Financial Accounting, Reporting and Records Retention Requirements Under the Public Utility Holding Company Act of 2005

Federal RegisterNov 7, 2006

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 366, 367, 368, 369, and 375

[Docket No. RM06-11-000; Order No. 684]

Financial Accounting, Reporting and Records Retention Requirements Under the Public Utility Holding Company Act of 2005

Issued October 19, 2006.

AGENCY:

Federal Energy Regulatory Commission, DOE.

ACTION:

Final rule.

SUMMARY:

In this Final Rule, the Federal Energy Regulatory Commission (Commission) is amending its regulations to further implement the Public Utility Holding Company Act of 2005 (PUHCA 2005). Specifically, the Commission is adding a Uniform System of Accounts (USofA) for Centralized Service Companies, adding preservation of records requirements for holding companies and service companies, revising FERC Form No. 60, Annual Report of Centralized Service Companies, to provide for financial reporting consistent with the new USofA and providing for electronic filing of the revised FERC Form No. 60. The Final Rule will provide for greater accounting transparency for centralized service company operations, and uniform records retention by holding companies and service companies subject to PUHCA 2005. This transparency will protect ratepayers from pass-through of improper service company costs.

EFFECTIVE DATE:

The rule will become effective January 8, 2007.

FOR FURTHER INFORMATION CONTACT:

James K. Guest (Technical Information), Division of Financial Regulation, Office of Enforcement, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, telephone (202) 502-6614, e-mail:

james.guest@ferc.gov.

Lawrence Greenfield (Legal Information), Office of the General Counsel—Energy Markets, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, telephone (202) 502-6415, e-mail:

lawrence.greenfield@ferc.gov.

Julia A. Lake (Legal Information), Office of the General Counsel—Energy Markets, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, telephone (202) 502-8370, e-mail:

julia.lake@ferc.gov.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Background

III. Overview of Final Rule

IV. Discussion

1. Adoption of the Proposed Uniform System of Accounts

2. Implementation Date

3. FERC Form No. 60 Filing Deadline

4. Definitions

(a) “Direct cost” and “Indirect cost”

(b) “Work order system”

5. Instructions

(a) Section 367.2—Companies for which this system of accounts is prescribed

(b) Section 367.8—Extraordinary items

(d) Section 367.20(b)—Depreciation accounting

(e) Section 367.23—Transactions with non-associate companies

(f) Section 367.24—Construction and service contracts for other companies

(g) Section 367.25—Determination of service cost

(h) Section 367.27—Billing procedures

(i) Section 367.51(a)(17)—Allowance for funds used during construction

(j) Section 367.53—Service company property purchased or sold

(k) Section 367.54—Expenditures on leased property

(l) Section 367.59— Additions and retirements of property

(m) Sections 367.103-.104—Current & Deferred Income Taxes

(n) Section 367.23—Transactions with non-associate companies; § 367.25—Determination of service cost; § 367.27—Billing procedures; § 367.28—Methods of allocation; § 367.29—Compensation for use of capital

6. Balance Sheet Accounts

7. Income Statement Accounts

(a) Sections 367.4570-.4594—Revenue accounts for services rendered

(b) Sections 367.5000 and 367.8000—Operation and maintenance expense accounts

(c) Sections 367.9220 and 367.4171—Account 922, Administrative expenses transferred—Credit, and Account 417.1, Expenses of non-utility company

(d) Section 367.4160—Costs and expenses of merchandising, jobbing and contract work; § 367.9120—Demonstrating and selling expenses; § 367.9130—Advertising expenses; § 367.9301—General advertising expenses

(e) Sections 367.4263, 367.4117, 367.4180—Miscellaneous Income Statement Issues

8. Records Retention Requirements

9. FERC Form No. 60

(a) Use of GAAP Financial Statement instead of Structured FERC Form No. 60

(b) FERC Form No. 60 Schedules

(1) Schedule II, Service Company Property

(2) Schedule III-A, Summary of Service Company Property and Accumulated Provisions for Depreciation and Amortization

(3) Schedule IV, Investments and Schedule XII, Long-Term Debt

(4) Schedule V, Accounts Receivable from Associate Companies

(5) Schedule VI, Fuel Stock Expenses Undistributed

(6) Schedule X, Research, Development or Demonstration Expenses

(7) Schedule XI, Proprietary Capital

(8) Schedule XIV, Notes to Financial Statements

(9) Schedule XV, Comparative Income Statement

(10) Schedule XV-A, Schedule of Utility Operating Expenses; Schedule XVI, Analysis of Charges for Service; Schedule XVII, Schedule of Expense Distribution by Department or Service Function

(11) Analysis of Billing Schedules

(12) Departmental Analysis of Salaries Schedule; Methods of Allocation Schedule; and Organizational Chart Schedule

(13) Annual Statement of Compensation for Use of Capital Billed

(14) Miscellaneous General Expenses Schedule (Account 930.2)

(d) Raising the Threshold for Individually Itemized Items

(e) Reporting in Whole Dollars or Alternatively in Thousands

(f) Comparative Information

(g) Request to Expand Data Collection in FERC Form No. 60

(h) Schedule Numbering

(i) Chief Accountant's delegated authority

V. Information Collection Statement

VI. Environmental Analysis

VII. Regulatory Flexibility Act

VIII. Document Availability

IX. Effective Date and Congressional Notification

Before Commissioners:

Joseph T. Kelliher, Chairman; Suedeen G. Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

I. Introduction

1. On April 24, 2006, the Commission issued a notice of proposed rulemaking (NOPR) that proposed to add a new Uniform System of Accounts (USofA) for centralized service companies,

i.e.

, service companies that are not special purpose companies, and new preservation of records requirements for holding companies and service companies as new parts 367 and 368 of Title 18 of the Code of Federal Regulations.

The NOPR also proposed to revise FERC Form No. 60, Annual Report of Centralized Service Companies, to be codified in new part 369, to provide for financial reporting by centralized service companies consistent with the new USofA; to provide for electronic filing of Form No. 60; and to make conforming changes to the Commission's regulations in part 366 and corresponding changes to the Commission's Chief Accountant's delegation of authority in part 375. The

NOPR proposed to make the changes effective January 1, 2007.

71 FR 28464 (May 16, 2006), FERC Stats. & Regs. ¶ 32,600 (2006).

2. As directed by the Commission in the NOPR, the Commission staff held a technical conference on July 18, 2006, to provide interested persons an opportunity to discuss the regulations proposed in the NOPR. At the conclusion of the technical conference, staff announced that the record in this docket would remain open until August 8, 2006, to provide interested persons additional time to submit specific recommendations on how the Commission's proposed regulations could be modified to accommodate their concerns.

3. This Final Rule adopts, in many respects, the proposals contained in the NOPR, but with certain noted changes to minimize any unnecessary burden. Chief among them, the Commission defers the implementation date by an additional year, to January 1, 2008.

II. Background

4. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005)

was signed into law. In relevant part, it repealed the Public Utility Holding Company Act of 1935 (PUHCA 1935)

and enacted the Public Utility Holding Company Act of 2005 (PUHCA 2005),

which, with one exception not relevant here, became effective on February 8, 2006 (six months from the date of enactment). On December 8, 2005, the Commission issued Order No. 667, adding a new Subchapter U and part 366 to Title 18 of the

Code of Federal Regulations

to implement PUHCA 2005.

Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005).

15 U.S.C. 79a

et seq.

EPAct 2005 at 1261

et seq.

Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005, Order No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ¶ 31,197 (2005), order on reh'g, Order No. 667-A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ¶ 31,213 (2006), order on reh'g, Order No. 667-B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ¶ 31,224 (2006).

5. Order No. 667 required that, unless otherwise exempted by Commission rule or order, holding companies

and service companies

must maintain and make available to the Commission their books and records.

In addition, Order No. 667 allowed holding companies and service companies that did not currently follow the Commission's records retention requirements to transition to the Commission's requirements by January 1, 2007. Order No. 667 further provided that holding companies would not be required to comply with a Uniform System of Accounts, but that centralized service companies would be required to do so as of January 1, 2007. The Commission also indicated in Order No. 667 that it would initiate a separate rulemaking proceeding to address how the Commission's Uniform Systems of Accounts and records retention requirements in Parts 101, 125, 201 and 225 of its regulations

should be modified to adopt or otherwise integrate the relevant parts of the Securities and Exchange Commission's (SEC) Uniform System of Accounts and records retention rules.

As defined in 18 CFR 366.1, a holding company is (i) any company that directly or indirectly owns, controls, or holds, with power to vote, 10 percent or more of the outstanding voting securities of a public-utility company or of a holding company of any public-utility company; and (ii) any person, determined by the Commission, after notice and opportunity for hearing, to exercise directly or indirectly (either alone or pursuant to an arrangement or understanding with one or more persons) such a controlling influence over the management or policies of any public-utility company or holding company as to make it necessary or appropriate for the rate protection of utility customers with respect to rates that such person be subject to the obligations, duties, and liabilities imposed by this subtitle upon holding companies.

As defined in 18 CFR 366.1, a service company is any associate company within a holding company system organized specifically for the purpose of providing non-power goods or services or the sale of goods or construction work to any public utility in the same holding company system. “Centralized service companies” are defined in 18 CFR 367.1(a)(7) as a service company that provides services such as administrative, managerial, financial, accounting, recordkeeping, legal or engineering services, which are sold, furnished, or otherwise provided (typically for a charge) to other companies in the same holding company system. Centralized service companies are different from other service companies that only provide a discrete good or service.

Order No. 667 also required centralized service companies to file the newly created FERC Form No. 60, Annual Report of Centralized Service Companies.

18 CFR parts 101, 125, 201 and 225 (2006).

6. In the April 24, 2006 NOPR,

the Commission recognized that the range of changes that would be needed to Parts 101, 125, 201 and 225 of its regulations to allow for application of those requirements to holding companies and service companies would make understanding and applying them difficult for all entities. Therefore, the Commission proposed to adopt separate accounting, records retention, and reporting requirements for holding companies and service companies in new Parts 367, 368 and 369.

Supra

note 1.

7. After consideration of the discussion during the technical conference and the comments received, the Commission is adopting this Final Rule which is generally consistent with the NOPR, but with several significant changes to reduce the compliance burden on affected entities. The Commission received nine comments on the proposed NOPR and ten supplemental comments submitted following the July 18, 2006 staff technical conference. A list of the commenters is attached as Appendix B. Comments received on specific aspects of the Commission's proposal are discussed in greater detail below.

III. Overview of Final Rule

8. As an initial matter, the Commission in this Final Rule has been guided by the clear intent of Congress to repeal the regulatory regime established by PUHCA 1935 and to rely on this Commission and state regulatory authorities to protect energy customers. Throughout, we have attempted to strike a balance between the Commission's need for information to carry out its regulatory responsibilities and the burden that gathering and reporting information imposes on industry. Therefore, as described below, we have modified our proposal in several key respects to reduce any unnecessary burden. The modifications include deleting and modifying certain accounts and instructions in the originally proposed USofA, providing flexibility in the work order system requirements, streamlining and eliminating certain schedules in the FERC Form No. 60, retaining the May 1 filing date for the FERC Form No. 60, and postponing the implementation date of the Final Rule until January 1, 2008. These modifications balance the Commission's need for information to fulfill its regulatory responsibilities with minimizing any unnecessary burden.

9. Specifically, in the NOPR, the Commission proposed to add, as Part 367 of its regulations, a new USofA for centralized service companies that conforms, to the maximum extent practicable, to the existing USofA for public utilities and licensees and for natural gas companies as set forth in Parts 101 and 201, respectively, of the Commission's regulations. The Final Rule adopts the new USofA for centralized service companies, but with the following modifications to reduce the burden on respondents:

• Centralized service companies will not be required to adopt a formal work order system. Instead, the Commission will permit centralized service companies to use a variety of cost accumulation systems, provided such systems support the allocation of expenses to the services performed and readily identify the source of the expenses and the basis for their allocation.

• Centralized service companies will not be required to obtain Commission approval to account for an item as extraordinary. Instead, the Commission will only require extraordinary items to be disclosed in footnotes to the financial statements.

• Centralized service companies will not be required to conduct extensive mortality studies to support the useful lives of all depreciable assets, but can exercise judgment in determining the evidence needed to support the lives of depreciable assets.

• Centralized service companies will not be required to prepare paper invoices each month for services rendered to associate utility companies. Instead, the Commission will permit centralized service companies to use a variety of accounting mechanisms, provided that associate utilities are receiving accurate information about the work being done for them and the related costs on a monthly basis.

• Centralized service companies will not be required to capitalize an allowance for funds used during construction (AFUDC) as a component of construction cost but will instead be allowed to capitalize interest.

• Centralized services companies will not be required to calculate income taxes for individual departments.

• Centralized service companies will not be required to recognize revenues received for, or expenses incurred in, providing services to non-utility companies in separate accounts.

• Centralized service companies will not be required to record revenues received for services provided in support of merchandising, jobbing and contract work in a separate account. Instead, revenues from such services will be included in the accounts provided for other service company revenues. Proposed Account 415, Revenues from merchandising, jobbing and contract work, will be eliminated.

10. In the NOPR, the Commission also proposed to add, as new part 368 of its regulations, preservation of records requirements for holding companies and service companies, that conform to the preservation of records requirements for public utilities and natural gas companies contained in §§ 125.3 and 225.3 of the Commission's regulations, with certain modifications appropriate for holding companies and service companies. The Final Rule adopts the new requirements, with certain modifications to the Schedule of Records and Periods of Retention in § 368.3. In order to reduce any unnecessary burden, the Commission will revise the retention period for certain depreciation records from 25 years to 3 years after retirement or disposition of the property.

11. Additionally, the NOPR proposed to revise FERC Form No. 60 to permit reporting consistent with the proposed USofA for centralized service companies, and to codify it in new part 369. The Final Rule adopts the revised FERC Form No. 60 in part 369, but deletes or modifies the following schedules in the Form itself to reduce the compliance burden:

• Schedule XV-A, Schedule of Utility Operating Expenses, will be deleted because similar information is available on Schedule XVI, Analysis of Charges for Service.

• Schedule XVI will be modified to reflect the Commission's decision not to require a separate account for recording expenses attributable to services provided to non-utility companies.

• The Analysis of Billing Non-utility Companies—Account 459 Schedule, will be deleted to reflect the Commission's decision to eliminate Account 459.

• The schedules for analysis of service company billings will eliminate the need to separately report billings to utility customers and non-utility customers.

• The departmental analysis of salaries schedule will be eliminated because the reported data is not comparable across companies.

12. In addition, the Final Rule delays the implementation date of the new requirements until January 1, 2008, and makes conforming changes to the transition provisions contained in §§ 366.21, 366.22 and 366.23 of the Commission's regulations. The delay in the implementation date and the transition periods will allow for a more orderly implementation of the new requirements and further reduce the compliance burden on affected entities.

13. The Final Rule, therefore, adopts new parts 367, 368 and 369 and corresponding changes to parts 366 and 375 of the Commission's regulations.

IV. Discussion

14. In general, the National Association of Regulatory Utility Commissioners (NARUC), the American Public Power Association (APPA), the Florida Municipal Power Authority (FMPA), and National Rural Electric Cooperative Association (NRECA) supported the NOPR while Edison Electric Institute (EEI) and individual service companies opposed the NOPR.

1. Adoption of the Proposed Uniform System of Accounts

15. The Commission proposed to adopt a new USofA for Centralized Service Companies that generally mirrors the Commission's existing USofA for public utilities and licensees and for natural gas companies, with certain modifications to reflect the unique business characteristics of centralized service companies.

Comments

16. Several industry commenters urge the Commission to allow centralized service companies to continue to use their existing systems of accounts.

These commenters contend that centralized service companies should not be required to adopt the USofA as proposed in the NOPR. EEI, First Energy, and XES also argue that centralized service companies should be permitted to continue to maintain their financial records in conformance with Generally Accepted Accounting Principles (GAAP) and Sarbanes-Oxley requirements.

EEI at 19-20; FirstEnergy Service Company (FirstEnergy) Supplemental Comments at 2; Pepco Holdings, Inc. and PHI Service Company (PHI Companies) jointly-filed Supplemental Comments at 4-5; Progress Energy, Inc. (Progress Energy) at 2; Public Service Enterprise Group Incorporated (PSEG Companies) at 9-10; Xcel Energy Services, Inc. (XES) at 2-3.

EEI at 20-21; FirstEnergy Supplemental Comments at 2; XES at 2-3.

17. EEI argues that, to the extent there is some detail the Commission does not currently have, but wants to obtain, rather than requiring centralized service companies to restructure their accounting systems, the Commission could simply add items to FERC Form No. 60 to obtain that information.

EEI at 18.

18. Progress Energy contends that instituting reporting requirements that are more complicated and time-consuming runs counter to the spirit that prompted the repeal of PUHCA 1935.

Progress Energy at 3.

19. PSEG Companies maintain that the Commission has substantially underestimated the costs of complying with the NOPR and that it failed to balance the costs associated with implementing the NOPR against the benefits expected to result from implementation.

PSEG Companies state that the proposals in the NOPR, if adopted, would impose more regulatory burdens than was required under PUHCA 1935. They state this would be inconsistent with the intent of Congress. PSEG Companies express their concern that the increased cost of compliance will be much higher than the Commission has estimated and that the benefits of the rule are non-existent and

may be counter-productive.

PSEG Companies request the Commission to withdraw the requirement that the centralized service companies must adopt the USofA, or, at a minimum, modify the NOPR in such a manner that provides net public benefits.

PSEG Companies at 3.

Id.

at 6-7.

Id.

at 12.

20. XES claims that conversion to the new USofA proposed by the Commission would be expensive and time consuming, and is unnecessary because the current accounts and accounting systems comply with SEC's requirements and state regulations. Additionally, XES asserts that it does not foresee any additional benefit to federal and state regulatory agencies by conversion to the USofA proposed by the Commission.

XES at 3-4.

21. Southern Company Services and Southern Nuclear Operating Company (Southern) state that the accounting and work order systems now in place allow the public utility company receiving service company billings to report these expenses using the USofA. They state, further, that the Commission's proposal for the centralized service companies to use a modified USofA does nothing to enhance that process. They suggest that, if the Commission concludes there must be a conversion to its USofA, there be flexibility.

In their supplemental comments, Southern notes that the Commission receives detailed FERC Form No. 1 information from all public utility companies, which is where the service company charges are ultimately placed in the appropriate USofA classification.

Southern at 1.

Southern Supplemental Comments at 1.

22. Some commenters express their belief that compliance with existing reporting requirements, including GAAP and SEC requirements, along with the Sarbanes-Oxley and state regulatory requirements, will provide adequate information in sufficient detail to ensure transparency and facilitate review of centralized service company charges.

XES adds, further, that existing federal and state requirements ensure the accuracy of records and the adequacy of internal accounting controls.

As such, these commenters believe the Commission's proposal to adopt the proposed conversion to a USofA is unnecessary.

EEI at 17-19; Progress Energy at 2; PSEG Companies at 9-10; XES at 3-4.

XES at 3.

EEI at 23; XES at 3.

23. Conversely, APPA supports the Commission's effort to develop a comprehensive chart of accounts for centralized service companies. APPA believes that the Commission generally has done an admirable and workmanlike job of developing a comprehensive chart of accounts for centralized service companies. APPA states that such companies are likely to perform many operations and maintenance services for their public utility affiliates. The costs of these functions should be recorded and accounted for in the same way, regardless of exactly what entity performs them. APPA reports that some of its members that have had to deal with allocations of costs from centralized service companies to their public utility affiliates in the past have reported that accounting for such service company costs was often vague and opaque, recorded in accounts such as “Administrative and General.” According to APPA, these accounts could lead to improper allocation of such costs to utility customers. The new chart of accounts should be of material assistance in this regard. Indeed, APPA states that the Commission should make clear its intent to use the greater transparency achieved by the proposed service company accounting requirements to protect ratepayers from the pass-through of improper service company costs —

i.e.

, costs that would not be chargeable to ratepayers consistent with Commission policy if incurred at the operating company level.

APPA at 5.

24. NRECA shares APPA's comments and concerns, and urges the Commission to adopt regulations ensuring just and reasonable rates by prohibiting the pass-through of improper service company costs to jurisdictional public utilities.

NRECA Supplemental Comments at 2.

25. FMPA supports the NOPR and compliments the Commission on the proposed standards, accounting requirements, and new accounts for centralized service companies. FMPA states that the rule provides long-needed transparency and consistency for centralized service companies' accounting. FMPA is of the view that the current method is broken, and there would not have been a need for a staff technical conference on this topic if it were otherwise. FMPA states that the current accounting method undermines the Commission's ability to insure just and reasonable rates and, that without the proposed reforms, the problem will only get worse. FMPA points out that with consolidation and mergers likely to follow the PUHCA repeal, inadequacies in the current accounting systems will face increasing stress leading to consumer harm. FMPA adds that there is growing reliance on formula rates at the Commission that heightens the need for greater transparency and consistency which also aids in their ability to audit and intervene in rate cases. FMPA states that the new USofA should facilitate scrutiny of costs passed through to customers, particularly as they need proper functionalization of costs under formula rates. FMPA indicates that there are centralized service companies that they deal with and have extreme difficulty getting the information needed to see the transparency. FMPA indicates also that, when they do get access to the information, it is very time consuming to ferret out, purge and find the information needed because there is not consistency of accounting between utilities. FMPA cautions that the Commission should not be swayed by the GAAP argument. FMPA states that financial reporting under GAAP is oriented toward investors, and that it does not provide sufficient regulatory scrutiny to protect the wholesale and retail ratepayers or to prevent cross-subsidization. FMPA asks that the Commission not water down the NOPR because it would only undermine the transparency and consistency that is needed.

See

Technical Conference Tr. 111-115 (Mr. Steven Ruppel).

26. NARUC and the Wisconsin Commission state that service company costs are an important piece to the ratemaking responsibilities at the state regulatory level. They state that, typically, costs originating at the service company make up a large and increasing percentage of the operating expenses of the regulated utilities. They point out that, as affiliated companies, these transactions are not made on an arms-length basis and, therefore, require additional controls. Therefore, NARUC supports the Commission's effort in attempting to increase transparency in bringing uniformity of these costs.

See

Technical Conference Tr. 90 (Mr. Thomas Ferris).

Commission Determination

27. The Commission concludes that a structured USofA as proposed under new part 367 of the Commission's regulations is necessary to ensure consistency across the centralized service companies and, equally important, to ensure the Commission has the information necessary to carry out its obligations under PUHCA 2005, the Federal Power Act (FPA), and the

Natural Gas Act (NGA).

In reaching this conclusion, the Commission is mindful that one of Congress' goals in repealing PUHCA 1935 was to reduce the regulatory burden on holding companies. The Commission, nevertheless, finds that the absence of a structured USofA would impede the Commission's ability to carry out the new regulatory responsibilities imposed by Congress when it adopted PUHCA 2005. Without a structured USofA, the Commission would not have adequate information to be able to ensure just and reasonable jurisdictional rates, discern potential or actual cross-subsidization, or be able to approve cost allocations between holding company affiliates.

42 U.S.C. 16451

et seq.

; 16 U.S.C. 824

et seq.

; 15 U.S.C. 717

et seq.

28. Although GAAP and the SEC's accounting rules may be sufficient for some purposes, they alone are not sufficient for fulfilling the Commission's new regulatory responsibilities under PUHCA 2005. In order to carry out its regulatory responsibilities, the Commission needs accounting information that is more “granular,”

i.e.

, more detailed, than what is required under GAAP. For example, reporting a single figure for total operation and maintenance expense on an income statement would satisfy GAAP requirements. However, the Commission needs information, among other things, about how much was spent on operations compared to maintenance, how much was spent on transmission compared to distribution, and what one company spent on an activity compared to another for that same activity in order to ensure, for example, just and reasonable jurisdictional rates.

29. Although flexibility in accounting rules may have enabled the SEC to meet its regulatory responsibilities, such flexibility will not allow the Commission to accomplish its regulatory mandate to ensure just and reasonable rates. There are hundreds of entities subject to the Commission's jurisdiction. The only way the Commission can efficiently carry out this mandate is by requiring these entities to account for transactions in a structured and uniform manner. That is why the Commission adopted and still maintains USofAs for public utilities and licensees and for natural gas companies. A structured USofA for centralized service companies is an equally essential tool that the Commission needs to carry out its regulatory responsibilities.

30. Upon further consideration, however, the Commission finds that the USofA proposed in the NOPR for centralized service companies may include some requirements that, in retrospect, may not be needed. Therefore, consistent with the overall objective of not imposing unnecessarily burdensome regulatory requirements under PUHCA 2005, we are adopting the following modifications suggested by the commenters to the proposed USofA to reduce that burden, as discussed below.

2. Implementation Date

31. The NOPR proposed to require holding companies and service companies to implement the new accounting, records retention, and reporting requirements on January 1, 2007.

Comments

32. Several commenters argue that the January 1, 2007 implementation date does not allow sufficient time to implement the Final Rule.

They argue that compliance with the Final Rule, if adopted as proposed, would require time, man hours and company resources to implement software changes, train personnel, to update Sarbanes-Oxley controls, and to receive sign off from internal and external auditors. In addition, Progress Energy argues that reengineering of company processes, procedures and software, remapping of thousands of projects to new Commission accounts, and testing and auditing (internal and external) of revised systems would take many months to ensure error-free implementation.

The commenters suggest, therefore, that the Commission defer compliance with the Final Rule until January 1, 2008. According to commenters, this deferral also would provide time to issue a Final Rule and an order on rehearing. NARUC and other state commissions had no objections to extension of the implementation date as long as there was no gap between the SEC's regulations and implementation of the Commission's regulations.

EEI at 45-48; XES at 5; Southern at 2; Progress Energy at 12; National Grid USA (National Grid) at 14-15; NiSource Inc. (NiSource) Supplemental Comments at 3; FirstEnergy Supplemental Comments at 4; PHI Companies Supplemental Comments at 5-6.

Progress Energy at 12.

See

Technical Conference Tr. 97-98 (Mr. Thomas Ferris); Technical Conference Tr. 101 (Mr. Joseph Buckley); Technical Conference Tr. 109 (Mr. James Mitchell).

Commission Determination

33. The Commission agrees with the commenters, and will move the implementation date of this Final Rule from January 1, 2007 to January 1, 2008. As a result, the revised FERC Form No. 60 prescribed in this Final Rule will first be due on May 1, 2009 (reporting data for the 2008 reporting year).

This change will provide companies sufficient time to implement software changes, train personnel, update Sarbanes-Oxley controls, and receive sign off from internal and external auditors. The change in implementation date will reduce the burden and cost to service companies impacted by the Final Rule. Additionally, the Commission will extend the transition periods for holding companies and service companies to comply with the Commission's accounting and recordkeeping requirements.

The currently effective FERC Form No. 60 due on May 1, 2007 and May 1, 2008 will be the FERC Form No. 60 adopted in Order Nos. 667, 667-A and 667-B.

See Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005

, Order No. 667, 70 FR 75592 (December 20, 2005), FERC Stats. & Regs. ¶ 31,197 (2005),

order on reh'g

, Order No. 667-A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ¶ 31,213 (2006),

order on reh'g

, Order No. 667-B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ¶ 31,224 (2006).

In Order No. 667, the Commission established transition periods for holding companies formerly “registered” under PUHCA 1935 to comply with the Commission's record retention requirements, and for service companies in such holding company systems to comply with the Commission's accounting, records retention, and reporting requirements.

See

18 CFR 366.21(b), 366.22(a)(2), 366.22(b)(2) and 366.23(b).

3. FERC Form No. 60 Filing Deadline

34. In the NOPR, the Commission proposed to change the filing deadline for the FERC Form No. 60 from May 1 to April 18. The proposed April 18 filing date is consistent with the filing date for most of the Commission's other annual report forms that contain financial information.

Comments

35. EEI proposes that the Commission retain the current FERC Form No. 60 filing deadline of May 1 because companies have a number of financial reporting requirements with spring due dates affecting the same staff. EEI claims accelerating the filing date to April 18 would increase the cost of compliance, and increase company staffing needs.

Commission Determination

36. We will retain the current FERC Form No. 60 filing date of May 1. Retention of the May 1 date will minimize the burden on service companies that may also be responsible for filing FERC Form Nos. 1, 2 or 6 on behalf of regulated public utility companies and licensees, natural gas pipelines, or oil pipelines. The

Commission will also make submission software available to companies, allowing for electronic filing of the revised FERC Form No. 60 for the 2008 reporting year and subsequent reporting years, similar to the submission software used for electronic filing of Form Nos. 1, 2, 2-A, 3-Q, 6, and 6-Q.

We note that, contemporaneously with this Final Rule, we are issuing, in Docket No. RM06-25-000, a Final Rule providing for the electronic filing of the currently-effective FERC Form No. 60 for 2006 and 2007 reporting years, to be filed on May 1, 2007 and May 1, 2008, respectively.

See Electronic Filing of FERC Form No. 60

, Order No. 685, published elsewhere in this issue of the

Federal Register

, FERC Stats. & Regs. ¶ (2006).

4. Definitions

(a) “Direct cost” and “Indirect cost”

37. In the NOPR, the Commission proposed to define “direct cost” to include “the labor costs and expenses which can be identified through a work order system as being applicable to services performed for a single or group of associate and non-associate companies. Costs incidental to or related to a directly charged item must be classified as a direct cost.” “Indirect cost” was defined to include “the costs of a general overhead nature such as general services, housekeeping costs, and other support costs which cannot be separately identified to a single or group of associate and non-associate companies and, therefore, must be allocated. Indirect costs must be accumulated on a departmental basis.” These are the same definitions that were contained in the SEC's former USofA for service companies.

See

17 CFR part 256 (Uniform System of Accounts for Mutual Service Companies; Subsidiary Companies, Public Utility Holding Company Act of 1935).

Comments

38. Southern recommends redefining the terms “direct cost” and “indirect cost” because it believes the definitions of these terms in the NOPR require costs it views as direct costs to be recharacterized as indirect costs. Southern explains that billings for direct costs should include overhead costs, such as employee benefits, as an adder to those direct costs, which otherwise would be characterized as indirect costs based on the definition in the NOPR. Southern suggests the Commission define “direct cost” as “those costs which are applicable to services performed for a single client company. Costs incidental to, or related to, a directly charged item also should be classified as a direct cost.” Likewise, Southern suggests “indirect cost” be defined as “those costs which are not applicable to services performed for a single client company and which must be allocated.” Costs incidental to, or related to, indirect items should also be classified as an indirect cost.

Southern at 4; Southern Supplemental Comments at 2.

Commission Determination

39. We do not agree with Southern's assertion that costs such as employee benefit costs must be recharacterized as indirect costs. The definition for “direct cost” includes labor costs and expenses applicable to services performed for a single or group of associate and non-associate companies and any cost incremental to or related to a directly charged item. Based on that definition, employee labor costs that are applicable to a service performed for a single or group of companies are a “direct cost” together with the related employee benefit costs.

40. We also will not adopt Southern's proposal to define “direct cost” as those applicable to services performed for a single client company, and “indirect cost” as those not applicable to services performed for a single client company. We do not believe Southern's proposed definition would be workable in all situations. For example, a centralized service company could provide engineering services for a construction project that is jointly owned by two associated public utilities. In that instance, the labor costs of providing the engineering services are a direct cost of the project but the services are provided for more than a single client company. Therefore, we will adopt the definitions set forth in the NOPR.

(b) “Work Order System”

41. In the NOPR, the Commission proposed to adopt the definition and requirements of “work order system” from the SEC's former USofA for service companies. The NOPR, therefore, defined “work order system” as a system for the accumulation of service company costs on a job, project, or functional basis. It includes schedules and worksheets used to account for charges billed to single and groups of associate and non-associate companies. The requirements of a “work order system,” in turn, were provided as a General Instruction in § 367.30. This instruction provides that a service company must maintain a detailed classification of service costs that permits costs to be identified with the functional processes of the associate companies served and also various other accounting and cost allocation records needed to support work order charges.

Comments

42. Commenters suggest that the Commission clarify and redefine the term “work order system” to incorporate a broader use of the term.

XES believes the focus of the Commission, as it relates to a work order system, should be on complete and accurate reporting to enable it, state commissions, and other interested persons to monitor service company activities. XES states that variation in work order procedures should not affect the accuracy of reporting, and holding company systems should have the flexibility to rely on the systems that they have previously developed and implemented.

EEI Supplemental Comments at 15; FirstEnergy Supplemental Comments at 4; XES Supplemental Comments at 2.

43. EEI notes that, at the technical conference, industry panelists suggested that work order systems could include the use of a variety of systems.

EEI recommends that the Commission replace the current definition of “work order system” with the following broader definition: “Work order system means a system for the accumulation of service company costs on a job, project, or functional basis. It includes any method used to account clearly for charges billed to single and groups of associate and non-associate companies, including, but not limited to, use of actual work orders, electronic notifications, bills, ledger entries, or activity-based accounting software systems.”

EEI encourages the Commission to reflect this broad meaning of the term “work order system” throughout this Final Rule, by conforming the regulatory text and preamble to this broadly defined concept. To do this, EEI states the following sections should be revised to avoid implying that work orders are required: §§ 367.24(a), 367.27, 367.28, 367.58(a), 367.4571, 367.4581, 367.4591, 367.50(d), 367.52(c), 367.1070(b), 367.1080(c), 367.1520, 367.1850, and 367.9240(d); and Records Retention Requirements Nos. 13, 15, 16, 17, and 19.

EEI Supplemental Comments at 15.

Id.

at 16.

44. Commenters also argue that, while the SEC previously had regulations on work order systems, the SEC never formally required formal work order systems and allowed significant flexibility in how to account for inter-affiliate transactions.

They state that, for the Commission to impose a formal work order system, centralized service companies would incur substantial

costs to update accounting systems and train workers and their companies would decrease operating efficiency would suffer because routine and recurring work would now need to be reorganized around specific work orders.

National Grid also explains that its current practice accomplishes all of the goals sought by the Commission's proposed work order system.

Accordingly, the commenters believe the Commission should not require the use of a formal work order system, but should allow centralized service companies to continue to use their prior SEC-approved practices for tracking and assigning service costs.

EEI at 40; National Grid at 4; XES at 4.

EEI at 41; National Grid at 5-6; XES at 4.

National Grid at 5.

45. NARUC states that if the Commission determines that a formal work order system would be too burdensome, an alternative would be for the Commission to use the proposed definition and describe the minimum requirements of a work order system. NARUC adds that each centralized service company would then be required to file information describing its system and how it complies with the Commission's definition and minimum requirements. NARUC suggests minimum requirements could include a written agreement on the types of work that will be performed by the service company for the utility, identification of the work to be completed by functional area, and the ability to track the costs to the services provided. NARUC states the work order system should separately break down costs related to one-time/nonrecurring expenditures. Further, if the service company incurs direct costs relating to construction work for a utility, NARUC believes the service company should have a work order system identical to the one that is required under parts 101 and 201 of the Commission's regulations.

NARUC Supplemental Comments at 6;

codified at

18 CFR parts 101 and 201.

Commission Determination

46. While the Commission would prefer centralized service companies to utilize formal work order systems, the Commission also recognizes that the goals and purposes of a formal work order system can be met through other means, as several commenters suggest. The Commission also recognizes that there are increased costs associated with implementing a formal work order system. Accordingly, the Commission will replace the term “work order system” with “cost accumulation system,” and will modify the instructions in § 367.30 so that the instructions do not mandate centralized service companies to implement a formal work order system. The Commission, further, will allow centralized service companies to use a variety of cost accumulation systems, provided any cost accumulation system adopted meets the requirements provided in the definition for “cost accumulation system” and the requirements contained in § 367.30. Also, we will modify the regulations to remove language that suggests a formal or uniform work order system is required.

47. The definition for “cost accumulation system” in § 367.1(a)(12) will be

“a system for the accumulation of service company costs on a job, project, or functional basis. It includes schedules and worksheets used to account for charges billed to single and groups of associate and non-associate companies. It can be a variety of systems, including but not limited to, a work order system or an activity-based accounting software system.”

While the instructions in § 367.30 will remain the same, we will revise all references to a work order system in the regulations.

48. In making the changes discussed above, the Commission affords centralized service companies flexibility in the type of cost accumulation system they use to reflect their costs, and reduces any unnecessary burden that may be associated with changing their current system for accounting for these costs to a formal “work order system.”

5. Instructions

49. In the NOPR, the Commission proposed to adopt four categories of instructions: General Instructions, Service Company Property Instructions, Operating Expense Instructions, and Special Instructions. The proposed instructions included most of the instructions contained in parts 101 and 201 of the Commission's regulations modified to meet the needs of centralized service companies and certain additional instructions contained in the SEC's USofA relevant to centralized service companies. The specific comments received on these instructions are discussed below.

(a) Section 367.2—Companies for Which This System of Accounts Is Prescribed

50. The Commission proposed that the USofA apply to any centralized service company operating, or organized specifically to operate, within a holding company system for the purpose of providing non-power services to any public utility in the same holding company system. However, we also proposed to continue the existing SEC exemptions from the USofA, including: Special-purpose service companies, electric or gas utility companies, companies primarily engaged in the production of goods, and service companies that provide services exclusively to a local gas distribution company.

Comments

51. NARUC states that § 367.2 does not adequately ensure the existence of proper controls in the event of certain possible organization changes. For example, NARUC explains that, in the event that a service company is eliminated, the utility may transfer relevant service company functions to the holding company, a utility within the holding company, or another company within the holding company system. NARUC claims there is a risk that such transfers will result in the elimination of needed accounting controls relating to these functions, because under the proposed rules holding companies and special purpose companies would not be required to comply with the new USofA. NARUC argues that, in order to assure all service companies that provide goods and services to utilities are subject to proper controls, § 367.2 should be revised to (1) eliminate the special purpose service company exemption; (2) clarify that the new USofA applies to the entity that performs service company functions, even if it is a holding company or a company providing electric or gas utility services; and (3) prohibit service company functions from being transferred to a utility in the holding company system. NARUC states that, in the absence of such modifications the purpose of the Commission's proposed regulations may be thwarted.

NARUC at 3-5.

52. Certain commenters, on the other hand, argue that the Commission should maintain its requirement that the new recordkeeping and reporting requirements apply to centralized service companies only.

EEI states that parent holding companies and their subsidiaries may own a variety of assets and undertake a variety of activities. Thus, EEI argues, if the Commission were to extend the requirements beyond centralized service companies, the Commission would need to address a variety of potential scenarios in order to define the circumstances in which the requirements would apply to other companies—which would complicate

and increase the accounting and recordkeeping burden.

EEI also argues that the Commission should not adopt requests to impose constraints on whether and how holding companies establish service companies to provide services to their subsidiaries. EEI states that neither the FPA nor PUHCA 2005 gives the Commission authority to regulate holding company structure and operations in such a manner. Additionally, EEI urges the Commission to adopt a new definition for centralized service companies that would limit application of the Final Rule's accounting and reporting requirements to service companies, and to preclude holding companies from being classified as service companies. EEI also suggests the Commission specify that only parts 367 and 368 apply to service companies.

EEI at 38; EEI Supplemental Comments at 19; CMS Energy Corporation and Consumers Energy Company (CMS Energy) Supplemental Comments at 3.

EEI Supplemental Comments at 21-22.

EEI Supplemental Comments at 20.

53. For its part, CMS Energy argues that the Commission already has put into place the ability to monitor and respond to any concentration of utility functions within special purpose companies through the FERC-65

and FERC-61

reporting requirements established in Order No. 667.

CMS Energy states these reporting requirements require identification of special purpose service companies and annual reporting on the functions of each special purpose company. CMS Energy adds that special purpose service companies have a simpler, smaller, more focused nature and the FERC-65 and FERC-61 reporting requirements are well suited to monitor them, without imposing the USofA and FERC Form No. 60 requirements.

Holding companies that meet the definition of a holding company as defined by § 366.1 must notify the Commission of this status by submitting FERC-65.

See

18 CFR366.4(a).

Every service company in a holding company system, including a special-purpose company, which does not file a FERC Form No. 60 must instead file a narrative description of the service company's function during the prior calendar year.

See

18 CFR 366.23(a)(2).

Supra

note 5.

CMS Energy Supplemental Comments at 8.

Commission Determination

54. We have decided that the USofA we are adopting herein will apply to centralized service companies only, consistent with Order No. 667.

We agree with EEI that extending the requirements beyond centralized service companies would be a difficult definitional exercise that could lead to unnecessary regulatory uncertainty. While the Commission shares NARUC's concerns that holding company systems could potentially circumvent the Commission's accounting and reporting requirements for centralized service companies, the Commission does not believe NARUC's recommendations are the best way to address the potential issue. At this time it is preferable to monitor developments in the industry and assess whether the instructions we are adopting lead to circumvention of our rules. If centralized service companies begin to decentralize their service functions in an effort to circumvent the Commission's accounting and reporting regulations, the Commission will take the necessary actions to ensure the Commission has the information necessary to carryout its obligations under PUCHA 2005, the FPA, and the NGA. The Commission also will not impose restrictions on holding company systems which prevent centralized service company functions from being transferred to other companies in the same holding company system. Such restrictions are outside the Commission's statutory authority under the PUCHA 2005, the FPA, and the NGA.

See

Order No. 667 at P 38.

55. We also clarify that holding companies are not subject to the rules of this USofA, and we will amend the instructions to § 367.2 to provide for this exemption. Further, we will adopt in § 367.1(a) of the regulations a definition for the term “centralized service company” based on our discussions in Order No. 667.

See

Order No. 667 at P 37.

(b) Section 367.8—Extraordinary Items

56. In the NOPR, we proposed that centralized service companies must obtain Commission approval to record all extraordinary items. Extraordinary items are items related to the effects of events and transactions that have occurred during the current period and that are of an unusual nature and infrequent occurrence.

Comments

57. EEI and Progress Energy disagree with the Commission's proposed requirement that Commission approval is required for an item to be accounted for as extraordinary.

They state that this requirement is unnecessary and burdensome. Further, they contend, it should be sufficient for centralized service companies to follow the GAAP requirement for reporting extraordinary items. Progress Energy also argues that, to the extent the Commission does not approve an item that is a required disclosure for SEC reporting, the Commission runs the risk of promoting inconsistent treatment of extraordinary items across holding company systems.

Progress Energy adds that such a requirement would be an unnecessary burden on Commission staff to perform the reviews.

EEI suggests that the Commission should require centralized service companies to provide a footnote describing any amounts included in Accounts 434, Extraordinary income and Account 435, Extraordinary deductions.

EEI at 32; Progress Energy at 10.

Progress Energy at 10.

Id.

EEI at 32.

Commission Determination

58. Upon further consideration, we agree that requiring Commission approval for any item to be recognized as extraordinary may impose an unnecessary burden on centralized service companies. EEI's suggested alternative strikes a balance between the need for disclosure of such items and the desire to reduce unnecessary regulatory burden. Accordingly, the Commission will not require centralized service companies to seek Commission approval for all extraordinary items. Rather, as suggested by EEI, the Commission will require centralized service companies to include disclosure in the Notes to the Financial Statements of the FERC Form No. 60 identifying and describing any amounts included in Account 434, Extraordinary income, and Account 435, Extraordinary deductions. Accordingly, we will add an instruction to Schedule XIV, Notes to Financial Statements, to require disclosure of extraordinary items.

59. Proposed § 367.10 states that, when preparing a financial statement required by the Commission, if it is known that a transaction has occurred that affects the accounts but the amount involved in the transaction and the effect upon the accounts cannot be determined with absolute accuracy, the amount must be estimated and the estimated amount included in the proper accounts.

Comments

60. Southern questions the purpose of § 367.10 because its financial statements are audited and include all estimable liabilities in accordance with GAAP.

Southern at 5.

Commission Determination

61. Southern's comments are misplaced. The Commission does not at this time require the centralized service company financial statements,

contained in the FERC Form No. 60, to be audited by independent public accountants. The purpose of § 367.10 is simply to instruct a centralized service company, in preparing such statements, that it must use estimates if a transaction occurs that affects a company's accounts even if the amount involved in the transaction and its effect upon the accounts cannot be determined with absolute accuracy and the estimates have not been audited.

(d) Section 367.20(b)—Depreciation Accounting

62. The NOPR at § 367.20(b) required service companies to support the estimated useful service lives of depreciable property with engineering, economic, or other depreciation studies.

Comments

63. Southern recommends the Commission eliminate § 367.20(b) or use a more restrictive definition of when a study is needed. Southern states that a service company would not typically need “engineering, economic, or other depreciation studies” to support the useful lives of depreciable property, which consists primarily of computer equipment, furniture, and other fixtures.

Southern at 5.

Commission Determination

64. Service companies own a variety of assets. Some centralized service companies primarily own office furniture and computers while others own more significant assets such as office buildings.

Accordingly, some centralized service companies may need to conduct a more sophisticated engineering, economic, or other type of depreciation study than would others based on the complexity and characteristic of the depreciable assets that they own. The intent of the instruction is to require service lives of depreciable assets to be supported by evidence and analysis. It is not intended to require unnecessarily extensive mortality studies to be conducted when the cost of doing so cannot be supported by the improved accuracy in depreciation estimates. The Commission, therefore, will revise the instructions in § 367.20(b) to state that the “estimated useful service lives of depreciable property must be supported by objective evidence and analysis, including where appropriate engineering, economic, or other depreciation studies.”

See

e.g.

, American Electric Power Service Company's 2005 FERC Form No. 60.

(e) Section 367.23—Transactions With Non-Associate Companies

65. Proposed § 367.23 was carried over from the SEC's former USofA and requires profits and losses on transactions with non-associate companies to be recorded in Account 458.4, Excess or deficiency on servicing non-associate utility companies (§ 367.4584), and Account 459.4, Excess or deficiency on servicing non-associate non-utility companies (§ 367.4594), as appropriate. It also requires centralized service companies to use net profits received outside of the holding company system to reduce the cost of providing service to associate companies within the holding company system.

Comments

66. NARUC supports the provisions; however, it explains that, if a service provided outside the corporate umbrella becomes profitable, a utility might form a new affiliate to provide the service so that profits associated with that service will no longer flow back to regulated operations.

In that circumstance, it points out, the excess profits that would otherwise be available to reduce the costs of associate companies may decline. Therefore, NARUC suggests that services should not be transferred to a new affiliate if, and when, they become profitable. Additionally, NARUC suggests the Final Rule could require the centralized service company to report yearly which services it provides to outside entities, including an explanation of why any services were dropped from one year to the next.

NARUC at 8.

Commission Determination

67. It is beyond the scope of the Commission's authority under PUHCA 2005 to set regulations which prohibit the transfer of services performed from one associate company in a holding company system to another associate company. Therefore, we will not adopt NARUC's suggestion to prohibit services provided outside the corporate umbrella by a service company from being transferred to another associate company. Nor will we adopt the suggestion that service companies provide a yearly report on changes to services provided. A separate report is unnecessary because the Commission and others will be able to monitor such transfers because they will be reported annually either through FERC Form No. 60 or in FERC-61.

Pursuant to Order No. 667-A, service companies that do not file the FERC Form No. 60 must file annually a narrative description of their functions, as identified in FERC-61.

See

18 CFR 366.23(a)(2).

(f) Section 367.24—Construction and Service Contracts for Other Companies

68. Proposed § 367.24 was carried over from the SEC's former USofA for service companies. Section 367.24(b) requires centralized service companies to exclude from their accounting system the cost of materials, construction payrolls, outside services, and other expenses directly attributable to the construction of physical property for other companies, and requires that these costs must be charged directly by the vendor or supplier to the construction project. Additionally, § 367.24(c) requires the cost of goods procured (as opposed to services) to be excluded from the accounting system of the service company and charged directly by the vendor or supplier to the associate company concerned.

Comments

69. Southern states it does not understand the purpose behind § 367.24(b) and (c), and recommends their elimination as it requires the exclusion of certain direct costs and cost of goods procured from the accounting system of the service company.

Southern explains that its service companies contract for such expenses on behalf of its affiliate companies, as well as incur costs directly that are related to construction projects, that are then billed to a utility or other affiliate company. EEI requests the Commission clarify to whom § 367.24(b) applies.

Southern at 5.

EEI at 25.

70. National Grid believes § 367.24 requires that expenses associated with the construction services performed by service company employees will not be accounted for separately but treated as part of the capital investment in assets being constructed. This will cause, in National Grid's view, an inconsistency with proposals by the Commission to create incentives for transmission construction by allowing expense treatment of pre-commercial costs incurred in relation to new transmission builds.

National Grid at 7-9.

Commission Determination

71. We agree with Southern that the purpose and intent of § 367.24(b) and (c) are somewhat unclear. We believe the ambiguity is due in part to the fact that § 367.24(a) does not prescribe specific accounts for recording costs incurred in connection with construction or service contracts under which the service company undertakes projects to

construct physical property for others. Therefore, we will amend § 367.24(a) to require that costs incurred for this purpose, as well as any other purpose not provided for elsewhere in the expense accounts, are to be charged to new Account 412, Costs and expenses of construction or other services, adopted in this Final Rule. We also will eliminate the ambiguous language contained in § 367.24(b) and (c).

(g) Section 367.25—Determination of Service Cost

72. In the NOPR, the Commission proposed to adopt § 367.25 to state that the total amounts included in the expense accounts during any period plus the amount that appropriately may be added as compensation for the use of capital, if paid, constitute cost during that period.

Comments

73. NARUC requests that the Commission clarify the meaning of the phrase “if paid” in § 367.25 because the language renders the meaning of the section unclear.

NARUC at 13-14.

Commission Determination

74. The Commission agrees that the phrase “if paid” in § 367.25 is unclear. This instruction is intended to state that the cost of services provided equals the total amounts included in the expense accounts plus an appropriate amount for the compensation for the use of capital. Furthermore, the meaning of compensation for the use of capital is explained in § 367.29, Compensation for use of capital. Therefore, the Commission finds that the phrase “if paid” is unnecessary and will modify § 367.25 to remove the phrase.

(h) Section 367.27—Billing Procedures

75. Proposed § 367.27 requires service companies to bill monthly for their services and to include sufficient information in such billings to permit any company to properly classify the amount billed according to the accounting system prescribed by the regulatory authority of such company. This section was carried over from the SEC's former USofA for service companies.

Comments

76. Several commenters disagree with the Commission's proposed regulation in § 367.27 on monthly billing procedures.

EEI and National Grid argue that generating paper invoices for billings of services rendered to associate utility companies on a monthly basis is largely unnecessary as the specific charges and their accounting are obtainable through the holding company's accounting system.

Southern also argues that it does not currently provide the level of detail required in § 367.27 to its affiliate companies but that the information it does provide is sufficient in detail.

EEI at 41-42; National Grid at 9-10; Southern at 5.

EEI at 41, National Grid at 10.

Southern at 5.

77. EEI and FirstEnergy encourage the Commission to clarify in the regulatory text and preamble to the Final Rule that service companies can bill their clients using a variety of mechanisms as long as the service company clients are receiving accurate, timely information about the work being done for them and the cost of the work.

FirstEnergy notes that it has a fully integrated accounting system which provides full access to the information contained within the system as it relates to their company. Therefore, FirstEnergy argues that there is no need for a formal bill due to the available technology.

EEI Supplemental Comments at 18, FirstEnergy Supplemental Comments at 4.

FirstEnergy Supplemental Comments at 4.

78. With respect to billing of services rendered to non-associated utility companies, these commenters state service companies often provide a

de minimis

amount of services.

Thus, according to National Grid, it makes little business sense to undertake the costs of establishing a detailed monthly invoicing for non-associated companies for services rendered.

The commenters add that those arrangements are largely negotiated on an arms-length basis without reference to specific costs and would potentially provide sensitive competitive information that is not required by any contract between the service company and the unrelated party.

Consequently, they contend, the Commission's mandated monthly invoice scheme would force the service company into a cost of service business, even for non-jurisdictional services.

EEI at 42; National Grid at 10; Southern at 5.

National Grid at 10.

EEI at 42; National Grid at 10; Southern at 5.

EEI at 42; National Grid at 10.

Commission Determination

79. The commenters misunderstood the purpose of this section. It was not intended to require the use of paper invoices as some commenters concluded. Rather, the intent of this instruction is to require centralized service companies to charge their associate public-utility companies for services provided each month, together with enough information to allow these companies to properly classify the amount in the accounts prescribed by their regulatory authorities. However, in order to eliminate any confusion, we will remove the reference to “invoices” in § 367.27, and clarify it is only intended for billings to associate public-utility companies.

(i) Section 367.51(a)(17)—Allowance for Funds Used During Construction

80. Proposed § 367.51 provided instructions on the cost of construction properly included in the service company property accounts. These instructions were taken from the Electric and Gas Plant Instructions in parts 101 and 201 of the Commission's regulations, and include an allowance for funds used during construction (AFUDC).

Comments

81. EEI believes that AFUDC, as described in § 367.51(a)(17), only has relevance to jurisdictional entities that have been granted this provision by regulators.

For service companies, EEI contends, a more appropriate approach would be to calculate capitalized interest based on GAAP. EEI recommends that the section on AFUDC be removed from the proposed rule and that service companies be allowed to capitalize interest based on GAAP.

EEI at 25.

Id.

Commission Determination

82. Based on a review of the record in this proceeding, the construction projects for service company property do not appear to be large and the related interest charges will be relatively insignificant. In such circumstances, the Commission agrees the use of the proposed AFUDC formula would be unnecessarily complex. Therefore, the Commission will modify § 367.51(a)(17) to allow centralized service companies to capitalize interest in accordance with GAAP.

(j) Section 367.53—Service Company Property Purchased or Sold

83. In § 367.53, we proposed to modify Electric and Gas Plant Instructions No. 5 in parts 101 and 201 of the Commission's regulations to require centralized service company property to be recorded at the cost of acquisition rather than its original cost. Section § 367.53 also requires centralized service companies to file journal entries with the Commission when they acquire property at a purchase price of $10 million or more

that has been previously devoted to public service.

This filing requirement was intended to provide the Commission and others the opportunity to monitor transactions involving property previously devoted to public service.

The $10 million threshold is consistent with the threshold for certain transactions subject to section 203 of the FPA, as amended by section 1289 of EPAct 2005.

See

Order No. 669, 71 FR 1348 (Jan. 6, 2006), FERC Stats. & Regs. ¶ 31,200 (2005).

Comments

84. NARUC states that the regulations on service company property purchased or sold could be used as a vehicle to inflate rate base.

For example, it posits, a service company may have bought an asset at a premium over original cost to the party that previously owned it and recorded the asset on the service company's books at the total acquisition cost, after which a public utility may have purchased the asset from the service company. To avoid such problems, NARUC suggests, the new USofA should require that any asset purchased by a service company not be transferred at an amount higher than the original purchase price or the remaining original cost, whichever is lower. Specifically, NARUC suggests that the following language (italicized below) should be incorporated into § 367.53(e), Service company property purchased or sold:

NARUC at 6.

In connection with the acquisition of property previously devoted to service company operations or acquired from an associate company, the service company must procure, if possible, all existing records relating to the property acquired or related certified copies, and must preserve the records in conformity with regulations or practices governing the preservation of records of its own construction.

If the property was previously devoted to utility service, the service company must preserve the original cost of the property in the records of the service company.

Id.

at 6-7.

85. NARUC also states that, in order for state commissions to monitor the acquisition of property from affiliates, a copy of the journal entries also should be filed with the relevant state commissions and suggests the following language changes (stricken language in brackets or new language italicized below) to incorporate this concept.

(c) Unless otherwise authorized by the Commission, all service company property acquired from an affiliate company must be at its book value. Additionally, if property is acquired that is in excess of $10 million and has been previously devoted to public service [at a price above book value], the service company must file with the Commission the proposed journal entries associated with the acquisition within six months from the date of acquisition of the property.

In addition, a copy of the proposed journal entries filed with the Commission must be sent to the state regulatory commissions having jurisdiction in the states in which associated utility companies provide utility service.

NARUC at 11-12.

Commission Determination

86. The Commission will not adopt NARUC's proposed language changes to § 367.53. The regulations which are already in place for public utilities and licensees, and natural gas companies adequately prevent rate base from being artificially inflated. The Commission's regulations in parts 101 and 201 require all electric and gas plant purchased by a public utility or a natural gas company to be recorded at its original cost and the related journal entries must be filed with the Commission.

Further, proposed § 367.53(c) requires that property acquired from affiliates must be at book value and journal entries must be filed with the Commission for purchases of property previously devoted to public service in excess of $10 million. Therefore, NARUC's proposed language is not necessary, nor do we believe it is necessary for the Commission to require copies of journal entries to be filed with State commissions. All filings of this nature are docketed by the Commission and can be viewed electronically by all interested parties. Accordingly, state commissions will be able to monitor the acquisition of property from affiliates without imposing an additional reporting burden on service companies. We also note that our determination here is consistent with the filing requirements applied to public utilities, licensees, and natural gas companies for similar transactions under the Commission's regulations in parts 101 and 201.

See, e.g.

, 18 CFR part 101, Account No. 102.

(k) Section 367.54—Expenditures on Leased Property

87. Proposed § 367.54 requires the cost of improvements made to leased property to be used for more than one year to be charged to the appropriate service company property account. It also requires that amounts charged to service company property be amortized to Account 404, Amortization of limited-term service property, over the lease term if the service life of the improvement is terminable by the action of the lease. Otherwise, the improvement is subject to depreciation practices normally followed for amounts recorded in the account to which the improvement was charged. The forgoing requirements are essentially the same requirements for public utilities, licensees and natural gas companies for leasehold improvements in Electric and Gas Plant Instructions No. 6 of parts 101 and 201 of the Commission's regulations.

Comments

88. Southern notes that GAAP requires that the life of a leasehold improvement be co-terminus with the lease; thus, there would not be a leasehold improvement whose “service life is not terminated by action of the lease but by depreciation proper.”

By this section's definition, according to the company, all leasehold improvement amortization would have to be accounted for as “amortization of limited term property.” Southern asks what value this information is to the Commission.

Southern at 5.

Commission Determination

89. This instruction provides important guidance on how the costs of leasehold improvements are to be recorded and depreciated or amortized under the USofA. We, therefore, will retain this instruction. Further, we do not believe this instruction prohibits a centralized service company from following GAAP as it relates to leasehold improvements.

(l) Section 367.59—Additions and Retirements of Property

90. Proposed § 367.59 requires centralized service companies to adopt and maintain a list of retirement units. The list forms the basis for determining whether the cost of property-related work should be capitalized or charged to expense. In general, if the work involves adding or replacing an item of property appearing on the list, the cost of the work is capitalized. If the work involves adding or replacing an item of property that is not on the list and, therefore, constitutes a minor item of property, the cost of the work is charged to expense.

Comments

91. Southern states it does not believe that retirement units are applicable to service company property. Southern states that each service company purchase is a discrete unit of property and service companies would not be able to maintain a written property units

listing for use in accounting for additions and retirements of property.

Southern at 5.

Commission Determination

92. We do not agree with Southern that retirement units are not applicable to service company property. Establishing a retirement unit is necessary to determine whether property-related expenditures should be capitalized or expensed. It is the same requirement that is followed by public utilities and licensees and by natural gas companies under parts 101 and 201 of the Commission's regulations. We see no reason service companies should not follow the same practice because they have the same assets that an electric or gas company would have if the service company did not exist. Therefore, service companies should maintain property unit listings.

(m) Sections 367.103-.104—Current and Deferred Income Taxes

93. Proposed §§ 367.103-.104 contain special accounting instructions for recognizing income tax expense. Among other things, they require the accruals for income taxes to be apportioned among service company departments and other income and deductions. These requirements were carried over from the Special Instructions for the current and deferred tax expense accounts in parts 101 and 201 of the Commission's regulations.

Comments

94. EEI and Progress Energy recommend that there be no requirement to calculate or allocate taxes on a department level because income taxes are generally computed at a legal entity level, not to individual departments.

Progress Energy notes that service companies are not income-producing; rather, they are cost centers required to bill all of their expenses at cost and their income statements net to zero. The only income taxes that are computed for service companies are due to timing differences between GAAP and tax accounting, which, according to Progress Energy, cannot, in any meaningful way, be associated with individual departments. Therefore, Progress Energy states it does not have actual income tax accruals for its individual service company departments and could not meaningfully apportion the limited timing-related income tax accruals to the individual departments.

EEI at 39; Progress Energy at 8-9.

Progress Energy at 9.

Commission Determination

95. Upon further consideration, the Commission agrees that it is not practical or necessary for centralized service companies to calculate income taxes for individual departments. Therefore, the regulations will be revised to eliminate this requirement.

(n) Section 367.23—Transactions With Non-Associate Companies; § 367.25—Determination of Service Cost; § 367.27—Billing Procedures; § 367.28—Methods of Allocation; § 367.29—Compensation for Use of Capital

96. The proposed sections of the Commission's regulations listed above specify rules or standards that must be applied in accounting for certain transactions or events. The rules are fairly broad in their application and were carried over from the SEC's USofA for service companies.

97. More specifically, § 367.23 requires that the excess or deficiencies in providing services to non-associated companies to be recorded in Account 458.4, and that the net excess be used to reduce charges to associate companies. Section 367.25 states that a service must be deemed at cost and the total amounts included in the expense accounts during any period plus the amount that appropriately may be added as compensation for the use of capital constitutes cost during that period. Section 367.27 provides that charges for services to associate public-utility companies be made monthly with sufficient information and in sufficient detail to permit such company, where applicable, to identify and classify the charge in terms of the system of accounts prescribed by the regulatory authorities to which it is subject. Section 367.28 requires that indirect costs and compensation for use of capital must be allocated to projects in accordance with the service company's applicable and currently effective methods of allocation. Section 367.29 states that interest on borrowed capital and compensation for the use of capital must represent a reasonable return on the amount of capital reasonably necessary for the performance of services or construction work for associate companies. It also requires that the amount of compensation be separately stated on each billing to associate companies and an annual statement to support the amount of compensation for the use of capital billed for the previous 12 months be supplied to each associate company at the end of the calendar year.

Comments

98. EEI argues that the proposed rule goes beyond accounting regulations and adopts cost allocation and billing practice principles in the definition of “indirect cost” and in §§ 367.23, 367.25, 367.27, 367.28, and 367.29.

EEI states these cost allocation and billing principles should be made applicable only in the context of service company cost allocations the Commission is asked to review under section 1275 of PUHCA 2005.

EEI at 39.

Section 1275 of PUHCA 2005 provides that in the case of non-power goods or administrative or management services provided by an associate company organized specifically for the purpose of providing such goods or services to any public utility in the same holding company system, at the election of the system or a State commission having jurisdiction over the public utility, the Commission, must review and authorize the allocation of costs for those goods or services to the extent relevant to that associate company.

See

42 U.S.C. 16462.

Commission Determination

99. The Commission disagrees with EEI's assertion that the matters addressed in these sections of the regulations are only applicable in the context of cost allocation reviews under section 1275 of PUHCA 2005. Costs are incurred continually and on an on-going basis by centralized service companies and these costs must be accounted for and eventually reported to the Commission in the FERC Form No. 60. The noted regulations provide important guidance to centralized service companies as to how the items covered by those regulations should be accounted for as the transactions or events occur. For example, § 367.23 requires excesses or deficiencies in providing services to non-associate companies to be recorded in Account 458.4, and § 367.25 provides that “cost” includes reasonable compensation for the use of capital. The guidance that these instructions provide promotes uniformity in accounting practices.

100. As it relates to the portions of these sections which relate to cost allocation and billing requirements, we note that such regulations are necessary to carry out the Commission's obligations and duties under PUCHA 2005, the FPA and the NGA. These instructions assist the Commission in ensuring just and reasonable jurisdictional rates, discerning potential or actual cross-subsidization, and approving cost allocations between holding company affiliates. Therefore, these instructions are needed beyond the review required under section 1275 of PUCHA 2005 and are adopted as proposed.

6. Balance Sheet Accounts

101. In the NOPR, the Commission proposed to adopt in the new USofA for centralized service companies many, but not all, of the balance sheet accounts contained in parts 101 and 201 of the Commission's regulations, as well as the primary property Accounts 301 (§ 367.3010), 303 (§ 367.3030) and 389 to 399.1 (§§ 367.3890 to 367.3991).

Comments

102. EEI suggests that the Commission add the following balance sheet accounts to part 367 subpart F:

Account 106—Completed construction not classified

Account 182.3—Other regulatory assets

Account 189—Unamortized loss on reacquired debt

Account 228.2—Accumulated provision for injuries and damages

Account 228.3—Accumulated provision for pensions and benefits

Account 254—Other regulatory liabilities

EEI at 26.

103. These accounts were not included in the SEC's Uniform System of Accounts.

However, a review of 2005 FERC Form No. 60s indicates that some companies are using these accounts.

17 CFR part 256.

See, e.g.

, Schedule I Comparative Balance Sheet contained in 2005 FERC Form No. 60 of American Electric Power Service Corporation, E. ON U.S. Services INC, PHI Service Company, and Progress Energy Service Company, LLC.

104. In addition, EEI and Southern suggest that the Commission make improvements to Account 146, Accounts receivable from associate companies, and Account 123, Investment in associate companies.

EEI argues that the requirement to classify long-term receivables as investments in associate companies is contrary to GAAP, and recommends elimination of this requirement.

Southern asserts that, on occasion, operating companies do not have to submit payment immediately. The company argues that the delay in payment could exceed 12 months, which, according to Southern, would be appropriately classified as long-term receivables and not as investments in associate companies.

EEI at 26; Southern at 6.

EEI at 26.

Southern at 6.

105. NARUC asks that the Commission clarify the meaning of “common expenditures” in § 367.1070, Construction work in progress, because, in its opinion, the proposed language renders the section unclear.

NARUC also believes proposed § 367.1070 includes language that may not be appropriate for a service company doing work for more than an associate public utility company. Accordingly, it requests that the Commission clarify the language (italicized below) in § 367.1070 as follows:

NARUC at 14.

(b) Work orders must be cleared from this account as soon as practicable after completion of the job. Further, if a project is designed to consist of two or more units that may be placed in service at different dates,

any expenditures that are common to and that will be used in the operation of the project as a whole must be included in service company property upon the completion and the readiness for service of the first unit...

NARUC at 14.

106. NiSource states that the definitions of proposed Accounts 233, Notes payable to associate companies (§ 367.2330) and 234, Accounts payable to associate companies (§ 367.2340) appear to be identical. The language of the definitions, it suggests, should be clarified to indicate that Account 233 applies to notes payable, whereas Account 234 applies to accounts payable.

NiSource at 3.

Commission Determination

107. EEI did not explain in its comments why it suggests that the Commission add the recommended accounts. However, our review of a number of the FERC Form No. 60s filed with the Commission for calendar year 2005 indicates that some of the recommended accounts are already being used by service companies.

For other recommended accounts it appears reasonably possible that service companies either already have or could enter into transactions in the future requiring use of those accounts. Therefore, the Commission will add the following balance sheet accounts recommended by EEI to part 367 subpart F:

See, e.g.

Account 106, Completed construction not classified

Account 182.3, Other regulatory assets

Account 189, Unamortized loss on reacquired debt

Account 228.2, Accumulated provision for injuries and damages

Account 228.3, Accumulated provision for pensions and benefits

Account 254, Other regulatory liabilities

108. The Commission also will add Account 306, Leasehold improvements, as a transitional accommodation only.

Account 306 was included in the SEC's Uniform System of Accounts.

100

Use of this account will be restricted to leasehold improvements placed in service prior to January 1, 2008. Effective January 1, 2008, leasehold improvements must be charged to the appropriate primary plant account consistent with § 367.54. Conforming changes to Schedules II and III of the FERC Form No. 60 will be made to permit reporting of amounts related to Account 306.

Account 306 was contained in the SEC USofA for service companies. We will permit continued use of this account and not require reclassification of amounts recorded therein for leasehold improvements placed in service prior to January 1, 2008.

100

17 CFR part 256.

109. In response to EEI and Southern's comments concerning Account 123, Investment in associate companies, we note that, in the NOPR, the Commission proposed to adopt Account 146, Accounts receivable from associate companies, (§ 367.1460) as contained in parts 101 and 201 of the Commission's regulations. The text to Account 146 requires that items which do not bear a specified due date, but which have been carried for more than 12 months and items which are not paid within 12 months from the due date be transferred to Account 123, Investment in associate companies. This requirement results in classifying receivables that are long-term in nature to a long-term asset account (Account 123) and facilitates preparation of a classified balance sheet directly from the accounts. Although the Commission could prescribe a new account created specifically for recording long-term accounts receivables held by service companies, as Southern suggests, it would create an inconsistency between the accounts prescribed for service companies and those prescribed for public utilities and licensees and for natural gas companies. To ensure consistency between the service companies and the public utilities and natural gas companies, the Commission will continue to require long-term accounts receivables to be recorded in Account 123, Investment in associate companies.

110. In response to NARUC's comments concerning Account 107, Construction work in progress, we agree that the instructions contained in § 367.1070 that address construction projects consisting of multiple units with different in-service dates are unclear. Therefore, the Commission will modify that section and adopt NARUC's recommended clarifying language.

111. Additionally, in response to NiSource's comments we will revise the language in Account 234 (§ 367.2340) to indicate that Account 234 applies to accounts payable. The language is revised to read, “This account must include all amounts payable to associate companies by the service company within one year, which are not provided for in other accounts.”

7. Income Statement Accounts

112. In the NOPR, the Commission proposed to incorporate some of the income statement accounts contained in parts 101 and 201 of the Commission's regulations and some of the income statement accounts contained in the SEC's USofA for service companies. The specific comments received on these accounts are discussed below.

(a) Sections 367.4570-.4594—Revenue Accounts for Services Rendered

113. In the NOPR, we proposed to adopt new revenue control Accounts 457, Services rendered to associate utility companies; Account 458, Services rendered to non-associate utility companies; and Account 459, Services rendered to non-utility companies. We proposed that each of these new revenue control accounts have corresponding subaccounts for direct labor (Accounts 457.1, 458.1 and 459.1) and indirect labor (Accounts 457.2, 458.2 and 459.2), and compensation for use of capital (Accounts 457.3, 458.3 and 459.3). We also proposed to include revenue Accounts 458.4, Excess or deficiency on servicing non-associate utility companies, and 459.4, Excess or deficiency on servicing non-associate non-utility companies. Our proposal differed slightly from the SEC's USofA for service companies, which provided control accounts for revenues from services provided to associate companies and revenues from services provided to non-associate companies.

Comments

114. National Grid and NiSource believe that the Commission should provide for separate revenue control accounts for services to associate companies and to non-associate companies, and that these accounts should each be further subdivided into separate accounts or subaccounts tracking services to utility and non-utility companies in order to satisfy the Commission's stated goals and to provide a more detailed picture of service company revenues.

101

These commenters believe that this added detail (

i.e.

, separately identifying revenues associated with services to associate, non-utility companies and non-associate, non-utility companies) would not impose a significant burden over the status quo, but would provide a more detailed picture of service company services rendered for non-utility companies than the Commission's proposed regulations would require. As an alternative, NiSource requests that the Commission clarify that all service company revenues received from non-utility companies are to be charged to Account 459.4, whether or not they are derived from companies that are part of the same holding company system.

102

Southern believes that subaccounts should be added for all direct and indirect charges including the non-labor components of billings.

103

101

National Grid at 11-12; at 2-3.

102

NiSource at 2-3.

103

Southern at 4.

115. In contrast, EEI believes most service companies will not have information needed to distinguish between direct labor, indirect labor, and use of capital costs for services provided to associate utilities, non-associate utilities and non-utilities. Instead, EEI encourages the Commission to retain the current breakdown into services rendered to associate and non-associate companies, at most subdividing the associate company information by utility and non-utility if necessary to address cross subsidization concerns. EEI also recommends that the Commission delete the requirement for tracking revenue related to the use of capital, and states that it is a minor aspect of service company activities already reflected elsewhere in company accounts.

104

EEI at 27-28.

116. Progress Energy expresses concerns that requiring the redesign of allocation processes and systems to capture and disaggregate expense and revenue data to distinguish utility and non-utility services would impose a significant and unjustified burden on company resources without any appreciable benefit. Progress Energy points out that service companies already have procedures in place to prevent inappropriate costs shifts and other cross subsidization, and that the separation of costs as proposed by the Commission is not necessary.

105

Progress Energy at 6-9.

Commission Determination

117. In response to commenters' concerns, the Commission will adopt revenue accounts that will provide a breakdown by services rendered to associate and non-associate companies, but eliminate the requirement to record revenues from services provided to utilities and non-utilities in separate accounts. The Commission believes this modification to the NOPR is appropriate because this information can be obtained in the FERC Form No. 60, Analysis of Billing Schedule, which requires reporting amounts billed by customer for the year. Therefore, this modification will reduce burden without loss of important data. More specifically, we will adopt the following revenue control accounts and corresponding subaccounts: Account 457, Services rendered to associate companies; Account 457.1, Direct costs charged to associate companies; Account 457.2, Indirect costs charged to associate companies; Account 457.3, Compensation for use of capital-associate companies; Account 458, Services rendered to non-associate companies; Account 458.1, Direct costs charged to non-associate companies; Account 458.2, Indirect costs charged to non-associate companies; Account 458.3, Compensation for use of capital-non-associate companies; Account 458.4, Excess or deficiency on servicing non-associate companies. Consistent with the discussion above, we will not adopt proposed Accounts 459, 459.1, 459.2, 459.3, and 459.4. Use of Accounts 457, 457.1, 457.2, 457.3, 458, 458.1, 458.2, 458.3, and 458.4 is consistent with the requirements that existed under the SEC's USofA for service companies. Contrary to EEI's assertion, our review of 2005 FERC Form No. 60s indicates that service companies are capable of breaking down amounts billed between direct costs, indirect costs and compensation for capital.

106

2005 FERC Form No. 60, Analysis of Billing—Associate Companies Schedule and Analysis of Billing—Non-associate Companies Schedule.

(b) Sections 367.5000 and 367.8000—Operation and Maintenance Expense Accounts

118. In the NOPR, the Commission proposed to require centralized service companies to use the 500 and 800 series of accounts contained in parts 101 and 201 of the Commission's regulations for recording the expenses related to generation, transmission and distribution operation and maintenance services they provide to associate public-utilities and licensees and, where applicable, associate natural gas companies.

Comments

119. NARUC initially indicated that it was unclear how the 500 and 800 series

accounts will be impacted by the types of services that centralized service companies provide.

107

In supplemental comments filed following the staff technical conference, NARUC explains that, at the July 18, 2006 Technical Conference, it became clear that because some service companies currently use the 500 and 800 series accounts, it could be reasonable to include the accounts in the centralized service company's USofA.

108

NARUC believes the question the Commission needs to determine is whether these accounts should be mandatory. NARUC believes that if the Commission determines that use of the 500 and 800 series accounts should not be mandatory for all service companies, then the Commission needs to identify the accounting methods that best reflect the financial position of the service companies and associate companies within a holding company system. NARUC suggests that one approach would be to establish a threshold for when the use of the 500 and 800 series accounts would become mandatory. NARUC suggests that a possible threshold could be a percentage, such as 10 percent or less, of utility costs or of service company expenses. Another option, NARUC suggests, is to require the use of the 500 and 800 series accounts whenever a service company starts performing utility functions that should be recorded in the 500 and 800 series accounts. NARUC also suggests that the Commission prohibit the recording of charges classified in Account 923, Outside services on the utility's records, and, instead, it suggests that the Commission mandate that service company charges be classified in accordance with the utility account or function to which they relate because, in some cases, all costs are classified in Account 923. NARUC explains that adoption of this recommendation is necessary if the Commission adopts a threshold.

109

107

NARUC at 8-9.

108

NARUC Supplemental Comments at 3-6.

109

NARUC Supplemental Comments at 3-5.

120. Mr. Buckley, a participant at the technical conference, indicates that in Ohio they have experienced an explosion of service company costs recently. Mr. Buckley states that service company costs make up a large and increasing percentage of the costs that are ultimately passed on to ratepayers. Mr. Buckley points out that mergers and consolidations are moving the physical records and altering the existing relationships that state regulators have with the companies they regulate. According to Mr. Buckley, this makes it harder to know to whom to go to get information and, therefore, any increase in transparency is a positive step.

110

Mr. Buckley adds that, if the service companies become more centralized, citing American Electric Power as an example and noting that consolidation in the industry could lead to things becoming more centralized, the 500 and 800 accounts will provide for growth.

111

110

See Technical Conference Tr. 101-102 (Joseph Buckley).

111

See Technical Conference Tr. 120-121 (Joseph Buckley).

121. In contrast, several commenters do not believe that the 500 and 800 series accounts accurately portray the majority of service company costs.

112

While National Grid recognizes that some companies already record costs and revenues to match the accounting accorded to such costs and revenues by the ultimate service recipients, it asserts there is no reason to require wholesale reclassification of costs and revenues by all service companies. National Grid also believes this may lead to an inaccurate picture of a service company's financial position, and explains that using the 500 and 800 series accounts implies that the service company owns the assets that it is operating and maintaining.

113

112

NARUC at 8-9; Progress Energy at 3; EEI at 22-24; NiSource Supplemental Comments at 4-6; FirstEnergy Supplemental Comments at 3.

113

National Grid at 7-8.

122. EEI and Progress Energy assert that requiring the use of the 500 and 800 series of accounts would cause service companies to be out-of-compliance with GAAP principles.

114

Progress Energy explains that GAAP principles presume that each company reports its financial information as if it were a stand-alone (non-affiliated) company. It explains that force-fitting a centralized service company's financials into the format reported by a public utility would result in books that do not properly reflect the work conducted by a centralized service company and would over-complicate the accounting, increase the risk of errors inherent in any process or system change and violate GAAP principles.

115

In addition, EEI and NARUC contend that the burden associated with the 500 and 800 series accounts is greater than the benefit.

116

114

Progress Energy at 6; EEI at 22-24.

115

Progress Energy at 6.

116

EEI at 5-6; NARUC at 8-9.

Commission Determination

123. We will require centralized service companies to use the 500 and 800 series of accounts as proposed. It is evident from the July 18, 2006 Technical Conference and from a review of the 2005 FERC Form No. 60s that a number of service companies use the 500 and 800 series accounts. These centralized service companies perform operation and maintenance services related to generation, distribution, transmission, and customer services for associate electric and gas companies. The expenses incurred from providing these types of services are most accurately reported in the 500 and 800 series accounts.

124. We do not agree with National Grid that use of these accounts by centralized service companies performing the types of services for which costs are properly included in these accounts would result in an inaccurate picture of the service company's financial position. To the contrary, we believe the use of these accounts will add transparency to centralized service company costs and will facilitate comparison across such companies. Centralized service companies that offer operation and maintenance services related to generation, distribution, transmission, and services perform the same type of work and incur the same costs that a public utility would incur if that public utility performed the work itself. Therefore, we will require centralized service companies to record the expenses it incurs for conducting operation and maintenance activities related to generation, transmission, distribution and customer services in the same expense accounts public utilities are required to use to record these costs. Using the 500 and 800 series of accounts also provides better assurance that costs are properly assigned because like items will be identified and measured in the same way regardless of the entity performing the work. Although EEI and Progress Energy suggest that this is somehow in violation of GAAP principles, they offer nothing in the way of concrete evidence or reference to specific accounting standards to support this allegation. Furthermore, even if such evidence did exist, and we do not believe it does, the Commission's need for comparability and transparency of service company expenses provided by use of the 500 and 800 series of accounts would outweigh concerns about conformity with GAAP principles.

125. In responding to NARUC's concern, we will not prohibit the recording of charges in Account 923, Outside services. Prohibiting the use of this account would be overly prescriptive. It is possible that some service company costs would be accurately reported in Account 923. However, we believe that it is appropriate for utilities that receive bills

from service companies to classify those costs in the appropriate accounts. Utilities would not be in compliance with part 101, General Instruction 14, if they do otherwise. Specifically, General Instruction 14 requires that transactions with associated companies be recorded in the appropriate accounts for transactions of the same nature. We will require that centralized service companies performing services such as operation and maintenance services related to generation, distribution, transmission, and customer service on behalf of service companies to use the appropriate accounts for those services performed.

126. We do not agree with NARUC that the use of thresholds is an option for determining when centralized service companies must use the 500 and 800 accounts. As discussed above, the use of the 500 and 800 accounts provides clarity about the types of services performed by centralized service companies and the costs of providing those services. Proper classification of service company costs facilitates proper classification of the costs at the utility. Therefore, we will require centralized service companies to use the 500 and 800 series of accounts as proposed.

(c) Sections 367.9220 and 367.4171—Account 922, Administrative Expenses Transferred—Credit, and Account 417.1, Expenses of Non-Utility Company

127. In the NOPR, the Commission proposed that the portion of administrative, general, and customer expenses recorded in the 900 series of expense accounts, but attributable to services provided to non-utility companies, be transferred to proposed Account 417.1, Expenses of non-utility company related operations, with a contra-credit to Account 922, Administrative expenses transferred-credit.

Comments

128. EEI and Progress Energy request clarification regarding the adoption of Account 922 since most service company expenses are recorded in Accounts 920, Administrative and general salaries, and 921, Office supplies and expenses.

117

Progress Energy states that service companies are labor intensive, so most of their expenses are currently charged to Accounts 920 and 921. Progress Energy also states that the Commission should not adopt its proposal to credit Account 922 with administrative expenses recorded in Accounts 920 and 921 that are transferred to construction costs or to other accounts or with the amount of operating expenses related to services provided to non-utility companies and Account 417.1, Expenses of non-utility company related operations. In addition, Progress Energy points out that its accounts are mapped to the appropriate associate company accounts in compliance with the Federal (

e.g.

, Commission and SEC) and state regulatory reporting requirements imposed on the affiliated companies. Further, Progress Energy explains that its cost allocation methodology and charging practices have been approved by state regulatory commissions and are currently consistent with inter-company service agreements. If required to comply with this proposal, Progress Energy asserts its processes, systems and legal documents will have to be changed even though the associate companies already accurately report their allocations in compliance with Federal and state requirements.

118

117

Progress Energy at 9-10; EEI at 24-26.

118

Progress Energy at 9-10.

129. EEI states there is confusion related to the credit posted in Account 922. EEI states that many of these costs are administrative and general costs that are allocated based on service agreement methodologies and that the proposed process would require service companies to keep track of a dollar spent on administrative and general labor so the dollar could be recorded partly in the administrative and general series and partly “below the line” in Account 417.1. EEI states this would result in a process to build a “clump” of expenses in Account 417.1 that would be essentially useless to the service company. EEI recommends that the Commission not implement, or require companies to use, the proposed accounting treatment for new Account 417.1.

119

EEI at 24-25.

Commission Determination

130. Upon further consideration, the Commission has concluded that it is not necessary at this time for centralized service companies to record expenses attributable to services provided to non-utility companies in a separate account because the information reported in the Analysis of Billing Schedule should be sufficient to identify such amounts. The Analysis of Billing Schedule requires centralized service companies to report all amounts billed for services during the year on a company by company basis. Since services are billed at cost, it will be possible to determine the expenses attributable to services provided to non-utilities from the schedule. Therefore, Accounts 417.1, Expenses of non-utility company, and Account 922, Administrative expenses transferred—credit, will be deleted from §§ 367.9220 and 367.4171.

(d) Section 367.4160—Costs and Expenses of Merchandising, Jobbing and Contract Work; § 367.9120—Demonstrating and Selling Expenses; § 367.9130—Advertising Expenses; § 367.9301—General Advertising Expenses

131. In the NOPR, the Commission proposed to adopt Account 416, Costs and expenses of merchandising, jobbing and contract work; Account 912, Demonstrating and selling expenses; Account 913, Advertising expenses; and Account 930.1, General advertising expenses as they presently appear in parts 101 and 201 of the Commission's regulation into the USofA for centralized service companies.

Comments

132. NARUC states that it is difficult to determine in which accounts different types of advertising costs should be recorded. It also states that the Commission should anticipate service companies providing promotional services to non-utility affiliates. To address these concerns NARUC suggests: Revising § 367.4160 to clarify that only the cost of merchandising and contract work performed for associated utility companies is recorded in Account 416, Costs and expenses of merchandizing, jobbing and contract work for associate companies; revising § 367.9120 and § 367.9130 to clarify that demonstrating, selling and advertising costs incurred to promote/retain either the service companies services/customers or associate companies services/customers are recorded in these accounts; and revising § 367.9301 to clarify that only general advertising costs incurred on behalf of associated utility companies are recorded in this account.

120

NARUC at 9-12.

Commission Determination

133. The Commission agrees that §§ 367.416, 367.912 and 367.913 should be clarified. We will adopt the revisions suggested by NARUC for §§ 367.912 and 367.913 and incorporate others that will clarify what amounts are properly included in these accounts. In considering the suggested revisions to § 367.416, the Commission has determined that services related to merchandising, jobbing and contract work could be performed on behalf of associate, non-associate, utility or non-

utility companies. Consequently, we do not believe the use of Account 416 should be limited to costs of merchandising, jobbing and contract work performed for associate utility companies. Additionally, we have concluded that it is inappropriate to place Account 416 within the Other Income section of FERC Form No. 60, Schedule XV—Comparative Income Statement, as proposed in the NOPR. Services performed related to merchandising, jobbing and contract work are an operating activity of a service company and the cost of those services should be included in an account that enters into the determination of net operating income of the service company. Therefore, we will revise Schedule XV to reflect Account 416, Costs and expenses of merchandizing, jobbing and contract work, as an operating expense account and require revenues related to merchandising, jobbing and contract work to be recorded in Accounts 457, Services rendered to associate companies and 458, Services rendered to non-associate companies, as appropriate. Account 415, Revenues for merchandising, jobbing and contract work, will be eliminated from the USofA for centralized service companies. Finally, we consider Account 930.1 to be a general “catch all” account for recording advertising costs not provided for elsewhere in the accounts. Therefore, we will not adopt NARUC's recommendation to limit its use to advertising related to associate utility companies.

(e) Sections 367.4263, 367.4117, 367.4180—Miscellaneous Income Statement Issues

Comments

134. EEI states that the numbering appears to be incorrect in § 367.4263.

121

EEI also states the following accounts should be added to subpart H: Account 411.7, Losses from disposition of service company plant; and Account 418, Non-operating rental income.

122

121

EEI at 26.

122

Id.

at 27.

Commission Determination

135. EEI did not explain in its comments why the numbering should be corrected in § 367.4263 or why the Commission should add the recommended accounts. However, our review of a number of the FERC Form No. 60s filed with the Commission for calendar year 2005 indicates that these accounts are used by some service companies.

123

Therefore, we will correct the numbering in § 367.4263, and add Account 411.7, Losses from disposition of service company plant, and Account 418, Non-operating rental income.

8. Records Retention Requirements

136. Order No. 667 required all holding companies and all service companies, which were not granted a waiver or otherwise exempted by the Commission, to follow the Commission's records retention requirements in parts 125 and 225. The NOPR proposed to establish, as new part 368 of the Commission's regulations, records retention requirements for all holding companies and all service companies. The records retention requirements proposed were based on the requirements contained in §§ 125.3 and 225.3 of the Commission's regulations,

124

with certain modifications considered appropriate for holding companies and service companies.

123

See,

2005 FERC Form No. 60, Schedule XV, Comparative Income Statement for American Electric Power Service Corporation.

124

See

18 CFR 125.3 and 225.3.

Comments

137. EEI notes that the NOPR is unclear as to whether a holding company that also is a public utility would be subject to both the Commission's holding company and public utility records retention requirements. EEI requests that the Commission specify that only one set of records retention requirements apply and allow the company involved to select the most appropriate set to apply. Furthermore, if the holding company is already following the public utility records retention requirements, it should be able to continue to do so without also having to follow the new holding company records retention requirements.

125

EEI at 39.

138. NARUC requests that the records retention general instruction at § 368.2(g) be amended to include the requirement for companies to file a copy of a certified statement of records prematurely lost or destroyed with state commissions to facilitate the state commissions' ability to monitor the activities of service companies.

126

NARUC at 12.

139. Southern requests that the records retention requirements be better tailored for a service company. Specifically, Southern proposes that the retention period for accumulated depreciation records should be reduced because the majority of service company property has useful lives significantly less than the 25-year retention period proposed in the NOPR.

127

Southern at 6.

Commission Determination

140. The records retention requirements originally proposed, and as adopted here, generally are based on the requirements contained in parts 125 and 225 of the Commission's regulations,

128

with certain minor modifications appropriate for holding companies and service companies. As a result, most retention periods proposed for holding companies and service companies are identical to the retention periods required for public utilities and licensees and natural gas pipelines. Additionally, the general instructions for parts 125 and 225 and proposed § 368.2(a)(5) make clear that “To the extent that any Commission regulations may provide for a different records retention period, the records must be retained for the longer of the retention periods.” If a holding company that is also a public utility has a conflict between the retention period specified for a public utility and the retention period specified for a holding company, the longer of the retention periods must be observed. Therefore, we do not believe it is appropriate to specify that only one set of records retention requirements apply.

128

See

18 CFR 125.2(a)(3) and 225.2(a)(3).

141. We deny NARUC's request to amend the records retention instruction at § 368.2(g) to include a requirement for companies to file a copy of a certified statement of records prematurely lost or destroyed with state commissions. We do not believe it is necessary for the Commission to establish filing requirements for state commissions. All filings of this nature are docketed by the Commission and can be viewed electronically by all interested parties. Accordingly, state commissions will be able to monitor the report of prematurely lost or destroyed records without imposing an additional reporting burden on companies. We note that this is the same treatment applied to public utilities, licensees, and natural gas companies under the Commission's regulations in parts 125 and 225.

142. We agree with Southern's observation related to holding and service company property, and will tailor the schedule of records retention periods. Specifically, we will reduce the retention period for accumulated depreciation records reflecting the service life of property at § 368.3—Item 24, Records of accumulated provisions for depreciation and depletion from 25

years to 3 years after retirement or disposition of property.

129

Most holding and service company property typically has a useful life significantly less than 25 years, for example office furniture and equipment and computer software have shorter useful lives than generating facilities or transmission towers. Therefore, establishing a shorter retention period for accumulated depreciation records that closely corresponds to the expected useful life of the related property is more reasonable.

9. FERC Form No. 60

(a) Use of GAAP Financial Statement Instead of Structured FERC Form No. 60

143. The Commission proposed a structured reporting format in proposed FERC Form No. 60 in the NOPR. Under the structured format, a centralized service company must report in specified data fields the financial information called for in the report.

Comments

144. In its supplemental comments, in contrast to its initial comments,

130

EEI suggests the FERC Form No. 60 be based on the original FERC Form No. 60 set out in the Commission's December 8, 2005 Order No. 667 Final Rule (December 2005 FERC Form No. 60), with additional changes EEI requests to streamline the form. EEI believes a streamlined version of the December 2005 FERC Form No. 60, together with data the Commission receives directly from public utilities and the Commission's new FPA section 203 regulations,

131

should suffice to enable the Commission to perform its regulatory responsibilities.

132

In its supplemental comments, EEI further encourages the Commission to work with a streamlined version of the December 2005 FERC Form No. 60 with changes EEI has requested to further streamline the form.

133

Southern, PHI Companies, and FirstEnergy support EEI's comments that the FERC Form No. 60 be a streamlined version of the December 2005 FERC Form No. 60. These commenters, together with EEI, believe this streamlined FERC Form No. 60 provides the transparency and uniformity that the Commission desires without imposing undue burden. However, Southern also suggests that the Commission should allow companies the option of submitting their audited GAAP financial statements instead of FERC Form No. 60.

134

130

In its initial comments to the NOPR, EEI proposed the Commission rely on information provided in the SEC Forms 10-K and 10-Q supplemented by selected additional information the Commission may need instead of the new FERC Form No. 60.

131

See

18 CFR part 33.

132

EEI Supplemental Comments at 2.

133

Id.

134

Southern at 2.

145. Conversely, APPA thinks that the revised FERC Form No. 60 will be very useful in auditing and understanding centralized service company cost allocations to public utility operating companies.

135

APPA at 3.

Commission Determination

146. The December 2005 FERC Form No. 60 is essentially the SEC's old Form U13-60 for service companies with certain streamlining changes adopted in Order No. 667. The December 2005 FERC Form No. 60, like the old SEC Form U13-60, is a non-structured reporting format that permits filers wide latitude and flexibility in how they report required financial information. While the Commission understands the centralized service companies” desire to have flexibility in reporting, the Commission believes that it is necessary to have a structured reporting system. A structured report format results in disclosure and display of predetermined financial information in a uniform manner by all centralized service companies. This promotes comparability of the data not only between entities but also between accounts prescribed. Increasing the comparability of the data makes the information inherently more useful. Moreover, a structured report format allows for the creation of a financial database that can be used for more complex and sophisticated analysis of the information. These items are important to allow the Commission to perform its duties. It also will facilitate electronic submission using Commission-supplied software. This system will help ensure the integrity of the data and make completing the FERC Form No. 60 easier.

147. In response to Southern's suggestion, we do not believe that audited GAAP financial statements would be sufficient for carrying out the Commission's regulatory responsibilities. GAAP financial statements are prepared primarily for investors, and do not provide information in enough detail to ensure that jurisdictional rates charged are just and reasonable or to review cost allocations under section 1275 of PUHCA 2005

136

if called upon to do so. Therefore, the Commission will not modify the proposed requirement for a structured FERC Form No. 60.

136

Supra

note 5.

(b) FERC Form No. 60 Schedules

(1) Schedule II, Service Company Property

148. Proposed Schedule II requires centralized service companies to report the amounts recorded in the service company primary property accounts and construction work in progress at the beginning of the year, changes to the accounts during the year, and the balance at the end of the year.

Comments

149. Southern does not see the added value of the supplemental information provided in Instructions 2-4

137

and proposes their elimination. Southern comments the break out of the property by account gives sufficient information.

138

137

Instruction 2 requires a breakdown of each equipment subaccount for each class of equipment property owned. Instruction 3 requires a description of other company property. Instruction 3 requires a listing of construction work-in-progress projects and the beginning, additions and end-of-year balance for each.

138

Southern at 2.

Commission Determination

150. The Commission agrees that the information required by Instructions 2 and 3 is of little value to the Commission and will be deleted. However, we will continue to require centralized service companies to provide information about construction projects similar to the December 2005 current FERC Form No. 60, Instruction 4. Instead of providing the information in a footnote format, we are revising the schedule to provide for additional lines on the schedule for reporting this information.

139

The December 2005 FERC Form No. 60 requires this information to be reported in a footnote.

(2) Schedule III-A, Summary of Service Company Property and Accumulated Provisions for Depreciation and Amortization

151. Schedule III-A would require companies to split out property devoted to utility versus non-utility services.

Comments

152. EEI contends this reporting requirement should be deleted because company records do not differentiate service company property between utility related and non-utility services.

140

FirstEnergy argues that assets devoted exclusively to the utility are on the books of the utility and not on the service company books.

141

140

EEI at 29.

141

FirstEnergy Supplemental Comments at 3.

Commission Determination

153. We agree with EEI and will eliminate this schedule from FERC Form No. 60. All service company property will be reported in Account 101.

(3) Schedule IV, Investments and Schedule XII, Long-Term Debt

154. Proposed Schedule IV provides detailed information on service company investments in associate companies and temporary cash investments. Proposed Schedule XII provides detailed information on long-term debt of the service company. Both schedules require the same information as in the current FERC Form No. 60.

Comments

155. EEI proposes to eliminate schedules that include information already available on the face of the Balance Sheet or within the detailed footnotes. Examples include Schedule IV, Investments and Schedule XII, Long Term Debt.

142

EEI at 29.

Commission Determination

156. We disagree with EEI that the information reported on Schedule IV and Schedule XII is available on the Balance Sheet. Long-term debt and investments are reported on the Balance Sheet as aggregate totals. Schedule IV and Schedule XII provide significant additional details that allow for a greater understanding of the aggregate totals reported on the Balance Sheet. For example, short-term investment schedules provide specific details on where centralized service companies have invested excess cash flows from operations and Schedule XII provides specific details on service company long-term capital. We do not agree that footnote disclosure is an adequate substitution for these supporting schedules because the format for footnotes is unstructured and does not allow for database archiving and retrieval. Therefore, the Commission will retain these schedules.

(4) Schedule V, Accounts Receivable From Associate Companies

157. This schedule identifies accounts receivable for each associate company and reports convenience payments.

Comments

158. EEI and Southern recommend the portion of this schedule identifying convenience payments

143

should be eliminated. If retained, EEI recommends the Commission modify the schedule to report the total convenience payments made during the year, consistent with the December 2005 FERC Form No. 60 reporting. EEI states that service companies do not necessarily identify convenience payments separately, and this information would be time consuming to gather. Also, EEI does not understand the usefulness of this information to the Commission; beginning and ending convenience payment balances are not meaningful because convenience payments are Expense accounts, rather than Balance Sheet accounts.

144

143

Convenience payments represent payments such as benefits, outside legal, and consulting paid by service companies to outside vendors and others on behalf of associate companies.

144

EEI at 33; Southern at 2-3.

Commission Determination

159. We agree it is not necessary to require beginning and ending convenience payment balances. Consequently, we will not adopt that portion of the proposed Schedule V that would require reporting the beginning and ending balances of convenience payments. Instead, we will retain the December 2005 FERC Form No. 60 requirement of reporting total convenience payments by associate company.

(5) Schedule VI, Fuel Stock Expenses Undistributed

160. Proposed Schedule VI requires centralized service companies to report labor and expenses incurred during the year with respect to fuel stock and the amounts attributable to each associate company. It also requires a summary of the fuel functions performed by the service company.

Comments

161. Southern comments that Schedule VI requires extracting data from work order billings through an annual process to meet the annual report requirement. Southern recommends elimination of this schedule based on its limited value.

145

Southern at 3.

Commission Determination

162. For centralized service companies performing fuel services for utilities, this is an important supporting schedule. Some companies report large amounts of labor and other expenses. The reported information includes amounts billed to each associate company including electric and gas utilities, which ultimately could be reflected in cost of service. Consequently we will retain this schedule.

(6) Schedule X, Research, Development or Demonstration Expenses

163. Proposed Schedule X requires a description of all research, development and demonstration projects engaged in by the centralized service company and the related costs incurred during the year.

Comments

164. EEI and Southern state project titles may not provide meaningful information to the Commission. EEI and Southern recommend that service companies have the option instead to list account balance by project partner, citing the U.S. Department of Energy, as an example.

146

EEI at 34; Southern at 3.

Commission Determination

165. The Commission disagrees with EEI and Southern that Schedule X requires a project title. The schedule requires a description of the project, not the project title. Knowing the project partner alone does not provide useful information. More relevant information is a description of the nature of the project and not just who is the project partner. Therefore, the schedule will be retained the same as in the FERC Form No. 60.

(7) Schedule XI, Proprietary Capital

166. Proposed Schedule XI discloses common and preferred stock shares authorized, outstanding, par or stated value, as well as information on miscellaneous paid-in capital, appropriated retained earnings and other comprehensive income. The second part of the schedule presents information similar to a statement of retained earnings.

Comments

167. EEI and Southern state the first section of this schedule duplicates Schedule I, Comparative Balance Sheet except for shares outstanding.

147

EEI argues the second section of this schedule is new, and generally not applicable to a service company.

148

EEI and Southern recommend including the shares outstanding on Schedule I, Comparative Balance Sheet, and deleting this schedule.

149

147

EEI at 34; Southern at 3.

148

EEI at 34.

149

EEI 34; Southern at 3.

Commission Determination

168. The Commission disagrees with commenters regarding what is reported on this schedule. Commenters indicate only outstanding shares of stock are reported. The schedule asks for class of

stock, number of shares authorized, par or stated value per share, and outstanding shares. Further, the schedule requests explanations about transactions which gave rise to miscellaneous paid-in capital and appropriated retained earnings. Additionally, the schedule requests information on changes in unappropriated retained earnings such as net income and dividends paid. This requirement is not new; it is part of the FERC Form No. 60. The requirements are not overly burdensome. Consequently, we will retain the current requirements. A statement of retained earnings is a basic financial statement. However, we agree with EEI's suggestion that a statement of retained earnings is not applicable to a service company; so, we will delete that portion of the schedule which includes the added statement of retained earnings.

(8) Schedule XIV, Notes to Financial Statements

169. Instruction No. 3 of Schedule XIV states “Furnish particulars as to any significant increase in services rendered or expenses incurred during the year.”

Comments

170. EEI recommends the Commission not implement this reporting requirement in the notes section.

150

EEI states this introduces an element of Management's Discussion and Analysis (MD&A) that is part of GAAP disclosure requirements, but has never been a requirement of the FERC Form No. 60, Form No. 1, or Form No. 2. EEI indicates that an explanation of service company expense variances is frequently scrutinized by state regulators and would unnecessarily add to the administrative burden of annual reporting. EEI contends this level of detail could be provided on an ad hoc basis as needed, and, when it is needed, companies would like the flexibility of attaching a Microsoft Word file rather than re-keying voluminous footnote data into the Commission's automated reporting application.

150

EEI at 34.

Commission Determination

171. Contrary to EEI's assertion, Instruction No. 3 is not a new reporting requirement. Instruction No. 3 is included in the December 2005 FERC Form No. 60 under Schedule XVIII, Notes to the Statement of Income. Any large increase in services and expenses could impact cost allocations which would be useful information to the Commission and others. The disclosure of significant increases in services rendered or expenses incurred is particularly relevant to understanding the business operations of the centralized service company and the efficiency or inefficiency of providing services on a centralized basis to associated utilities. Furthermore, reporting this information should not be administratively burdensome. As EEI notes, this type of information is already part of the MD&A in its GAAP disclosures. The Commission's FERC Form No. 60 submission software will allow copy and paste of this information into the footnote page. Consequently, we will retain the instruction as proposed.

151

EEI at 34 and 35.

(9) Schedule XV, Comparative Income Statement

172. Proposed Schedule XV requires centralized service companies to report revenues, expenses, gains and losses for the current and prior year by account.

Comments

173. EEI states that the Commission should not require reporting of information broken down into accounts that do not make sense for a given service company. EEI states that there seems to be a presumption in the NOPR that the service company income statement can be presented in a ratemaking format, with an “above the line” and “below the line” character. EEI points out, that just as with the proposed use of the 500 and 800 series of operational and maintenance expense accounts, this presumption does not fit well with many service company operations, which typically consist primarily of labor services to other companies.

152

EEI at 30.

Commission Determination

174. The Schedule XV, Comparative Income Statement, we are adopting for the revised FERC Form No. 60 will require centralized service companies to report the amounts entered in the income statement accounts adopted in this Final Rule. These accounts were developed to be of sufficient scope and breadth to allow for recording the economic effects of all transactions and events that could impact a centralized service company. As noted elsewhere in this Final Rule, not all service companies are engaged in all of the activities for which use of the new accounts would be required. This, however, does not mean that the accounts do not “fit well” or do not “make sense” for centralized service companies, as EEI seems to suggest. It means only that more accounts exist under the USofA than might be used by any particular centralized service company. If a centralized service company does not incur costs properly included in one of the new accounts adopted in this Final Rule, it simply would not record anything in that account.

(10) Schedule XV-A, Schedule of Utility Operating Expenses; Schedule XVI, Analysis of Charges for Service; Schedule XVII, Schedule of Expense Distribution by Department or Service Function

175. Proposed Schedule XV-A requires centralized service companies to report all amounts entered in the 500 and 800 series of operation and maintenance expense accounts. Proposed Schedule XVI requires centralized service companies to report direct and indirect costs charged to associate utility companies, associate non-utility companies, non-associate utility companies and non-associate non-utility companies. Proposed Schedule XVII requires centralized service companies to report service cost billed by department or service function and overhead costs.

Comments

176. EEI recommends that the Commission consider deleting Schedule XV-A and either Schedule XVI or XVII.

153

EEI states that, whichever of these schedules the Commission retains, the Commission should allow companies to report total amounts for each account or group of accounts listed rather than by direct and indirect or overhead costs. In EEI's opinion, the breakdown by direct, indirect, and use of capital would require companies to parse the information in each account or set of accounts to too fine a degree with no clear benefit. EEI indicates that if Schedule XVI is retained, the Commission should follow the SEC's past practice of having companies distinguish the information for associate and non-associate companies, ideally by group of accounts rather than by utility versus non-utility.

154

153

EEI at 36.

154

Id.

177. In addition, EEI encourages the Commission not to require information to be broken down as shown on Schedule XVII by service company department or service function.

155

As presented, EEI states, the schedule would require companies to break down internal financials across the array of USofA accounts by department or

function, requiring far too much detail with no clear benefit.

156

Southern states departmental/functional reporting by account adds difficulty and would not be consistent among companies.

157

155

EEI at 36.

156

Id.

157

Southern Supplemental Comments at 3.

178. NARUC, on the other hand, states Schedule XVI is important since it allows a comparison of direct and indirect costs allocated to utility companies and non-utility companies while showing the allocation of 100 percent of these costs to the various billing groups.

158

NARUC indicates this is needed to ensure utility companies are not treated differently from non-utility companies. NARUC suggests simplifying this schedule, at least for the 500 and 800 series of operation and maintenance expense accounts; NARUC contends it may be possible to allow companies to provide information by group of accounts.

158

NARUC Supplemental Comments at 7.

179. NARUC explains that Schedule XVII assists state regulators in classifying charges on the utility's records, helps in judging the reasonableness of service company charges and whether such charges duplicate what the utility incurs internally, and focuses attention on comparisons between what gets charged to the associated utility companies and non-utility companies. NARUC proposes expanding Schedule XVII to provide a breakdown by associate utilities and non-utilities, and by non-associate companies. NARUC states this is important to make a comparison of departmental costs allocated to associate utility and non-utility companies because these comparisons ensure that associate utility companies are not treated differently from associated non-utility companies.

159

Id.

Commission Determination

180. The Commission agrees with EEI that the information required in proposed Schedule XV-A is unnecessary, and will delete Schedule XV-A. The same information is reported in Schedule XVI, Analysis of Charges for Services, except for comparable information for the prior year. Therefore, the Commission will delete Schedule XV-A.

181. The Commission will also delete Schedule XVII. With regard to Schedule XVII, Southern notes that departmental/functional reporting would not be consistent among companies. Departments and functions are not standardized and, therefore, comparison across companies is not possible. While we agree with NARUC that Schedule XVII may provide some useful departmental/functional information, on a company by company basis, requiring the reporting on an annual basis may be an unnecessary burden. NARUC's proposal to expand Schedule XVII to include reporting by individual associate and non-associate utility companies, associate non-utility companies and non-associate companies points to a weakness in the current schedule. In fact, the schedule does not disclose information on charges to utility companies except through the department service or functional category. The additional expense accounts required under the new USofA will provide better functional information and lessen the need for this schedule. The information provided in Schedule XVI will enable the Commission to capture information about charges for services provided to utility companies. If departmental/functional information is needed, the information can be obtained from each centralized service company on a case-by-case basis without the need to be reported annually. Therefore, the Commission will delete Schedule XVII.

182. The Commission will retain Schedule XVI, but modify the schedule to remove the utility versus non-utility expense separation, consistent with our decision concerning the service company revenue accounts discussed elsewhere in this Final Rule. While the utility versus non-utility expense separation is removed, the total amounts assigned to individual utility companies are available in the Analysis of Billing schedules. This will result in returning to the associate company/non-associate company expense separation contained in the December 2005 FERC Form No. 60. We also will revise Schedule XVI to roll up certain expense classifications suggested by EEI and NARUC to reduce the burden associated with completing this schedule.

(11) Analysis of Billing Schedules

183. In the NOPR, the Commission proposed to modify the Analysis of Billing schedules that report billings to each company for services provided by the centralized service companies by breaking out the schedules into associate utility, non-associate utility and non-utility companies.

Comments

184. EEI indicates the Commission should not require reporting of information broken down into utility and non-utility services, in particular for non-associate companies where the service company often will not have this information. Service companies currently report their services provided by individual company in the FERC Form No. 60, on schedules “Analysis of Billing—Associate Companies” and “Analysis of Billing—Non-associate Companies.” EEI argues these schedules provide ample information of the sort being proposed and that no additional detail is necessary.

160

EEI at 29.

185. Southern recommends the schedule, Analysis of Billing—Non-associate Companies, be revised to request the names and amounts for non-associate companies only for those that exceed 10% of the total non-associate billings. Southern argues this would reduce the time spent in preparation of this schedule while still providing the Commission with the names of all non-associate companies of consequence.

161

Southern Supplemental Comments at 3.

Commission Determination

186. We agree with EEI's comments that the Analysis of Billing schedules contained in the December 2005 FERC Form No. 60 provide sufficient information concerning the customers to whom amounts are billed, and a further separation of those customers into utility and non-utility classifications for purposes of this schedule is not needed by the Commission since specific information about utilities is already reported separately in the current Analysis of Billing schedules. Therefore, consistent with our decision above to eliminate Account 459, Services rendered to non-utility companies, we will also eliminate the proposed schedule “Analysis of Billing Nonutility Companies—Account 459.” Also, we will revise the “Analysis of Billing Schedules” for Accounts 457, Services rendered to associate companies, and 458, Services rendered to non-associate companies to reflect only a separation of billings between associate and non-associate companies, consistent with our decision on the service company revenue accounts discussed elsewhere in this Final Rule. The Commission will not adopt Southern's proposal to reduce the reported number of non-associate companies. The requirement is not overly burdensome and allows the Commission to observe all billings to such companies.

(12) Departmental Analysis of Salaries Schedule; Methods of Allocation Schedule; and Organizational Chart Schedule

187. The proposed Departmental Analysis of Salaries Schedule reports the amount of service company salaries

billed by department or service function to the parent holding company, associate companies, and non-associate companies and the number of employees. The Methods of Allocation Schedule reports the allocation factors used to allocate indirect costs to each associate company. The Organizational Chart schedule reports how the service company is organized.

Comments

188. EEI states these schedules involve what it considers organizational reporting and recommends eliminating the schedules because adequate oversight can be accomplished without this level of detail, and accurate comparisons between companies would be very difficult.

162

If the Methods of Allocation schedule is retained, EEI requests the Commission continue its current practice of allowing companies to list their allocation methods, as they currently do in the FERC Form No. 60, rather than having to elaborate on the methods in the form. EEI indicates companies should not be required to key voluminous formulas, by service rendered, into the automated reporting application.

163

162

EEI at 30.

163

EEI at 31.

189. Southern does not see the benefit to the Commission of providing a current Organizational Chart in the FERC Form No. 60 and proposes that this requirement be eliminated. Southern argues it is not required for FERC Form No. 1.

164

Southern at 3.

Commission Determination

190. The Commission will eliminate the Departmental Analysis of Salaries Schedule. Consistent with our decision above regarding our decision to eliminate Schedule XVII, departmental or functional categories are difficult to compare because they are not standardized. If needed, the information can be obtained from centralized service companies on a case-by-case basis.

191. The Commission will retain the Methods of Allocation schedule, however, because that is the only means readily available to determine how indirect costs are being allocated to services provided. The current schedule has no instructions and Staff's review of 2005 FERC Form No. 60s indicated poor reporting. The main purpose of the schedule is to disclose what allocation ratios are used and what numerator and denominator were used to create the ratio. We are revising the instruction, accordingly.

192. The Commission will also continue to require submission of an Organization Chart in the FERC Form No. 60 as proposed. An Organization Chart provides basic information about the hierarchical structure of the service company. It provides useful information to the Commission about how the centralized service company deploys its resources and the relationship between organizational departments within the centralized service company and the allocation of costs to services, functions and projects. We recognize the FERC Form No. 1 does not require an Organization Chart. However, our need to know the organizational structure of a centralized service company is greater as opposed to the organizational structure of an electric utility company.

(13) Annual Statement of Compensation for Use of Capital Billed

193. This schedule reports the amount of compensation for use of capital billed to each associate company.

Comments

194. EEI proposes to eliminate the Annual Statement of Compensation for Use of Capital Billed, and the associated revenue Accounts 457.3, Compensation for use of capital-associate companies, 458.3, Compensation for use of capital—Non-associate companies, and 459.3, Compensation for use of capital—Non-associate non-utility companies. EEI argues compensation for use of capital is so minor that it does not warrant special treatment in reporting. Moreover, EEI states details of significant financial arrangements are included in the notes to the balance sheet, and total interest costs are disclosed in the income statement.

165

EEI at 31.

195. Conversely, NARUC indicates the Annual Statement of Compensation for Use of Capital Billed should be required in FERC Form No. 60. NARUC argues this statement provides the calculation of the use of capital that will be billed to the centralized service companies' associate companies during the calendar year. In addition, NARUC indicates this statement in the FERC Form No. 60 is a resource for verifying and reconciling the costs that are included in centralized service company billings. NARUC notes the FERC Form No. 60 requires a separate statement for each associate company. However, NARUC claims, a separate statement for each associate company may not be necessary if the calculations are consistent.

166

NARUC Supplemental Comments at 8 and 9.

Commission Determination

196. We agree with EEI that footnote disclosure would be a suitable substitute for this schedule, and so, we will delete the Annual Statement of Compensation for Use of Capital Billed. However, we will not delete Accounts 457.3 or 458.3. The amounts recorded in these accounts will continue to be reported on the Analysis of Billing Schedules for Accounts 457 and 458. Centralized service companies should disclose the basis of how the amounts are assigned to the associate and non-associate companies in a footnote to the Analysis of Billing Schedules for Accounts 457 and 458. As long as all companies are treated similarly, we believe this should satisfy NARUC's requirements.

(14) Miscellaneous General Expenses Schedule (Account 930.2)

197. This schedule lists the items included in Account 930.2, Miscellaneous general expenses.

Comments

198. EEI and Southern recommend deleting the schedule or only requiring disclosure of items that exceed $1 million. EEI and Southern contend this schedule requires considerable detailed analysis to complete.

167

EEI at 37; Southern at 3.

Commission Determination

199. The Commission will retain this schedule. Many service companies report significant amounts in Account 930.2. This schedule provides the nature of the amounts included in a miscellaneous catchall account where the account title does not provide descriptive information of the amounts included in the account. This schedule currently has no threshold level. However, in response to EEI's and Southern's proposal, we will adopt a threshold requiring the separate reporting of items over $50,000.

168

We believe a $1,000,000 threshold alternative suggested by commenters is unreasonably high and would not provide for adequate disclosure of the nature of the items included in this account.

169

168

Our staff review of FERC Form No. 60 submissions for calendar year 2005 indicates that $50,000 is a reasonable threshold that will provide sufficient information without eliminating necessary detail.

169

The FERC Form No. 1 threshold for this account schedule is $5,000.

200. General Instruction IX states that prior period comparison figures must be the same as reported in the previous

report, or “an appropriate explanation given as to why the different figures were used.”

Comments

201. EEI states that in general, companies would like to follow the GAAP practice of reclassifying prior period amounts when necessary, with a footnote to the effect that “certain prior amounts have been reclassified to conform to the current year presentation.”

170

EEI indicates any material reclassifications would include a footnote disclosure. Therefore, EEI recommends the Commission insert the word “materially” before “different figures were used.”

170

EEI at 32-33.

Commission Determination

202. As an initial matter, we note that instances in which prior year data in current reports is different than previously reported should be rare. The instances should be limited to such things as corrections of accounting errors and changes in accounting principles. The Commission and other users of the FERC Form No. 60 are particularly interested in understanding the economic effects of these types of occurrences, including the particular accounts affected and the related amounts. An explanation that “certain prior amounts have been reclassified to conform to the current year presen

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