UNITED STATES OF AMERICA 101 FERC ¶ 61,032

FEDERAL ENERGY REGULATORY COMMISSION

18 CFR Parts 101, 201 and 352

(Docket No. RM02-3-000; Order No. 627) 

Accounting and Reporting of Financial Instruments,

Comprehensive Income, Derivatives and Hedging Activities

(Issued October 10, 2002)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Final Rule.

SUMMARY: The Federal Energy Regulatory Commission is amending its regulations

to update the accounting and financial reporting requirements under its Uniform Systems

of Accounts for jurisdictional public utilities and licensees, natural gas companies and oil

pipeline companies. The Commission is establishing uniform accounting requirements

and related accounts for the recognition of changes in the fair value of certain security

investments, items of other comprehensive income, derivative instruments, and hedging

activities. The Commission is adding new balance sheet accounts to the Uniform

Systems of Accounts to record items of other comprehensive income and derivative

instruments. The Commission is also adding new general instructions and revising

certain account instructions to incorporate the above changes in the existing Uniform

Systems of Accounts. And, the Commission is revising the following Annual Reports:
Docket No. RM02-3-000 - 2 -

FERC Form Nos. 1, 1-F, 2, 2-A and 6 to include the new accounts and a new schedule

contained in the Final Rule. 

The Commission is severing from this rulemaking proceeding the inquiry on

whether independent and affiliated power marketers, and power producers should

continue to be eligible, on a case by case basis, for waiver of the Commission's Uniform

Systems of Accounts and blanket approval under Part 34 of the Commission's regulations

for the issuance of securities and the assumptions of liabilities. The Commission will

consider separately the issue of accounting and reporting requirements by gas marketers,

independent and affiliated power marketers, and power producers . 

 An important objective of the rule is to provide sound and uniform accounting

and financial reporting for the above types of transactions and events. The new accounts

and reporting schedule will add visibility, completeness and consistency of accounting

and reporting changes in the fair value of certain financial instruments, items of other

comprehensive income, derivative instruments and hedging activities, in the above

mentioned FERC Forms.

EFFECTIVE DATE: The rule will become effective [insert date 60 days after 

publication in the FEDERAL REGISTER]. 

FOR FURTHER INFORMATION CONTACT:

Mark Klose, (Technical Information) 

Office of the Executive Director

Federal Energy Regulatory Commission

888 First Street, N.E. 
Docket No. RM02-3-000 - 3 -

Washington, D.C. 20426 

 (202) 502-8283

Julia A. Lake, (Legal Information)

Office of the General Counsel

Federal Energy Regulatory Commission

888 First Street, N.E.

Washington, D.C. 20426

(202) 502-8370

SUPPLEMENTARY INFORMATION:

TABLE OF CONTENTS

I. INTRODUCTION

II. BACKGROUND

III. DISCUSSION

A. General

B. Inquiry Concerning Waivers Given to Marketers and Others

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

Securities 

D. Accounting for Other Comprehensive Income

E. Accounting for Derivatives and Hedging Activities

1. General

2. General Instructions for Fair Value and Cash Flow Hedges 

3. Changes to General Instruction 21 Allowances

4. Accounting for Derivative Assets and Liabilities
Docket No. RM02-3-000 - 4 -

a. Balance Sheet Classification for Derivative Assets and 

 Liabilities

b. Income Statement Classification for Changes in Value of 

 Derivative Instruments

c. Inclusion of the Normal Purchases and Sales Scope Exception

F. Changes to the FERC Annual Report Forms 

G. Disclosure Requirements

H. Miscellaneous Items

IV. REGULATORY FLEXIBILITY ACT CERTIFICATION

V. ENVIRONMENTAL IMPACT STATEMENT

VI. INFORMATION COLLECTION STATEMENT

VII. DOCUMENT AVAILABILITY

VIII. EFFECTIVE DATE AND CONGRESSIONAL NOTIFICATION

REGULATORY TEXT

APPENDIX A - LIST OF COMMENTERS

APPENDIX B - PROPOSED SCHEDULES FOR FORMS 1, 1-F, 2, 2-A, 

AND 6
UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Pat Wood, III, Chairman;

 William L. Massey, Linda Breathitt,

 and Nora Mead Brownell.

Accounting and Reporting of Financial Instruments, Docket No. RM02-3-000

Comprehensive Income, Derivatives and Hedging 

Activities

FINAL RULE

ORDER NO. 627 

(Issued October 10, 2002)

I. INTRODUCTION

1. The Federal Energy Regulatory Commission (Commission) is amending its

accounting and financial reporting regulations. In a Notice of Proposed Rulemaking

issued on December 20, 2001, the Commission proposed to amend its Uniform Systems
Docket No. RM02-3-000 - 2 - Docket No. RM02-3-000

1

Section 301(a) of the Federal Power Act (FPA), 16 U.S.C. 825(a), section 8 of

the Natural Gas Act (NGA), 15 U.S.C. 717g and section 20 of the Interstate Commerce

Act (ICA), 49 App. U.S.C. 20 (1988), authorize the Commission to prescribe rules and

regulations concerning accounts, records and memoranda as necessary or appropriate for

the purposes of administering the FPA, NGA and the ICA. The Commission may

prescribe a system of accounts for jurisdictional companies and, after notice and

opportunity for hearing, may determine the accounts in which particular outlays and

receipts will be entered, charged or credited.

2

Part 101 Uniform System of Accounts Prescribed for Public Utilities and

Licensees Subject to the Provisions of the Federal Power Act. 18 CFR Part 101 (2002).

3

Part 201 Uniform System of Accounts Prescribed for Natural Gas Companies

Subject to the Provisions of the Natural Gas Act. 18 CFR Part 201 (2002).

4

Part 352 Uniform System of Accounts Prescribed for Oil Pipeline Companies

Subject to the Provisions of the Interstate Commerce Act. 18 CFR Part 352 (2002).

of Accounts 1

 for public utilities and licensees2, natural gas companies3 and oil pipeline

companies4

 by establishing uniform accounting requirements for the recognition of

changes in the fair value of certain security investments, items of other comprehensive

income, derivative instruments, and hedging activities. The Commission is adding new

balance sheet accounts to the Uniform Systems of Accounts to record items of other

comprehensive income and changes in the fair value of derivative instruments. The

Commission is also adding new general instructions for the accounting of derivative

instruments and hedging activities along with new instructions for the accounting of

items of other comprehensive income. Revisions to existing investment asset accounts

and general instructions will incorporate fair value accounting for trading and availablefor-sale type security investments.
Docket No. RM02-3-000 - 3 - Docket No. RM02-3-000

5

The FERC Annual Reports bear the following OMB approvals: Form No. 1 has

OMB approval number 1902-0021; Form No. 1-F has OMB approval number 1902-

0029; Form No. 2 has OMB approval number 1902-0028; Form No. 2-A has OMB

approval number 1902-0030; and Form No. 6 has OMB approval number 1902-0022. 

2. Additionally, the Commission is revising the following Annual Reports: FERC

Form No. 1, Annual Report of Major Public Utilities, Licensees and Others (Form 1);

FERC Form No. 1-F, Annual Report of Nonmajor Public Utilities and Licensees (Form

1-F); FERC Form No. 2, Annual Report of Major Natural Gas Companies (Form 2);

FERC Form No. 2-A, Annual Report of Nonmajor Natural Gas Companies (Form 2-A);

and Form No. 6, Annual Report of Oil Pipeline Companies (Form 6) to include the new

accounts and a new schedule.5

3. These revisions are being made to improve the usefulness of financial information

provided to the Commission and other users of the FERC Forms by establishing uniform

accounting and reporting requirements for items of other comprehensive income,

changes in the fair value of investment securities, derivatives, and hedging activities. An

important objective of the rule is to provide sound and uniform accounting and financial

reporting for the above types of transactions and events. The Commission is of the view

that such requirements are needed because these types of transactions and events are not

specifically addressed in the existing Uniform Systems of Accounts or in FERC Forms 1,

1-F, 2, 2-A, and 6. This Final Rule is part of the Commission's ongoing effort to address
Docket No. RM02-3-000 - 4 - Docket No. RM02-3-000

6

The accounting pronouncements issued by FASB were Financial Accounting

Standards (FAS) 115, Accounting for Certain Investments in Debt and Equity Securities,

130, Reporting Comprehensive Income, and 133, Accounting for Derivative Instruments

and Hedging Activities, as amended by 138, Accounting for Certain Derivative

Instruments and Certain Hedging Activities. These accounting pronouncements may be

obtained from FASB at ( http://accounting.rutgers.edu/raw/fasb/ ). 

emerging financial and accounting developments within the context of the Uniform

Systems of Accounts.

II. BACKGROUND

4. In recent years, fair value measurements have become useful in assisting investors,

creditors and other users of the financial data in making rational investment, credit and

similar decisions. The use of fair value as a measurement attribute for financial reporting

has grown in importance and relevance. Despite this fact, the companies that this

Commission regulates traditionally have had only a relatively small number of

transactions for which fair value measurements would be appropriate. This however is

changing. As the regulated industries restructure and a greater percentage of sales are

based on other than cost-of-service, fair value will increasingly provide a relevant

measure of economic effects for a growing number of transactions and events. The 

usefulness of fair value information has resulted in the Financial Accounting Standards

Board (FASB) issuing new accounting pronouncements affecting the manner in which

certain types of financial instruments, derivatives and hedging activities are measured

and reported in the financial statements applicable to entities in general.6
Docket No. RM02-3-000 - 5 - Docket No. RM02-3-000

7

 See, All Jurisdictional Public Utilities and Licensees, Natural Gas Companies,

and Oil Pipeline Companies, 96FERC ¶ 62,147 (2001).

8

 See 97FERC ¶ 61,321 (2001).

5. The Commission considers the requirements contained in Financial Accounting

Standards (FAS) 115, 130 and 133 to be an improvement in financial accounting and

reporting practices if properly implemented and interpreted for filings made with this

agency. While some companies have implemented certain aspects of these

pronouncements, the implementation has not been uniform concerning the accounting

and reporting to the Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6. 

6. On August 10, 2001, the Commission's Chief Accountant issued interim

accounting guidance on the proper accounting and reporting requirements for financial

instruments, comprehensive income, derivatives and hedging activities.7

 This interim

accounting guidance was subsequently followed by a Notice of Proposed Rulemaking

(NOPR) issued on December 20, 2001, in which the Commission proposed changes to its

accounting and financial reporting requirements to establish uniform accounting and

reporting of the above mentioned items.8

 

7. The Commission received numerous comments from interested parties on its 

proposed changes to the accounting and financial reporting requirements. As more fully

discussed below, the Commission is issuing this final rule to provide guidance on the
Docket No. RM02-3-000 - 6 - Docket No. RM02-3-000

9

 See Appendix A for Listing of Commenters.

proper interpretation and implementation of the principles and concepts set forth in 

FAS 115, 130 and 133 for accounting and financial reporting to the FERC.

III. DISCUSSION

A. General

8. As discussed in the NOPR, the current accounting and financial reporting

standards for certain investment securities, derivative instruments, and hedging activities

were developed when companies that this Commission regulates had only a relatively

small number of transactions for which fair value measurements would be appropriate. 

As a result of the increased usage of derivative instruments to manage risk along with

recent developments in the accounting profession, the Commission proposed revisions to

its accounting and financial reporting requirements to provide greater visibility and

transparency of these transactions and to help minimize inconsistent accounting and

reporting of the above mentioned items. 

9. The Commission received 36 comments concerning various aspects of the

proposed rule.9

 The majority of commenters were supportive of the Commission’s effort

to provide interpretative guidance on the application of generally accepted accounting

principles to jurisdictional entities that presently file financial information to the
Docket No. RM02-3-000 - 7 - Docket No. RM02-3-000

10 See for example APGA at p. 1, EEI at p. 3, Dominion at p. 5, Pinnacle West at

p. 3, Sempra at p. 1, Portland General at p. 3, NRECA at p. 6, Ohio PUC at p. 2,

NYPUC at p. 2, and Williams at p. 2.

11 See for example Williams at p. 4.

Commission in Annual Report Forms 1, 1-F, 2, 2-A, and 6.10 Additionally, some

commenters did not find the new standards as reflected in the proposed regulations

unduly burdensome and have already implemented the principles and concepts contained

in FAS 115, 130 and 133.11

10. The addition of new accounts and related general instructions is intended to

improve the visibility, completeness and consistency of accounting and reporting of

changes in the fair value of certain investment securities, items of other comprehensive

income, derivatives and hedging activities. The addition of new accounts will enhance

the Commission's understanding of the nature and extent to which derivatives and

hedging activities are used by regulated entities and the impact these transactions and

events have on their financial condition. With a greater understanding of the financial

impact that derivative instruments have on regulated entities the Commission will be in a

better position to make more informed decisions that affect the industries it regulates. 

11. Also, the addition of the new reporting requirements to the FERC Forms 1, 1-F, 2,

2-A and 6 will reduce regulatory uncertainty as to the proper accounting and reporting

for these items, and minimize regulatory burden by reducing the potential differences in
Docket No. RM02-3-000 - 8 - Docket No. RM02-3-000

12 We note that the Commission's jurisdiction over issuances of securities and

assumptions of liabilities under section 204 of the FPA applies only to entities that are

(continued...)

the manner in which these amounts are reported to shareholders and to the Commission. 

B. Inquiry Concerning Waivers Given to Marketers and Others

12. There are a number of public utilities with market-based rates that have received

waivers from the Commission's Uniform System of Accounts, and thus would not be

subject to the rule, for as long as the Commission continues the waivers. For instance,

Parts 41, 101, and 141 of the Commission's regulations prescribe certain informational

requirements that focus on the physical assets that a public utility owns. For marketbased rate applications by public utilities, the Commission has taken the position that

since a marketer does not own any electric power generation or transmission facilities, its

jurisdictional facilities would be only corporate and documentary, its costs would be

determined by utilities that sell power to it, and its earnings would not be defined and

regulated in terms of an authorized return on invested capital, and that, accordingly, it

would grant waivers to marketers of the requirements of these Parts. The Commission

has also granted power marketers and others their requests for blanket approval under

Part 34 of the Commission's regulations for all future issuances of securities and

assumptions of liability, assuming that no party objects to such treatment during a notice

period which the Commission provides.12 The Commission concluded that since
Docket No. RM02-3-000 - 9 - Docket No. RM02-3-000

12(...continued)

public utilities as defined in the FPA and only where the public utilitity's security issues

are not regulated by a State commission (see FPA section 204(f)).

13See, e.g., St. Joe Minerals Corp, 21 FERC ¶ 61,323 (1982); Cliffs Electric

Service Company, 32 FERC ¶ 61,372 (1985); Citizens Energy Corporation, 35 FERC 

¶ 61,198 (1986); Howell Gas Management Company, 40 FERC ¶ 61,336 (1987);

Citizens Power & Light Corporation , 48 FERC ¶ 61,210 (1989); National Electric

Associates Limited Partnership, 50 FERC ¶ 61,378 (1990); and Nevada Sun-Peak

Limited Partnership, 86 FERC ¶ 61,243 (1999).

marketers do not obligate themselves to serve electric consumers, the requirements are

inapplicable.13

13. As the development of competitive wholesale power markets continues, however,

independent and affiliated power marketers, and power producers are playing more

significant roles in the electric power industry. In light of the evolving nature of the 

electric power industry, the Commission sought comment in the NOPR on the extent to

which these entities should be required to follow the Uniform System of Accounts, what

financial information, if any, should be reported by these entities, how frequently it

should be reported, and, in particular, whether these exempted entities should be subject

to reporting the information required in the proposed regulations. 

14. Furthermore, the Commission sought comments on whether it should rescind the

Part 34 blanket authorizations granted to independent and affiliated power marketers and

power producers and require these entities to comply with the filing requirement of Part

34 for all future issuances of securities and assumptions of liabilities. The purpose of
Docket No. RM02-3-000 - 10 - Docket No. RM02-3-000

14See for example, EEI at p. 14, Sempra at p. 1, and APX at p. 8.

15See for example, Sempra at p. 12.

16See for example, Avista at p. 7, Competitive at p. 16, and NEM at p. 5.

requiring these marketers and producers to comply with these regulations would not be to

ensure their financial viability under Section 204 of the FPA. Rather, it would be to

promote transparency and facilitate investor risk analysis which in the long run promotes

infrastructure and competition, and makes rates more just and reasonable. 

15. Most commenters stated that the Commission should not revoke the existing

waivers. They argue that the basis for the Commission initially granting the waivers has

not changed. They stated that marketers do not own any electric power generation or

transmission facilities; their jurisdictional facilities are only corporate and documentary; 

their costs are determined by utilities that sell power to it; and their earnings are not

defined and regulated in terms of an authorized return on invested capital.14

16. They also argue that the marketers would incur substantial costs if required to add

new accounting systems at this time to capture data required by the Uniform System of

Accounts.15 Additionally, they assert that providing the data could place the marketers in

a competitive disadvantage because the information is proprietary in nature.16

17. Furthermore, they argue that the application of the Uniform System of Accounts,

and the approval of the issuance of securities does not work well with power marketers

and power producers, because these requirements are focused on providing accurate
Docket No. RM02-3-000 - 11 - Docket No. RM02-3-000

17See for example, EEI at p. 15, Dominion at p. 7.

18See for example, EEI at p. 16, Dominion at p. 7, Sempra at p. 13, Avista at p. 7,

and Calpine at p. 6.

19See Sempra at p. 6 and 7. 

information for the determination of cost-based rates, and the accounting rules are not

relevant to entities with market-based rate authority.17

18. Regarding the filing requirements of Part 34, some commenters stated that this

regulation was intended to prevent the issuance of securities that might impair the

company's ability to perform its public utility responsibilities, however independent and

affiliated power marketers and power producers are not public utilities with such

responsibilities. They state that applying Part 34 to power marketers would be

unreasonable because it is unclear how the Commission could determine whether

particular issuances are compatible with the public interest and could force power

marketers out of business.18 

19. One commenter stated that there are indications within the NOPR that the

Commission does not intend its proposed rule to apply to gas marketers. They requested

that the Commission clarify its intent to exempt gas marketers from the Uniform System

of Accounts and related annual reporting requirements, and continue to honor the

existing waivers previously granted to these entities.19 Others state that the new rules

should not sweep in qualified facilities and other on-site generators that primarily serve
Docket No. RM02-3-000 - 12 - Docket No. RM02-3-000

20See American Forest at p. 5.

21See Calpine at p. 3.

22See NYPSC at p. 2 and 3, Ohio PUC at p. 5, APGA at p. 14, and NRECA at p.

5.

23See APGA at p. 15. 

host facilities.20 Finally, some commenters stated that other government agencies such as

the U.S. Securities and the Exchange Commission (SEC) and the Commodity Futures

Trading Commission (CFTC) are better suited to regulate accounting and the use of

financial derivatives.21

20. Some commenters however supported extending the accounting and reporting

requirements to marketers, power producers, and affiliates with market based rates.22

They argue that the events of the last few months justify these new requirements. In their

view, in light of the public's better understanding of the role derivatives play in energy

security, the need for the Commission to obtain such information outweighs the reasons

for exempting such entities. They state that the Commission requires a comprehensive

picture of the marketplace and that the picture is incomplete if these entities are

exempted from reporting requirements.23 In their view, the requirements would help

state regulators in reviewing financial activities that may subject utilities to financial risk. 

Therefore, they recommend that affiliates of utilities be subject to existing and proposed

Uniform System of Accounts requirements insofar as derivative and hedging transactions

may impact and affect traditional utilities. 
Docket No. RM02-3-000 - 13 - Docket No. RM02-3-000

24 See Ohio PUC at p. 5. 

25 See NRECA at p. 5. 

26 See for example, Congentrix at p. 10, DENA at p. 10, EPSA at p. 3, and J. Aron

(continued...)

21. One commenter suggested the possibility of requiring independent and affiliated

power marketers and power producers to maintain a translation matrix, certified by the

company's ethics officer, that could quickly convert its current method of maintaining

financial records into the Uniform System of Accounts. Thus, information need not be

filed but would be available in a consistent and easily understandable format if 

necessary. 

24 Another commenter recommended that the Commission expand its data

collection on derivative instruments. The purpose for derivative data collection should

be not only to assist the Commission in its monitoring efforts, but also to further the

transparency of the energy derivatives markets. The Commission should collect and

make summary data available to potential buyers and sellers in the market, and in essence

provide market participants with a forward price curve, allowing them to benchmark

proposed deals.25

22. Finally, some commenters indicated that the Commission needs to reform its data

resources with regard to monitoring competitive electric markets and market based

sellers. If any changes are to be considered with regard to information review, the

Commission should employ a thoughtful stakeholder process, such as a technical

conference, to identify its information needs.26
Docket No. RM02-3-000 - 14 - Docket No. RM02-3-000

26(...continued)

at p. 11.

23. The Commission has decided to sever from this rulemaking proceeding, the

inquiry on whether independent and affiliated power marketers, and power producers

should continue to be exempt from the Commission's Uniform System of Accounts and

other reporting requirements. The Commission thus will consider separately the issue of

what information collection and recordkeeping requirements it may impose on gas

marketers, independent and affiliated power marketers, and power producers . While

the Commission is sensitive to the fact that independent and affiliated power marketers

and power producers and their use of derivatives are playing a more significant financial

role in this evolving electric power industry, we also recognize the need to reform the

approach used to monitor competitive electric markets and market based sellers in the

context of a number of current and ongoing Commission initiatives. 

24. For example, there are several ongoing investigations that may impact on the

direction the Commission may take vis-a-vis power marketers and power producers. In

addition, the Commission is currently reviewing its existing reporting requirements to

determine what new information needs to be collected to monitor competitive energy

markets, the sources for that information, how often that information should be updated,

and how the Commission should gain access to specific information as needed in order to
Docket No. RM02-3-000 - 15 - Docket No. RM02-3-000

effectively monitor energy markets. The Commission thus will hold technical

conferences and outreach meetings on these matters. 

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

25. In May 1993, the FASB issued Financial Accounting Standard (FAS) 115,

Accounting for Certain Investments in Debt and Equity Securities, effective for fiscal

years beginning after December 15, 1993. This statement addressed the accounting and

reporting for investments in equity securities that have a readily determinable fair value

and for all investments in debt securities, and its major provisions were summarized in

the NOPR.

26. Under the Commission's Uniform Systems of Accounts for public utilities and

licensees, and natural gas companies, all types of securities are recorded at cost and

subsequent changes in the fair value of security investments are normally not recognized

in the financial statements until realized. The Uniform System of Accounts for oil

pipeline companies however, permits the recognition of decreases in the carrying value

of investment securities, but currently would not permit the carrying value to be

increased. 

27. The Commission is of the view that fair value measurement of the trading and

available-for-sale type securities presents relevant and useful information to regulators

and others. For example, fair value measurements provide useful information to the
Docket No. RM02-3-000 - 16 - Docket No. RM02-3-000

27 The security investment accounts for public utilities and gas pipeline companies

are: Account 124, Other investments; Account 125, Sinking funds (Major only); 

Account 126, Depreciation fund (Major only); Account 127, Amortization fund (Major

only); Account 128, Other special funds (Major only); and Account 129, Special funds

(Nonmajor only). The security investment asset accounts for oil pipelines are 

Account 11, Temporary investments; Account 21, Other investments; and Account 22,

Sinking and other funds. 

Commission concerning the status of certain amounts set aside to fund future obligations

such as decommissioning nuclear plants. 

28. The Commission therefore proposed to add language to its security investment

accounts for public utilities and licensees, natural gas companies, and oil pipeline

companies to permit the recognition of changes in the fair value of trading and availablefor-sale types of securities due to unrealized holding gains and losses.27 The

Commission also proposed amending its oil pipeline General Instruction 1-15,

Accounting for marketable equity securities, and removing oil pipeline Accounts 23, 24,

and 75.5 to conform the regulations to the proposed changes.

29. The Commission received no objections concerning its proposal to include

unrealized holding gains and losses on certain qualifying securities in the investment

asset accounts, or to its proposal to amend its oil pipeline General Instruction 1-15 to

conform the regulations to the proposed changes. Therefore the Commission will revise

the instructions to its investment accounts and make conforming changes to the

applicable oil pipeline General Instruction 1-15, to require the recording of unrealized

holding gains and losses on certain eligible investment securities. 
Docket No. RM02-3-000 - 17 - Docket No. RM02-3-000

28 See for example, EEI at p. 12, and NRECA at p. 8.

30. As part of the accounting for recording unrealized holding gains and losses on

certain investment securities, the Commission proposed to include in a separate section

of stockholders equity, the corresponding change in value of these securities. Some

commenters stated that changes in the carrying value of certain securities that will be

ultimately used in the development of future rates, such as nuclear decommissioning trust

funds, are better reflected in a regulatory asset or a regulatory liability account rather than

in accumulated other comprehensive income when it is probable that the customer, rather

than the stockholder, will be affected by changes in the value of these securities. They 

indicated that it is prevailing practice within the electric industry to record regulatory

assets or liabilities when it is probable that such changes in the fair market value will be

considered by regulators in the setting of rates in future proceedings.28 Such prevailing

practice according to the commenters is in accordance with the provisions of FAS 71,

"Accounting for the Effects of Certain Types of Regulation." In order to implement this

change, the commenters recommended that the final rule should include revised account

descriptions of Accounts 182.3 and 254 to include certain items of other comprehensive

and the new General Instruction for Accounting for Other Comprehensive Income should

be revised accordingly.

31. The Commission agrees that under certain circumstances it may be appropriate for

rate regulated entities to report unrealized holding gains and losses on certain investment
Docket No. RM02-3-000 - 18 - Docket No. RM02-3-000

29 See Revisions to Uniform Systems of Accounts to Account for Allowances

Under the Clean Air Act Amendments of 1990 and Regulatory-Created Assets and

Liabilities and to Form Nos. 1, 1-F, 2 and 2-A. Order No. 552, 58 FR17982 (Apr. 7,

1993), FERC Stats & Regs. Regulations Preambles January 1991-June 1996 ¶ 30,967

(Mar. 31, 1993).

30Comprehensive income is defined by FASB in Concepts Statement No. 6 as, 

"the change in equity [net assets] of a business enterprise during a period from

transactions and other events and circumstances from nonowner sources. It includes all

changes in equity during a period except those resulting from investments by owners and

distributions to owners." 

securities as regulatory assets or regulatory liabilities pursuant to Order 552 which

adopted the accounting standards set forth in FAS 71.29 The Commission will revise its

proposed General Instruction for Accounting of Other Comprehensive Income and its

existing regulatory asset and liability accounts accordingly.

D. Accounting for Other Comprehensive Income

32. In June 1997, the FASB issued FAS 130, Reporting Comprehensive Income. This

statement established the standards for reporting comprehensive income in a full set of

general-purpose financial statements effective for fiscal years beginning after 

December 15, 1997. Comprehensive income represents the change in equity of an entity

during a period from transactions and other events and circumstances from nonowner

sources. Comprehensive income is composed of traditional net income plus items of

"other comprehensive income."30 The major provisions of this statement were

summarized in the NOPR.
Docket No. RM02-3-000 - 19 - Docket No. RM02-3-000

33. The Commission proposed to revise the Uniform Systems of Accounts for public

utilities and licensees, natural gas companies and oil pipeline companies to provide

accounting for items of other comprehensive income, and proposed the creation of two

new equity accounts to record the activity related to other comprehensive income. The

proposed new accounts would require supporting records be maintained by each category

of other comprehensive income for reporting the information in the FERC Forms 1, 1-F,

2, 2-A, and 6. 

34. The Commission also proposed instructions to the other comprehensive income

accounts for all jurisdictional entities that would require supporting records be

maintained by each category of other comprehensive income. This level of record

keeping is required so that the entity is able to identify the amounts associated with the

item of other comprehensive income when it enters into the determination of net income

in subsequent periods. 

35. Many commenters questioned the need and the benefit of using two accounts for

the recognition of other comprehensive income, along with the requirement to transfer

amounts of other comprehensive income from Account 219.1 to Account 219 at the

balance sheet date. In their view this was a duplicative requirement and therefore they 
Docket No. RM02-3-000 - 20 - Docket No. RM02-3-000

31 See, for example, EEI at p. 5, AEP at p. 2, Dominion at p. 14, Southern at p. 1,

and Pinnacle at p. 3. 

recommended the use of only one equity account for the recognition of other

comprehensive income.31 

36. Based upon the comments received the Commission agrees that one equity

account can accommodate all of the activity provided that sufficient detailed records are

maintained in order to identify and display current years' activity for items of other

comprehensive income, in addition to providing a year-to-date summary of the activity. 

Therefore, the Commission will create only one account for public utilities and licensees,

and natural gas companies entitled Account 219, Accumulated other comprehensive

income, and one account for oil pipeline companies entitled Account 77, Accumulated

other comprehensive income, to record amounts for items of other comprehensive

income in stockholders equity. However, the Commission will keep the requirements

originally set forth in the NOPR that detailed records be maintained so that the current

period activity, year-to-date activity, and reclassification adjustments related to items of

other comprehensive income can be readily identified. Maintaining detailed records for

items included in accumulated other comprehensive income are necessary so that an

entity can readily identify amounts when the item is included in net income in subsequent

periods and to periodically report this information in the new reporting schedule entitled

Accumulated Other Comprehensive Income and Hedging Activities. 
Docket No. RM02-3-000 - 21 - Docket No. RM02-3-000

37. Finally, the NOPR proposed the need for reclassification adjustments for items of

other comprehensive income to avoid double counting an item in net income and other

comprehensive income. The proposed instructions would have required that

reclassification adjustments be made directly to other comprehensive income. This

proposed accounting treatment for reclassification adjustments would minimize the need

for creating a new account to capture amounts solely related to reclassification

adjustments. 

38. No commenters objected to the proposed accounting for reclassification

adjustments. The Commission will therefore adopt the proposed accounting for

reclassification adjustments.

E. Accounting for Derivatives and Hedging Activities

1. General

39. In June 1998, the FASB issued FAS No. 133, Accounting for Derivative

Instruments and Hedging Activities, as amended on June 2000, by FAS 138, Accounting

for Certain Derivative Instruments and Certain Hedging Activities. This pronouncement

was issued in a response to an increased use of derivatives and to resolve problems with

the accounting and reporting practices for derivatives and hedging activities. These

problems included incomplete and inconsistent accounting guidance on the effects of

derivative transactions and hedging activities. The effects of derivatives were not

transparent in the basic financial statements, and many derivative instruments were
Docket No. RM02-3-000 - 22 - Docket No. RM02-3-000

carried "off-balance-sheet" regardless of whether they were formally part of a hedging

strategy. The NOPR summarized the key points of the pronouncement.

2. General Instructions for Fair Value and Cash Flow Hedges

40. The Commission proposed to add a new general instruction that would require

public utilities and licensees, natural gas companies, and oil pipeline companies to record

changes in the fair value of the derivative instrument designated as a cash flow hedge to

other comprehensive income. The proposed instructions would also require

jurisdictional entities to record changes in the fair value of a derivative instrument

designated as a fair value hedge in the new derivative asset or liability account with a

corresponding adjustment to a subaccount of the asset or liability that carries the item

being hedged. The ineffective portion of the cash flow and fair value hedges would be

charged to the same income or expense account that will be used when the hedged item

enters into the determination of net income. 

41. No commenters objected to the above proposal regarding the use of a subaccount

to adjust the carrying amount of the asset or liability being hedged under a fair value

hedge, or the proposal to include the ineffective portion of the hedge in the same income
Docket No. RM02-3-000 - 23 - Docket No. RM02-3-000

32 See FAS 133 as amended by FAS 138 for definition, examples and illustrations

of assessing effectiveness and measuring ineffectiveness for fair value and cash flow

hedges. 

or expense account that will be used when the hedged item enters into the determination

of net income.32 Therefore, the Commission will implement this change as proposed. 

3. Changes to General Instruction 21. Allowances

42. The Commission proposed to make technical changes to its existing general

instructions concerning the accounting for hedge transactions related to exchange traded

allowance future contracts. General Instruction No. 21, Allowances, of Part 101, directs

public utilities to defer in Account 186, Miscellaneous deferred debits, or Account 253,

Other deferred credits, the costs and benefits from hedging transactions associated with

exchange traded allowance future contracts. The Commission proposed to delete

paragraph I to be consistent with proposed accounting for derivatives. The accounting

framework proposed for derivatives would also include exchange traded future

allowances. No commenters objected to the changes proposed to General Instruction 21,

Allowances, therefore, the Commission will implement the changes as proposed.

4. Accounting for Derivative Assets and Liabilities

a. Balance Sheet Classification for Derivative Assets and Liabilities
Docket No. RM02-3-000 - 24 - Docket No. RM02-3-000

33 See FAS 133 as amended by FAS 138 for discussion and examples of hedging

activities.

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

43. The NOPR proposed establishing new balance sheet accounts to record derivative

assets and liabilities. Under the proposal, derivative assets and liabilities would be

accounted for and reported to the Commission based upon their intended use. 

Derivatives used for hedging activities would be classified in Accounts 176 and 245 for

public utilities and licensees, and natural gas companies, and Accounts 47 and 66 for oil

pipeline companies.33 Derivatives used in non-hedging activities would be classified in

Accounts 175 and 244 for public utilities and licensees, and natural gas companies, and

Accounts 46 and 65 for oil pipeline companies. 

44. The Commission also noted in the NOPR that entities are required to classify

derivative assets and liabilities as current or long-term on their financial statements

reported to the U.S. Securities and Exchange Commission (SEC) and in Annual Reports

to Stockholders. The Commission stated that entities may create current and long-term

subaccounts associated with the proposed new derivative balance sheet accounts in order

to facilitate reporting derivative assets and liabilities to shareholders in general purpose

financial statements. 

45. Some commenters responded that the Commission should create current and

long-term accounts to record derivative assets and liabilities on the balance sheet.34 They
Docket No. RM02-3-000 - 25 - Docket No. RM02-3-000

stated that the Commission’s Uniform System of Accounts includes separate sections for

current and accrued assets and deferred debits, as well as current liabilities and deferred

credits, and that FERC requires that other items be reported as current or long-term. 

They also stated that the establishment of current and long-term accounts would reduce

the potential for misclassifications between current and long-term subaccounts of the

proposed new accounts.

46. At this time the Commission declines to adopt the commenters' suggestion that

derivative assets and liabilities should be reported to the Commission based upon a

current or long-term balance sheet distinction. It is important for the Commission to

obtain information concerning the nature of the derivative transactions that jurisdictional

entities have entered into to manage their financial and other business risks. By reporting

to the Commission derivative instruments used to hedge business risks separately from

those derivative instruments used for non-hedging activities, the Commission and other

regulators will have enhanced information as to the positions regulated entities have at

the balance sheet date related to the entities' hedging and non-hedging activities. This

important distinction would not be transparent if derivative instruments were displayed in

the FERC Forms 1, 1-F, 2, 2-A and 6 based upon a current or long-term balance sheet

classification. Additionally, reporting derivative instruments based upon their intended

use will assist regulators in assessing the activities of jurisdictional entities related to

their traditional utility business as compared to their trading activities.
Docket No. RM02-3-000 - 26 - Docket No. RM02-3-000

35 See Cinergy at p. 4.

36 See for example Southern Company at p. 3 and EEI at p. 12.

b. Income Statement Classifications for Changes in the Value of 

Derivative Instruments

47. The Commission proposed that public utilities and licensees, and natural gas

companies would use Account 421, Miscellaneous nonoperating income, and oil pipeline

companies would use Account 660, Miscellaneous income charges, to record on the

income statement the change in the fair value of the derivative instruments not used in

hedging activities. 

48. One commenter specifically supported the use of Account 421 to record gains and

losses on non-hedge activities.35 They indicated that using Account 421 to record gains

and Account 426.5 to record losses did not provide valuable information and they found

it very difficult to separate gains and losses due to the large volumes of derivative

transactions from power trading activities. However other commenters asserted that

Account 421 is appropriate when there is an increase in the fair value of a derivative

instrument, and Account 426.5 is appropriate when there is a decrease in the fair value of

the derivative instrument.36 

49. The Commission concurs with the commenters that a better accounting and

financial presentation is not to net gains and losses in one income statement account, but

rather to record gains from non-hedging activities in Account 421 and losses in 
Docket No. RM02-3-000 - 27 - Docket No. RM02-3-000

Account 426.5, for electric and natural gas companies. The use of separate income

statement accounts to record gains and losses on derivative instruments used in nonhedging activities follows our existing accounting practice for exchange traded emission

allowances. Finally, the Commission will also require that oil pipelines record gains in

Account 640, Miscellaneous income, and losses in Account 660, Miscellaneous income

charges, to better reflect increases and decreases in the fair value of derivative

instruments not used in hedging activities on the income statement. 

50. This accounting will aid the Commission and other users of the FERC Forms 1, 

1-F, 2, 2-A and 6 to see more clearly the extent to which gains or losses have been

incurred on non-hedging derivative transactions. And, by separately recording changes

in the value of derivative instruments in separate income and expense accounts, any

subsequent reclassification of amounts will be better displayed if a regulator chooses to

include a portion of the holding gains or losses, or realized gains or losses, in the

development of rates. 

51. While respondents did not object to the use of below-the-line income statement

accounts to record both unrealized and realized gains or losses on derivative instruments

used for non-hedging activities, there were many views on what the appropriate

accounting should be in instances when a regulator incorporates all or part of the actual

gain or loss in the development of rates. The Commission proposed that when a

regulator explicitly approves the inclusion of the changes in fair value of derivative
Docket No. RM02-3-000 - 28 - Docket No. RM02-3-000

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

instruments in the development of rates, the company should reclassify those amounts

from the below-the-line income statement accounts to the appropriate utility operating

revenue or expense account that will be charged with the derivative transaction when it

settles.

52. Some commenters indicated that it is inappropriate to record the changes in the

fair value of non-hedge type derivative instruments in a below-the-line account prior to

settlement, only to reclassify some or all of the amount to the appropriate operating

revenue or expense account when the transaction settles.37 They believe that changes in

the fair value that will be included in rates should be initially recorded in the appropriate

operating revenue or expense account, so reclassification is not necessary. Others

support a position that in situations where it is probable that realized gains and losses

would be included in rates, then unrealized changes in fair value of the related derivative

instrument should be deferred in an appropriate regulatory asset or regulatory liability

account. 

53. After reviewing the comments, the Commission is of the view that entities will

avail themselves of the special accounting afforded derivative instruments when these

instruments are entered into as part of a cash flow or fair value hedge transaction. Under

the special accounting afforded qualifying hedges, any unrealized gains and losses

effectively remain on the balance sheet and therefore do not enter into the determination
Docket No. RM02-3-000 - 29 - Docket No. RM02-3-000

of net income until the hedged item enters into the determination of net income. If the

derivative instrument is not part of qualifying hedge, entities will record the unrealized,

as well as realized, gains or losses in Accounts 421 and 426.5 as appropriate. However, 

if the derivative instrument does not qualify for hedge accounting, but it is probable

under the requirements of Order 552 that changes in the fair value of the derivative

instrument will be used in the development of rates, the entity must follow the

Commission's existing accounting regulations for the recognition of regulatory assets and

regulatory liabilities.

c. Inclusion of the Normal Purchases and Sales Scope Exception

54. The Commission noted in the NOPR that certain types of contracts are exempted

from the requirements of FAS 133. For example, normal purchases and normal sales

contracts that provided for the purchase or sale of goods that will be delivered in

quantities expected to be used or sold by the reporting entity over a reasonable period in

the normal course of business are not treated as derivative instruments. This exception is

commonly referred to as the normal purchases and normal sales scope exception. The

exception would include typical purchases and sales of inventory items, certain insurance

contracts, and employee compensation agreements, and certain electric power contracts. 
Docket No. RM02-3-000 - 30 - Docket No. RM02-3-000

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

39 See FAS 133 as amended by FAS 138, Derivatives Implementation Group

(DIG) conclusions, and the Emerging Issues Task Force (EITF) pronouncements. 

These accounting pronouncements may be obtained from FASB at 

( http://accounting.rutgers.edu/raw/fasb/ ). 

55. Some commenters noted that the normal purchases and sales exception should

also be specifically included in the Commission’s regulations.38 They indicate that most

forward power and electric option contracts will meet the normal purchase and sales

scope exception and therefore changes in the contracts' fair value will not be required to

be reflected on the financial statements. The Commission agrees with the commenters

that some electric power contracts will meet this exception and therefore changes in the

fair value of those contracts will not be reflected in the financial statements. 

56. It is the Commission's view that the existing normal purchases and sales

accounting exception criteria should also be applied to transactions that jurisdictional

entities account and report to the Commission in the FERC Forms 1, 1-F, 2, 2-A, and 6. 

The Commission will therefore include language in the General Instructions for the

Accounting for Derivative Instruments and Hedging Activities that provides for the

normal purchases and sales exceptions.39 

F. Changes to the FERC Annual Report Forms

57. The accounting changes proposed in the NOPR would require one new schedule

and changes to existing balance sheet schedules in the FERC Forms 1, 1-F, 2, 2-A, and 6
Docket No. RM02-3-000 - 31 - Docket No. RM02-3-000

filed with the Commission by public utilities and licensees, natural gas companies, and

oil pipeline companies. The proposed new schedule was shown in Appendix A of the

NOPR. 

58. As stated in the NOPR, in order to provide consistent accounting and reporting of

items of other comprehensive income the Commission proposed to add a new schedule

with instructions on the proper footnote disclosures for the FERC Forms 1, 1-F, 2, 2-A,

and 6. The proposed new schedule would show the components of other comprehensive

income and required: 

59. - the reporting of categories of other comprehensive income on a net-of-tax basis,

where appropriate, along with the reporting of the related tax effects allocated to each

component, in a footnote to the schedule. 

60. - the reporting of accumulated other comprehensive income balances at year end

by category, in a footnote to the schedule. 

61. - the reporting of fair value hedge balances at year end by category, in a footnote

to the schedule. 

62. Some commenters recommended format changes to the proposed new schedule to

better display the items of other comprehensive income. A roll-forward format was

recommended that would show the current years activity, in addition to the cumulative
Docket No. RM02-3-000 - 32 - Docket No. RM02-3-000

40 See for example, Dominion at p. 14, Southern at p. 2, and EEI's April 1, 2002,

supplement to its March 11, 2002 filing.

balances for items of other comprehensive income.40 The revised format would display

all of the information proposed in the NOPR without the use of reporting accumulated

balances for certain items through the use of footnotes. 

63. The Commission notes that the roll-forward format recommendation made by the

commenters will improve the transparency of the data displayed and reduce the need for

certain year end balances to be reported in a footnote. The Commission will adopt the

roll-forward format that will display amounts of other comprehensive income during the

current period as well as at the balance sheet date. The new schedule for reporting

derivative information and other comprehensive income amounts is shown in Appendix

B entitled Statement of Accumulated Comprehensive Income and Hedging Activities. 

G. Disclosure Requirements

64. For many years financial statements issued to the public have required the

inclusion of a disclosure entitled "Management's Discussion and Analysis of Financial

Condition and Results of Operations" commonly referred to as the MD&A. It requires a

discussion of liquidity, capital resources, results of operations and other information

necessary to understand the financial condition, changes in financial condition and

results of operations of the entity. 
Docket No. RM02-3-000 - 33 - Docket No. RM02-3-000

41 See SEC release nos. 34-45321;FR-61. This notice may be obtained from the

SEC website at( http://www.sec.gov/rules/other/33-8056.htm )

65. On January 22, 2002, the U.S. Securities and Exchange Commission (SEC)

issued a statement entitled Commission Statement About Management's Discussion and

Analysis of Financial Condition and Results of Operations.41 This statement set forth

certain views of the SEC regarding disclosure that should be considered by registrants

that address matters of liquidity and capital resources including off-balance sheet

arrangements; certain trading activities that include non-exchange traded contracts

accounted for at fair value; and effects of transactions with related and certain other

parties. The SEC's interpretative guidance related to the MD&A did not create new legal

requirements, but suggested steps that issuers of financial statements should consider in

meeting their current disclosure obligations with respect to the matters described above.

66. In particular the SEC's interpretative guidance recommended certain disclosures

about trading activities that include non-exchange traded contracts accounted for at fair

value. The recommended disclosures include information concerning realized and

unrealized changes in fair value of commodity contracts including derivatives, the source

of the fair value price, and the fair value of the contracts at various maturity dates. 

67. The Commission recognizes that there have been some concerns raised about how

the fair value of derivative instruments have been determined. The information provided

by entities in their MD&A will provide additional insight to regulators, investors,
Docket No. RM02-3-000 - 34 - Docket No. RM02-3-000

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

No. 6 p. 108. 

creditors, and other users of the financial statements into the valuation techniques and

assumptions used to value the outstanding contracts as of the balance sheet date. 

68. The Commission is of the view that the type of information disclosed by

jurisdictional entities in their MD&A related to trading activities involving material

commodity contracts that are accounted for at fair value is an important part of

understanding the financial condition of entities that report financial information to the

Commission in FERC Forms 1, 1-F, 2, 2-A, and 6. Therefore to the extent that a

jurisdictional entity filing a FERC Form 1, 1-F, 2, 2-A, or 6 includes the above type of

information on trading activities in its MD&A as part of its Annual Report to

Shareholders and SEC filing, it must report the same information reported to the

Commission on the schedule entitled Important Changes During the Year.42 The

instructions on this schedule require important information that appears in their Annual

Reports to Shareholders and the SEC to also be included on this schedule. By including

the derivative information presented in the MD&A to the FERC, the quality of the

information received by this Commission will be no less than that provided by

jurisdictional entities to shareholders and other users of the financial data. 

69. The Commission notes that power marketers and power producers that file

financial information with the SEC will also be subject to its recent interpretative
Docket No. RM02-3-000 - 35 - Docket No. RM02-3-000

43 See Sempra at p. 6. 

44 See EEI at p. 13, and Dominion at p. 15.

guidance regarding additional disclosures concerning their trading activities. The SEC's

information reporting initiatives may impact the Commission's need to require further

reporting from these entities. 

H. Miscellaneous Items

70. One commenter recommended that the Commission state it will not incorporate

derivative instruments, hedging activities, and other comprehensive income into its

ratemaking process for utilities, because the value of these instruments are certain to

change over time and the Commission would set rates incorrectly.43 

71. As stated in the NOPR, the proposed rule was not intended to prescribe the

ratemaking treatment for items of other comprehensive income or for derivative

instruments and hedging activities. The adoption of any particular rate treatment for

these amounts is beyond the scope of this rulemaking. The Commission will decide the

appropriate treatment, for these transactions on a case-by-case basis in individual rate

proceedings. 

72. Some commenters recommended that the Commission delay the effective date of

the proposed changes for one year after the rulemaking is approved in order to allow for

a complete review of the regulations and their prospective implementation.44 One

commenter indicated that the Commission's consideration of this accounting is premature
Docket No. RM02-3-000 - 36 - Docket No. RM02-3-000

45 See Wisconsin Electric at p. 4 and 5.

46 See APGA at p. 3.

at this time and delay its review and implementation until various regulatory bodies

review current accounting procedures or until any reforms are adopted.45 However,

another commenter requested that the Commission make the proposed filing

requirements retroactive and effective for 2001 reporting by requiring supplements to the

Commission's Annual Report filings with the new schedules required under the proposed

rule.46

73. The Commission is of the view that jurisdictional entities are already familiar

with the accounting pronouncements contained in this final rule and have already

implemented these requirements in their Annual Reports to Shareholders and in filings

with the SEC. By delaying proper implementation of these new accounting and

reporting standards, different and inconsistent sets of financial information would be

reported to the Commission, and accounting and reporting guidance would continue to

be required on how these transactions should be reported to FERC. Consequently, it is

the Commission's view that little, if any, benefit would be gained by delaying the

issuance of accounting and reporting guidance on these matters. In order to provide

consistent accounting and reporting to the Commission on a timely basis, the

Commission declines to postpone implementation for another year. The accounting and
Docket No. RM02-3-000 - 37 - Docket No. RM02-3-000

reporting changes will become effective 60 days after date of publication in the Federal

Register. 

74. The Commission acknowledges that with any new accounting and financial

reporting standard, implementation issues may arise. Jurisdictional entities can seek

clarification from the Chief Accountant concerning the proper application or

implementation of any accounting standard under the Commission's existing regulations.

75. Finally, the Chief Accountant had previously issued guidance concerning the

proper accounting for derivative and hedging activities pending further action by the

Commission. That guidance letter provided for the recording of derivative assets and

liabilities in miscellaneous deferred debit or credit accounts, or in other investment

accounts, based upon the jurisdictional entities rationale for entering into the derivative

transaction. In order to provide for consistent accounting and reporting treatment for all

derivative transactions, the Commission will require that amounts previously accounted

for under the Chief Accountant’s guidance letter using existing asset, liability and equity

accounts, be reclassified to the appropriate new derivative assets, derivative liabilities,

and accumulated other comprehensive income account, established under this Final Rule.

IV. REGULATORY FLEXIBILITY ACT CERTIFICATION
Docket No. RM02-3-000 - 38 - Docket No. RM02-3-000

47 5 U.S.C. 601(3), citing to section 3 of the Small Business Act, 15 U.S.C. 632. 

Section 3 of the Small Business Act defines a "small-business concern" as a business

which is independently owned and operated and which is not dominate in its field of

operation. 

48Regulations Implementing National Environmental Policy Act, 52 FR 47897

(continued...)

76. The Commission finds that most filing entities regulated by the Commission do

not fall within the Regulatory Flexibility Act's definition of small entity. 47 This Final

Rule will promote consistent reporting practices for all reporting companies and would

not be a significant burden to industry since the information is already being captured by

their accounting systems and generally being reported to shareholders and others at a

company, or at a consolidated business level. However, if the reporting requirements

represent an undue burden on small businesses, the entity affected may seek a waiver of

the disclosure requirements from the Commission. Accordingly, the Commission

certifies that this Final Rule will not have a significant economic impact on a substantial

number of small entities.

V. ENVIRONMENTAL IMPACT STATEMENT

77. Commission regulations require that an environmental assessment or an

environmental impact statement be prepared for any Commission action that may have a

significant adverse effect on the human environment.48 No environmental consideration
Docket No. RM02-3-000 - 39 - Docket No. RM02-3-000

48(...continued)

(Dec. 17, 1987), FERC Stats. & Regs. ¶ 30,783 (1987).

49 18 CFR 380.4(a)(2)(ii).

5018 CFR 380.4(a)(5).

is necessary for the promulgation of a rule that is clarifying, corrective, or procedural or

does not substantially change the effect of legislation or regulations being amended49,

and also for information gathering, analysis, and dissemination.50 The proposed rule

updates the Parts 101, 201 and 352 of the Commission's regulations, and does not

substantially change the effect of the underlying legislation or the regulations being

revised or eliminated. In addition, the Final Rule involves information gathering,

analysis and dissemination. Therefore, this Final Rule falls within categorical

exemptions provided in the Commission's Regulations. Consequently, neither an

environmental impact statement nor an environmental assessment is required. 

VI. INFORMATION COLLECTION STATEMENT 

78. The Office of Management and Budget (OMB) regulations require that OMB

approve certain reporting and record keeping (collections of information) imposed by an

agency. The information collection requirements in this Final Rule are contained in the

following Annual Reports: FERC Form No. 1, Annual Report of Major Public Utilities,

Licensees and Others (Form 1); FERC Form No. 1-F, Annual Report of Nonmajor Public

Utilities and Licensees (Form 1-F); FERC Form No. 2, Annual Report of Major Natural

Gas Companies (Form 2); FERC Form No. 2-A, Annual Report of Nonmajor Natural
Docket No. RM02-3-000 - 40 - Docket No. RM02-3-000

Gas Companies (Form 2-A); and Form No. 6, Annual Report of Oil Pipeline Companies

(Form 6). Form 1 most recently received OMB approval on March 29, 2002, for the

period through March 2005. Form 1-F received OMB approval on April 2, 2002, for the

period through April 2005. Form 2 received approval on March 29, 2002, for the period

through March 2005. Form 2-A received approval on April 2, 2002, for the period

through April 2005. Form 6 was previously approved March 28, 2001 for the period

through March 2004. OMB declined to take any action at the NOPR stage instead

deciding to make a determination at the final rule stage.

79. Interested persons may obtain information on the reporting requirements by

contacting the Federal Energy Regulatory Commission, 888 First Street, NE,

Washington, D.C. 20426 (Attention: Michael Miller, Office of the Chief Information

Officer, (202) 502-8415) or from the Office of Management and Budget, Room 10202

NEOB, Washington, D.C. 20503 (Attention: Desk Officer for the Federal Energy

Regulatory Commission, (202) 395-7318, fax: (202) 395-7285).

80. The regulated entity shall not be penalized for failure to respond to this collection

of information unless the collection of information displays a valid OMB control

number.

81. Titles: FERC Form No. 1, "Annual Report of Major Public Utilities, Licensees

and Others"; FERC Form No. 1-F, "Annual Report of Nonmajor Public Utilities and

Licensees"; FERC Form No. 2, "Annual Report of Major Natural Gas Companies";
Docket No. RM02-3-000 - 41 - Docket No. RM02-3-000

FERC Form No. 2-A, "Annual Report of Nonmajor Natural Gas Companies"; and Form

No. 6, "Annual Report of Oil Pipeline Companies." 

82. Action: Revision of Currently Approved Collections of Information

83. OMB Control Nos.:1902-0021; 1902-0029; 1902-0028; 1902-0030; and 1902-

0022.

84. Respondents: Business or other for profit.

85. Frequency of Responses: Annually.

86. Reporting Burden: The Commission estimated that adoption of the reporting

requirements as identified in the NOPR, would result in an increase in reporting burden

to the information collections identified above. Those increases were the following:

Data Collection Hours per Respondent Total Hours for data coll.*

Form - 1 2 NOPR 

 420

Final Rule 

 432

Form - 1F 2 14 52

Form - 2 2 114 114

Form - 2A 2 114 106

Form - 6 2 318 318

Totals 980 1,022

* The changes in total hours reflect changes in the number of respondents filing the

information collections based on the most recent submissions to the Commission. 

Forms 1 & 1-F had increases in the number of respondents filing while Form 2-A had a
Docket No. RM02-3-000 - 42 - Docket No. RM02-3-000

decrease in the number of respondents who filed. The Commission did not receive

specific comments concerning its burden estimates and will therefore continue those

estimates in the Final Rule. Comments on the substantive issues raised in the NOPR are

addressed elsewhere in the Final Rule.

87. Interested persons may obtain information on the reporting requirements by

contacting the following:

 Federal Energy Regulatory Commission

888 First Street, N.E.

Washington, D.C. 20426 

Attention: Michael Miller, Office of the Chief Information Officer,

Phone: (202) 502-8415, fax: (202) 208-2425,

e-mail: mike.miller@ferc.gov

88. For submitting comments concerning the collections of information and the 

associated burden estimate(s), please send your comments to the contact listed above or

to the Office of Management and Budget, Office of Information and Regulatory Affairs,

725 17th Street, NW, Washington, D.C. 20503 [Attention: Desk Officer for the Federal 

Energy Regulatory Commission, phone (202)395-7856, fax: (202)395-7285]. 

VII. DOCUMENT AVAILABILITY 

89. In addition to publishing the full text of this document in the Federal Register, the 

Commission also provides all interested persons an opportunity to view and/or print the 

contents of this document via the Internet through FERC's Home Page 
Docket No. RM02-3-000 - 43 - Docket No. RM02-3-000

51 5 U.S.C. 804(2).

( http://www.ferc.gov/ ) and in FERC's Public Reference Room during normal business

hours ( 8:30 a.m. to 5:00 p.m. Eastern time ) at 888 First Street, N.E., Room 2A,

Washington, D.C. 20426. 

90. From FERC's Home Page on the Internet, this information is available in the

Federal Energy Regulatory Records Information System (FERRIS). The full text of this

document is available on FERRIS in PDF and WordPerfect format for viewing, printing,

and/or downloading. To access this document in FERRIS, type the docket number

excluding the last three digits of this document in the docket number field. 

91. User assistance is available for FERRIS and the FERC website during normal

business hours from our Help line at (202) 502-8222 or the Public Reference Room at

(202) 502-8371 Press 0, TTY (202) 502-8659. E-mail the Public Reference Room at

public.referenceroom@ferc.gov . 

VIII. EFFECTIVE DATE AND CONGRESSIONAL NOTIFICATION

92. This Final Rule will take effect [insert date that is 60 days after date of publication

in the FEDERAL REGISTER]. The Commission has determined, with the concurrence

of the Administrator of the Office of Information and Regulatory Affairs of the Office of

Management and Budget, that this rule is not a "major rule" within the meaning of

Section 251 of the Small Business Regulatory Enforcement Fairness Act of 1996.51 The
Docket No. RM02-3-000 - 44 - Docket No. RM02-3-000

52 5 U.S.C. 801(a)(1)(A).

Commission will submit the Final Rule to both houses of Congress and the General

Accounting Office.52

List of Subjects

18 CFR Part 101

Electric power, Electric utilities, Reporting and recordkeeping requirements,

Uniform System of Accounts

18 CFR Part 201

Natural gas, Reporting and recordkeeping requirements, Uniform System of

Accounts

18 CFR Part 352

Pipelines, Reporting and recordkeeping requirements, Uniform System of

Accounts

By the Commission.

( S E A L )

 Linwood A. Watson, Jr.,

 Deputy Secretary.

In consideration of the foregoing, the Commission proposes to amend Parts 101, 201,

and 352, Title 18 of the Code of Federal Regulations, as follows:
Docket No. RM02-3-000 - 45 - Docket No. RM02-3-000

PART 101– UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR PUBLIC

UTILITIES AND LICENSEES SUBJECT TO THE PROVISIONS OF THE

FEDERAL POWER ACT

1. The authority citation for part 101 continues to read as follows: 

AUTHORITY: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 U.S.C. 7101-7352,

7651-7651o.

2. In part 101, General Instructions, Section 21. Allowances, paragraph I is removed,

and Section 23. Accounting for other comprehensive income, and 24. Accounting for

derivative instruments and hedging activities, are added to read as follows:

General Instructions

* * * * *

23. Accounting for other comprehensive income.

(A) Utilities shall record items of other comprehensive income in account 219,

Accumulated other comprehensive income. Amounts included in this account shall be

maintained by each category of other comprehensive income. Examples of categories of

other comprehensive income include, foreign currency items, minimum pension liability

adjustments, unrealized gains and losses on available-for-sale type securities and cash

flow hedge amounts. Supporting records shall be maintained for account 219 so that the

company can readily identify the cumulative amount of other comprehensive income for

each item included in this account. 
Docket No. RM02-3-000 - 46 - Docket No. RM02-3-000

(B) When an item of other comprehensive income enters into the determination of

net income in the current or subsequent periods, a reclassification adjustment shall be

recorded in account 219 to avoid double counting of that amount.

(C) When it is probable that an item of other comprehensive income will be

included in the development of cost-of-service rates in subsequent periods, that amount

of unrealized losses or gains will be recorded in Accounts 182.3 or 254 as appropriate. 

24. Accounting for derivative instruments and hedging activities.

A. Utilities shall recognize derivative instruments as either assets or liabilities in

the financial statements and measure those instruments at fair value, except those falling

within recognized exceptions. Normal purchases or sales are contracts that provide for

the purchase or sale of goods that will be delivered in quantities expected to be used or

sold by the utility over a reasonable period in the normal course of business. A

derivative instrument is a financial instrument or other contract with all of the following

characteristics:

(1) It has one or more underlyings and a notional amount or payment provision. 

Those terms determine the amount of the settlement or settlements, and, in some cases,

whether or not a settlement is required. 

(2) It requires no initial net investment or an initial net investment that is smaller

than would be required for other types of contracts that would be expected to have a

similar response to changes in market factors.
Docket No. RM02-3-000 - 47 - Docket No. RM02-3-000

(3) Its terms require or permit net settlement, can readily be settled net by a means

outside the contract, or provides for delivery of an asset that puts the recipient in a

position not substantially different from net settlement.

B. The accounting for the changes in the fair value of derivative instruments

depends upon its intended use and designation. Changes in the fair value of derivative

instruments not designated as fair value or cash flow hedges shall be recorded in 

account 175, Derivative instrument assets, or account 244, Derivative instrument

liabilities, as appropriate, with the gains recorded in account 421, Miscellaneous

nonoperating income, and losses recorded in account 426.5, Other deductions.

C. A derivative instrument may be specifically designated as a fair value or cash

flow hedge. A hedge is used to manage risk to price, interest rates, or foreign currency

transactions. A company shall maintain documentation of the hedge relationship at the

inception of the hedge that details the risk management objective and strategy for

undertaking the hedge, the nature of the risk being hedged, and how hedge effectiveness

will be determined. 

D. If the utility designates the derivative instrument as a fair value hedge against

exposure to changes in the fair value of a recognized asset, liability, or a firm

commitment, it shall record the change in fair value of the derivative instrument to

account 176, Derivative instrument assets-Hedges, or account 245, Derivative instrument

liabilities-Hedges, as appropriate, with a corresponding adjustment to the subaccount of
Docket No. RM02-3-000 - 48 - Docket No. RM02-3-000

the item being hedged. The ineffective portion of the hedge transaction shall be reflected

in the same income or expense account that will be used when the hedged item enters

into the determination of net income. In the case of a fair value hedge of a firm

commitment a new asset or liability is created. As a result of the hedge relationship, the

new asset or liability will become part of the carrying amount of the item being hedged. 

E. If the utility designates the derivative instrument as a cash flow hedge against

exposure to variable cash flows of a probable forecasted transaction, it shall record

changes in the fair value of the derivative instrument in account 176, Derivative

instrument assets-Hedges, or account 245, Derivative instrument liabilities-Hedges, as

appropriate, with a corresponding amount in account 219, Accumulated other

comprehensive income, for the effective portion of the hedge. The ineffective portion of

the hedge transaction shall be reflected in the same income or expense account that will

be used when the hedged item enters into the determination of net income. Amounts

recorded in other comprehensive income shall be reclassified into earnings in the same

period or periods that the hedged forecasted item enters into the determination of net

income. 

3. In part 101, Balance Sheet Accounts, accounts 124, paragraph A, 125, 126 and

127 are revised to read as follows:

Balance Sheet Accounts
Docket No. RM02-3-000 - 49 - Docket No. RM02-3-000

* * * * *

124 Other investments.

A. This account shall include the book cost of investments in securities issued or

assumed by nonassociated companies, investment advances to such companies, and any

investments not accounted for elsewhere. This account shall also include unrealized

holding gains and losses on trading and available-for-sale types of security investments. 

Include also the offsetting entry to the recording of amortization of discount or premium

on interest bearing investments. (See account 419, Interest and dividend income.)

*****

125 Sinking funds (Major only).

This account shall include the amount of cash and book cost of investments held

in sinking funds. This account shall also include unrealized holding gains and losses on

trading and available-for-sale types of security investments. A separate account, with

appropriate title, shall be kept for each sinking fund. Transfers from this account to

special deposit accounts may be made as necessary for the purpose of paying matured

sinking-fund obligations, or obligations called for redemption but not presented, or the

interest thereon.

126 Depreciation fund (Major only).

This account shall include the amount of cash and book cost of investments which

have been segregated in a special fund for the purpose of identifying such assets with the
Docket No. RM02-3-000 - 50 - Docket No. RM02-3-000

accumulated provisions for depreciation. This account shall also include unrealized

holding gains and losses on trading and available-for-sale types of security investments. 

127 Amortization fund–Federal (Major only).

This account shall include the amount of cash and book cost of investments of any

investments of any fund maintained pursuant to the requirements of a federal regulatory

body, as the cash and investments segregated for the purpose of identifying the specific

assets associated with account 215.1, Appropriated retained earnings–Amortization

reserve, Federal. This account shall also include unrealized holding gains and losses on

trading and available-for-sale types of security investments.

*****

4. In part 101, Balance Sheet Accounts, account 128, introductory text above the

note is revised to read as follows:

Balance Sheet Accounts

*****

128 Other special funds (Major only).

This account shall include the amount of cash and book cost of investments which

have been segregated in special funds for insurance, employee pensions, savings, relief,

hospital, and other purposes not provided for elsewhere. This account shall also include

unrealized holding gains and losses on trading and available-for-sale types of security

investments. A separate account with appropriate title, shall be kept for each fund.
Docket No. RM02-3-000 - 51 - Docket No. RM02-3-000

*****

5. In part 101, Balance Sheet Accounts, account 129, introductory text preceding

Note A, is revised to read as follows:

Balance Sheet Accounts

*****

129 Special funds (Nonmajor only).

This account shall include the amount of cash and book cost of investments which

have been segregated in special funds for bond retirements, property additions and

replacements, insurance, employees' pensions, savings, relief, hospital, and other

purposes not provided for elsewhere. This account shall also include unrealized holding

gains and losses on trading and available-for-sale types of security investments. A

separate account, with appropriate title, shall be kept for each fund. 

*****

6. In part 101, Balance Sheet Accounts, accounts 175 and 176 are added to read as

follows: 

Balance Sheet Accounts

*****

175 Derivative instrument assets.
Docket No. RM02-3-000 - 52 - Docket No. RM02-3-000

This account shall include the amounts paid for derivative instruments, and the

change in the fair value of all derivative instrument assets not designated as cash flow or

fair value hedges. Account 421, Miscellaneous nonoperating income, shall be credited

or debited, as appropriate, with the corresponding amount of the change in the fair value

of the derivative instrument. 

176 Derivative instrument assets-Hedges.

A. This account shall include the amounts paid for derivative instruments, and the

change in the fair value of derivative instrument assets designated by the utility as cash

flow or fair value hedges. 

B. When a utility designates a derivative instrument asset as a cash flow hedge it

will record the change in the fair value of the derivative instrument in this account with a

concurrent charge to account 219, Accumulated other comprehensive income, with the

effective portion of the gain or loss. The ineffective portion of the cash flow hedge shall

be charged to the same income or expense account that will be used when the hedged

item enters into the determination of net income. 

C. When a utility designates a derivative instrument as a fair value hedge it shall

record the change in the fair value of the derivative instrument in this account with a

concurrent charge to a subaccount of the asset or liability that carries the item being

hedged. The ineffective portion of the fair value hedge shall be charged to the same
Docket No. RM02-3-000 - 53 - Docket No. RM02-3-000

income or expense account that will be used when the hedged item enters into the

determination of net income.

* * * * * 

7. In part 101, Balance Sheet Accounts, account 182.3, paragraph B is revised to

read as follows:

Balance Sheet Accounts

*****

182.3 Other regulatory assets.

*****

B. The amounts included in this account are to be established by those charges

which would have been included in net income, or accumulated other comprehensive

income, determinations in the current period under the general requirements of the

Uniform System of Accounts but for it being probable that such items will be included in

a different period(s) for purposes of developing rates that the utility is authorized to

charge for its utility services. When specific identification of the particular source of a

regulatory asset cannot be made, such as in plant phase-ins, rate moderation plans, or rate

levelization plans, account 407.4, Regulatory credits, shall be credited. The amounts

recorded in this account are generally to be charged, concurrently with the recovery of

the amounts in rates, to the same account that would have been charged if included in

income when incurred, except all regulatory assets established through the use of account
Docket No. RM02-3-000 - 54 - Docket No. RM02-3-000

407.4 shall be charged to account 407.3, Regulatory debits, concurrent with the recovery

in rates.

*****

8. In part 101, Balance Sheet Accounts, accounts 219, 244 and 245 are added to read

as follows: 

Balance Sheet Accounts

*****

219 Accumulated other comprehensive income.

A. This account shall include revenues, expenses, gains, and losses that are

properly includable in other comprehensive income during the period. Examples of other

comprehensive income include foreign currency items, minimum pension liability

adjustments, unrealized gains and losses on certain investments in debt and equity

securities, and cash flow hedges. Records supporting the entries to this account shall be

maintained so that the utility can furnish the amount of other comprehensive income for

each item included in this account. 

B. This account shall also be debited or credited, as appropriate, with amounts of

accumulated other comprehensive income that have been included in the determination

of net income during the period and in accumulated other comprehensive income in prior

periods. Separate records for each category of items shall be maintained to identify the
Docket No. RM02-3-000 - 55 - Docket No. RM02-3-000

amount of the reclassification adjustments from accumulated other comprehensive

income to earnings made during the period. 

*****

244 Derivative instrument liabilities.

This account shall include the change in the fair value of all derivative instrument

liabilities not designated as cash flow or fair value hedges. Account 426, Other

deductions, shall be debited or credited as appropriate with the corresponding amount of

the change in the fair value of the derivative instrument. 

245 Derivative instrument liabilities-Hedges.

A. This account shall include the change in the fair value of derivative instrument

liabilities designated by the utility as cash flow or fair value hedges. 

B. A utility shall record the change in the fair value of a derivative instrument

liability related to a cash flow hedge in this account, with a concurrent charge to 

account 219, Accumulated other comprehensive income, with the effective portion of the

derivative's gain or loss. The ineffective portion of the cash flow hedge shall be charged

to the same income or expense account that will be used when the hedged item enters

into the determination of net income. 

C. A utility shall record the change in the fair value of a derivative instrument

liability related to a fair value hedge in this account, with a concurrent charge to a

subaccount of the asset or liability that carries the item being hedged. The ineffective
Docket No. RM02-3-000 - 56 - Docket No. RM02-3-000

portion of the fair value hedge shall be charged to the same income or expense account

that will be used when the hedged item enters into the determination of net income. 

* * * * * 

9. In part 101, Balance Sheet Accounts, account 254, paragraph B, is revised to read

as follows:

Balance Sheet Accounts

*****

254 Other regulatory liabilities.

*****

B. The amounts included in this account are to be established by those credits

which would have been included in net income, or accumulated other comprehensive

income, determinations in the current period under the general requirements of the

Uniform System of Accounts but for it being probable that: 1) such items will be

included in a different period(s) for purposes of developing the rates that the utility is

authorized to charge for its utility services; or 2) refunds to customers, not provided for

in other accounts, will be required. When specific identification of the particular source

of the regulatory liability cannot be made or when the liability arises from revenues

collected pursuant to tariffs on file at a regulatory agency, account 407.3, Regulatory

debits, shall be debited. The amounts recorded in this account generally are to be

credited to the same account that would have been credited if included in income when
Docket No. RM02-3-000 - 57 - Docket No. RM02-3-000

earned except: 1) all regulatory liabilities established through the use of account 407.3

shall be credited to account 407.4, Regulatory credits; and 2) in the case of refunds, a

cash account or other appropriate account should be credited when the obligation is

satisfied. 

* ****

PART 201-- UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR

NATURAL GAS COMPANIES SUBJECT TO THE PROVISIONS OF THE

NATURAL GAS ACT

10. The authority citation for part 201 continues to read as follows:

AUTHORITY: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352, 7651-7651o.

11. In part 201, Sections 22. Accounting for other comprehensive income, and 23.

Accounting for derivative instruments and hedging activities, are added to read as

follows:

General Instructions

* * * * *

22. Accounting for other comprehensive income.

(A) Utilities shall record items of other comprehensive income in account 219,

Accumulated other comprehensive income. Amounts included in this account shall be

maintained by each category of other comprehensive income. Examples of categories of

other comprehensive income include, foreign currency items, minimum pension liability
Docket No. RM02-3-000 - 58 - Docket No. RM02-3-000

adjustments, unrealized gains and losses on available-for-sale type securities and cash

flow hedge amounts. Supporting records shall be maintained for account 219 so that the

company can readily identify the cumulative amount of other comprehensive income for

each item included in this account. 

(B) When an item of other comprehensive income enters into the determination of

net income in the current or subsequent periods, a reclassification adjustment shall be

recorded in account 219 to avoid double counting of that amount.

(C) When it is probable that an item of other comprehensive income will be

included in the development of cost of service rates in subsequent periods, that amount

of unrealized losses or gains shall be recorded in Accounts 182.3 or 254 as appropriate. 

23. Accounting for derivative instruments and hedging activities. 

A. Utilities shall recognize derivative instruments as either assets or liabilities in

the financial statements and measure those instruments at fair value, except those falling

within recognized exceptions, the most common of which being the normal purchases

and sales scope exception. Normal purchases or sales are contracts that provide for the

purchase or sale of goods that will be delivered in quantities expected to be used or sold

by the utility over a reasonable period in the normal course of business. A derivative

instrument is a financial instrument or other contract with all three of the following

characteristics:
Docket No. RM02-3-000 - 59 - Docket No. RM02-3-000

(1) It has one or more underlyings and a notional amount or payment provision. 

Those terms determine the amount of the settlement or settlements, and, in some cases,

whether or not a settlement is required. 

 (2) It requires no initial net investment or an initial net investment that is smaller

than would be required for other types of contracts that would be expected to have

similar response to changes in market factors.

(3) Its terms require or permit net settlement, can readily be settled net by a means

outside the contract, or provides for delivery of an asset that puts the recipient in a

position not substantially different from net settlement.

B. The accounting for the changes in the fair value of derivative instruments

depends upon its intended use and designation. Changes in the fair value of derivative

instruments not designated as fair value or cash flow hedges will be recorded in account

175, Derivative instrument assets, or account 244, Derivative instrument liabilities, as

appropriate, with the gains recorded in account 421, Miscellaneous nonoperating income,

and losses recorded in account 426.4, Other deductions. 

C. A derivative instrument may be specifically designated as a fair value or cash

flow hedge. A hedge may be used to manage risk to price, interest rates, or foreign

currency transactions. Utilities shall maintain documentation of the hedge relationship at

the inception of the hedge that details the risk management objective and strategy for
Docket No. RM02-3-000 - 60 - Docket No. RM02-3-000

undertaking the hedge, the nature of the risk being hedged, and how hedge effectiveness

will be determined.

D. If the utility designates the derivative instrument as a fair value hedge against

exposure to changes in the fair value of a recognized asset, liability, or a firm

commitment, it will record the change in fair value of the derivative instrument to 

account 176, Derivative instrument assets-Hedges, or account 245, Derivative instrument

liabilities-Hedges, as appropriate, with a corresponding adjustment to the subaccount of

the item being hedged. The ineffective portion of the hedge transaction shall be reflected

in the same income or expense account that will be used when the hedged item enters

into the determination of net income. In the case of a fair value hedge of a firm

commitment a new asset or liability is created. As a result of the hedge relationship, the

new asset or liability will become part of the carrying amount of the item being hedged. 

 

E. If the utility designates the derivative instrument as a cash flow hedge against

exposure to variable cash flows of a probable forecasted transaction, it shall record

changes in the fair value of the derivative instrument in account 176, Derivative

instrument assets-Hedges, or account 245, Derivative instrument liabilities-Hedges, as

appropriate, with a corresponding amount in account 219, Accumulated other

comprehensive income, for the effective portion of the hedge. The ineffective portion of

the hedge transaction shall be reflected in the same income or expense account that will
Docket No. RM02-3-000 - 61 - Docket No. RM02-3-000

be used when the hedged item enters into the determination of net income. Amounts

recorded in other comprehensive income shall be reclassified into earnings in the same

period or periods that the hedged forecasted item enters into the determination of net

income. 

*****

12. In part 201, Balance Sheet Accounts, accounts 124, paragraph A, 125, 126, and

128, introductory text preceding the Note, are revised to read as follows:

Balance Sheet Accounts

* * * * * 

124 Other investments.

A. This account shall include the book cost of investments in securities issued or

assumed by nonassociated companies, investment advances to such companies, and any

investments not accounted for elsewhere. This account shall also include unrealized

holding gains and losses on trading and available-for-sale types of security investments. 

Include also the offsetting entry to the recording of amortization of discount or premium

on interest bearing investments. (See account 419, interest and dividend income.)

*****

125 Sinking funds.

This account shall include the amount of cash and book cost of investments held

in sinking funds. This account shall also include unrealized holding gains and losses on
Docket No. RM02-3-000 - 62 - Docket No. RM02-3-000

trading and available-for-sale types of security investments. A separate account, with

appropriate title, shall be kept for each sinking fund. Transfers from this account to

special deposit accounts may be made as necessary for the purpose of paying matured

sinking-fund obligations, or obligations called for redemption but not presented, or the

interest thereon.

126 Depreciation fund.

This account shall include the amount of cash and book cost of investments which

have been segregated in a special fund for the purpose of identifying such assets with the

accumulated provisions for depreciation. This account shall also include unrealized

holding gains and losses on trading and available-for-sale types of security investments. 

*****

128 Other special funds.

This account shall include the amount of cash and book cost of investments which

have been segregated in special funds for insurance, employee pensions, savings, relief,

hospital, and other purposes not provided for elsewhere. This account shall also include

unrealized holding gains and losses on trading and available-for-sale types of security

investments. A separate account with appropriate title, shall be kept for each fund.

*****

13. In part 201, Balance Sheet Accounts, accounts 174 and 175 are added to read as

follows:
Docket No. RM02-3-000 - 63 - Docket No. RM02-3-000

Balance Sheet Accounts

*****

175 Derivative instrument assets.

This account shall include the amounts paid for derivative instruments, and the

change in the fair value of all derivative instrument assets not designated as cash flow or

fair value hedges. Account 421, Miscellaneous nonoperating income, will be credited or

debited as appropriate with the corresponding amount of the change in the fair value of

the derivative instrument. 

176 Derivative instrument assets-Hedges.

A. This account shall include the amounts paid for derivative instruments, and the

change in the fair value of derivative instrument assets designated by the utility as cash

flow or fair value hedges. 

B. When a utility designates a derivative instrument asset as a cash flow hedge it

will record the change in the fair value of the derivative instrument in this account with a

concurrent charge to account 219, Accumulated other comprehensive income, with the

effective portion of the derivative gain or loss. The ineffective portion of the cash flow

hedge shall be charged to the same income or expense account that will be used when the

hedged item enters into the determination of net income. 
Docket No. RM02-3-000 - 64 - Docket No. RM02-3-000

C. When a utility designates a derivative instrument asset as a fair value hedge it

shall record the change in the fair value of the derivative instrument in this account with

a concurrent charge to a subaccount of the asset or liability that carries the item being

hedged. The ineffective portion of the fair value hedge shall be charged to the same

income or expense account that will be used when the hedged item enters into the

determination of net income. 

*****

14. In part 201, Balance Sheet Accounts, account 182.3, Paragraph B, is revised to

read as follows:

Balance Sheet Accounts

*****

182.3 Other regulatory assets.

*****

B. The amounts included in this account are to be established by those charges

which would have been included in net income, or accumulated other comprehensive

income, determinations in the current period under the general requirements of the

Uniform System of Accounts but for it being probable that such items will be included in

a different period(s) for purposes of developing rates that the utility is authorized to

charge for its utility services. When specific identification of the particular source of a

regulatory asset cannot be made, such as in plant phase-ins, rate moderation plans, or rate
Docket No. RM02-3-000 - 65 - Docket No. RM02-3-000

levelization plans, account 407.4, Regulatory credits, shall be credited. The amounts

recorded in this account are generally to be charged, concurrently with the recovery of

the amounts in rates, to the same account that would have been charged if included in

income when incurred, except all regulatory assets established through the use of account

407.4 shall be charged to account 407.3, Regulatory debits, concurrent with the recovery

in rates.

*****

15. In part 201, Balance Sheet Accounts, accounts 219, 244 and 245 are added, to

read as follows:

Balance Sheet Accounts

*****

219 Accumulated other comprehensive income.

A. This account shall include revenues, expenses, gains, and losses that are

properly includable in other comprehensive income during the period. Examples of other

comprehensive income include foreign currency items, minimum pension liability

adjustments, unrealized gains and losses on certain investments in debt and equity

securities, and cash flow hedges. Records supporting the entries to this account shall be

maintained so that the utility can furnish the amount of other comprehensive income for

each item included in this account. 
Docket No. RM02-3-000 - 66 - Docket No. RM02-3-000

B. This account shall also be debited or credited, as appropriate, with amounts of

accumulated other comprehensive income that have been included in the determination

of net income during the period and in accumulated other comprehensive income in prior

periods. Separate records for each category of items will be maintained to identify the

amount of the reclassification adjustments from accumulated other comprehensive

income to earnings made during the period. 

*****

244 Derivative instrument liabilities.

This account shall include the change in the fair value of all derivative instrument

liabilities not designated as cash flow or fair value hedges. Account 426.5, Other

deductions, shall be debited or credited as appropriate with the corresponding amount of

the change in the fair value of the derivative instrument. 

245 Derivative instrument liabilities-Hedges.

A. This account shall include the change in the fair value of derivative instrument

liabilities designated by the utility as cash flow or fair value hedges. 

B. A utility shall record the change in the fair value of a derivative liability related

to a cash flow hedge in this account, with a concurrent charge to account 219,

Accumulated other comprehensive income, with the effective portion of the derivative

gain or loss. The ineffective portion of the cash flow hedge shall be charged to the same
Docket No. RM02-3-000 - 67 - Docket No. RM02-3-000

income or expense account that will be charged when the hedged item enters into the

determination of net income. 

C. A utility shall record the change in the fair value of a derivative instrument

liability related to a fair value hedge in this account, with a concurrent charge to a

subaccount of the asset or liability that carries the item being hedged. The ineffective

portion of the fair value hedge shall be charged to the same income or expense account

that will be charged when the hedged item enters into the determination of net income. 

* * * * * 

16. In part 201, Balance Sheet Accounts, accounts 254, Paragraph B is revised, to

read as follows:

Balance Sheet Accounts

*****

254 Other regulatory liabilities.

*****

B. The amounts included in this account are to be established by those credits

which would have been included in net income, or accumulated other comprehensive

income, determinations in the current period under the general requirements of the

Uniform System of Accounts but for it being probable that: 1) such items will be

included in a different period(s) for purposes of developing the rates that the utility is

authorized to charge for its utility services; or 2) refunds to customers, not provided for
Docket No. RM02-3-000 - 68 - Docket No. RM02-3-000

in other accounts, will be required. When specific identification of the particular source

of the regulatory liability cannot be made or when the liability arises from revenues

collected pursuant to tariffs on file at a regulatory agency, account 407.3, Regulatory

debits, shall be debited. The amounts recorded in this account generally are to be

credited to the same account that would have been credited if included in income when

earned except: 1) all regulatory liabilities established through the use of account 407.3

shall be credited to account 407.4, Regulatory credits; and 2) in the case of refunds, a

cash account or other appropriate account should be credited when the obligation is

satisfied. 

* ****

PART 352-- UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR OIL

PIPELINE COMPANIES SUBJECT TO THE PROVISIONS OF THE

INTERSTATE COMMERCE ACT

17. The authority citation for part 352 continues to read as follows:

AUTHORITY: 49 U.S.C. 60502; 49 App. U.S.C. 1-85 (1988).

18. In part 352, List of Instructions and Accounts, definition, paragraph 35(d) is

revised to read as follows:

Definitions.

* * * * *

35 * * * 
Docket No. RM02-3-000 - 69 - Docket No. RM02-3-000

(d) Cost, as applied to a marketable equity security, refers to the original cost as

adjusted for unrealized holding gains and losses. 

*****

19. In part 352, General Instructions, paragraph 1-15(a), (b) and (c) are revised, (d)

and (e) are removed, and General Instructions paragraphs 1-17 and 1-18 are added to

read as follows:

General Instructions

* * * * *

1-15 Accounting for marketable securities owned. (a) Accounts 11 "Temporary

investments," 20 "Investments in affiliated companies," and 21 "Other investments" shall

be maintained in such a manner as to reflect the marketable equity portion (see definition

35) and other securities or investments

(b) For the purpose of determining net ledger value, the marketable equity

securities in account 11 shall be considered the current portfolio and the marketable

equity securities in accounts 20 and 21 (combined) shall be considered the noncurrent

portfolio. 

(c) Carriers will categorize their security investments as held-to-maturity, trading,

or available-for-sale. Unrealized holding gains and losses on trading type investment

securities will be recorded in accounts 640, Miscellaneous income, and 660,

Miscellaneous income charges, as appropriate. Unrealized holding gains and losses on
Docket No. RM02-3-000 - 70 - Docket No. RM02-3-000

available-for-sale type investment securities shall be recorded in account 77,

Accumulated other comprehensive income. 

* * * * *

1-17 Accounting for other comprehensive income.

(a) Carriers shall record items of other comprehensive income in account 77,

Accumulated other comprehensive income. Amounts included in this account shall be

maintained by each category of other comprehensive income. Examples of categories of

other comprehensive income include, foreign currency items, minimum pension liability

adjustments, unrealized gains and losses on available-for-sale type securities and cash

flow hedge amounts. Supporting records shall be maintained for account 77 so that the

company can readily identify the cumulative amount of other comprehensive income for

each item included in this account. 

(b) When an item of other comprehensive income enters into the determination of

net income in the current or subsequent periods, a reclassification adjustment shall be

recorded in account 77 to avoid double counting of that amount. 

1-18 Accounting for derivative instruments and hedging activities.

(a) A carrier shall recognize derivative instruments as either assets or liabilities in

the financial statements and measure those instruments at fair value, except those falling

within recognized exceptions, the most common of which being the normal purchases

and sales scope exception. Normal purchases or sales are contracts that provide for the
Docket No. RM02-3-000 - 71 - Docket No. RM02-3-000

purchase or sale of goods that will be delivered in quantities expected to be used or sold

by the utility over a reasonable period in the normal course of business. A derivative

instrument is a financial instrument or other contract with all three of the following

characteristics:

(1) It has one or more underlyings and a notional amount or payment provision. 

Those terms determine the amount of the settlement or settlements, and, in some cases,

whether or not a settlement is required. 

 (2) It requires no initial net investment or an initial net investment that is smaller

than would be required for other types of contracts that would be expected to have

similar response to changes in market factors.

(3) Its terms require or permit net settlement, can readily be settled net by a means

outside the contract, or provides for delivery of an asset that puts the recipient in a

position not substantially different from net settlement.

(b) The accounting for the changes in the fair value of derivative instruments

depends upon its intended use and designation. Changes in the fair value of derivative

instruments not designated as fair value or cash flow hedges shall be recorded in 

account 46, Derivative instrument assets, or account 65, derivative instrument liabilities,

as appropriate, with the gains recorded in account 640, Miscellaneous income, and losses

recorded in account 660, Miscellaneous income charges. 
Docket No. RM02-3-000 - 72 - Docket No. RM02-3-000

(c) A derivative instrument may be specifically designated as a fair value or cash

flow hedge. A hedge may be used to manage risk to price, interest rates, or foreign

currency transactions. An entity shall maintain documentation of the hedge relationship

at the inception of the hedge that details the risk management objective and strategy for

undertaking the hedge, the nature of the risk being hedged, and how hedge effectiveness

will be determined. 

(d) If the carrier designates the derivative instrument as a fair value hedge against

exposure to changes in the fair value of a recognized asset, liability, or a firm

commitment, it shall record the change in fair value of the derivative instrument

designated as a fair value hedge to account 47, Derivative instrument assets-Hedges, or

account 66, Derivative instrument liabilities-Hedges, as appropriate, with a

corresponding adjustment to the subaccount of the item being hedged. The ineffective

portion of the hedge transaction shall be reflected in the same income or expense account

that will be used when the hedged item enters into the determination of net income. In

the case of a fair value hedge of a firm commitment, a new asset or liability is created. 

As a result of the hedge relationship, the new asset or liability will become part of the

carrying amount of the item being hedged. 

(e) If the carrier designates the derivative instrument as a cash flow hedge against

exposure to variable cash flows of a probable forecasted transaction, it shall record

changes in the fair value of the derivative instrument in account 47, Derivative
Docket No. RM02-3-000 - 73 - Docket No. RM02-3-000

instrument assets-Hedges, or account 66, Derivative instrument liabilities-Hedges, as

appropriate, with a corresponding amount in account 77, Accumulated other

comprehensive income, for the effective portion of the hedge. The ineffective portion of

the hedge transaction shall be reflected in the same income or expense account that will

be used when the hedged item enters into the determination of net income. Amounts

recorded in other comprehensive income shall be reclassified into earnings in the same

period or periods that the hedged forecasted item enters into the determination of net

income.

* * * * * 

20. In part 352, Balance Sheet Accounts, accounts 11, 21, and 22, paragraph (a) are

revised to read as follows:

Balance Sheet Accounts

* * * * * 

11 Temporary investments.

(a) This account shall include the cost of securities and other collectible

obligations acquired for the purpose of temporarily investing cash, such as United States

Treasury certificates, marketable securities, time drafts receivable, demand loans, time

deposits with banks and trust companies, and other similar investments of a temporary

character. This account shall also include unrealized holding gains and losses on trading

and available-for-sale types of security investments. 
Docket No. RM02-3-000 - 74 - Docket No. RM02-3-000

 (b) This account shall be subdivided to reflect the marketable equity securities'

portion and other temporary investments. (See Instruction 1-15).

*****

21 Other investments.

This account shall include the cost of investments in securities of (other than

securities held in special funds) and advances made to other than affiliated companies. 

This account shall also include unrealized holding gains and losses on trading and

available-for-sale types of security investments. Separate records shall be maintained to

show the securities pledged and the following classes of investments in each

nonaffiliated company:

(a) Stocks.

(b) Bonds.

(c) Other secured obligations.

(d) Unsecured notes.

(e) Investment advances. 

22 Sinking and other funds.

(a) This account shall include cash and cost of investments in securities and other

assets, trusteed or otherwise restricted, that have been segregated in distinct funds for

purposes of redeeming outstanding obligations; purchasing or replacing assets; paying
Docket No. RM02-3-000 - 75 - Docket No. RM02-3-000

pensions, relief, hospitalization, and other similar items. This account shall also include

unrealized holding gains and losses on trading and available-for-sale types of security

investments. The cash value of life insurance policies on the lives of employees and

officers to the extent that the carrier is the beneficiary of such policies shall also be

included in this account. Separate subsidiary records shall be maintained for each

distinct fund.

*****

21. In part 352, Balance Sheet Accounts, accounts 23, 24, and 75.5 are removed.

*****

22. In part 352, Balance Sheet Accounts, accounts 46, 47, 65, 66 and 77 are added to

read as follows:

Balance Sheet Accounts

*****

46 Derivative instrument assets.

This account shall include the amounts paid for derivative instruments, and the

change in the fair value of all derivative instrument assets not designated as cash flow or

fair value hedges. Account 640, Miscellaneous income, shall be credited or debited as

appropriate with the corresponding amount of the change in the fair value of the

derivative instrument. 

 47 Derivative instrument assets-Hedges.
Docket No. RM02-3-000 - 76 - Docket No. RM02-3-000

(a) This account shall include the amounts paid for derivative instruments, and the

change in the fair value of derivative instrument assets, designated by the utility as cash

flow or fair value hedges. 

(b) When a carrier designates a derivative instrument asset as a cash flow hedge, it

will record the change in the fair value of the derivative instrument in this account with a

concurrent charge to account 77, Accumulated other comprehensive income, with the

effective portion of the derivative gain or loss. The ineffective portion of the cash flow

hedge shall be charged to the same income or expense account that will be used when the

hedged item enters into the determination of net income. 

(c) When a carrier designates a derivative instrument as a fair value hedge, it shall

record the change in the fair value of the derivative instrument in this account with a

concurrent charge to a subaccount of the asset or liability that carries the item being

hedged. The ineffective portion of the fair value hedge shall be charged to the same

income or expense account that will be used when the hedged item enters into the

determination of net income. 

*****

65 Derivative instrument liabilities.

This account shall include the change in the fair value of all derivative instrument

liabilities not designated as cash flow or fair value hedges. Account 660, Miscellaneous
Docket No. RM02-3-000 - 77 - Docket No. RM02-3-000

income charges, shall be debited or credited as appropriate with the corresponding

amount of the change in the fair value of the derivative instrument. 

 66 Derivative instrument liabilities-Hedges.

(a) This account shall include the change in the fair value of derivative instrument

liabilities designated by the carrier as cash flow or fair value hedges. 

(b) A carrier shall record the change in the fair value of a derivative instrument

liability related to a cash flow hedge in this account, with a concurrent charge to account

77, Accumulated other comprehensive income, with the effective portion of the

derivative gain or loss. The ineffective portion of the cash flow hedge shall be charged

to the same income or expense account that will be used when the hedged item enters

into the determination of net income. 

(c) A carrier shall record the change in the fair of a derivative instrument liability

related to a fair value hedge in this account, with a concurrent charge to a subaccount of

the asset or liability that carries the item being hedged. The ineffective portion of the fair

value hedge shall be charged to the same income or expense account that will be used

when the hedged item enters into the determination of net income. 

*****

 77 Accumulated other comprehensive income.

(a) This account shall include revenues, expenses, gains, and losses that are

properly includable in other comprehensive income during the period. Examples of other
Docket No. RM02-3-000 - 78 - Docket No. RM02-3-000

comprehensive income include foreign currency items, minimum pension liability

adjustments, unrealized gains and losses on certain investments in debt and equity

securities, and cash flow hedges. Records supporting the entries to this account shall be

maintained so that the utility can furnish the amount of other comprehensive income for

each item included in this account. 

(b) This account shall also be debited or credited, as appropriate, with amounts of

accumulated other comprehensive income that have been included in the determination

of net income during the period and in accumulated other comprehensive income in prior

periods. Separate records for each category of items shall be maintained to identify the

amount of the reclassification adjustments from accumulated other comprehensive

income to earnings made during the period. 

*****
Docket No. RM02-3-000 - 79 - Docket No. RM02-3-000

NOTE: THE FOLLOWING APPENDICES WILL NOT BE PUBLISHED IN THE

CODE OF FEDERAL REGULATIONS.

APPENDIX A

LIST OF COMMENTERS

Respondent Abbreviation

1 American Forest & Paper Association, 

Process Gas Consumers Group

Georgia Industrial Group

Industrial Gas Users of Florida

Florida Industrial Gas Users

American Forest 

2 American Electric Power System AEP

3 Automated Power Exchange, Inc. APE

4 American Public Gas Association APGA

5 Avista Energy, Inc. Avista

6 California Electric Oversight Board Electric Board

7 Calpine Corporation Calpine

8 Cinergy Services Inc. Cinergy

9 Cogentrix Energy, Inc. Cogentrix

10 Competitive Supply Commenters Competitive

11 Dominion Resources, Inc Dominion

12 Duke Energy North America LLC Duke Energy

13 Edison Electric Institute EEI

14 Edison Mission Energy

Edison Mission Marketing & Trading, Inc.

Edison Mission

15 Electric Power Supply Association EPSA
Docket No. RM02-3-000 - 80 - Docket No. RM02-3-000

Respondent Abbreviation

16 J. Aron & Company

Merrill Lynch Capital Services, Inc.

Morgan Stanley Capital Group Inc.

J. Aron 

17 National Energy Marketers Association NEM

18 National Rural Electric Cooperative Assn. NRECA

19 Nicor Gas Company Nicor

20 Oneok Power Marketing Company OPMC

21 PanCanadian Energy Services, Inc. PanCanadian

22 Pinnacle West Capital Corporation Pinnacle West

23 Portland General Electric Company Portland General

24 Public Utilities Commission of Ohio Ohio PUC

25 Public Utilities Commission of the State of

California

California PUC

26 Reliant Resources, Inc. RRI

27 RWE Trading Americas, Inc. RWE Trading

28 Sempra Energy Sempra

29 Society for the Preservation of Oil Pipeline Shippers Oil Pipeline Shippers

30 Southern California Edison Southern Cal Ed

31 Southern Company Southern

32 State of New York Department of Public Service NYPUC

33 TXU Energy Trading Company LP TXU

34 UBS AG UBS

35 Williams Companies, Inc Williams

36 Wisconsin Electric Power Company Wisconsin Electric
Docket No. RM02-3-000 - 81 - Docket No. RM02-3-000

APPENDIX B NOT ON DISKETTE 

A COPY CAN BE FOUND IN THE PUBLIC REFERENCE ROOM