A final rule that requires closer FERC scrutiny of the cash-sharing programs of regulated subsidiaries and their unregulated parent companies “falls far short” of providing the needed “insulation” to justify separate credit ratings for Commission-regulated companies, a Standard & Poor’s analyst said.

“Although the new rule helps to clarify many of the tax record-keeping practices of the past, Standard & Poor’s does not believe the FERC has erected any barrier between the utilities it regulates and their affiliates to warrant any change in the consolidated approach now taken with the credit ratings of each,” wrote analyst Todd A. Shipman in a published report.

FERC’s move to clamp down on the cash-management practices of regulated subsidiaries and parent companies was in response to the actions taken by Enron Corp. in the weeks leading up to its bankruptcy in December 2001, when it tapped its two regulated natural gas pipelines — Transwestern and Northern Natural Gas — for $1 billion to stave off its liquidity crisis. The new rule applies to regulated gas and oil pipelines and public utilities.

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. FERC proposed the harsher action after discovering regulated companies kept large amounts of money — an estimated $16 billion — in these accounts, that record-keeping was lax, and there appeared to be abuses. A more recent Commission analysis revealed regulated companies presently have $25.2 billion in these accounts.

In the initial proposed rule, “FERC at first planned to impose a minimum common equity balance of 30% and a requirement that the pipeline and its parent maintain investment-grade credit ratings to participate in cash-management programs with affiliates. While the minimum equity balance [was] not particularly protective…at least the minimum credit rating requirement added some marginal credit-related discipline to the regulatory mix.

However, the FERC backed away from even those relatively mild demands in the final rule, and instead opted to only ask the companies to notify the Commission each quarter if their equity ratio falls below the 30% mark,” Shipman said (see Daily GPI, Oct. 23).

In addition to what he saw as a weak rule, “the degree of oversight by the FERC has traditionally been viewed as being less than sufficient to justify insulation, and nothing has changed in that regard because of the new rule,” he noted.

“That the FERC took almost two years to respond to the Enron pipeline situation indicates that timely intervention that would protect bondholder interests is not likely when a regulated utility’s parent is experiencing financial problems.”

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 these cash-sharing 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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