[BETA] Fortnightly

Citing overlap with the Securities and Exchange Commission (SEC) , the power industry has largely panned FERC's proposals to require greater disclosure on financial instruments and derivatives. Also criticized is FERC's move to force marketers to adopt reporting standards similar to the Uniform Systems of Accounts (USOA) used by utilities, as announced in the commission's Notice of Proposed Rulemaking (NOPR) issued Jan. 16. (See FERC )

But one group, the American Public Gas Association (APGA), has offered some tantalizing ideas on how the industry might use derivatives to hedge capacity on gas pipelines and transmission lines. APGA has offered an apparently viable argument on why FERC might well have an interest at stake in financial disclosure of energy risk management. According to APGA, derivatives can play a key role in hedging the locational basis risk between points on gas pipeline and electric transmission networks.

In this way, APGA sees derivatives as valuable for the network as well as the commodity, thus justifying some degree of oversight at the FERC.

FERC suggests in the NOPR that the current accounting system for public utilities, gas companies, and oil pipelines fails to address changes in the fair value of certain investment securities, derivatives instruments, and open hedging interests. It explores whether marketers should be made to seek approval of the issuance of securities or assumption of liabilities.

Some industry experts recognize FERC's proposal as a reaction to the concern in Congress and elsewhere that analysts, credit rating companies, and watchdog government agencies proved unable to anticipate the financial collapse of Enron because of inadequate financial disclosure.

In fact, the Senate was expected after its spring recess to vote on an amendment to the Senate energy bill (S. 517) offered by Sen. Diane Feinstein (D-Calif.), to allow the Commodities Futures Trading Commission (CFTC) to regulate over-the-counter derivatives, such as those used by utilities and marketers alike.

Opposition from Marketers

Power marketers argue that FERC's NOPR will accomplish nothing. Williams Companies, for example, insists that FERC apply the rule to traditional regulated utilities, but not to marketers.

"By definition," says Williams, "entities with market-based rate authority are not regulated on a cost-basis. ... Thus, accounting and reporting information ... [is] cost-based ... and ... will not yield comparable or insightful results."

The company says that the long-held FERC waivers of specific accounting and reporting requirements can and do contribute to market efficiency.

Avista adds that marketers remain fundamentally different from companies that retain an obligation to serve:

"The distinction between marketers and utilities ... is as true today as it was when the commission initially concluded that the financial reporting requirements should not apply to marketers," Avista opines.

Also, Avista says that no financial disclosure is necessary because market participants are better suited to evaluating counterparts in business, and have developed very sophisticated and stringent strategies with respect to structuring transactions, including the posting of collateral, so as to minimize financial risk.

Nevertheless, New York's Department of Public Service wants FERC's proposed rules imposed