Seeking to shield regulated companies from cash-hungry parent corporations, FERC on Wednesday issued a final rule that requires regulated natural gas and oil pipelines and public utilities who participate in intra-corporate cash management pools with their parents and affiliates to submit written agreements to the agency for scrutiny.

In addition to reporting the cash management agreements to the agency, regulated companies will be required to notify the Commission within 45 days after the end of each calendar quarter when their proprietary capital ratio dips below 30%, and when it returns to or exceeds that level. The final rule will take effect 30 days after being published in the Federal Register.

The final rule closely parallels the interim final rule that was issued by FERC in June, with one key exception. The interim rule gave regulated companies only 20 days to alert FERC when their minimum proprietary capital balance (stockholders’ equity) dropped to below 30% of total capital.

Although the rulemaking was not released Wednesday, it appeared the final rule was a somewhat watered-down version of the initial proposed rule, which came out in August 2002 and sought to set limits on the involvement of regulated companies in these intra-corporate cash transfer programs, or money pools (see Daily GPI, Aug. 5, 2002). FERC proposed the harsher action after an agency audit found that regulated companies kept large amounts of money — in the billions of dollars — in these accounts and that record-keeping was lax and uncovered what appeared to be abuses.

The Commission at the time was particularly concerned that financially troubled parent corporations, such as Enron Corp., were draining the cash funds that were maintained by jurisdictional subsidiaries in these arrangements. FERC proposed the new regulation to protect the cash of regulated companies, but regulated gas pipelines and others said the agency had gone too far.

Simply requiring regulated companies to maintain accurate records of their participation, subject to audits, in cash management arrangements should be enough, insisted the Interstate Natural Gas Association of America (INGAA). Also, the pipeline group was concerned that requiring a regulated subsidiary to publicly notify the agency when its proprietary equity falls below 30% could trigger a free-fall in the company’s stock market price.

But the Commission contends the new rule will provide it with “additional financial transparency” of cash management arrangements, and will augment its “oversight and market-monitoring” duties.

Under cash management arrangements, funds in excess of the daily needs of a FERC-regulated company are combined with the excess funds of the parent corporation and affiliates, and are made available for use by entities within the corporate group. The cash assets of affiliates (both regulated and unregulated) are concentrated in joint accounts for the purpose of providing financial flexibility and lowering the cost of borrowing.

While cash management arrangements do have benefits for regulated companies, they also present certain risks, as was demonstrated with Enron. “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,” said FERC in its August 2002 proposed rule.

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