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.
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 on both regulated utilities and unregulated marketers.
"These entities have the ability to enter into transactions that may subject utilities to greater risk and associated consequences."
The Edison Electric Institute reminds FERC of possible overlap with SEC filing requirements. EEI advised FERC that in late January, the SEC recommended () that with regard to trading activities that include non-exchange traded contracts accounted for at fair value, that registrants should consider providing disclosure through the "management's discussion and analysis of financial condition and results of operation," or "MD&A," as the term is widely known.
(SEC requires registrants to file the MD&A as part of the 10-K Annual Report filings and the 10-Q Quarterly Report. The MD&A disclosures are related to [1] liquidity and capital resources, including off-balance sheet arrangements, [2] certain trading activities involving non-exchange traded contracts accounted for at fair value, and [3] relationships and transactions on terms that would not be available from clearly independent third parties on an arm's-length basis.)
EEI believes that disclosure of energy trading information in SEC filings should prove sufficient.
The Ohio Public Utilities Commission (PUCO) finds a middle ground keyed to efficient data collection and aggregation:
The National Rural Electric Cooperative Association adds that information disclosed to the public might be aggregated to protect sensitive corporate information.
The American Public Gas Association insists that FERC should have a place at the table, since derivatives and hedging have a place in gas transportation and electric transmission.
"FERC must collect enough accurate data to understand the impact of energy derivatives upon energy policy." The APGA comment might also frame how derivatives might be looked at in terms of power transmission.
For example, the APGA does not know the extent that parties may be hedging the value of transmission resources that remain regulated by the FERC.
APGA understands that most financial derivatives concern the price of the commodity. "But those same instruments easily serve as a proxy for interstate pipeline capacity. By locking in a commodity basis differential, an interstate pipeline can hedge the value of its unsubscribed capacity that serves both points. To some extent this is under review in the El Paso Corp. investigation [].
El Paso Marketing claimed in the first phase of the proceeding that it had not profited on high gas prices in California because it had hedged the value of its El Paso Natural Gas capacity," the APGA filing said.
But the implication of such activity should be well understood by the FERC if it is to meet the Natural Gas Act obligations, the APGA states.
For example, the APGA asks: if the pipeline takes a position on the value of its unsold capacity, does this position alter its incentive to sell the capacity (at a discount)? Furthermore, APGA asks, "Can the timing of a capacity sale affect the value of a hedge taken by the seller of the capacity? What claim to revenues from such endeavors do ratepayers have and who bears the risk of a failed transaction? What bearing does a pipeline's rate design have on such activities?"
Certainly, APGA points out there are many more questions than answers, and if APGA gets its way, the industry may just have to diclose all. The question is, will we like what we see?