[Federal Register Volume 67, Number 5 (Tuesday, January 8, 2002)]
[Proposed Rules]
[Pages 1026-1065]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-190]



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Part III





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Parts 101, 201, and 352



Accounting and Reporting of Financial Instruments, Comprehensive 
Income, Derivatives and Hedging Activities; Proposed Rule

  Federal Register / Vol. 67 , No. 5 / Tuesday, January 8, 2002 / 
Proposed Rules  

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 101, 201, and 352

[Docket No. RM02-3-000]


Accounting and Reporting of Financial Instruments, Comprehensive 
Income, Derivatives and Hedging Activities; Notice of Proposed 
Rulemaking

December 20, 2001.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission proposes to revise 
its regulations to update the accounting and reporting requirements 
under its Uniform Systems of Accounts for jurisdictional public 
utilities, natural gas companies and oil pipelines. The Commission 
proposes to establish uniform accounting requirements and related 
accounts for the recognition of changes in the fair value of certain 
security investments, items of other comprehensive income, derivative 
instruments, and hedging activities. The Commission proposes to add new 
balance sheet accounts to the Uniform Systems of Accounts to record 
items of other comprehensive income and derivative instruments. The 
Commission also proposes to add new general instructions and revise 
certain account instructions to incorporate the above changes in the 
existing Uniform Systems of Accounts.
    Additionally, the Commission proposes to revise the following 
Annual Reports: FERC Form No. 1, Annual Report of Major Public 
Utilities, Licensees and Others (Form 1); FERC Form No. 1-F, Annual 
Report of Nonmajor Public Utilities and Licensees (Form 1-F); FERC Form 
No. 2, Annual Report of Major Natural Gas Companies (Form 2); FERC Form 
No. 2-A, Annual Report of Nonmajor Natural Gas Companies (Form 2-A); 
and Form No. 6, Annual Report of Oil Pipeline Companies (Form 6) to 
include the new accounts and new schedules proposed by this rulemaking.
    An important objective of the proposed rule is to provide sound and 
uniform accounting and financial reporting for the above types of 
transactions and events. The new instructions and accounts for 
recording the above transactions and events will result in improved, 
consistent and complete accounting and reporting. The addition of new 
accounts and new reporting schedule is intended to address and resolve 
the problems of lack of visibility, completeness and consistency of 
accounting and reporting changes in the fair value of certain financial 
instruments, items of other comprehensive income, derivative 
instruments and hedging activities, in the above mentioned FERC Forms.

DATES: Comments on the proposed rulemaking are due on or before March 
11, 2002.

ADDRESSES: File written comments with the Office of the Secretary, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC, 20426. Comments should reference Docket No. RM02-3-000. 
Comments may be filed electronically or by paper (an original and 14 
copies, with an accompanying computer diskette in the prescribed format 
requested).

FOR FURTHER INFORMATION CONTACT:

Mark Klose, (Technical Information), Office of the Executive Director, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 219-2959.
Julia A. Lake, (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 208-2019.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction 
II. Background 
    A. General 
    B. Investments In Debt And Equity Securities 
    C. Other Comprehensive Income 
    D. Derivative Instruments And Hedging Activities 
    1. General 
    2. Definition of a Derivative 
    3. Accounting for a Derivative Instrument 
    4. Hedge Accounting 
    a. Fair Value Hedge 
    b. Cash Flow Hedge 
    c. Documentation of Hedge Relationship 
III. Discussion 
    A. General 
    B. Proposed Accounting For Trading and Available-For-Sale Type 
Securities 
    C. Proposed Accounting For Other Comprehensive Income 
    D. Proposed Accounting For Derivatives and Hedging Activities 
    1. General 
    2. Proposed General Instructions For Fair Value and Cash Flow 
Hedges 
    3. Proposed Changes to General Instruction 21. Allowances 
    4. Proposed Accounting for Derivative Assets and Liabilities 
    5. Proposed Accounting for Fair Value and Cash Flow Hedges 
    E. Proposed Changes to the FERC Annual Report Forms 
IV. Regulatory Flexibility Act Statement 
V. Environmental Impact Statement 
VI. Information Collection Statement and Public Reporting Burden 
VII. Public Comment Procedures 
VIII. Document Availability 
Regulatory Text 
Appendix A--Proposed Schedules for Forms 1, 1-F, 2, 2-A, and 6 

Federal Energy Regulatory Commission

[Docket No. RM02-3-000]

Accounting and Reporting of Financial Instruments, Comprehensive 
Income, Derivatives and Hedging Activities; Notice of Proposed 
Rulemaking

December 20, 2001.

I. Introduction

    In this notice of proposed rulemaking (NOPR), the Federal Energy 
Regulatory Commission (Commission) proposes to amend its Uniform 
Systems of Accounts \1\ for public utilities and licensees \2\ (public 
utilities), natural gas companies \3\ (gas companies) and oil pipeline 
companies \4\ (oil pipelines). Briefly, the Commission proposes to 
establish uniform accounting requirements for the recognition of 
changes in the fair value of certain security investments, items of 
other comprehensive income, derivative instruments, and hedging 
activities. The Commission proposes to add new balance sheet accounts 
to the Uniform Systems of Accounts to record items of other 
comprehensive income and changes in the fair value of derivative 
instruments. The Commission also proposes to add new general 
instructions for the accounting of derivative instruments and hedging 
activities along with new instructions for the accounting of items of 
other comprehensive income. Revisions to existing investment asset 
accounts and general instructions are proposed to incorporate fair 
value accounting for

[[Page 1027]]

trading and available-for-sale type security investments.
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    \1\ Section 301(a) of the Federal Power Act (FPA), 16 U.S.C. 
825(a), section 8 of the Natural Gas Act (NGA), 15 U.S.C. 717g and 
section 20 of the Interstate Commerce Act (ICA), 49 App. U.S.C. 20 
(1988), authorize the Commission to prescribe rules and regulations 
concerning accounts, records and memoranda as necessary or 
appropriate for the purposes of administering the FPA, NGA and the 
ICA. The Commission may prescribe a system of accounts for 
jurisdictional companies and, after notice and opportunity for 
hearing, may determine the accounts in which particular outlays and 
receipts will be entered, charged or credited.
    \2\ Part 101 Uniform System of Accounts Prescribed for Public 
Utilities and Licensees Subject to the Provisions of the Federal 
Power Act. 18 CFR part 101.
    \3\ Part 201 Uniform System of Accounts Prescribed for Natural 
Gas Companies Subject to the Provisions of the Natural Gas Act. 18 
CFR part 201.
    \4\ Part 352 Uniform System of Accounts Prescribed for Oil 
Pipeline Companies Subject to the Provisions of the Interstate 
Commerce Act. 18 CFR part 352.
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    Additionally, the Commission proposes to revise the following 
Annual Reports: FERC Form No. 1, Annual Report of Major Public 
Utilities, Licensees and Others (Form 1); FERC Form No. 1-F, Annual 
Report of Nonmajor Public Utilities and Licensees (Form 1-F); FERC Form 
No. 2, Annual Report of Major Natural Gas Companies (Form 2); FERC Form 
No. 2-A, Annual Report of Nonmajor Natural Gas Companies (Form 2-A); 
and Form No. 6, Annual Report of Oil Pipeline Companies (Form 6) to 
include the new accounts and a new schedule proposed by this 
rulemaking.\5\
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    \5\ The FERC Annual Reports bear the following OMB approvals: 
Form No. 1 has OMB approval number 1902-0021; Form No. 1-F has OMB 
approval number 1902-0029; Form No. 2 has OMB approval number 1902-
0028; Form No. 2-A has OMB approval number 1902-0030; and Form No. 6 
has OMB approval number 1902-0022.
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    The purpose of the proposed rule is to provide useful financial 
information to regulatory agencies and other users of the financial 
statements of public utilities, gas companies and oil pipelines by 
establishing uniform accounting and reporting requirements for items of 
other comprehensive income, changes in the fair value of investment 
securities, derivatives, and hedging activities. An important objective 
of the proposed rule is to provide sound and uniform accounting and 
financial reporting for the above types of transactions and events. The 
Commission is of the view that such requirements are needed at this 
time because these types of transactions and events are not 
specifically addressed in the existing Uniform Systems of Accounts or 
in FERC Forms 1, 1-F, 2, 2-A, and 6. This NOPR is part of the 
Commission's ongoing effort to address emerging accounting 
pronouncements within the context of the Uniform Systems of 
Accounts.\6\
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    \6\ On August 10, 2001, the Commission's Chief Accountant issued 
interim accounting guidance on the proper accounting and reporting 
requirements for changes in the fair value of certain investments in 
marketable securities, items of other comprehensive income, and 
derivatives and hedging activities. See, All Jurisdictional Public 
Utilities, Licensees, Natural Gas Companies, and Oil Pipeline 
Companies, 96 FERC para. 62,147 (2001).
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    There are, however, a number of entities with market-based rates 
that have been exempted from the Commission's Uniform System of 
Accounts, and thus would not be subject to the proposed rule. For 
instance, parts 41, 101, and 141 of the Commission's regulations 
prescribe certain informational requirements that focus on the assets 
that a public utility owns. For market-based applications, the 
Commission has taken the position that since a marketer does not own 
any electric power generation or transmission facilities, its 
jurisdictional facilities would be only corporate and documentary, its 
costs would be determined by utilities that sell power to it, and its 
earnings would not be defined and regulated in terms of an authorized 
return on invested capital, and that, accordingly, it would grant 
waivers to marketers of the requirements of these Parts. The Commission 
has also granted power marketers' requests for blanket approval under 
Part 34 of the Commission's regulations for all future issuances of 
securities and assumptions of liability, assuming that no party objects 
to such treatment during a notice period which the Commission 
provides.\7\ The purpose of section 204 of the Federal Power Act, which 
Part 34 implements, is to ensure the financial viability of public 
utilities obligated to serve electric consumers. The Commission 
concluded that since marketers do not obligate themselves to serve 
electric consumers, the requirements are inapplicable.\8\
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    \7\ We note that the Commission's jurisdiction over issuances of 
securities and assumptions of liabilities under section 204 of the 
FPA applies only to entities that are public utilities as defined in 
the FPA and only where the public utilities' security issues are not 
regulated by a State commission (see FPA section 204(f)).
    \8\ See, e.g., St. Joe Minerals Corp, 21 FERC para. 61,323 
(1982); Cliffs Electric Service Company, 32 FERC para. 61,372 
(1985); Citizens Energy Corporation, 35 FERC para. 61,198 (1986); 
Howell Gas Management Company, 40 FERC para. 61,336 (1987); Citizens 
Power & Light Corporation, 48 FERC para. 61,210 (1989); National 
Electric Associates Limited Partnership, 50 FERC para. 61,378 
(1990); and Nevada Sun-Peak Limited Partnership, 86 FERC para. 
61,243 (1999).
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    As the development of competitive wholesale power markets 
continues, however, independent and affiliated power marketers and 
power producers are playing more significant roles in the electric 
power industry. In light of the evolving nature of the electric power 
industry, the Commission seeks comment on the extent to which these 
entities should be required to follow the Uniform System of Accounts, 
what financial information, if any, should be reported by these 
entities, how frequently it should be reported, and, in particular, 
whether these exempted entities should be subject to reporting the 
information required in the proposed regulations. Furthermore, the 
Commission seeks comments on whether we should rescind the part 34 
blanket authorizations granted to these entities and require these 
entities to comply with the filing requirement of part 34 for all 
future issuances of securities and assumptions of liabilities.
    Finally, the proposed rule is not intended to prescribe the 
ratemaking treatment for items of other comprehensive income or for 
derivative instruments and hedging activities. The Commission's 
proposal does not bar regulatory commissions (including this 
Commission) from adopting any particular ratemaking treatment for these 
transactions.

II. Background

A. General

    In recent years, fair value measurements have become useful in 
assisting investors, creditors and other users of the financial data in 
making rational investment, credit and similar decisions. The use of 
fair value as a measurement attribute for financial reporting has grown 
in importance and relevance. Despite this fact, the companies that this 
Commission regulates have had only a relatively small number of 
transactions for which fair value measurements would be appropriate. 
This however is changing. As the regulated industries restructure, fair 
value will provide a relevant measure of economic effects for a growing 
number of transactions and events. The potential usefulness of fair 
value information has resulted in the Financial Accounting Standards 
Board (FASB) \9\ issuing new accounting pronouncements affecting the 
manner in which certain types of financial instruments, derivatives and 
hedging activities are measured and reported in the financial 
statements applicable to entities in general.\10\
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    \9\ FASB and other accounting bodies are responsible for 
establishing and improving financial accounting and reporting 
standards for private sector companies.
    \10\ The accounting pronouncements issued by FASB were Financial 
Accounting Standards (FAS) 115, Accounting for Certain Investments 
in Debt and Equity Securities, 130, Reporting Comprehensive Income, 
and 133, Accounting for Derivative Instruments and Hedging 
Activities, as amended by 138, Accounting for Certain Derivative 
Instruments and Certain Hedging Activities. These accounting 
pronouncements may be obtained from FASB at (http://accounting.rutgers.edu/raw/fasb/).
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    The Commission considers the requirements contained in Financial 
Accounting Standards (FAS) 115, 130 and 133 to be an improvement in 
financial accounting and reporting practices if properly implemented. 
Also, as a general proposition, the Commission considers it desirable 
for its accounting requirements and those used for general purpose 
financial reporting to be consistent. While some companies have 
implemented certain aspects of these pronouncements, the implementation 
has not been uniform concerning the accounting and reporting

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to the Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6. Therefore 
the Commission plans to implement the principles and concepts set forth 
in FAS 115, 130 and 133 for FERC accounting and reporting purposes 
effective upon the issuance of a final order in this proceeding. 
Consequently, the interim accounting and reporting guidance provided by 
the Chief Accountant on August 10, 2001, will be superceded with the 
issuance of the final rule in this proceeding.\11\
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    \11\ See note 6.
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    In summary, the Commission considers that the proposed accounting 
and reporting changes will provide consistent accounting and reporting 
of changes in the fair value of financial investments, derivatives and 
hedging activities. The proposed changes will also minimize the 
accounting and reporting burden on jurisdictional entities and assist 
the Commission in its analysis of profitability, efficiency, risk 
management, and in its overall monitoring effort.
    In order to provide a context for the Commission's proposed changes 
the key aspects of the relevant FASB pronouncements are provided below.

B. Investments in Debt and Equity Securities

    In May 1993, the FASB issued Financial Accounting Standard (FAS) 
115, Accounting for Certain Investments in Debt and Equity Securities, 
effective for fiscal years beginning after December 15, 1993. This 
statement addresses the accounting and reporting for investments in 
equity securities that have readily determinable fair value and for all 
investments in debt securities.
    This accounting pronouncement requires entities to classify 
investments in securities into one of three categories, held-to-
maturity, trading, or available-for-sale.
    The first category of investments, held-to-maturity, consists of 
debt securities that the entity has the intent and ability to hold to 
maturity. For debt securities held to maturity, the cost will be the 
amount realized when the entity redeems the security. Therefore, 
changes in the fair value of securities held to maturity are not 
recognized during the period the entity holds the security investment.
    Securities that fall into the second category, trading type 
securities, reflect active and frequent buying and selling. They are 
held for short periods of time with the objective of generating profits 
from short term differences in price. Entities must recognize 
unrealized holding gains and losses on trading type securities in 
earnings when the fair value of security changes.
    Securities that do not fall into the category of held-to-maturity 
or trading type securities are considered to be available-for-sale. 
Changes in the fair value of available for sale type securities are 
reflected in the financial statements in ``other comprehensive income'' 
rather than earnings. This accounting treatment results in unrealized 
holding gains and losses on debt and equity securities that are 
available for sale being reported outside of earnings because they are 
not actively managed in a trading account.

C. Other Comprehensive Income

    In June 1997, the FASB issued FAS 130, Reporting Comprehensive 
Income. This statement established the standards for reporting 
comprehensive income in a full set of general-purpose financial 
statements effective for fiscal years beginning after December 15, 
1997. Comprehensive income represents the change in equity of an entity 
during a period from transactions and other events and circumstances 
from nonowner sources. Comprehensive income is composed of traditional 
net income plus items of ``other comprehensive income.'' \12\
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    \12\ Comprehensive income is defined by FASB in Concepts 
Statement No. 6 as, ``the change in equity [net assets] of a 
business enterprise during a period from transactions and other 
events and circumstances from nonowner sources. It includes all 
changes in equity during a period except those resulting from 
investments by owners and distributions to owners.''
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    Items of other comprehensive income are amounts under existing 
accounting standards that were permitted to bypass the income statement 
and be recorded directly in a separate section of equity. These amounts 
were required to be classified by their category and reported 
separately from retained earnings and additional paid-in capital. Under 
existing accounting standards other comprehensive income categories 
include, foreign currency items, minimum pension liability adjustments, 
unrealized gains and losses on certain investments in debt and equity 
securities, and cash flow hedge amounts.
    Under the provision's of FAS 130, entities may report the 
categories of other comprehensive income using an income statement 
format or by showing the amounts as part of the Statement of 
Shareholders Equity. Entities may also report the amounts on a before-
tax or after-tax basis provided that certain disclosures are made in 
the notes to the financial statements.

D. Derivative Instruments and Hedging Activities

1. General
    In June 1998, the FASB issued FAS No. 133, Accounting for 
Derivative Instruments and Hedging Activities, as amended on June 2000, 
by FAS 138, Accounting for Certain Derivative Instruments and Certain 
Hedging Activities. This pronouncement was issued in a response to an 
increased use of derivatives and to resolve problems with the 
accounting and reporting practices for derivatives and hedging 
activities. These problems included incomplete and inconsistent 
accounting guidance on the effects of derivative transactions and 
hedging activities. The effects of derivatives were not transparent in 
the basic financial statements, and many derivative instruments were 
carried ``off-balance-sheet'' regardless of whether they were formally 
part of a hedging strategy. The FASB issued new accounting guidance to 
address these concerns.
2. Definition of a Derivative
    A derivative instrument is defined for accounting purposes based on 
its distinguishing characteristics rather than by specific examples of 
derivative instruments such as futures or option contracts because the 
expansion of financial markets and other contracts could ultimately 
render obsolete a definition based solely on examples.
    A derivative instrument is a financial instrument or other contract 
with all of the following characteristics:
    First, the instrument has one or more underlyings. An underlying is 
a specified interest rate, security price, commodity price, foreign 
exchange rate, index of prices or rates, or other variable. An 
underlying may be a price or rate of an asset or liability but is not 
the asset or liability itself.
    Second, the instrument must have one or more notional amounts or 
payment provisions. A notional amount represents quantity such as a 
number of currency units, shares, bushels, pounds or other units 
specified in a derivative instrument. Those terms determine the amount 
of the settlement or settlements, and, in some cases, whether or not a 
settlement is required.
    Third, the instrument requires no initial net investment or an 
initial net investment that is smaller than would be required for other 
types of contracts that would be expected to have similar response to 
changes in market factors.
    Finally, the instrument requires or permits net settlement. It can 
readily be settled net by a means outside the contract, or it provides 
for delivery of an

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asset that puts the recipient in a position not substantially different 
from net settlement.
    Certain types of contracts are exempted from the requirements of 
this statement. For example, normal purchases and normal sales 
contracts that provided for the purchase or sale of goods that will be 
delivered in quantities expected to be used or sold by the reporting 
entity over a reasonable period in the normal course of business are 
not considered derivative instruments. This exception is commonly 
referred to as the normal purchases and normal sales scope exception. 
The exception would include typical purchases and sales of inventory 
items, certain insurance contracts, and employee compensation 
agreements. Derivative instruments that do not qualify for the normal 
purchases and normal sales scope exception, or other exceptions 
provided for under the statement, are reflected in the financial 
statements. Consequently, most futures, forwards, swaps, and option 
contracts meet the definition of a derivative instrument and changes in 
their fair value would be reflected in the financial statements.
3. Accounting for a Derivative Instrument
    Changes in the fair value of derivative instruments depends upon 
its intended use and designation. Essentially, entities recognize in 
earnings in the period of the change gains or losses on certain 
derivative instruments not designated as a hedge instrument. The change 
in the value of the derivative instrument is reflected on the balance 
sheet as an asset or liability with a corresponding amount recognized 
in earnings. This accounting effectively provides users of the 
financial statements with information concerning the value of the 
derivative instrument as if it had been settled in the market place.
4. Hedge Accounting
    Providing certain criteria are met, a derivative may be 
specifically designated as a fair value or cash flow hedge. Entities 
hedge to manage risk to prices, interest rates, or foreign currency 
exposures. Under the rules for hedge accounting the changes in the fair 
value of the derivative are measured at fair value with adjustments 
made to the carrying amount of the items being hedged (as in a fair 
value hedge) or to other comprehensive income (as in a cash flow hedge) 
to the extent the hedge is effective.
    a. Fair Value Hedge
    In a fair value hedge a derivative instrument is designated as a 
hedge against exposure to changes in the fair value of a recognized 
asset, liability, or a firm commitment. A firm commitment is defined as 
an agreement with an unrelated party, binding on both parties and 
usually legally enforceable. The agreement specifies all significant 
terms, including the quantity to be exchanged, the fixed price, and the 
timing of the transaction. The fixed price may be expressed as a 
specified amount of an entity's functional currency or a foreign 
currency. It may also be expressed as a specified interest rate or 
specified effective yield.
    In a fair value hedge, the change in value of the derivative 
instrument is recognized in earnings in the period of the change 
together with the offsetting gain or loss on the item being hedged. To 
the extent that a hedge is perfectly effective, it will produce the 
same offsetting amounts in earnings so that net income is not impacted 
by the hedge. However, amounts would be reflected in earnings to the 
extent that the hedge is not effective in offsetting the change in 
value of the item being hedged.
    Additionally, fair value hedge accounting results in an adjustment 
of the carrying amount of the hedged asset or liability. In the case of 
a fair value hedge of a firm commitment, a new asset or liability is 
created. As a result of the hedge relationship, the new asset or 
liability ultimately becomes part of the carrying amount of the item 
being hedged.
    b. Cash Flow Hedge
    A cash flow hedge uses a derivative instrument to protect against 
the risk caused by variable prices or costs, that cause future cash 
flows to be uncertain. It is a hedge against an anticipated or 
forecasted transaction that is probable of occurring in the future but 
the amount of the transaction has not been fixed.
    In a cash flow hedge, the effective portion of the derivative's 
gain or loss is initially reported as a component of other 
comprehensive income. The ineffective portion of the gain or loss is 
reported in earnings immediately. Amounts recorded in other 
comprehensive income are reclassified into earnings when the hedged 
item affects earnings.
    c. Documentation of Hedge Relationship
    Entities must keep extensive documentation of the hedge 
relationship. An entity that elects to apply the special hedge 
accounting is required to document at the inception of the hedge the 
risk management objective and strategy for undertaking the hedge, 
including the hedge instrument, the related transaction, the nature of 
the risk being hedged, and how hedge effectiveness will be determined.
    The company's documentation of its overall risk management 
philosophy is essential in addressing the role that derivative 
instruments and hedging activities play in achieving the company's risk 
management objectives.
    Concurrent designation and documentation of a hedge is critical 
because an entity could retroactively identify a transaction as a hedge 
or change a method of measuring effectiveness to achieve a desired 
outcome. At the inception of the hedge formal documentation is required 
that identifies the hedging instrument and specifically identifies the 
hedged item or transaction along with the nature of the risk being 
hedged. Entities are required to formally document how effectiveness 
will be assessed at the adoption of the hedge and on an ongoing basis.

III. Discussion

A. General

    The Commission's existing Uniform Systems of Accounts for public 
utilities, gas companies and oil pipelines do not specifically address 
the proper accounting and reporting for changes in the fair value of 
certain investment securities, derivative instruments, and hedging 
activities. Additionally, the existing Uniform Systems of Accounts do 
not contain specific accounts to record amounts related to items of 
other comprehensive income or a format to display comprehensive income 
in the FERC Forms 1, 1-F, 2, 2-A, and 6.
    Without specific instructions and accounts for recording and 
reporting the above transactions and events, inconsistent and 
incomplete accounting will result. For example, if the effects of 
certain derivative instruments and hedging activities are not properly 
reported to the Commission in the FERC Annual Reports, it will be 
difficult for the Commission and others to determine the extent and 
effects of derivatives on a jurisdictional entity's' financial 
statements and results of operations. The addition of new accounts and 
related general instructions is intended to improve the visibility, 
completeness and consistency of accounting and reporting of changes in 
the fair value of certain investment securities, items of other 
comprehensive income, derivatives and hedging activities.
    Also, the addition of the proposed new accounts and related 
reporting requirements to the FERC Forms 1, 1-F, 2, 2A and 6 will 
reduce regulatory uncertainty as to the proper accounting and reporting 
for these items and

[[Page 1030]]

minimize regulatory burden by reducing the potential differences in the 
manner in which these amounts are reported to shareholders and to the 
Commission. Finally, the reporting of derivatives and hedging 
activities by jurisdictional entities will assist the Commission in its 
analysis of profitability, efficiency, risk and in its overall 
monitoring effort.

B. Proposed Accounting for Trading and Available-for-Sale Type 
Securities

    Under the Commission's Uniforms Systems of Accounts for public 
utilities and gas companies, all types of securities are recorded at 
cost and subsequent changes in the fair value of security investments 
are not recognized in the financial statements. The Uniform System of 
Accounts for oil pipelines requires adjustments to the carrying value 
of security investments when certain conditions are met.
    The Commission is of the view that fair value measurement of the 
trading and available-for-sale type securities presents relevant and 
useful information to existing and potential investors, creditors, 
regulators and others in making credit and other decisions. Fair value 
measurements will also provide useful information to the Commission 
concerning the status of certain amounts set aside to fund future 
obligations.
    The Commission therefore proposes to add language to its security 
investment accounts for public utilities, gas companies, and oil 
pipelines to permit the recognition of changes in the fair value of 
trading and available-for-sale types of securities due to unrealized 
holding gains and losses.\13\ The Commission also proposes amending its 
oil pipeline General Instruction 1-15, Accounting for marketable equity 
securities, and remove oil pipeline Accounts 23, 24, and 75.5 to 
conform the regulations to the proposed changes.
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    \13\ The security investment accounts for public utilities and 
gas pipeline companies are: Account 124, Other investments; Account 
125, Sinking funds (Major only); Account 126, Depreciation fund 
(Major only); Account 127, Amortization fund (Major only); Account 
128, Other special funds (Major only); and Account 129, Special 
funds (Nonmajor only). The security investment asset accounts for 
oil pipelines are Account 11, Temporary investments; Account 21, 
Other investments; and Account 22, Sinking and other funds.
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C. Proposed Accounting for Other Comprehensive Income

    As part of the proposed rule, the Commission proposes to revise the 
Uniform Systems of Accounts for public utilities, gas companies and oil 
pipelines to provide accounting for items of other comprehensive 
income. As proposed, new equity Account 219, Accumulated other 
comprehensive income, would be created for public utilities and gas 
companies, and a new equity Account 77, Accumulated other comprehensive 
income, would be established for oil pipelines to include the 
accumulated balance for items of other comprehensive income. The 
accounts will require supporting records be maintained by each category 
of other comprehensive income for reporting the information in the FERC 
Form 1, 1F, 2, 2A, and 6.
    As proposed, a new equity account entitled Account 219.1, Other 
comprehensive income, for public utilities and gas companies, and a new 
account entitled Account 77.1, Other comprehensive income, for oil 
pipeline companies, would be established to include amounts for items 
of other comprehensive income for the reporting year. The purpose of 
these accounts is to record the activity for items of other 
comprehensive income during the year. At year end, the amounts recorded 
in Account 219.1 and Account 77.1 would be transferred to the new 
equity Account 219 and Account 77, respectively. Consequently, Accounts 
219.1 and 77.1 as proposed will always have a zero beginning and year 
end balance and therefore the Commission proposes not to include these 
accounts as part of the balance sheet schedules. Accounts 219.1 and 
77.1 will capture activity during the year for items of other 
comprehensive income and the activity will be reported in a proposed 
new schedule entitled ``Statement of Comprehensive Income and Hedging 
Activities.''
    The proposed instructions to the other comprehensive income 
accounts for all jurisdictional entities will require that supporting 
records be maintained by each category of other comprehensive income. 
This level of detail is required so that the entity is able to identify 
the amounts associated with the item when it enters into the 
determination of earnings in current or subsequent periods.
    Finally, reclassification adjustments are required to be made for 
items of other comprehensive income to avoid double counting an item in 
net income and other comprehensive income. The proposed instructions to 
Accounts 219 and 219.1 for public utilities and natural gas companies, 
and the proposed instructions to Accounts 77 and 77.1 for oil pipeline 
companies will require that reclassification adjustments be made 
directly to these accounts as appropriate. This proposed accounting 
treatment for reclassification adjustments will minimize the need for 
creating a new account to capture amounts solely related to 
reclassification adjustments.

D. Proposed Accounting for Derivatives and Hedging Activities

1. General
    The Commission's existing Uniform Systems of Accounts for public 
utilities, natural gas companies and oil pipelines do not contain 
specific accounts to record changes in the fair value of derivative 
instruments used in hedging and non-hedging activities. The Commission 
considers that the addition of new accounts and instructions will 
provide improved visibility, and completeness of accounting and 
reporting of derivatives and hedging activities by jurisdictional 
entities. As part of the proposed rule, the Commission proposes to 
revise the Uniform Systems of Accounts to provide accounting for 
derivatives and hedging activities.
2. Proposed General Instructions for Fair Value and Cash Flow Hedges
    The Commission proposes to add a new general instruction that would 
require public utilities, natural gas companies, and oil pipelines to 
record changes in the fair value of the derivative instrument 
designated as a cash flow hedge to other comprehensive income. The 
ineffective portion of the cash flow hedge will be charged to the same 
income or expense account that would have been used if the hedged item 
had been disposed of, or otherwise settled.
    The proposed instructions would also require jurisdictional 
entities to record changes in the fair value of a derivative instrument 
designated as a fair value hedge in this account with a concurrent 
charge to a subaccount of the asset or liability that carries the item 
being hedged. The ineffective portion of the fair value hedge would be 
charged to the same income or expense account that would have been used 
if the hedged item had been disposed of, or otherwise settled.
3. Proposed Changes to General Instruction 21. Allowances
    The Commission is also proposing to make technical changes to its 
existing general instructions concerning the accounting for hedge 
transactions related to exchange traded allowance future contracts. 
General Instruction No. 21. Allowances, of Part 101, directs public 
utilities to defer in Account 186, Miscellaneous deferred debits, or 
Account 253, Other deferred credits, the costs and benefits from 
hedging transactions associated with exchange

[[Page 1031]]

traded allowance future contracts. The Commission is proposing to 
delete paragraph I to be consistent with proposed accounting for 
derivatives. The accounting framework proposed for derivatives would 
also include exchange traded future allowances.
4. Proposed Accounting for Derivative Assets and Liabilities
    As proposed, two new asset and two new liability accounts would be 
established to include amounts related to the changes in the fair value 
of derivative instruments not designated as a cash flow or fair value 
hedges. The two new asset accounts are Account 175, Derivative 
instrument assets, for public utilities and natural gas companies, and 
Account 46, Derivative instrument assets, for oil pipeline companies. 
The two new liability accounts are Account 244, Derivative instrument 
liabilities, for public utilities and natural gas companies, and 
Account 65, Derivative instrument liabilities, for oil pipeline 
companies.
    Public utilities and natural gas companies would charge Account 
421, Miscellaneous nonoperating income, with the corresponding amount 
of the change in the fair value of the derivative instruments. Oil 
pipelines would charge Account 660, Miscellaneous income charges, with 
the corresponding amount of the change in the fair value of the 
derivative instruments.
    The Commission recognizes that under certain circumstances rate 
regulators may include all or part of a derivative instruments change 
in value in the development of rates even though the derivative 
instrument is not part of a fair value or cash flow hedge. The 
Commission therefore proposes where regulators explicitly approve the 
inclusion of the changes in fair value of derivative instruments in the 
development of rates, company's will reclassify those amounts from 
Account 421 or Account 660 to the appropriate utility operating revenue 
or expense account that will be charged with the transaction when it 
settles.
    The Commission also recognizes that companies are required to 
classify derivative asset and liabilities as current or long-term on 
their balance sheets. In order to facilitate reporting derivative asset 
and liabilities to shareholders in general purpose financial 
statements, companies may create current and long-term subaccounts 
associated with the proposed new derivative balance sheet accounts.
    Finally, if the derivative instrument does not qualify for hedge 
accounting, but it is probable that the rate regulator will include the 
changes in the fair value of the derivative instrument in the future 
development of rates, the entity must follow the Commission's existing 
accounting regulations for the recognition of regulatory assets and 
regulatory liabilities.
5. Proposed Accounting for Fair Value and Cash Flow Hedges
    As proposed, two new asset and two new liability accounts would be 
established to include amounts related to the changes in the fair value 
of derivative instruments designated as a cash flow or fair value 
hedges. The two new asset accounts are Account 176, Derivative 
instrument assets-Hedges, for public utilities and natural gas 
companies, and Account 47, Derivative instrument assets-Hedges, for oil 
pipelines. The two new liability accounts are Account 245, Derivative 
instrument liabilities-Hedges, for public utilities and natural gas 
companies, and Account 66, Derivative instrument liabilities-Hedges, 
for oil pipelines.

E. Proposed Changes to the FERC Annual Reports Forms

    The proposed accounting changes, if adopted, will require one new 
schedule and changes to existing balance sheet schedules in the FERC 
Forms 1, 1-F, 2, 2-A, and 6 filed with the Commission by public 
utilities, gas companies, and oil pipelines. The proposed new schedule 
is attached in Appendix A and the proposed changes to the FERC Forms 
are discussed below.
    As previously mentioned, entities have a choice of formats for 
their general purpose financial statements along with a choice of 
reporting certain items net of reclassification adjustments and a 
choice of reporting these amounts on a net-of-tax or pre-tax basis 
provided that certain footnote disclosure requirements are met. In 
order to provide consistent accounting and reporting of items of other 
comprehensive income the Commission is adding a new schedule entitled 
``Statement of Comprehensive Income and Hedging Activities'' with 
instructions on the proper footnote disclosures for the FERC Forms 1, 
1-F, 2, 2-A, and 6.
    This proposed new schedule is modeled after an income statement 
approach which provides the most transparency for the components of 
other comprehensive income and is more consistent with the overall 
framework of the FASB Concepts Statements. The proposed income 
statement format would also avoid duplication of data already reported 
on other schedules. This new schedule will show the components of other 
comprehensive income and require:
    (1) The reporting of categories of other comprehensive income on a 
net-of-tax basis, where appropriate, along with the reporting of the 
related tax effects allocated to each component, in a footnote to the 
schedule.
    (2) The reporting of accumulated other comprehensive income 
balances at year end by category, in a footnote to the schedule.
    (3) The reporting of fair value hedge balances at year end by 
category, in a footnote to the schedule.
    The Commission concludes that the above reporting requirements 
would not be a significant reporting burden to industry since the 
information is already being captured by their accounting systems for 
internal and external reporting as needed.

IV. Regulatory Flexibility Act Statement

    The Regulatory Flexibility Act (RFA) requires agencies to prepare 
certain statements, descriptions, and analyses of proposed rules that 
will have a significant economic impact on a substantial number of 
small entities.\14\ The Commission is not required to make such 
analyses if a rule would not have such an effect.
---------------------------------------------------------------------------

    \14\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

    The Commission concludes that this rule would not have such an 
impact on small entities. Most filing companies regulated by the 
Commission do not fall within the RFA's definition of a small 
entity.\15\ As previously mentioned, the Commission concludes that this 
reporting would not be a significant burden to industry since the 
information is already being captured by their accounting systems and 
generally being reported to shareholders and others at a company, or at 
a consolidated business level.
---------------------------------------------------------------------------

    \15\ 5 U.S.C. 601(3), citing to section 3 of the Small Business 
Act, 15 U.S.C. 632. Section 3 of the Small Business Act defines a 
``small-business concern'' as a business which is independently 
owned and operated and which is not dominant in its field of 
operation.
---------------------------------------------------------------------------

    However, if the reporting requirements represent an undue burden on 
small businesses, the entity affected may seek a waiver of the 
disclosure requirements from the Commission.

V. Environmental Impact Statement

    The Commission excludes certain actions not having a significant 
effect on the human environment from the requirement to prepare an 
environmental assessment or an environmental impact statement.\16\ No

[[Page 1032]]

environmental consideration is raised by the promulgation of a rule 
that is procedural or does not substantially change the effect of 
legislation or regulations being amended.\17\ The proposed rule updates 
the Parts 101, 201 and 352 of the Commission's regulations, and does 
not substantially change the effect of the underlying legislation or 
the regulations being revised or eliminated. Accordingly, no 
environmental consideration is necessary.
---------------------------------------------------------------------------

    \16\ 18 CFR 380.4.
    \17\ 18 CFR 380.4(a)(2)(ii).
---------------------------------------------------------------------------

VI. Information Collection Statement and Public Reporting Burden

    The following collections of information contained in this proposed 
rule have been submitted to the Office of Management and Budget (OMB) 
for review under Sec. 3507(d) of the Paperwork Reduction Act of 1995, 
44 U.S.C. 3507(d). Comments are solicited on the Commission's need for 
this information, whether the information will have practical utility, 
the accuracy of provided burden estimates, ways to enhance the quality, 
utility, and clarity of the information to be collected, and any 
suggested methods for minimizing respondent's burden, including the use 
of automated information techniques.
    Estimated Annual Burden: The Commission estimates that on average 
it will take respondents 2 hours to comply with the proposed 
requirements. This will result in total hours for the following 
collections of information:

------------------------------------------------------------------------
                                                                Total
         Data collection            Number of    Number of      annual
                                   respondents   responses      hours
------------------------------------------------------------------------
FERC-Form 1......................          210          210          420
FERC Form 1-F....................            7            7           14
FERC Form 2......................           57           57          114
FERC Form 2-A....................           57           57          114
FERC Form 6......................          159          159          318
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
------------------------------------------------------------------------

    Total Annual Hours for Collection: (Reporting + Recordkeeping, (if 
appropriate)) = 980 + 470 hours* (recordkeeping) = 1,450 hours.
    *This estimate is based on an average of 3 hours per respondent for 
recordkeeping purposes.
    Information Collection Costs: The Commission seeks comments on the 
costs to comply with these requirements. It has projected the cost for 
complying to be the following: 1,450 hours  2,080  x  $117,041 
= $81,596.

Annualized Capital/Startup Costs--$0
Annualized Costs (Operations & Maintenance)--$81,596
Total Annualized Costs--$81,596

    OMB's regulations require it to approve certain information 
collection requirements imposed by agency rule. The Commission is 
submitting notification of this proposed rule to OMB.\18\
---------------------------------------------------------------------------

    \18\ 5 CFR 1320.11.
---------------------------------------------------------------------------

    Title: FERC Form 1 Annual Report of Major Electric Utilities, 
Licensees and Others;
    FERC Form 1-F Annual Report For Non-Major Public Utilities and 
Licensees;
    FERC Form 2 Annual Report for Major Natural Gas Companies;
    FERC Form 2-A Annual Report for Nonmajor natural gas companies;
    FERC Form No. 6 Annual Report of Oil Pipeline Companies.
    Action: Proposed Collections.
    OMB Control No: 1902-0021; 1902-0029; 1902-0028; 1902-0030; and 
1902-0022.
    Respondents: Business or other for profit.
    Frequency of Responses: Annual.
    Necessity of the Information: The Commission's existing Uniform 
Systems of Accounts do not specifically address the proper accounting 
and reporting for changes in fair value of certain investment 
securities, and derivative instruments and hedging activities. 
Additionally, the existing Uniform Systems of Accounts do not contain 
specific accounts to record amounts related to items of other 
comprehensive income in its annual financial reports.
    Without specific instructions and accounts for recording and 
reporting the above transactions and events, inconsistent and 
incomplete accounting will result. The addition of new accounts and 
related general instructions is intended to improve the visibility, 
completeness and consistency of accounting practices for derivative 
instruments and hedging activities, and items of other comprehensive 
income.
    As these derivative instruments are risk-shifting devices, it is 
important to identify and fully comprehend the risks being assumed, 
evaluate those risks and continuously monitor and manage those risks. 
Part of the risk identification process is a determination of the 
monetary exposure of the parties under the terms of the derivative 
instrument. In a derivative situation, performance of the other party's 
obligations is highly dependent on the strength of its balance sheet.
    Internal Review: The Commission has reviewed the requirements 
pertaining to the Uniform Systems of Accounts and to the financial 
reports it prescribes and determined the proposed revisions are 
necessary because the Commission needs to establish uniform accounting 
and reporting requirements for items of other comprehensive income, 
changes in the fair value of investment securities and derivatives, and 
hedging activities.
    These requirements conform to the Commission's plan for efficient 
information collection, communication, and management within the 
electric, natural gas and oil pipeline industries. The Commission has 
assured itself, by means of internal review, that there is specific, 
objective support for the burden estimates associated with the 
information requirements.
    Interested persons may obtain information on the reporting 
requirements by contacting the following: Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, [Attention: 
Michael Miller, Office of the Chief Information Officer, Phone: (202) 
208-1415, fax: (202) 208-2425, e-mail: [email protected]]
    For submitting comments concerning the collections of information 
and the associated burden estimate(s), please send your comments to the 
contact listed above and to the Office of Management and Budget, Office 
of Information and Regulatory Affairs, 725 17th Street, NW., 
Washington, DC 20503 [Attention: Desk Officer for the Federal Energy 
Regulatory Commission, phone (202) 395-7318, fax: (202) 395-7285].

[[Page 1033]]

VII. Public Comment Procedures

    The Commission invites all interested persons to submit comments on 
this NOPR.
    To facilitate the Commission's review of comments, commenters are 
requested to provide an executive summary of their position on the 
issues raised in the NOPR. Commenters are requested to identify each 
specific question posed by the NOPR that their discussion addresses and 
to use appropriate heading. Additional issues the commenters wish to 
raise should be identified separately. The commenters should double 
space their comments.
    Comments may be filed paper or electronically via the Internet and 
must be received by the Commission within 60 days after publication in 
the Federal Register. Those filing electronically do not need to make a 
paper filing. For paper filings, the original and 14 copies of such 
comments should be submitted to the Office of the Secretary, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426 and should refer to Docket No. RM02-3-000.
    Comments filed via the Internet must be prepared in WordPerfect, MS 
Word, Portable Document Format, or ASCII format. To file the document, 
access the Commission's Web site at www.ferc.gov and click on ``e-
Filing,'' and then follow the instructions on each screen. First time 
users will have to establish a user name and password. The Commission 
will send an automatic acknowledgment to the sender's E-Mail address 
upon receipt of comments.
    User assistance for electronic filing is available at 202-208-0258 
or by e-mail to [email protected]. Comments should not be submitted 
to the e-mail address. All comments will be placed in the Commission's 
public files and will be available for inspection in the Commission's 
Public Reference Room at 888 First Street, NE., Washington DC 20426, 
during regular business hours. Additionally, all comments may be 
viewed, printed, or downloaded remotely via the Internet through FERC's 
Homespage using the RIMS link. User assistance for RIMS is available at 
202-208-2222, or by e-mail to [email protected].

VIII. Document Availability

    In addition to publishing the full text of this document in the 
Federal Register, the Commission also provides all interested persons 
an opportunity to view and/or print the contents of this document via 
the Internet through FERC's home page (http://www.ferc.fed.gov) and in 
FERC's Public Reference Room during normal business hours (8:30 a.m. to 
5 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 
20426.
    From FERC's home page on the Internet, this information is 
available in both the Commission Issuance Posting System (CIPS) and the 
Records and Information Management System (RIMS).

--CIPS provides access to the text of formal documents issued by the 
Commission since November 14, 1994.
--CIPS can be accessed using the CIPS link or the Energy Information 
Online icon. The full text of this document is available on CIPS in 
ASCII and WordPerfect 8.0 format for viewing, printing, and/or 
downloading.
--RIMS contains images of documents submitted to and issued by the 
Commission after November 16, 1981. Documents from November 1995 to the 
present can be viewed and printed from FERC's Home Page using the RIMS 
link or the Energy Information Online icon. Descriptions of documents 
back to November 16, 1981, are also available from RIMS-on-the-Web; 
request for copies of these and other older documents should be 
submitted to the Public Reference Room.

    User assistance is available for RIMS, CIPS, and the Website during 
normal business hours from our Help line at (202) 208-2222 (e-mail to 
[email protected]) or the Public Reference Room at (202) 208-1371 
(e-mail to [email protected]).
    During normal business hours, documents can also be viewed and/or 
printed in FERC's Public Reference Room, where RIMS, CIPS, and FERC Web 
site are available. User assistance is also available.

List of Subjects

18 CFR Part 101

    Electric power, Electric utilities, Reporting and recordkeeping 
requirements, Uniform System of Accounts.

18 CFR Part 201

    Natural gas, Reporting and recordkeeping requirements, Uniform 
System of Accounts.

18 CFR Part 352

    Pipelines, Reporting and recordkeeping requirements, Uniform System 
of Accounts.

    By direction of the Commission.
Linwood A. Watson, Jr.,
Acting Secretary.
    In consideration of the foregoing, the Commission proposes to amend 
Parts 101, 201, and 352, Title 18 of the Code of Federal Regulations, 
as follows:

PART 101--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR PUBLIC 
UTILITIES AND LICENSEES SUBJECT TO THE PROVISIONS OF THE FEDERAL 
POWER ACT

    1. The authority citation for part 101 continues to read as 
follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352, 7651-7651o.

    2. In part 101, General Instructions, section 21. Allowances, 
paragraph I is removed, and sections 23. Accounting for other 
comprehensive income, and 24. Accounting for derivative instruments and 
hedging activities, are added to read as follows:

General Instructions

* * * * *
    23. Accounting for other comprehensive income. 
    (A) Utilities will record items of other comprehensive income in 
account 219.1, Other comprehensive income. Amounts included in this 
account will be maintained by each category of other comprehensive 
income. Examples of categories of other comprehensive income include, 
foreign currency items, minimum pension liability adjustments, 
unrealized gains and losses on available-for-sale type securities and 
cash flow hedge amounts.
    (B) At year end, amounts recorded in account 219.1, Other 
comprehensive income, will be transferred to account 219, Accumulated 
other comprehensive income. Supporting records will be maintained for 
account 219 so that the company can readily identify the cumulative 
amount of other comprehensive income for each item included in this 
account.
    (C) When an item of other comprehensive income enters into the 
determination of earnings in the current or subsequent periods, a 
reclassification adjustment will be recorded in accounts 219 or 219.1 
to avoid double counting of that amount.
* * * * *
    24. Accounting for derivative instruments and hedging activities. 
    A. Utilities will recognize derivative instruments as either assets 
or liabilities in the financial statements and measure those 
instruments at fair value. A derivative instrument is a financial

[[Page 1034]]

instrument or other contract with all of the following characteristics:
    (1) It has one or more underlyings and a notional amount or payment 
provision. Those terms determine the amount of the settlement or 
settlements, and, in some cases, whether or not a settlement is 
required.
    (2) It requires no initial net investment or an initial net 
investment that is smaller than would be required for other types of 
contracts that would be expected to have a similar response to changes 
in market factors.
    (3) Its terms require or permit net settlement, can readily be 
settled net by a means outside the contract, or provides for delivery 
of an asset that puts the recipient in a position not substantially 
different from net settlement.
    B. The accounting for the changes in the fair value of derivative 
instruments depends upon their intended use and designation. Changes in 
the fair value of derivative instruments not designated as fair value 
or cash flow hedges will be recorded in account 175, Derivative 
instrument assets, or account 244, Derivative instrument liabilities, 
as appropriate, with the gains or losses charged to earnings in account 
421, Miscellaneous nonoperating income.
    C. A derivative instrument may be specifically designated as a fair 
value or cash flow hedge. A hedge is used to manage risk to price, 
interest rates, or foreign currency transactions. A company will 
maintain documentation of the hedge relationship at the inception of 
the hedge that details the risk management objective and strategy for 
undertaking the hedge, the nature of the risk being hedged, and how 
hedge effectiveness will be determined.
    D. If the utility designates the derivative instrument as a fair 
value hedge against exposure to changes in the fair value of a 
recognized asset, liability, or a firm commitment, it will record the 
change in fair value of the derivative instrument to account 176, 
Derivative instrument assets-Hedges, or account 245, Derivative 
instrument liabilities-Hedges, as appropriate, with a corresponding 
adjustment to the subaccount of the item being hedged. The ineffective 
portion of the hedge transaction will be reflected in the same income 
or expense account that would have been used if the hedged item had 
been disposed of or settled. In the case of a fair value hedge of a 
firm commitment a new asset or liability is created. As a result of the 
hedge relationship, the new asset or liability will become part of the 
carrying amount of the item being hedged.
    E. If the utility designates the derivative instrument as a cash 
flow hedge against exposure to variable cash flows of a probable 
forecasted transaction, it will record changes in the fair value of the 
derivative instrument in account 176, Derivative instrument assets-
Hedges, or account 245, Derivative instrument liabilities-Hedges, as 
appropriate, with a corresponding amount in account 219.1, Other 
comprehensive income, for the effective portion of the hedge. The 
ineffective portion of the hedge transaction will be reflected in the 
same income or expense account that would have been used if the hedged 
item had been disposed of or settled. Amounts recorded in other 
comprehensive income will be reclassified into earnings in the same 
period or periods that the hedged forecasted item affects earnings.
    3. In part 101, Balance Sheet Accounts, accounts 124, paragraph A, 
125, 126, 127, 128 introductory text preceding the Note, and 129 
introductory text preceding the Note, are revised, and Accounts 175, 
176, 219, 219.1, 244 and 245 are added to read as follows:

Balance Sheet Accounts

* * * * *

124  Other investments.

    A. This account shall include the book cost of investments in 
securities issued or assumed by nonassociated companies, investment 
advances to such companies, and any investments not accounted for 
elsewhere. This account shall also include unrealized holding gains and 
losses on trading and available-for-sale types of security investments. 
Include also the offsetting entry to the recording of amortization of 
discount or premium on interest bearing investments. (See account 419, 
Interest and dividend income.)
* * * * *

125  Sinking funds (Major only).

    This account shall include the amount of cash and book cost of 
investments held in sinking funds. This account shall also include 
unrealized holding gains and losses on trading and available-for-sale 
types of security investments. A separate account, with appropriate 
title, shall be kept for each sinking fund. Transfers from this account 
to special deposit accounts may be made as necessary for the purpose of 
paying matured sinking-fund obligations, or obligations called for 
redemption but not presented, or the interest thereon.

126  Depreciation fund (Major only).

    This account shall include the amount of cash and book cost of 
investments which have been segregated in a special fund for the 
purpose of indentifying such assets with the accumulated provisions for 
depreciation. This account shall also include unrealized holding gains 
and losses on trading and available-for-sale types of security 
investments.

127  Amortization fund--Federal (Major only).

    This account shall include the amount of cash and book cost of 
investments of any investments of any fund maintained pursuant to the 
requirements of a federal regulatory body, as the cash and investments 
segregated for the purpose of identifying the specific assets 
associated with account 215.1, Appropriated retained earnings--
Amortization reserve, Federal. This account shall also include 
unrealized holding gains and losses on trading and available-for-sale 
types of security investments.

128  Other special funds (Major only).

    This account shall include the amount of cash and book cost of 
investments which have been segregated in special funds for insurance, 
employee pensions, savings, relief, hospital, and other purposes not 
provided for elsewhere. This account shall also include unrealized 
holding gains and losses on trading and available-for-sale types of 
security investments. A separate account with appropriate title, shall 
be kept for each fund.
* * * * *

129  Special funds (Nonmajor only).

    This account shall include the amount of cash and book cost of 
investments which have been segregated in special funds for bond 
retirements, property additions and replacements, insurance, employees' 
pensions, savings, relief, hospital, and other purposes not provided 
for elsewhere. This account shall also include unrealized holding gains 
and losses on trading and available-for-sale types of security 
investments. A separate account, with appropriate title, shall be kept 
for each fund.
* * * * *

175  Derivative instrument assets.

    This account shall include the amounts paid for derivative 
instruments, and the change in the fair value of all derivative 
instrument assets not designated as cash flow or fair value hedges. 
Account 421, Miscellaneous

[[Page 1035]]

nonoperating income, will be charged with the corresponding amount of 
the change in the fair value of the derivative instrument.

176  Derivative instrument assets-Hedges.

    A. This account shall include the amounts paid for derivative 
instruments, and the change in the fair value of derivative instrument 
assets designated by the utility as cash flow or fair value hedges.
    B. When a utility designates a derivative instrument asset as a 
cash flow hedge it will record the change in the fair value of the 
derivative instrument in this account with a concurrent charge to 
account 219.1, Other comprehensive income, with the effective portion 
of the derivative's gain or loss. The ineffective portion of the cash 
flow hedge will be charged to the same income or expense account that 
would have been used if the hedged item had been disposed of or 
otherwise settled.
    C. When a utility designates a derivative instrument as a fair 
value hedge it will record the change in the fair of the derivative 
instrument in this account with a concurrent charge to a subaccount of 
the asset or liability that carries the item being hedged. The 
ineffective portion of the fair value hedge will be charged to the same 
income or expense account that would have been used if the hedged item 
had been disposed of or otherwise settled.
* * * * *

219  Accumulated other comprehensive income.

    A. This account shall include amounts of other comprehensive income 
transferred from account 219.1, Other comprehensive income. Records 
supporting the entries to this account shall be maintained so that the 
utility can furnish the amount of other comprehensive income for each 
item included in this account.
    B. This account shall also be debited or credited, as appropriate, 
with amounts of accumulated other comprehensive income that have been 
included in the determination of net income during the period and in 
accumulated other comprehensive income in prior periods. Separate 
records for each category of items will be maintained to identify the 
amount of the reclassification adjustments from accumulated other 
comprehensive income to earnings made during the period.

219.1  Other comprehensive income.

    A. This account shall include revenues, expenses, gains, and losses 
that are appropriately includable in other comprehensive income during 
the period. At year end the total of other comprehensive income will be 
transferred to account 219, Accumulated other comprehensive income.
    B. This account shall also be debited or credited, as appropriate, 
with amounts of other comprehensive income that have been included in 
the determination of net income in the same period. Separate records 
will be maintained to identify the amount of the reclassification 
adjustments to earnings during the period.
    C. Examples of items of other comprehensive income include foreign 
currency items, minimum pension liability adjustments, unrealized gains 
and losses on certain investments in debt and equity securities, and 
cash flow hedges. Records supporting the entries to this account shall 
be maintained so that the utility can furnish the amount of other 
comprehensive income for each item included in this account.
* * * * *

244  Derivative instrument liabilities.

    This account shall include the change in the fair value of all 
derivative instrument liabilities not designated as cash flow or fair 
value hedges. Account 421, Miscellaneous nonoperating income, will be 
charged with the corresponding amount of the change in the fair value 
of the derivative instrument.

245  Derivative instrument liabilities-Hedges.

    A. This account shall include the change in the fair value of 
derivative instrument liabilities designated by the utility as cash 
flow or fair value hedges.
    B. A utility will record the change in the fair value of a 
derivative instrument liability related to a cash flow hedge in this 
account, with a concurrent charge to account 219.1, Other comprehensive 
income, with the effective portion of the derivative's gain or loss. 
The ineffective portion of the cash flow hedge will be charged to the 
same income or expense account that would have been used if the hedged 
item had been disposed of or otherwise settled.
    C. A utility will record the change in the fair of a derivative 
instrument liability related to a fair value hedge in this account, 
with a concurrent charge to a subaccount of the asset or liability that 
carries the item being hedged. The ineffective portion of the fair 
value hedge will be charged to the same income or expense account that 
would have been used if the hedged item had been disposed of or 
otherwise settled.
* * * * *

PART 201--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR NATURAL GAS 
COMPANIES SUBJECT TO THE PROVISIONS OF THE NATURAL GAS ACT

    4. The authority citation for part 201 continues to read as 
follows:

    Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352, 
7651-7651o.

    5. In part 201, General Instructions, sections 22. Accounting for 
other comprehensive income, and 23. Accounting for derivative 
instruments and hedging activities, are added to read as follows:

General Instructions.

* * * * *
    22. Accounting for other comprehensive income.
    A. Utilities will record items of other comprehensive income in 
account 219.1, Other comprehensive income. Amounts included in this 
account will be classified by their nature and supporting records will 
be maintained by each category of other comprehensive income. Examples 
of categories of other comprehensive income include, foreign currency 
items, minimum pension liability adjustments, unrealized gains and 
losses on available-for-sale type securities and cash flow hedge 
amounts.
    B. At year end, amounts recorded in account 219.1, Other 
comprehensive income, will be transferred to account 219, Accumulated 
other comprehensive income. Supporting records will be maintained for 
account 219 so that the company can readily identify the cumulative 
amount of other comprehensive income for each item included in this 
account.
    C. When an item of other comprehensive income enters into the 
determination of earnings in the current or subsequent periods a 
reclassification adjustment will be recorded in accounts 219 or 219.1 
to avoid double counting of when an item included in net income was 
also included in other comprehensive income in the same or prior 
period.
    23. Accounting for derivative instruments and hedging activities.
    A. Utilities will recognize derivative instruments as either assets 
or liabilities in the financial statements and measure those 
instruments at fair value. A derivative instrument is a financial

[[Page 1036]]

instrument or other contract with all three of the following 
characteristics:
    (1) It has one or more underlyings and a notional amount or payment 
provision. Those terms determine the amount of the settlement or 
settlements, and, in some cases, whether or not a settlement is 
required.
    (2) It requires no initial net investment or an initial net 
investment that is smaller than would be required for other types of 
contracts that would be expected to have similar response to changes in 
market factors.
    (3) Its terms require or permit net settlement, can readily be 
settled net by a means outside the contract, or provides for delivery 
of an asset that puts the recipient in a position not substantially 
different from net settlement.
    B. The accounting for the changes in the fair value of derivative 
instruments depends upon their intended use and designation. Changes in 
the fair value of derivative instruments not designated as fair value 
or cash flow hedges will be recorded in account 175, Derivative 
instrument assets, or account 244, Derivative instrument liabilities, 
as appropriate, with the gains or losses charged to earnings in account 
421, Miscellaneous nonoperating income.
    C. A derivative instrument may be specifically designated as a fair 
value or cash flow hedge. A hedge may be used to manage risk to price, 
interest rates, or foreign currency transactions. Utilities will 
maintain documentation of the hedge relationship at the inception of 
the hedge that details the risk management objective and strategy for 
undertaking the hedge, the nature of the risk being hedged, and how 
hedge effectiveness will be determined.
    D. If the utility designates the derivative instrument as a fair 
value hedge against exposure to changes in the fair value of a 
recognized asset, liability, or a firm commitment, it will record the 
change in fair value of the derivative instrument to account 176, 
Derivative instrument assets-Hedges, or account 245, Derivative 
instrument liabilities-Hedges, as appropriate, with a corresponding 
adjustment to the subaccount of the item being hedged. The ineffective 
portion of the hedge transaction will be reflected in the same income 
or expense account that would have been used if the hedged item had 
been disposed of or settled. In the case of a fair value hedge of a 
firm commitment a new asset or liability is created. As a result of the 
hedge relationship, the new asset or liability will become part of the 
carrying amount of the item being hedged.
    E. If the utility designates the derivative instrument as a cash 
flow hedge against exposure to variable cash flows of a probable 
forecasted transaction, it will record changes in the fair value of the 
derivative instrument in account 176, Derivative instrument assets-
Hedges, or account 245, Derivative instrument liabilities-Hedges, as 
appropriate, with a corresponding amount in Account 219.1, Other 
comprehensive income, for the effective portion of the hedge. The 
ineffective portion of the hedge transaction will be reflected in the 
same income or expense account that would have been used if the hedged 
item had been disposed of or settled. Amounts recorded in other 
comprehensive income will be reclassified into earnings in the same 
period or periods that the hedged forecasted item affects earnings.
* * * * *
    6. In part 201, Balance Sheet Accounts, Accounts 124, paragraph A, 
125, 126, and 128, introductory text preceding the Note, are revised, 
and Accounts 175, 176, 219, 219.1, 244 and 245 are added to read as 
follows:

Balance Sheet Accounts

* * * * *

124  Other investments.

    A. This account shall include the book cost of investments in 
securities issued or assumed by nonassociated companies, investment 
advances to such companies, and any investments not accounted for 
elsewhere. This account shall also include unrealized holding gains and 
losses on trading and available-for-sale types of security investments. 
Include also the offsetting entry to the recording of amortization of 
discount or premium on interest bearing investments. (See account 419, 
interest and dividend income.)
* * * * *

125  Sinking funds.

    This account shall include the amount of cash and book cost of 
investments held in sinking funds. This account shall also include 
unrealized holding gains and losses on trading and available-for-sale 
types of security investments. A separate account, with appropriate 
title, shall be kept for each sinking fund. Transfers from this account 
to special deposit accounts may be made as necessary for the purpose of 
paying matured sinking-fund obligations, or obligations called for 
redemption but not presented, or the interest thereon.

126  Depreciation fund.

    This account shall include the amount of cash and book cost of 
investments which have been segregated in a special fund for the 
purpose of indentifying such assets with the accumulated provisions for 
depreciation. This account shall also include unrealized holding gains 
and losses on trading and available-for-sale types of security 
investments.
* * * * *

128  Other special funds.

    This account shall include the amount of cash and book cost of 
investments which have been segregated in special funds for insurance, 
employee pensions, savings, relief, hospital, and other purposes not 
provided for elsewhere. This account shall also include unrealized 
holding gains and losses on trading and available-for-sale types of 
security investments. A separate account with appropriate title, shall 
be kept for each fund.
* * * * *

175  Derivative instrument assets.

    This account shall include the amounts paid for derivative 
instruments, and the change in the fair value of all derivative 
instrument assets not designated as cash flow or fair value hedges. 
Account 421, Miscellaneous nonoperating income, will be charged with 
the corresponding amount of the change in the fair value of the 
derivative instrument.

176  Derivative instrument assets-Hedges.

    A. This account shall include the amounts paid for derivative 
instruments, and the change in the fair value of derivative instrument 
assets designated by the utility as cash flow or fair value hedges.
    B. When a utility designates a derivative instrument asset as a 
cash flow hedge it will record the change in the fair value of the 
derivative instrument in this account with a concurrent charge to 
account 219.1, Other comprehensive income, with the effective portion 
of the derivative's gain or loss. The ineffective portion of the cash 
flow hedge will be charged to the same income or expense account that 
would have been used if the hedged item had been disposed of or 
otherwise settled.
    C. When a utility designates a derivative instrument asset as a 
fair value hedge it will record the change in the fair value of the 
derivative instrument in this account with a concurrent charge to a 
subaccount of the

[[Page 1037]]

asset or liability that carries the item being hedged. The ineffective 
portion of the fair value hedge will be charged to the same income or 
expense account that would have been used if the hedged item had been 
disposed of or otherwise settled.
* * * * *

219  Accumulated other comprehensive income.

    A. This account shall include amounts of other comprehensive income 
transferred from account 219.1, Other comprehensive income. Records 
supporting the entries to this account shall be maintained so that the 
utility can furnish the amount of other comprehensive income for each 
item included in this account.
    B. This account shall also be debited or credited, as appropriate, 
with amounts of accumulated other comprehensive income that have been 
included in the determination of net income during the period and in 
accumulated other comprehensive income in prior periods. Separate 
records for each category of items will be maintained to identify the 
amount of the reclassification adjustments from accumulated other 
comprehensive income to earnings made during the period.

219.1  Other comprehensive income.

    A. This account shall include revenues, expenses, gains, and losses 
that are properly includable in other comprehensive income during the 
period. At year end the total of other comprehensive income will be 
transferred to account 219, Accumulated other comprehensive income.
    B. This account shall also be debited or credited, as appropriate, 
with amounts of other comprehensive income that have been included in 
the determination of net income in the same period. Separate records 
will be maintained to identify the amount of the reclassification 
adjustments to earnings during the period.
    C. Examples of items of other comprehensive income include foreign 
currency items, minimum pension liability adjustments, unrealized gains 
and losses on certain investments in debt and equity securities, and 
cash flow hedges. Records supporting the entries to this account shall 
be maintained so that the utility can furnish the amount of other 
comprehensive income for each item included in this account.
* * * * *

244  Derivative instrument liabilities.

    This account shall include the change in the fair value of all 
derivative instrument liabilities not designated as cash flow or fair 
value hedges. Account 421, Miscellaneous nonoperating income, will be 
charged with the corresponding amount of the change in the fair value 
of the derivative instrument.

245  Derivative instrument liabilities-Hedges.

    A. This account shall include the change in the fair value of 
derivative instrument liabilities designated by the utility as cash 
flow or fair value hedges.
    B. A utility will record the change in the fair value of a 
derivative liability related to a cash flow hedge in this account, with 
a concurrent charge to account 219.1, Other comprehensive income, with 
the effective portion of the derivative's gain or loss. The ineffective 
portion of the cash flow hedge will be charged to the same income or 
expense account that would have been used if the hedged item had been 
disposed of or otherwise settled.
    C. A will record the change in the fair of a derivative instrument 
liability related to a fair value hedge in this account, with a 
concurrent charge to a subaccount of the asset or liability that 
carries the item being hedged. The ineffective portion of the fair 
value hedge will be charged to the same income or expense account that 
would have been used if the hedged item had been disposed of or 
otherwise settled.
* * * * *

PART 352--UNIFORM SYSTEMS OF ACCOUNTS PRESCRIBED FOR OIL PIPELINE 
COMPANIES SUBJECT TO THE PROVISIONS OF THE INTERSTATE COMMERCE ACT

    7. The authority citation for part 352 continues to read as 
follows:

    Authority: 49 U.S.C. 60502; 49 App. U.S.C. 1-85 (1988).
* * * * *
    8. In part 352, List of Instructions and Accounts, Definitions, 
paragraph 35(d) is revised to read as follows:

Definitions.

* * * * *
    35. * * *
    (d) Cost, as applied to a marketable equity security, refers to the 
original cost as adjusted for unrealized holding gains and losses.
* * * * *
    9. In part 352, General Instructions, paragraph 1-15(a), (b) and 
(c) are revised, (d) and (e) are removed, and General Instructions 
paragraphs 1-17 and 1-18 are added to read as follows:

General Instructions

* * * * *
    1-15 Accounting for marketable securities owned. (a) Accounts 11 
``Temporary investments,'' 20 ``Investments in affiliated companies,'' 
and 21 ``Other investments'' shall be maintained in such a manner as to 
reflect the marketable equity portion (see definition 35) and other 
securities or investments
    (b) For the purpose of determining net ledger value, the marketable 
equity securities in account 11 shall be considered the current 
portfolio and the marketable equity securities in accounts 20 and 21 
(combined) shall be considered the noncurrent portfolio.
    (c) Carriers will categorize their security investments as held-to-
maturity, trading, or available-for-sale. Unrealized holding gains and 
losses on trading type investment securities will be recorded in 
account 660, Miscellaneous income charges. Unrealized holding gains and 
losses on available-for-sale type investment securities will be 
recorded in account 77.1, Other comprehensive income.
* * * * *
    1-17 Accounting for other comprehensive income.
    (a) Carriers will record items of other comprehensive income in 
account 77.1, Other comprehensive income. Amounts included in this 
account will be maintained by each category of other comprehensive 
income. Examples of categories of other comprehensive income include, 
foreign currency items, minimum pension liability adjustments, 
unrealized gains and losses on available-for-sale type securities and 
cash flow hedge amounts.
    (b) At year end, amounts recorded in account 77.1, Other 
comprehensive income, will be transferred to account 77, Accumulated 
other comprehensive income. Supporting records will be maintained for 
account 77 so that the carrier can readily identify the cumulative 
amount of other comprehensive income for each item included in this 
account.
    (c) When an item of other comprehensive income enters into the 
determination of earnings in the current or subsequent periods a 
reclassification adjustment will be recorded in accounts 77 or 77.1 to 
avoid double counting of when an item included in net income was also 
included in other comprehensive income in the same or prior period.
* * * * *

[[Page 1038]]

    1-18 Accounting for derivative instruments and hedging activities.
    (a) A carrier will recognize derivative instruments as either 
assets or liabilities in the financial statements and measure those 
instruments at fair value. A derivative instrument is a financial 
instrument or other contract with all three of the following 
characteristics:
    (1) It has one or more underlyings and a notional amount or payment 
provision. Those terms determine the amount of the settlement or 
settlements, and, in some cases, whether or not a settlement is 
required.
    (2) It requires no initial net investment or an initial net 
investment that is smaller than would be required for other types of 
contracts that would be expected to have similar response to changes in 
market factors.
    (3) Its terms require or permit net settlement, can readily be 
settled net by a means outside the contract, or provides for delivery 
of an asset that puts the recipient in a position not substantially 
different from net settlement.
    (b) The accounting for the changes in the fair value of derivative 
instruments depends upon their intended use and designation. Changes in 
the fair value of derivative instruments not designated as fair value 
or cash flow hedges will be recorded in account 46, Derivative 
instrument assets, or account 65, derivative instrument liabilities, as 
appropriate, with the gains or losses charged to earnings in account 
660, Miscellaneous income charges.
    (c) A derivative instrument may be specifically designated as a 
fair value or cash flow hedge. A hedge may be used to manage risk to 
price, interest rates, or foreign currency transactions. An entity will 
maintain documentation of the hedge relationship at the inception of 
the hedge that details the risk management objective and strategy for 
undertaking the hedge, the nature of the risk being hedged, and how 
hedge effectiveness will be determined.
    (d) If the carrier designates the derivative instrument as a fair 
value hedge against exposure to changes in the fair value of a 
recognized asset, liability, or a firm commitment, it will record the 
change in fair value of the derivative instrument designated as a fair 
value hedge to account 47, Derivative instrument assets-Hedges, or 
account 66, Derivative instrument liabilities-Hedges, as appropriate, 
with a corresponding adjustment to the subaccount of the item being 
hedged. The ineffective portion of the hedge transaction will be 
reflected in the same income or expense account that would have been 
used if the hedged item had been disposed of or settled. In the case of 
a fair value hedge of a firm commitment, a new asset or liability is 
created. As a result of the hedge relationship, the new asset or 
liability will become part of the carrying amount of the item being 
hedged.
    (e) If the carrier designates the derivative instrument as a cash 
flow hedge against exposure to variable cash flows of a probable 
forecasted transaction it will record changes in the fair value of the 
derivative instrument in account 47, Derivative instrument assets-
Hedges, or account 66, Derivative instrument liabilities-Hedges, as 
appropriate, with a corresponding amount in account 77.1, Other 
comprehensive income, for the effective portion of the hedge. The 
ineffective portion of the hedge transaction will be reflected in the 
same income or expense account that would have been used if the hedged 
item had been disposed of or settled. Amounts recorded in other 
comprehensive income will be reclassified into earnings in the same 
period or periods that the hedged forecasted item affects earnings.
* * * * *
    10. In part 352, Balance Sheet Accounts, Accounts 11, 21, and 22 
are revised, Accounts 23, 24, and 75.5 are removed, and Accounts 46, 
47, 65, 66, 77 and 77.1 are added to read as follows:

Balance Sheet Accounts

* * * * *

11  Temporary investments.

    (a) This account shall include the cost of securities and other 
collectible obligations acquired for the purpose of temporarily 
investing cash, such as United States Treasury certificates, marketable 
securities, time drafts receivable, demand loans, time deposits with 
banks and trust companies, and other similar investments of a temporary 
character. This account shall also include unrealized holding gains and 
losses on trading and available-for-sale types of security investments.
    (b) This account shall be subdivided to reflect the marketable 
equity securities' portion and other temporary investments. (See 
Instruction 1-15).
* * * * *

21  Other investments.

    This account shall include the cost of investments in securities of 
(other than securities held in special funds) and advances made to 
other than affiliated companies. This account shall also include 
unrealized holding gains and losses on trading and available-for-sale 
types of security investments. Separate records shall be maintained to 
show the securities pledged and the following classes of investments in 
each nonaffiliated company:
    (a) Stocks.
    (b) Bonds.
    (c) Other secured obligations.
    (d) Unsecured notes.
    (e) Investment advances.

22  Sinking and other funds.

    (a) This account shall include cash and cost of investments in 
securities and other assets, trusteed or otherwise restricted, that 
have been segregated in distinct funds for purposes of redeeming 
outstanding obligations; purchasing or replacing assets; paying 
pensions, relief, hospitalization, and other similar items. This 
account shall also include unrealized holding gains and losses on 
trading and available-for-sale types of security investments. The cash 
value of life insurance policies on the lives of employees and officers 
to the extent that the carrier is the beneficiary of such policies 
shall also be included in this account. Separate subsidiary records 
shall be maintained for each distinct fund.

23 and 24  [Removed]

* * * * *

46  Derivative instrument assets.

    This account shall include the amounts paid for derivative 
instruments, and the change in the fair value of all derivative 
instrument assets not designated as cash flow or fair value hedges. 
Account 660, Miscellaneous income charges, will be charged with the 
corresponding amount of the change in the fair value of the derivative 
instrument.

47  Derivative instrument assets--Hedges.

    (a) This account shall include the amounts paid for derivative 
instruments, and the change in the fair value of derivative instrument 
assets designated by the utility as cash flow or fair value hedges.
    (b) When a carrier designates a derivative instrument asset as a 
cash flow hedge, it will record the change in the fair value of the 
derivative instrument in this account with a concurrent charge to 
account 77.1, Other comprehensive income, with the effective portion of 
the derivative's gain or loss. The ineffective portion of the cash flow 
hedge will be charged to the same income or expense account that would 
have been used if the hedged item had been disposed of or otherwise 
settled.
    (c) When a carrier designates a derivative instrument as a fair 
value

[[Page 1039]]

hedge, it will record the change in the fair of the derivative 
instrument in this account with a concurrent charge to a subaccount of 
the asset or liability that carries the item being hedged. The 
ineffective portion of the fair value hedge will be charged to the same 
income or expense account that would have been used if the hedged item 
had been disposed of or otherwise settled.
* * * * *

65  Derivative instrument liabilities.

    This account shall include the change in the fair value of all 
derivative instrument liabilities not designated as cash flow or fair 
value hedges. Account 660, Miscellaneous income charges, will be 
charged with the corresponding amount of the change in the fair value 
of the derivative instrument.
* * * * *

66  Derivative instrument liabilities--Hedges.

    (a) This account shall include the change in the fair value of 
derivative instrument liabilities designated by the carrier as cash 
flow or fair value hedges.
    (b) A carrier will record the change in the fair value of a 
derivative instrument liability related to a cash flow hedge in this 
account, with a concurrent charge to account 77.1, Other comprehensive 
income, with the effective portion of the derivative's gain or loss. 
The ineffective portion of the cash flow hedge will be charged to the 
same income or expense account that would have been used if the hedged 
item had been disposed of or otherwise settled.
    (c) A carrier will record the change in the fair of a derivative 
instrument liability related to a fair value hedge in this account, 
with a concurrent charge to a subaccount of the asset or liability that 
carries the item being hedged. The ineffective portion of the fair 
value hedge will be charged to the same income or expense account that 
would have been used if the hedged item had been disposed of or 
otherwise settled.
* * * * *

75.5  [Removed]

* * * * *

77  Accumulated other comprehensive income.

    (a) This account shall include amounts of other comprehensive 
income transferred from account 77.1, Other comprehensive income. 
Records supporting the entries to this account shall be maintained so 
that the utility can furnish the amount of other comprehensive income 
for each item included in this account.
    (b) This account shall also be debited or credited, as appropriate, 
with amounts of accumulated other comprehensive income that have been 
included in the determination of net income during the period and in 
accumulated other comprehensive income in prior periods. Separate 
records for each category of items will be maintained to identify the 
amount of the reclassification adjustments from accumulated other 
comprehensive income to earnings made during the period.
* * * * *

77.1  Other comprehensive income.

    (a) This account shall include revenues, expenses, gains, and 
losses that are properly includable in other comprehensive income 
during the period. At year end, the total of other comprehensive income 
will be transferred to account 77, Accumulated other comprehensive 
income.
    (b) This account shall also be debited or credited, as appropriate, 
with amounts of other comprehensive income that have been included in 
the determination of net income in the same period. Separate records 
will be maintained to identify the amount of the reclassification 
adjustments to earnings during the period.
    (c) Examples of items of other comprehensive income include foreign 
currency items, minimum pension liability adjustments, unrealized gains 
and losses on certain investments in debt and equity securities, and 
cash flow hedges. Records supporting the entries to this account shall 
be maintained so that the carrier can furnish the amount of other 
comprehensive income for each item included in this account.
* * * * *

    Note: The following Appendix A will not appear in the Code of 
Federal Regulations:

BILLING CODE 6717-01-P

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[FR Doc. 02-190 Filed 1-7-02; 8:45 am]
BILLING CODE 6717-01-C