FERC Accounting and Reporting Requirements

Transcription

1 To help protect your privacy, PowerPoint has blocked automatic download of this picture. To help protect your privacy, PowerPoint has blocked automatic download of this picture. FERC Accounting and Reporting Requirements Jason Gambone, Director, Deloitte & Touche LLP Jamie Saunders, Sr. Consultant, Deloitte & Touche LLP Kelly Louque, Sr. Staff Accountant, Entergy Corporation May 17, 2016

2 FERC Overview About FERC FERC Federal Energy Regulatory Commission An independent agency that regulates the interstate transmission of electricity, natural gas, and oil Provides regulation over rates for wholesale sales and transmission of electricity in interstate commerce. Provides oversight of mandatory reliability standards for the bulk power system. Promoters of strong national energy infrastructure, including adequate transmission facilities. Provides regulation of jurisdictional issuances of stock and debt securities, assumptions of obligations and liabilities, and mergers.* * FERC website 2

3 FERC Overview Federal Power Act Key Provisions: Section 203 Section 203 regulates Corporate Activities and Transactions by public utilities such as: Mergers & Consolidations Sale, lease, or disposal of assets exceeding $10M Purchase and acquisition of securities exceeding $10M Purchase, lease, or acquire generation for interstate wholesale sales exceeding $10M Filing Process includes a comprehensive application by the jurisdictional public utility involved in any of the covered Section 203 activities. This is supported by: Contracts Proposed accounting entries Agreements Additional documentation supporting the underlying transaction Stakeholder Intervention Motion to Intervene Under Intervention (Rule 214), a stakeholder(s) has the right to intervene upon filing a notice or a motion to intervene FERC can accept, reject, set for settlement, or find the filing deficient. 3

4 FERC Overview Federal Power Act Key Provisions: Section 203 Key Considerations: Mergers & Other Section 203 transactions Mergers must be consistent with public interest; The FERC focuses on four factors: the effect on competition, the effect on rates, the effect on regulation, and the ability for cross-subsidization (Order 707) Order reaffirming commission policy and termination proceeding RM11-14, RM96-6 Majority of filings contain a hold harmless provision which (Policy on hold harmless PL15-3) : Mitigates adverse effects on rates (does not allow transactional (transitional) costs through) Clarifies controls & procedures to track and identify subjected costs Commit to a hold harmless period (which is no longer a specific period (i.e., 5 years) as of 2015) Show cost savings based on executed transaction (if seeking recovery in later years) 4

5 FERC Overview Federal Power Act Key Provisions: Section 205 Section 205 requires rates on file. Jurisdictional public utilities must file all rates, terms, and conditions made, demanded, or received in connection with interstate transmission or wholesale electricity sales. These rates are provided through the filing of a tariff or schedules. Absent a waiver, rates must be filed at least 60 days before they become effective. Any rates charged for interstate transmission and wholesale sale of electricity must be on file with the FERC. This filing should include: Rates Terms Conditions Additional documentation supporting proposed rate Public Notice of Filing Issued Providing time for responses FERC can accept, reject, suspend, or find the filing deficient. It can also set the rates for settlement, trial type or oral hearing. 5

6 FERC Overview Federal Power Act Key Provisions: Section 205 (cont d) Key Considerations: Rates on File Rates are just and reasonable - A just and reasonable rate is cost justified and market justified Rates are not unduly discriminatory or preferential Filed rate doctrine Rates on file are the rates charged Rates are subject to interest and refunds Key Provisions: Section 206 Section 206 allows the FERC, after a hearing held upon its own motion or upon complaint by customer or competitor, may determine that an existing rate, term, or condition is not just or reasonable, unduly discriminatory or preferential, the FERC should determine the just and reasonable rate. No filing Process, the burden of proof lies with the FERC. Upon Commission review, this process can result in refunds & interest up to 15 months. Key Considerations: Rates are just and reasonable Rates are not unduly discriminatory or preferential Filed rate doctrine Burden of proof on the Commission 6

7 FERC Accounting & Reporting USofA Numbering System The account numbering plan used herein consists of a system of three-digit whole numbers as follows: , Assets and other debits Liabilities and other credits Plant Accounts Income Accounts Operating Revenue Operation & Maintenance Customer accounts, customer service and informational, sales, and general and administrative expenses 7

8 FERC Accounting & Reporting Financial Statements FERC reporting Form 1 Annual reporting of major electric utility Form 1f Annual report of non-major electric utility Form 2 Annual reporting of major natural gas company Form 2a Non-major Natural Gas Pipeline annual report Form 60 - Annual Report of Centralized Service Companies Form 3-Q - Quarterly Financial Report of Electric Utilities, Licensees, and Natural Gas Companies Form 1 and Form 2 have a due date of April 18, 2016 Form 60 has a due date of May 1 Form 3 Q have a due date of 60 days (Major) or 70 days (Non-major) after quarter end 8

9 FERC Accounting & Reporting FERC to U.S GAAP Accounting Differences Examples of common differences: All Subsidiaries, regardless of ownership percentage or control, are accounted for using the equity method No distinction in FERC reporting between current and long term classification for certain accounts such as debt, regulatory assets and regulatory liabilities For FERC reporting, power purchase and sale transactions with an RTO are netted based on hourly volumes; separate netting for real time and day ahead markets (under GAAP, different units of account for netting are acceptable) 9

10 FERC Accounting & Reporting FERC to U.S GAAP Accounting Differences Common differences (cont.) Accumulated cost of removal is included in accumulated depreciation for FERC reporting (classified as a regulatory liability in SEC reporting) Revenues and expenses from nonutility activities are classified in the below the line accounts under FERC reporting (typically classified within operations under GAAP) FERC allows reporting as regulatory assets incurred costs that can be reasonably expected to be recovered (under GAAP, amounts must be probable of recovery) 10

11 FERC Accounting & Reporting FERC to U.S GAAP Accounting Differences Common differences (cont.) Income tax differences Balance Sheet FERC reporting Deferred income tax assets (account 190) and deferred income tax liabilities (accounts 281, 282 and 283) are presented gross US GAAP reporting Deferred tax assets and liabilities are netted by jurisdiction and recorded as noncurrent deferred tax assets or liabilities, as appropriate. 11

12 FERC Accounting & Reporting FERC to U.S GAAP Accounting Differences Common differences (cont.) Income tax differences Income statement For FERC reporting, income tax expense amounts are classified in a variety of above the line and below the line accounts Below the line income tax expense or benefit applies to the various pre tax revenue and expense amounts that are classified below the line Best practice-prepare a separate effective tax rate analysis for the above the line and below the line accounts 12

13 FERC Accounting & Reporting FERC to U.S GAAP Accounting Differences Common differences (cont.) Uncertain tax positions FERC Docket A (May 25, 2007) sets forth guidance Certain classifications that are required or permitted under GAAP for uncertain tax positions (ASC ) are not permitted under FERC reporting 13

14 FERC Accounting & Reporting FERC to U.S GAAP Accounting Differences Common differences (cont.) Uncertain tax positions Uncertain tax positions related to temporary differences must continue to be classified within the deferred tax accounts under FERC reporting (the liability for uncertain tax benefits under GAAP may not be combined with the deferred tax accounts) Interest must be charged to account 431 and penalties must be charged to account (under GAAP, an acceptable policy is to include interest and penalties in income tax expense) 14

15 FERC Accounting & Reporting FERC reporting using XML Conversion of certain FERC forms (including Form 1 and Form 2) to XML North American Energy Standards Board (NAESB) will develop the standards and protocols to report to FERC using XML Expected to take 2-4 years (informal goal to be ready for testing in 2.5 years) Expressed desire for industry involvement, including testing in a sandbox environment Companies will need to develop systems to export data to FERC using XML Multiple vendors interested in providing this service EEI/AGA task force to provide industry input and keep us informed Continued use of Visual Fox Pro until XML is ready 15

16 FERC Accounting & Reporting Accountant Certification Code of Federal Regulations and Instructions for filing Form 1, 1-F, 2 and 2-A require a CPA certification statement The certification should: Attest to the conformity, in all material respects, of the financial statements with the uniform system of accounts and published accounting releases 16

17 FERC Accounting & Reporting Accountant Certification Schedules covered by CPA Certification: Comparative balance sheet Statement of income for the year (total with separate columns for electric, gas and other utility) Statement of retained earnings (for current year) Statement of cash flows (for current year) Notes to financial statements Note that the Statement of Accumulated Comprehensive Income, Comprehensive Income and Hedging Activities (pages 122a and 122b of Form 1) is not required to be audited 17

18 FERC Accounting & Reporting Accountant Certification Most audit firm reports state that the audit of the financial statements was conducted in accordance with auditing standards generally accepted in the US (the AICPA auditing standards) The AICPA issued new reporting standards that changed the wording of the standard auditors report effective for calendar year 2012 Many audit firm reports include an emphasis of matter paragraph (noting that the uniform system of accounts is a basis of accounting other than GAAP) and a report restriction paragraph The audit firm report must be submitted within 30 days of the Form 1 or 2 due date Filers are encouraged to file the audit firm report electronically, although it can be mailed 18

19 FERC Accounting & Reporting FERC & EEI/AGA Annually, the EEI/AGA FERC Accounting Liaison Group meets with the FERC Chief Accountant and his staff to discuss and exchange views on industry accounting issues This group was created in 1965 Current Chair is Tom Mitchell from American Electric Power Services Corporation AGA participated for the first time in 2015 Meeting was held on August 12, 2015 in Washington, DC Attended by 14 company representatives (13 companies) Attended by 8 FERC staff, including Steven Hunt, Deputy Chief Accountant 19

20 FERC Research Tools FERC.gov & e-library The FERC.gov website provides access to resources regarding FERC accounting and reporting guidance FERC.gov allows key word searches Examples of searches: Annual Enforcement Report Accounting Matters Uniform System of Accounts Landmark Orders elibrary allows you to search by docket or group of dockets Search by key words Includes wildcard search capability under General Search Docket prefix defines the type of filing or document 20

21 FERC Research Tools FERC.gov & e-library Under Advance Search Most widely used search options 21

22 FERC Research Tools FERC.gov & e-library Accession No. Feature: 22

23 FERC Research Tools FERC.gov & e-library Standard FERC Docket Prefixes 23

24 FERC - Office of Enforcement Organization Chart New Director, Larry Parkinson and Deputy Director, Lee Ann Watson * FERC website 24

25 FERC Office of Enforcement Audit Trends * FERC Report on Enforcement, Docket No. AD

26 FERC - Office of Enforcement Areas of Focus Continued areas of focus for FERC Staff include: Formula Rates - Specifically mentioned - are the balance sheet amounts proper for ratemaking (accruals, goodwill, fair value adjustments) Short-term recurring accruals are not a concern Long-term accruals may be excluded from formula rates (not considered for ratemaking purposes or for those with market based rates) Examples: contract retentions, legal reserves, contingencies Tax Prepayments Recording of income tax payments in which a refund has been elected in Account 165, Prepayments, resulting in over-recoveries. Mergers & Acquisitions Goodwill Internal Merger Costs Policy on Hold Harmless (PL15-3) Allocated Labor Inappropriate or unsupported allocation of labor costs between transmission and distribution projects when an employee supported both. 26

27 FERC - Office of Enforcement Areas of Focus Continued areas of focus for FERC Staff include: Plant Classification Distribution plant placed into service without appropriate policies and controls being utilized to ensure project costs are properly classified. Regulatory Assets Need to be supported Service Company Allocations Allocation methodologies need to be supported Natural Gas Accounting & Reporting Erroneous Accounting and reporting Penalty revenues assessed to noncompliant shippers, transmission mains and compression station expenses, line pack inventory changes, shipper imbalances and cash-outs, lost and unaccounted-for gas, gains from the sale of cushion gas Tariff Issues 27

28 FERC - Office of Enforcement Audit Determination & Selection Companies are selected for audit using a risk based assessment based on the Commission s strategic plan areas of focus FERC staff does not target a particular company Audit plan is approved by the Chair of the Commission Culture of compliance assessment by the FERC staff Drives the audit procedures and level of testing Recommended Internal Audit (IA) involvement regarding compliance with FERC regulations Normally see involvement with GAAP reporting but not FERC Examples where IA can be involved were development of formula rates, compliance with hold harmless commitments, merger reviews, and Order 1000 commitments Necessary part of regulation 28

29 FERC Office of Enforcement Audit Determination & Selection Significant Events Relevant Risks facing the markets Regulatory Environment COMPREHENSIVE RISK ASSESSMENT Consults with other offices with FERC Industry Outreach 29

30 FERC - Office of Enforcement Preparing for an Audit A few recommended tips: Provide concise responses to every data request on key areas Request rolling submission of responses if tight deadline Request site visit agenda/topic areas in advance for preparation Provide overviews through conference calls of areas that aren t as critical Research Orders, filings, and guidance relevant to the scope area(s) Ensure accounting practices are understood (ratemaking and/or acctg, retail or wholesale) Provide copies of overview materials Provide an open flow of communication Ask for clarification on topics, issues, areas of audit Provide observations and walk-throughs of systems supporting audit scope 30 areas

31 FERC - Office of Enforcement Division of Audits & Accounting There were 22 audits completed in 2015 Legend: MBR = market based rates; EQR = electronic quarterly reporting; FR = formula rates; OATT = open access transmission tariff; NDT = nuclear decommissioning trust; Acct/Rpt = accounting & reporting; DR=Demand Response; RR=record retention; M=merger Search by docket number at 31

32 FERC - Office of Enforcement Division of Audits & Accounting As of April 2016, there were 13 audits commenced for FY16: Legend: MBR = market based rates; EQR = electronic quarterly reporting; FR = formula rates; OATT = open access transmission tariff; NDT = nuclear decommissioning trust; Acct/Rpt = accounting & reporting; DR=Demand Response; RR=record retention; M=merger Search by docket number at 32

33 FERC - Office of Enforcement Division of Audits & Accounting Other Dockets issued by FERC Staff: 33

34 FERC - Office of Enforcement Division of Audits & Accounting Included in 2015 Report on Enforcement compliance alert section A&G included nonoperational expenses and maintenance expenses Merger goodwill included in the equity component of the capital structure Depreciation rates using state approved or blended rates without FERC approval Merger costs including any merger-related costs Tax prepayments overpayments recorded as prepayments Unused inventory and equipment remove unused items from construction projects Allocated labor need current time studies ARO need specific FERC approval to include costs in formula rates Below-the-line costs instances of lobbying, donations, penalties, and compromise settlements being charged above-the-line Plant Classification distribution plant included in transmission plant 34

35 FERC - Office of Enforcement Division of Audits & Accounting Key Orders and Guidance related to findings: Acquisition Premiums/Goodwill Order 592, Commission Policy on Mergers AC11-46 Depreciation rates Order 618, Depreciation Accounting Section 302(a) of FPA 18 C.F.R. 35.1(e) Merger costs PL15-3, Policy Statement on Hold Harmless Commitment Below-the-line in Account 426.5, Other Deductions General Instruction No. 5, Submittal of Questions Tax prepayments 2015 Report on Enforcement, Account 143 or 146, as appropriate Account 236, Taxes Accrued 35

36 FERC - Office of Enforcement Division of Audits & Accounting Consolidated Method of Accounting Order 469, Adopt Equity Method of Accounting Account 123.1, Investment in Subsidiary Companies Asset Retirement Obligations Order 631, Accounting, Financial Reporting, and Rate Filing Requirements for AROs Formula Rates Staff s Guidance on Formula Rates Regulatory Assets & Liabilities Order 552, Revisions to the USoA..Regulatory created Assets and Liabilities Deferred Tax Liabilities associated with AFUDC Equity AI93-5, Accounting for Income Taxes Gas Imbalances (not reported net) Order 581, Revisions of USoA.Reporting Requirements for Natural Gas Account 174, Miscellaneous Current and Accrued Assets (Receivables) Account 242, Miscellaneous Current and Accrued Liabilities (Payables) 36

37 FERC - Office of Enforcement Recent Audit Activity Docket No. PA14-2 Scope: formula rates, accounting and reporting Key Findings: Accounting for Merger Transaction Costs Merger Transaction Internal Labor Costs Merger Transaction Outside Services and Related Costs Use of the Consolidated Method of Accounting 37 Pertinent Guidance: Account 426.5, Other Deductions Order No. 469 states, in part, Under the equity method of accounting, the utility s investment account is increased or decreased to reflect the utility s proportionate share of a subsidiary s current earnings applicable to common stock regardless of whether the earnings are actually paid out as dividends to the utility. When dividends are received, the investment account is reduced by an equivalent amount. Account No , Investments in Subsidiary Companies B. This account shall be maintained in such a manner as to show separately for each subsidiary: the cost of such investments in the securities of the subsidiary at the time of acquisition; the amount of equity in the subsidiary's undistributed net earnings or net losses since acquisition; advances or loans to such subsidiary; and full particulars regarding any such investments that are pledged.

38 FERC - Office of Enforcement Recent Audit Activity Docket No. FA15-1 Scope: FERC gas tariff, accounting regulations in the USofA, Form 2 reporting requirements, compliance review program Key Findings: Accounting for Imbalances Accounting and reporting accruals and third-party reimbursements Accounting and reporting of ADIT Accounting and reporting accrued taxes Pertinent Guidance: Order No. 581 explained that pipelines should record a receivable and payable for all customer gas that is used to meet imbalances to reflect their right to receive gas from one shipper and their obligation to provide gas to another shipper. Account 252, Customer Advances for Construction, states: This account shall include advances by customers for construction which are to be refunded either wholly or in part. When a customer is refunded the entire amount to which he is entitled, according to the agreement or rule under which the advance was made, the balance, if any, remaining in this account shall be credited to the respective plant account. 38

39 FERC - Office of Enforcement Recent Audit Activity Docket No. FA15-1 continued, Pertinent Guidance Accounting for Income Taxes, Docket No. AI states: An entity shall record the deferred tax liability for the equity component of AFUDC in Account 282, Accumulated Deferred Income Taxes Other Property, and any corresponding regulatory asset in Account 182.3, Other Regulatory Assets. The regulatory asset is itself a temporary difference for which deferred incomes taxes shall be recognized and recorded in Account 283, Accumulated Deferred Income Taxes Other. Accrued Taxes: Destin did not make any offsetting entries to remove the accrued income taxes in Account 236, which resulted in a cumulative balance reported in Account 236 since Destin must adjust the Account 236 balances to reflect the correct accrued taxes and credit the excess amount to Account 211, Miscellaneous Paid-In Capital, taking into consideration the estimated and final income tax payments made by its member companies. Docket No. FA15-14 Scope: merger, accounting and reporting Key Findings: Accounting for Merger Transaction Costs Pertinent Guidance Account 426.5, Other Deductions 39

40 FERC Relevant Topics Additional Topics of Interest Other Topics Addressed by FERC: RTO filings changes in accounting policies or corrections Encourage dialogue with customers in formula rate updates with respect to new GAAP and correction of any errors Proposed policy statement on hold harmless commitments Issued in January 2015 EEI and 8 others filed comments in March 2015 Most significant issue is making commitments unlimited in duration 40

41 FERC Relevant Topics Additional Topics of Interest Pensions and Other Postretirement Benefit Costs Exposure Draft released in January 2016 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost Proposed changes Service cost presented as an operating expense Remaining components presented in a separate non-operating item in the income statement Only the service cost component would be eligible for capitalization EEI/AGA Comment Letter May result in complex tracking of amounts capitalized for regulatory accounting vs GAAP Would differences be classified as regulatory assets and liabilities? 41

42 FERC Relevant Topics Additional Topics of Interest Lease ASU All leases will be presented on the balance sheet Straight-line expense for former operating leases Effective for years ending after 12/15/18 Modified retrospective adoption to first balance sheet presented What FERC account will be utilized for the right of use asset for operating leases that are currently off-balance sheet? 42

43 FERC Relevant Topics Additional Topics of Interest Discontinued Operations Discussed recently issued guidance by FASB and potential impact on FERC accounting and reporting ASU Reporting Discontinued Operations and Disclosure of Components of an Entity Disposal of an entity or a group of components of an entity required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results (whether held for sale, sold, or disposed of other than sale, such as an abandonment or in a distribution to owners in a spinoff) No impact on FERC reporting since FERC has no presentation of discontinued operations on the FERC 43 Income Statement

44 FERC Relevant Topics Additional Topics of Interest Revenue from contracts with customers ASU Revenue from Contracts with Customers Overall, we do not expect significant accounting impacts on the industry from applying the ASU, but given its principles-based requirements and the elimination of industry-specific guidance, we are working diligently to identify and address any potential issues. Potential issues include contract modifications, price and volume variability contracts, contributions in aid of construction, and presentation of operating revenue. Open question not discussed with FERC Staff: FERC formula rate revenue recognition AICPA industry task force is currently evaluating Is the alternative revenue program: All amounts billed to customers under formula rates Only the true-up amount 44

45 FERC Relevant Topics Additional Topics of Interest Extraordinary and Unusual Items ASU Extraordinary and Unusual Items Eliminates the concept of extraordinary items for presentation on the face of the income statement. Potential additional FERC vs. GAAP difference unless FERC decides to revise the USofA to eliminate Accounts 434, 435, and We understand FERC staff observed that there may be instances where FERC may require the continued use of the extraordinary items accounts depending on the nature of the transaction. 45

46 FERC Relevant Topics Additional Topics of Interest Presentation of Debt Issuance Costs ASU Presentation of Debt Issuance Costs Present debt issuance costs on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with discounts. Will result in another FERC vs. GAAP difference. FERC Account 181 is presented as a deferred asset on the FERC balance sheet. Account 181 should continue to be used to avoid understating the long term debt balances used to determine debt/equity weighting. 46

47 FERC Relevant Topics Additional Topics of Interest Cloud Computing Arrangements ASU Fees Paid in a Cloud Computing Arrangement The guidance in this Subtopic applies only to internaluse software that a customer obtains access to in a hosting arrangement if both of the following criteria are met: a. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty b. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software 47

48 FERC Relevant Topics Additional Topics of Interest Cloud Computing Arrangements ASU Fees Paid in a Cloud Computing Arrangement Many common cloud computing arrangements would be treated as service contracts and expensed as they are incurred, and companies would no longer be permitted to analogize to lease accounting to capitalize such contracts. However, there are several remaining considerations for the utility that may result in a diversity of accounting practice: Capitalization treatment of ancillary costs (e.g., up-front fees, customization, integration, testing) Appropriate balance sheet classification for capitalized costs Income statement treatment of costs of cloud computing Treatment of cloud costs on the FERC forms No feedback from the FERC Staff assuming we will follow GAAP for FERC 48

49 FERC Relevant Topics Additional Topics of Interest Measurement of Inventory ASU Simplifying the Measurement of Inventory Other than inventory measured using LIFO or the retail inventory method, the subsequent measurement of inventory should be at the lower of cost and net realizable value Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation Little if any impact expected on regulated utilities with cost based ratemaking Unregulated operations may be impacted 49

50 Q & A

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