FERC Wants Detailed ISO Accounting

By Published On: September 18, 2004

To boost confidence in its oversight of accounting, financial reporting, and cost-recovery practices of independent system operators (ISOs) and regional transmission organizations (RTOs), the Federal Energy Regulatory Commission said it intends to look at regulating cost information for those organizations?including incentives for cost efficiency. FERC also announced at its September 15 meeting that it would take a closer look at its rate review methods. In addition, the agency considered increasing incentives to build natural gas storage. While FERC believes regional grid operators save money overall, their public, nonprofit status results in different methods for allocating costs and thus their reporting requirements may not be detailed enough to provide proper oversight, the commission acknowledged. Accounting regulations in place deal with generation, transmission, and distribution transactions, but since ISOs and RTOs arrive at rate determinations in a collaborative manner, with advisory committee and stakeholder participation, simple transaction data do not account for all inputs and cost factors used in the determinations. It is time to move out of the experimental phase to ?full-bore financial accounting,? creating clear records of costs, said commission chair Pat Wood, presiding over the brief meeting on a dark and stormy day in Washington. Wood said FERC?s action came about as a result of public complaints, particularly on the part of smaller actors, whom he declined to name. Staff from the Office of Markets, Tariffs, and Rates said the commission feels current accounting methods are outdated and inappropriate with regard to the organizations given that the methods were created with traditional public utilities in mind. The California Independent System Operator wants to report its finances more specifically and has asked FERC for the authority to do so, according to CAISO spokesperson Gregg Fishman. Federal regulators also considered natural gas storage and the potential to proffer incentives to build it with returns on investment as high as 20 percent. A preliminary report by commission staff issued September 15, examining development of and demand for underground natural gas storage, only briefly mentions the role of LNG in the long-term gas picture. LNG cannot substitute for all underground storage, though it should be noted that Western geology limits underground infrastructure, according to the report. The report states that under average conditions, storage is adequate, but recent price spikes suggest that more storage could be needed, especially in the West. It also points out the relationship between the amount of storage and price volatility, with the former determined by how much volatility the market will accept. From 2002 to date, 75 Bcf of storage space has been approved, with 57 Bcf of that currently in service. In contrast, the Interstate Natural Gas Association of America estimates that up to 700 Bcf will be needed by 2020. To meet these anticipated needs, the preliminary findings of the report suggest a new ?creative? approach to ratemaking, regulation, and policy. Currently, projects by regulated storage companies are allowed returns of up to 15 percent, while storage developers are said to seek equity returns greater than 20 percent.

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