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The Empire Strikes Back

Will FERC's market solution wipe out state commissions?

Fortnightly Magazine - September 1 2002

the federal agency has made some major moves in protecting regulated assets from being used or abused by unregulated parents wanting to leverage the assets for non-regulated reasons and hit ratepayers with the bill.

Take former Enron Corp. subsidiary Northern Natural Gas. The pipeline company in early August agreed to a consent order that prohibits it from requesting a rate increase to recover a $450 million loan it received from CitiCorp North America and J.P. Morgan Chase Bank in November 2001-secured just weeks before Enron declared bankruptcy.

The week before, FERC had questioned whether the loan was improperly funneled to its ailing parent, Enron. Northern Natural Gas is now owned by Dynegy and is in the process of being sold to MidAmerican Energy Holdings Co., which is partly owned by investor Warren Buffett's Berkshire Hathaway Inc.

Furthermore, on the day FERC released its SMD NOPR, it also floated a NOPR on regulation of cash management practices.

The NOPR calls for the amendment of the Uniform Systems of Accounts for public utilities, natural gas companies, and oil pipelines companies by establishing the documentation necessary "to furnish full information" concerning the management of funds from a FERC-regulated subsidiary by a non-regulated parent.

In addition, under the proposed rule, FERC calls for more documentation of cash or money pool arrangements. Also, FERC proposes that as a condition for participating in a cash or management or money pool arrangement, the FERC-regulated entity must maintain a minimum proprietary capital balance (stockholder's equity) of 30 percent.

Furthermore, the FERC-regulated entity and its parent must maintain investment grade credit ratings. If either of these conditions is not met, the FERC-regulated entity may not participate in the cash management or money pool arrangement.

Certainly, this is FERC jumping on the S&P and Moody's bandwagon-insisting that that ratepayers are no longer made indebted to fund non-utility management growth programs.

The overall objective of a cash management program is to enhance owner value. Cash management arrangements can provide participants with greater financing flexibility and a lower cost of borrowing than would otherwise be available to small entities. These arrangements can also help smaller affiliates within the group receive the same favorable rates as larger entities.

But cash management programs are not without risk. Problems can arise over the respective rights to the concentration or pooled account when the parent company or its subsidiaries file for bankruptcy. Courts have ruled that the funds swept into a parent company's concentration account become the property of the parent, and the subsidiary loses all interest in those funds.

Furthermore, FERC's NOPR points out the potential for degradation of the financial solvency of regulated entities if non-regulated parent companies declare bankruptcy and default on the accounts payable, advances or borrowings owed to their regulated subsidiaries. The bankruptcy of Pacific Gas & Electric comes to mind. Many were taken by surprise when just the utility declared bankruptcy. How was it that that the holding company was able to remain a viable business? people asked.

That is why FERC is insisting that cash management agreements, generally and across the