[Federal Register Volume 67, Number 215 (Wednesday, November 6, 2002)]
[Rules and Regulations]
[Pages 67692-67739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26809]



[[Page 67691]]

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Part II





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; Final Rule

  Federal Register / Vol. 67, No. 215 / Wednesday, November 6, 2002 / 
Rules and Regulations  

[[Page 67692]]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 101, 201 and 352

[Docket No. RM02-3-000; Order No. 627]


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

October 10, 2002.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule.

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SUMMARY: The Federal Energy Regulatory Commission is amending its 
regulations to update the accounting and financial reporting 
requirements under its Uniform Systems of Accounts for jurisdictional 
public utilities and licensees, natural gas companies and oil pipeline 
companies. The Commission is establishing 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 is adding new balance sheet accounts to the Uniform 
Systems of Accounts to record items of other comprehensive income and 
derivative instruments. The Commission is also adding new general 
instructions and revising certain account instructions to incorporate 
the above changes in the existing Uniform Systems of Accounts. And, the 
Commission is revising the following Annual Reports: FERC Form Nos. 1, 
1-F, 2, 2-A and 6 to include the new accounts and a new schedule 
contained in the final rule.
    The Commission is severing from this rulemaking proceeding the 
inquiry on whether independent and affiliated power marketers, and 
power producers should continue to be eligible, on a case by case 
basis, for waiver of the Commission's Uniform Systems of Accounts and 
blanket approval under part 34 of the Commission's regulations for the 
issuance of securities and the assumptions of liabilities. The 
Commission will consider separately the issue of accounting and 
reporting requirements by gas marketers, independent and affiliated 
power marketers, and power producers.
    An important objective of the rule is to provide sound and uniform 
accounting and financial reporting for the above types of transactions 
and events. The new accounts and reporting schedule will add 
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.

EFFECTIVE DATE: The rule will become effective January 6, 2003.

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) 502-8283.
Julia A. Lake (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426. (202) 502-8370.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
III. Discussion
    A. General
    B. Inquiry Concerning Waivers Given to Marketers and Others
    C. Accounting for Trading and Available-for-Sale Type Securities
    D. Accounting for Other Comprehensive Income
    E. Accounting for Derivatives and Hedging Activities
    1. General
    2. General Instructions for Fair Value and Cash Flow Hedges
    3. Changes to General Instruction 21 Allowances
    4. Accounting for Derivative Assets and Liabilities
    a. Balance Sheet Classification for Derivative Assets and 
Liabilities
    b. Income Statement Classification for Changes in Value of 
Derivative Instruments
    c. Inclusion of the Normal Purchases and Sales Scope Exception
    F. Changes to the FERC Annual Report Forms
    G. Disclosure Requirements
    H. Miscellaneous Items
IV. Regulatory Flexibility Act Certification
V. Environmental Impact Statement
VI. Information Collection Statement
VII. Document Availability
VIII. Effective Date and Congressional Notification
Regulatory Text
Appendix A--List of Commenters
Appendix B--Revised Schedules for Forms 1, 1-F, 2, 2-A, and 6

    Before Commissioners: Pat Wood, III, Chairman; William L. Massey, 
Linda Breathitt, and Nora Mead Brownell.

I. Introduction

    1. The Federal Energy Regulatory Commission (Commission) is 
amending its accounting and financial reporting regulations. In a 
notice of proposed rulemaking issued on December 20, 2001, and 
published in the Federal Register on January 8, 2002 (67 FR 1025), the 
Commission proposed to amend its Uniform Systems of Accounts \1\ for 
public utilities and licensees,\2\ natural gas companies \3\ and oil 
pipeline companies \4\ by establishing 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 is adding 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 is also adding 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 will incorporate fair value 
accounting for 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 (2002).
    \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 (2002).
    \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 (2002).
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    2. Additionally, the Commission is revising 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.\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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[[Page 67693]]

    3. These revisions are being made to improve the usefulness of 
financial information provided to the Commission and other users of the 
FERC Forms 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 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 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 final rule is 
part of the Commission's ongoing effort to address emerging financial 
and accounting developments within the context of the Uniform Systems 
of Accounts.

II. Background

    4. 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 traditionally 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 and a greater percentage of sales are based on other than 
cost-of-service, fair value will increasingly provide a relevant 
measure of economic effects for a growing number of transactions and 
events. The usefulness of fair value information has resulted in the 
Financial Accounting Standards Board (FASB) 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.\6\
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    \6\ 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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    5. 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 
and interpreted for filings made with this agency. While some companies 
have implemented certain aspects of these pronouncements, the 
implementation has not been uniform concerning the accounting and 
reporting to the Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6.
    6. On August 10, 2001, the Commission's Chief Accountant issued 
interim accounting guidance on the proper accounting and reporting 
requirements for financial instruments, comprehensive income, 
derivatives and hedging activities.\7\ This interim accounting guidance 
was subsequently followed by a notice of proposed rulemaking (NOPR) 
issued on December 20, 2001, in which the Commission proposed changes 
to its accounting and financial reporting requirements to establish 
uniform accounting and reporting of the above mentioned items.\8\
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    \7\ See, All Jurisdictional Public Utilities and Licensees, 
Natural Gas Companies, and Oil Pipeline Companies, 97 FERC 62,147 
(2001).
    \8\ See 97 FERC 61,321 (2001).
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    7. The Commission received numerous comments from interested 
parties on its proposed changes to the accounting and financial 
reporting requirements. As more fully discussed below, the Commission 
is issuing this final rule to provide guidance on the proper 
interpretation and implementation of the principles and concepts set 
forth in FAS 115, 130 and 133 for accounting and financial reporting to 
the FERC.

III. Discussion

A. General

    8. As discussed in the NOPR, the current accounting and financial 
reporting standards for certain investment securities, derivative 
instruments, and hedging activities were developed when companies that 
this Commission regulates had only a relatively small number of 
transactions for which fair value measurements would be appropriate. As 
a result of the increased usage of derivative instruments to manage 
risk along with recent developments in the accounting profession, the 
Commission proposed revisions to its accounting and financial reporting 
requirements to provide greater visibility and transparency of these 
transactions and to help minimize inconsistent accounting and reporting 
of the above mentioned items.
    9. The Commission received 36 comments concerning various aspects 
of the proposed rule.\9\ The majority of commenters were supportive of 
the Commission's effort to provide interpretative guidance on the 
application of generally accepted accounting principles to 
jurisdictional entities that presently file financial information to 
the Commission in Annual Report Forms 1, 1-F, 2, 2-A, and 6.\10\ 
Additionally, some commenters did not find the new standards as 
reflected in the proposed regulations unduly burdensome and have 
already implemented the principles and concepts contained in FAS 115, 
130 and 133.\11\
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    \9\ See appendix A for Listing of Commenters.
    \10\ See for example APGA at p. 1, EEI at p. 3, Dominion at p. 
5, Pinnacle West at p. 3, Sempra at p. 1, Portland General at p. 3, 
NRECA at p. 6, Ohio PUC at p 2, NYPUC at p. 2, and Williams at p. 2.
    \11\ See for example Williams at p. 4.
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    10. 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. The addition of new accounts will enhance the 
Commission's understanding of the nature and extent to which 
derivatives and hedging activities are used by regulated entities and 
the impact these transactions and events have on their financial 
condition. With a greater understanding of the financial impact that 
derivative instruments have on regulated entities the Commission will 
be in a better position to make more informed decisions that affect the 
industries it regulates.
    11. Also, the addition of the new reporting requirements to the 
FERC Forms 1, 1-F, 2, 2-A and 6 will reduce regulatory uncertainty as 
to the proper accounting and reporting for these items, and minimize 
regulatory burden by reducing the potential differences in the manner 
in which these amounts are reported to shareholders and to the 
Commission.

B. Inquiry Concerning Waivers Given to Marketers and Others

    12. There are a number of public utilities with market-based rates 
that have received waivers from the Commission's Uniform System of 
Accounts, and thus would not be subject to the rule, for as long as the 
Commission continues the waivers. For instance, parts 41, 101, and 141 
of the Commission's regulations prescribe

[[Page 67694]]

certain informational requirements that focus on the physical assets 
that a public utility owns. For market-based rate applications by 
public utilities, 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 and others their 
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.\12\ The Commission 
concluded that since marketers do not obligate themselves to serve 
electric consumers, the requirements are inapplicable.\13\
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    \12\ 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 utilitity's security 
issues are not regulated by a State commission (see FPA section 
204(f)).
    \13\ See, e.g., St. Joe Minerals Corp, 21 FERC 61,323 (1982); 
Cliffs Electric Service Company, 32 FERC 61,372 (1985); Citizens 
Energy Corporation, 35 FERC 61,198 (1986); Howell Gas Management 
Company, 40 FERC 61,336 (1987); Citizens Power & Light Corporation, 
48 FERC 61,210 (1989); National Electric Associates Limited 
Partnership, 50 FERC 61,378 (1990); and Nevada Sun-Peak Limited 
Partnership, 86 FERC 61,243 (1999).
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    13. 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 sought comment in the NOPR 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.
    14. Furthermore, the Commission sought comments on whether it 
should rescind the part 34 blanket authorizations granted to 
independent and affiliated power marketers and power producers and 
require these entities to comply with the filing requirement of part 34 
for all future issuances of securities and assumptions of liabilities. 
The purpose of requiring these marketers and producers to comply with 
these regulations would not be to ensure their financial viability 
under section 204 of the FPA. Rather, it would be to promote 
transparency and facilitate investor risk analysis which in the long 
run promotes infrastructure and competition, and makes rates more just 
and reasonable.
    15. Most commenters stated that the Commission should not revoke 
the existing waivers. They argue that the basis for the Commission 
initially granting the waivers has not changed. They stated that 
marketers do not own any electric power generation or transmission 
facilities; their jurisdictional facilities are only corporate and 
documentary; their costs are determined by utilities that sell power to 
it; and their earnings are not defined and regulated in terms of an 
authorized return on invested capital.\14\
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    \14\ See for example, EEI at p. 14, Sempra at p. 1, and APX at 
p. 8.
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    16. They also argue that the marketers would incur substantial 
costs if required to add new accounting systems at this time to capture 
data required by the Uniform System of Accounts.\15\ Additionally, they 
assert that providing the data could place the marketers in a 
competitive disadvantage because the information is proprietary in 
nature.\16\
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    \15\ See for example, Sempra at p. 12.
    \16\ See for example, Avista at p. 7, Competitive at p. 16, and 
NEM at p. 5.
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    17. Furthermore, they argue that the application of the Uniform 
System of Accounts, and the approval of the issuance of securities does 
not work well with power marketers and power producers, because these 
requirements are focused on providing accurate information for the 
determination of cost-based rates, and the accounting rules are not 
relevant to entities with market-based rate authority.\17\
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    \17\ See for example, EEI at p. 15, Dominion at p. 7.
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    18. Regarding the filing requirements of part 34, some commenters 
stated that this regulation was intended to prevent the issuance of 
securities that might impair the company's ability to perform its 
public utility responsibilities, however independent and affiliated 
power marketers and power producers are not public utilities with such 
responsibilities. They state that applying part 34 to power marketers 
would be unreasonable because it is unclear how the Commission could 
determine whether particular issuances are compatible with the public 
interest and could force power marketers out of business.\18\
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    \18\ See for example, EEI at p. 16, Dominion at p. 7, Sempra at 
p. 13, Avista at p. 7, and Calpine at p. 6.
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    19. One commenter stated that there are indications within the NOPR 
that the Commission does not intend its proposed rule to apply to gas 
marketers. They requested that the Commission clarify its intent to 
exempt gas marketers from the Uniform System of Accounts and related 
annual reporting requirements, and continue to honor the existing 
waivers previously granted to these entities.\19\ Others state that the 
new rules should not sweep in qualified facilities and other on-site 
generators that primarily serve host facilities.\20\ Finally, some 
commenters stated that other government agencies such as the U.S. 
Securities and the Exchange Commission (SEC) and the Commodity Futures 
Trading Commission (CFTC) are better suited to regulate accounting and 
the use of financial derivatives.\21\
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    \19\ See Sempra at p. 6 and 7.
    \20\ See American Forest at p. 5.
    \21\ See Calpine at p. 3.
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    20. Some commenters however supported extending the accounting and 
reporting requirements to marketers, power producers, and affiliates 
with market based rates.\22\ They argue that the events of the last few 
months justify these new requirements. In their view, in light of the 
public's better understanding of the role derivatives play in energy 
security, the need for the Commission to obtain such information 
outweighs the reasons for exempting such entities. They state that the 
Commission requires a comprehensive picture of the marketplace and that 
the picture is incomplete if these entities are exempted from reporting 
requirements.\23\ In their view, the requirements would help state 
regulators in reviewing financial activities that may subject utilities 
to financial risk. Therefore, they recommend that affiliates of 
utilities be subject to existing and proposed Uniform System of 
Accounts requirements insofar as derivative and hedging transactions 
may impact and affect traditional utilities.
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    \22\ See NYPSC at p. 2 and 3, Ohio PUC at p. 5, APGA at p. 14, 
and NRECA at p. 5.
    \23\ See APGA at p. 15.
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    21. One commenter suggested the possibility of requiring 
independent and affiliated power marketers and power producers to 
maintain a translation matrix, certified by the company's ethics 
officer, that could quickly convert its current method of maintaining 
financial records into the Uniform System of Accounts. Thus, 
information

[[Page 67695]]

need not be filed but would be available in a consistent and easily 
understandable format if necessary. \24\ Another commenter recommended 
that the Commission expand its data collection on derivative 
instruments. The purpose for derivative data collection should be not 
only to assist the Commission in its monitoring efforts, but also to 
further the transparency of the energy derivatives markets. The 
Commission should collect and make summary data available to potential 
buyers and sellers in the market, and in essence provide market 
participants with a forward price curve, allowing them to benchmark 
proposed deals.\25\
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    \24\ See Ohio PUC at p. 5.
    \25\ See NRRECA at p. 5.
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    22. Finally, some commenters indicated that the Commission needs to 
reform its data resources with regard to monitoring competitive 
electric markets and market based sellers. If any changes are to be 
considered with regard to information review, the Commission should 
employ a thoughtful stakeholder process, such as a technical 
conference, to identify its information needs.\26\
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    \26\ See for example, Congentrix at p. 10, DENA at p. 10, EPSA 
at p. 3, and J. Aron at p. 11.
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    23. The Commission has decided to sever from this rulemaking 
proceeding the inquiry on whether independent and affiliated power 
marketers and power producers should continue to be exempt from the 
Commission's Uniform System of Accounts and other reporting 
requirements. The Commission thus will consider separately the issue of 
what information collection and recordkeeping requirements it may 
impose on gas marketers, independent and affiliated power marketers, 
and power producers. While the Commission is sensitive to the fact that 
independent and affiliated power marketers and power producers and 
their use of derivatives are playing a more significant financial role 
in this evolving electric power industry, we also recognize the need to 
reform the approach used to monitor competitive electric markets and 
market based sellers in the context of a number of current and ongoing 
Commission initiatives.
    24. For example, there are several ongoing investigations that may 
impact on the direction the Commission may take vis-a-vis power 
marketers and power producers. In addition, the Commission is currently 
reviewing its existing reporting requirements to determine what new 
information needs to be collected to monitor competitive energy 
markets, the sources for that information, how often that information 
should be updated, and how the Commission should gain access to 
specific information as needed in order to effectively monitor energy 
markets. The Commission thus will hold technical conferences and 
outreach meetings on these matters.

C. Accounting for Trading and Available-for-Sale Type Securities

    25. 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 addressed the accounting and reporting for 
investments in equity securities that have a readily determinable fair 
value and for all investments in debt securities, and its major 
provisions were summarized in the NOPR.
    26. Under the Commission's Uniform Systems of Accounts for public 
utilities and licensees, and natural gas companies, all types of 
securities are recorded at cost and subsequent changes in the fair 
value of security investments are normally not recognized in the 
financial statements until realized. The Uniform System of Accounts for 
oil pipeline companies however, permits the recognition of decreases in 
the carrying value of investment securities, but currently would not 
permit the carrying value to be increased.
    27. 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 regulators and others. For example, fair 
value measurements provide useful information to the Commission 
concerning the status of certain amounts set aside to fund future 
obligations such as decommissioning nuclear plants.
    28. The Commission therefore proposed to add language to its 
security investment accounts for public utilities and licensees, 
natural gas companies, and oil pipeline companies 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.\27\ The Commission also proposed amending its oil pipeline 
General Instruction 1-15, accounting for marketable equity securities, 
and removing oil pipeline accounts 23, 24, and 75.5 to conform the 
regulations to the proposed changes.
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    \27\ 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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    29. The Commission received no objections concerning its proposal 
to include unrealized holding gains and losses on certain qualifying 
securities in the investment asset accounts, or to its proposal to 
amend its oil pipeline General Instruction 1-15 to conform the 
regulations to the proposed changes. Therefore the Commission will 
revise the instructions to its investment accounts and make conforming 
changes to the applicable oil pipeline General Instruction 1-15, to 
require the recording of unrealized holding gains and losses on certain 
eligible investment securities.
    30. As part of the accounting for recording unrealized holding 
gains and losses on certain investment securities, the Commission 
proposed to include in a separate section of stockholders equity, the 
corresponding change in value of these securities. Some commenters 
stated that changes in the carrying value of certain securities that 
will be ultimately used in the development of future rates, such as 
nuclear decommissioning trust funds, are better reflected in a 
regulatory asset or a regulatory liability account rather than in 
accumulated other comprehensive income when it is probable that the 
customer, rather than the stockholder, will be affected by changes in 
the value of these securities. They indicated that it is prevailing 
practice within the electric industry to record regulatory assets or 
liabilities when it is probable that such changes in the fair market 
value will be considered by regulators in the setting of rates in 
future proceedings.\28\ Such prevailing practice according to the 
commenters is in accordance with the provisions of FAS 71, ``Accounting 
for the Effects of Certain Types of Regulation.'' In order to implement 
this change, the commenters recommended that the final rule should 
include revised account descriptions of accounts 182.3 and 254 to 
include certain items of other comprehensive and the new General 
Instruction for accounting for other comprehensive income should be 
revised accordingly.
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    \28\ See for example, EEI at p. 12, and NRECA at p. 8.
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    31. The Commission agrees that under certain circumstances it may 
be appropriate for rate regulated entities to report unrealized holding 
gains and losses on certain investment securities as regulatory assets 
or regulatory liabilities pursuant to Order 552 which

[[Page 67696]]

adopted the accounting standards set forth in FAS 71.\29\ The 
Commission will revise its proposed General Instruction for accounting 
of other comprehensive income and its existing regulatory asset and 
liability accounts accordingly.
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    \29\ See Revisions to Uniform Systems of Accounts to Account for 
Allowances Under the Clean Air Act Amendments of 1990 and 
Regulatory-Created Assets and Liabilities and to Form Nos. 1, 1-F, 2 
and 2-A. Order No. 552, 58 FR17982 (Apr. 7, 1993), FERC Stats & 
Regs. Regulations Preambles January 1991-June 1996 30,967 (Mar. 31, 
1993).
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D. Accounting for Other Comprehensive Income

    32. 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.'' \30\ The major 
provisions of this statement were summarized in the NOPR.
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    \30\ 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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    33. The Commission proposed to revise the Uniform Systems of 
Accounts for public utilities and licensees, natural gas companies and 
oil pipeline companies to provide accounting for items of other 
comprehensive income, and proposed the creation of two new equity 
accounts to record the activity related to other comprehensive income. 
The proposed new accounts would require supporting records be 
maintained by each category of other comprehensive income for reporting 
the information in the FERC Forms 1, 1-F, 2, 2-A, and 6.
    34. The Commission also proposed instructions to the other 
comprehensive income accounts for all jurisdictional entities that 
would require supporting records be maintained by each category of 
other comprehensive income. This level of record keeping is required so 
that the entity is able to identify the amounts associated with the 
item of other comprehensive income when it enters into the 
determination of net income in subsequent periods.
    35. Many commenters questioned the need and the benefit of using 
two accounts for the recognition of other comprehensive income, along 
with the requirement to transfer amounts of other comprehensive income 
from account 219.1 to account 219 at the balance sheet date. In their 
view this was a duplicative requirement and therefore they recommended 
the use of only one equity account for the recognition of other 
comprehensive income.\31\
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    \31\ See, for example, EEI at p. 5, AEP at p. 2, Dominion at p. 
14, Southern at p. 1, and Pinnacle at p. 3.
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    36. Based upon the comments received the Commission agrees that one 
equity account can accommodate all of the activity provided that 
sufficient detailed records are maintained in order to identify and 
display current years' activity for items of other comprehensive 
income, in addition to providing a year-to-date summary of the 
activity. Therefore, the Commission will create only one account for 
public utilities and licensees, and natural gas companies entitled 
account 219, accumulated other comprehensive income, and one account 
for oil pipeline companies entitled account 77, accumulated other 
comprehensive income, to record amounts for items of other 
comprehensive income in stockholders equity. However, the Commission 
will keep the requirements originally set forth in the NOPR that 
detailed records be maintained so that the current period activity, 
year-to-date activity, and reclassification adjustments related to 
items of other comprehensive income can be readily identified. 
Maintaining detailed records for items included in accumulated other 
comprehensive income are necessary so that an entity can readily 
identify amounts when the item is included in net income in subsequent 
periods and to periodically report this information in the new 
reporting schedule entitled Accumulated Other Comprehensive Income and 
Hedging Activities.
    37. Finally, the NOPR proposed the need for reclassification 
adjustments for items of other comprehensive income to avoid double 
counting an item in net income and other comprehensive income. The 
proposed instructions would have required that reclassification 
adjustments be made directly to other comprehensive income. This 
proposed accounting treatment for reclassification adjustments would 
minimize the need for creating a new account to capture amounts solely 
related to reclassification adjustments.
    38. No commenters objected to the proposed accounting for 
reclassification adjustments. The Commission will therefore adopt the 
proposed accounting for reclassification adjustments.

E. Accounting for Derivatives and Hedging Activities

1. General
    39. 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 NOPR summarized the key points of the 
pronouncement.
2. General Instructions for Fair Value and Cash Flow Hedges
    40. The Commission proposed to add a new general instruction that 
would require public utilities and licensees, natural gas companies, 
and oil pipeline companies to record changes in the fair value of the 
derivative instrument designated as a cash flow hedge to other 
comprehensive income. 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 the new 
derivative asset or liability account with a corresponding adjustment 
to a subaccount of the asset or liability that carries the item being 
hedged. The ineffective portion of the cash flow and fair value hedges 
would be charged to the same income or expense account that will be 
used when the hedged item enters into the determination of net income.
    41. No commenters objected to the above proposal regarding the use 
of a subaccount to adjust the carrying amount of the asset or liability 
being hedged under a fair value hedge, or the proposal to include the 
ineffective portion of the hedge in the same income or expense account 
that will be used when the hedged item enters into the determination of 
net income.\32\ Therefore, the Commission will implement this change as 
proposed.
---------------------------------------------------------------------------

    \32\ See FAS 133 as amended by FAS 138 for definition, examples 
and illustrations of assessing effectiveness and measuring 
ineffectiveness for fair value and cash flow hedges.

---------------------------------------------------------------------------

[[Page 67697]]

3. Changes to General Instruction 21 Allowances
    42. The Commission proposed 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 traded allowance future 
contracts. The Commission proposed 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. No commenters objected to the changes proposed to 
General Instruction 21, allowances, therefore, the Commission will 
implement the changes as proposed.
4. Accounting for Derivative Assets and Liabilities
a. Balance Sheet Classification for Derivative Assets and Liabilities
    43. The NOPR proposed establishing new balance sheet accounts to 
record derivative assets and liabilities. Under the proposal, 
derivative assets and liabilities would be accounted for and reported 
to the Commission based upon their intended use. Derivatives used for 
hedging activities would be classified in accounts 176 and 245 for 
public utilities and licensees, and natural gas companies, and accounts 
47 and 66 for oil pipeline companies.\33\ Derivatives used in non-
hedging activities would be classified in accounts 175 and 244 for 
public utilities and licensees, and natural gas companies, and accounts 
46 and 65 for oil pipeline companies.
---------------------------------------------------------------------------

    \33\ See FAS 133 as amended by FAS 138 for discussion and 
examples of hedging activities.
---------------------------------------------------------------------------

    44. The Commission also noted in the NOPR that entities are 
required to classify derivative assets and liabilities as current or 
long-term on their financial statements reported to the U.S. Securities 
and Exchange Commission (SEC) and in Annual Reports to Stockholders. 
The Commission stated that entities may create current and long-term 
subaccounts associated with the proposed new derivative balance sheet 
accounts in order to facilitate reporting derivative assets and 
liabilities to shareholders in general purpose financial statements.
    45. Some commenters responded that the Commission should create 
current and long-term accounts to record derivative assets and 
liabilities on the balance sheet.\34\ They stated that the Commission's 
Uniform System of Accounts includes separate sections for current and 
accrued assets and deferred debits, as well as current liabilities and 
deferred credits, and that FERC requires that other items be reported 
as current or long-term. They also stated that the establishment of 
current and long-term accounts would reduce the potential for 
misclassifications between current and long-term subaccounts of the 
proposed new accounts.
---------------------------------------------------------------------------

    \34\ See for example EEI at p. 8 and 9, AEP at p. 2, and 
Dominion at p. 13.
---------------------------------------------------------------------------

    46. At this time the Commission declines to adopt the commenters' 
suggestion that derivative assets and liabilities should be reported to 
the Commission based upon a current or long-term balance sheet 
distinction. It is important for the Commission to obtain information 
concerning the nature of the derivative transactions that 
jurisdictional entities have entered into to manage their financial and 
other business risks. By reporting to the Commission derivative 
instruments used to hedge business risks separately from those 
derivative instruments used for non-hedging activities, the Commission 
and other regulators will have enhanced information as to the positions 
regulated entities have at the balance sheet date related to the 
entities' hedging and non-hedging activities. This important 
distinction would not be transparent if derivative instruments were 
displayed in the FERC Forms 1, 1-F, 2, 2-A and 6 based upon a current 
or long-term balance sheet classification. Additionally, reporting 
derivative instruments based upon their intended use will assist 
regulators in assessing the activities of jurisdictional entities 
related to their traditional utility business as compared to their 
trading activities.
b. Income Statement Classifications for Changes in the Value of 
Derivative Instruments
    47. The Commission proposed that public utilities and licensees, 
and natural gas companies would use account 421, miscellaneous 
nonoperating income, and oil pipeline companies would use account 660, 
miscellaneous income charges, to record on the income statement the 
change in the fair value of the derivative instruments not used in 
hedging activities.
    48. One commenter specifically supported the use of account 421 to 
record gains and losses on non-hedge activities.\35\ They indicated 
that using account 421 to record gains and account 426.5 to record 
losses did not provide valuable information and they found it very 
difficult to separate gains and losses due to the large volumes of 
derivative transactions from power trading activities. However, other 
commenters asserted that account 421 is appropriate when there is an 
increase in the fair value of a derivative instrument, and account 
426.5 is appropriate when there is a decrease in the fair value of the 
derivative instrument.\36\
---------------------------------------------------------------------------

    \35\ See Cinergy at p. 4.
    \36\ See for example Southern Company at p. 3 and EEI at p. 12.
---------------------------------------------------------------------------

    49. The Commission concurs with the commenters that a better 
accounting and financial presentation is not to net gains and losses in 
one income statement account, but rather to record gains from non-
hedging activities in account 421 and losses in account 426.5, for 
electric and natural gas companies. The use of separate income 
statement accounts to record gains and losses on derivative instruments 
used in non-hedging activities follows our existing accounting practice 
for exchange traded emission allowances. Finally, the Commission will 
also require that oil pipelines record gains in account 640, 
miscellaneous income, and losses in account 660, miscellaneous income 
charges, to better reflect increases and decreases in the fair value of 
derivative instruments not used in hedging activities on the income 
statement.
    50. This accounting will aid the Commission and other users of the 
FERC Forms 1, 1-F, 2, 2-A and 6 to see more clearly the extent to which 
gains or losses have been incurred on non-hedging derivative 
transactions. And, by separately recording changes in the value of 
derivative instruments in separate income and expense accounts, any 
subsequent reclassification of amounts will be better displayed if a 
regulator chooses to include a portion of the holding gains or losses, 
or realized gains or losses, in the development of rates.
    51. While respondents did not object to the use of below-the-line 
income statement accounts to record both unrealized and realized gains 
or losses on derivative instruments used for non-hedging activities, 
there were many views on what the appropriate accounting should be in 
instances when a regulator incorporates all or part of the actual gain 
or loss in the development of rates. The Commission proposed that when 
a regulator explicitly approves the inclusion of the changes in fair 
value of derivative instruments in the

[[Page 67698]]

development of rates, the company should reclassify those amounts from 
the below-the-line income statement accounts to the appropriate utility 
operating revenue or expense account that will be charged with the 
derivative transaction when it settles.
    52. Some commenters indicated that it is inappropriate to record 
the changes in the fair value of non-hedge type derivative instruments 
in a below-the-line account prior to settlement, only to reclassify 
some or all of the amount to the appropriate operating revenue or 
expense account when the transaction settles.\37\ They believe that 
changes in the fair value that will be included in rates should be 
initially recorded in the appropriate operating revenue or expense 
account, so reclassification is not necessary. Others support a 
position that in situations where it is probable that realized gains 
and losses would be included in rates, then unrealized changes in fair 
value of the related derivative instrument should be deferred in an 
appropriate regulatory asset or regulatory liability account.
---------------------------------------------------------------------------

    \37\ See for example, Cinergy at p. 5, Southern at p. 3, and 
Pinnacle at p. 4.
---------------------------------------------------------------------------

    53. After reviewing the comments, the Commission is of the view 
that entities will avail themselves of the special accounting afforded 
derivative instruments when these instruments are entered into as part 
of a cash flow or fair value hedge transaction. Under the special 
accounting afforded qualifying hedges, any unrealized gains and losses 
effectively remain on the balance sheet and therefore do not enter into 
the determination of net income until the hedged item enters into the 
determination of net income. If the derivative instrument is not part 
of qualifying hedge, entities will record the unrealized, as well as 
realized, gains or losses in accounts 421 and 426.5 as appropriate. 
However, if the derivative instrument does not qualify for hedge 
accounting, but it is probable under the requirements of Order 552 that 
changes in the fair value of the derivative instrument will be used in 
the development of rates, the entity must follow the Commission's 
existing accounting regulations for the recognition of regulatory 
assets and regulatory liabilities.
c. Inclusion of the Normal Purchases and Sales Scope Exception
    54. The Commission noted in the NOPR that certain types of 
contracts are exempted from the requirements of FAS 133. 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 treated as 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, and certain electric 
power contracts.
    55. Some commenters noted that the normal purchases and sales 
exception should also be specifically included in the Commission's 
regulations.\38\ They indicate that most forward power and electric 
option contracts will meet the normal purchase and sales scope 
exception and therefore changes in the contracts' fair value will not 
be required to be reflected on the financial statements. The Commission 
agrees with the commenters that some electric power contracts will meet 
this exception and therefore changes in the fair value of those 
contracts will not be reflected in the financial statements.
---------------------------------------------------------------------------

    \38\ For example see Cinergy at p. 3, Wisconsin Electric at p. 
6, and EEI at p. 6.
---------------------------------------------------------------------------

    56. It is the Commission's view that the existing normal purchases 
and sales accounting exception criteria should also be applied to 
transactions that jurisdictional entities account and report to the 
Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6. The Commission will 
therefore include language in the General Instructions for the 
Accounting for Derivative Instruments and Hedging Activities that 
provides for the normal purchases and sales exceptions.\39\
---------------------------------------------------------------------------

    \39\ See FAS 133 as amended by FAS 138, Derivatives 
Implementation Group (DIG) conclusions, and the Emerging Issues Task 
Force (EITF) pronouncements. These accounting pronouncements may be 
obtained from FASB at (http://accounting.rutgers.edu/raw/fasb/ ).
---------------------------------------------------------------------------

F. Changes to the FERC Annual Report Forms

    57. The accounting changes proposed in the NOPR would 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 and licensees, natural gas companies, and oil pipeline 
companies. The proposed new schedule was shown in appendix A of the 
NOPR.
    58. As stated in the NOPR, in order to provide consistent 
accounting and reporting of items of other comprehensive income the 
Commission proposed to add a new schedule with instructions on the 
proper footnote disclosures for the FERC Forms 1, 1-F, 2, 2-A, and 6. 
The proposed new schedule would show the components of other 
comprehensive income and required:

    59. 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.
    60. The reporting of accumulated other comprehensive income 
balances at year end by category, in a footnote to the schedule.
    61. The reporting of fair value hedge balances at year end by 
category, in a footnote to the schedule.

    62. Some commenters recommended format changes to the proposed new 
schedule to better display the items of other comprehensive income. A 
roll-forward format was recommended that would show the current years 
activity, in addition to the cumulative balances for items of other 
comprehensive income.\40\ The revised format would display all of the 
information proposed in the NOPR without the use of reporting 
accumulated balances for certain items through the use of footnotes.
---------------------------------------------------------------------------

    \40\ See for example, Dominion at p. 14, Southern at p. 2, and 
EEI's April 1, 2002, supplement to its March 11, 2002 filing.
---------------------------------------------------------------------------

    63. The Commission notes that the roll-forward format 
recommendation made by the commenters will improve the transparency of 
the data displayed and reduce the need for certain year end balances to 
be reported in a footnote. The Commission will adopt the roll-forward 
format that will display amounts of other comprehensive income during 
the current period as well as at the balance sheet date. The new 
schedule for reporting derivative information and other comprehensive 
income amounts is shown in appendix B entitled Statement of Accumulated 
Comprehensive Income and Hedging Activities.

G. Disclosure Requirements

    64. For many years financial statements issued to the public have 
required the inclusion of a disclosure entitled ``Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations'' commonly referred to as the MD&A. It requires a discussion 
of liquidity, capital resources, results of operations and other 
information necessary to understand the financial condition, changes in 
financial condition and results of operations of the entity.
    65. On January 22, 2002, the U.S. Securities and Exchange 
Commission

[[Page 67699]]

(SEC) issued a statement entitled Commission Statement About 
Management's Discussion and Analysis of Financial Condition and Results 
of Operations.\41\ This statement set forth certain views of the SEC 
regarding disclosure that should be considered by registrants that 
address matters of liquidity and capital resources including off-
balance sheet arrangements; certain trading activities that include 
non-exchange traded contracts accounted for at fair value; and effects 
of transactions with related and certain other parties. The SEC's 
interpretative guidance related to the MD&A did not create new legal 
requirements, but suggested steps that issuers of financial statements 
should consider in meeting their current disclosure obligations with 
respect to the matters described above.
---------------------------------------------------------------------------

    \41\ See SEC release nos. 34-45321; FR-61. This notice may be 
obtained from the SEC website at (http://www.sec.gov/rules/other/33-8056.htm)
---------------------------------------------------------------------------

    66. In particular the SEC's interpretative guidance recommended 
certain disclosures about trading activities that include non-exchange 
traded contracts accounted for at fair value. The recommended 
disclosures include information concerning realized and unrealized 
changes in fair value of commodity contracts including derivatives, the 
source of the fair value price, and the fair value of the contracts at 
various maturity dates.
    67. The Commission recognizes that there have been some concerns 
raised about how the fair value of derivative instruments have been 
determined. The information provided by entities in their MD&A will 
provide additional insight to regulators, investors, creditors, and 
other users of the financial statements into the valuation techniques 
and assumptions used to value the outstanding contracts as of the 
balance sheet date.
    68. The Commission is of the view that the type of information 
disclosed by jurisdictional entities in their MD&A related to trading 
activities involving material commodity contracts that are accounted 
for at fair value is an important part of understanding the financial 
condition of entities that report financial information to the 
Commission in FERC Forms 1, 1-F, 2, 2-A, and 6. Therefore to the extent 
that a jurisdictional entity filing a FERC Form 1, 1-F, 2, 2-A, or 6 
includes the above type of information on trading activities in its 
MD&A as part of its Annual Report to Shareholders and SEC filing, it 
must report the same information reported to the Commission on the 
schedule entitled Important Changes During the Year.\42\ The 
instructions on this schedule require important information that 
appears in their Annual Reports to Shareholders and the SEC to also be 
included on this schedule. By including the derivative information 
presented in the MD&A to the FERC, the quality of the information 
received by this Commission will be no less than that provided by 
jurisdictional entities to shareholders and other users of the 
financial data.
---------------------------------------------------------------------------

    \42\ See FERC Form No. 1 p. 108, FERC Form No. 2 p. 108, and 
FERC Form No. 6 p. 108.
---------------------------------------------------------------------------

    69. The Commission notes that power marketers and power producers 
that file financial information with the SEC will also be subject to 
its recent interpretative guidance regarding additional disclosures 
concerning their trading activities. The SEC's information reporting 
initiatives may impact the Commission's need to require further 
reporting from these entities.

H. Miscellaneous Items

    70. One commenter recommended that the Commission state it will not 
incorporate derivative instruments, hedging activities, and other 
comprehensive income into its ratemaking process for utilities, because 
the value of these instruments are certain to change over time and the 
Commission would set rates incorrectly.\43\
---------------------------------------------------------------------------

    \43\ See Sempra at p. 6.
---------------------------------------------------------------------------

    71. As stated in the NOPR, the proposed rule was not intended to 
prescribe the ratemaking treatment for items of other comprehensive 
income or for derivative instruments and hedging activities. The 
adoption of any particular rate treatment for these amounts is beyond 
the scope of this rulemaking. The Commission will decide the 
appropriate treatment, for these transactions on a case-by-case basis 
in individual rate proceedings.
    72. Some commenters recommended that the Commission delay the 
effective date of the proposed changes for one year after the 
rulemaking is approved in order to allow for a complete review of the 
regulations and their prospective implementation.\44\ One commenter 
indicated that the Commission's consideration of this accounting is 
premature at this time and delay its review and implementation until 
various regulatory bodies review current accounting procedures or until 
any reforms are adopted.\45\ However, another commenter requested that 
the Commission make the proposed filing requirements retroactive and 
effective for 2001 reporting by requiring supplements to the 
Commission's Annual Report filings with the new schedules required 
under the proposed rule.\46\
---------------------------------------------------------------------------

    \44\ See EEI at p. 13, and Dominion at p. 15.
    \45\ See Wisconsin Electric at p. 4 and 5.
    \46\ See APGA at p. 3.
---------------------------------------------------------------------------

    73. The Commission is of the view that jurisdictional entities are 
already familiar with the accounting pronouncements contained in this 
final rule and have already implemented these requirements in their 
Annual Reports to Shareholders and in filings with the SEC. By delaying 
proper implementation of these new accounting and reporting standards, 
different and inconsistent sets of financial information would be 
reported to the Commission, and accounting and reporting guidance would 
continue to be required on how these transactions should be reported to 
FERC. Consequently, it is the Commission's view that little, if any, 
benefit would be gained by delaying the issuance of accounting and 
reporting guidance on these matters. In order to provide consistent 
accounting and reporting to the Commission on a timely basis, the 
Commission declines to postpone implementation for another year. The 
accounting and reporting changes will become effective 60 days after 
date of publication in the Federal Register.
    74. The Commission acknowledges that with any new accounting and 
financial reporting standard, implementation issues may arise. 
Jurisdictional entities can seek clarification from the Chief 
Accountant concerning the proper application or implementation of any 
accounting standard under the Commission's existing regulations.
    75. Finally, the Chief Accountant had previously issued guidance 
concerning the proper accounting for derivative and hedging activities 
pending further action by the Commission. That guidance letter provided 
for the recording of derivative assets and liabilities in miscellaneous 
deferred debit or credit accounts, or in other investment accounts, 
based upon the jurisdictional entities rationale for entering into the 
derivative transaction. In order to provide for consistent accounting 
and reporting treatment for all derivative transactions, the Commission 
will require that amounts previously accounted for under the Chief 
Accountant's guidance letter using existing asset, liability and equity 
accounts, be reclassified to the appropriate new derivative assets, 
derivative liabilities, and accumulated other comprehensive income 
account, established under this Final Rule.

[[Page 67700]]

IV. Regulatory Flexibility Act Certification

    76. The Commission finds that most filing entities regulated by the 
Commission do not fall within the Regulatory Flexibility Act's 
definition of small entity.\47\ This final rule will promote consistent 
reporting practices for all reporting companies and 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. 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. Accordingly, the 
Commission certifies that this Final Rule will not have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \47\ 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 dominate in its field of 
operation.
---------------------------------------------------------------------------

V. Environmental Impact Statement

    77. Commission regulations require that an environmental assessment 
or an environmental impact statement be prepared for any Commission 
action that may have a significant adverse effect on the human 
environment.\48\ No environmental consideration is necessary for the 
promulgation of a rule that is clarifying, corrective, or procedural or 
does not substantially change the effect of legislation or regulations 
being amended,\49\ and also for information gathering, analysis, and 
dissemination.\50\ 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. In addition, the final rule involves information 
gathering, analysis and dissemination. Therefore, this final rule falls 
within categorical exemptions provided in the Commission's Regulations. 
Consequently, neither an environmental impact statement nor an 
environmental assessment is required.
---------------------------------------------------------------------------

    \48\ Regulations Implementing National Environmental Policy Act, 
52 FR 47897 (December 17, 1987), FERC Stats. & Regs. 30,783 (1987).
    \49\ 18 CFR 380.4(a)(2)(ii).
    \50\ 18 CFR 380.4(a)(5).
---------------------------------------------------------------------------

VI. Information Collection Statement

    78. The Office of Management and Budget (OMB) regulations require 
that OMB approve certain reporting and record keeping (collections of 
information) imposed by an agency. The information collection 
requirements in this final rule are contained in 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). Form 1 most 
recently received OMB approval on March 29, 2002, for the period 
through March 2005. Form 1-F received OMB approval on April 2, 2002, 
for the period through April 2005. Form 2 received approval on March 
29, 2002, for the period through March 2005. Form 2-A received approval 
on April 2, 2002, for the period through April 2005. Form 6 was 
previously approved March 28, 2001 for the period through March 2004. 
OMB declined to take any action at the NOPR stage instead deciding to 
make a determination at the final rule stage.
    79. Interested persons may obtain information on the reporting 
requirements by contacting the Federal Energy Regulatory Commission, 
888 First Street, NE., Washington, DC 20426 (Attention: Michael Miller, 
Office of the Chief Information Officer, (202) 502-8415) or from the 
Office of Management and Budget, Room 10202 NEOB, Washington, DC 20503 
(Attention: Desk Officer for the Federal Energy Regulatory Commission, 
(202) 395-7318, fax: (202) 395-7285).
    80. The regulated entity shall not be penalized for failure to 
respond to this collection of information unless the collection of 
information displays a valid OMB control number.
    81. Titles: FERC Form No. 1, ``Annual Report of Major Public 
Utilities, Licensees and Others''; FERC Form No. 1-F, ``Annual Report 
of Nonmajor Public Utilities and Licensees''; FERC Form No. 2, ``Annual 
Report of Major Natural Gas Companies''; FERC Form No. 2-A, ``Annual 
Report of Nonmajor Natural Gas Companies''; and Form No. 6, ``Annual 
Report of Oil Pipeline Companies.''
    82. Action: Revision of Currently Approved Collections of 
Information.
    83. OMB Control Nos.: 1902-0021; 1902-0029; 1902-0028; 1902-0030; 
and 1902-0022.
    84. Respondents: Business or other for profit.
    85. Frequency of Responses: Annually.
    86. Reporting Burden: The Commission estimated that adoption of the 
reporting requirements as identified in the NOPR, would result in an 
increase in reporting burden to the information collections identified 
above. Those increases were the following:

----------------------------------------------------------------------------------------------------------------
                                                                                    Total hours for data coll.*
                         Data collection                             Hours per   -------------------------------
                                                                    respondent         NOPR         Final rule
----------------------------------------------------------------------------------------------------------------
Form--1.........................................................               2             420             432
Form--1-F.......................................................               2              14              52
Form--2.........................................................               2             114             114
Form-2-A........................................................               2             114             106
Form--6.........................................................               2             318             318
                                                                 -----------------
    Totals......................................................  ..............             980          1,022
----------------------------------------------------------------------------------------------------------------
* The changes in total hours reflect changes in the number of respondents filing the information collections
  based on the most recent submissions to the Commission. Forms 1 & 1-F had increases in the number of
  respondents filing while Form 2-A had a decrease in the number of respondents who filed. The Commission did
  not receive specific comments concerning its burden estimates and will therefore continue those estimates in
  the final rule. Comments on the substantive issues raised in the NOPR are addressed elsewhere in the final
  rule.

    87. 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:

[[Page 67701]]

Michael Miller, Office of the Chief Information Officer, Phone: (202) 
502-8415, fax: (202) 208-2425, e-mail: [email protected].
    88. For submitting comments concerning the collections of 
information and the associated burden estimate(s), please send your 
comments to the contact listed above or 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) 395-7856, fax: (202) 395-
7285).

VII. Document Availability

    89. 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.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.
    90. From FERC's Home Page on the Internet, this information is 
available in the Federal Energy Regulatory Records Information System 
(FERRIS). The full text of this document is available on FERRIS in PDF 
and WordPerfect format for viewing, printing, and/or downloading. To 
access this document in FERRIS, type the docket number excluding the 
last three digits of this document in the docket number field.
    91. User assistance is available for FERRIS and the FERC website 
during normal business hours from our Help line at (202) 502-8222 or 
the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 502-
8659. E-mail the Public Reference Room at 
[email protected].

VIII. Effective Date and Congressional Notification

    92. This Final Rule will take effect January 6, 2003. The 
Commission has determined, with the concurrence of the Administrator of 
the Office of Information and Regulatory Affairs of the Office of 
Management and Budget, that this rule is not a ``major rule'' within 
the meaning of section 251 of the Small Business Regulatory Enforcement 
Fairness Act of 1996.\51\ The Commission will submit the final rule to 
both houses of Congress and the General Accounting Office.\52\
---------------------------------------------------------------------------

    \51\ 5 U.S.C. 804(2).
    \52\ 5 U.S.C. 801(a)(1)(A).
---------------------------------------------------------------------------

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 the Commission.
Linwood A. Watson, Jr.,
Deputy Secretary.


    In consideration of the foregoing, the Commission amends 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. Amend part 101 as follows:
    a. In General Instructions, section 21. Allowances, paragraph I is 
removed, and section 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 shall record items of other comprehensive income in 
account 219, Accumulated other comprehensive income. Amounts included 
in this account shall 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. Supporting records shall 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.
    B. When an item of other comprehensive income enters into the 
determination of net income in the current or subsequent periods, a 
reclassification adjustment shall be recorded in account 219 to avoid 
double counting of that amount.
    C. When it is probable that an item of other comprehensive income 
will be included in the development of cost-of-service rates in 
subsequent periods, that amount of unrealized losses or gains will be 
recorded in Accounts 182.3 or 254 as appropriate.
    24. Accounting for derivative instruments and hedging activities.
    A. Utilities shall recognize derivative instruments as either 
assets or liabilities in the financial statements and measure those 
instruments at fair value, except those falling within recognized 
exceptions. Normal purchases or sales are contracts that provide for 
the purchase or sale of goods that will be delivered in quantities 
expected to be used or sold by the utility over a reasonable period in 
the normal course of business. A derivative instrument is a financial 
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 its intended use and designation. Changes in 
the fair value of derivative instruments not designated as fair value 
or cash flow hedges shall be recorded in account 175, derivative 
instrument assets, or account 244, derivative instrument liabilities, 
as appropriate, with the gains recorded in account 421, miscellaneous 
nonoperating income, and losses recorded in account 426.5, other 
deductions.
    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 shall 
maintain documentation of the hedge relationship at the inception of 
the hedge that details the

[[Page 67702]]

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 shall 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 shall be reflected in the same income 
or expense account that will be used when the hedged item enters into 
the determination of net income. 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 shall 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, accumulated 
other comprehensive income, for the effective portion of the hedge. The 
ineffective portion of the hedge transaction shall be reflected in the 
same income or expense account that will be used when the hedged item 
enters into the determination of net income. Amounts recorded in other 
comprehensive income shall be reclassified into earnings in the same 
period or periods that the hedged forecasted item enters into the 
determination of net income.
    b. In Balance Sheet Accounts, accounts 124, paragraph A, 125, 126 
and 127 are revised 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 identifying 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.
* * * * *
    c. In Balance Sheet Accounts, account 128, introductory text above 
the note is revised to read as follows:

Balance Sheet Accounts

* * * * *
    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.
* * * * *
    d. In Balance Sheet Accounts, account 129, introductory text 
preceding Note A, is revised to read as follows:

Balance Sheet Accounts

* * * * *
    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.
* * * * *
    e. In Balance Sheet Accounts, accounts 175 and 176 are added to 
read as follows:

Balance Sheet Accounts

* * * * *
    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, shall be credited or 
debited, as appropriate, 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, accumulated other comprehensive income, with the effective 
portion of the gain or loss. The ineffective portion of the cash flow 
hedge shall be charged to the same income or expense account that will 
be used when the hedged item enters into the determination of net 
income.
    C. When a utility designates a derivative instrument as a fair 
value hedge it shall record the change in the fair value 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

[[Page 67703]]

ineffective portion of the fair value hedge shall be charged to the 
same income or expense account that will be used when the hedged item 
enters into the determination of net income.
* * * * *
    f. In Balance Sheet Accounts, account 182.3, paragraph B is revised 
to read as follows:

Balance Sheet Accounts

* * * * *
    182.3 Other regulatory assets.
* * * * *
    B. The amounts included in this account are to be established by 
those charges which would have been included in net income, or 
accumulated other comprehensive income, determinations in the current 
period under the general requirements of the Uniform System of Accounts 
but for it being probable that such items will be included in a 
different period(s) for purposes of developing rates that the utility 
is authorized to charge for its utility services. When specific 
identification of the particular source of a regulatory asset cannot be 
made, such as in plant phase-ins, rate moderation plans, or rate 
levelization plans, account 407.4, regulatory credits, shall be 
credited. The amounts recorded in this account are generally to be 
charged, concurrently with the recovery of the amounts in rates, to the 
same account that would have been charged if included in income when 
incurred, except all regulatory assets established through the use of 
account 407.4 shall be charged to account 407.3, regulatory debits, 
concurrent with the recovery in rates.
* * * * *
    g. In Balance Sheet Accounts, accounts 219, 244 and 245 are added 
to read as follows:

Balance Sheet Accounts

* * * * *
    219 Accumulated other comprehensive income.
    A. This account shall include revenues, expenses, gains, and losses 
that are properly includable in other comprehensive income during the 
period. Examples 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.
    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 shall be maintained to identify the 
amount of the reclassification adjustments from accumulated other 
comprehensive income to earnings made during the period.
* * * * *
    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 426, other deductions, shall be debited or 
credited as appropriate 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 shall 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, accumulated other 
comprehensive income, with the effective portion of the derivative's 
gain or loss. The ineffective portion of the cash flow hedge shall be 
charged to the same income or expense account that will be used when 
the hedged item enters into the determination of net income.
    C. A utility shall record the change in the fair value 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 shall be charged to the same income or expense 
account that will be used when the hedged item enters into the 
determination of net income.
* * * * *
    h. In Balance Sheet Accounts, account 254, paragraph B, is revised 
to read as follows:

Balance Sheet Accounts

* * * * *
    254 Other regulatory liabilities.
* * * * *
    B. The amounts included in this account are to be established by 
those credits which would have been included in net income, or 
accumulated other comprehensive income, determinations in the current 
period under the general requirements of the Uniform System of Accounts 
but for it being probable that: Such items will be included in a 
different period(s) for purposes of developing the rates that the 
utility is authorized to charge for its utility services; or refunds to 
customers, not provided for in other accounts, will be required. When 
specific identification of the particular source of the regulatory 
liability cannot be made or when the liability arises from revenues 
collected pursuant to tariffs on file at a regulatory agency, account 
407.3, regulatory debits, shall be debited. The amounts recorded in 
this account generally are to be credited to the same account that 
would have been credited if included in income when earned except: All 
regulatory liabilities established through the use of account 407.3 
shall be credited to account 407.4, regulatory credits; and in the case 
of refunds, a cash account or other appropriate account should be 
credited when the obligation is satisfied.
* * * * *

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

    3. 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.

    4. Amend part 201 as follows:
    a. In 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 shall record items of other comprehensive income in 
account 219, accumulated other comprehensive income. Amounts included 
in this account shall 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. Supporting records shall 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.

[[Page 67704]]

    B. When an item of other comprehensive income enters into the 
determination of net income in the current or subsequent periods, a 
reclassification adjustment shall be recorded in account 219 to avoid 
double counting of that amount.
    C. When it is probable that an item of other comprehensive income 
will be included in the development of cost of service rates in 
subsequent periods, that amount of unrealized losses or gains shall be 
recorded in accounts 182.3 or 254 as appropriate.
    23. Accounting for derivative instruments and hedging activities.
    A. Utilities shall recognize derivative instruments as either 
assets or liabilities in the financial statements and measure those 
instruments at fair value, except those falling within recognized 
exceptions, the most common of which being the normal purchases and 
sales scope exception. Normal purchases or sales are contracts that 
provide for the purchase or sale of goods that will be delivered in 
quantities expected to be used or sold by the utility over a reasonable 
period in the normal course of business. 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 its 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 recorded in account 421, miscellaneous 
nonoperating income, and losses recorded in account 426.4, other 
deductions.
    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 shall 
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 shall be reflected in the same income 
or expense account that will be used when the hedged item enters into 
the determination of net income. 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 shall 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, 
accumulated other comprehensive income, for the effective portion of 
the hedge. The ineffective portion of the hedge transaction shall be 
reflected in the same income or expense account that will be used when 
the hedged item enters into the determination of net income. Amounts 
recorded in other comprehensive income shall be reclassified into 
earnings in the same period or periods that the hedged forecasted item 
enters into the determination of net income.
* * * * *
    b. In Balance Sheet Accounts, accounts 124, paragraph A, 125, 126, 
and 128, introductory text preceding the Note, are revised 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 identifying 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.
* * * * *
    c. In Balance Sheet Accounts, accounts 175 and 176 are added to 
read as follows:

Balance Sheet Accounts

* * * * *
    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 credited or 
debited as appropriate with the

[[Page 67705]]

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, accumulated other comprehensive income, with the effective 
portion of the derivative gain or loss. The ineffective portion of the 
cash flow hedge shall be charged to the same income or expense account 
that will be used when the hedged item enters into the determination of 
net income.
    C. When a utility designates a derivative instrument asset as a 
fair value hedge it shall record the change in the fair value 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 shall be 
charged to the same income or expense account that will be used when 
the hedged item enters into the determination of net income.
* * * * *
    d. In Balance Sheet Accounts, account 182.3, paragraph B, is 
revised to read as follows:

Balance Sheet Accounts

* * * * *
    182.3 Other regulatory assets.
* * * * *
    B. The amounts included in this account are to be established by 
those charges which would have been included in net income, or 
accumulated other comprehensive income, determinations in the current 
period under the general requirements of the Uniform System of Accounts 
but for it being probable that such items will be included in a 
different period(s) for purposes of developing rates that the utility 
is authorized to charge for its utility services. When specific 
identification of the particular source of a regulatory asset cannot be 
made, such as in plant phase-ins, rate moderation plans, or rate 
levelization plans, account 407.4, regulatory credits, shall be 
credited. The amounts recorded in this account are generally to be 
charged, concurrently with the recovery of the amounts in rates, to the 
same account that would have been charged if included in income when 
incurred, except all regulatory assets established through the use of 
account 407.4 shall be charged to account 407.3, Regulatory debits, 
concurrent with the recovery in rates.
* * * * *
    e. In Balance Sheet Accounts, accounts 219, 244 and 245 are added, 
to read as follows:

Balance Sheet Accounts

* * * * *
    219 Accumulated other comprehensive income.
    A. This account shall include revenues, expenses, gains, and losses 
that are properly includable in other comprehensive income during the 
period. Examples 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.
    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.
* * * * *
    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 426.5, other deductions, shall be debited or 
credited as appropriate 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 shall 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, accumulated other comprehensive 
income, with the effective portion of the derivative gain or loss. The 
ineffective portion of the cash flow hedge shall be charged to the same 
income or expense account that will be charged when the hedged item 
enters into the determination of net income.
    C. A utility shall record the change in the fair value 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 shall be charged to the same income or expense 
account that will be charged when the hedged item enters into the 
determination of net income.
* * * * *
    f. In Balance Sheet Accounts, account 254, paragraph B is revised, 
to read as follows:

Balance Sheet Accounts

* * * * *
    254 Other regulatory liabilities.
* * * * *
    B. The amounts included in this account are to be established by 
those credits which would have been included in net income, or 
accumulated other comprehensive income, determinations in the current 
period under the general requirements of the Uniform System of Accounts 
but for it being probable that: Such items will be included in a 
different period(s) for purposes of developing the rates that the 
utility is authorized to charge for its utility services; or refunds to 
customers, not provided for in other accounts, will be required. When 
specific identification of the particular source of the regulatory 
liability cannot be made or when the liability arises from revenues 
collected pursuant to tariffs on file at a regulatory agency, account 
407.3, regulatory debits, shall be debited. The amounts recorded in 
this account generally are to be credited to the same account that 
would have been credited if included in income when earned except: All 
regulatory liabilities established through the use of account 407.3 
shall be credited to account 407.4, regulatory credits; and in the case 
of refunds, a cash account or other appropriate account should be 
credited when the obligation is satisfied.
* * * * *

[[Page 67706]]

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

    5. 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).


    6. Amend part 352 as follows:
    a. In List of Instructions and Accounts, definition, 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.
* * * * *
    b. In 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 
accounts 640, miscellaneous income, and 660, miscellaneous income 
charges, as appropriate. Unrealized holding gains and losses on 
available-for-sale type investment securities shall be recorded in 
account 77, accumulated other comprehensive income.
* * * * *
    1-17 Accounting for other comprehensive income.
    (a) Carriers shall record items of other comprehensive income in 
account 77, accumulated other comprehensive income. Amounts included in 
this account shall 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. Supporting records shall be 
maintained for account 77 so that the company can readily identify the 
cumulative amount of other comprehensive income for each item included 
in this account.
    (b) When an item of other comprehensive income enters into the 
determination of net income in the current or subsequent periods, a 
reclassification adjustment shall be recorded in account 77 to avoid 
double counting of that amount.
    1-18 Accounting for derivative instruments and hedging activities.
    (a) A carrier shall recognize derivative instruments as either 
assets or liabilities in the financial statements and measure those 
instruments at fair value, except those falling within recognized 
exceptions, the most common of which being the normal purchases and 
sales scope exception. Normal purchases or sales are contracts that 
provide for the purchase or sale of goods that will be delivered in 
quantities expected to be used or sold by the utility over a reasonable 
period in the normal course of business. 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 its intended use and designation. Changes in 
the fair value of derivative instruments not designated as fair value 
or cash flow hedges shall be recorded in account 46, derivative 
instrument assets, or account 65, derivative instrument liabilities, as 
appropriate, with the gains recorded in account 640, miscellaneous 
income, and losses recorded 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 
shall 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 shall 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 shall be 
reflected in the same income or expense account that will be used when 
the hedged item enters into the determination of net income. 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 shall 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, accumulated 
other comprehensive income, for the effective portion of the hedge. The 
ineffective portion of the hedge transaction shall be reflected in the 
same income or expense account that will be used when the hedged item 
enters into the determination of net income. Amounts recorded in other 
comprehensive income shall be reclassified into earnings in the same 
period or periods that the hedged forecasted item enters into the 
determination of net income.
* * * * *
    c. In Balance Sheet Accounts, accounts 11, 21, and 22, paragraph 
(a) are revised to read as follows:

Balance Sheet Accounts

* * * * *
    11 Temporary investments.

[[Page 67707]]

    (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.
* * * * *
    d. In Balance Sheet Accounts, accounts 23, 24, and 75.5 are 
removed.
    e. In Balance Sheet Accounts, accounts 46, 47, 65, 66 and 77 are 
added to read as follows:

Balance Sheet Accounts

* * * * *
    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 640, miscellaneous income, shall be credited or debited as 
appropriate 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, accumulated other comprehensive income, with the effective 
portion of the derivative gain or loss. The ineffective portion of the 
cash flow hedge shall be charged to the same income or expense account 
that will be used when the hedged item enters into the determination of 
net income.
    (c) When a carrier designates a derivative instrument as a fair 
value hedge, it shall record the change in the fair value 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 shall be 
charged to the same income or expense account that will be used when 
the hedged item enters into the determination of net income.
* * * * *
    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, shall be 
debited or credited as appropriate 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 shall 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, accumulated other 
comprehensive income, with the effective portion of the derivative gain 
or loss. The ineffective portion of the cash flow hedge shall be 
charged to the same income or expense account that will be used when 
the hedged item enters into the determination of net income.
    (c) A carrier shall 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 shall be charged to the same income or expense account that 
will be used when the hedged item enters into the determination of net 
income.
* * * * *
    77 Accumulated other comprehensive income.
    (a) This account shall include revenues, expenses, gains, and 
losses that are properly includable in other comprehensive income 
during the period. Examples 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.
    (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 shall be maintained to identify the 
amount of the reclassification adjustments from accumulated other 
comprehensive income to earnings made during the period.
* * * * *

    Note: The following appendices will not be published in the Code 
of Federal Regulations.


[[Page 67708]]



Appendix A--List of Commenters

------------------------------------------------------------------------
             Respondent                          Abbreviation
------------------------------------------------------------------------
1. American Forest & Paper           American Forest.
 Association, Process Gas Consumers
 Group, Georgia Industrial Group,
 Industrial Gas Users of Florida,
 Florida Industrial Gas Users.
2. American Electric Power System..  AEP.
3. Automated Power Exchange, Inc...  APE.
4. American Public Gas Association.  APGA.
5. Avista Energy, Inc..............  Avista.
6. California Electric Oversight     Electric Board.
 Board.
7. Calpine Corporation.............  Calpine.
8. Cinergy Services Inc............  Cinergy.
9. Cogentrix Energy, Inc...........  Cogentrix.
10. Competitive Supply Commenters..  Competitive.
11. Dominion Resources, Inc........  Dominion.
12. Duke Energy North America LLC..  Duke Energy.
13. Edison Electric Institute......  EEI.
14. Edison Mission Energy, Edison    Edison Mission.
 Mission Marketing & Trading, Inc..
15. Electric Power Supply            EPSA.
 Association.
16. J. Aron & Company, Merrill       J. Aron.
 Lynch Capital Services, Inc.,
 Morgan Stanley Capital Group Inc..
17. National Energy Marketers        NEM.
 Association.
18. National Rural Electric          NRECA.
 Cooperative Assn..
19. Nicor Gas Company..............  Nicor.
20. Oneok Power Marketing Company..  OPMC.
21. PanCanadian Energy Services,     PanCanadian.
 Inc..
22. Pinnacle West Capital            Pinnacle West.
 Corporation.
23. Portland General Electric        Portland General.
 Company.
24. Public Utilities Commission of   Ohio PUC.
 Ohio.
25. Public Utilities Commission of   California PUC.
 the State of California.
26. Reliant Resources, Inc.........  RRI.
27. RWE Trading Americas, Inc......  RWE Trading.
28. Sempra Energy..................  Sempra.
29. Society for the Preservation of  Oil Pipeline Shippers.
 Oil Pipeline Shippers.
30. Southern California Edison.....  Southern Cal Ed.
31. Southern Company...............  Southern.
32. State of New York Department of  NYPUC.
 Public Service.
33. TXU Energy Trading Company LP..  TXU.
34. UBS AG.........................  UBS.
35. Williams Companies, Inc........  Williams.
36. Wisconsin Electric Power         Wisconsin Electric.
 Company.
------------------------------------------------------------------------

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[FR Doc. 02-26809 Filed 11-5-02; 8:45 am]
BILLING CODE 6717-01-C