1. 1 Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC NARUC Staff Subcommittee on Accounting and Finance 2008 Spring Meeting New Orleans, Louisiana

2. SurveyRIB 2 Overview Request and Objectives Scope and Methodology Report Summary Results in Brief Recommendations for Agency Actions State Survey Highlights

3. SurveyRIB 3 Request and Objectives Work requested by: Chairman Bingaman together with Senator Brownback and Senator Feingold We agreed to examine: (1) the extent to which FERC, since EPAct’s enactment, has changed its merger or acquisition review process and postmerger or acquisition oversight to ensure that potential harmful cross-subsidization by utilities does not occur; and (2) the views of state utility commissions regarding their current capacity, in terms of regulations and resources, to oversee utilities.

4. SurveyRIB 4 Scope and Methodology To examine FERC’s process and changes, if any, we: Held extensive discussions with FERC officials Reviewed information, formal plans, and regulations Discussed FERC’s oversight with experts in mergers and cross-subsidization, including state regulators Interviewed utility officials and representatives from the financial community To develop an understanding of state oversight, we: Reviewed literature Conducted a survey of 50 states (plus DC) Conducted detailed site work in 4 states, interviewing regulators, company officials, consumer advocates, etc.

5. SurveyRIB 5 Report Summary Results-in-Brief FERC has made few substantive changes to either its merger review process or its postmerger oversight since EPAct Require merging companies to attest, in writing, that they will not engage in unapproved cross-subsidization Rely on existing enforcement mechanisms (e.g. self-reporting, hotline reports, formal complaints, and a limited number of audits) In 2008, FERC plans audits of 3 of 36 holding companies (Allegheny, Excelon, Southern) As a result, does not have a strong basis for ensuring that harmful cross-subsidization does not occur States’ views varied on their current capacities, but many states reported the need for additional resources to respond to changes in oversight after the repeal of PUHCA 1935 All but a few states have a strong role in mergers and/or acquisitions States reported being concerned about consumer rates and rising corporate complexity Most states reported having some affiliate transaction authority, but many reported reviewing or auditing only a small percentage Almost all states require financial reports from utilities and have access to financial books and records from utilities, many states reported they do not have such direct access to holding or affiliated companies Almost one-half (22 of 50 states reporting) said that with the changes in EPAct they needed additional staffing and funding to a carry out their oversight responsibilities.

6. SurveyRIB 6 Report Summary Recommendations for FERC 1.Develop a risk-based approach to auditing for affiliate transactions 2.Develop a better understanding of risk by working with the financial community and state regulators 3.Improve audit reporting to provide more complete reports 4.Determine whether it has sufficient resources and ask Congress for more resources, if needed

7. SurveyRIB 7 Report Summary Recommendations for FERC (from report) 1.Develop a comprehensive, risk-based approach to planning audits of affiliate transactions in holding companies and other corporations that it oversees to more efficiently target its resources to highest priority needs and to address the risk that affiliate transactions pose for utility customers, shareholders, bondholders, and other stakeholders. 2.As an aid to developing this risk-based approach, FERC should develop a better understanding of the risks posed by each company by doing the following: a)Monitoring the financial condition of utilities to detect significant changes in the financial health of the utility sector, as some state regulators have found it useful to do. To do this, FERC could leverage analyses done by the financial market and develop a standard set of performance indicators. b)Developing a better means of collaborating with state regulators to leverage resources already applied to enforcement efforts and to capitalize on state regulators’ unique knowledge. As part of thiseffort, FERC may want to consider identifying a liaison, or liaisons, for state regulators to contact and to serve as a focal point(s). 3.Develop an audit reporting approach to clearly identify the objectives, scope and methodology, and the specific findings of the audit, irrespective of whether FERC takes an enforcement action, in order to improve public confidence in FERC’s enforcement functions and the usefulness of audit reports on affiliate transactions for FERC, state regulators, affected utilities, and others. 4.After developing a more formal risk-based approach, reassess whether it has sufficient audit resources to perform these audits. If FERC believes that it does not have sufficient resources to conduct adequate auditing of the companies that it oversees within its existing staff and budget, FERC should provide this information to Congress and request additional resources.

8. SurveyRIB 8 State Survey Highlights Authorities Over Mergers and Corporate Structures Q7: Please identify the importance of each of the following factors as the commission evaluates proposed mergers and acquisitions. Authorities Over Affiliate Transactions and Cross Subsidies Q9: Which one of the following best describes your Commission’s affiliate transaction authorities? Q13: How does your commission regulate each of the following transactions? Q16: For affiliate transactions between the parties listed below, which types of pricing describe your commission’s requirements? Financial Protections Including Ring Fencing Q17: Which one of the following describe the nature of your ring fencing authorities? Q20: What is the status of your authority to require each of the following provisions? Q21: Which of the following forms of monitoring does your commission use to monitor companies’ adherence to specific financial protections required by your commission? Financial Reporting, Access to Books and Records, and Auditing Q25: What type of financial reporting does your commission require for utility transactions involving affiliates? Q26: Excluding the information, if any, provided to the commission through financial reporting by the utilities, does your commission have access to any books and records that document costs and other relevant information for each of the following? Q34: Within the last five years, about how many separate reviews of holding company/affiliate transactions, including auditing and investigations, has your staff performed? Q35: Considering the entire universe of affiliate transactions, what percentage of all individual affiliate transactions do you estimate your commission has audited in the past 5 years? Federal Oversight and State Concerns Q48: Does your commission foresee needing any of the following to deal with the changes from EPAct 2005 concerning holding companies, mergers and various activities previously covered by the Public Utility Holding Company Act of 1935 (PUHCA 1935)? Q52: To what extent do current state authorities protect ratepayers for each of the following? Q53: To what extent do federal authorities protect ratepayers for the following?

9. SurveyRIB 9 Authorities Over Mergers and Corporate Structures Question 7: Please identify the importance of each of the following factors as the commission evaluates proposed mergers and acquisitions.

10. SurveyRIB 10 Authorities Over Affiliate Transactions and Cross Subsidies Question 9: Which one of the following best describes your Commission’s affiliate transaction authorities?

11. SurveyRIB 11 Authorities Over Affiliate Transactions and Cross Subsidies Question 13: How does your commission regulate each of the following transactions?

12. SurveyRIB 12 Authorities Over Affiliate Transactions and Cross Subsidies Question 16: For affiliate transactions between the parties listed below, which types of pricing describe your commission’s requirements?

13. SurveyRIB 13 Financial Protections Including Ring Fencing Question 17: Which one of the following describe the nature of your ring fencing authorities?

14. SurveyRIB 14 Financial Protections Including Ring Fencing Question 20: What is the status of your authority to require each of the following provisions?

15. SurveyRIB 15 Financial Protections Including Ring Fencing Question 21: Which of the following forms of monitoring does your commission use to monitor companies’ adherence to specific financial protections required by your commission?

16. SurveyRIB 16 Financial Reporting, Access to Books and Records, and Auditing Question 25: What type of financial reporting does your commission require for utility transactions involving affiliates?

17. SurveyRIB 17 Financial Reporting, Access to Books and Records, and Auditing Question 26: Excluding the information, if any, provided to the commission through financial reporting by the utilities, does your commission have access to any books and records that document costs and other relevant information for each of the following?

18. SurveyRIB 18 Financial Reporting, Access to Books and Records, and Auditing Question 34: Within the last five years, about how many separate reviews of holding company/affiliate transactions, including auditing and investigations, has your staff performed?

19. SurveyRIB 19 Financial Reporting, Access to Books and Records, and Auditing Question 35: Considering the entire universe of affiliate transactions, what percentage of all individual affiliate transactions do you estimate your commission has audited in the past 5 years?

20. SurveyRIB 20 Federal Oversight and State Concerns Question 48: Does your commission foresee needing any of the following to deal with the changes from EPAct 2005 concerning holding companies, mergers and various activities previously covered by the Public Utility Holding Company Act of 1935?

21. SurveyRIB 21 Federal Oversight and State Concerns Question 52: To what extent do current state authorities protect ratepayers for each of the following?

22. SurveyRIB 22 Federal Oversight and State Concerns Question 53: To what extent do federal authorities protect ratepayers for the following?

23. SurveyRIB 23 Report and Survey Publicly Available Report and survey released February 25, 2008 Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC (GAO-08-289) Utility Oversight: Survey of State Public Utility Commissions Regarding Utility Commission Authorities and Reporting Responsibilities for Overseeing Utilities Since the Passage of EPAct 2005 (GAO-08-290SP) Available on the Internet Report: http://www.gao.gov/GAO-08-289 Survey: http://www.gao.gov/special.pubs/gao-08-290sp