Seeking to shield regulated companies and their customers from cash-hungry parent corporations, FERC last Wednesday issued a final rule that requires regulated natural gas and oil pipelines and public utilities who participate in intra-corporate cash pool arrangements with their unregulated parents and affiliates to submit written agreements to the agency for scrutiny.
In addition to disclosing 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 ratio of equity-to-debt dips below 30% of capital, 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 new regulations require regulated companies to compute their capital ratios quarterly instead of the proposed monthly; maintain records on themselves and the administrators of the cash-sharing programs rather than on all pool participants; document interest rates on their deposits or borrowings in the cash pools; and maintain records on their monthly cash-pool balances. The final rule also gives regulated companies more time to alert FERC when their capital ratio drops below 30% of capitalization.
While the final rule increases FERC’s oversight of money pool arrangements, it is a 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 programs that pool the cash assets of affiliates in joint accounts (see NGI, Aug. 5, 2002). FERC proposed the harsher action after an agency audit discovered that regulated companies kept large amounts of money — an estimated $16 billions — in these accounts, that record-keeping was lax and uncovered what appeared to be abuses. A more recent analysis revealed regulated companies presently have $25.2 billion in these cash accounts, the Commission said.
“This is an enormous, mostly unregulated, pool of money in cash management programs that may detrimentally affect regulated rates,” the Commission said in the final rule. These disclosure requirements “are needed to ensure that rates paid by the customers of FERC-regulated entities are just and reasonable.”
The Commission initiated the rulemaking because it was 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 shield both regulated companies and their ratepayers, but regulated gas pipelines and others said the agency went 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 said the rule will provide it with “additional financial transparency” of cash management arrangements, and will augment its “oversight and market-monitoring” duties. The new regulations were not intended to regulate regulated companies’ participation in cash-sharing arrangements with their parents and affiliates, the agency noted.
Under cash management arrangements, funds in excess of the daily needs of a FERC-regulated company are combined with the excess funds of the unregulated parent corporation and affiliates, and are made available for use by entities within the corporate group. The cash assets of affiliates 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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