FERC’s proposal to place limits on the participation of regulated public utilities and natural gas and oil pipelines in intra-corporate cash management programs, or money pools, would duplicate existing regulations of the Securities and Exchange Commission (SEC), inflict higher administrative costs on companies and discriminate against smaller jurisdictional entities, companies said.

Registered holding companies, such as Cinergy Corp., KeySpan Corp. and NiSource Inc., pointed out that the cash management or money pool arrangements involving FERC jurisdictional subsidiaries were already “heavily regulated” under the Public Utility Holding Company Act of 1935 (PUHCA), which is enforced by the SEC. “Most fundamentally, PUHCA expressly prohibits any loans or extensions of credit from a FERC-regulated subsidiary to the parent [registered holding company],” Cinergy told FERC.

Not only does its fall under PUHCA regulation, but KeySpan said it was subject to a separate SEC order that requires it to maintain “meticulous and detailed records” of all money pool transactions.

Reflecting comments made by Edison Electric Institute, the three asked the Commission to exempt registered holding companies from its notice of proposed rulemaking (NOPR). In the Aug. 7 NOPR, FERC proposed that agency-regulated subsidiaries maintain a minimum proprietary capital balance (stockholders’ equity) of 30%, and that both subsidiaries and their parent firms possess an investment grade credit rating, as a precondition to a regulated subsidiary’s involvement in a cash-management or money pool arrangement (See Daily GPI, Aug. 5).

The Commission proposed the rule to protect jurisdictional companies from having their cash funds drained by parent firms facing bankruptcy or other financial troubles. The NOPR was the result of a FERC audit conducted this year into energy companies’ cash management programs. The audit found that jurisdictional companies kept large amounts of money — in the billions of dollars — in these type of accounts, that record-keeping by the companies was lax, and uncovered what appeared to be some abuses.

Cash management arrangements take several forms, but generally they permit parent companies to “sweep” all of the cash of their affiliates together and invest it in one lump sum, thus providing their affiliates with a “better rate of return” than what they would receive if they invested the money individually. But “cash management programs are not without risk…Courts have ruled that funds swept into a parent company’s concentration account become the property of the parent, and the subsidiary loses all interest in those funds,” FERC said in the NOPR.

Dominion Resources, KeySpan and others took issue with the Commission’s proposal to bar the “netting” (or lumping together) of subsidiaries’ cash deposits and borrowings in a cash-management program. “It is unreasonable and unnecessary for the Commission to require each company to establish a separate line of credit for each subsidiary and to administer each of those separate credit lines in isolation from the other credit lines; yet, that is exactly what the Commission proposes when it would prohibit netting of cash deposits and borrowings,” Dominion said.

“Without netting, KeySpan would be required to maintain individual deposits and borrowing balances for each company. Those balances would unnecessarily increase significantly because they could not be reduced through netting,” KeySpan noted. This would subject subsidiaries to “unnecessary interest charges” on borrowing balances and “unnecessary interest credits” on deposit balances, and KeySpan would incur “unnecessary administrative costs” to maintain and keep track of the individual balances. “It is simply not practical to eliminate the ability to net deposits and borrowings.”

Dominion Resources also objected to FERC’s proposed requirement that regulated subsidiaries and their parents post security to ensure repayment of deposits and withdrawals from the pool. “It is unnecessary to require the parent to provide security for deposits, where the parent has management control of the cash and assets of the regulated entity. The only assets the rational parent corporation would post as security are the assets of a regulated entity itself, which would not change the regulated entity’s position. Likewise, requiring the regulated entity to post security with the parent ignores the fact that the regulated entity could only default to the parent,” it said.

“Requiring the parent and the [jurisdictional] entity to post security for repayment promotes form over substance and ignores the fundamental nature of the corporate relationship,” Dominion noted.

KeySpan quizzed the Commission about “what type or amount of security” would be demanded by the agency. It further noted it was not required by the SEC to post security for pool transactions, and said that such a requirement would result in “higher costs to customers with little or no benefit.” In order to comply with the security provision, KeySpan said it would be forced to enter into a credit facility twice that of its existing $1.3 billion credit facility.

The proposal that regulated subsidiaries maintain a minimum 30% equity balance to participate in money pools also came under fire, with NiSource calling it an “unnecessary restriction” that wasn’t even required by the SEC. Instead, it suggested that FERC adopt “general guidelines…of hard and fast rules prescribing who may participate in cash management programs and the conditions for such participation.”

NiSource said it agreed with the Interstate Natural Gas Association of America (INGAA), which favors FERC guidelines, rather than bright line rules, for the use of cash-management programs. Noting the proposed rules were “unduly rigid” and placed companies between a “rock and a hard place,” INGAA proposed that FERC instead issue a policy statement that would offer guidance to jurisdictional gas companies and their parents on cash management programs.

Dominion not only supported FERC’s proposed equity requirement for subsidiaries, it suggested that parent companies be ordered to maintain a minimum proprietary capital balance (stockholders’ equity) of 30% as well. “Additionally, the Commission should provide that in the event the parent no longer meets the conditions, then the authority to engage in cash netting at the parent level should immediately cease,” it said.

NiSource asked the agency to clarify that only those regulated subsidiaries that have independent credit ratings need to maintain an investment grade rating in order to participate in money pools. “Entities such as the NiSource pipelines that do not issue securities and, therefore, do not have any credit rating should not required to obtain a rating.”

Furthermore, NiSource said it was unclear which security issuances (short-term debt, long-term debt, preferred debt) must maintain an investment grade rating, and whether a regulated subsidiary need only obtain an investment grade rating from only one recognized rating group.

Cinergy noted it also opposed the NOPR because it would “unfairly” shut out smaller regulated affiliates from participation in cash-management programs. “Under the literal application of the Commission’s proposal, three of Cinergy’s smaller FERC-regulated subsidiaries would be precluded from continued money pool access, including Lawrenceburg Gas Co. with some 6,200 retail gas customers in southeastern Indiana.”

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