One might say, when it comes to FERC, some state public utilities commissions' lack of faith is disturbing—to paraphrase Lord Vader. It's also necessary, as any journalist would tell you.
The FERC NOPR on standard market design (SMD)—which completes the "trilogy" of regulation on wholesale markets, as chairman Pat Wood described it—had some state PUCs blasting the NOPR even before its July 31 release.
One might call it a small rebellion. PUC commissioners from 15 states, including Alabama, Arkansas, California, Georgia, Idaho, Kentucky, Louisiana, Mississippi, New Hampshire, North Carolina, South Carolina, Oregon, South Dakota, Washington, and Wyoming, joined to fight FERC's SMD. These PUCs believe in their hearts that FERC's SMD is a "massive takeover" of state authority (see Public Utilities Commissions: Re-regulate or Re-engineer? By Branko Terzic, p. 12).
In fact, many industry experts readily agree that the SMD is a power grab-but the real question is whether it is a legal one. If it is-then what is to happen to PUCs?
FERC does propose establishing a single flexible transmission service that incorporates oversight that once was in the state commissioners' sole discretion-and courts have affirmed FERC's authority. FERC will be exercising jurisdiction over the transmission component of bundled retail transactions, aka native load.
Not to mention that FERC's proposed role for state regulators is to participate in Regional State "Advisory" Committees that would oversee a particular RTO, or independent entity. The fact that they use the word "advisory" does say much about how much PUC authority will be retained.
Meanwhile, the SMD has revitalized the pro-deregulation movement. Many energy executives have told me that with all the SEC and FERC inquiries, ratings downgrades and asset sales, they had almost given up on the idea of electric competition, until SMD. Naturally, most people at this point are still thinking the document through-but questions remain whether FERC politically can pull off the SMD.
To those of you just coming off a summer vacation, wanting to get up to speed on all things SMD, I direct you to our August 2002 SMD primer issue, as well as contributing legal editor Lori Burkhart's News Analysis on page 36 in this issue, covering the fine points of the NOPR. Not only that, but with the numerous utility executives, academics, consultants, and analysts that have already submitted articles on the subject, our readers can depend on a steady stream of SMD material in the Fortnightly for the next year.
Some state commissions have painted FERC's SMD plan as one that will open the nation's markets to more volatile prices like those seen during the California crisis. In fact, Washington Governor Gary Locke stated at the time of the SMD release, "There is no need for a central market that can be manipulated by unscrupulous traders." Of course, had he read the FERC plan at the time, he would have known that SMD calls for less reliance on spot markets.
Even while the FERC seeks to standardize energy markets, 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 electric, gas, and oil industries, be formalized in writing to stipulate the terms of the programs and the interest associated with the loans of the subsidiaries' cash.
Of course, further restricting a holding company's ability to raise capital by insisting on investment grade ratings and having loans secured by regulated assets be paid at the holding company level changes the dynamic by which companies will be able to fund expansion.
Certainly, some independent power plant developers, like Calpine and Mirant, will applaud the proposed measures, because having a regulated utility in a diversified holding company will hold no extra advantage in obtaining power plant development funding.
While FERC's NOPR on cash management suggests it supports a less leveraged, more transparent capital structure for diversified utilities, one might keep in mind that more power plant development as soon as 2004 will be needed in certain regions. Naturally, FERC's SMD needs participation by market participants that have capital to invest in market development. No one can argue with a less indebted energy company-but alternatively we cannot complain or be surprised if no one wants to pay for the SMD party.