In an effort to protect jurisdictional companies from having their cash funds siphoned off by parent firms facing bankruptcy or other financial troubles, the Federal Energy Regulatory Commission last week proposed a rule that would set limits on the involvement of regulated public utilities and natural gas and oil pipelines in intra-corporate cash management programs, or money pools.

In a notice of proposed rulemaking (NOPR) issued last Thursday, the Commission proposed that FERC-regulated companies maintain a minimum proprietary capital balance (stockholder’s equity) of 30%, and that both the subsidiaries and their parent firms possess an investment grade credit rating, as a precondition to a regulated company’s involvement in a cash-management or money-pool arrangement.

Both the NOPR and a companion accounting guidance, also issued Thursday (see Daily GPI, Aug. 1), are the result of a sweeping audit conducted this year into energy companies’ cash-management arrangements. The audit found 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.

As a result of the audit, FERC also cited concerns about Enron Corp.’s use of the assets of its two natural gas pipeline subsidiaries at the time — Northern Natural Gas and Transwestern Pipeline — to secure emergency loans of approximately $1 billion just weeks before it filed for bankruptcy last December (See related story).

Money-pool and 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 affiliates with a “better rate of return” than what they would receive it they invested the money individually, said John Delaware, FERC’s deputy executive director and chief accountant. Money-pool arrangements are commonly used by corporations, he said.

After allowing for payroll and other expenditures of regulated subsidiaries, the “parent invests unspent funds in overnight investments so that the money of all of the subsidiaries will be working for the company rather than being idle,” the NOPR noted. “Cash management programs are not without risk, however…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.”

In conducting the audit, FERC said it had discovered that regulated companies had deposited a total of approximately $16 billion into these cash management accounts over the past couple of years — $8.2 billion in public utility accounts, $2 billion in natural gas company accounts, and $5.7 billion in oil and product pipeline accounts.

The investigation further revealed “severe record-keeping deficiencies” on the part of the regulated subsidiaries and their parents. “Cash management agreements, generally and across the electric, gas and oil industries, have not been formalized in writing to stipulate the terms of the programs and the interest associated with the loans of the subsidiaries’ cash,” the NOPR said. As a result of its new accounting guidance, FERC is now requiring that all such arrangements be in writing.

In the future, the Commission proposed that cash management agreements provide documents for all deposits, withdrawals, interest income from, and interest expenses related to the arrangements.

FERC is seeking industry comment on the NOPR within 15 days.

In addition to the proposed rule, FERC last week issued accounting guidance that imposes stricter controls on jurisdictional pipeline and public utility affiliates’ deposits and withdrawals from intra-corporate money-pool arrangements. The accounting clarification went into effect Aug. 1.

“We just feel that with everything going on out there [accounting irregularities]…this was an area where we needed to be more explicit on the kind of controls that they need to have,” said FERC’s Delaware. “Right now, there’s not a whole lot of guidance out there” on accounting treatment of money pools.

In addition to requiring written verification of all money-pool transactions, the new accounting treatment requires utilities and pipes to maintain up-to-date documents identifying the duties and responsibilities of the money pool; restrictions on deposits or borrowings by pool members; the method used to determine interest-earning rates and interest-borrowing rates by pool members; and the method used to allocate interest income and expenses among pool members.

Specifically, the Commission will require amounts deposited to money pools to be recorded in Account 145 (Notes receivable from associated companies) or Account 146 (Accounts receivable from associated companies), unless the deposits “are evidenced by notes with maturities of more than one year from date of issue,” according to the new guidance. In the case of notes with maturities that are greater than a year, the deposits should be recorded in Account 123 (Investment in associated companies) or Account 123.1 (Investment in subsidiary companies), it said.

Withdrawals from money pools should be credited to Account 233 (Notes payable to associated companies) or Account 234 (Accounts payable to associated companies) unless they have notes with maturities of more than one year from the date of issue, FERC said. If the maturities are greater than one year, the withdrawals should be recorded in Account 20 (Investments in affiliated companies), it noted.

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