Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

< Encouraging states to adopt programs that let customers respond to
changing prices; and

< Helping to remove any impediments that prevent full demand-side
participation in electricity markets.

Performance Measurement Performance Target Result

Adopt market design standards br
wholesale electric markets

In April 2003, the Commission issued a
White Paper in the Standard Market
Design proceeding that emphasized its
strong commitment to customer-based,
competitive wholesale power markets,
while underscoring an increasingly
flexible approach to regional needs and
outlining step-by-step elaborations of its
key market design proposal. The
Commission intends to focus on the
formation of RTOs and on ensuring that
all independent transmission
organizations have sound wholesale
market rules. The final rule will allow
implementation schedules to vary
depending on local needs and will allow
for regional differences. During the
remainder of FY 2003, the Commission
continued its dialogue on market design
by holding a number of regional
conferences to exchange ideas with
stakeholders.

Issue final Standard Market Design rule

Absent consistent, non-discriminatory rules for all transmission customers, there
are substantial competitive consequences and higher costs to all customers.
Therefore, the Commission has proposed a common set of principles for the
design of electric transmission markets, based on an extensive discussion about
the best practices for wholesale electric markets. The wholesale market platform
will address persistent and costly problems in the nation’s wholesale electric
power markets. Our goals are to:

«< Remedy remaining undue discrimination in transmission service;

< Provide more choices and improved services to all wholesale market
participants;

« Reduce delivered wholesale electricity prices through lower transaction
costs and wider trade opportunities;

< Improve reliability through better grid operations and expedited
infrastructure improvements; and

< Increase certainty about market rules and cost recovery for greater investor
confidence to facilitate much-needed investments.

After issuance of a proposed rule in 2002, FERC reviewed the 1,000 plus
comments received and issued a white paper on wholesale market design in April
2003, in which we modified some of the positions in the Notice of Proposed
Rulemaking by acknowledging the appropriateness of regional and timing
flexibility in the adoption of key market design elements. RTOs and ISOs in

18



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003
Performance Measurement Performance Target Result
‘ADR Cases — OALJ/OAL: 76 cases were
successfully completed through the use of
ADR:
< 2cases completed in < 60 days
(2.6%)
< 10 cases completed in < 100 days
(13%)
< 15 cases completed in <150 days
(20%)
< 14 cases completed in < 200 days
ADR Cases: (18%)
< 20% within 60 days. < 35 cases completed in >200 days
< 30% within 100 days
< 75% within 150 days ADR Cases — DRS: 20 cases completed
< 100% within 200 days through the use of ADR:
< 8 cases completed in < 60 days (40%)
Litigated Cases: < 2 cases completed in < 100 days
Percentage of cases in time fames < 95% of simple cases within 206 days (10%)
< ADR processes completed (29.5 weeks) < 5.cases completed in < 150 days
< Litigated cases reaching initial decision |< 95% of complex cases within 329 days (25%)
(47 weeks) < 3.cases completed in < 200 days
< 95% of exceptionally complex cases, (15%)
441 (63 weeks) < 2 .cases completed in > 200 days
(10%)
Complaints:
< 95% of regular complaints within 60 Litigated Cases - OALJ/OAL:
days <_ Track | Cases: Standard processing
time = 29.5 weeks. FY 2003 Average
processing time = 24.3 weeks
< Track Il Cases: Standard processing
time = 47 weeks. FY 2003 Average
processing time = 38.4 weeks
< Track Ill Cases: Standard processing
time = 63 weeks. FY 2003 Average
processing time = 46.2 weeks
Regular Complaints - OGC: 97%

39



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

Establish RTOs/ISOs with sufficient
market monitoring and mitigation
measures in place

Fewer complaints about rates in RTOs
filed with the Commission

In FY 2002, 19 complaints vere filed
against ISO/RTOs (ISO-NE 10, NYISO 5,
CAISO 4).

In FY 2003, 6 complaints were filed
against ISO/RTOs (ISO-NE/NEPOOL 3,
NYISO 1, CAISO 1 and PJM 1).

While complaints are fewer when
comparing FY 2002 and 2003, we do not
expect this to be the case in the fiture;
rather, we anticipate more complaints as
numbers of participants increase, and as
RTOs mature beyond current stages.

We will review this performance target for
appropriateness. Focusing on the
number of complaints about rates in
RTOs does not highlight the fact that
market monitoring units exist in all
RTOs/ISOs and that they work together
with the Commission to evaluate market
performance and identify problems with
proposed and existing market rules,
market operations, and individual
participant behavior.

RTO/ISO wholesale market design
includes demand-response features

Measure increasing percentage of
operating RTOs and ISOs with demand
response programs

During FY 2003, four ISOs/RTOs (Cal
ISO, NYISO, PJM, and ISO New England)
operated demand response programs,
and one RTO which does not yet run any
energy market (Midwest ISO) did not.
Since these four RTOs/ISOs operated
demand response programs in FY 2002,
there was no increase in the percentage
of operating RTOs and ISOs during FY
2003. Nevertheless, throughout the year,
FERC has encouraged and approved
improvements in both the number and
design of demand response in PJM,
NYISO and ISO-NE. For example, FERC
supported the New England Demand
Response Initiative, a broad stakeholder
process in New England, to provide a
detailed assessment of ISO demand
response programs and to develop
recommended improvements.

35



Le Dig |

KPMG LLP
2001 M Street, NW
Washington, DC 20036

Independent Auditors’ Report

The Federal Energy Regulatory Commission and the
Inspector General, United States Department of Energy:

We have audited the accompanying balance sheets of the Federal Energy Regulatory Commission (the
Commission) as of September 30, 2003 and 2002, the related statements of net costs, changes in net
position, budgetary resources, financing, and custodial activities for the years then ended. The objective of
our audits was to express an opinion on the fair presentation of these financial statements. In connection
with our audits, we also considered the Commission’s internal control over financial reporting and tested
the Commission’s compliance with certain provisions of applicable laws and regulations that could have a
direct and material effect on its financial statements.

SUMMARY

As stated in our opinion on the financial statements, we concluded that the Commission’s financial
statements as of and for the years ended September 30, 2003 and 2002, are presented fairly, in all material
respects, in conformity with accounting principles generally accepted in the United States of America.

Our consideration of internal control over financial reporting would not necessarily disclose al] matters in
the internal control over financial reporting that might be material weaknesses under standards issued by
the American Institute of Certified Public Accountants. However, we noted no matters involving the
internal control and its operation that we considered to be material weaknesses.

The results of our tests of compliance with laws and regulations disclosed no instances of noncompliance
that are required to be reported herein under Government Auditing Standards, issued by the Comptroller
General of the United States, or Office of Management and Budget (OMB) Bulletin No. 01-02, Audit
Requirements for Federal Financial Statements.

The following sections discuss our opinion on the Commission’s financial statements, our consideration of
the Commission’s internal control over financial reporting, our tests of the Commission’s compliance with
certain provisions of applicable laws and regulations, and management’s and our responsibilities.

OPINION ON THE FINANCIAL STATEMENTS

We have audited the accompanying balance sheets of the Federal Energy Regulatory Commission as of
September 30, 2003 and 2002, the related statements of net cost, changes in net position, budgetary
resources, financing, and custodial activities for the years then ended.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of the Commission as of September 30, 2003 and 2002, its net cost, changes in net
position, budgetary resources, reconciliation of net costs to budgetary obligations, and custodial activities,
for the years then ended, in conformity with accounting principles generally accepted in the United States
of America.

44

imitedhabitty parnership,
1 KPMG Intemational Swiss evone

ae ontat



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Program Performance

To ensure the FERC is making strides in fulfilling its mission, the Commission
developed its Strategic Plan and Business Plan as discussed above, as well as
performance measures, in accordance with the Government Performance and
Results Act of 1993 (GPRA). Performance measures included in this overview
were drawn from the FERC’s Annual Performance Plan as submitted to Congress
with the FERC’s FY 2003 Budget Request as well as the FY 2002 Annual
Performance Report (February 2003), which assesses FY 2002 performance
efforts and highlights the goals for FY 2003 and FY 2004.

Included below is a sampling of the Commission’s most significant performance
measures by program goal for FY 2003. A complete list of the Commission’s FY
2003 performance measures and results is included at the end of this
Management’s Discussion and Analysis as other accompanying information.

The Commission is continuing to develop better performance measures to capture
the effectiveness and efficiencies of its programs based on the Commission’s new
strategic direction. The Commission’s Strategic Plan for Fiscal Years 2003-2008,
issued in September 2003, reflects a sampling of these new measures.

Performance Measurements for Energy Infrastructure
Goal: Promote a Secure, High-Quality, Environmentally
Responsible Infrastructure through Consistent Policies

Performance Measurement Performance Target Result

The Large Generator Interconnection inal
rule was issued on July 24, 2003, and

Implement generic policy on Large
Generator Interconnections and Small
Generator Interconnections

Issue final rules on both policies in FY

2003

became effective on October 20, 2003.
The Small Generator Notice of Proposed
Rulemaking was also issued on July24,

2003. The final rule will be issued in FY
2004.

One major potential barrier to obtaining adequate generation supplies is the lack
of a standard, expeditious way to connect to the transmission system. Plants are
not built if they have no economical means to deliver their power. Standardized
interconnection procedures and agreements for electric generators will encourage
needed investment, remove incentives for transmission owners to favor affiliated
generation, and encourage efficient generation and transmission siting decisions.

To address this issue, the Commission issued the Standardization of Generator
Interconnection Agreements and Procedures Notice of Proposed Rulemaking
(NOPR) in April 2002. A final rule for interconnections of large generators was
issued in the summer of 2003. In August 2002 the Commission began a separate
proceeding to specifically address generators no larger than 20 megawatts in size.



qa)

FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements

September 30, 2003 and 2002

Description of Reporting Entity

The Federal Energy Regulatory Commission (the Commission) is an independent federal agency that
oversees key operating functions of the United States’ natural gas and oil pipeline transportation, electric
utility, and hydroelectric power industries.

The Commission was created through the Department of Energy’s (DOE) Organization Act on
October 1, 1977. The Commission’s predecessor, the Federal Power Commission (FPC), established in
1920, was abolished, and the Commission inherited a significant portion of FPC’s energy agenda.

The Commission administers laws and regulations involving key energy issues. These include
transportation and sale of natural gas and oil in interstate commerce; regulation of electric utility wholesale
rates and transactions; licensing and inspection of private, municipal, and state hydroelectric projects; and
oversight of related environmental matters.

The Commission’s main legal authority is derived from the Federal Power Act of 1935 (FPA), the Natural
Gas Act of 1938, the Natural Gas Policy Act of 1978, and the Public Utility Regulatory Policies Act of
1978.

The Commission’s activities are separated into the following three segments.

Energy Infrastructure

The Commission’s overall objective is to encourage investment in the infrastructure needed to
sustain energy markets by removing roadblocks, providing cost recovery clarity and welcoming
innovative thinking about rates and use of new technology. By focusing on infrastructure, this
segment covers many of the Commission’s important traditional activities, for example, pipeline
certificates, hydropower licenses and preliminary permits, compliance activities, environmental and
other licensing conditions, dam safety inspections and most rate determinations.

Competitive Markets

Another Commission objective is to complete the transition to competitive energy markets as quickly
and comprehensively as possible. This requires the growth of certain new institutions, particularly
clearly defined and independent regional transmission organizations (RTOs), to make electric
markets work. The Commission also needs to establish balanced, self-enforcing market rules in
wholesale electric markets, and encourage continued efforts by industry groups to standardize
reliability and business practice standards, promote the use of demand-side participation in energy
markets, and establish regional transmission planning. Along with some traditional work in the area
of determinations, this segment includes work on initiatives begun in the last couple of years such as
RTOs and new policies for natural gas.

Market Oversight

The Commission also needs to ensure that competitive energy markets benefit the Nation over the
long run. The Commission must offer the public and market participants credible assurance that the
Commission will identify and remedy energy market problems to maintain just and reasonable rates.
At the systemic level, the Commission needs to recognize problems when or before they develop and
craft solutions quickly. The Commission must also be able to police individual behavior in markets

54 (Continued)


FEDERAL ENERGY REGULATORY COMMISSION
Statements of Financing
Years Ended September 30, 2003 and 2002

2003 2002
Resources used to finance activities:
Budgetary resources obligated:
Obligations incurred $ 193,377,167 196,490,146
Less: spending authority from offsetting collections (192,292,407) (184,324,676)
Obligations, net of offsetting collections 1,084,760 12,165,470
Other resources:
Imputed financing from costs absorbed by others 10,132,936 8.557,306
Transfers-out, net of appropriations received (10,772,655) (12,399,620)
Net other resources used to finance activities (639,719) (3,842,314)
Total resources used to finance activities 445,041 8,323,156
Resources used to finance items not part of the
net cost of operations
Change in budgetary resources obligated for
goods/services/benefits ordered but not yet provided 1,505,058 3.265,749
Resources that finance the acquisition of assets 183,102 2,760,932
Payments to states 2,891,743 5,507,239.
Total resources used to finance items not part of the
net cost of operations 4,579,903 11,533,920
Total resources used to finance the net cost of operations (4,134,862) (3,210,764)
Components of the net cost of operations that will not
require or generate resources in the current period:
Components requiring or generating resources in the future periods —
increase in unfunded liabilities 321,132 182,752
Components not requiring or generating resources:
Depreciation and amortization 3,855,789 3,338,473
Other 137,257 1,210
Total components of net cost of operations that will not
require or generate resources 3,993,046 3,339,683
Total net cost of operations that do not require or
generate resources in the current period 4,314,178 3,522,435
Net cost of operations $ 179,316 311,671

The accompanying notes are an integral part of these statements

52


(g)

(h)

@

7)

(k)

@

FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements

September 30, 2003 and 2002

Allowance for Doubtful Accounts

The Commission calculates its allowance for doubtful accounts using historical collection data and
specific account analysis.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The Commission capitalizes
property (other than furniture) and equipment purchases with a cost greater than $25,000 and a total
useful life exceeding two years. The Commission capitalizes furniture purchases with a cost greater
than $50,000, and commercially purchased or developed software with a cost greater than $25,000.
Depreciation is calculated based on an estimated useful life of 20 years for leasehold improvements,
10 years for furniture, 2 to 5 years for commercially purchased or developed software, and 5 years
for all remaining assets. Expenditures for repairs and maintenance are charged to program costs as
incurred,

Liabilities
Liabilities represent amounts owed by the Commission as the result of transactions or events that

have occurred as of year-end. Liabilities for which Congress has not appropriated funds are disclosed
in note 9 as liabilities not covered by budgetary resources.

Revenue Collected Under Protest

Revenue collected under protest is deferred and recorded as a liability until the protest is resolved.

Collections Due to States

The Commission disburses 50% of the fees it collects from licensees for the occupancy and use of
public lands to affected states in the year following collection. These collections are initially
deposited into the Treasury’s miscellaneous receipts fund.

Accrued Leave

Annual leave is accrued as a liability as it is earned. The accrual is reduced as leave is taken. Each
year, the balance in the accrued annual leave account is adjusted to reflect current year pay rates. To
the extent that the current or prior year appropriations are not available to fund annual leave earned
but not taken, funding will be obtained from future appropriations. Sick leave and other types of
nonvested leave are charged to expense as the leave is used.

Workers’ Compensation Payable

The Federal Employees Compensation Act (FECA) provides income and medical cost protection to
cover federal civilian employees injured on the job, employees who have incurred a work-related
occupational disease and beneficiaries of employees whose death is attributable to a job-related
injury or occupational disease. Claims incurred for benefits for the Commission’s employees under
FECA are administered by the Department of Labor (DOL) and are ultimately paid by the
Commission. The workers’ compensation payable represents unpaid billings to DOL. An actuarial
estimate of unbilled claims is recorded by DOE at the departmental level and was not separately
calculated for the Commission.

58 (Continued)


12)

(8)

(9)

FEDERAL ENERGY REGULATORY COMMISSION

Notes to Financial Statements

September 30, 2003 and 2002

Property and Equipment, Net

Property and equipment, and related accumulated depreciation at September 30, 2003 and 2002 consisted

of:
2003
Acquisition Accumulated
amount depreciation Net
Equipment $ 4,885,633 3,375,716 1,509,917
Furniture 9,070,773 7,118,665 1,952,108
Leasehold improvements 9,491,415 3,757,257 5,734,158
Software 11,321,496 9,986,021 1,335,475
Total $ 34,769,317 24,237,659 10,531,658
2002
Acquisition Accumulated
amount depreciation Net
Equipment $ 4,979,504 3,077,125 1,902,379
Furniture 9,070,773 6,211,587 2,859,186
Leasehold improvements 9,491,415 3,282,687 6,208,728
Software 11,246,911 8,012,859 3,234,052
Total $ 34,788,603 20,584,258 14,204,345
Building Leases

The General Services Administration (GSA) enters into lease agreements for government buildings and
maintains those lease agreements. The Commission pays GSA a standard level users charge for the annual
rental of building space. The standard level users charge approximates the commercial rental rates for
similar properties. The Commission is not legally a party to any building lease agreements; therefore, the
Commission does not disclose future minimum lease payments on buildings.

Liabilities Not Covered by Budgetary Resources

Liabilities not covered by budgetary resources at September 30, 2003 and 2002 consisted of:

Intragovernmental — workers’ compensation payable
Accrued leave

Total

62

2003 2002

521,508 422,836
9,760,361 9,537,901
10,281,869 9,960,737

(Continued)


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Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Performance Measurements for Management Initiatives

Performance Measurement Performance Target Result

Number of new hires from recruitment Attract new talent through targeted

program

Exceeded target level by2%. Of the 60
permanent hires in targeted positions in
FY 2003, 31 were entry level recruits.
Met the Commission's need br new talent
through targeted recruitment.

recruitment, with 50% at entry levels

The Commission is focusing its human capital activities on targeted recruiting,
retraining, and the rightsizing and reallocation of staff based upon our Human
Capital Plan. These critical areas will determine how efficiently and effectively
FERC meets current objectives and prepare for future ones.

As part of the workforce planning process, the Commission has developed a
Human Capital Plan. In that plan, each office identified current and desired skills
requirements necessary to achieve the strategic goals of the Commission. The
plan identifies gaps in human resources by outlining the potential retirement wave
facing the Commission, as well as workforce profiles for FERC and each program
office. The plan provides data on the age and service of the Commission’s leaders
and also gender and diversity composition of the workforce. Based on statistical
data on FERC’s workforce, action plans have been established and provide the
foundation for recruitment, succession planning and employee development.

Additionally, to meet the Commission’s staffing requirements, FERC is
enhancing its recruiting and training processes, finding new ways to retain needed
talent, and aligning staff assignments with its most important strategic goals. The
Commission has initiated an aggressive entry-level recruitment effort to bring new
talent into the Commission. Since its inception at the end of FY 2001, this
program has brought 87 new employees into the Commission with a variety of
skills including accounting, auditing, engineering, economics, and law. The
Commission has supplemented this effort with a reinvigorated summer intern
program, designed to create a pool of future employees who can learn how the
Commission works while demonstrating their skills and potential. In 2003, 42
summer interns worked at the Commission; 40 worked at FERC in summer 2002.

22



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Performance Measurements for Management I ives

FY 2003

Performance Measurement

Performance Target

Result

Number of new hires from recruitment
program

Attract new talent through targeted
recruitment, with 50% at entrylevels

Exceeded target level by2%. Of the 60
permanent hires in targeted positions in
FY 2003, 31 were entry level recruits.

Met the Commission's need br new talent
through targeted recruitment.

New staff from summer inten program

Hire 30% of participants into permanent
positions

Exceeded target level by 3%. Of the 33
summer interns eligible to be hired, 11
were hired into permanent positions.

Increase diversity of staff in high grades

Continue increasing diversityin GS-14,
GS-15 and SES positions

Increased the number of women and
minorities in GS-14, GS-15 and SES
positions by 35 (18%). Of the 35, 13
(37%) were minorities.

Encourage knowedge sharing

Conduct informal training workshops

Conducted 184 informal training
workshops in 5 offices.

Improved executive performance

Implement 360 degree assessment of
senior staff

Completed 360 degree assessments br
429 supervisors and managers, including
senior staff. Completed targeted
individual executive coaching sessions.

Percentage of transactions accepted
electronically

95% of transactions accepted
electronically

57% of all documents received were
eligible to be e-fled; 57% of the
documents eligible to be e-fled were
actually e-filed; 33% of all documents
received (paper and electronic) were e-
filed. We expect to have 95% of
transactions eligible to be accepted
electronically in December 2003.

Percentage of e-issuance versus paper

90% of issuances made electronically

100%

Improved Web site

Redesigned Web site

‘The redesigned web site, sponsored by
the Office of External Affairs, was
deployed in August, 2003.

99% availability

The site was 99% available in FY 2003
based on contract performance
evaluation server availability reporting by
FERC IT Support Services contractor.

Timeliness of getting public documents
online

99% within 24 hours of receipt or
issuance

99% of FERC issuances are available
online within 24 hours or less.

99% of electronic submissions to FERC
are published within 24 hours of review by
the Office of the Secretary.

99% of paper submissions to FERC are
published within 48 hours.

Network availability

99%

File and Printer servers (where all Office
‘Automation applications and network
drives reside) were available for use
99.93% of the Prime Period of
Maintenance (PPM). The PPM is defined
as the 11 hour period fom 7:00 a.m. to
6:00 p.m. on all days the FERC is open
for business.

40



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Full Cost Recovery

The Commission collects the full cost of its operations from annual charges and
fees authorized by the FPA, Omnibus Budget Reconciliation Act of 1986 and
other laws. Congress annually adopts a budget appropriation authorizing the
Commission to use funds from the Treasury to meet operating expenses. The
Commission retums to the Treasury all revenue from annual charges and fees;
therefore, there is no direct taxpayer funding.

Organizational Structure

Approximately 1,214 full time equivalents carried out the Commission’s mission
in FY 2003 using a budget of $192 million.

Below is a list of offices within the agency as well as a short description of the
role each plays in the Commission’s operations. An organizational chart for the
FERC, as of September 30, 2003, is included at the end of this section.

Office of Energy Projects (OEP) — Fosters economic and environmental benefits
for the nation through the approval and oversight of hydroelectric and natural gas
pipeline energy projects that are in the public interest. Included in OEP are
FERC’s five regional offices located in Atlanta, Georgia; Chicago, Illinois; New
York, New York; Portland, Oregon and San Francisco, California.

Office of Markets, Tariffs and Rates (OMTR) — Deals with matters involving
markets, tariffs and rates relating to electric, natural gas and oil pipeline facilities
and services.

Office of Market Oversight and Investigation (OMOI) — Oversees and assesses the
operations of the nation’s gas, oil pipeline and electricity markets.

Office of Administrative Law Judges (OALJ) — Resolves contested cases as
directed by the Commission effectively, efficiently and expeditiously, either
through impartial hearing and decision or through negotiated settlement, ensuring
that the rights of all parties are preserved.

Office of the General Counsel (OGC) — Provides legal services to the
Commission. OGC represents the Commission before the courts and Congress
and is responsible for the legal phases of the Commission’s activities. Included in
OGC is Dispute Resolution Service (DRS). DRS assists participants achieve
resolution of disputes through consensual decision making.

Office of Administrative Litigation (OAL) — Represents the public interest in
administrative proceedings at the Commission. OAL provides testimony, exhibits


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

Percentage of hydropower licenses
approved within specified time frames

75% of licenses approved within the
following time frames:

< ALP median case, less than 16
months

< Traditional median case, less than
43 months

‘= 100% of the ALP, or collaboratively
prepared license applications, were
completed within 15 months when
external factors (ie., water quality
certificate, Coastal Zone Management
reviews) did not delay processing. OF
the pending cases in which
collaboratively prepared amendments
to license applications were filed and
were not delayed by external factors,
80% were completed within 16 months
after receipt of the settlement.

nN

For traditionally prepared license
applications for which no external
factors contributed to the delay, 77% of
the cases were processed in less than
43 months.

Inspect each major onshore pipeline
project at least once everyfour weeks
during ongoing construction activity

100% of qualifying projects inspected per
established schedule

All 7 major onshore pipeline projects were
inspected at least once every4 weeks
during ongoing construction activity

Increase the percentage of hydropower
licenses issued using ALP

2% increase over FY 2002

13% increase over FY 2002

Evaluate and improve the effectiveness of
required environmental enhancement and
mitigation measures in hydropower
licenses

Conduct 5 site visits

Conducted 5 site visits and evaluated the
effectiveness of the targeted
environmental mitigation measures.

Hold 2 regional meetings with
stakeholders

Held 3 regional outreach meetings with
stakeholders, i.e., 2 shoreline
management outreach meetings in
Wisconsin and South Carolina, and a
water quality mitigation effectiveness
outreach meeting in New York

Disseminate 2 environmental
effectiveness reports

Disseminated 2 environmental
effectiveness reports: “Mitigation
Effectiveness Studies at the Federal
Energy Regulatory Commission: Final
Water Quality Report’; and “Mitigation
Effectiveness Studies at the Federal
Energy Regulatory Commission: Draft
Fish Passage Report’.

Percentage of high- and significant-
hazard-potential dams inspected annually

100% of high- and significant-hazard-
potential dams inspected annually

100% of high- and significant-hazard-
potential dams were inspected.

Percentage of high- and significant-
hazard-potential dams meeting all current
structural safety standards

Percentage of high- and significant-
hazard-potential dams meeting alll current
structural safety standards remains
uniformly high

95% of high- and significant-hazard-
potential dams met all current structural
safety standards

Percentage of high- and significant-
hazard-potential dams in compliance with
EAP requirements

100% of qualifying dams in compliance
with EAP requirements

100% of qualifying dams were in
compliance with EAP requirements

Update and add new chapters to the
Engineering Guidelines, as appropriate

Issue new or revised Engineering
Guidelines chapters, as appropriate

Developed and issued a new Engineering
Guidelines chapter on the Dam Satty
Performance Monitoring Program.

33



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

many parts of the country are already implementing many key market design
elements. For example, in the Northeast where most market design elements are
already in place and the region is continuing to move toward a common market
design across all three ISOs, New England implemented locational marginal
transmission pricing in early 2003. California, the Electric Reliability Council of
Texas (ERCOT), and the Midwest are also working to implement most of the
market design elements. Even in regions that do not yet have functioning
independent system operators or RTOs, RTO proposals have incorporated most of
the major principles in the proposed rule, particularly in the Northwest (RTO
West) and parts of the Southeast (SeTrans).

Most regions have implemented or have committed to implement key elements of
wholesale market design, including independent operation of the transmission
grid, regional transmission planning, common energy and ancillary service
markets and a single transmission tariff for the region, market monitoring and
market power mitigation, locational pricing and congestion management. We
anticipate that RTOs will continue to develop over the next several years
incorporating the key features of FERC’s wholesale market platform, producing
better wholesale electric markets and better protection against failure.

Performance Measurements for Market Oversight
Goal: Protect Customers and Market Participants through Vigilant
and Fair Oversight of the Transitioning Energy Markets

Performance Measurement Performance Target Result

Enhance institutional capability for
overseeing energy markets

Establish the Office of Market Oversight

and Investigation (OMO!) Complete

Reported winter 2002-2003 and summer
Publish regular summer and winter 2003 assessments in formal

‘Seasonal Market Assessments presentations to the Commission and
published on Commission's website.

Developed 5 standard metrics br electric.
markets that agreed with market
monitoring units.

Develop metrics/indicators of gas and
electric market performance measures

At the center of the Commission’s oversight effort is the OMOI. Organized in
August 2002, OMOI provides an authoritative understanding of energy markets to
the Commission and the public.

19



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Asset Summary (In millions)

Asset FY 2003 FY 2002
Fund Balance with Treasury $87.7 $93.9
‘Accounts Receivable, Net : $25.3 $14.5
Property, Plant, & Equipment, Net $105 $14.2
Due from Regulated Entities S151 0

'Total Assets

Liabilities Summary (In millions)

‘Liabilities

$138.6 $122.6

The Fund Balance with Treasury represents the Commission's largest asset of
$87.7 million as of September 30, 2003, a decrease of $6.2 million from the FY
2002 year-end balance. This balance represents appropriated funds, collected
license fees, and other funds maintained at the U.S. Treasury to pay current
liabilities.

Accounts Receivable, Net, as of September 30, 2003, were $25.3 million and
includes an offsetting allowance for doubtful accounts of $7.6 million.

The value of Property, Plant, and Equipment, Net, was $10.5 million. The
majority of the balance is comprised of equipment, furniture, leasehold
improvements, and computer hardware and software.

The $15.1 million associated with the Duc from Regulated Entities line item
represents the adjustment made to accrue revenue which will be billed next year
for the excess of the Commission’s costs over estimated billings.

The Commission's liabilities were $116.3 million as of September 30, 2003. The
Liabilities Summary table shows an increase in total liabilities of $16.8 million
from the FY 2002 year-end balance of $99.5 million.

FY 2002

FY 2003
|Accounts Payable : ; ‘87.9 : S118 |
Federal Employee Benefits 55.5 $10.0
Other Liabilities : $102.9 $77.7
‘Total Liabilities $1163 $99.5

25


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

a quick, effective, and increasingly popular resource for addressing informal
disputes. By the close of the third quarter of FY 2003, the Hotline had fielded
241 calls, as compared to 249 calls through all of FY 2002. In addition, the
Commission's administrative law judges may serve as settlement judges or
mediators, thereby offering another alternative to litigation that allows the parties
to exercise greater control over the outcomes.

Performance Measurement

Performance Target

Result

Timeliness of formal complaints.
resolutions

Complete 80% within target time fames
for various paths for resolution of
complaints as specifed by the
Commission

Office of Administrative Law
Judges/Office of Administrative Litigation
(OALJ/OAL): Issued sixinitial decisions
on complaints set for hearing. 84% were
completed within expected targets (4 out
of 6). OALJ also handled 17 additional
complaints; 12 settled; 5 were either
returned to the Commission fr further
action or set for hearing before a judge
(no targets were set for those cases while
in settlement mode).

Percentage of cases in time fames
< Litigated cases reaching initial decision

< 95% of simple litigated cases within
206 days (29.5 weeks)

< 95% of complex litigated cases within
329 days (47 weeks)

< 95% of exceptionally complex cases,
441 (63 weeks)

< 95% of regular complaints, 60 days

Litigated Cases - OALJ/OAL:

< Track | Cases: Standard processing
time = 29.5 weeks. FY 2003 Average
processing time = 24.3 weeks

< Track Il Cases: Standard processing
time = 47 weeks. FY 2003 Average
processing time = 38.4 weeks

< Track Ill Cases: Standard processing
time = 63 weeks. FY 2003 Average
processing time = 46.2 weeks

Regular Complaints - OGC: 97%

In some cases, the best approach to a possible abuse of market power will be
through our formal litigation process. This is especially true when it is important
to establish, in open proceedings, the cxact facts of a case. The openness of the
process can also promote credibility in important cases. Since litigation can be
costly and time-consuming, we are always seeking to streamline the process as
much as possible. The Commission has a centralized litigation staff to guide the
efficient handling of the unique, complex issues that arise in a pro-competitive
environment, and speed their resolution.

241



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Performance Measurements for Competitive Markets (Goal 2)

FY 2003

Performance Measurement

Performance Target

Result

Timely processing of RTO filings

Benchmarks to be established in FY 2003

Upon review, we have concluded that it is.
impractical to put to put into efect an

a
di
nl
a

Wverage processing time fo filings as
issimilar in scope, complexity, and

umber of issues needing resolution as
re RTO filings. For example, it took 26

months to grant RTO status to PJM
(Pennsylvania-New Jersey-Maryland); 11
months for Midwest ISO.

‘A sampling of other RTO filings or

pe

\etitions for declaratory orders also

revealed significant variances in

pr

<

rocessing times, as shown below:

SeTrans — Filed on 6/27/02;
Commission issued initial order on
10/9/02 (less than 4 months).
(SeTrans has not yet formally
requested authority to form, or to
operate an RTO.)

RTO West - filed on 10/16/00; first
order was issued on 4/26/01 (over 6
months); order on Stage 2 issued on
9/18/02 (23 months).

WestConnect - filed on 10/16/01;
order issued on 10/10/02 (12 months)
(Neither RTO West nor WestConnect
has filed a Section 205 requesting
RTO status).

Cal ISO - filed on 6/1/01; no order
has been issued in this proceeding,

Percentage of country covered by
approved RTOs or ISOs (as measured by
percentage of electricity load)

ity load in regions where
we have jurisdiction

59% of load in jurisdictional areas under

a

n RTONISO.

Timely processing of proposed
rulemakings adopting consensus
industry-wide business practice and
reliability standards (North American
Energy Standards Board (NAESB) and
North American Electric Reliability
Council (NERC))

Benchmarks to be established in FY 2003

Target is established for FY 2004 as
follows: Non-controversial rulemakings
completed within 9 months/controversial
rulemakings completed within 12 months

o

f external party action.

< During October 2002, NAESB fled
natural gas industry standards with
the Commission. The Commission
codified the standards, on which all
segments of the natural gas industry
had reached consensus, in its
Regulations in a Final Rule issued in
March 2003, five months after
submission.

In June 2003, NAESB fled
creditworthiness standards on which
all segments of the natural gas
industry participants were able to
reach consensus; NAESB also
reported additional proposed
creditworthiness standards on which
consensus was not reached. Action
is pending on the creditworthiness
standards.

34



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Based on the Commission’s experience in the natural gas industry with the North
American Energy Standards Board (NAESB), the best way to develop reliability
and business practice standards is for them to be developed by industry experts,
with the Commission resolving issues those experts cannot agree on. The
Commission was instrumental in the formation of the Wholesale Electric
Quadrant (WEQ) of NAESB as the group responsible for addressing business
practices in this area. The Commission is also working closely with the North
American Electric Reliability Council (NERC) on reliability standards. At the
urging of the Commission, NAESB and NERC have developed procedures to
coordinate business practice and reliability standards development, and to
coordinate their efforts closely with the RTOs and Information System Operators
(ISOs) that manage and operate the grid day-to-day. The Commission
periodically issues orders incorporating by reference business practice standards
developed by NAESB. FERC will continue to strengthen its relationship with
these organizations and rely on their expertise, where possible, to address
emerging business practice standards and reliability issues critical to efficient
operation of markets.

In addition to the WEQ, FERC is working with NAESB’s Wholesale Gas
Quadrant (WGQ) to develop creditworthiness standards for shippers on natural
gas pipelines which will lower information costs to shippers and increase market
efficiency. Input from both shippers and the pipelines have proven crucial to the
Commission’s understanding of the credit issues faced by industry participants.

Performance Measurement

Performance Target Result

In FY 2002, 19 complaints were filed
against RTOs/ISOs (ISO-New England
10, New York ISO 5, California ISO 4).

In FY 2003, 6 complaints were filed
against RTOs/ISOs (ISO.New
England/New England Power Pool 3,
New York ISO 14, California ISO tand
Pennsylvania-New Jersey-Maryiand 1).

While complaints are fewer when
comparing FY 2002 and 2003, we do not

Establish RTOs/ISOs with sufficient
market monitoring and mitigation
measures in place

Fewer complaints about rates in RTOs
and ISOs filed with the Commission

expect this to be the case in the fiture;
rather, we anticipate more complaints as
numbers of participants increase, and as
RTOs mature beyond current stages.

We will review this performance target for
appropriateness. Focusing on the
number of complaints about rates in
RTOs does not highlight the fact that
market monitoring units exst in all
RTOs/ISOs and that they work together
with the Commission to evaluate market
performance and identify problems with
proposed and existing market rules,
market operations, and individual
participant behavior.



FEDERAL ENERGY REGULATORY COMMISSION

Notes to Financial Statements
September 30, 2003 and 2002

(4) Fund Balances with Treasury

Fund balances with Treasury at September 30, 2003 and 2002 consisted of:

Fund balances:
Appropriated funds
Revenue collected under protest
Special receipts fund
Other

Total

Unobligated budgetary resources:
Available
Unavailable

Obligated balance not yet disbursed

Total

(5) Accounts Receivable

2003 2002

$ 27,526,833 47,770,932
48,477,803 29,062,800
7,222,919 7,222,919
4,476,579 9,864,071
$ 87,704,134 93,920,722
$ 3,524,264 1,762,681
63,224 42,624
84,116,646 92,115,417

$ 87,704,134 93,920,722

Entity and nonentity govemmental accounts receivable at September 30, 2003 and 2002 consisted of:

Entity

Uncollected billings
Allowance for doubtful accounts

Total entity accounts
receivable, net

Nonentity

Uncollected billings
Allowance for doubtful accounts

Total nonentity
accounts receivable, net

Total accounts receivable,
net

2003

Annual

charges

(note 6) Other Total
13,516,825 101,694 13,618,519
(4,875,976) (27,796) (4,903,772)

8,640,849 73,898 8,714,747
18,543,962 253,962 18,797,924
(2,171,280) (66,708) (2,237,988)
16,372,682 187,254 16,559,936
25,013,531 261,152 25,274,683

60 (Continued)


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Making Markets Work

Immediate Responses

The Commission responded to the crisis in Westem energy markets by mitigating
unjustifiably high electric prices and ensuring that power sellers did not withhold
supplies to drive prices up. These measures provided customers with relief from
extreme spot market prices. Several of the Commission’s efforts in this regard are
not yet completed and require additional work in the future.

For example, the Commission has taken important steps to provide refunds to
customers for purchases made in the organized spot power markets in California
from October 2, 2000 through June 20, 2001. In an order issued in March 2003,
the Commission adopted many findings proposed by a Commission
Administrative Law Judge (ALJ) regarding refunds, and also revised the formula
for calculating the refunds, which will increase refunds significantly compared to
the ALJ’s recommendation. While most of the Commission’s work on the refund
issues has been completed, certain steps are still pending and are planned for
completion soon.

The Commission responded to allegations of market manipulation by Enron and
others by directing its staff to undertake an exhaustive, year-long investigation,
not only of Enron but also of all other market participants in the West. The initial
phase of the investigation culminated in March 2003 with staff's Final Report on
Price Manipulation in Western Markets. In the Final Report, staff found clear
evidence of market manipulation in the Western markets.

Based on staff’s Final Report, the Commission has taken measures to prevent
such behavior in the future. For instance, in June 2003, the Commission took the
unprecedented step of revoking Enron companies’ authorization to trade in
electric and gas markets at market-based rates. The Commission also directed
over 60 power trading companies to explain why their trading practices were not
manipulative and submit all relevant information pertaining to specific actions
and transactions during the California energy crisis. This litigation will take time
to complete, unless settlements are reached.

Also in June 2003, the Commission proposed to amend electric power sellers’
market-based rate tariffs and gas sellers’ blanket certificate authority to include
clear “rules of the road” that prohibit anticompetitive behavior. These proposals
identify more precisely the transactions and practices that would be prohibited.
Under the proposed rules, if a seller engages in prohibited behavior, the seller
could be required to disgorge its unjust profits and could lose its market-based
rate authority or blanket certificate authority. These rules will help restore
confidence in the Nation’s energy markets. The Commission is awaiting public
comment on these proposals before final action.


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Other Accompanying Information:
Performance Measurement Results

Performance Measurements for Energy Infrastructure (Goal 1)

FY 2003

Performance Measurement

Performance Target

Result

Percentage of natural gas pipelines with
approved Order No. 637 compliance
filings

100% of pipelines subject to Order No.

By the end of FY 2003, the Commission
issued orders approving and establishing
effective dates for 92 out of a total 94
(98%) pending Order No. 637 compliance
filings. The two pipeline filings that were
not completed were Northern Natural Gas
Pipeline Company, Docket No. RPOO-
404, and El Paso Natural Gas Co.,
Docket No. RP00-336. The Northern
Natural Order is scheduled for the
October 22, 2003 Commission agenda.
Action on the Order No. 637 compiance
issues in El Paso are delayed pending
resolution of pre-existing capacity
allocation issues. Those allocation issues
need to be resolved before the
‘Commission can move frward on the
Order No. 637 compliance issues.

Statutory cases by workload category

All cases competed bystatutory action
date

Of the nearly 3,000 statutory items whose
due date fell in FY 2003, 99.7% were
completed by the statutory action date.

Merger and qualifying facilities workload
(regulatory cases)

80% of cases completed byregulatory
deadline

Approximately 325 QF filings were
received in FY 2003. Of these 325, 9
filings were applications for Commission
QF certification or re-certification. The
Commission completed 100% of the
applications for certification or re-
certification within 90 days specified in the
Commission's regulations (18 C.FR. §
202.207(b)(3)(2003)). Orders were
issued in response to all 9 applications, 3
‘of which were issued pursuant to
delegated authority and 6 of which were
Commission issued orders. No merger
applications were received in FY 2003.

Number of cases requiring additional
remedial action

Less than 20% ofall cases processed in
FY 2003 require additional remedial
action

The Commission received no merger
applications in FY 2003; therefore, we
have no results to report fr this
performance measure.

HM



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Systems, Controls, and Legal Compliance

This section provides information on the Commission's compliance with the:

. Federal Managers' Financial Integrity Act of 1982

. Federal Financial Management Improvement Act of 1996
. Prompt Payment Act

. Debt Collection Improvement Act of 1996

Federal Managers' Financial Integrity Act

The Federal Managers’ Financial Integrity Act of 1982 (Integrity Act) mandates
that agencies establish controls that reasonably ensure that: (i) obligations and
costs comply with applicable law; (ii) assets are safeguarded against waste, loss,
unauthorized use, or misappropriation; and (iii) revenues and expenditures are
properly recorded and accounted for. This act encompasses program, operational,
and administrative areas as well as accounting and financial management. The act
requires the Chairman to provide an assurance statement on the adequacy of
management controls and conformance of financial systems with Government
wide standards.

Integrity Act Statement

During Fiscal year 2003, the Commission responded to the challenge of a changing
energy industry as it becomes more competitive. Our strategic plan contains four primary
Commission goals which reflect the Commission’s vision of “dependable, affordable
energy through sustained competitive markets.” We are progressing on each goal and are

tracking our achievements so that the real benefits of competition to consumers and the
industry are not delayed. Our goals are: (1) Promote a secure, high quality,
environmentally responsible infrastructure through consistent policies; (2) Foster
nationwide competitive energy markets as a substitute for traditional regulation; (3)
Protect customers and market participants through vigilant and fair oversight of the
transitioning energy markets; and (4) Strategically manage agency resources.

To accomplish our goals, we must manage our resources efficiently and integrate our
budget, business plan, performance measures, and management controls to improve
performance and accountability. We have developed a business plan that outlines
detailed objectives and resources for each goal and through this plan we track our
progress. Problems that impede our progress continue to be brought to the attention of
management and resolved within the Commission at the appropriate level. The auditors’
FY 2002 report on the Commission’s internal contro] structure disclosed no material
weaknesses or reportable conditions and no instances of noncompliance with laws and
regulations. We will continue to maintain a strong management control system.

Pat Wood, III

Chairman

Federal Energy Regulatory Commission
September 10, 2003

28


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Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

and studies on electric rate, transmission, open access and restructuring cases and
in natural gas rate-design cases.

Office of External Affairs (OEA) ~ Responsible for all external communications
with the public and media for the Commission.

Office of the Secretary (OSEC) — Serves as the official focal point through which
all filings are made for proceedings before the Commission.

Office of the Executive Director (OED) — Provides administrative support services
to the Commission including human resources, procurement, organizational
management, financial, logistics, information technology and other.


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

As RTOs/ISOs are established, each will have a Market Monitoring Unit (MMU).
Five MMUs are in place today. MMUs have detailed knowledge of the markets
they monitor and tailor their monitoring programs to deal with specific
characteristics of their own markets as well as generic issues. Thus they can
identify developing problems rapidly and will be the first line of defense against
market problems. However, the MMUs may have limited understanding of
markets outside their area of operations, and may know relatively little about other
markets (including financial and gas) that affect their market arcas. FERC’s
market oversight function should provide the broader view of how markets
interact, inform MMUs and be informed by them.

Performance Measurement

Performance Target Result

During FY 2003, four RTOs/!SOs
(California ISO, New York ISO (NYISO),
Pennsyivania-New Jersey-Maryland
(PJM), and ISO-New England (ISO-NE))
operated demand response programs,
and one RTO which does not yet run any
energy market (Midwest ISO) did not.
Since these four RTOs/ISOs operated
demand response programs in FY 2002,

RTO/ISO wholesale market design
includes demand-response features

Measure increasing percentage of
operating RTOs and ISOs with demand
response programs

there was no increase in the percentage
of operating RTOs and ISOs during FY
2003. Nevertheless, throughout the year,
FERC has encouraged and approved

improvements in both the number and
design of demand response in PJM,
NYISO and ISO-NE. For example, FERC
supported the New England Demand
Response Initiative, a broad stakeholder
process in New England, to provide a
detailed assessment of SO demand
response programs and to develop
recommended improvements.

Energy markets must allow responses from both the supply and the demand side
of the industry. Historically, industry has assumed most demand is fixed, and has
priced power to most customers at constant rates during fairly long periods of time
(i.e., a month or year). The result is that customers have seldom seen prices
change in the short run and have had little if any incentive to change their usage to
meet the true costs of producing power at any given time. The lack of short-term
demand response was a major contributing factor to the problems in western
electricity markets, just as individual customer decisions to conserve electricity
were a significant part of the solution to the problem. In the future, electricity
markets at both the wholesale and retail levels will require a full demand response
to better balance supply with demand and reduce supplier market power.

Although states have direct jurisdictional authority over many demand-side
measures, the Commission is working to encourage more demand response by:

< Ensuring that wholesale markets facilitate equal participation by demand-
side and supply-side resources;

17



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

needs to establish balanced, self-enforcing market rules in wholesale electric
markets, and encourage continued efforts by industry groups to standardize
reliability and business practice standards, promote the use of demand-side
participation in energy markets, and establish regional transmission planning.
Along with some traditional work in the area of rate determinations, this goal
furthers work on initiatives begun in the last couple of years such as RTOs and
new policies for natural gas.

3. Market Oversight. Goal: Protect Customers and Market Participants
Through Vigilant and Fair Oversight of the Transitioning Energy Markets.
This goal ensures that competitive energy markets benefit the Nation over the long
run. FERC must offer the public and market participants credible assurance that
FERC will identify and remedy energy market problems to maintain just and
reasonable rates. At the systemic level, FERC needs to recognize problems when,
or before, they develop and craft solutions quickly. The Commission must also be
able to police individual behavior in markets much more effectively than in the
past. Work toward this goal also includes more traditional work, such as some
aspects of litigation, dispute resolution, complaints, mergers and auditing.

The Commission has restructured its Strategic Plan by reclassifying its Resource
Management program from a Commission goal to management initiatives
supporting all goals and objectives. The Commission’s budget request has
followed suit by allocating its funding requests among the three programs listed
above, with funding for management initiatives allocated among these programs.
Management initiatives include functions such as enhancing the talents and skills
of the staff through recruitment and training, building effective, customer-friendly
information technology (IT) services, supporting the Commission with logistics
and financial services and strengthening strategic management processes.
Management initiatives also include the Commission’s communication, outreach
and collaboration efforts.

Business Plan

FERC adopted its first annual Business Plan in September, 2001, detailing the
Commission’s activities and resource allocations to meet the Strategic Plan’s
goals and objectives. Developing the Business Plan is an iterative process; it is
helping to identify which activities move the Commission toward particular goals
and objectives. The Business Plan enables management to tie budget resources to
Commission activities. To build in accountability, the Business Plan also
identifies responsible offices, due dates and priorities. Future iterations will better
refine priorities, identify gaps in implementation, organize resource allocation,
and ensure the results the Commission wants to see by allowing FERC to more
accurately compare estimated to actual resource use by strategic goals.


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Performance Measurement Performance Target Result

57% of all documents received were
eligible to be e-filed; 57% of the
documents eligible to be e-fled were

Percentage of transactions accepted 95% of transactions accepted actually e-filed; 33% of all documents

electronically

electronically received (paper and electronic) were e-
filed. We expect to have 95% of
transactions eligible to be accepted
electronically in December 2003

Percentage of e-issuance versus paper | 90% of issuances made electronically 100%

Timeliness of getting public documents 99% within 24 hours of receipt or

online

99% of FERC issuances are available
online within 24 hours or less.

99% of electronic submissions to FERC
are published within 24 hours of review by
issuance the Office of the Secretary.
99% of paper submissions to FERC are
published within 48 hours.

The Commission has made major advances in its use of electronic filing in the
past two years. In April 2002, the Commission initiated the FERC On-Line
project to achieve the President’s Management Agenda initiatives of expanding
electronic government (e-government). Citizens and businesses can make
electronic submissions of comments, motions, briefs, and other documents related
to proceedings before the Commission. E-Filing will be extended to all
documents submitted in Commission proceedings, reducing the cost and time for
making a filing for our customers while reducing the cost and handling time for
FERC to receive and process the document. Since November 2000, the
Commission has received 22,000 documents electronically. Companies regulated
by the Commission have also filed 15,000 forms and reports electronically. More
than half of the documents received annually can be filed electronically.

Performance Measurement Performance Target Result

Improved Web site

The redesigned web site, sponsored by
Redesigned Web site the Office of External Affairs, was
deployed in August, 2003.

99% availability The site was 99% available in FY 2003,

In FY 2003, the Commission completed a comprehensive redesign of its internet
web site, FERC. gov, to make it more useable for: energy practitioners;
landowners and citizens affected by natural gas and hydroelectric projects; and the
press, financial community, and Commission staff. FERC improved server
reliability, providing a powerful search engine, making it easier to navigate its
Internet site, making notices available to the public within minutes of issuance,
and ensuring the quality and usefulness of the information disseminated through
the website.

23



FEDERAL ENERGY REGULATORY COMMISSION

Fiscal Year 2003 Annual Financial Report


bbl

Auditors’ Responsibilities

Our responsibility is to express an opinion on the fiscal year 2003 and 2002 financial statements of the
Commission based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America, the standards applicable to financial audits contained in
Government Auditing Standards and OMB Bulletin No. 01-02. Those standards and OMB Bulletin No. 01-
02 require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement.

An audit includes:

¢ Examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements;

¢ Assessing the accounting principles used and significant estimates made by management; and
¢ Evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In planning and performing our fiscal year 2003 audit, we considered the Commission’s internal control
over financial reporting by obtaining an understanding of the Commission’s internal control, determining
whether internal controls had been placed in operation, assessing control risk, and performing tests of
controls in order to determine our auditing procedures for the purpose of expressing our opinion on the
financial statements. We limited our internal contro] testing to those controls necessary to achieve the
objectives described in OMB Bulletin No. 01-02 and Government Auditing Standards. We did not test all
internal controls relevant to operating objectives as broadly defined by the Federal Managers’ Financial
Integrity Act of 1982. The objective of our audit was not to provide assurance on internal control over
financial reporting. Consequently, we do not provide an opinion thereon.

As required by OMB Bulletin No. 01-02, with respect to internal control related to performance measures
determined by management to be key and reported in the Management’s Discussion and Analysis, we
obtained an understanding of the design of significant internal controls relating to the existence and
completeness assertions. Our procedures were not designed to provide assurance on internal control over
performance measures and, accordingly, we do not provide an opinion thereon.

As part of obtaining reasonable assurance about whether the Commission's fiscal year 2003 financial
statements are free of material misstatement, we performed tests of the Commission’s compliance with
certain provisions of laws and regulations, noncompliance with which could have a direct and material
effect on the determination of financial statement amounts, and certain provisions of other laws and
regulations specified in OMB Bulletin No. 01-02, including certain provisions referred to in FFMIA. We
limited our tests of compliance to the provisions described in the preceding sentence, and we did not test
compliance with all laws and regulations applicable to the Commission. Providing an opinion on
compliance with laws and regulations was not an objective of our audit and, accordingly, we do not
express such an opinion.

Under OMB Bulletin No 01-02 and FFMIA, we are required to report whether the Commission’s financial
management systems substantially comply with (1) Federal financial management systems requirements,
(2) applicable Federal accounting standards, and (3) the United States Government Standard General
Ledger at the transaction level. To meet this requirement, we performed tests of compliance with FFMIA
Section 803(a) requirements.

46


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

In 2003, we issued a Proposed Pricing Policy for Efficient Operation and
Expansion of Transmission Grid. This proposed policy will reward transmission
owners for joining regional transmission organizations (RTOs) and turning their
assets over for RTO operation by providing them with the opportunity to earn
higher rates of return on assets than would otherwise be available. It also would
reward transmission owners for forming independent transmission companies or
taking other measures which make their transmission facilities operationally
independent from the activities of market participants. It would also reward
transmission owners for pursuing additional measures to operate and expand the
transmission grid efficiently in ways that solve RTO-identified system needs using
either traditional transmission investments or innovative technologies. Further
Commission action is needed to implement this proposed policy.

Energy Markets

Crises can erupt quickly in energy markets, especially in electricity markets, and
we are acting to provide a much more stable long-term platform for these markets.
Two initiatives are especially important:

+ Wholesale Power Market Platform; and
+ Market Oversight and Investigation.

Wholesale Power Market Platform. in July 2002, after ten months of
unprecedented outreach and dialogue with state commissions, the public, and
customer groups, the Commission issued a market design proposal. Since that
time, the Commission has continued its extensive outreach efforts with interested
parties and has reconsidered several aspects of its proposal to address concerns
raised by various stakeholders. In a White Paper on Wholesale Power Market
Platform, issued on April 28, 2003, the Commission emphasized its strong
commitment to customer-based, competitive wholesale power markets, while
underscoring an increasingly flexible approach to regional needs and outlining
step-by-step elaborations of its key market design proposal.

The Wholesale Power Market Platform proposal advances the competitive
markets envisioned by two earlier Commission orders, Order Nos. 888 and 2000.
Order No. 888, issued in 1996, opened up the Nation’s transmission grid through
open access transmission tariffs. In 1999, the Commission issued Order No.
2000, which encouraged the creation of RTOs. RTOs bring about increased
efficiency through improved grid management and increased customer access to
competitive power supplies.

The proposal is designed to establish a customer-based wholesale power market
platform. Among its customer-focused objectives are:

+ Reliable service — sufficient power to meet demand;
- Fairness — transmission and power at just and reasonable rates;


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

In addition, we uncovered instances in which unregulated companies took loans
from regulated subsidiaries to the detriment of ratepayers. We are currently
examining ways to ensure that customers do not suffer from such behavior. For
example, in June 2003, we implemented an Interim Rule requiring Commission-
regulated companies to maintain documentation when they share their cash with
affiliates. We also proposed new quarterly financial reporting rules to help the
Commission meet its goal of vigilant oversight in energy markets by providing the
Commission and the financial community with more timely, relevant and
transparent financial information. Further Commission action is needed to
conclude both matters.

Long-Term Responses

Infrastructure

A robust natural gas pipeline infrastructure is critical for the reliability of the
Nation’s energy supply and for competitive market development. To meet
growing demand for natural gas, the Commission must respond quickly to the
need to expand and construct pipelines and related facilities. The Commission’s
rate policies, consistently applied to transportation infrastructure projects, must
give investors confidence that they will have an opportunity to recover their
investments, and provide rate certainty to customers as well.

For example, in 2003, we issued a certificate authorizing the “Grasslands” project
proposed by Williston Basin Interstate Pipeline Company to provide much needed
pipeline capacity for transporting gas produced in the Rocky Mountain supply
area. The Commission continues to receive and expeditiously process similar
applications for all parts of the country.

Another way our Nation can meet its growing need for natural gas is by importing
liquefied natural gas (LNG). The Commission has facilitated this development
by, for example, authorizing the resumption of LNG imports at Cove Point,
Maryland. Similarly, we granted Hackberry LNG, an import terminal facility
located in Louisiana, authority to provide service without becoming subject to
unnecessary rate and tariff regulation. The Commission expects to receive
applications for other LNG facilities in the future, based on current market
conditions.

In a series of orders, the Commission clarified credit and collateral requirements
that pipelines may impose on their customers. These policies allow for the
construction of pipeline infrastructure needed to meet critical demand growth,
such as new electric generation, while protecting the pipeline and its existing
customers from the risks and costs of a non-creditworthy customer’s future
default. Credit and collateral issues continue to arise in Commission proceedings
and require prompt action to ensure that financial risks are allocated fairly among
market participants.


G)

FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements
September 30, 2003 and 2002

(m) Net Position Accounts

(

()

@

Net position account balances consist of the following components:

Unexpended appropriations — Represents amounts of spending authority that are unobligated
and available to the Commission, or obligated but not expended.

Cumulative results of operations — Represents the Commission’s net results of operations since
inception, including (1) the amount in the Special Receipts Fund Balance with Treasury, (2) the
cost of property and equipment acquired that has been financed by appropriations, less
accumulated depreciation, and (3) the amount of appropriated funding that will be needed in
future periods to liquidate liabilities incurred through the current fiscal year. Funding for these
items is generally received in the year that amounts become due and payable.

Tax Status

The Commission, as a federal agency, is not subject to federal, state, or local income taxes, and
accordingly, no provision for income tax is recorded.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

Comparative Data

Certain FY 2002 amounts have been reclassified to conform to the FY 2003 presentation. These
reclassifications primarily affected the Statement of Net Cost, wherein amounts were reclassified to
align costs and revenues with the Commission’s FY 2004 strategic goals and the Statement of
Financing.

Non-Entity Assets

Non-entity assets at September 30, 2003 and 2002 consisted of:

2003 2002

Fund balances with Treasury:
Appropriated fund balance with Treasury $ 63,223 88,025
Collections due to states 210,327 2,942,157
Miscellaneous receipts held in suspense 25,700 1,661
Accounts receivable, net 16,559,936 497,194
Total non-entity assets 16,859,186 3,529,037
Total entity assets 121,746,256 119,117,122
Total assets $ 138,605,442 122,646,159

59 (Continued)


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement.

Performance Target

Result

Improved integration of work processes
and electronic fling

Refresh integrated filing, docket, and
document management system

Software releases of the FERC eFiling
system were deployed in FY 2003 that
increased the types of documents
accepted electronically, improved the
interface used by stakeholders to submit
documents electronically, and improved
the integration with the FERC document
management system, eLibrary, and the
FERC Online eRegistration system.

A business case for the Activity
Management Tracking System (ATMS) is
under review by the FERC Online
Executive Steering Committee. ATMS
will allow FERC to align FTE time
reporting with business planning goals
and objectives.

‘Two releases of the FERC document
management system, eLibrary, were
deployed that improved systems
availability, reliability, and usability as,
documented in weekly reporting by the
FERC IT Support Services Contractor
and reflected in comments received
through customer surveys.

eSubscription, a facility that allows
stakeholders to receive email notifcations
and document links whenever a
document is received or issued in a case
to which they subscribe, was deployed
and has improved the work processes of
external and intemal stakeholders.

Monitoring of manage-to-budget process

Bi-weekly tracking of office salary levels
and quarterly review of salary levels
between CFO and Office Directors

The Commission met its perbrmance
target of bi-weekly tracking of the MTB
process. However, the quarterly reviews
between the CFO and Office Directors did
not take place. This was due to the open
and constant communication between the
Division of Budget and the individual
office MTB points-of-contact. As a result,
managers were able to make quicker and
more informed decisions on the
resources within their particular program.
No issues were raised during these
discussions that necessitated
involvement from the CFO or Office
Directors.

Timeliness of annual charges collections

Within 45 days of billing

The Commission collected 74% ofthe
total dollar value of current year annual
charge billings within the 45 day billing
period; however, by the close of the fiscal
year, the Commission collected 96% of
the total dollar value of current year
billings.

Invoices paid by electronic funds transfer

98%

The Commission processed over 99% of
its disbursements via electronic inds
transfer.

42



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

accounting standards required by the Improvement Act.

Prompt Payment

The Prompt Payment Act requires Federal agencies to make timely payments to
vendors for supplies and services, to pay interest penalties when payments are
made after the due date, and to take cash discounts when they are economically
justified. The Commission made over 99% of its payments on-time that were
subject to the Prompt Payment Act. The Commission incurred $44.70 in interest
penalties in FY 2003. Over 99 percent of the Commission’s vendor payments
were made electronically.

Debt Collection

The Debt Collection Improvement Act of 1996 was enacted to enhance the ability
of the Federal Government to service and collect debts. The agency's goal is to
maintain the delinquent debt owed to the Commission at year-end at less than one
percent of its annual billings. The Commission continues to meet its goal and has
kept delinquent debt at less than one percent for the past five years. The
Commission continues to aggressively pursue the collection of delinquent debt
and continues to meet the requirement that all eligible delinquent debt over 180
days is referred to the U.S. Treasury for collection.

Limitations of the Financial Statements

The financial statements have been prepared to report the financial position and
results of operations of the Commission, pursuant to the requirements of 31
U.S.C. 3515(b). While the statements have been prepared from the books and
records of the Commission in accordance with generally accepted accounting
principles for federal entities and the formats prescribed by OMB, the statements
are in addition to the financial reports used to monitor and control budgetary
resources which are prepared from the same books and records. The statements
should be read with the realization that they are for a component of the U.S.
Government, a sovereign entity. One implication of this is that liabilities cannot
be liquidated without legislation that provides resources to do so.

30


kbigle)

DISTRIBUTION

This report is intended for the information and use of the Commission’s management, the Department of
Energy’s Office of the Inspector General, OMB, General Accounting Office, and the U.S. Congress, and is
not intended to be and should not be used by anyone other than these specified parties.

KPMG LEP

November 14, 2003

47


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Management Control Review Program

Managers throughout the Commission are responsible for ensuring that effective
controls are implemented in their areas of responsibilitics. Each office director
and regional administrator prepared an annual assurance statement that identified
any control weaknesses that required the attention of the chairman. These
statements were based on various sources and included:

+ Management knowledge gained from the daily operation of agency
programs and reviews

« Management reviews

¢ Annual performance plans

+ Inspector General and General Accounting Office reports

The Commission's ongoing management control program requires, among other
things, that management control deficiencies be integrated into office action plans.
The action plan process has provisions for periodic updates and for attention from
senior managers. The management control information in these plans, combined
with the individual assurance statements discussed previously, provides the
framework for monitoring and improving the agency's management controls on an
ongoing basis.

FY 2003 Integrity Act Results

The Commission evaluated its management control systems for the fiscal year
ending September 30, 2003. This evaluation provided reasonable assurance that
the Commission's management controls achieved their intended objectives. As a
result, management concluded that the Commission did not have any material
weaknesses in its programmatic or administrative activities.

Federal Financial Management Improvement Act

The Federal Financial Management Improvement Act of 1996 (Improvement Act)
requires cach agency to implement and maintain systems that comply substantially
with: (i) Federal financial management system requirements, (ii) applicable
Federal accounting standards, and (iii) the standard general ledger at the
transaction level. The act requires the Chairman to determine whether the agency's
financial management systems comply with the Improvement Act and to develop
remediation plans for systems that do not comply.

FY 2003 Improvement Act Results

As of September 30, 2003, the Commission evaluated its financial management
system to determine if it complied with applicable federal requirements and
accounting standards required by the improvement act. We found that the
Commission financial management system was in substantial compliance with the
Federal financial management system requirements. In making this determination
we undertook financial reporting tests of the system and reviewed entries at the
transaction level, determined compliance with Federal requirements and

29


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Strategic Plan

The United States has the world’s most durable market economy, every sector of
which depends vitally on energy. Our primary duty is to promote dependable,
affordable energy, and thereby support a strong, stable national economy. To
fulfill this obligation, we have three main goals:

+ Adequate infrastructure. Promote a secure, high-quality,
environmentally responsible infrastructure.

+ Competitive energy markets. Create and maintain competitive energy
markets by advancing competitive market institutions and establishing
balanced, self-enforcing market rules.

+ Vigilant market oversight. Protect customers and market participants
through vigilant and fair oversight of energy markets.

Confidence in our Nation’s energy markets has been affected by the problems in
Wester energy markets that occurred in 2000 and 2001 and, more recently, by
high prices for natural gas. The Commission is making steady progress in
resolving the Western energy crisis and has begun addressing the issues in natural
gas markets that are within its authority. More remains to be done to restore
confidence in energy markets so that necessary additions to infrastructure can be
financed at reasonable prices. This will require balanced and fair market rules and
vigilant oversight of energy markets in the future.

The Commission’s primary emphasis must be to facilitate a full transition to
competitive wholesale energy markets as soon as possible, and to address crucial
issues that arise during the transition. The Commission’s Strategic Plan lays out
the goals of the Commission as follows:

1. Energy Infrastructure. Goal: Promote a Secure, High-quality,
Environmentally Responsible Infrastructure Through Consistent Policies.
This goal encourages investment in the infrastructure needed to sustain energy
markets by removing roadblocks, providing cost recovery clarity and welcoming
innovative thinking about rates and use of new technology. By focusing on
infrastructure, this goal covers many of the Commission’s important traditional
responsibilities, for example, pipeline certificates, hydropower licenses and
preliminary permits, compliance activities, environmental and other licensing
conditions, dam safety inspections and most rate determinations.

2. Competitive Markets. Goal: Foster Nationwide Competitive Energy
Markets as a Substitute for Traditional Regulation. This goal focuses on
FERC’s need to complete the transition to competitive energy markets as quickly
and comprehensively as possible. This will require the growth of many new
institutions, particularly clearly defined and independent regional transmission
organizations (RTOs), to make electric markets work. The Commission also


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Performance Measurement.

Performance Target

Result

Establishment of protocols between the
Commission and independent market
monitoring units (MMU) of RTOs.

All approved RTOs

Target achieved

Protocols established with MMUs at all current ISOs and RTOs include:
< Joint mission statement expressing the common goals of MMUs and

OMOI,

< Market monitoring plan requirements expressing what issues MMUs need
to address in their plan;
< Clear contact lists and standard periodic conference calls for each region;
< Agreed on triggers (i.e., market events or conditions) that lead MMUs to
contact OMOI;
< Information sharing between MMUs and OMOI, codified by Commission
order on January 15, 2003; and
< Standard joint meetings between all MMUs and OMOI twice a year.

Performance Measurement

Performance Target

Result

Percentage of cases in time fames
< Alternative Dispute Resolution (ADR)
processes completed

< 20% of ADR cases within 60 days
< 30% of ADR cases within 100 days
< 75% of ADR cases within 150 days
< 100% of ADR cases within 200 days

ADR Cases — Office of Adminitrative Law

Judges/Office of Administrative Litigation

{OALJ/OAL): 76 cases were successiully

completed through the use of ADR:

< 2 cases completed in < 60 days (2.6%)

< 10 cases completed in < 100 days
(13%)

< 15 cases completed in <150 days
(20%)

< 14 cases completed in < 200 days
(18%)

< 35 cases completed in > 200 days
(46%)

ADR Cases — Dispute Resolution Service
(DRS): 20 cases were completed through
the use of ADR:

< 8 cases completed in < 60 days (40%)
< 2 cases completed in < 100 days (10%)
< 5.cases completed in < 150 days (25%)
< 3 cases completed in < 200 days (15%)
< 2cases completed in > 200 days (10%)

Timeliness of Hotline calls resolutions

Resolve 80% within 1 week of initial
contact

74% of Hotline calls were closed by the
end of the two-week period in which they
were received during FY 2003.

The Commission encourages parties to use alternative dispute resolution (ADR)
whenever appropriate, to resolve conflicts quickly, satisfactorily, less expensively,
and with the use of fewer resources. The Commission's Dispute Resolution
Service is becoming a greater resource for facilitation and mediation, and also
offers consultation and training in effective negotiation skills to individuals and
organizations that do business with the Commission. The Hotline continues to be

20



(b)

(©

(@

(¢)

FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements
September 30, 2003 and 2002

Budgets and Budgetary Accounting

Congress annually adopts a budget appropriation that provides the Commission with authority to use
funds from the Treasury to meet its operating and capital expenditure requirements. The appropriated
funds are not restricted to use in a specific fiscal year. All revenue from annual charges and filing
fees is remitted to the Treasury when received.

Basis of Accounting

The Commission’s financial statements are prepared using the accrual method of accounting. The
accrual method of accounting requires recognition of the financial effects of transactions, events, and
circumstances in the period(s) when those transactions, events, and circumstances occur, regardless
of when cash is received or paid. The Commission also uses budgetary accounting to facilitate
compliance with legal constraints and to monitor its budget authority at the various stages of
execution, including allotment, obligation, and eventual outlay.

Revenue and Financing Sources

As described above, the Commission receives funds for its operating and capital expenditures
through an appropriation allotment from DOE. For financial statement purposes, the appropriation
allotment is recognized as a financing source when operating expenses (primarily salaries and
benefits), other than depreciation, are incurred and when capital assets are purchased.

The Commission recognizes revenue for hydropower, gas, oil, and electric annual charges when
earned. Annual charges are based on estimated current year program costs and adjustments from the
prior year. At year-end, the Commission records a due from or to regulated entities to reflect the
difference between the charges and the actual program costs for the year. The Commission adjusts
the subsequent year’s charge for such amount. Revenue is recognized for filing fees when received.

The Commission recognizes an imputed financing source for the estimated annual pension and life
and health insurance costs in excess of contributions made by the Commission during the year.
These costs will ultimately be funded by the Office of Personnel Management.

Reimbursable work agreement revenue, included in other programs’ earned revenue, is recognized
when the related services are rendered.

Transfers-out represent receipts collected and remitted to the Treasury during the year and net
accounts receivable that, once collected, will be returned to the Treasury, less any amounts due to
regulated entities for the excess of estimated and billed costs over actual costs incurred.

Fund Balances with Treasury

The Commission does not maintain cash in commercial bank accounts. Cash receipts and
disbursements are processed by the Treasury. The balance of funds with the Treasury represents
appropriated funds that are available to pay current liabilities and finance authorized purchase
commitments relative to goods or services that have not been received.

37 (Continued)


FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements
September 30, 2003 and 2002

(13) Custodial Activity

The Commission currently bills regulated companies as a custodian for certain federal agencies, including
the Army Corps of Engineers and the Department of Interior’s Bureau of Reclamation. The receivables are
maintained by the Commission, and the collections are processed directly to each federal agency on a
monthly basis. In addition to the annual charges billed yearly, penalty and administrative costs are assessed
on past-due bills and remitted to the Treasury when received. For fiscal years 2003 and 2002, these
custodial transactions totaled approximately $36.6 million and $16.0 million, respectively. In 2003, the
Commission issued a significant civil penalty against one of its regulated companions that is still largely
uncollected. Upon collection the money will be remitted to Treasury.

(14) Required Supplementary Information — Intragovernmental Balances (Unaudited)

Intragovernmental receivables at September 30, 2003 consists of:

Department of Interior $ 50,834
Nuclear Regulatory Commission 60,000
United States Army — Corps of Engineers 138,830

$ 249,664

Intragovernmental accounts payable at September 30, 2003 and 2002 consists of:

2003 2002

Government Printing Office Ss 570,536 641,763
General Services Administration 768,066 416,518
Veterans Administration —_ 63,933
Office of Personnel Management 80,400 18.215
Department of Health and Human Services 9,361 27,308
Others. 61,363 100,548

$ 1,489,726 1,268,285

Intragovernmental accrued payroll benefits at September 30, 2003 and 2002 consists of:

2003 2002
Office of Personnel Management $ 389,484 868,426
Social Security Administration 137,907 306,479
$ 527,391 1,174,905

Intragovernmental workers’ compensation payable at September 20, 2003 and 2002 totals $521,508 and
$442,836, respectively, and is due to the Department of Labor.

64


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Performance Measurements for Market Oversight (Goal 3)

FY 2003

Performance Measurement

Performance Target

Result

Enhance institutional capability for
overseeing energy markets

Establish the Office of Market Oversight
and Investigation

Complete

Publish regular summer and winter
Seasonal Market Assessments,

Reported winter 2002-2003 and summer
2003 assessments in brmal
presentations to the Commission and
published on Commission's website.

Develop metrics/indicators ofgas and
electric market performance measures

Developed 5 standard metrics br electric
markets that agreed with market
monitoring units.

Top to bottom review of all existing
information systems to monitor markets

Complete entire review

The complete review has been delayed
until FY 2004.

Development or acquisition ofusable
electronic baselines and databases to
support market oversight objectives

Complete development ofall baselines
and databases by end of FY 2003

Complete

Development of market expertise

Training on market issues br 40% of
OMO! and 20% of OMTR, OGC, and
other staff

OMOI: 50% of OMO! staff received
training explicitly related to markets.

OMTR: Target met through a combination
of formal and informal training
opportunities available to or required of
OMTR staff. Examples of informal
training: attendance at events sponsored
by OMOI such as presentations byguest
speakers with market expertise and
courses on the operations of|SOs in New
York and New England; market
development discussions at selected
Commission meetings which are aired
live as well as videotaped for later

viewing; access to material relevant to
Commission conferences posted on the
web site; speakers brought in bygroup
managers to discuss various topics—
including market-related issues—at their
group meetings; and hands-on training
conducted in our divisions.

Hiring of staff with market expertise

Hiring target achieved

Issuance of market assessment products
and data analysis demonstrating market
understanding

Produced comprehensive market
surveillance report for each closed
Commission meeting (every two to three
weeks); seasonal assessments; and daily
market reports for Commission staff. Also
analyzed key issued in detail, for
example, natural gas spike and energy
price index reaction.

Establishment of protocols between the
Commission and independent market
monitoring units of RTOs

All approved RTOs

Target achieved

Timeliness of corporate application orders

Less than 20% of merger applications will
require examination or the imposition of
ation measures beyond the initial
review period, with such percentage
targeted to decrease as turther policy
guidance is issued in cases requiring
more time to address market power

Since the Commission received no
merger requests in FY 2003, we have no
results to report for this performance
measure.

37



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

Timeliness of audits

Complete 90% of audits on time

Target achieved

Timeliness of Hotline calls resolutions

Resolve 80% within 1 week of initial
contact

74% of Hotline calls were closed by the
end of the two-week period in which they
were received during FY 2003.

Timeliness of formal complaints
resolutions

Complete 80% within target time fames
for various paths for resolution of
complaints as specifed by the
Commission

OALJ/OAL: Issued sixinitial decisions on
complaints set for hearing. 84% were
completed within expected targets (4 out
of 6). OALJ also handled 17 additional
complaints; 12 settled; 5 were either
returned to the Commission fr further
action or set for hearing before a judge
(no targets were set for those cases while
in settlement mode).

Number of requests and referrals for ADR
services

Maintain at or increase levels achieved in
FY 2001

DRS: 38 requests or active cases vere
initiated in FY 2003. This number
includes simple inquiries about ADR,
cases in which persons eventually
indicated that they were not interested in
using ADR, cases referred to
Enforcement Hotline, and cases that are
‘ongoing into FY 2004. Note: There were
51 requests in FY 2002, and 38 requests
in FY 2003. While this represents a
decrease in cases, the DRS eforts
devoted to outreach projects have
increased dramatically by comparison.

Percentage of customers satisfed with
ADR processes

85%

DRS: 14 of 20 cases (70%) that were
completed in FY 2003 achieved
settlement.

Percentage of processes that achieve
consensual agreements

Maintain at or increase levels achieved in
FY 2001

OALJ/OAL: 112 cases vere closed in
OALJ. Out of the 112 cases, 16 cases
were terminated by initial decision,
leaving 94 cases where ADR was used.
Of the 94 cases, settlement was achieved
in 76 cases (81% success). Settlement
was not successtil in 18 of the 94 cases.

ORS: 14 of 20 cases (70%) that were
completed in FY 2003 achieved
settlement. Note: This includes 7 cases
that were begun prior to FY 2003 but
completed in FY 2003. It does not
include simple inquires about ADR (1),
cases in which persons eventually said
they were not interested in trying ADR or
ADR was determined to be inappropriate
(11), cases referred to Enforcement
Hotline (3), or cases that were ongoing
into FY 2004 (14).

38



FEDERAL ENERGY REGULATORY COMMISSION

STATEMENTS OF CUSTODIAL ACTIVITY
Years Ended September 30, 2003 and 2002

2003 2002

Sources of collections:
Cash collections — annual charges $ 20,645,218 15,958,829
Accrual adjustment 15,924,643 40,697
Total custodial revenue 36,569,861 15,999,526

Disposition of revenue:

Transferred to others:
United States Army — Corps of Engineers (7,164,221) (6,365,704)
Department of Interior (5,991,877) (6,086,508)
United States Treasury (4,813,878) (201,458)
Various states (2,891,743) (2,807,648)
Increase in amounts to be transferred (15,708,142) (538,208)

Net custodial activities $ _—

The accompanying notes are an integral part of these statements

53


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

The difference between total assets and total liabilities, net position, was $22.3
million as of September 30, 2003. The Net Position Summary table shows a
decrease of $.9 million from the FY 2002 year-end balance. This decrease is a
combination of an increase in costs and a decrease in expended appropriations.
Unexpended Appropriations are the amount of authority granted by Congress that
has not been expended. Cumulative results of operations represent net results of
operations since the Commission's inception.

Net Position Summary (In millions)
Position = FY 2003 FY 2002
Inexpended Appropriations $14.8 S117

‘Cumulative Results of Operations —— a : $7.5 $11.4

Total Net Position : _ $2230 $23.1

Analysis of the Statement of Net Cost

The Statement of Net Cost presents the net cost of the Commission's three
strategic goals as identified in the Commission’s Annual Strategic Plan. The
purpose of this statement is to link program performance under GPRA reporting
to the cost of programs. The Commission's net cost of operations for the year
ended September 30, 2003, was $.2 million, which is a decrease of $.1 million
over the FY 2002 net cost of $.3 million. Net costs by strategic goal are shown in
the Net Cost of Operations table.

Net Cost of Operations (In millions)

‘Operation FY 2003 FY 2002

Goall “$11 $20
Goal 2 - oo a $04 «$07
Goal 3 : 7 $.03 $.03

Analysis of Statement of Changes in Net Position

The Statement of Changes in Net Position reports the change in net position
during the reporting period. Net position is affected by changes in its two
components: Cumulative Results of Operations and Unexpended Appropriations.
The change in Net Position of $.8 million from FY 2002 to FY 2003 represents
the net change in Cumulative Results of Operations and Unexpended
Appropriations.

Analysis of the Statement of Budgetary Resources

The Statement of Budgetary Resources shows the sources of budgetary resources
available and the status at the end of the period. It presents the relationship
between budget authority and budget outlays, and reconciles obligations to total

26


FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements
September 30, 2003 and 2002

Filing Fees

Filing fees are calculated annually. Regulated entities pay the current fee when filing with the Commission
for a specific service. The fees are based on the average time spent to perform the particular type of service
and the average cost per employee, including salary, benefits, and indirect costs. Fee structure and
procedures are codified in 18 C.F.R. Part 381

The Independent Offices Appropriations Act of 1952 (IOAA) authorizes agencies to prescribe regulations
establishing charges for services, benefits, or items of value provided by an agency. In establishing a fee
under the IOAA, the Commission must:

. Identify the service for which the fee is to be assessed;

. Explain why that particular service benefits an identifiable recipient more than it benefits the
general public;

. Base the fee on as small a category of service as possible; and

. Demonstrate what direct and indirect costs are incurred by the Commission in rendering the
service.

Section 3401 of the Omnibus Budget Reconciliation Act of 1986 also provides for fees and annual charges
“computed on the basis of methods that the Commission determines, by rule, to be fair and equitable.”

(2) Summary of Significant Accounting Policies

(a)

Basis of Presentation

The accompanying financial statements have been prepared to report the financial position of the
Commission and its net costs, changes in net position, budgetary resources, reconciliation of net
costs to budgetary obligations, and custodial activity in accordance with accounting principles
generally accepted in the United States of America applicable to federal government entities.

These financial statements have also been prepared in accordance with the form and content for
financial statements specified by Office of Management and Budget (OMB) in Bulletin 01-09, Form
and Content of Agency Financial Statements.

The financial statements include all activity related to the Commission’s portion of appropriation
(89X0212), including the budget authority allotted by DOE to other DOE agencies. In addition, the
Commission receives small allotments from six DOE appropriations: (8990224), (8980224),
(89X0224), (89X0240), (89X0243), and (89X5105). All of the Commission’s appropriations relate
to budget functional classification code 276, Energy Information Policy and Regulation.

Entity assets disclosed in notes 3 and 5 include those assets that the Commission has the authority to
use in its operations.

Nonentity assets disclosed in notes 3 and 5 include those assets that result from the Commission’s
custodial billing activities for other federal agencies, including the Army Corps of Engineers and the
Department of Interior.

56 (Continued)


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Hydropower is the oldest area of Commission jurisdiction. The Commission’s
predecessor began federal regulation of non-federal hydroelectric generation in
1920, authorizing the construction of projects in interstate commerce and
overseeing their operation and safety.

Since 1935, the Commission and its predecessor have regulated certain electric
utility activities under the Federal Power Act (FPA). Under FPA Sections 205
and 206, the Commission oversees the rates, terms and conditions of sales for
resale of electric energy and transmission service in interstate commerce by public
utilities. The Commission must ensure that those rates, terms and conditions are
just and reasonable, and not unduly discriminatory or preferential. Under FPA
Section 203, the Commission reviews mergers and other asset transfers involving
public utilities. The utilities regulated under FPA sections 203, 205 and 206 are
primarily investor-owned utilities; government-owned utilities (such as the
Tennessee Valley Authority, the federal power marketing agencies, and municipal
utilities) and most cooperatively-owned utilities are not subject to the
Commission’s regulation, with certain exceptions.

The Commission may not regulate retail sales or local distribution of electricity.
These are matters left to the states by the FPA. Nor does the Commission have a
role in authorizing the construction of new generation facilities (other than non-
federal hydroelectric facilities) or transmission facilities. These too are state or
local responsibilities.

The Commission’s role in the natural gas industry is largely defined by the
Natural Gas Act of 1938 (NGA). Under NGA, the Commission regulates the
construction of new natural gas pipelines and related facilities and oversees the
rates, terms and conditions of sales for resale and transportation of natural gas in
interstate commerce. Pipeline siting and construction is authorized by the
Commission if found to be required by the public convenience and necessity. As
with hydropower licensing, the Commission’s actions on pipeline projects
typically require consideration of factors under the National Environmental Policy
Act (NEPA), the Endangered Species Act, the Fish and Wildlife Coordination
Act, the Coastal Zone Management Act and other such legislation. Regulation of
retail sales and local distribution of natural gas are matters left to the states.

Finally, the Interstate Commerce Act (ICA) gives the Commission jurisdiction
over the rates, terms and conditions of transportation services provided by
interstate oil pipelines. The Commission has no authority over the construction of
new oil pipelines, or over other aspects of the industry such as production,
refining or wholesale or retail sales of oil.


bia)

The information in the Management's Discussion and Analysis section and note 15 to the financial
statements is not a required part of the financial statements, but is supplementary information required by
accounting principles generally accepted in the United States of America or OMB Bulletin No. 01-09,
Form and Content of Agency Financial Statements. We have applied certain limited procedures, which
consisted principally of inquiries of management regarding the mcthods of measurement and presentation
of this information. However, we did not audit this information and, accordingly, we express no opinion on
it.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Our consideration of internal control over financial reporting would not necessarily disclose all matters in
the internal control over financial reporting that might be material weaknesses under standards issued by
the American Institute of Certified Public Accountants. Material weaknesses are conditions in which the
design or operation of one or more of the internal control components does not reduce to a relatively low
level the risk that misstatements, in amounts that would be material in relation to the financial statements
being audited, may occur and not be detected within a timely period by employees in the normal course of
performing their assigned functions. However, we noted no matters involving the internal control and its
operation that we considered to be material weaknesses as defined above.

We did, however, note other matters involving internal control over financial reporting and its operation
that we will report to the management of the Commission in a separate letter.

COMPLIANCE WITH LAWS AND REGULATIONS

The results of our tests of compliance with certain provisions of laws and regulations described in the
Responsibilities section of this report, exclusive of those referred to in the Federal Financial Management
Improvement Act (FFMIA), disclosed no instances of noncompliance that are required to be reported
herein under Government Auditing Standards or OMB Bulletin No. 01-02.

The results of our tests of FFMIA disclosed no instances in which the Commission’s financial management
systems did not substantially comply with the three requirements discussed in the Responsibilities section
of this report.

RESPONSIBILITIES
Management’s Responsibilities
Management is responsible for the financial statements, including:

© Preparing the financial statements in conformity with accounting principles generally accepted in
the United States of America;

e Establishing and maintaining intemal controls over financial reporting, and preparation of the
Management’s Discussion and Analysis (including the performance measures), required
supplementary information, and required supplementary stewardship information; and

¢ Complying with laws and regulations, including FFMIA.
In fulfilling this responsibility, estimates and judgments by management are required to assess the expected

benefits and related costs of internal control policies. Because of inherent limitations in internal control,
misstatements, due to error or fraud may nevertheless occur and not be detected.

45


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

Accuracy and completeness of annual
financial statements

Unqualified opinion

The Commission received an unqualifed
opinion on its FY 2002 financial

Statements.
Percentage of contracts performance- 400% 100% of all contracts were performance
based ° based.

100% of all competitive contract
Percentage of contracts advertised online | 100% requirements advertised in the Fed Biz

Ops.

43



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

The Commission issued a NOPR for interconnections of small generators in the
summer of 2003, and is expected to issue a final rule in 2004. These procedures
and agreements will give most competitive energy market participants reasonable
certainty about the costs they will bear and the terms and conditions that will
affect interconnection to the electric transmission system, and will hasten the
interconnection process.

Performance Measurement

Performance Target

Result

Increase non-federal hydropower capacity

Complete license amendments proposing
increased capacity/generation in less than
12 months

5 amendments authorizing an increase in
capacity were processed in less than 8
months.

For licensing cases processed in FY 2003, there was an additional 10.7 megawatts
of additional capacity authorized as part of the licensing process. In addition, over
186 megawatts of energy was authorized through approval of five license

amendments.

Performance Measurement

Performance Target

Result

Percentage of hydropower licenses
approved within specified time frames

75% of licenses approved within the
following time frames.

< Altemative Licensing Process (ALP)
median case, less than 16 months.

< Traditional median case, less than
43 months

< 100% of the ALP, or collaboratively
prepared license applications, were
completed within 15 months when
external factors (i.e., water quality
certificate, Coastal Zone Management
reviews) did not delay processing. Of
the pending cases in which
collaboratively prepared amendments
to license applications were filed and
were not delayed by extemal factors,
80% were completed within 16 months
after receipt of the settlement.

«< For traditionally prepared license
applications for which no external
factors contributed to the delay, 77% of
the cases were processed in less than
43 months.

Licensing applications and subsequent amendments to applications can be
prepared using either the collaborative ALP process or the traditional process.
The Commission encourages licensing participants to use the more collaborative
approach because the applications are more quickly processed and, more often
than not, the end result is a license that includes conditions more reflective of the
stakeholders’ interests.

With regard to the processing of license applications, the Commission’s ability to
issue a timely license is often constrained by external processes. This is true for
both the collaborative and traditional approaches. While the Commission has
instituted actions that should provide for faster processing, license issuance, in a
large number of cases, is delayed because of other mandatory processes that are
beyond our control. These processes include issuance of water quality

13



FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements
September 30, 2003 and 2002

much more effectively than in the past. Work in this segment includes activities related to litigation,
dispute resolution, complaints, mergers and auditing.

Cost Recovery

As described below, the Commission recovers 100% of its annual appropriation from the U.S. Treasury
(the Treasury) through annual charges and filing fees authorized by the Omnibus Budget Reconciliation
Act of 1986 and other laws.

Annual Charges

The Commission recovers most of its administrative program costs through allocated annual charges to the
entities it regulates, regardless of the number or type of services rendered to any particular entity during the
year. The annual charge assessed in a fiscal year is based on an estimate of costs to be incurred during that
year. Final program costs are determined from year-end accounting reports and time distribution reports by
office and program. The difference in assessments that results from estimated versus final program costs is
an adjustment to the following fiscal year’s assessments. In hydropower regulation, the annual charges
include the Commission’s program costs and, through FY 2002, the related costs incurred by several other
agencies that review the Commission’s hydro license applications under Part I of FPA. In FY 2003 the
Commission did not collect these related costs due to a court decision ordering the Commission not to
collect such costs until revised related procedures were adopted.

The authority and related implementation methods for the annual changes are summarized as follows:

Hydropower

Authority — Section 10(e) of FPA makes the general provision that licensees under Part I of FPA
shall pay reasonable annual charges to recompense the federal government for the costs of
administering Part I.

Implementation -- The methods for assessing annual charges to hydropower licensees are codified at
18 Code of Federal Regulations (C.F.R.) Part 11. Costs are prorated based on capacity (municipal
projects), on capacity and generation (nonmunicipal projects), or on a flat rate per horsepower under
1,000 (minor projects).

Gas, Electric, and Oil

Authority — Section 3401 of the Omnibus Budget Reconciliation Act of 1986 provides that the
Commission shall “assess and collect fees and annual charges in any fiscal year in amounts equal to
all of the costs incurred by the Commission in that fiscal year.” It further provides that “fees or
annual charges assessed shall be computed on the basis of methods that the Commission determines,
by rule, to be fair and equitable.”

Implementation — The methods for assessing annual charges to gas and oil pipelines and to electric
utilities and power marketing administrations are codified at 18 C.F.R. Parts 382.201-203. Costs are
prorated to gas pipelines based on volume transported and sold, to electric utilities and power
marketing administrations based on energy sold, and to oil pipelines based on operating revenues.

55 (Continued)


(6)

FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements
September 30, 2003 and 2002

2002
Annual
charges
(note 6) Other Total
Entity
Uncollected billings S 19,427,676 42,870 19,470,546
Allowance for doubtful accounts (5,436,034) (10,614) (5,446,648)
Total entity accounts
receivable, net 13,991,642 32,256 14,023,898
Nonentity
Uncollected billings 2,355,649 732 2,356,381
Allowance for doubtful accounts (1,859,187) = (1,859,187)
Total nonentity
accounts receivable, net 496,462 732 497,194
Total accounts receivable,
net S 14,488,104 32,988 14,521,092

Resources Transferable to Treasury and Other Entities

Resources transferable to Treasury and other entities at September 30, 2003 and 2002 consist of:

2003 2002
Net accounts receivable, related to annual charges (note 5) $ 25,013,531 14,488,104
Fund balance with Treasury — 21,823,179
Due from (to) regulated entities 15,094,967 (111,973)
Total resources transferable to Treasury 40,108,498 36,199,310
Net accounts receivable transferable to other entities 130,113 =
Total resources transferable to
Treaxsury and other entities $ 40,238,611 36,199,310

The fund balance with Treasury amount as of September 30, 2002 above relates to certain revenue initially
collected under protest which was settled in the Commission’s favor in late September 2002. The resources
were transferred to the Treasury in October 2002.

61

(Continued)


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Even with the best safety program, emergencies can occur. Emergency action
plans (EAPs) specify actions owners must take, in coordination with federal, state
and local preparedness agencies, in case of emergencies such as floods,
earthquakes, project failures, or improper operation. FERC conducts tests to
ensure that EAPs work as designed.

Performance Measurements for Competitive Markets

Goal: Foster Nationwide Competitive Energy Markets
as a Substitute for Traditional Regulation

Performance Measurement

Performance Target

Result

Percentage of country covered by
approved Regional Transmission
Organizations (RTOs) or Independent
System Operators (ISOs) (as measured
by percentage of electricity load).

70% of electricity load in regions where
we have jurisdiction

59% of load in jurisdictional areas under
an RTOIISO.

The Commission believes that the best sustainable path to competitive power
markets is to establish regional transmission organizations (RTOs) implementing
fair market rules that are consistent across the Nation’s bulk power markets.
RTOs must operate the transmission system across large geographic areas,
operating independently of market participants. As a result, the most immediate
task is to complete development of RTOs and independent electric wholesale

markets.

Performance Measurement

Performance Target

Result

Timely processing of proposed
rulemakings adopting consensus
industry-wide business practice and
reliability standards (North American
Energy Standards Board (NAESB) and
North American Electric Reliability
Council (NERC))

Benchmarks to be established in FY 2003
for use in FY 2004.

Target is established for FY 2004 as
follows: Non-controversial rulemakings
completed within 9 months/controversial
rulemakings completed within 12 months
of external party action.

< During October 2002, NAESB fled
natural gas industry standards with
the Commission. The Commission
codified the standards, on which all
segments of the natural gas industry
had reached consensus, in its
Regulations in a Final Rule issued in
March 2003, five months after
submission.

<_ In June 2003, NAESB fled
creditworthiness standards on which
all segments of the natural gas
industry participants were able to
reach consensus; NAESB also
reported additional proposed
creditworthiness standards on which
consensus was not reached. Action
is pending on the creditworthiness
standards.

15



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

MANAGEMENT?’S DISCUSSION and ANALYSIS

Introduction

As authorized by the Reports Consolidation Act of 2000, this report presents the
Federal Energy Regulatory Commission’s (FERC’s, the Commission’s) audited
annual financial statements for fiscal year 2003 (FY 2003) and FY 2002. Included
are a balance sheet; statements of: net cost; changes in financial position;
budgetary resources; financing; and custodial activity; and notes to the financial
statements. Additionally, an overview of the FERC, its mission and
organizational structure, and performance information are provided. This report
serves as a guide to key FERC initiatives and activities taking place during FY
2003, and planned for future years that demonstrate the breadth of the
Commission’s work.

Overview of the FERC

The FERC is an independent regulatory agency within the Department of Energy.
Its function is to oversee America’s electric utilities, natural gas industry,
hydroelectric projects and oil pipeline transportation system.

Mission

The Federal Energy Regulatory Commission regulates and
oversees energy industries in the economic and environmental
interest of the American public.

The Commission was created through the Department of Energy Organization Act
on October 1, 1977. At that time, the Federal Power Commission (FPC), the
Commission’s predecessor which was established in 1920, was abolished and the
Commission inherited most of the FPC’s regulatory mission.

The Commission has five members who are appointed by the President with the
advice and consent of the Senate to five-year staggered terms. Each
Commissioner has an equal vote on regulatory matters and no more than three
Commissioners may belong to the same political party. One member is
designated by the President to serve as Chair and is the Commission’s
administrative head.


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

‘Adopt market design standards fr
wholesale electric markets

Issue final Standard Market Design rule

In April 2003, the Commission issued a
White Paper in the Standard Market
Design proceeding that emphasized its
strong commitment to customer-based,
competitive wholesale power markets,
while underscoring an increasingly
flexible approach to regional needs and
outlining step-by-step elaborations of its
key market design proposal. The
Commission intends to cus on the
formation of RTOs and on ensuring that
all independent transmission
organizations have sound wholesale
market rules. The final rule will allow
implementation schedules to vary
depending on local needs and will allow
for regional differences. During the
remainder of FY 2003, the Commission
continued its dialogue on market design
by holding a number of regional
conferences to exchange ideas with
stakeholders.

Enhanced regulatory support for market
institutions

Creation of OMO!

OMOI established

Creation o f market performance
indicators

Market performance indicators created
with an ongoing process to add or delete
metrics as appropriate.

36



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

Financial Performance Overview

As of September 30, 2003, and 2002, the financial condition of the Commission was
sound with respect to having sufficient funds to meet program needs and adequate
control of these funds in place to ensure obligations did not exceed budget authority.
The Commission prepared its financial statements in accordance with the accounting
standards codified in the Statements of Federal Financial Accounting Standards
(SFFAS) and Office of Management and Budget (OMB) Bulletin No. 01-09, Form
and Content of Agency Financial Statements.

Sources of Funds

The Commission has one appropriation, and funds for this appropriation are
available until expended. The Commission collects the full cost of its operations
from annual charges and fees authorized by the Federal Power Act of 1986 and
other laws. The Commission's total FY 2003 budget authority was $192 million.
This represents an overall increase in new budget authority of $7.8 million over
FY 2002.

Consistent with the requirements of the Omnibus Budget Reconciliation Act of
1986, as amended, the Commission collected fees to offset 100 percent of its new
budget authority in FY 2003.

Audit Results

The Commission received an unqualified audit opinion on its FY 2003 financial
statements. This was the 9th consecutive year the agency has received an
unqualified opinion. For FY 2003, the auditors identified no material weaknesses.

Financial Statement Highlights

The Commission's financial statements summarize the financial activity and
financial position of the agency.

Analysis of the Balance Sheet

The Commission's assets were approximately $138.6 million as of September 30,
2003. This is an increase of $16.0 million from the end of FY 2002 and is mainly
due to an increase in amounts Due from Regulated Entities. The assets reported in
the Commission's Balance Sheet are summarized in the Asset Summary table.

24


FEDERAL ENERGY REGULATORY COMMISSION
Fiscal Year 2003 Annual Financial Report

Management’s Discussion and Analysis:
Introduction
Overview of the FERC
Full Cost Recovery
Organizational Structure
Strategic Plan
Business Plan
Making Markets Work
Program Performance
Financial Performance Overview
Systems, Controls, and Legal Compliance
Other Accompanying Information

Financial Statements:
Independent Auditors’ Report
Balance Sheets
Statements of Net Cost
Statements of Changes in Net Position
Statements of Budgetary Resources
Statements of Financing
Statements of Custodial Activity
Notes to Financial Statements

Table of Contents


FEDERAL ENERGY REGULATORY COMMISSION

Balance Sheets
September 30, 2003 and 2002

Assets
Intragovernmental assets:
Fund balances with Treasury (note 4) $
Intragovernmental receivables (notes 5 and 14)

Total intragovernmental assets

Accounts receivable, net (note 5)
Due from regulated entities (note 6)
Property and equipment, net (note 7)

Total assets $
Liabilities and net position

Intragovernmental liabilities:
Accounts payable (note 14) $
Accrued payroll benefits (note 14)
Resources transferable to Treasury and other entities (note 6)
Miscellaneous receipts transferable to Treasury
Workers' compensation payable (notes 9 and 14)

Total intragovernmental liabilities

Accounts payable

Due to regulated entities (note 6)
Accrued payroll and benefits

Collections due to states (note 3)
Revenue collected under protest (note 12)
Accrued leave (note 9)

Advances from others

Total liabilities
Commitments and contingencies (notes 8 and 12)

Net position:
Unexpended appropriations
Cumulative results of operations

Total net position

Total liabilities and net position $

The accompanying notes are an integral part of these statements

48

2003 2002
87,704,134 93,920,722
249,664 =
87,953,798 93,920,722
25,025,019 14,521,092
15,094,967 _—
10,531,658 14,204,345
138,605,442 122,646,159
1,489,726 1,268,285
527,391 1,174,905
40,238,611 36,199,310
25,700 16,661
521,508 422,836
42,802,936 39,081,997
6,408,615 10,385,505
_ 111,973
4,406,338 8,405,251
267,468 2,942,157
52,655,131 29,062,800
9,760,361 9,537,901
29,855 =
116,330,704 99,527,584
14,802,030 11,652,047
7,472,708 11,466,528
22,274,738 23,118,575
138,605,442 122,646,159



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

Timely processing of filings seeking
recovery of security and safety expenses
in jurisdictional rates

Process filings:

< within 30 days for gas and oil rate
filings

< within 60 days for electric flings

The following filings were acted on in FY
2003:

RP02-129-000, Southern LNG
Filed: December 21, 2001

Order Issued: January 31, 2002
(Suspension order setting case br
hearing)

Case settled: Letter order issued
October 10, 2002, accepting a settlement
and closing out the case.

Target: While this case was not acted on
within 30 days, action did meet our
statutory guidelines as we acted prior to.
the proposed effective date of February 1,
2002. The suspension order was dated
January 31, 2002; the case vas settled in
early FY 2003.

1S03-457, Plantation Pipe Line Co.
Filed: July 31, 2003

Order Issued: August 29, 2003
Target: Met

1S03-475, West Shore Pipe Line Co.
Filed: August 12, 2003

Order Issued: September 30, 2003
Target: While this case was not acted on
within the 30-day target, it met our
statutory guidelines as we acted prior to.
the proposed effective date of October 1,
2003,

Implement generic policyon Large
Generator Interconnections and Small
Generator Interconnections

Issue final rules on both policies in FY
2003

The Large Generator Interconnection inal
tule was issued on July24, 2003, and
became effective on October 20, 2003.
The Small Generator Notice of Proposed
Rulemaking was also issued on July 245,
2003. The final rule will be issued in FY
2004.

Percentage of pipeline certificate cases
completed in specified time frames

85% of cases completed within the
following time frames:

<_unprotested cases that involve no
precedential issues, 159 days

< protested cases that involve no
precedential issues, 304 days

<_ cases of first impression or containing
larger policy implications, 365 days

< cases requiring a major
environmental assessment or
environmental impact statement, 480
days

< 148 days for Category 1

< 193 days for Category 2

<_ 272 days for Category 3

< 469 days for Category 4

Percentage of filings addressing the
development of increased hydropower
capacity

25% of all relicense cases using ALP

29% of licenses issued based on the
collaborative process resulted in an
increase in capacity.

Increase non-federal hydropower capacity

Complete license amendments proposing
increased capacitygeneration in less than
12 months

5 amendments authorizing an increase in
capacity were processed in less than 8
months.

32



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

FY 2003

Performance Measurement

Performance Target

Result

Standard office automation platiorm and
PC rate of refresh

33%

During this performance period, in an
effort to reduce costs, the replace cyle
has been changed from 3 years to 3.5
years. During this period 335 CPUs were
replaced that were 3.5 years or older. All
primary FERC workstations are now
newer than 3.5 years old. The
performance measure should refect the
new 28.5% target.

Timeliness of virus definition files updates
on servers and workstations

Updates within 24 hours from release by
vendors

The performance target has been met
We currently have our servers set up to
Auto Update each moming at 1 a.m. or
any Virus Engine Updates and at 2 a.m.
for any DAT (virus definition file) Updates.
They are set to update dailyand to scan
local drives 'On Access’ and boot sectors
and floppy drives on shutdown. Updates
are received via the internal FERC.
“McAfee/NetShield’ FTP server which in
tum is getting the updates straight fom
the secure Network Associates, Inc. (NAI)
site. We update to this server and use it
as an intemal update point for security
and ease of configuration. All
workstations are conigured to check virus
update from FTP server hourly.

IT system changes to complywith
enterprise IT architecture and
configuration management practices

Implement 98% reviews

Although an Enterprise IT Architecture
has not been completed for FERC, 100%
of configuration changes are reviewed
and approved or rejected by the FERC
DCIO Configuration Control Board. All
change requests and approvals are
documented in the FERC configuration
management library.

a



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

outlays. For FY 2003, Commission had budgetary resources available of $196.9
million, the majority of which was derived from new budget authority. This
represents a decrease from FY 2002 budgetary resources available of $198.3
million.

For FY 2003, the status of budgetary resources showed obligations incurred of
$193.4 million, or 98.2 percent of funds available. This is comparable to FY 2002
obligations incurred of $196.4 million, or 97.8 percent of funds available. Total
outlays for FY 2003 were $10.9 million, which represents a $6.6 million increase
from FY 2002 total outlays of $4.3 million.

The Statement of Financing

The Statement of Financing is designed to provide the bridge between accrual-
based (financial accounting) information in the Statement of Net Cost and
obligation-based (budgetary accounting) information in the Statement of
Budgetary Resources by reporting the differences and reconciling the two
statements. This reconciliation ensures that the proprietary and budgetary accounts
in the financial management system are in balance. The Statement of Financing
takes budgetary obligations and reconciles to the net cost of operations by
deducting non-budgetary resources, costs not requiring resources, and financing
sources yet to be provided.

The Statement of Custodial Activity

The Statement of Custodial Activity shows the total Custodial Revenue Activity
and the Disposition of Collections related to that revenue activity. The effect
should be Net Custodial Revenue Activity equal to zero.

27


Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

+ Stability — service in a marketplace marked by certainty and fairness;

+ Mitigation of market power ~ ensuring that customers are protected
from the types of market power abuses that occurred in California
markets in 2000-2001;

+ Predictability - good price signals to encourage investment in needed
generation and transmission infrastructure; and

+ Innovative technology ~ future technological advances will be
accommodated.

In addition, the proposal envisions that regional authorities will play a significant
role in establishing regional power markets. The Commission will rely on
regional state committees to address significant market design features for their
regions while ensuring that “seams” issues between regions are minimized. State
commission and market participants in each region will have sufficient flexibility
to work out the details of how certain core elements will be implemented in their
respective regions.

Market Oversight and Investigation. One of the clearest lessons stemming from
the electricity crisis in the West is that we need to do a much better job of policing
natural gas and electric markets and addressing problems before they become
severe. In August 2002, we established a new OMOI. OMOl assesses market
performance, ensures conformance with Commission rules, and reports on its
findings to the Commission and the public. OMOl also analyzes overall energy
markets to identify and remedy key issues before they become major problems,
and serves as the “cop on the beat” to ensure that individual market players play
by the rules. The Commission has two main objectives in meeting this goal:

+ Assure pro-competitive market structures and operations; and
+ Remedy individual market participant behavior as needed to ensure
just and reasonable outcomes.

OMOT has given us the ability to identify market conditions and address market
problems quickly and effectively. This is a necessary part of restoring public
confidence in energy markets. We have developed a new Commission meeting
process to update Commissioners frequently on market developments, the first
essential change in how the Commission does business in many years. As a new
office within the Commission, OMOI is developing rapidly and will continue to
expand its ability to quickly identify problems in energy markets and pursue
enforcement issues.

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FEDERAL ENERGY REGULATORY COMMISSION
Notes to Financial Statements

September 30, 2003 and 2002

Pension Expense

Commission employees participate in either the Civil Service Retirement System (CSRS) or the Federal
Employees’ Retirement System (FERS). Employees participating in CSRS contribute 7% of their gross
pay to the plan, and the Commission makes a matching contribution.

On January 1, 1987, FERS went into effect pursuant to Public Law 99-335. Most employees hired after
December 31, 1983, are automatically covered by FERS and Social Security. Employees hired prior to
January 1, 1984, could elect either to join FERS and Social Security or remain in CSRS. FERS offers a
savings plan in which the Commission automatically contributes 1% of employees’ pay and matches any
employee contribution up to an additional 4% of pay. For most employees hired since December 31, 1983,
the Commission also contributes the employer’s matching share for Social Security.

The actuarial present value of accumulated benefits, assets available for benefits, and unfunded pension
liability of CSRS and FERS is not allocated to individual departments and agencies and is therefore not
disclosed by the Commission. Total pension expense paid by the Commission for both plans for fiscal
years 2003 and 2002 was approximately $9.9 million and $10.9 million, respectively. During fiscal year
2003 and 2002, an additional $10.1 million and $8.6 million, respectively, of pension and life and health
insurance expense was recognized by the Commission for amounts that will ultimately be funded through
the Office of Personnel Management. This amount is also recorded as an imputed financing source.

Statement of Budgetary Resources

The obligated balance, net — end of period at September 30, 2003 and 2002 is comprised of the following
components:

2003 2002
Accounts receivable (110,834) (732)
Unfilled customer order from Federal sources (113,092) (18,630)
Undelivered orders 11,394,424 9,889,366
Accounts payable 13,042,397 24,176,103
Total obligated balance, net — end of period $ 24,212,895 34,046,107

Contingencies

Certain licensees have filed appeals with the Commission challenging the basis for other agencies’ costs
included in the annual charges billed by the Commission. These appeals total $52.7 million and
$29.1 million as of September 30, 2003 and 2002, respectively, and are included in revenue collected
under protest. If these licensees were to prevail in their argument that there is no substantial evidence to
support the other agencies’ costs at issue, then the Commission might be obligated to grant relief not only
for the appellants, but also to all other similarly situated licensees, of which there are over 600. Related
losses cannot be estimated at this time.

63 (Continued)


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FEDERAL ENERGY REGULATORY COMMISSION

Statements of Budgetary Resources

Years Ended September 30, 2003 and 2002

Budgetary resources:
Budget authority $
Unobligated balance
Spending authority from offsetting collections earned

Total budgetary resources $

Status of budgetary resources:
Obligations incurred $
Unobligated balances available and apportioned
Unobligated balances — not available

Total status of budgetary resources $

Relationship of obligations to outlays:
Obligated balance, net — beginning of period $
Obligations incurred
Spending authority from offsetting collections
Obligated balance, net — end of period (note 11)

Total outlays $
Outlay:
Disbursements
Collections
Net outlays $

The accompanying notes are an integral part of these statements

51

2003 2002
2,866,943 5,482,057
1,805,305 8,488,718

192,292,407 184,324,676
196,964,655 198,295,451
193,377,167 196,490,146
3,524,264 1,762,681
63,224 42,624
196,964,655 198,295,451
34,046,107 26,145,765
193,377,167 196,490,146
(192,292,407) (184,324,676)
(24,212,895) (34,046,107)
10,917,972 4,265,128
203,133,815 188,459,730
(192,215,843) _ (184,194,602)
10,917,972 4,265,128



Federal Energy Regulatory Commission
Fiscal Year 2003 Annual Financial Report

certification and coastal zone management (CZM) consistency review by state

agencies.

Performance Measurement

Performance Target

Result

Percentage of pipeline certificate cases
completed in specifed time frames

‘85% of cases completed within the
following time frames:

< unprotested cases that involve no
precedential issues, 159 days

< protested cases that involve no
precedential issues, 304 days

nN

cases of first impression or containing
larger policy implications, 365 days

A

cases requiring a major
environmental assessment or
environmental impact statement, 480
days

< 148 days for Category 1

< 193 days for Category 2

< 272 days for Category 3

< 469 days for Category 4

The Commission was well within the casc processing time goals for all categories
of pipeline certificate cases. Although the numbers reflected above are based on
completing 85% of the cases within the respective category goals, the
Commission actually exceeded the goals by completing: 88% of Category 1 cases
in 159 days or less; 100% of Category 2 cases in 304 days or less; 100% of
Category 3 cases in 365 days or less; and 96% of Category 4 cases in 480 days or

less.

Performance Measurement

Performance Target

Result

Percentage of high- and significant-
hazard-potential dams inspected annually

100% of high- and significant-hazard-
potential dams inspected annually

100% of high- and significant-hazard-
potential dams were inspected.

Percentage of high- and significant-
hazard-potential dams meeting all current
structural safety standards

Percentage of high- and significant-
hazard-potential dams meeting all current
structural safety standards remains
uniformly high

95% of high- and significant-hazard-
potential dams met all current structural
safety standards

Percentage of high- and significant-
hazard-potential dams in compliance with
Emergency Action Plan (EAP)
requirements

100% of qualifying dams in compliance
with EAP requirements

100% of qualifying dams were in
compliance with EAP requirements

To protect the life, health, and property, the Commission works to protect the
safety of the approximately 2,600 non-federal hydropower dams it licenses.
FERC’s program inspects high- and significant-hazard-potential dams (about

1,000) once a year and the remaining dams (low-hazard-potential dams) at least
once every three years. Many of the Nation’s dams were constructed more than
100 years ago. Therefore, FERC is working with licensees, dam safety experts,
and other federal and state agencies to develop and apply state-of-the-art safety
criteria appropriately.

14