
B. This account shall also be debited or credited, as appropriate,
with amounts of accumulated other comprehensive income that have been
included in the determination of net income during the period and in
accumulated other comprehensive income in prior periods. Separate
records for each category of items shall be maintained to identify the
amount of the reclassification adjustments from accumulated other
comprehensive income to earnings made during the period.
* * * * *
244 Derivative instrument liabilities.
This account shall include the change in the fair value of all
derivative instrument liabilities not designated as cash flow or fair
value hedges. Account 426, other deductions, shall be debited or
credited as appropriate with the corresponding amount of the change in
the fair value of the derivative instrument.
245 Derivative instrument liabilities-Hedges.
A. This account shall include the change in the fair value of
derivative instrument liabilities designated by the utility as cash
flow or fair value hedges.
B. A utility shall record the change in the fair value of a
derivative instrument liability related to a cash flow hedge in this
account, with a concurrent charge to account 219, accumulated other
comprehensive income, with the effective portion of the derivative's
gain or loss. The ineffective portion of the cash flow hedge shall be
charged to the same income or expense account that will be used when
the hedged item enters into the determination of net income.
C. A utility shall record the change in the fair value of a
derivative instrument liability related to a fair value hedge in this
account, with a concurrent charge to a subaccount of the asset or
liability that carries the item being hedged. The ineffective portion
of the fair value hedge shall be charged to the same income or expense
account that will be used when the hedged item enters into the
determination of net income.
* * * * *
h. In Balance Sheet Accounts, account 254, paragraph B, is revised
to read as follows:
Balance Sheet Accounts
* * * * *
254 Other regulatory liabilities.
* * * * *
B. The amounts included in this account are to be established by
those credits which would have been included in net income, or
accumulated other comprehensive income, determinations in the current
period under the general requirements of the Uniform System of Accounts
but for it being probable that: Such items will be included in a
different period(s) for purposes of developing the rates that the
utility is authorized to charge for its utility services; or refunds to
customers, not provided for in other accounts, will be required. When
specific identification of the particular source of the regulatory
liability cannot be made or when the liability arises from revenues
collected pursuant to tariffs on file at a regulatory agency, account
407.3, regulatory debits, shall be debited. The amounts recorded in
this account generally are to be credited to the same account that
would have been credited if included in income when earned except: All
regulatory liabilities established through the use of account 407.3
shall be credited to account 407.4, regulatory credits; and in the case
of refunds, a cash account or other appropriate account should be
credited when the obligation is satisfied.
* * * * *
PART 201--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR NATURAL GAS
COMPANIES SUBJECT TO THE PROVISIONS OF THE NATURAL GAS ACT
3. The authority citation for part 201 continues to read as
follows:
Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352,
7651-7651o.
4. Amend part 201 as follows:
a. In General Instructions, sections 22, accounting for other
comprehensive income, and 23, accounting for derivative instruments and
hedging activities, are added to read as follows:
General Instructions
* * * * *
22. Accounting for other comprehensive income.
A. Utilities shall record items of other comprehensive income in
account 219, accumulated other comprehensive income. Amounts included
in this account shall be maintained by each category of other
comprehensive income. Examples of categories of other comprehensive
income include, foreign currency items, minimum pension liability
adjustments, unrealized gains and losses on available-for-sale type
securities and cash flow hedge amounts. Supporting records shall be
maintained for account 219 so that the company can readily identify the
cumulative amount of other comprehensive income for each item included
in this account.
[[Page 67704]]
B. When an item of other comprehensive income enters into the
determination of net income in the current or subsequent periods, a
reclassification adjustment shall be recorded in account 219 to avoid
double counting of that amount.
C. When it is probable that an item of other comprehensive income
will be included in the development of cost of service rates in
subsequent periods, that amount of unrealized losses or gains shall be
recorded in accounts 182.3 or 254 as appropriate.
23. Accounting for derivative instruments and hedging activities.
A. Utilities shall recognize derivative instruments as either
assets or liabilities in the financial statements and measure those
instruments at fair value, except those falling within recognized
exceptions, the most common of which being the normal purchases and
sales scope exception. Normal purchases or sales are contracts that
provide for the purchase or sale of goods that will be delivered in
quantities expected to be used or sold by the utility over a reasonable
period in the normal course of business. A derivative instrument is a
financial instrument or other contract with all three of the following
characteristics:
(1) It has one or more underlyings and a notional amount or payment
provision. Those terms determine the amount of the settlement or
settlements, and, in some cases, whether or not a settlement is
required.
(2) It requires no initial net investment or an initial net
investment that is smaller than would be required for other types of
contracts that would be expected to have similar response to changes in
market factors.
(3) Its terms require or permit net settlement, can readily be
settled net by a means outside the contract, or provides for delivery
of an asset that puts the recipient in a position not substantially
different from net settlement.
B. The accounting for the changes in the fair value of derivative
instruments depends upon its intended use and designation. Changes in
the fair value of derivative instruments not designated as fair value
or cash flow hedges will be recorded in account 175, derivative
instrument assets, or account 244, derivative instrument liabilities,
as appropriate, with the gains recorded in account 421, miscellaneous
nonoperating income, and losses recorded in account 426.4, other
deductions.
C. A derivative instrument may be specifically designated as a fair
value or cash flow hedge. A hedge may be used to manage risk to price,
interest rates, or foreign currency transactions. Utilities shall
maintain documentation of the hedge relationship at the inception of
the hedge that details the risk management objective and strategy for
undertaking the hedge, the nature of the risk being hedged, and how
hedge effectiveness will be determined.
D. If the utility designates the derivative instrument as a fair
value hedge against exposure to changes in the fair value of a
recognized asset, liability, or a firm commitment, it will record the
change in fair value of the derivative instrument to account 176,
derivative instrument assets--hedges, or account 245, derivative
instrument liabilities--hedges, as appropriate, with a corresponding
adjustment to the subaccount of the item being hedged. The ineffective
portion of the hedge transaction shall be reflected in the same income
or expense account that will be used when the hedged item enters into
the determination of net income. In the case of a fair value hedge of a
firm commitment a new asset or liability is created. As a result of the
hedge relationship, the new asset or liability will become part of the
carrying amount of the item being hedged.
E. If the utility designates the derivative instrument as a cash
flow hedge against exposure to variable cash flows of a probable
forecasted transaction, it shall record changes in the fair value of
the derivative instrument in account 176, derivative instrument
assets--hedges, or account 245, derivative instrument liabilities--
hedges, as appropriate, with a corresponding amount in account 219,
accumulated other comprehensive income, for the effective portion of
the hedge. The ineffective portion of the hedge transaction shall be
reflected in the same income or expense account that will be used when
the hedged item enters into the determination of net income. Amounts
recorded in other comprehensive income shall be reclassified into
earnings in the same period or periods that the hedged forecasted item
enters into the determination of net income.
* * * * *
b. In Balance Sheet Accounts, accounts 124, paragraph A, 125, 126,
and 128, introductory text preceding the Note, are revised to read as
follows:
Balance Sheet Accounts
* * * * *
124 Other investments.
A. This account shall include the book cost of investments in
securities issued or assumed by nonassociated companies, investment
advances to such companies, and any investments not accounted for
elsewhere. This account shall also include unrealized holding gains and
losses on trading and available-for-sale types of security investments.
Include also the offsetting entry to the recording of amortization of
discount or premium on interest bearing investments. (See account 419,
interest and dividend income.)
* * * * *
125 Sinking funds.
This account shall include the amount of cash and book cost of
investments held in sinking funds. This account shall also include
unrealized holding gains and losses on trading and available-for-sale
types of security investments. A separate account, with appropriate
title, shall be kept for each sinking fund. Transfers from this account
to special deposit accounts may be made as necessary for the purpose of
paying matured sinking-fund obligations, or obligations called for
redemption but not presented, or the interest thereon.
126 Depreciation fund.
This account shall include the amount of cash and book cost of
investments which have been segregated in a special fund for the
purpose of identifying such assets with the accumulated provisions for
depreciation. This account shall also include unrealized holding gains
and losses on trading and available-for-sale types of security
investments.
* * * * *
128 Other special funds.
This account shall include the amount of cash and book cost of
investments which have been segregated in special funds for insurance,
employee pensions, savings, relief, hospital, and other purposes not
provided for elsewhere. This account shall also include unrealized
holding gains and losses on trading and available-for-sale types of
security investments. A separate account with appropriate title, shall
be kept for each fund.
* * * * *
c. In Balance Sheet Accounts, accounts 175 and 176 are added to
read as follows:
Balance Sheet Accounts
* * * * *
175 Derivative instrument assets.
This account shall include the amounts paid for derivative
instruments, and the change in the fair value of all derivative
instrument assets not designated as cash flow or fair value hedges.
Account 421, miscellaneous nonoperating income, will be credited or
debited as appropriate with the
[[Page 67705]]
corresponding amount of the change in the fair value of the derivative
instrument.
176 Derivative instrument assets--Hedges.
A. This account shall include the amounts paid for derivative
instruments, and the change in the fair value of derivative instrument
assets designated by the utility as cash flow or fair value hedges.
B. When a utility designates a derivative instrument asset as a
cash flow hedge it will record the change in the fair value of the
derivative instrument in this account with a concurrent charge to
account 219, accumulated other comprehensive income, with the effective
portion of the derivative gain or loss. The ineffective portion of the
cash flow hedge shall be charged to the same income or expense account
that will be used when the hedged item enters into the determination of
net income.
C. When a utility designates a derivative instrument asset as a
fair value hedge it shall record the change in the fair value of the
derivative instrument in this account with a concurrent charge to a
subaccount of the asset or liability that carries the item being
hedged. The ineffective portion of the fair value hedge shall be
charged to the same income or expense account that will be used when
the hedged item enters into the determination of net income.
* * * * *
d. In Balance Sheet Accounts, account 182.3, paragraph B, is
revised to read as follows:
Balance Sheet Accounts
* * * * *
182.3 Other regulatory assets.
* * * * *
B. The amounts included in this account are to be established by
those charges which would have been included in net income, or
accumulated other comprehensive income, determinations in the current
period under the general requirements of the Uniform System of Accounts
but for it being probable that such items will be included in a
different period(s) for purposes of developing rates that the utility
is authorized to charge for its utility services. When specific
identification of the particular source of a regulatory asset cannot be
made, such as in plant phase-ins, rate moderation plans, or rate
levelization plans, account 407.4, regulatory credits, shall be
credited. The amounts recorded in this account are generally to be
charged, concurrently with the recovery of the amounts in rates, to the
same account that would have been charged if included in income when
incurred, except all regulatory assets established through the use of
account 407.4 shall be charged to account 407.3, Regulatory debits,
concurrent with the recovery in rates.
* * * * *
e. In Balance Sheet Accounts, accounts 219, 244 and 245 are added,
to read as follows:
Balance Sheet Accounts
* * * * *
219 Accumulated other comprehensive income.
A. This account shall include revenues, expenses, gains, and losses
that are properly includable in other comprehensive income during the
period. Examples of other comprehensive income include foreign currency
items, minimum pension liability adjustments, unrealized gains and
losses on certain investments in debt and equity securities, and cash
flow hedges. Records supporting the entries to this account shall be
maintained so that the utility can furnish the amount of other
comprehensive income for each item included in this account.
B. This account shall also be debited or credited, as appropriate,
with amounts of accumulated other comprehensive income that have been
included in the determination of net income during the period and in
accumulated other comprehensive income in prior periods. Separate
records for each category of items will be maintained to identify the
amount of the reclassification adjustments from accumulated other
comprehensive income to earnings made during the period.
* * * * *
244 Derivative instrument liabilities.
This account shall include the change in the fair value of all
derivative instrument liabilities not designated as cash flow or fair
value hedges. Account 426.5, other deductions, shall be debited or
credited as appropriate with the corresponding amount of the change in
the fair value of the derivative instrument.
245 Derivative instrument liabilities--Hedges.
A. This account shall include the change in the fair value of
derivative instrument liabilities designated by the utility as cash
flow or fair value hedges.
B. A utility shall record the change in the fair value of a
derivative liability related to a cash flow hedge in this account, with
a concurrent charge to account 219, accumulated other comprehensive
income, with the effective portion of the derivative gain or loss. The
ineffective portion of the cash flow hedge shall be charged to the same
income or expense account that will be charged when the hedged item
enters into the determination of net income.
C. A utility shall record the change in the fair value of a
derivative instrument liability related to a fair value hedge in this
account, with a concurrent charge to a subaccount of the asset or
liability that carries the item being hedged. The ineffective portion
of the fair value hedge shall be charged to the same income or expense
account that will be charged when the hedged item enters into the
determination of net income.
* * * * *
f. In Balance Sheet Accounts, account 254, paragraph B is revised,
to read as follows:
Balance Sheet Accounts
* * * * *
254 Other regulatory liabilities.
* * * * *
B. The amounts included in this account are to be established by
those credits which would have been included in net income, or
accumulated other comprehensive income, determinations in the current
period under the general requirements of the Uniform System of Accounts
but for it being probable that: Such items will be included in a
different period(s) for purposes of developing the rates that the
utility is authorized to charge for its utility services; or refunds to
customers, not provided for in other accounts, will be required. When
specific identification of the particular source of the regulatory
liability cannot be made or when the liability arises from revenues
collected pursuant to tariffs on file at a regulatory agency, account
407.3, regulatory debits, shall be debited. The amounts recorded in
this account generally are to be credited to the same account that
would have been credited if included in income when earned except: All
regulatory liabilities established through the use of account 407.3
shall be credited to account 407.4, regulatory credits; and in the case
of refunds, a cash account or other appropriate account should be
credited when the obligation is satisfied.
* * * * *
[[Page 67706]]
PART 352--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR OIL PIPELINE
COMPANIES SUBJECT TO THE PROVISIONS OF THE INTERSTATE COMMERCE ACT
5. The authority citation for part 352 continues to read as
follows:
Authority: 49 U.S.C. 60502; 49 App. U.S.C. 1-85 (1988).
6. Amend part 352 as follows:
a. In List of Instructions and Accounts, definition, paragraph
35(d) is revised to read as follows:
Definitions.
35 * * *
(d) Cost, as applied to a marketable equity security, refers to the
original cost as adjusted for unrealized holding gains and losses.
* * * * *
b. In General Instructions, paragraph 1-15(a), (b) and (c) are
revised, (d) and (e) are removed, and General Instructions paragraphs
1-17 and 1-18 are added to read as follows:
General Instructions
* * * * *
1-15 Accounting for marketable securities owned.
(a) Accounts 11 ``Temporary investments,'' 20 ``Investments in
affiliated companies,'' and 21 ``Other investments'' shall be
maintained in such a manner as to reflect the marketable equity portion
(see definition 35) and other securities or investments.
(b) For the purpose of determining net ledger value, the marketable
equity securities in account 11 shall be considered the current
portfolio and the marketable equity securities in accounts 20 and 21
(combined) shall be considered the noncurrent portfolio.
(c) Carriers will categorize their security investments as held-to-
maturity, trading, or available-for-sale. Unrealized holding gains and
losses on trading type investment securities will be recorded in
accounts 640, miscellaneous income, and 660, miscellaneous income
charges, as appropriate. Unrealized holding gains and losses on
available-for-sale type investment securities shall be recorded in
account 77, accumulated other comprehensive income.
* * * * *
1-17 Accounting for other comprehensive income.
(a) Carriers shall record items of other comprehensive income in
account 77, accumulated other comprehensive income. Amounts included in
this account shall be maintained by each category of other
comprehensive income. Examples of categories of other comprehensive
income include, foreign currency items, minimum pension liability
adjustments, unrealized gains and losses on available-for-sale type
securities and cash flow hedge amounts. Supporting records shall be
maintained for account 77 so that the company can readily identify the
cumulative amount of other comprehensive income for each item included
in this account.
(b) When an item of other comprehensive income enters into the
determination of net income in the current or subsequent periods, a
reclassification adjustment shall be recorded in account 77 to avoid
double counting of that amount.
1-18 Accounting for derivative instruments and hedging activities.
(a) A carrier shall recognize derivative instruments as either
assets or liabilities in the financial statements and measure those
instruments at fair value, except those falling within recognized
exceptions, the most common of which being the normal purchases and
sales scope exception. Normal purchases or sales are contracts that
provide for the purchase or sale of goods that will be delivered in
quantities expected to be used or sold by the utility over a reasonable
period in the normal course of business. A derivative instrument is a
financial instrument or other contract with all three of the following
characteristics:
(1) It has one or more underlyings and a notional amount or payment
provision. Those terms determine the amount of the settlement or
settlements, and, in some cases, whether or not a settlement is
required.
(2) It requires no initial net investment or an initial net
investment that is smaller than would be required for other types of
contracts that would be expected to have similar response to changes in
market factors.
(3) Its terms require or permit net settlement, can readily be
settled net by a means outside the contract, or provides for delivery
of an asset that puts the recipient in a position not substantially
different from net settlement.
(b) The accounting for the changes in the fair value of derivative
instruments depends upon its intended use and designation. Changes in
the fair value of derivative instruments not designated as fair value
or cash flow hedges shall be recorded in account 46, derivative
instrument assets, or account 65, derivative instrument liabilities, as
appropriate, with the gains recorded in account 640, miscellaneous
income, and losses recorded in account 660, miscellaneous income
charges.
(c) A derivative instrument may be specifically designated as a
fair value or cash flow hedge. A hedge may be used to manage risk to
price, interest rates, or foreign currency transactions. An entity
shall maintain documentation of the hedge relationship at the inception
of the hedge that details the risk management objective and strategy
for undertaking the hedge, the nature of the risk being hedged, and how
hedge effectiveness will be determined.
(d) If the carrier designates the derivative instrument as a fair
value hedge against exposure to changes in the fair value of a
recognized asset, liability, or a firm commitment, it shall record the
change in fair value of the derivative instrument designated as a fair
value hedge to account 47, derivative instrument assets-hedges, or
account 66, derivative instrument liabilities-hedges, as appropriate,
with a corresponding adjustment to the subaccount of the item being
hedged. The ineffective portion of the hedge transaction shall be
reflected in the same income or expense account that will be used when
the hedged item enters into the determination of net income. In the
case of a fair value hedge of a firm commitment, a new asset or
liability is created. As a result of the hedge relationship, the new
asset or liability will become part of the carrying amount of the item
being hedged.
(e) If the carrier designates the derivative instrument as a cash
flow hedge against exposure to variable cash flows of a probable
forecasted transaction, it shall record changes in the fair value of
the derivative instrument in account 47, derivative instrument assets-
hedges, or account 66, derivative instrument liabilities-hedges, as
appropriate, with a corresponding amount in account 77, accumulated
other comprehensive income, for the effective portion of the hedge. The
ineffective portion of the hedge transaction shall be reflected in the
same income or expense account that will be used when the hedged item
enters into the determination of net income. Amounts recorded in other
comprehensive income shall be reclassified into earnings in the same
period or periods that the hedged forecasted item enters into the
determination of net income.
* * * * *
c. In Balance Sheet Accounts, accounts 11, 21, and 22, paragraph
(a) are revised to read as follows:
Balance Sheet Accounts
* * * * *
11 Temporary investments.
[[Page 67707]]
(a) This account shall include the cost of securities and other
collectible obligations acquired for the purpose of temporarily
investing cash, such as United States Treasury certificates, marketable
securities, time drafts receivable, demand loans, time deposits with
banks and trust companies, and other similar investments of a temporary
character. This account shall also include unrealized holding gains and
losses on trading and available-for-sale types of security investments.
(b) This account shall be subdivided to reflect the marketable
equity securities' portion and other temporary investments. (See
Instruction 1-15).
* * * * *
21 Other investments.
This account shall include the cost of investments in securities of
(other than securities held in special funds) and advances made to
other than affiliated companies. This account shall also include
unrealized holding gains and losses on trading and available-for-sale
types of security investments. Separate records shall be maintained to
show the securities pledged and the following classes of investments in
each nonaffiliated company:
(a) Stocks.
(b) Bonds.
(c) Other secured obligations.
(d) Unsecured notes.
(e) Investment advances.
22 Sinking and other funds.
(a) This account shall include cash and cost of investments in
securities and other assets, trusteed or otherwise restricted, that
have been segregated in distinct funds for purposes of redeeming
outstanding obligations; purchasing or replacing assets; paying
pensions, relief, hospitalization, and other similar items. This
account shall also include unrealized holding gains and losses on
trading and available-for-sale types of security investments. The cash
value of life insurance policies on the lives of employees and officers
to the extent that the carrier is the beneficiary of such policies
shall also be included in this account. Separate subsidiary records
shall be maintained for each distinct fund.
* * * * *
d. In Balance Sheet Accounts, accounts 23, 24, and 75.5 are
removed.
e. In Balance Sheet Accounts, accounts 46, 47, 65, 66 and 77 are
added to read as follows:
Balance Sheet Accounts
* * * * *
46 Derivative instrument assets.
This account shall include the amounts paid for derivative
instruments, and the change in the fair value of all derivative
instrument assets not designated as cash flow or fair value hedges.
Account 640, miscellaneous income, shall be credited or debited as
appropriate with the corresponding amount of the change in the fair
value of the derivative instrument.
47 Derivative instrument assets-Hedges.
(a) This account shall include the amounts paid for derivative
instruments, and the change in the fair value of derivative instrument
assets, designated by the utility as cash flow or fair value hedges.
(b) When a carrier designates a derivative instrument asset as a
cash flow hedge, it will record the change in the fair value of the
derivative instrument in this account with a concurrent charge to
account 77, accumulated other comprehensive income, with the effective
portion of the derivative gain or loss. The ineffective portion of the
cash flow hedge shall be charged to the same income or expense account
that will be used when the hedged item enters into the determination of
net income.
(c) When a carrier designates a derivative instrument as a fair
value hedge, it shall record the change in the fair value of the
derivative instrument in this account with a concurrent charge to a
subaccount of the asset or liability that carries the item being
hedged. The ineffective portion of the fair value hedge shall be
charged to the same income or expense account that will be used when
the hedged item enters into the determination of net income.
* * * * *
65 Derivative instrument liabilities.
This account shall include the change in the fair value of all
derivative instrument liabilities not designated as cash flow or fair
value hedges. Account 660, miscellaneous income charges, shall be
debited or credited as appropriate with the corresponding amount of the
change in the fair value of the derivative instrument.
66 Derivative instrument liabilities-Hedges.
(a) This account shall include the change in the fair value of
derivative instrument liabilities designated by the carrier as cash
flow or fair value hedges.
(b) A carrier shall record the change in the fair value of a
derivative instrument liability related to a cash flow hedge in this
account, with a concurrent charge to account 77, accumulated other
comprehensive income, with the effective portion of the derivative gain
or loss. The ineffective portion of the cash flow hedge shall be
charged to the same income or expense account that will be used when
the hedged item enters into the determination of net income.
(c) A carrier shall record the change in the fair of a derivative
instrument liability related to a fair value hedge in this account,
with a concurrent charge to a subaccount of the asset or liability that
carries the item being hedged. The ineffective portion of the fair
value hedge shall be charged to the same income or expense account that
will be used when the hedged item enters into the determination of net
income.
* * * * *
77 Accumulated other comprehensive income.
(a) This account shall include revenues, expenses, gains, and
losses that are properly includable in other comprehensive income
during the period. Examples of other comprehensive income include
foreign currency items, minimum pension liability adjustments,
unrealized gains and losses on certain investments in debt and equity
securities, and cash flow hedges. Records supporting the entries to
this account shall be maintained so that the utility can furnish the
amount of other comprehensive income for each item included in this
account.
(b) This account shall also be debited or credited, as appropriate,
with amounts of accumulated other comprehensive income that have been
included in the determination of net income during the period and in
accumulated other comprehensive income in prior periods. Separate
records for each category of items shall be maintained to identify the
amount of the reclassification adjustments from accumulated other
comprehensive income to earnings made during the period.
* * * * *
Note: The following appendices will not be published in the Code
of Federal Regulations.
[[Page 67708]]
Appendix A--List of Commenters
------------------------------------------------------------------------
Respondent Abbreviation
------------------------------------------------------------------------
1. American Forest & Paper American Forest.
Association, Process Gas Consumers
Group, Georgia Industrial Group,
Industrial Gas Users of Florida,
Florida Industrial Gas Users.
2. American Electric Power System.. AEP.
3. Automated Power Exchange, Inc... APE.
4. American Public Gas Association. APGA.
5. Avista Energy, Inc.............. Avista.
6. California Electric Oversight Electric Board.
Board.
7. Calpine Corporation............. Calpine.
8. Cinergy Services Inc............ Cinergy.
9. Cogentrix Energy, Inc........... Cogentrix.
10. Competitive Supply Commenters.. Competitive.
11. Dominion Resources, Inc........ Dominion.
12. Duke Energy North America LLC.. Duke Energy.
13. Edison Electric Institute...... EEI.
14. Edison Mission Energy, Edison Edison Mission.
Mission Marketing & Trading, Inc..
15. Electric Power Supply EPSA.
Association.
16. J. Aron & Company, Merrill J. Aron.
Lynch Capital Services, Inc.,
Morgan Stanley Capital Group Inc..
17. National Energy Marketers NEM.
Association.
18. National Rural Electric NRECA.
Cooperative Assn..
19. Nicor Gas Company.............. Nicor.
20. Oneok Power Marketing Company.. OPMC.
21. PanCanadian Energy Services, PanCanadian.
Inc..
22. Pinnacle West Capital Pinnacle West.
Corporation.
23. Portland General Electric Portland General.
Company.
24. Public Utilities Commission of Ohio PUC.
Ohio.
25. Public Utilities Commission of California PUC.
the State of California.
26. Reliant Resources, Inc......... RRI.
27. RWE Trading Americas, Inc...... RWE Trading.
28. Sempra Energy.................. Sempra.
29. Society for the Preservation of Oil Pipeline Shippers.
Oil Pipeline Shippers.
30. Southern California Edison..... Southern Cal Ed.
31. Southern Company............... Southern.
32. State of New York Department of NYPUC.
Public Service.
33. TXU Energy Trading Company LP.. TXU.
34. UBS AG......................... UBS.
35. Williams Companies, Inc........ Williams.
36. Wisconsin Electric Power Wisconsin Electric.
Company.
------------------------------------------------------------------------
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[FR Doc. 02-26809 Filed 11-5-02; 8:45 am]
BILLING CODE 6717-01-C