December 2003

Splash

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2003/12/21)
 

Cash management or “money pool” programs typically concentrate affiliates’ cash assets in joint accounts for the purpose of providing financial flexibility and lowering the cost of borrowing. FERC-regulated entities are currently estimated to have $25.2 billion in cash management accounts. FERC has jumped in this pool a little late with a little splash. But it is likely there will be important ripples.

The need for improved corporate governance for recognition that there will be abuses in markets not subject to orderly regulatory surveillance has emerged as the great theme of the present decade. Yet, at the same time, one of the clarion calls of the 90’s, which led to the current transparent governance boom - deregulation - close to enactment enrichment in Congress, which plans to dismantle the Public Utility Holding Company Act, and generally substitute a lighter FERC regulatory load.

Yet just as the great sucking sound of a coming energy governance vacuum is heard, the creaking sound of FERC closing the barn door closing as Enron’s raid on its regulated pipelines just prior to its bankruptcy is heard. FERC has published its Regulation of Cash Management Practices (Order 634AA, RM02-14-000 and 001). Once the Energy Act passes, it will be just its first toe in the cash pool.

Briefly the Order provides that FERC regulated entities must file their cash management agreements with the FERC, and timely notify the Commission when their “Proprietary Capital Ratio” falls below 30%, i.e., that an event in which an unregulated parent of unregulated utilities sought to raid a regulated cookie jar to protect or leverage its financial position, would not go unnoticed. (It also applies to increases in capital above the proprietary threshold.) While the purpose of the accounts is to provide financial flexibility and lower the cost of borrowing; the potential for abuse is apparent and has been demonstrated.

Most of the debate about Order rule has centered on whether the Commission is opening new areas of governance; imposing a new layer of regulation outside its core jurisdiction and competence, and in the process possibly giving marketplace investors arbitrary and ill-advised guidance as to the financial health of utilities. Proponents of the Order have highlighted the protection which FERC (lagging its State Regulatory Counterparts) has given to the structure of utilities’ “regulatory compact” with it and the basis on which utilities are expected to fulfill their duty to serve.

It is important however, additionally to view this administrative skirmish from a vantage point above of the resurgent new trends in the industry. We are entering a time when many more financial and non-regulated parties will be owning a variety of energy assets, subject to regulation of both a rate-based, and market-based variety. There will be more types of entities which might be styled “utility holding companies”. We are entering a time when the structures on holding company inter-corporate transactions are about to be lifted or loosened; a time when utility holding companies are wittingly drawing back formerly “deregulated” assets into their regulated rate base, so that better returns can be earned and a time when as a result of “conveyances”, simple vertical integration, and continued technology change the types of firms and trading businesses which comprise an “energy company” are becoming more comple.

No doubt, we are entering a time when – absent the abrupt transcendence of the entire history of American business– the potential for abusive transactions is presented. The FERC’s effort to deal with cash management accounts may, whether it really wants to or not, be the first in a series of measures to provide an orderly framework for the plugging of potential abuses to which it becomes aware. The Order relies on its information-gathering authority. Post Energy- Act, presumably that authority will be much broader.

To be sure, FERC’s record in dealing with affiliate abuse through clear definition of guidelines as to market power, have not been accelerated or stellar. But at least this new rule has the advantage (if you can get through the definitions) of providing a bright line tests for precluding one type of inter-corporate raiding a holding company context. One would expect that not – withstanding the inefficiencies the approach may introduce, therefore we will see more.

Is the FERC equipped for this purpose? Is this even the best way to deal with governance? There clearly is at least one pro-regulation constituency prepared to say it isn’t: State regulators and attorneys general. In a highly technical industry, in important transition it seems reasonable to suggest that 50 State Attorneys General complemented by 50 Ralph Naders, is not the formula for orderly evolution and preservation of the benefits of operating deregulation. FERC should learn from the SECs low scores in its recent splash in the governance pool.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.