About The Author:
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.
by Roger Feldman -- Bingham, Dana L.L.P.
(originally published by PMA OnLine
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.