[Federal Register: November 7, 2006 (Volume 71, Number 215)]
[Rules and Regulations]
[Page 65199-65299]
[DOCID:fr07no06-12]

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Part II

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Parts 366, 367, et al.

 Financial Accounting, Reporting and Records Retention Requirements
Under the Public Utility Holding Company Act of 2005; Final Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 366, 367, 368, 369, and 375

[Docket No. RM06-11-000; Order No. 684]

Financial Accounting, Reporting and Records Retention
Requirements Under the Public Utility Holding Company Act of 2005

Issued October 19, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: In this Final Rule, the Federal Energy Regulatory Commission
(Commission) is amending its regulations to further implement the
Public Utility Holding Company Act of 2005 (PUHCA 2005). Specifically,
the Commission is adding a Uniform System of Accounts (USofA) for
Centralized Service Companies, adding preservation of records
requirements for holding companies and service companies, revising FERC
Form No. 60, Annual Report of Centralized Service Companies, to provide
for financial reporting consistent with the new USofA and providing for
electronic filing of the revised FERC Form No. 60. The Final Rule will
provide for greater accounting transparency for centralized service
company operations, and uniform records retention by holding companies
and service companies subject to PUHCA 2005. This transparency will
protect ratepayers from pass-through of improper service company costs.

EFFECTIVE DATE: The rule will become effective January 8, 2007.

FOR FURTHER INFORMATION CONTACT: James K. Guest (Technical
Information), Division of Financial Regulation, Office of Enforcement,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, telephone<PHONE_NUMBER>, e-mail:
<EMAIL_ADDRESS>
    Lawrence Greenfield (Legal Information), Office of the General
Counsel--Energy Markets, Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426, telephone<PHONE_NUMBER>, e-
mail<EMAIL_ADDRESS>    Julia A. Lake (Legal Information), Office of the General Counsel--
Energy Markets, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426, telephone<PHONE_NUMBER>, e-mail:
<EMAIL_ADDRESS>

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
III. Overview of Final Rule
IV. Discussion
    1. Adoption of the Proposed Uniform System of Accounts
    2. Implementation Date
    3. FERC Form No. 60 Filing Deadline
    4. Definitions
    (a) ``Direct cost'' and ``Indirect cost''
    (b) ``Work order system''
    5. Instructions
    (a) Section 367.2--Companies for which this system of accounts
is prescribed
    (b) Section 367.8--Extraordinary items
    (c) Section 367.10--Unaudited Items
    (d) Section 367.20(b)--Depreciation accounting
    (e) Section 367.23--Transactions with non-associate companies
    (f) Section 367.24--Construction and service contracts for other
companies
    (g) Section 367.25--Determination of service cost
    (h) Section 367.27--Billing procedures
    (i) Section 367.51(a)(17)--Allowance for funds used during
construction
    (j) Section 367.53--Service company property purchased or sold
    (k) Section 367.54--Expenditures on leased property
    (l) Section 367.59-- Additions and retirements of property
    (m) Sections 367.103-.104--Current & Deferred Income Taxes
    (n) Section 367.23--Transactions with non-associate companies;
Sec.  367.25--Determination of service cost; Sec.  367.27--Billing
procedures; Sec.  367.28--Methods of allocation; Sec.  367.29--
Compensation for use of capital
    6. Balance Sheet Accounts
    7. Income Statement Accounts
    (a) Sections 367.4570-.4594--Revenue accounts for services
rendered
    (b) Sections 367.5000 and 367.8000--Operation and maintenance
expense accounts
    (c) Sections 367.9220 and 367.4171--Account 922, Administrative
expenses transferred--Credit, and Account 417.1, Expenses of non-
utility company
    (d) Section 367.4160--Costs and expenses of merchandising,
jobbing and contract work; Sec.  367.9120--Demonstrating and selling
expenses; Sec.  367.9130--Advertising expenses; Sec.  367.9301--
General advertising expenses
    (e) Sections 367.4263, 367.4117, 367.4180--Miscellaneous Income
Statement Issues
    8. Records Retention Requirements
    9. FERC Form No. 60
    (a) Use of GAAP Financial Statement instead of Structured FERC
Form No. 60
    (b) FERC Form No. 60 Schedules
    (1) Schedule II, Service Company Property
    (2) Schedule III-A, Summary of Service Company Property and
Accumulated Provisions for Depreciation and Amortization
    (3) Schedule IV, Investments and Schedule XII, Long-Term Debt
    (4) Schedule V, Accounts Receivable from Associate Companies
    (5) Schedule VI, Fuel Stock Expenses Undistributed
    (6) Schedule X, Research, Development or Demonstration Expenses
    (7) Schedule XI, Proprietary Capital
    (8) Schedule XIV, Notes to Financial Statements
    (9) Schedule XV, Comparative Income Statement
    (10) Schedule XV-A, Schedule of Utility Operating Expenses;
Schedule XVI, Analysis of Charges for Service; Schedule XVII,
Schedule of Expense Distribution by Department or Service Function
    (11) Analysis of Billing Schedules
    (12) Departmental Analysis of Salaries Schedule; Methods of
Allocation Schedule; and Organizational Chart Schedule
    (13) Annual Statement of Compensation for Use of Capital Billed
    (14) Miscellaneous General Expenses Schedule (Account 930.2)
    (c) General Instruction IX
    (d) Raising the Threshold for Individually Itemized Items
    (e) Reporting in Whole Dollars or Alternatively in Thousands
    (f) Comparative Information
    (g) Request to Expand Data Collection in FERC Form No. 60
    (h) Schedule Numbering
    (i) Chief Accountant's delegated authority
V. Information Collection Statement
VI. Environmental Analysis
VII. Regulatory Flexibility Act
VIII. Document Availability
IX. Effective Date and Congressional Notification
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G.
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

I. Introduction

    1. On April 24, 2006, the Commission issued a notice of proposed
rulemaking (NOPR) that proposed to add a new Uniform System of Accounts
(USofA) for centralized service companies, i.e., service companies that
are not special purpose companies, and new preservation of records
requirements for holding companies and service companies as new parts
367 and 368 of Title 18 of the Code of Federal Regulations.\1\ The NOPR
also proposed to revise FERC Form No. 60, Annual Report of Centralized
Service Companies, to be codified in new part 369, to provide for
financial reporting by centralized service companies consistent with
the new USofA; to provide for electronic filing of Form No. 60; and to
make conforming changes to the Commission's regulations in part 366 and
corresponding changes to the Commission's Chief Accountant's delegation
of authority in part 375. The

NOPR proposed to make the changes effective January 1, 2007.
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    \1\ 71 FR 28464 (May 16, 2006), FERC Stats. & Regs. ] 32,600
(2006).
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    2. As directed by the Commission in the NOPR, the Commission staff
held a technical conference on July 18, 2006, to provide interested
persons an opportunity to discuss the regulations proposed in the NOPR.
At the conclusion of the technical conference, staff announced that the
record in this docket would remain open until August 8, 2006, to
provide interested persons additional time to submit specific
recommendations on how the Commission's proposed regulations could be
modified to accommodate their concerns.
    3. This Final Rule adopts, in many respects, the proposals
contained in the NOPR, but with certain noted changes to minimize any
unnecessary burden. Chief among them, the Commission defers the
implementation date by an additional year, to January 1, 2008.

II. Background

    4. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005)
\2\ was signed into law. In relevant part, it repealed the Public
Utility Holding Company Act of 1935 (PUHCA 1935) \3\ and enacted the
Public Utility Holding Company Act of 2005 (PUHCA 2005),\4\ which, with
one exception not relevant here, became effective on February 8, 2006
(six months from the date of enactment). On December 8, 2005, the
Commission issued Order No. 667, adding a new Subchapter U and part 366
to Title 18 of the Code of Federal Regulations to implement PUHCA
2005.\5\
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    \2\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594
(2005).
    \3\ 15 U.S.C. 79a et seq.
    \4\ EPAct 2005 at 1261 et seq.
    \5\ Repeal of the Public Utility Holding Company Act of 1935 and
Enactment of the Public Utility Holding Company Act of 2005, Order
No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ] 31,197
(2005), order on reh'g, Order No. 667-A, 71 FR 28446 (May 16, 2006),
FERC Stats. & Regs. ] 31,213 (2006), order on reh'g, Order No. 667-
B, 71 FR 42750 (July 28, 2006), FERC Stats. & Regs. ] 31,224 (2006).
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    5. Order No. 667 required that, unless otherwise exempted by
Commission rule or order, holding companies \6\ and service companies
\7\ must maintain and make available to the Commission their books and
records.\8\ In addition, Order No. 667 allowed holding companies and
service companies that did not currently follow the Commission's
records retention requirements to transition to the Commission's
requirements by January 1, 2007. Order No. 667 further provided that
holding companies would not be required to comply with a Uniform System
of Accounts, but that centralized service companies would be required
to do so as of January 1, 2007. The Commission also indicated in Order
No. 667 that it would initiate a separate rulemaking proceeding to
address how the Commission's Uniform Systems of Accounts and records
retention requirements in Parts 101, 125, 201 and 225 of its
regulations \9\ should be modified to adopt or otherwise integrate the
relevant parts of the Securities and Exchange Commission's (SEC)
Uniform System of Accounts and records retention rules.
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    \6\ As defined in 18 CFR 366.1, a holding company is (i) any
company that directly or indirectly owns, controls, or holds, with
power to vote, 10 percent or more of the outstanding voting
securities of a public-utility company or of a holding company of
any public-utility company; and (ii) any person, determined by the
Commission, after notice and opportunity for hearing, to exercise
directly or indirectly (either alone or pursuant to an arrangement
or understanding with one or more persons) such a controlling
influence over the management or policies of any public-utility
company or holding company as to make it necessary or appropriate
for the rate protection of utility customers with respect to rates
that such person be subject to the obligations, duties, and
liabilities imposed by this subtitle upon holding companies.
    \7\ As defined in 18 CFR 366.1, a service company is any
associate company within a holding company system organized
specifically for the purpose of providing non-power goods or
services or the sale of goods or construction work to any public
utility in the same holding company system. ``Centralized service
companies'' are defined in 18 CFR 367.1(a)(7) as a service company
that provides services such as administrative, managerial,
financial, accounting, recordkeeping, legal or engineering services,
which are sold, furnished, or otherwise provided (typically for a
charge) to other companies in the same holding company system.
Centralized service companies are different from other service
companies that only provide a discrete good or service.
    \8\ Order No. 667 also required centralized service companies to
file the newly created FERC Form No. 60, Annual Report of
Centralized Service Companies.
    \9\ 18 CFR parts 101, 125, 201 and 225 (2006).
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    6. In the April 24, 2006 NOPR,\10\ the Commission recognized that
the range of changes that would be needed to Parts 101, 125, 201 and
225 of its regulations to allow for application of those requirements
to holding companies and service companies would make understanding and
applying them difficult for all entities. Therefore, the Commission
proposed to adopt separate accounting, records retention, and reporting
requirements for holding companies and service companies in new Parts
367, 368 and 369.
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    \10\ Supra note 1.
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    7. After consideration of the discussion during the technical
conference and the comments received, the Commission is adopting this
Final Rule which is generally consistent with the NOPR, but with
several significant changes to reduce the compliance burden on affected
entities. The Commission received nine comments on the proposed NOPR
and ten supplemental comments submitted following the July 18, 2006
staff technical conference. A list of the commenters is attached as
Appendix B. Comments received on specific aspects of the Commission's
proposal are discussed in greater detail below.

III. Overview of Final Rule

    8. As an initial matter, the Commission in this Final Rule has been
guided by the clear intent of Congress to repeal the regulatory regime
established by PUHCA 1935 and to rely on this Commission and state
regulatory authorities to protect energy customers. Throughout, we have
attempted to strike a balance between the Commission's need for
information to carry out its regulatory responsibilities and the burden
that gathering and reporting information imposes on industry.
Therefore, as described below, we have modified our proposal in several
key respects to reduce any unnecessary burden. The modifications
include deleting and modifying certain accounts and instructions in the
originally proposed USofA, providing flexibility in the work order
system requirements, streamlining and eliminating certain schedules in
the FERC Form No. 60, retaining the May 1 filing date for the FERC Form
No. 60, and postponing the implementation date of the Final Rule until
January 1, 2008. These modifications balance the Commission's need for
information to fulfill its regulatory responsibilities with minimizing
any unnecessary burden.
    9. Specifically, in the NOPR, the Commission proposed to add, as
Part 367 of its regulations, a new USofA for centralized service
companies that conforms, to the maximum extent practicable, to the
existing USofA for public utilities and licensees and for natural gas
companies as set forth in Parts 101 and 201, respectively, of the
Commission's regulations. The Final Rule adopts the new USofA for
centralized service companies, but with the following modifications to
reduce the burden on respondents:
     Centralized service companies will not be required to
adopt a formal work order system. Instead, the Commission will permit
centralized service companies to use a variety of cost accumulation
systems, provided such systems support the allocation of expenses to
the services performed and readily identify the source of the expenses
and the basis for their allocation.

     Centralized service companies will not be required to
obtain Commission approval to account for an item as extraordinary.
Instead, the Commission will only require extraordinary items to be
disclosed in footnotes to the financial statements.
     Centralized service companies will not be required to
conduct extensive mortality studies to support the useful lives of all
depreciable assets, but can exercise judgment in determining the
evidence needed to support the lives of depreciable assets.
     Centralized service companies will not be required to
prepare paper invoices each month for services rendered to associate
utility companies. Instead, the Commission will permit centralized
service companies to use a variety of accounting mechanisms, provided
that associate utilities are receiving accurate information about the
work being done for them and the related costs on a monthly basis.
     Centralized service companies will not be required to
capitalize an allowance for funds used during construction (AFUDC) as a
component of construction cost but will instead be allowed to
capitalize interest.
     Centralized services companies will not be required to
calculate income taxes for individual departments.
     Centralized service companies will not be required to
recognize revenues received for, or expenses incurred in, providing
services to non-utility companies in separate accounts.
     Centralized service companies will not be required to
record revenues received for services provided in support of
merchandising, jobbing and contract work in a separate account.
Instead, revenues from such services will be included in the accounts
provided for other service company revenues. Proposed Account 415,
Revenues from merchandising, jobbing and contract work, will be
eliminated.
    10. In the NOPR, the Commission also proposed to add, as new part
368 of its regulations, preservation of records requirements for
holding companies and service companies, that conform to the
preservation of records requirements for public utilities and natural
gas companies contained in Sec. Sec.  125.3 and 225.3 of the
Commission's regulations, with certain modifications appropriate for
holding companies and service companies. The Final Rule adopts the new
requirements, with certain modifications to the Schedule of Records and
Periods of Retention in Sec.  368.3. In order to reduce any unnecessary
burden, the Commission will revise the retention period for certain
depreciation records from 25 years to 3 years after retirement or
disposition of the property.
    11. Additionally, the NOPR proposed to revise FERC Form No. 60 to
permit reporting consistent with the proposed USofA for centralized
service companies, and to codify it in new part 369. The Final Rule
adopts the revised FERC Form No. 60 in part 369, but deletes or
modifies the following schedules in the Form itself to reduce the
compliance burden:
     Schedule XV-A, Schedule of Utility Operating Expenses,
will be deleted because similar information is available on Schedule
XVI, Analysis of Charges for Service.
     Schedule XVI will be modified to reflect the Commission's
decision not to require a separate account for recording expenses
attributable to services provided to non-utility companies.
     The Analysis of Billing Non-utility Companies--Account 459
Schedule, will be deleted to reflect the Commission's decision to
eliminate Account 459.
     The schedules for analysis of service company billings
will eliminate the need to separately report billings to utility
customers and non-utility customers.
     The departmental analysis of salaries schedule will be
eliminated because the reported data is not comparable across
companies.
    12. In addition, the Final Rule delays the implementation date of
the new requirements until January 1, 2008, and makes conforming
changes to the transition provisions contained in Sec. Sec.  366.21,
366.22 and 366.23 of the Commission's regulations. The delay in the
implementation date and the transition periods will allow for a more
orderly implementation of the new requirements and further reduce the
compliance burden on affected entities.
    13. The Final Rule, therefore, adopts new parts 367, 368 and 369
and corresponding changes to parts 366 and 375 of the Commission's
regulations.

IV. Discussion

    14. In general, the National Association of Regulatory Utility
Commissioners (NARUC), the American Public Power Association (APPA),
the Florida Municipal Power Authority (FMPA), and National Rural
Electric Cooperative Association (NRECA) supported the NOPR while
Edison Electric Institute (EEI) and individual service companies
opposed the NOPR.

1. Adoption of the Proposed Uniform System of Accounts

    15. The Commission proposed to adopt a new USofA for Centralized
Service Companies that generally mirrors the Commission's existing
USofA for public utilities and licensees and for natural gas companies,
with certain modifications to reflect the unique business
characteristics of centralized service companies.
Comments
    16. Several industry commenters urge the Commission to allow
centralized service companies to continue to use their existing systems
of accounts.\11\ These commenters contend that centralized service
companies should not be required to adopt the USofA as proposed in the
NOPR. EEI, First Energy, and XES also argue that centralized service
companies should be permitted to continue to maintain their financial
records in conformance with Generally Accepted Accounting Principles
(GAAP) and Sarbanes-Oxley requirements.\12\
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    \11\ EEI at 19-20; FirstEnergy Service Company (FirstEnergy)
Supplemental Comments at 2; Pepco Holdings, Inc. and PHI Service
Company (PHI Companies) jointly-filed Supplemental Comments at 4-5;
Progress Energy, Inc. (Progress Energy) at 2; Public Service
Enterprise Group Incorporated (PSEG Companies) at 9-10; Xcel Energy
Services, Inc. (XES) at 2-3.
    \12\ EEI at 20-21; FirstEnergy Supplemental Comments at 2; XES
at 2-3.
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    17. EEI argues that, to the extent there is some detail the
Commission does not currently have, but wants to obtain, rather than
requiring centralized service companies to restructure their accounting
systems, the Commission could simply add items to FERC Form No. 60 to
obtain that information.\13\
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    \13\ EEI at 18.
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    18. Progress Energy contends that instituting reporting
requirements that are more complicated and time-consuming runs counter
to the spirit that prompted the repeal of PUHCA 1935.\14\
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    \14\ Progress Energy at 3.
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    19. PSEG Companies maintain that the Commission has substantially
underestimated the costs of complying with the NOPR and that it failed
to balance the costs associated with implementing the NOPR against the
benefits expected to result from implementation.\15\ PSEG Companies
state that the proposals in the NOPR, if adopted, would impose more
regulatory burdens than was required under PUHCA 1935. They state this
would be inconsistent with the intent of Congress. PSEG Companies
express their concern that the increased cost of compliance will be
much higher than the Commission has estimated and that the benefits of
the rule are non-existent and

may be counter-productive.\16\ PSEG Companies request the Commission to
withdraw the requirement that the centralized service companies must
adopt the USofA, or, at a minimum, modify the NOPR in such a manner
that provides net public benefits.\17\
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    \15\ PSEG Companies at 3.
    \16\ Id. at 6-7.
    \17\ Id. at 12.
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    20. XES claims that conversion to the new USofA proposed by the
Commission would be expensive and time consuming, and is unnecessary
because the current accounts and accounting systems comply with SEC's
requirements and state regulations. Additionally, XES asserts that it
does not foresee any additional benefit to federal and state regulatory
agencies by conversion to the USofA proposed by the Commission.\18\
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    \18\ XES at 3-4.
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    21. Southern Company Services and Southern Nuclear Operating
Company (Southern) state that the accounting and work order systems now
in place allow the public utility company receiving service company
billings to report these expenses using the USofA. They state, further,
that the Commission's proposal for the centralized service companies to
use a modified USofA does nothing to enhance that process. They suggest
that, if the Commission concludes there must be a conversion to its
USofA, there be flexibility.\19\ In their supplemental comments,
Southern notes that the Commission receives detailed FERC Form No. 1
information from all public utility companies, which is where the
service company charges are ultimately placed in the appropriate USofA
classification.\20\
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    \19\ Southern at 1.
    \20\ Southern Supplemental Comments at 1.
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    22. Some commenters express their belief that compliance with
existing reporting requirements, including GAAP and SEC requirements,
along with the Sarbanes-Oxley and state regulatory requirements, will
provide adequate information in sufficient detail to ensure
transparency and facilitate review of centralized service company
charges.\21\ XES adds, further, that existing federal and state
requirements ensure the accuracy of records and the adequacy of
internal accounting controls.\22\ As such, these commenters believe the
Commission's proposal to adopt the proposed conversion to a USofA is
unnecessary.\23\
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    \21\ EEI at 17-19; Progress Energy at 2; PSEG Companies at 9-10;
XES at 3-4.
    \22\ XES at 3.
    \23\ EEI at 23; XES at 3.
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    23. Conversely, APPA supports the Commission's effort to develop a
comprehensive chart of accounts for centralized service companies. APPA
believes that the Commission generally has done an admirable and
workmanlike job of developing a comprehensive chart of accounts for
centralized service companies. APPA states that such companies are
likely to perform many operations and maintenance services for their
public utility affiliates. The costs of these functions should be
recorded and accounted for in the same way, regardless of exactly what
entity performs them. APPA reports that some of its members that have
had to deal with allocations of costs from centralized service
companies to their public utility affiliates in the past have reported
that accounting for such service company costs was often vague and
opaque, recorded in accounts such as ``Administrative and General.''
According to APPA, these accounts could lead to improper allocation of
such costs to utility customers. The new chart of accounts should be of
material assistance in this regard. Indeed, APPA states that the
Commission should make clear its intent to use the greater transparency
achieved by the proposed service company accounting requirements to
protect ratepayers from the pass-through of improper service company
costs--i.e., costs that would not be chargeable to ratepayers
consistent with Commission policy if incurred at the operating company
level.\24\
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    \24\ APPA at 5.
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    24. NRECA shares APPA's comments and concerns, and urges the
Commission to adopt regulations ensuring just and reasonable rates by
prohibiting the pass-through of improper service company costs to
jurisdictional public utilities.\25\
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    \25\ NRECA Supplemental Comments at 2.
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    25. FMPA supports the NOPR and compliments the Commission on the
proposed standards, accounting requirements, and new accounts for
centralized service companies. FMPA states that the rule provides long-
needed transparency and consistency for centralized service companies'
accounting. FMPA is of the view that the current method is broken, and
there would not have been a need for a staff technical conference on
this topic if it were otherwise. FMPA states that the current
accounting method undermines the Commission's ability to insure just
and reasonable rates and, that without the proposed reforms, the
problem will only get worse. FMPA points out that with consolidation
and mergers likely to follow the PUHCA repeal, inadequacies in the
current accounting systems will face increasing stress leading to
consumer harm. FMPA adds that there is growing reliance on formula
rates at the Commission that heightens the need for greater
transparency and consistency which also aids in their ability to audit
and intervene in rate cases. FMPA states that the new USofA should
facilitate scrutiny of costs passed through to customers, particularly
as they need proper functionalization of costs under formula rates.
FMPA indicates that there are centralized service companies that they
deal with and have extreme difficulty getting the information needed to
see the transparency. FMPA indicates also that, when they do get access
to the information, it is very time consuming to ferret out, purge and
find the information needed because there is not consistency of
accounting between utilities. FMPA cautions that the Commission should
not be swayed by the GAAP argument. FMPA states that financial
reporting under GAAP is oriented toward investors, and that it does not
provide sufficient regulatory scrutiny to protect the wholesale and
retail ratepayers or to prevent cross-subsidization. FMPA asks that the
Commission not water down the NOPR because it would only undermine the
transparency and consistency that is needed.\26\
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    \26\ See Technical Conference Tr. 111-115 (Mr. Steven Ruppel).
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    26. NARUC and the Wisconsin Commission state that service company
costs are an important piece to the ratemaking responsibilities at the
state regulatory level. They state that, typically, costs originating
at the service company make up a large and increasing percentage of the
operating expenses of the regulated utilities. They point out that, as
affiliated companies, these transactions are not made on an arms-length
basis and, therefore, require additional controls. Therefore, NARUC
supports the Commission's effort in attempting to increase transparency
in bringing uniformity of these costs.\27\
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    \27\ See Technical Conference Tr. 90 (Mr. Thomas Ferris).
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Commission Determination
    27. The Commission concludes that a structured USofA as proposed
under new part 367 of the Commission's regulations is necessary to
ensure consistency across the centralized service companies and,
equally important, to ensure the Commission has the information
necessary to carry out its obligations under PUHCA 2005, the Federal
Power Act (FPA), and the

Natural Gas Act (NGA).\28\ In reaching this conclusion, the Commission
is mindful that one of Congress' goals in repealing PUHCA 1935 was to
reduce the regulatory burden on holding companies. The Commission,
nevertheless, finds that the absence of a structured USofA would impede
the Commission's ability to carry out the new regulatory
responsibilities imposed by Congress when it adopted PUHCA 2005.
Without a structured USofA, the Commission would not have adequate
information to be able to ensure just and reasonable jurisdictional
rates, discern potential or actual cross-subsidization, or be able to
approve cost allocations between holding company affiliates.
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    \28\ 42 U.S.C. 16451 et seq.; 16 U.S.C. 824 et seq.; 15 U.S.C.
717 et seq.
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    28. Although GAAP and the SEC's accounting rules may be sufficient
for some purposes, they alone are not sufficient for fulfilling the
Commission's new regulatory responsibilities under PUHCA 2005. In order
to carry out its regulatory responsibilities, the Commission needs
accounting information that is more ``granular,'' i.e., more detailed,
than what is required under GAAP. For example, reporting a single
figure for total operation and maintenance expense on an income
statement would satisfy GAAP requirements. However, the Commission
needs information, among other things, about how much was spent on
operations compared to maintenance, how much was spent on transmission
compared to distribution, and what one company spent on an activity
compared to another for that same activity in order to ensure, for
example, just and reasonable jurisdictional rates.
    29. Although flexibility in accounting rules may have enabled the
SEC to meet its regulatory responsibilities, such flexibility will not
allow the Commission to accomplish its regulatory mandate to ensure
just and reasonable rates. There are hundreds of entities subject to
the Commission's jurisdiction. The only way the Commission can
efficiently carry out this mandate is by requiring these entities to
account for transactions in a structured and uniform manner. That is
why the Commission adopted and still maintains USofAs for public
utilities and licensees and for natural gas companies. A structured
USofA for centralized service companies is an equally essential tool
that the Commission needs to carry out its regulatory responsibilities.
    30. Upon further consideration, however, the Commission finds that
the USofA proposed in the NOPR for centralized service companies may
include some requirements that, in retrospect, may not be needed.
Therefore, consistent with the overall objective of not imposing
unnecessarily burdensome regulatory requirements under PUHCA 2005, we
are adopting the following modifications suggested by the commenters to
the proposed USofA to reduce that burden, as discussed below.

2. Implementation Date

    31. The NOPR proposed to require holding companies and service
companies to implement the new accounting, records retention, and
reporting requirements on January 1, 2007.
Comments
    32. Several commenters argue that the January 1, 2007
implementation date does not allow sufficient time to implement the
Final Rule.\29\ They argue that compliance with the Final Rule, if
adopted as proposed, would require time, man hours and company
resources to implement software changes, train personnel, to update
Sarbanes-Oxley controls, and to receive sign off from internal and
external auditors. In addition, Progress Energy argues that
reengineering of company processes, procedures and software, remapping
of thousands of projects to new Commission accounts, and testing and
auditing (internal and external) of revised systems would take many
months to ensure error-free implementation.\30\ The commenters suggest,
therefore, that the Commission defer compliance with the Final Rule
until January 1, 2008. According to commenters, this deferral also
would provide time to issue a Final Rule and an order on rehearing.
NARUC and other state commissions had no objections to extension of the
implementation date as long as there was no gap between the SEC's
regulations and implementation of the Commission's regulations.\31\
---------------------------------------------------------------------------

    \29\ EEI at 45-48; XES at 5; Southern at 2; Progress Energy at
12; National Grid USA (National Grid) at 14-15; NiSource Inc.
(NiSource) Supplemental Comments at 3; FirstEnergy Supplemental
Comments at 4; PHI Companies Supplemental Comments at 5-6.
    \30\ Progress Energy at 12.
    \31\ See Technical Conference Tr. 97-98 (Mr. Thomas Ferris);
Technical Conference Tr. 101 (Mr. Joseph Buckley); Technical
Conference Tr. 109 (Mr. James Mitchell).
---------------------------------------------------------------------------

Commission Determination
    33. The Commission agrees with the commenters, and will move the
implementation date of this Final Rule from January 1, 2007 to January
1, 2008. As a result, the revised FERC Form No. 60 prescribed in this
Final Rule will first be due on May 1, 2009 (reporting data for the
2008 reporting year).\32\ This change will provide companies sufficient
time to implement software changes, train personnel, update Sarbanes-
Oxley controls, and receive sign off from internal and external
auditors. The change in implementation date will reduce the burden and
cost to service companies impacted by the Final Rule. Additionally, the
Commission will extend the transition periods for holding companies and
service companies to comply with the Commission's accounting and
recordkeeping requirements.\33\
---------------------------------------------------------------------------

    \32\ The currently effective FERC Form No. 60 due on May 1, 2007
and May 1, 2008 will be the FERC Form No. 60 adopted in Order Nos.
667, 667-A and 667-B. See Repeal of the Public Utility Holding
Company Act of 1935 and Enactment of the Public Utility Holding
Company Act of 2005, Order No. 667, 70 FR 75592 (December 20, 2005),
FERC Stats. & Regs. ] 31,197 (2005), order on reh'g, Order No. 667-
A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ] 31,213 (2006),
order on reh'g, Order No. 667-B, 71 FR 42750 (July 28, 2006), FERC
Stats. & Regs. ] 31,224 (2006).
    \33\ In Order No. 667, the Commission established transition
periods for holding companies formerly ``registered'' under PUHCA
1935 to comply with the Commission's record retention requirements,
and for service companies in such holding company systems to comply
with the Commission's accounting, records retention, and reporting
requirements. See 18 CFR 366.21(b), 366.22(a)(2), 366.22(b)(2) and
366.23(b).
---------------------------------------------------------------------------

3. FERC Form No. 60 Filing Deadline

    34. In the NOPR, the Commission proposed to change the filing
deadline for the FERC Form No. 60 from May 1 to April 18. The proposed
April 18 filing date is consistent with the filing date for most of the
Commission's other annual report forms that contain financial
information.
Comments
    35. EEI proposes that the Commission retain the current FERC Form
No. 60 filing deadline of May 1 because companies have a number of
financial reporting requirements with spring due dates affecting the
same staff. EEI claims accelerating the filing date to April 18 would
increase the cost of compliance, and increase company staffing needs.
Commission Determination
    36. We will retain the current FERC Form No. 60 filing date of May
1. Retention of the May 1 date will minimize the burden on service
companies that may also be responsible for filing FERC Form Nos. 1, 2
or 6 on behalf of regulated public utility companies and licensees,
natural gas pipelines, or oil pipelines. The

Commission will also make submission software available to companies,
allowing for electronic filing of the revised FERC Form No. 60 for the
2008 reporting year and subsequent reporting years, similar to the
submission software used for electronic filing of Form Nos. 1, 2, 2-A,
3-Q, 6, and 6-Q.\34\
---------------------------------------------------------------------------

    \34\ We note that, contemporaneously with this Final Rule, we
are issuing, in Docket No. RM06-25-000, a Final Rule providing for
the electronic filing of the currently-effective FERC Form No. 60
for 2006 and 2007 reporting years, to be filed on May 1, 2007 and
May 1, 2008, respectively. See Electronic Filing of FERC Form No.
60, Order No. 685, published elsewhere in this issue of the Federal
Register, FERC Stats. & Regs. ] (2006).
---------------------------------------------------------------------------

4. Definitions

(a) ``Direct cost'' and ``Indirect cost''
    37. In the NOPR, the Commission proposed to define ``direct cost''
to include ``the labor costs and expenses which can be identified
through a work order system as being applicable to services performed
for a single or group of associate and non-associate companies. Costs
incidental to or related to a directly charged item must be classified
as a direct cost.'' ``Indirect cost'' was defined to include ``the
costs of a general overhead nature such as general services,
housekeeping costs, and other support costs which cannot be separately
identified to a single or group of associate and non-associate
companies and, therefore, must be allocated. Indirect costs must be
accumulated on a departmental basis.'' These are the same definitions
that were contained in the SEC's former USofA for service
companies.\35\
---------------------------------------------------------------------------

    \35\ See 17 CFR part 256 (Uniform System of Accounts for Mutual
Service Companies; Subsidiary Companies, Public Utility Holding
Company Act of 1935).
---------------------------------------------------------------------------

Comments
    38. Southern recommends redefining the terms ``direct cost'' and
``indirect cost'' because it believes the definitions of these terms in
the NOPR require costs it views as direct costs to be recharacterized
as indirect costs. Southern explains that billings for direct costs
should include overhead costs, such as employee benefits, as an adder
to those direct costs, which otherwise would be characterized as
indirect costs based on the definition in the NOPR. Southern suggests
the Commission define ``direct cost'' as ``those costs which are
applicable to services performed for a single client company. Costs
incidental to, or related to, a directly charged item also should be
classified as a direct cost.'' Likewise, Southern suggests ``indirect
cost'' be defined as ``those costs which are not applicable to services
performed for a single client company and which must be allocated.''
Costs incidental to, or related to, indirect items should also be
classified as an indirect cost.\36\
---------------------------------------------------------------------------

    \36\ Southern at 4; Southern Supplemental Comments at 2.
---------------------------------------------------------------------------

Commission Determination
    39. We do not agree with Southern's assertion that costs such as
employee benefit costs must be recharacterized as indirect costs. The
definition for ``direct cost'' includes labor costs and expenses
applicable to services performed for a single or group of associate and
non-associate companies and any cost incremental to or related to a
directly charged item. Based on that definition, employee labor costs
that are applicable to a service performed for a single or group of
companies are a ``direct cost'' together with the related employee
benefit costs.
    40. We also will not adopt Southern's proposal to define ``direct
cost'' as those applicable to services performed for a single client
company, and ``indirect cost'' as those not applicable to services
performed for a single client company. We do not believe Southern's
proposed definition would be workable in all situations. For example, a
centralized service company could provide engineering services for a
construction project that is jointly owned by two associated public
utilities. In that instance, the labor costs of providing the
engineering services are a direct cost of the project but the services
are provided for more than a single client company. Therefore, we will
adopt the definitions set forth in the NOPR.
(b) ``Work Order System''
    41. In the NOPR, the Commission proposed to adopt the definition
and requirements of ``work order system'' from the SEC's former USofA
for service companies. The NOPR, therefore, defined ``work order
system'' as a system for the accumulation of service company costs on a
job, project, or functional basis. It includes schedules and worksheets
used to account for charges billed to single and groups of associate
and non-associate companies. The requirements of a ``work order
system,'' in turn, were provided as a General Instruction in Sec.
367.30. This instruction provides that a service company must maintain
a detailed classification of service costs that permits costs to be
identified with the functional processes of the associate companies
served and also various other accounting and cost allocation records
needed to support work order charges.
Comments
    42. Commenters suggest that the Commission clarify and redefine the
term ``work order system'' to incorporate a broader use of the
term.\37\ XES believes the focus of the Commission, as it relates to a
work order system, should be on complete and accurate reporting to
enable it, state commissions, and other interested persons to monitor
service company activities. XES states that variation in work order
procedures should not affect the accuracy of reporting, and holding
company systems should have the flexibility to rely on the systems that
they have previously developed and implemented.
---------------------------------------------------------------------------

    \37\ EEI Supplemental Comments at 15; FirstEnergy Supplemental
Comments at 4; XES Supplemental Comments at 2.
---------------------------------------------------------------------------

    43. EEI notes that, at the technical conference, industry panelists
suggested that work order systems could include the use of a variety of
systems.\38\ EEI recommends that the Commission replace the current
definition of ``work order system'' with the following broader
definition: ``Work order system means a system for the accumulation of
service company costs on a job, project, or functional basis. It
includes any method used to account clearly for charges billed to
single and groups of associate and non-associate companies, including,
but not limited to, use of actual work orders, electronic
notifications, bills, ledger entries, or activity-based accounting
software systems.'' \39\ EEI encourages the Commission to reflect this
broad meaning of the term ``work order system'' throughout this Final
Rule, by conforming the regulatory text and preamble to this broadly
defined concept. To do this, EEI states the following sections should
be revised to avoid implying that work orders are required: Sec. Sec.
367.24(a), 367.27, 367.28, 367.58(a), 367.4571, 367.4581, 367.4591,
367.50(d), 367.52(c), 367.1070(b), 367.1080(c), 367.1520, 367.1850, and
367.9240(d); and Records Retention Requirements Nos. 13, 15, 16, 17,
and 19.
---------------------------------------------------------------------------

    \38\ EEI Supplemental Comments at 15.
    \39\ Id. at 16.
---------------------------------------------------------------------------

    44. Commenters also argue that, while the SEC previously had
regulations on work order systems, the SEC never formally required
formal work order systems and allowed significant flexibility in how to
account for inter-affiliate transactions.\40\ They state that, for the
Commission to impose a formal work order system, centralized service
companies would incur substantial

costs to update accounting systems and train workers and their
companies would decrease operating efficiency would suffer because
routine and recurring work would now need to be reorganized around
specific work orders.\41\ National Grid also explains that its current
practice accomplishes all of the goals sought by the Commission's
proposed work order system.\42\ Accordingly, the commenters believe the
Commission should not require the use of a formal work order system,
but should allow centralized service companies to continue to use their
prior SEC-approved practices for tracking and assigning service costs.
---------------------------------------------------------------------------

    \40\ EEI at 40; National Grid at 4; XES at 4.
    \41\ EEI at 41; National Grid at 5-6; XES at 4.
    \42\ National Grid at 5.
---------------------------------------------------------------------------

    45. NARUC states that if the Commission determines that a formal
work order system would be too burdensome, an alternative would be for
the Commission to use the proposed definition and describe the minimum
requirements of a work order system. NARUC adds that each centralized
service company would then be required to file information describing
its system and how it complies with the Commission's definition and
minimum requirements. NARUC suggests minimum requirements could include
a written agreement on the types of work that will be performed by the
service company for the utility, identification of the work to be
completed by functional area, and the ability to track the costs to the
services provided. NARUC states the work order system should separately
break down costs related to one-time/nonrecurring expenditures.
Further, if the service company incurs direct costs relating to
construction work for a utility, NARUC believes the service company
should have a work order system identical to the one that is required
under parts 101 and 201 of the Commission's regulations.\43\
---------------------------------------------------------------------------

    \43\ NARUC Supplemental Comments at 6; codified at 18 CFR parts
101 and 201.
---------------------------------------------------------------------------

Commission Determination
    46. While the Commission would prefer centralized service companies
to utilize formal work order systems, the Commission also recognizes
that the goals and purposes of a formal work order system can be met
through other means, as several commenters suggest. The Commission also
recognizes that there are increased costs associated with implementing
a formal work order system. Accordingly, the Commission will replace
the term ``work order system'' with ``cost accumulation system,'' and
will modify the instructions in Sec.  367.30 so that the instructions
do not mandate centralized service companies to implement a formal work
order system. The Commission, further, will allow centralized service
companies to use a variety of cost accumulation systems, provided any
cost accumulation system adopted meets the requirements provided in the
definition for ``cost accumulation system'' and the requirements
contained in Sec.  367.30. Also, we will modify the regulations to
remove language that suggests a formal or uniform work order system is
required.
    47. The definition for ``cost accumulation system'' in Sec.
367.1(a)(12) will be

    ``a system for the accumulation of service company costs on a
job, project, or functional basis. It includes schedules and
worksheets used to account for charges billed to single and groups
of associate and non-associate companies. It can be a variety of
systems, including but not limited to, a work order system or an
activity-based accounting software system.''

While the instructions in Sec.  367.30 will remain the same, we will
revise all references to a work order system in the regulations.
    48. In making the changes discussed above, the Commission affords
centralized service companies flexibility in the type of cost
accumulation system they use to reflect their costs, and reduces any
unnecessary burden that may be associated with changing their current
system for accounting for these costs to a formal ``work order
system.''

5. Instructions

    49. In the NOPR, the Commission proposed to adopt four categories
of instructions: General Instructions, Service Company Property
Instructions, Operating Expense Instructions, and Special Instructions.
The proposed instructions included most of the instructions contained
in parts 101 and 201 of the Commission's regulations modified to meet
the needs of centralized service companies and certain additional
instructions contained in the SEC's USofA relevant to centralized
service companies. The specific comments received on these instructions
are discussed below.
(a) Section 367.2--Companies for Which This System of Accounts Is
Prescribed
    50. The Commission proposed that the USofA apply to any centralized
service company operating, or organized specifically to operate, within
a holding company system for the purpose of providing non-power
services to any public utility in the same holding company system.
However, we also proposed to continue the existing SEC exemptions from
the USofA, including: Special-purpose service companies, electric or
gas utility companies, companies primarily engaged in the production of
goods, and service companies that provide services exclusively to a
local gas distribution company.
Comments
    51. NARUC states that Sec.  367.2 does not adequately ensure the
existence of proper controls in the event of certain possible
organization changes. For example, NARUC explains that, in the event
that a service company is eliminated, the utility may transfer relevant
service company functions to the holding company, a utility within the
holding company, or another company within the holding company system.
NARUC claims there is a risk that such transfers will result in the
elimination of needed accounting controls relating to these functions,
because under the proposed rules holding companies and special purpose
companies would not be required to comply with the new USofA. NARUC
argues that, in order to assure all service companies that provide
goods and services to utilities are subject to proper controls, Sec.
367.2 should be revised to (1) eliminate the special purpose service
company exemption; (2) clarify that the new USofA applies to the entity
that performs service company functions, even if it is a holding
company or a company providing electric or gas utility services; and
(3) prohibit service company functions from being transferred to a
utility in the holding company system. NARUC states that, in the
absence of such modifications the purpose of the Commission's proposed
regulations may be thwarted.\44\
---------------------------------------------------------------------------

    \44\ NARUC at 3-5.
---------------------------------------------------------------------------

    52. Certain commenters, on the other hand, argue that the
Commission should maintain its requirement that the new recordkeeping
and reporting requirements apply to centralized service companies
only.\45\ EEI states that parent holding companies and their
subsidiaries may own a variety of assets and undertake a variety of
activities. Thus, EEI argues, if the Commission were to extend the
requirements beyond centralized service companies, the Commission would
need to address a variety of potential scenarios in order to define the
circumstances in which the requirements would apply to other
companies--which would complicate

and increase the accounting and recordkeeping burden.\46\ EEI also
argues that the Commission should not adopt requests to impose
constraints on whether and how holding companies establish service
companies to provide services to their subsidiaries. EEI states that
neither the FPA nor PUHCA 2005 gives the Commission authority to
regulate holding company structure and operations in such a manner.
Additionally, EEI urges the Commission to adopt a new definition for
centralized service companies that would limit application of the Final
Rule's accounting and reporting requirements to service companies, and
to preclude holding companies from being classified as service
companies. EEI also suggests the Commission specify that only parts 367
and 368 apply to service companies.\47\
---------------------------------------------------------------------------

    \45\ EEI at 38; EEI Supplemental Comments at 19; CMS Energy
Corporation and Consumers Energy Company (CMS Energy) Supplemental
Comments at 3.
    \46\ EEI Supplemental Comments at 21-22.
    \47\ EEI Supplemental Comments at 20.
---------------------------------------------------------------------------

    53. For its part, CMS Energy argues that the Commission already has
put into place the ability to monitor and respond to any concentration
of utility functions within special purpose companies through the FERC-
65 \48\ and FERC-61 \49\ reporting requirements established in Order
No. 667.\50\ CMS Energy states these reporting requirements require
identification of special purpose service companies and annual
reporting on the functions of each special purpose company. CMS Energy
adds that special purpose service companies have a simpler, smaller,
more focused nature and the FERC-65 and FERC-61 reporting requirements
are well suited to monitor them, without imposing the USofA and FERC
Form No. 60 requirements.\51\
---------------------------------------------------------------------------

    \48\ Holding companies that meet the definition of a holding
company as defined by Sec.  366.1 must notify the Commission of this
status by submitting FERC-65. See 18 CFR366.4(a).
    \49\ Every service company in a holding company system,
including a special-purpose company, which does not file a FERC Form
No. 60 must instead file a narrative description of the service
company's function during the prior calendar year. See 18 CFR
366.23(a)(2).
    \50\ Supra note 5.
    \51\ CMS Energy Supplemental Comments at 8.
---------------------------------------------------------------------------

Commission Determination
    54. We have decided that the USofA we are adopting herein will
apply to centralized service companies only, consistent with Order No.
667.\52\ We agree with EEI that extending the requirements beyond
centralized service companies would be a difficult definitional
exercise that could lead to unnecessary regulatory uncertainty. While
the Commission shares NARUC's concerns that holding company systems
could potentially circumvent the Commission's accounting and reporting
requirements for centralized service companies, the Commission does not
believe NARUC's recommendations are the best way to address the
potential issue. At this time it is preferable to monitor developments
in the industry and assess whether the instructions we are adopting
lead to circumvention of our rules. If centralized service companies
begin to decentralize their service functions in an effort to
circumvent the Commission's accounting and reporting regulations, the
Commission will take the necessary actions to ensure the Commission has
the information necessary to carryout its obligations under PUCHA 2005,
the FPA, and the NGA. The Commission also will not impose restrictions
on holding company systems which prevent centralized service company
functions from being transferred to other companies in the same holding
company system. Such restrictions are outside the Commission's
statutory authority under the PUCHA 2005, the FPA, and the NGA.
---------------------------------------------------------------------------

    \52\ See Order No. 667 at P 38.
---------------------------------------------------------------------------

    55. We also clarify that holding companies are not subject to the
rules of this USofA, and we will amend the instructions to Sec.  367.2
to provide for this exemption. Further, we will adopt in Sec.  367.1(a)
of the regulations a definition for the term ``centralized service
company'' based on our discussions in Order No. 667.\53\
---------------------------------------------------------------------------

    \53\ See Order No. 667 at P 37.
---------------------------------------------------------------------------

(b) Section 367.8--Extraordinary Items
    56. In the NOPR, we proposed that centralized service companies
must obtain Commission approval to record all extraordinary items.
Extraordinary items are items related to the effects of events and
transactions that have occurred during the current period and that are
of an unusual nature and infrequent occurrence.
Comments
    57. EEI and Progress Energy disagree with the Commission's proposed
requirement that Commission approval is required for an item to be
accounted for as extraordinary.\54\ They state that this requirement is
unnecessary and burdensome. Further, they contend, it should be
sufficient for centralized service companies to follow the GAAP
requirement for reporting extraordinary items. Progress Energy also
argues that, to the extent the Commission does not approve an item that
is a required disclosure for SEC reporting, the Commission runs the
risk of promoting inconsistent treatment of extraordinary items across
holding company systems.\55\ Progress Energy adds that such a
requirement would be an unnecessary burden on Commission staff to
perform the reviews.\56\ EEI suggests that the Commission should
require centralized service companies to provide a footnote describing
any amounts included in Accounts 434, Extraordinary income and Account
435, Extraordinary deductions.\57\
---------------------------------------------------------------------------

    \54\ EEI at 32; Progress Energy at 10.
    \55\ Progress Energy at 10.
    \56\ Id.
    \57\ EEI at 32.
---------------------------------------------------------------------------

Commission Determination
    58. Upon further consideration, we agree that requiring Commission
approval for any item to be recognized as extraordinary may impose an
unnecessary burden on centralized service companies. EEI's suggested
alternative strikes a balance between the need for disclosure of such
items and the desire to reduce unnecessary regulatory burden.
Accordingly, the Commission will not require centralized service
companies to seek Commission approval for all extraordinary items.
Rather, as suggested by EEI, the Commission will require centralized
service companies to include disclosure in the Notes to the Financial
Statements of the FERC Form No. 60 identifying and describing any
amounts included in Account 434, Extraordinary income, and Account 435,
Extraordinary deductions. Accordingly, we will add an instruction to
Schedule XIV, Notes to Financial Statements, to require disclosure of
extraordinary items.
(c) Section 367.10--Unaudited Items
    59. Proposed Sec.  367.10 states that, when preparing a financial
statement required by the Commission, if it is known that a transaction
has occurred that affects the accounts but the amount involved in the
transaction and the effect upon the accounts cannot be determined with
absolute accuracy, the amount must be estimated and the estimated
amount included in the proper accounts.
Comments
    60. Southern questions the purpose of Sec.  367.10 because its
financial statements are audited and include all estimable liabilities
in accordance with GAAP.\58\
---------------------------------------------------------------------------

    \58\ Southern at 5.
---------------------------------------------------------------------------

Commission Determination
    61. Southern's comments are misplaced. The Commission does not at
this time require the centralized service company financial statements,

contained in the FERC Form No. 60, to be audited by independent public
accountants. The purpose of Sec.  367.10 is simply to instruct a
centralized service company, in preparing such statements, that it must
use estimates if a transaction occurs that affects a company's accounts
even if the amount involved in the transaction and its effect upon the
accounts cannot be determined with absolute accuracy and the estimates
have not been audited.
(d) Section 367.20(b)--Depreciation Accounting
    62. The NOPR at Sec.  367.20(b) required service companies to
support the estimated useful service lives of depreciable property with
engineering, economic, or other depreciation studies.
Comments
    63. Southern recommends the Commission eliminate Sec.  367.20(b) or
use a more restrictive definition of when a study is needed. Southern
states that a service company would not typically need ``engineering,
economic, or other depreciation studies'' to support the useful lives
of depreciable property, which consists primarily of computer
equipment, furniture, and other fixtures.\59\
---------------------------------------------------------------------------

    \59\ Southern at 5.
---------------------------------------------------------------------------

Commission Determination
    64. Service companies own a variety of assets. Some centralized
service companies primarily own office furniture and computers while
others own more significant assets such as office buildings.\60\
Accordingly, some centralized service companies may need to conduct a
more sophisticated engineering, economic, or other type of depreciation
study than would others based on the complexity and characteristic of
the depreciable assets that they own. The intent of the instruction is
to require service lives of depreciable assets to be supported by
evidence and analysis. It is not intended to require unnecessarily
extensive mortality studies to be conducted when the cost of doing so
cannot be supported by the improved accuracy in depreciation estimates.
The Commission, therefore, will revise the instructions in Sec.
367.20(b) to state that the ``estimated useful service lives of
depreciable property must be supported by objective evidence and
analysis, including where appropriate engineering, economic, or other
depreciation studies.''
---------------------------------------------------------------------------

    \60\ See, e.g., American Electric Power Service Company's 2005
FERC Form No. 60.
---------------------------------------------------------------------------

(e) Section 367.23--Transactions With Non-Associate Companies
    65. Proposed Sec.  367.23 was carried over from the SEC's former
USofA and requires profits and losses on transactions with non-
associate companies to be recorded in Account 458.4, Excess or
deficiency on servicing non-associate utility companies (Sec.
367.4584), and Account 459.4, Excess or deficiency on servicing non-
associate non-utility companies (Sec.  367.4594), as appropriate. It
also requires centralized service companies to use net profits received
outside of the holding company system to reduce the cost of providing
service to associate companies within the holding company system.
Comments
    66. NARUC supports the provisions; however, it explains that, if a
service provided outside the corporate umbrella becomes profitable, a
utility might form a new affiliate to provide the service so that
profits associated with that service will no longer flow back to
regulated operations.\61\ In that circumstance, it points out, the
excess profits that would otherwise be available to reduce the costs of
associate companies may decline. Therefore, NARUC suggests that
services should not be transferred to a new affiliate if, and when,
they become profitable. Additionally, NARUC suggests the Final Rule
could require the centralized service company to report yearly which
services it provides to outside entities, including an explanation of
why any services were dropped from one year to the next.
---------------------------------------------------------------------------

    \61\ NARUC at 8.
---------------------------------------------------------------------------

Commission Determination
    67. It is beyond the scope of the Commission's authority under
PUHCA 2005 to set regulations which prohibit the transfer of services
performed from one associate company in a holding company system to
another associate company. Therefore, we will not adopt NARUC's
suggestion to prohibit services provided outside the corporate umbrella
by a service company from being transferred to another associate
company. Nor will we adopt the suggestion that service companies
provide a yearly report on changes to services provided. A separate
report is unnecessary because the Commission and others will be able to
monitor such transfers because they will be reported annually either
through FERC Form No. 60 or in FERC-61.\62\
---------------------------------------------------------------------------

    \62\ Pursuant to Order No. 667-A, service companies that do not
file the FERC Form No. 60 must file annually a narrative description
of their functions, as identified in FERC-61. See 18 CFR
366.23(a)(2).
---------------------------------------------------------------------------

(f) Section 367.24--Construction and Service Contracts for Other
Companies
    68. Proposed Sec.  367.24 was carried over from the SEC's former
USofA for service companies. Section 367.24(b) requires centralized
service companies to exclude from their accounting system the cost of
materials, construction payrolls, outside services, and other expenses
directly attributable to the construction of physical property for
other companies, and requires that these costs must be charged directly
by the vendor or supplier to the construction project. Additionally,
Sec.  367.24(c) requires the cost of goods procured (as opposed to
services) to be excluded from the accounting system of the service
company and charged directly by the vendor or supplier to the associate
company concerned.
Comments
    69. Southern states it does not understand the purpose behind Sec.
367.24(b) and (c), and recommends their elimination as it requires the
exclusion of certain direct costs and cost of goods procured from the
accounting system of the service company.\63\ Southern explains that
its service companies contract for such expenses on behalf of its
affiliate companies, as well as incur costs directly that are related
to construction projects, that are then billed to a utility or other
affiliate company. EEI requests the Commission clarify to whom Sec.
367.24(b) applies.\64\
---------------------------------------------------------------------------

    \63\ Southern at 5.
    \64\ EEI at 25.
---------------------------------------------------------------------------

    70. National Grid believes Sec.  367.24 requires that expenses
associated with the construction services performed by service company
employees will not be accounted for separately but treated as part of
the capital investment in assets being constructed. This will cause, in
National Grid's view, an inconsistency with proposals by the Commission
to create incentives for transmission construction by allowing expense
treatment of pre-commercial costs incurred in relation to new
transmission builds.\65\
---------------------------------------------------------------------------

    \65\ National Grid at 7-9.
---------------------------------------------------------------------------

Commission Determination
    71. We agree with Southern that the purpose and intent of Sec.
367.24(b) and (c) are somewhat unclear. We believe the ambiguity is due
in part to the fact that Sec.  367.24(a) does not prescribe specific
accounts for recording costs incurred in connection with construction
or service contracts under which the service company undertakes
projects to

construct physical property for others. Therefore, we will amend Sec.
367.24(a) to require that costs incurred for this purpose, as well as
any other purpose not provided for elsewhere in the expense accounts,
are to be charged to new Account 412, Costs and expenses of
construction or other services, adopted in this Final Rule. We also
will eliminate the ambiguous language contained in Sec.  367.24(b) and
(c).
(g) Section 367.25--Determination of Service Cost
    72. In the NOPR, the Commission proposed to adopt Sec.  367.25 to
state that the total amounts included in the expense accounts during
any period plus the amount that appropriately may be added as
compensation for the use of capital, if paid, constitute cost during
that period.
Comments
    73. NARUC requests that the Commission clarify the meaning of the
phrase ``if paid'' in Sec.  367.25 because the language renders the
meaning of the section unclear.\66\
---------------------------------------------------------------------------

    \66\ NARUC at 13-14.
---------------------------------------------------------------------------

Commission Determination
    74. The Commission agrees that the phrase ``if paid'' in Sec.
367.25 is unclear. This instruction is intended to state that the cost
of services provided equals the total amounts included in the expense
accounts plus an appropriate amount for the compensation for the use of
capital. Furthermore, the meaning of compensation for the use of
capital is explained in Sec.  367.29, Compensation for use of capital.
Therefore, the Commission finds that the phrase ``if paid'' is
unnecessary and will modify Sec.  367.25 to remove the phrase.
(h) Section 367.27--Billing Procedures
    75. Proposed Sec.  367.27 requires service companies to bill
monthly for their services and to include sufficient information in
such billings to permit any company to properly classify the amount
billed according to the accounting system prescribed by the regulatory
authority of such company. This section was carried over from the SEC's
former USofA for service companies.
Comments
    76. Several commenters disagree with the Commission's proposed
regulation in Sec.  367.27 on monthly billing procedures.\67\ EEI and
National Grid argue that generating paper invoices for billings of
services rendered to associate utility companies on a monthly basis is
largely unnecessary as the specific charges and their accounting are
obtainable through the holding company's accounting system.\68\
Southern also argues that it does not currently provide the level of
detail required in Sec.  367.27 to its affiliate companies but that the
information it does provide is sufficient in detail.\69\
---------------------------------------------------------------------------

    \67\ EEI at 41-42; National Grid at 9-10; Southern at 5.
    \68\ EEI at 41, National Grid at 10.
    \69\ Southern at 5.
---------------------------------------------------------------------------

    77. EEI and FirstEnergy encourage the Commission to clarify in the
regulatory text and preamble to the Final Rule that service companies
can bill their clients using a variety of mechanisms as long as the
service company clients are receiving accurate, timely information
about the work being done for them and the cost of the work.\70\
FirstEnergy notes that it has a fully integrated accounting system
which provides full access to the information contained within the
system as it relates to their company. Therefore, FirstEnergy argues
that there is no need for a formal bill due to the available
technology.\71\
---------------------------------------------------------------------------

    \70\ EEI Supplemental Comments at 18, FirstEnergy Supplemental
Comments at 4.
    \71\ FirstEnergy Supplemental Comments at 4.
---------------------------------------------------------------------------

    78. With respect to billing of services rendered to non-associated
utility companies, these commenters state service companies often
provide a de minimis amount of services.\72\ Thus, according to
National Grid, it makes little business sense to undertake the costs of
establishing a detailed monthly invoicing for non-associated companies
for services rendered.\73\ The commenters add that those arrangements
are largely negotiated on an arms-length basis without reference to
specific costs and would potentially provide sensitive competitive
information that is not required by any contract between the service
company and the unrelated party.\74\ Consequently, they contend, the
Commission's mandated monthly invoice scheme would force the service
company into a cost of service business, even for non-jurisdictional
services.\75\
---------------------------------------------------------------------------

    \72\ EEI at 42; National Grid at 10; Southern at 5.
    \73\ National Grid at 10.
    \74\ EEI at 42; National Grid at 10; Southern at 5.
    \75\ EEI at 42; National Grid at 10.
---------------------------------------------------------------------------

Commission Determination
    79. The commenters misunderstood the purpose of this section. It
was not intended to require the use of paper invoices as some
commenters concluded. Rather, the intent of this instruction is to
require centralized service companies to charge their associate public-
utility companies for services provided each month, together with
enough information to allow these companies to properly classify the
amount in the accounts prescribed by their regulatory authorities.
However, in order to eliminate any confusion, we will remove the
reference to ``invoices'' in Sec.  367.27, and clarify it is only
intended for billings to associate public-utility companies.
(i) Section 367.51(a)(17)--Allowance for Funds Used During Construction
    80. Proposed Sec.  367.51 provided instructions on the cost of
construction properly included in the service company property
accounts. These instructions were taken from the Electric and Gas Plant
Instructions in parts 101 and 201 of the Commission's regulations, and
include an allowance for funds used during construction (AFUDC).
Comments
    81. EEI believes that AFUDC, as described in Sec.  367.51(a)(17),
only has relevance to jurisdictional entities that have been granted
this provision by regulators.\76\ For service companies, EEI contends,
a more appropriate approach would be to calculate capitalized interest
based on GAAP. EEI recommends that the section on AFUDC be removed from
the proposed rule and that service companies be allowed to capitalize
interest based on GAAP.\77\
---------------------------------------------------------------------------

    \76\ EEI at 25.
    \77\ Id.
---------------------------------------------------------------------------

Commission Determination
    82. Based on a review of the record in this proceeding, the
construction projects for service company property do not appear to be
large and the related interest charges will be relatively
insignificant. In such circumstances, the Commission agrees the use of
the proposed AFUDC formula would be unnecessarily complex. Therefore,
the Commission will modify Sec.  367.51(a)(17) to allow centralized
service companies to capitalize interest in accordance with GAAP.
(j) Section 367.53--Service Company Property Purchased or Sold
    83. In Sec.  367.53, we proposed to modify Electric and Gas Plant
Instructions No. 5 in parts 101 and 201 of the Commission's regulations
to require centralized service company property to be recorded at the
cost of acquisition rather than its original cost. Section Sec.  367.53
also requires centralized service companies to file journal entries
with the Commission when they acquire property at a purchase price of
$10 million or more

that has been previously devoted to public service.\78\ This filing
requirement was intended to provide the Commission and others the
opportunity to monitor transactions involving property previously
devoted to public service.
---------------------------------------------------------------------------

    \78\ The $10 million threshold is consistent with the threshold
for certain transactions subject to section 203 of the FPA, as
amended by section 1289 of EPAct 2005. See Order No. 669, 71 FR 1348
(Jan. 6, 2006), FERC Stats. & Regs. ] 31,200 (2005).
---------------------------------------------------------------------------

Comments
    84. NARUC states that the regulations on service company property
purchased or sold could be used as a vehicle to inflate rate base.\79\
For example, it posits, a service company may have bought an asset at a
premium over original cost to the party that previously owned it and
recorded the asset on the service company's books at the total
acquisition cost, after which a public utility may have purchased the
asset from the service company. To avoid such problems, NARUC suggests,
the new USofA should require that any asset purchased by a service
company not be transferred at an amount higher than the original
purchase price or the remaining original cost, whichever is lower.
Specifically, NARUC suggests that the following language (italicized
below) should be incorporated into Sec.  367.53(e), Service company
property purchased or sold:
---------------------------------------------------------------------------

    \79\ NARUC at 6.

    In connection with the acquisition of property previously
devoted to service company operations or acquired from an associate
company, the service company must procure, if possible, all existing
records relating to the property acquired or related certified
copies, and must preserve the records in conformity with regulations
or practices governing the preservation of records of its own
construction. If the property was previously devoted to utility
service, the service company must preserve the original cost of the
property in the records of the service company.\80\
---------------------------------------------------------------------------

    \80\ Id. at 6-7.

    85. NARUC also states that, in order for state commissions to
monitor the acquisition of property from affiliates, a copy of the
journal entries also should be filed with the relevant state
commissions and suggests the following language changes (stricken
language in brackets or new language italicized below) to incorporate
---------------------------------------------------------------------------
this concept.

    (c) Unless otherwise authorized by the Commission, all service
company property acquired from an affiliate company must be at its
book value. Additionally, if property is acquired that is in excess
of $10 million and has been previously devoted to public service [at
a price above book value], the service company must file with the
Commission the proposed journal entries associated with the
acquisition within six months from the date of acquisition of the
property. In addition, a copy of the proposed journal entries filed
with the Commission must be sent to the state regulatory commissions
having jurisdiction in the states in which associated utility
companies provide utility service.\81\
---------------------------------------------------------------------------

    \81\ NARUC at 11-12.

Commission Determination
    86. The Commission will not adopt NARUC's proposed language changes
to Sec.  367.53. The regulations which are already in place for public
utilities and licensees, and natural gas companies adequately prevent
rate base from being artificially inflated. The Commission's
regulations in parts 101 and 201 require all electric and gas plant
purchased by a public utility or a natural gas company to be recorded
at its original cost and the related journal entries must be filed with
the Commission.\82\ Further, proposed Sec.  367.53(c) requires that
property acquired from affiliates must be at book value and journal
entries must be filed with the Commission for purchases of property
previously devoted to public service in excess of $10 million.
Therefore, NARUC's proposed language is not necessary, nor do we
believe it is necessary for the Commission to require copies of journal
entries to be filed with State commissions. All filings of this nature
are docketed by the Commission and can be viewed electronically by all
interested parties. Accordingly, state commissions will be able to
monitor the acquisition of property from affiliates without imposing an
additional reporting burden on service companies. We also note that our
determination here is consistent with the filing requirements applied
to public utilities, licensees, and natural gas companies for similar
transactions under the Commission's regulations in parts 101 and 201.
---------------------------------------------------------------------------

    \82\ See, e.g., 18 CFR part 101, Account No. 102.
---------------------------------------------------------------------------

(k) Section 367.54--Expenditures on Leased Property
    87. Proposed Sec.  367.54 requires the cost of improvements made to
leased property to be used for more than one year to be charged to the
appropriate service company property account. It also requires that
amounts charged to service company property be amortized to Account
404, Amortization of limited-term service property, over the lease term
if the service life of the improvement is terminable by the action of
the lease. Otherwise, the improvement is subject to depreciation
practices normally followed for amounts recorded in the account to
which the improvement was charged. The forgoing requirements are
essentially the same requirements for public utilities, licensees and
natural gas companies for leasehold improvements in Electric and Gas
Plant Instructions No. 6 of parts 101 and 201 of the Commission's
regulations.
Comments
    88. Southern notes that GAAP requires that the life of a leasehold
improvement be co-terminus with the lease; thus, there would not be a
leasehold improvement whose ``service life is not terminated by action
of the lease but by depreciation proper.'' \83\ By this section's
definition, according to the company, all leasehold improvement
amortization would have to be accounted for as ``amortization of
limited term property.'' Southern asks what value this information is
to the Commission.
---------------------------------------------------------------------------

    \83\ Southern at 5.
---------------------------------------------------------------------------

Commission Determination
    89. This instruction provides important guidance on how the costs
of leasehold improvements are to be recorded and depreciated or
amortized under the USofA. We, therefore, will retain this instruction.
Further, we do not believe this instruction prohibits a centralized
service company from following GAAP as it relates to leasehold
improvements.
(l) Section 367.59--Additions and Retirements of Property
    90. Proposed Sec.  367.59 requires centralized service companies to
adopt and maintain a list of retirement units. The list forms the basis
for determining whether the cost of property-related work should be
capitalized or charged to expense. In general, if the work involves
adding or replacing an item of property appearing on the list, the cost
of the work is capitalized. If the work involves adding or replacing an
item of property that is not on the list and, therefore, constitutes a
minor item of property, the cost of the work is charged to expense.
Comments
    91. Southern states it does not believe that retirement units are
applicable to service company property. Southern states that each
service company purchase is a discrete unit of property and service
companies would not be able to maintain a written property units

listing for use in accounting for additions and retirements of
property.\84\
---------------------------------------------------------------------------

    \84\ Southern at 5.
---------------------------------------------------------------------------

Commission Determination
    92. We do not agree with Southern that retirement units are not
applicable to service company property. Establishing a retirement unit
is necessary to determine whether property-related expenditures should
be capitalized or expensed. It is the same requirement that is followed
by public utilities and licensees and by natural gas companies under
parts 101 and 201 of the Commission's regulations. We see no reason
service companies should not follow the same practice because they have
the same assets that an electric or gas company would have if the
service company did not exist. Therefore, service companies should
maintain property unit listings.
(m) Sections 367.103-.104--Current and Deferred Income Taxes
    93. Proposed Sec. Sec.  367.103-.104 contain special accounting
instructions for recognizing income tax expense. Among other things,
they require the accruals for income taxes to be apportioned among
service company departments and other income and deductions. These
requirements were carried over from the Special Instructions for the
current and deferred tax expense accounts in parts 101 and 201 of the
Commission's regulations.
Comments
    94. EEI and Progress Energy recommend that there be no requirement
to calculate or allocate taxes on a department level because income
taxes are generally computed at a legal entity level, not to individual
departments.\85\ Progress Energy notes that service companies are not
income-producing; rather, they are cost centers required to bill all of
their expenses at cost and their income statements net to zero. The
only income taxes that are computed for service companies are due to
timing differences between GAAP and tax accounting, which, according to
Progress Energy, cannot, in any meaningful way, be associated with
individual departments. Therefore, Progress Energy states it does not
have actual income tax accruals for its individual service company
departments and could not meaningfully apportion the limited timing-
related income tax accruals to the individual departments.\86\
---------------------------------------------------------------------------

    \85\ EEI at 39; Progress Energy at 8-9.
    \86\ Progress Energy at 9.
---------------------------------------------------------------------------

Commission Determination
    95. Upon further consideration, the Commission agrees that it is
not practical or necessary for centralized service companies to
calculate income taxes for individual departments. Therefore, the
regulations will be revised to eliminate this requirement.
(n) Section 367.23--Transactions With Non-Associate Companies; Sec.
367.25--Determination of Service Cost; Sec.  367.27--Billing
Procedures; Sec.  367.28--Methods of Allocation; Sec.  367.29--
Compensation for Use of Capital
    96. The proposed sections of the Commission's regulations listed
above specify rules or standards that must be applied in accounting for
certain transactions or events. The rules are fairly broad in their
application and were carried over from the SEC's USofA for service
companies.
    97. More specifically, Sec.  367.23 requires that the excess or
deficiencies in providing services to non-associated companies to be
recorded in Account 458.4, and that the net excess be used to reduce
charges to associate companies. Section 367.25 states that a service
must be deemed at cost and the total amounts included in the expense
accounts during any period plus the amount that appropriately may be
added as compensation for the use of capital constitutes cost during
that period. Section 367.27 provides that charges for services to
associate public-utility companies be made monthly with sufficient
information and in sufficient detail to permit such company, where
applicable, to identify and classify the charge in terms of the system
of accounts prescribed by the regulatory authorities to which it is
subject. Section 367.28 requires that indirect costs and compensation
for use of capital must be allocated to projects in accordance with the
service company's applicable and currently effective methods of
allocation. Section 367.29 states that interest on borrowed capital and
compensation for the use of capital must represent a reasonable return
on the amount of capital reasonably necessary for the performance of
services or construction work for associate companies. It also requires
that the amount of compensation be separately stated on each billing to
associate companies and an annual statement to support the amount of
compensation for the use of capital billed for the previous 12 months
be supplied to each associate company at the end of the calendar year.
Comments
    98. EEI argues that the proposed rule goes beyond accounting
regulations and adopts cost allocation and billing practice principles
in the definition of ``indirect cost'' and in Sec. Sec.  367.23,
367.25, 367.27, 367.28, and 367.29.\87\ EEI states these cost
allocation and billing principles should be made applicable only in the
context of service company cost allocations the Commission is asked to
review under section 1275 of PUHCA 2005.\88\
---------------------------------------------------------------------------

    \87\ EEI at 39.
    \88\ Section 1275 of PUHCA 2005 provides that in the case of
non-power goods or administrative or management services provided by
an associate company organized specifically for the purpose of
providing such goods or services to any public utility in the same
holding company system, at the election of the system or a State
commission having jurisdiction over the public utility, the
Commission, must review and authorize the allocation of costs for
those goods or services to the extent relevant to that associate
company. See 42 U.S.C. 16462.
---------------------------------------------------------------------------

Commission Determination
    99. The Commission disagrees with EEI's assertion that the matters
addressed in these sections of the regulations are only applicable in
the context of cost allocation reviews under section 1275 of PUHCA
2005. Costs are incurred continually and on an on-going basis by
centralized service companies and these costs must be accounted for and
eventually reported to the Commission in the FERC Form No. 60. The
noted regulations provide important guidance to centralized service
companies as to how the items covered by those regulations should be
accounted for as the transactions or events occur. For example, Sec.
367.23 requires excesses or deficiencies in providing services to non-
associate companies to be recorded in Account 458.4, and Sec.  367.25
provides that ``cost'' includes reasonable compensation for the use of
capital. The guidance that these instructions provide promotes
uniformity in accounting practices.
    100. As it relates to the portions of these sections which relate
to cost allocation and billing requirements, we note that such
regulations are necessary to carry out the Commission's obligations and
duties under PUCHA 2005, the FPA and the NGA. These instructions assist
the Commission in ensuring just and reasonable jurisdictional rates,
discerning potential or actual cross-subsidization, and approving cost
allocations between holding company affiliates. Therefore, these
instructions are needed beyond the review required under section 1275
of PUCHA 2005 and are adopted as proposed.

6. Balance Sheet Accounts
    101. In the NOPR, the Commission proposed to adopt in the new USofA
for centralized service companies many, but not all, of the balance
sheet accounts contained in parts 101 and 201 of the Commission's
regulations, as well as the primary property Accounts 301 (Sec.
367.3010), 303 (Sec.  367.3030) and 389 to 399.1 (Sec. Sec.  367.3890
to 367.3991).
Comments
    102. EEI suggests that the Commission add the following balance
sheet accounts to part 367 subpart F:

Account 106--Completed construction not classified
Account 182.3--Other regulatory assets
Account 189--Unamortized loss on reacquired debt
Account 228.2--Accumulated provision for injuries and damages
Account 228.3--Accumulated provision for pensions and benefits
Account 254--Other regulatory liabilities \89\
---------------------------------------------------------------------------

    \89\ EEI at 26.

    103. These accounts were not included in the SEC's Uniform System
of Accounts.\90\ However, a review of 2005 FERC Form No. 60s indicates
that some companies are using these accounts.\91\
---------------------------------------------------------------------------

    \90\ 17 CFR part 256.
    \91\ See, e.g., Schedule I Comparative Balance Sheet contained
in 2005 FERC Form No. 60 of American Electric Power Service
Corporation, E. ON U.S. Services INC, PHI Service Company, and
Progress Energy Service Company, LLC.
---------------------------------------------------------------------------

    104. In addition, EEI and Southern suggest that the Commission make
improvements to Account 146, Accounts receivable from associate
companies, and Account 123, Investment in associate companies.\92\ EEI
argues that the requirement to classify long-term receivables as
investments in associate companies is contrary to GAAP, and recommends
elimination of this requirement.\93\ Southern asserts that, on
occasion, operating companies do not have to submit payment
immediately. The company argues that the delay in payment could exceed
12 months, which, according to Southern, would be appropriately
classified as long-term receivables and not as investments in associate
companies.\94\
---------------------------------------------------------------------------

    \92\ EEI at 26; Southern at 6.
    \93\ EEI at 26.
    \94\ Southern at 6.
---------------------------------------------------------------------------

    105. NARUC asks that the Commission clarify the meaning of ``common
expenditures'' in Sec.  367.1070, Construction work in progress,
because, in its opinion, the proposed language renders the section
unclear.\95\ NARUC also believes proposed Sec.  367.1070 includes
language that may not be appropriate for a service company doing work
for more than an associate public utility company. Accordingly, it
requests that the Commission clarify the language (italicized below) in
Sec.  367.1070 as follows:
---------------------------------------------------------------------------

    \95\ NARUC at 14.

    (b) Work orders must be cleared from this account as soon as
practicable after completion of the job. Further, if a project is
designed to consist of two or more units that may be placed in
service at different dates, any expenditures that are common to and
that will be used in the operation of the project as a whole must be
included in service company property upon the completion and the
readiness for service of the first unit...\96\
---------------------------------------------------------------------------

    \96\ NARUC at 14.

    106. NiSource states that the definitions of proposed Accounts 233,
Notes payable to associate companies (Sec.  367.2330) and 234, Accounts
payable to associate companies (Sec.  367.2340) appear to be identical.
The language of the definitions, it suggests, should be clarified to
indicate that Account 233 applies to notes payable, whereas Account 234
applies to accounts payable.\97\
---------------------------------------------------------------------------

    \97\ NiSource at 3.
---------------------------------------------------------------------------

Commission Determination
    107. EEI did not explain in its comments why it suggests that the
Commission add the recommended accounts. However, our review of a
number of the FERC Form No. 60s filed with the Commission for calendar
year 2005 indicates that some of the recommended accounts are already
being used by service companies.\98\ For other recommended accounts it
appears reasonably possible that service companies either already have
or could enter into transactions in the future requiring use of those
accounts. Therefore, the Commission will add the following balance
sheet accounts recommended by EEI to part 367 subpart F:
---------------------------------------------------------------------------

    \98\ See, e.g., Schedule I Comparative Balance Sheet contained
in 2005 FERC Form No. 60 of American Electric Power Service
Corporation, E. ON U.S. Services INC, PHI Service Company, and
Progress Energy Service Company, LLC.

Account 106, Completed construction not classified
Account 182.3, Other regulatory assets
Account 189, Unamortized loss on reacquired debt
Account 228.2, Accumulated provision for injuries and damages
Account 228.3, Accumulated provision for pensions and benefits
Account 254, Other regulatory liabilities

    108. The Commission also will add Account 306, Leasehold
improvements, as a transitional accommodation only.\99\ Account 306 was
included in the SEC's Uniform System of Accounts.\100\ Use of this
account will be restricted to leasehold improvements placed in service
prior to January 1, 2008. Effective January 1, 2008, leasehold
improvements must be charged to the appropriate primary plant account
consistent with Sec.  367.54. Conforming changes to Schedules II and
III of the FERC Form No. 60 will be made to permit reporting of amounts
related to Account 306.
---------------------------------------------------------------------------

    \99\ Account 306 was contained in the SEC USofA for service
companies. We will permit continued use of this account and not
require reclassification of amounts recorded therein for leasehold
improvements placed in service prior to January 1, 2008.
    \100\ 17 CFR part 256.
---------------------------------------------------------------------------

    109. In response to EEI and Southern's comments concerning Account
123, Investment in associate companies, we note that, in the NOPR, the
Commission proposed to adopt Account 146, Accounts receivable from
associate companies, (Sec.  367.1460) as contained in parts 101 and 201
of the Commission's regulations. The text to Account 146 requires that
items which do not bear a specified due date, but which have been
carried for more than 12 months and items which are not paid within 12
months from the due date be transferred to Account 123, Investment in
associate companies. This requirement results in classifying
receivables that are long-term in nature to a long-term asset account
(Account 123) and facilitates preparation of a classified balance sheet
directly from the accounts. Although the Commission could prescribe a
new account created specifically for recording long-term accounts
receivables held by service companies, as Southern suggests, it would
create an inconsistency between the accounts prescribed for service
companies and those prescribed for public utilities and licensees and
for natural gas companies. To ensure consistency between the service
companies and the public utilities and natural gas companies, the
Commission will continue to require long-term accounts receivables to
be recorded in Account 123, Investment in associate companies.
    110. In response to NARUC's comments concerning Account 107,
Construction work in progress, we agree that the instructions contained
in Sec.  367.1070 that address construction projects consisting of
multiple units with different in-service dates are unclear. Therefore,
the Commission will modify that section and adopt NARUC's recommended
clarifying language.

    111. Additionally, in response to NiSource's comments we will
revise the language in Account 234 (Sec.  367.2340) to indicate that
Account 234 applies to accounts payable. The language is revised to
read, ``This account must include all amounts payable to associate
companies by the service company within one year, which are not
provided for in other accounts.''

7. Income Statement Accounts

    112. In the NOPR, the Commission proposed to incorporate some of
the income statement accounts contained in parts 101 and 201 of the
Commission's regulations and some of the income statement accounts
contained in the SEC's USofA for service companies. The specific
comments received on these accounts are discussed below.
(a) Sections 367.4570-.4594--Revenue Accounts for Services Rendered
    113. In the NOPR, we proposed to adopt new revenue control Accounts
457, Services rendered to associate utility companies; Account 458,
Services rendered to non-associate utility companies; and Account 459,
Services rendered to non-utility companies. We proposed that each of
these new revenue control accounts have corresponding subaccounts for
direct labor (Accounts 457.1, 458.1 and 459.1) and indirect labor
(Accounts 457.2, 458.2 and 459.2), and compensation for use of capital
(Accounts 457.3, 458.3 and 459.3). We also proposed to include revenue
Accounts 458.4, Excess or deficiency on servicing non-associate utility
companies, and 459.4, Excess or deficiency on servicing non-associate
non-utility companies. Our proposal differed slightly from the SEC's
USofA for service companies, which provided control accounts for
revenues from services provided to associate companies and revenues
from services provided to non-associate companies.
Comments
    114. National Grid and NiSource believe that the Commission should
provide for separate revenue control accounts for services to associate
companies and to non-associate companies, and that these accounts
should each be further subdivided into separate accounts or subaccounts
tracking services to utility and non-utility companies in order to
satisfy the Commission's stated goals and to provide a more detailed
picture of service company revenues.\101\ These commenters believe that
this added detail (i.e., separately identifying revenues associated
with services to associate, non-utility companies and non-associate,
non-utility companies) would not impose a significant burden over the
status quo, but would provide a more detailed picture of service
company services rendered for non-utility companies than the
Commission's proposed regulations would require. As an alternative,
NiSource requests that the Commission clarify that all service company
revenues received from non-utility companies are to be charged to
Account 459.4, whether or not they are derived from companies that are
part of the same holding company system.\102\ Southern believes that
subaccounts should be added for all direct and indirect charges
including the non-labor components of billings.\103\
---------------------------------------------------------------------------

    \101\ National Grid at 11-12; at 2-3.
    \102\ NiSource at 2-3.
    \103\ Southern at 4.
---------------------------------------------------------------------------

    115. In contrast, EEI believes most service companies will not have
information needed to distinguish between direct labor, indirect labor,
and use of capital costs for services provided to associate utilities,
non-associate utilities and non-utilities. Instead, EEI encourages the
Commission to retain the current breakdown into services rendered to
associate and non-associate companies, at most subdividing the
associate company information by utility and non-utility if necessary
to address cross subsidization concerns. EEI also recommends that the
Commission delete the requirement for tracking revenue related to the
use of capital, and states that it is a minor aspect of service company
activities already reflected elsewhere in company accounts.\104\
---------------------------------------------------------------------------

    \104\ EEI at 27-28.
---------------------------------------------------------------------------

    116. Progress Energy expresses concerns that requiring the redesign
of allocation processes and systems to capture and disaggregate expense
and revenue data to distinguish utility and non-utility services would
impose a significant and unjustified burden on company resources
without any appreciable benefit. Progress Energy points out that
service companies already have procedures in place to prevent
inappropriate costs shifts and other cross subsidization, and that the
separation of costs as proposed by the Commission is not
necessary.\105\
---------------------------------------------------------------------------

    \105\ Progress Energy at 6-9.
---------------------------------------------------------------------------

Commission Determination
    117. In response to commenters' concerns, the Commission will adopt
revenue accounts that will provide a breakdown by services rendered to
associate and non-associate companies, but eliminate the requirement to
record revenues from services provided to utilities and non-utilities
in separate accounts. The Commission believes this modification to the
NOPR is appropriate because this information can be obtained in the
FERC Form No. 60, Analysis of Billing Schedule, which requires
reporting amounts billed by customer for the year. Therefore, this
modification will reduce burden without loss of important data. More
specifically, we will adopt the following revenue control accounts and
corresponding subaccounts: Account 457, Services rendered to associate
companies; Account 457.1, Direct costs charged to associate companies;
Account 457.2, Indirect costs charged to associate companies; Account
457.3, Compensation for use of capital-associate companies; Account
458, Services rendered to non-associate companies; Account 458.1,
Direct costs charged to non-associate companies; Account 458.2,
Indirect costs charged to non-associate companies; Account 458.3,
Compensation for use of capital-non-associate companies; Account 458.4,
Excess or deficiency on servicing non-associate companies. Consistent
with the discussion above, we will not adopt proposed Accounts 459,
459.1, 459.2, 459.3, and 459.4. Use of Accounts 457, 457.1, 457.2,
457.3, 458, 458.1, 458.2, 458.3, and 458.4 is consistent with the
requirements that existed under the SEC's USofA for service companies.
Contrary to EEI's assertion, our review of 2005 FERC Form No. 60s
indicates that service companies are capable of breaking down amounts
billed between direct costs, indirect costs and compensation for
capital.\106\
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    \106\ 2005 FERC Form No. 60, Analysis of Billing--Associate
Companies Schedule and Analysis of Billing--Non-associate Companies
Schedule.
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(b) Sections 367.5000 and 367.8000--Operation and Maintenance Expense
Accounts
    118. In the NOPR, the Commission proposed to require centralized
service companies to use the 500 and 800 series of accounts contained
in parts 101 and 201 of the Commission's regulations for recording the
expenses related to generation, transmission and distribution operation
and maintenance services they provide to associate public-utilities and
licensees and, where applicable, associate natural gas companies.
Comments
    119. NARUC initially indicated that it was unclear how the 500 and
800 series

accounts will be impacted by the types of services that centralized
service companies provide.\107\ In supplemental comments filed
following the staff technical conference, NARUC explains that, at the
July 18, 2006 Technical Conference, it became clear that because some
service companies currently use the 500 and 800 series accounts, it
could be reasonable to include the accounts in the centralized service
company's USofA.\108\ NARUC believes the question the Commission needs
to determine is whether these accounts should be mandatory. NARUC
believes that if the Commission determines that use of the 500 and 800
series accounts should not be mandatory for all service companies, then
the Commission needs to identify the accounting methods that best
reflect the financial position of the service companies and associate
companies within a holding company system. NARUC suggests that one
approach would be to establish a threshold for when the use of the 500
and 800 series accounts would become mandatory. NARUC suggests that a
possible threshold could be a percentage, such as 10 percent or less,
of utility costs or of service company expenses. Another option, NARUC
suggests, is to require the use of the 500 and 800 series accounts
whenever a service company starts performing utility functions that
should be recorded in the 500 and 800 series accounts. NARUC also
suggests that the Commission prohibit the recording of charges
classified in Account 923, Outside services on the utility's records,
and, instead, it suggests that the Commission mandate that service
company charges be classified in accordance with the utility account or
function to which they relate because, in some cases, all costs are
classified in Account 923. NARUC explains that adoption of this
recommendation is necessary if the Commission adopts a threshold.\109\
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    \107\ NARUC at 8-9.
    \108\ NARUC Supplemental Comments at 3-6.
    \109\ NARUC Supplemental Comments at 3-5.
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    120. Mr. Buckley, a participant at the technical conference,
indicates that in Ohio they have experienced an explosion of service
company costs recently. Mr. Buckley states that service company costs
make up a large and increasing percentage of the costs that are
ultimately passed on to ratepayers. Mr. Buckley points out that mergers
and consolidations are moving the physical records and altering the
existing relationships that state regulators have with the companies
they regulate. According to Mr. Buckley, this makes it harder to know
to whom to go to get information and, therefore, any increase in
transparency is a positive step.\110\ Mr. Buckley adds that, if the
service companies become more centralized, citing American Electric
Power as an example and noting that consolidation in the industry could
lead to things becoming more centralized, the 500 and 800 accounts will
provide for growth.\111\
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    \110\ See Technical Conference Tr. 101-102 (Joseph Buckley).
    \111\ See Technical Conference Tr. 120-121 (Joseph Buckley).
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    121. In contrast, several commenters do not believe that the 500
and 800 series accounts accurately portray the majority of service
company costs.\112\ While National Grid recognizes that some companies
already record costs and revenues to match the accounting accorded to
such costs and revenues by the ultimate service recipients, it asserts
there is no reason to require wholesale reclassification of costs and
revenues by all service companies. National Grid also believes this may
lead to an inaccurate picture of a service company's financial
position, and explains that using the 500 and 800 series accounts
implies that the service company owns the assets that it is operating
and maintaining.\113\
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    \112\ NARUC at 8-9; Progress Energy at 3; EEI at 22-24; NiSource
Supplemental Comments at 4-6; FirstEnergy Supplemental Comments at
3.
    \113\ National Grid at 7-8.
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    122. EEI and Progress Energy assert that requiring the use of the
500 and 800 series of accounts would cause service companies to be out-
of-compliance with GAAP principles.\114\ Progress Energy explains that
GAAP principles presume that each company reports its financial
information as if it were a stand-alone (non-affiliated) company. It
explains that force-fitting a centralized service company's financials
into the format reported by a public utility would result in books that
do not properly reflect the work conducted by a centralized service
company and would over-complicate the accounting, increase the risk of
errors inherent in any process or system change and violate GAAP
principles.\115\ In addition, EEI and NARUC contend that the burden
associated with the 500 and 800 series accounts is greater than the
benefit.\116\
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    \114\ Progress Energy at 6; EEI at 22-24.
    \115\ Progress Energy at 6.
    \116\ EEI at 5-6; NARUC at 8-9.
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Commission Determination
    123. We will require centralized service companies to use the 500
and 800 series of accounts as proposed. It is evident from the July 18,
2006 Technical Conference and from a review of the 2005 FERC Form No.
60s that a number of service companies use the 500 and 800 series
accounts. These centralized service companies perform operation and
maintenance services related to generation, distribution, transmission,
and customer services for associate electric and gas companies. The
expenses incurred from providing these types of services are most
accurately reported in the 500 and 800 series accounts.
    124. We do not agree with National Grid that use of these accounts
by centralized service companies performing the types of services for
which costs are properly included in these accounts would result in an
inaccurate picture of the service company's financial position. To the
contrary, we believe the use of these accounts will add transparency to
centralized service company costs and will facilitate comparison across
such companies. Centralized service companies that offer operation and
maintenance services related to generation, distribution, transmission,
and services perform the same type of work and incur the same costs
that a public utility would incur if that public utility performed the
work itself. Therefore, we will require centralized service companies
to record the expenses it incurs for conducting operation and
maintenance activities related to generation, transmission,
distribution and customer services in the same expense accounts public
utilities are required to use to record these costs. Using the 500 and
800 series of accounts also provides better assurance that costs are
properly assigned because like items will be identified and measured in
the same way regardless of the entity performing the work. Although EEI
and Progress Energy suggest that this is somehow in violation of GAAP
principles, they offer nothing in the way of concrete evidence or
reference to specific accounting standards to support this allegation.
Furthermore, even if such evidence did exist, and we do not believe it
does, the Commission's need for comparability and transparency of
service company expenses provided by use of the 500 and 800 series of
accounts would outweigh concerns about conformity with GAAP principles.
    125. In responding to NARUC's concern, we will not prohibit the
recording of charges in Account 923, Outside services. Prohibiting the
use of this account would be overly prescriptive. It is possible that
some service company costs would be accurately reported in Account 923.
However, we believe that it is appropriate for utilities that receive
bills

from service companies to classify those costs in the appropriate
accounts. Utilities would not be in compliance with part 101, General
Instruction 14, if they do otherwise. Specifically, General Instruction
14 requires that transactions with associated companies be recorded in
the appropriate accounts for transactions of the same nature. We will
require that centralized service companies performing services such as
operation and maintenance services related to generation, distribution,
transmission, and customer service on behalf of service companies to
use the appropriate accounts for those services performed.
    126. We do not agree with NARUC that the use of thresholds is an
option for determining when centralized service companies must use the
500 and 800 accounts. As discussed above, the use of the 500 and 800
accounts provides clarity about the types of services performed by
centralized service companies and the costs of providing those
services. Proper classification of service company costs facilitates
proper classification of the costs at the utility. Therefore, we will
require centralized service companies to use the 500 and 800 series of
accounts as proposed.
(c) Sections 367.9220 and 367.4171--Account 922, Administrative
Expenses Transferred--Credit, and Account 417.1, Expenses of Non-
Utility Company
    127. In the NOPR, the Commission proposed that the portion of
administrative, general, and customer expenses recorded in the 900
series of expense accounts, but attributable to services provided to
non-utility companies, be transferred to proposed Account 417.1,
Expenses of non-utility company related operations, with a contra-
credit to Account 922, Administrative expenses transferred-credit.
Comments
    128. EEI and Progress Energy request clarification regarding the
adoption of Account 922 since most service company expenses are
recorded in Accounts 920, Administrative and general salaries, and 921,
Office supplies and expenses.\117\ Progress Energy states that service
companies are labor intensive, so most of their expenses are currently
charged to Accounts 920 and 921. Progress Energy also states that the
Commission should not adopt its proposal to credit Account 922 with
administrative expenses recorded in Accounts 920 and 921 that are
transferred to construction costs or to other accounts or with the
amount of operating expenses related to services provided to non-
utility companies and Account 417.1, Expenses of non-utility company
related operations. In addition, Progress Energy points out that its
accounts are mapped to the appropriate associate company accounts in
compliance with the Federal (e.g., Commission and SEC) and state
regulatory reporting requirements imposed on the affiliated companies.
Further, Progress Energy explains that its cost allocation methodology
and charging practices have been approved by state regulatory
commissions and are currently consistent with inter-company service
agreements. If required to comply with this proposal, Progress Energy
asserts its processes, systems and legal documents will have to be
changed even though the associate companies already accurately report
their allocations in compliance with Federal and state
requirements.\118\
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    \117\ Progress Energy at 9-10; EEI at 24-26.
    \118\ Progress Energy at 9-10.
---------------------------------------------------------------------------

    129. EEI states there is confusion related to the credit posted in
Account 922. EEI states that many of these costs are administrative and
general costs that are allocated based on service agreement
methodologies and that the proposed process would require service
companies to keep track of a dollar spent on administrative and general
labor so the dollar could be recorded partly in the administrative and
general series and partly ``below the line'' in Account 417.1. EEI
states this would result in a process to build a ``clump'' of expenses
in Account 417.1 that would be essentially useless to the service
company. EEI recommends that the Commission not implement, or require
companies to use, the proposed accounting treatment for new Account
417.1.\119\
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    \119\ EEI at 24-25.
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Commission Determination
    130. Upon further consideration, the Commission has concluded that
it is not necessary at this time for centralized service companies to
record expenses attributable to services provided to non-utility
companies in a separate account because the information reported in the
Analysis of Billing Schedule should be sufficient to identify such
amounts. The Analysis of Billing Schedule requires centralized service
companies to report all amounts billed for services during the year on
a company by company basis. Since services are billed at cost, it will
be possible to determine the expenses attributable to services provided
to non-utilities from the schedule. Therefore, Accounts 417.1, Expenses
of non-utility company, and Account 922, Administrative expenses
transferred--credit, will be deleted from Sec. Sec.  367.9220 and
367.4171.
(d) Section 367.4160--Costs and Expenses of Merchandising, Jobbing and
Contract Work; Sec.  367.9120--Demonstrating and Selling Expenses;
Sec.  367.9130--Advertising Expenses; Sec.  367.9301--General
Advertising Expenses
    131. In the NOPR, the Commission proposed to adopt Account 416,
Costs and expenses of merchandising, jobbing and contract work; Account
912, Demonstrating and selling expenses; Account 913, Advertising
expenses; and Account 930.1, General advertising expenses as they
presently appear in parts 101 and 201 of the Commission's regulation
into the USofA for centralized service companies.
Comments
    132. NARUC states that it is difficult to determine in which
accounts different types of advertising costs should be recorded. It
also states that the Commission should anticipate service companies
providing promotional services to non-utility affiliates. To address
these concerns NARUC suggests: Revising Sec.  367.4160 to clarify that
only the cost of merchandising and contract work performed for