In an effort to shield jurisdictional companies from having their cash funds drained by parent firms facing financial troubles, FERC last Wednesday issued an interim final rule in which it proposes that regulated natural gas and oil pipelines and public utilities who participate in cash-management arrangements with their parents file written agreements at the agency. A second proposal called for additional financial reports from jurisdictional companies.

The interim rule calls for FERC-regulated subsidiaries involved in cash-management programs to “keep and maintain” written agreements that specify the duties and responsibilities of the cash-management administrator and the participants in the arrangement. It proposes that these agreements be filed with the Commission, and that regulated companies notify FERC within 20 days when their minimum propriety capital balance drops to below 30% of total capital, staff said. The agency has asked for industry comments on its proposal.

The recommendations in the interim rule would provide “transparency of financial dealings, allowing the Commission, customers and investors to evaluate the actions and operations of regulated entities,” a FERC staffer said. The public would have access to the cash-management agreements at the Commission.

The interim rule replaces a proposed rule, which was issued in August 2002, that sought to set limits on the involvement of regulated companies in intra-corporate cash management programs, or money pools (see NGI, Aug. 5, 2002).

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 often providing affiliates with a “better rate of return” than what they would receive if they had invested the money individually, according to an expert on the issue.

But the programs have their risks as well, as was demonstrated with Enron Corp. “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. There is thus a potential for degradation of the financial solvency of regulated entities, if non-regulated parent companies declare bankruptcy,” FERC noted in its proposed rule last August.

FERC last week also voted out a proposed rule to require jurisdictional entities to file quarterly financial reports in addition to the annual reports they currently file. The more frequent and transparent reporting will help the Commission in evaluating trends and market conditions, the order said, noting that the accelerated filing conforms to the Sarbanes-Oxley accounting reform measure enacted by Congress a year ago.

The quarterly financial reports will include a management discussion and analysis (MDA) section and annual reports will add in a similar section. Companies also will be required to add a schedule for ancillary services to the annual report.

Responding to Commissioner Nora Brownell, staff said the filing would not duplicate work already done by the Securities and Exchange Commission because many jurisdictional companies are subsidiaries of larger ones and the SEC receives consolidated statements. Brownell said she would like to see a report in a year as to how the Commission actually used the data.

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