FR Doc 02-28294

[Federal Register: November 19, 2002 (Volume 67, Number 223)]
[Proposed Rules]
[Page 69815-69908]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19no02-23]

[[Page 69815]]

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Part II

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Parts 35, 101, et al.

Accounting, Financial Reporting, and Rate Filing Requirements for Asset
Retirement Obligations; Proposed Rule

[[Page 69816]]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 35, 101, 154, 201, 346, and 352

[Docket No. RM02-7-000]

Accounting, Financial Reporting, and Rate Filing Requirements for
Asset Retirement Obligations

Issued: October 30, 2002.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) proposes
to revise its regulations to update the accounting and reporting
requirements for liabilities for asset retirement obligations under its
Uniform Systems of Accounts for public utilities, licensees, natural
gas companies, and oil pipeline companies.
The Commission proposes to establish uniform accounting and
financial reporting for the recognition and measurement of liabilities
arising from retirement and decommissioning obligations of tangible
long-lived assets and the related capitalized costs. The Commission
also proposes to add new income statement accounts to the Uniform
Systems of Accounts to record the accretion of the liability and the
depreciation of the related capitalized costs. The Commission proposes
to add or revise as necessary the definitions, general and plant
instructions, and balance sheet and income statement accounts contained
in the Uniform Systems of Accounts. Additionally, the Commission
proposes to revise its rate filing requirements to incorporate the
above mentioned changes.
Finally, the Commission proposes to revise 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 revised schedules proposed by this rulemaking.
An important objective of the proposed rule is to provide sound and
uniform accounting and financial reporting for the above types of
transactions and events. The new instructions and accounts will result
in improved, consistent and complete accounting and reporting of
liabilities for obligations associated with the retirement of tangible
long-lived assets and the related asset retirement costs capitalized.
The additions of new accounts and changes to the FERC Forms noted above
will add visibility, completeness and consistency of the accounting and
reporting of liabilities for asset retirement obligations and the
related asset retirement costs capitalized.

DATES: Comments on the proposed rulemaking are due on or before January
3, 2003.

ADDRESSES: File written comments with the Office of the Secretary,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426. Comments should reference Docket No. RM02-7-000.
Comments may be filed electronically or by paper (an original and 14
copies, with an accompanying computer diskette in the prescribed format
requested).

FOR FURTHER INFORMATION CONTACT:

Mark Klose (Project Manager), Office of the Executive Director, Federal
Energy Regulatory Commission, 888 First Street, NE., Washington, DC
20426, (202) 502-8283.
Raymond Reid (Technical Information), Office of the Executive Director,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-6125.
Robert T. Catlin (Technical Information), Office of Markets, Tariffs,
and Rates, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-8754.
Julia A. Lake (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-8370.

SUPPLEMENTARY INFORMATION:

I. Introduction
II. Background
III. Discussion of Proposed Revisions to Regulations for Public
Utilities, Licensees, and Natural Gas Companies
A. General
B. Proposed New Accounts for Asset Retirement Obligations
C. Proposed New Accounts for Capitalized Asset Retirement Costs
D. Proposed New General Instructions for Accounting for Asset
Retirement Obligations
E. Other Revisions to the Uniform Systems of Accounts
1. Proposed Revisions to the Cost of Removal Definition
2. Proposed Revisions to Electric and Gas General Instruction
20, Accounting for Leases
3. Proposed Revisions to Electric and Gas Plant Instructions
4. Proposed Revision to Account 121, Nonutility Property
5. Proposed Revisions to Electric and Gas Utility Operating
Income Accounts
F. Proposed Accounting for Transition Adjustments
G. Proposed Revisions to Tariff Filing Requirements under 18 CFR
part 35 and 18 CFR part 154
IV. Discussion of Proposed Revisions to Regulations for Oil Pipeline
Companies
A. General
B. Proposed New Accounts for Asset Retirement Obligations
C. Proposed New Accounts for Capitalized Asset Retirement Costs
D. Proposed New General Instruction for Accounting for Asset
Retirement Obligations
E. Other Revisions to the Uniform System of Accounts
1. Proposed Revisions to the Cost of Removal Definition
2. Proposed Revisions to Instructions for Carrier Property
Accounts
3. Proposed Revisions to Account 34, Noncarrier Property
4. Proposed New Account for Operating Expenses
F. Proposed Accounting for Transition Adjustments
G. Proposed Revisions to Tariff Filing Requirements under 18 CFR
part 346
V. Proposed Effective Date
VI. Proposed Changes to the FERC Annual Report Forms
VII. Regulatory Flexibility Act Statement
VIII. Environmental Impact Statement
IX. Information Collection Statement and Public Reporting Burden
X. Public Comment Procedures
XI. Document Availability
Regulatory Text
Appendix A--Summary of Proposed Changes to Schedules for Forms 1, 1-
F, 2, 2-A, and 6

I. Introduction

1. In this Notice of Proposed Rulemaking (NOPR), the Federal Energy
Regulatory Commission (Commission) proposes to revise its Uniform
Systems of Accounts \1\ for public utilities and licensees,\2\ natural
gas companies \3\ and

[[Page 69817]]

oil pipeline companies \4\ for the recognition of liabilities for legal
obligations associated with the retirement of tangible long-lived
assets and the associated capitalization of these amounts as part of
the cost of the asset giving rise to the obligation.
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\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 entities 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. See 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. See
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. See 18 CFR part 352 (2002).
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2. The purpose of the NOPR is 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 legal obligations associated with the retirement of
tangible long-lived assets. The Commission proposes to add or revise as
necessary the definitions, general and plant instructions, and balance
sheet and income statement accounts contained in the Uniform Systems of
Accounts to incorporate the proposed changes for the accounting for
asset retirement obligations. The Commission is of the view that such
requirements are needed because these types of transactions and events
are not clearly or consistently reported. This NOPR is part of the
Commission's ongoing effort to address emerging accounting developments
within the context of the Uniform Systems of Accounts.
3. The proposed accounting for asset retirement obligations is
consistent with the accounting and reporting requirements that
jurisdictional entities will use in their general purpose financial
statements provided to shareholders and the Securities Exchange
Commission (e.g., companies will separately account and report the
liability for the asset retirement obligations, capitalize the asset
costs, and charge earnings for depreciation of the asset and operating
expense for the accretion of the liability).
4. An asset retirement obligation is a liability resulting from a
legal obligation to retire or decommission a plant asset. The types of
work activities typically include removing or dismantling the asset.
For example, public utilities have a legal liability to decommission
nuclear plants under certain Nuclear Regulatory Commission (NRC)
regulations. The activities would include the dismantlement and removal
of the reactor vessel and the related contaminated facilities. Natural
gas pipeline companies may have legal liabilities to remove compressor
stations and related piping under state regulations, local ordinances
or agreements entered into with the landowners. Offshore pipelines may
have legal obligations that arise under federal and state site
clearance requirements to remove the offshore platforms, wells, pilings
and other appurtenances resulting from the retirement of such
facilities. However, certain assets may not have legal obligations if
no law, statute, ordinance, or contract exists to remove or dismantle
the facilities.
5. Business entities have accounted for legal obligations in
various ways. Some business entities recognize these asset retirement
obligations gradually over the life of the asset as part of
depreciation expense while others have not recognized any liability for
the legal obligations for the asset to be retired. Under the proposed
accounting all entities must record the present value of the legal
obligation at the time it is incurred.
6. To illustrate, the owner of a nuclear plant estimates that the
cost to decommission the facilities as required by law is $400,000 ten
years from today. Under the current practice the owner records $40,000
($400,000/10 years) of additional depreciation expense each year for
the cost of removing the plant. This simplified example ignores
interest earnings, etc. on amounts placed in an external fund.
7. The new accounting standard requires that the owner record a
liability for the present value of the $400,000. Assuming a $100,000
present value, the owner initially records a liability of $100,0000 and
capitalizes a corresponding amount as part of the asset costs. The
liability recorded will increase or grow over time (time value of
money) until the actual retirement activity commences and the liability
is settled (paid). Both approaches recognize the same total expenses of
$400,000 over the asset's useful life. Under the new accounting
standard, the total expenses are made up of $100,000 in depreciation on
the capitalized asset costs plus $300,000 for the time value of money,
while under the current practice the decommissioning liability is
recognized on a pro rata basis over the life of the plant as
depreciation expense of $400,000.
8. In summary, the new accounting standard requires the present
value of the liability to be recorded for all assets. Additionally, the
entity capitalizes this amount as part of the cost of the plant and
depreciates it over the useful life of the related asset.
9. Finally, a gain or loss may be recognized for any difference
between the estimated liability and the actual amount paid to settle
the asset retirement obligation. In the example above, if the owner
paid a contractor $380,000 to remove the plant and thereby settle the
obligation, a gain of $20,000 will be recognized for the difference
between the $400,000 liability recorded on its books and the $380,000
paid to the contractor for the work performed.
10. The Commission also proposes to revise its rate filing
requirements to accommodate the above mentioned changes. In that
regard, we specifically note that the proposed accounting will not
affect jurisdictional entities' ability to recover costs arising from
asset retirement obligations in rates. However, public utilities,
licensees, natural gas and oil pipeline companies with formula rate
tariffs must seek approval with the Commission prior to implementing
the accounting changes, if doing so would affect tariff billings.
11. Finally, the Commission proposes to revise 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 FERC
Form No. 6, Annual Report of Oil Pipeline Companies (Form 6) to include
the new accounts and the revised schedules proposed in this
rulemaking.\5\
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\5\ The FERC Annual Reports bear the following OMB approval
control numbers: Form 1 has OMB approval number 1902-0021; Form 1-F
has OMB approval number 1902-0029; Form 2 has OMB approval number
1902-0028; Form 2-A has OMB approval number 1902-0030; and Form 6
has OMB approval number 1902-002.
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II. Background

12. The recognition and measurement of legal liabilities associated
with the retirement and decommissioning of long-lived assets by various
entities, including Commission jurisdictional entities, has been
inconsistent over the years. The usefulness of consistently recognizing
and measuring asset retirement obligations in the financial statements
resulted in the Financial Accounting Standards Board (FASB) issuing a
new accounting pronouncement affecting the manner in which legal
obligations are measured and reported in the financial statements
applicable to entities in general.\6\ The

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major objective of this change in accounting by FASB is to provide
standards for the recognition and measurement of liabilities for asset
retirement obligations associated with the retirement of tangible long-
lived assets. When an entity acquires or constructs an asset, it may
incur certain legal obligations associated with the future retirement
of that asset. These obligations are generally referred to as asset
retirement obligations. An asset retirement obligation is a legal
obligation associated with the retirement of a tangible long-lived
asset that an entity is required to settle as a result of an existing
enacted law, statute, ordinance, or written or oral contract or by
legal construction of a contract under the doctrine of promissory
estoppel.\7\
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\6\ The accounting pronouncement issued by FASB was Financial
Accounting Standards (FAS) No. 143, Accounting for Asset Retirement
Obligations, issued in June 2001. The accounting may be obtained
from FASB at http://accounting.rutgers.edu/raw/fasb//.
\7\ See FAS 143, Appendix A, paragraphs A2 through A5, for a
discussion of the scope of the legal obligations covered under the
pronouncement.
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13. An entity essentially recognizes a liability for the fair value
of an asset retirement obligation at the time the asset is constructed,
acquired, or when a change in the law creates a legal obligation to
perform the retirement activities. Upon initial recognition of that
liability, an entity also increases the cost of the related asset that
gives rise to the legal obligation by the same amount.\8\ The liability
is increased over time until the actual retirement activity
commences.\9\ Additionally, the asset retirement cost capitalized is
depreciated over the same life of the related asset giving rise to the
obligation. An entity is required to remeasure the liability due to the
passage of time and certain other changes in the estimate of the
liability.\10\
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\8\ See FAS 143, paragraphs 11, for a discussion of the
recognition and allocation of an asset retirement cost.
\9\ See FAS 143, paragraphs 8 and 9, for a discussion of the
``credit adjusted risk free rate'' used to measure the fair value of
the asset retirement obligation.
\10\ See FAS 143, paragraphs 13 through 16, for a discussion of
the discussion of the subsequent recognition and measurement of the
asset retirement obligation.
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14. Business entities are required to apply the standards for
accounting for asset retirement obligations to all existing assets as
if the accounting requirements had always been in existence for such
assets, as well as those under construction that have associated legal
obligations for their disposal or retirement.\11\
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\11\ See FAS 143, paragraphs 24 and 25, for a detailed of the
accounting for the cumulative effect of a change in accounting
principle.
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15. The accounting standards for asset retirement obligations rely
on the general standards of accounting for the effects of regulation
for regulated entities in accordance with FASB Statement No. 71,
Accounting for the Effects of Certain Types of Regulation, (FAS
71).\12\ Therefore, an entity must recognize a regulatory asset or
regulatory liability if the requirements of FAS 71 are met. The
Commission established regulatory assets and liabilities which apply to
public utilities, licensees and natural gas companies.\13\
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\12\ See FAS 143, paragraphs 19 through 21 for a discussion of
the subsequent recognition and measurement of the asset retirement
obligation.
\13\ See Order No. 552, 58 FR 17,982 (Apr. 7, 1993), FERC Stats.
& Regs., Regulations Preambles January 1991-June 1996 ] 30,967, at
pp. 30,823-26 (Mar. 31, 1993) for guidance on the recognition of
regulatory assets and regulatory liabilities when certain criteria
conditions are met.
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16. The Commission considers it desirable for its accounting
requirements and those used by jurisdictional entities for general
purpose financial reporting to be consistent. Currently, some
jurisdictional entities do not recognize asset retirement obligations
in the Uniform Systems of Accounts while other jurisdictional entities
only recognize the amounts included in the rate setting process as a
component of accumulated depreciation. The Commission is of the view
that the accounting for asset retirement obligations to be an
improvement in financial accounting and reporting practices. The
Commission notes that the proposed rule will improve consistency in
accounting and reporting of legal obligations to retire tangible long-
lived assets which under current accounting practices are accounted and
reported in an inconsistent manner. The Commission also notes that the
proposed rule will provide the Commission's stakeholders with more
transparent financial statement disclosure of the costs related to the
legal obligation in the FERC Annual Reports. The proposed rule is
consistent with the enhanced disclosure initiatives announced by the
Security Exchange Commission to ensure more important transparent and
comprehensive accounting and reporting information will be provided by
business entities to their stakeholders.
17. In an effort to eliminate the inconsistencies in accounting
practices by jurisdictional entities for asset retirement obligations,
the Commission proposes to provide in the Uniform Systems of Accounts
accounting requirements for the recognition and measurement of
liabilities for obligations associated with the retirement and
decommissioning of tangible long-lived assets. The Commission considers
that the proposed rule for asset retirement obligations will provide
consistent accounting and reporting requirements for the recognition
and measurement of liabilities for legal obligations associated with
the retirement of long-lived assets and the capitalization of the
related asset retirement costs. The proposed rule, if adopted, will
initially result in a minimal increase in burden as a result of
standardizing the accounting and reporting for asset retirement
obligations for regulatory purposes. The proposed rule will eliminate
the need by jurisdictional entities to maintain duplicate sets of
books.
18. Finally, on May 7, 2002, Commission staff held an informal
technical conference to discuss the financial accounting, reporting and
ratemaking implications related to obligations associated with the
retirement of tangible long-lived assets.\14\ The main purpose for
convening this technical conference was to afford an opportunity for
the electric, natural gas and oil pipeline industries and other
interested parties to discuss the financial and reporting implications
related to asset retirement obligations on the Commission's existing
accounting and rate regulations. The Commission staff received
suggestions from the participants at the technical conference which
have been incorporated into the NOPR, to the maximum extent possible.
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\14\ See 67 FR 16,071 (April 4, 2002) and 67 FR 20,922 (April
29, 2002).
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III. Discussion of Proposed Revisions to Regulation for Public
Utilities, Licensees, and Natural Gas Companies

A. General

19. The Commission's existing Uniform Systems of Accounts and
Annual Report Forms for public utilities, licensees, and natural gas
companies do not contain adequate instructions and accounts to provide
for the recording of liabilities for asset retirement obligations and
the associated asset retirement costs. Therefore, the following changes
are proposed to our existing accounting and reporting regulations to
provide transparent accounting and reporting to this Commission and
other users of the FERC Forms 1, 1-F, 2 and 2-A any legal liabilities
related to the future retirement or decommissioning of utility and
nonutility plant.

B. Proposed New Accounts for Asset Retirement Obligations

20. The Commission proposes to create a new noncurrent liability
account entitled account 230, Asset

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retirement obligations, to record legal liabilities related to the
future retirement or decommissioning of utility and nonutility plant
for public utilities and licensees in part 101 (part 101) of the
Commission's regulations and for natural gas companies in part 201
(part 201) of the Commission's regulations. The new proposed account
230, Asset retirement obligations, will record the fair value of the
liability based upon a present value calculation. These amounts will
increase or grow over time until the liability is settled. The process
of increasing the liabilities recorded in account 230, Asset retirement
obligations, is referred to as an ``accretion'' to record the increase
or growth in the liability due to the passage of time. The Commission
proposes to create a new income statement account entitled account
411.10, Accretion expense, in parts 101 and 201 of the Commission's
regulations to record the increase or growth in the liability due to
the passage of time. The proposed account 411.10 will provide for the
accretion expense of asset retirement obligations due to the passage of
time.

C. Proposed New Accounts for Capitalized Asset Retirement Costs

21. Under the new accounting requirements, when an entity records a
liability for an asset retirement obligation, it concurrently
capitalizes that amount as part of the asset's cost. Effectively, the
fair value of the obligation becomes part of the overall cost of the
asset, similar to other amounts that are capitalized as part of the
asset's construction or acquisition cost to separately identify these
in the electric and gas utility plant records. The Commission proposes
to create the following new primary plant accounts for each plant
functions within account 101, Electric plant in service (Major only),
for public utilities and licensees in part 101 of the Commission's
regulations, and account 101, Gas plant in service, for natural gas
companies in part 201 of the Commission's regulation, to record
separately these amounts across the life of the asset.
22. For account 101, Electric plant in service (Major only), the
new proposed primary plant accounts are shown in the following table:

------------------------------------------------------------------------
Public utilities and Proposed new primary
licensees plant accounts
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1........................... Steam Production 317, Asset
Plant. retirement costs
for steam
production plant.
2........................... Nuclear Production 326, Asset
Plant. retirement costs
for nuclear
production plant.
3........................... Hydraulic Production 337, Asset
Plant. retirement costs
for hydraulic
production plant.
4........................... Other Production 347, Asset
Plant. retirement costs
for other
production plant.
5........................... Transmission Plant.. 359.1, Asset
retirement costs
for transmission
plant.
6........................... Distribution Plant.. 374, Asset
retirement costs
for distribution
plant.
7........................... General Plant....... 399.1, Asset
retirement costs
for general plant.
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23. For account 101, Gas plant in service, the new proposed primary
plant accounts are shown in the following table below:

------------------------------------------------------------------------
Natural gas Proposed new primary
companies plant accounts
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1........................... Manufactured Gas 321, Asset
Production Plant. retirement costs
for manufactured
gas production
plant.
2........................... Natural Gas 339, Asset
Production Plant. retirement costs
for natural gas
production and
gathering plant.
3........................... Products Extraction 348, Asset
Plant. retirement costs
for products
extraction plant.
4........................... Underground Storage 358, Asset
Plant. retirement costs
for underground
storage plant.
5........................... Other Storage Plant. 363.6, Asset
retirement costs
for other storage
plant.
6........................... Base Load Liquefied 364.9, Asset
Natural Gas retirement costs
Terminaling and for base load
Processing Plant. liquefied natural
gas terminaling
plant.
7........................... Transmission Plant.. 372, Asset
retirement costs
for transmission
plant.
8........................... Distribution Plant.. 388, Asset
retirement costs
for distribution
plant.
9........................... General Plant....... 399.1, Asset
retirement costs
for general plant.
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24. The Commission proposes that the amounts in the above primary
plant accounts be depreciated over the life of the electric and gas
utility plant giving rise to the asset retirement obligations. In order
to separately identify the depreciation expense recorded on capitalized
asset retirement costs related to electric and gas utility plant, the
Commission proposes to create a new depreciation expense account
entitled account 403.1, Depreciation expense for asset retirement
costs, in parts 101 and 201 of the Commission's regulations to record
these amounts on the income statement.

D. Proposed New General Instructions for Accounting for Asset
Retirement Obligations

25. In addition to the above mentioned new accounts, the Commission
also proposes to create a new General Instruction 25, Accounting for
asset retirement obligations, for public utilities and licensees in
part 101 and a new General Instruction 24, Accounting for asset
retirement obligations, for natural gas companies in part 201 of the
Commission's regulations to provide additional direction for the
accounting for the recognition of asset retirement costs and related
obligations. These proposed General Instructions provide for the
capitalization of the asset retirement costs in electric and gas
utility plant and nonutility plant accounts as appropriate. It also
provides for the liability to be recorded in the new proposed
noncurrent liability account 230, Asset retirement obligations, in
parts 101 and 201 of the Commission's regulations.
26. Under proposed General Instruction 25 in part 101 and General
Instruction 24 in part 201 of the Commission's regulations, the
Commission proposes that the accretion of the liability be debited to
the new proposed account 411.10, Accretion expense, for electric and
gas utility plant, and the existing account 413, Expenses of electric
plant leased to others, and account 413, Expenses of gas plant leased
to others, for utility plant

[[Page 69820]]

leased to others and account 421, Miscellaneous nonoperating income,
for nonutility plant.
27. Finally, when an asset retirement obligation is settled by a
jurisdictional entity, a gain or loss can result from the difference
between the estimated amount of the asset retirement obligation
liability included in proposed account 230, Asset retirement
obligations, and the actual amount paid to settle the obligation. For
example, an entity may settle its asset retirement obligation by either
using its internal workforce or paying a third party to perform the
work to retire the electric or gas utility plant. If the amount of the
liability included in account 230, Asset retirement obligations, is
greater or less than the actual amount paid to settle the obligation, a
gain or loss will be incurred. The Commission proposes to record gains
or losses resulting from the settlement of asset retirement obligations
for electric and gas utility plant in account 411.6, Gains from
disposition of utility plant, and the account 411.7, Losses from
disposition of utility plant, respectively.\15\ The Commission proposes
to revise the text of accounts 411.6 and 411.7 in Parts 101 and 201 of
the Commission's regulations to record gains in account 411.6 and
losses in account 411.7 resulting from the settlement of asset
retirement obligations related to utility property.
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\15\ See Order No. 552, supra note 13 for guidance on the
recognition of regulatory assets and regulatory liabilities when
certain criteria conditions are met.
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28. The Commission proposes that any gains or losses relating to
the settlement of asset retirement obligations for nonutility plant
must be recorded directly in account 421, Miscellaneous nonoperating
income, and account 426.5, Other deductions, respectively. The
Commission proposes to revise the text of accounts 421 and 426.5 in
parts 101 and 201 of the Commission's regulations to record gains in
account 421 and losses in account 426.5 resulting from the settlement
of asset retirement obligations related to nonutility property.
29. Finally, the Commission proposes that jurisdictional entities
keep subsidiary records and supporting documentation for each asset
retirement obligation in order to be able to furnish accurately and
expeditiously the full details of the identity and nature of the legal
obligation, the year incurred, the identity of the plant giving rise to
the obligation, the full particulars relating of each component and
supporting computations related to the measurement of the asset
retirement obligation.

E. Other Revisions to the Uniform Systems of Accounts

30. The Commission also proposes to revise the following additional
existing definitions and general instructions, and revise the text of
certain balance sheet and income statement accounts to the Uniform
Systems of Accounts in parts 101 and 201 of the Commission's
regulations to incorporate the accounting for asset retirement
obligations as discussed above.
1. Proposed Revisions to the Cost of Removal Definition
31. Under the Uniform Systems of Accounts in parts 101 and 201 of
the Commission's regulations, jurisdictional entities record cost of
removal related to the disposition and retirement of long-lived assets
as a component of depreciation expense. The definition of cost of
removal as presently contained in the Uniform Systems of Accounts
includes the costs of demolishing, dismantling, tearing down or
otherwise removing the electric or gas plant.\16\ Certain cost of
removal activities falling within this definition may relate to a legal
obligation associated with the retirement of a long-lived asset while
others may not relate to a legal obligation to retire a long-lived
asset. Under the proposed rule, retirement activities which constitute
legal obligations must be removed from cost of removal and accounted
for separately as liabilities for legal obligations that are
capitalized as part of the tangible long-lived assets that give rise to
the obligation. The Commission proposes to amend the definition of cost
of removal to exclude legal obligations related to the retirement of
long-lived assets at the end of their service life because the asset
retirement costs and related obligations will be separately recognized
on the balance sheet and income statement.
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\16\ See Definition 10 in 18 CFR part 101 (Public Utilities and
Licensees), and Definition 10 in 18 CFR part 201 (Natural Gas
Companies).
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2. Proposed Revisions to Electric and Gas General Instruction 20,
Accounting for Leases
32. Under the Uniform Systems of Accounts in parts 101 and 201 for
public utilities, licensees, and natural gas companies, there are no
provisions under General Instruction 20, Accounting for leases, for the
recognition of a liability for an asset retirement obligation and the
related asset retirement costs that are not recognized as part of the
liability related to minimum lease payments for a capital lease. The
Commission proposes to add a new instruction to General Instruction 20,
Accounting for leases, that provides when an entity incurs an asset
retirement obligation through assumption of a capital lease, the entity
must recognize the liability in account 230, Asset retirement
obligations, and record the related asset retirement costs in account
101.1, Property under capital leases, account 120.6, Nuclear fuel under
capital leases, or account 121, Nonutility property, as appropriate.
3. Proposed Revisions to Electric and Gas Plant Instructions
33. For public utilities, licensees, and natural gas companies,
there are no specific provisions under the Uniform Systems of Accounts
to allow for the capitalization of asset retirement costs related to
legal obligations that were incurred during the construction of
tangible long-lived assets. The Commission proposes to revise Electric
and Gas Plant Instructions 3, Components of construction cost, in parts
101 and 201 of the Commission's regulations by adding asset retirement
costs to the item list as a new construction cost component that is
capitalized if incurred during the construction phase of a long-lived
asset that gives rise to a legal obligation. However, since there will
be no immediate cash expenditure during the construction phase for this
cost, the Commission proposes to exclude this cost from the
construction work in progress base for calculating the allowance for
funds used during construction (AFUDC).
4. Proposed Revision to Account 121, Nonutility Property
34. The Commission proposes to revise the instructions to account
121, Nonutility property, contained in parts 101 and 201 of the
Commission's regulations to require the asset retirement costs
associated with the nonutility plant to be recorded in account 121. The
Commission also proposes that the depreciation expense on the asset
retirement costs included in account 121 must be recorded in account
421, Miscellaneous nonoperating income, in parts 101 and 201 of the
Commission's regulations.
5. Proposed Revisions to Electric and Gas Utility Operating Income
Accounts
35. The Commission proposes to add a new instruction to account
411.6, Gains from disposition of utility plant, and account 411.7,
Losses from disposition of utility plant, to record

[[Page 69821]]

gains and losses, respectively, resulting from the settlement of asset
retirement obligations in accordance with the accounting prescribed in
the new proposed General Instruction 25 in part 101 of the Commission's
regulations. The Commission also proposes to add a similar instruction
in accounts 411.6 and 411.7 to record gains or losses in accordance
with the accounting prescribed for natural gas companies in the new
proposed General Instruction 24 in part 201 of the Commission's
regulations.

F. Proposed Accounting for Transition Adjustments

36. The Commission proposes that at the adoption of the final rule,
jurisdictional entities must apply the proposed requirements of the
rule to all existing long-lived assets at January 1, 2003, with legal
obligations associated with the future retirement or disposal of those
assets.
37. The Commission proposes at the initial date of the adoption of
the accounting for asset retirement obligations rule, jurisdictional
entities recognize a transition adjustment for a liability for any
existing asset retirement obligation adjusted for the cumulative
accretion on the liability and capitalize the associated asset
retirement costs and the related accumulated depreciation on the
capitalized costs. The Commission proposes that jurisdictional entities
measure the transitional adjustment for the asset retirement cost and
related liability for the retirement obligations for existing long-
lived asset as of the date that the retirement obligation was incurred
and would have been recognized through January 1, 2003. The
transitional adjustment recognized for the existing long-lived asset
represents the cumulative accretion of the liability and the
accumulated depreciation on the related capitalized asset retirement
cost from the date the obligation would have been incurred through
January 1, 2003.
38. The Commission proposes that when the amount of any previously
recognized asset retirement obligation recorded in account 108 and
account 110 for major and non-major public utilities and licensees,
respectively, and account 108 for natural gas companies is greater than
the amount recognized under the proposed rule, the excess must be
credited to account 254, Other regulatory liabilities. However, when
the amount of any previously recognized asset retirement obligation in
account 108 and account 110 for major and non-major public utilities
and licensees, respectively, and account 108 for natural gas companies
is less than the amount recognized under the proposed rule, the
Commission proposes that the difference must be charged to income in
account 435, Extraordinary deductions, and the related income taxes
recorded in account 409.3, Income taxes, extraordinary items, and
reported as a cumulative effect of a change in accounting
principle.\17\ The Commission notes that jurisdictional entities must
record a regulatory asset for part, or all of the cumulative effect of
a change in accounting principle in account 182.3, Other regulatory
assets, if the requirements for recording a regulatory asset under
Order No. 552 are met.\18\
---------------------------------------------------------------------------

\17\ When authorized by the Commission, amounts related to a
cumulative effect of a change in accounting principles have been
reported in account 435. The effect on net income for amounts
charged to account 435 must be reported on the income statement on
the lines designated for extraordinary deductions in FERC Forms 1,
1-F, 2, and 2-A. Public utilities, licensees and natural gas
companies must disclose in a footnote in the FERC Forms 1, 1-F, 2,
and 2-A the full particulars of the amounts reported as a cumulative
effect of a change in accounting principle.
\18\ See Order No. 552, supra note 13, for guidance on the
recognition of regulatory assets and regulatory liabilities when
certain criteria conditions are met.
---------------------------------------------------------------------------

39. For public utilities, licensees and natural gas companies, the
instructions to account 108 and account 110 for major and non-major
public utilities and licensees, respectively, in part 101 of the
Commission's regulations \19\ and account 108 for natural gas companies
in part 201 of the Commission's regulations \20\ requires the
Commission's approval to remove amounts from these accounts. For any
excess amounts removed from account 108 and 110, the Commission
proposes that the final rule issued in this proceeding will constitute
the requisite authority for jurisdictional entities to remove amounts
from account 108 and 110 to account 254.
---------------------------------------------------------------------------

\19\ See paragraph E to account 108, Accumulated provision for
depreciation of electric utility plant (Major only), and paragraph E
to account 110, Accumulated provision for depreciation and
amortization of electric utility plant (Nonmajor only), in 18 CFR
part 101 (Public Utilities and Licensees).
\20\ See paragraph E to account 108, Accumulated provision for
depreciation of gas utility plant, in 18 CFR part 201 (Natural Gas
Companies).
---------------------------------------------------------------------------

40. The Commission proposes that jurisdictional entities must
charge the cumulative accretion expense on the liability for existing
legal obligations to account 435, Extraordinary deductions, and the
related income taxes in account 409.3, Income taxes, extraordinary
items, under parts 101 and 201 of the Commission's regulations and
report such amounts in net income as a cumulative effect of a change in
accounting principle.\21\ The Commission also proposes that the
cumulative accretion expense related to the liabilities for the asset
retirement obligations may be included in account 182.3, if the
requirements for recording a regulatory asset under Order No. 552 are
met.\22\
---------------------------------------------------------------------------

\21\ See supra note 17.
\22\ See Order No. 552, supra note 13, for guidance on the
recognition of regulatory assets and regulatory liabilities when
certain criteria conditions are met.
---------------------------------------------------------------------------

41. In summary, the Commission proposes at the date of adoption of
the final rule, jurisdictional entities must record the liability for
asset retirement obligation associated with those long-lived asset
existing at January 1, 2003, in the new proposed account 230, Asset
retirement obligations. The jurisdictional entities must capitalize the
related asset retirement costs in the proposed primary plant accounts
within the plant functions applicable to the utility plant that gives
rise to the obligations. The Commission also proposes that
jurisdictional entities must record any cumulative transition
adjustments associated with the asset retirement obligations for
existing long lived assets at the date of the adoption of the final
rule in the appropriate accounts in the manner as prescribed above.

G. Proposed Revisions to Tariff Filing Requirements Under 18 CFR Part
35 and 18 CFR Part 154

42. The Commission's proposed rule will require public utilities,
licensees or natural gas companies for accounting purposes to recognize
asset retirement obligations. The Commission is not requiring
jurisdictional entities with stated rate tariffs to make any tariff
filings with the Commission due to this rulemaking at this time.
However, public utilities, licensees and natural gas companies with
formula rate tariffs must not include any cost components related to
asset retirement obligations in their formula rate billing
determinations for automatic recovery prior to obtaining Commission
approval.
43. The Commission proposes that to the extent, if any, a
particular asset retirement cost should be allowed recovery through
jurisdictional rates, it shall be addressed on a case by case basis in
the individual rate change proposals filed by public utilities,
licensees, and natural gas companies. Although the proposed accounting
rules require the recording of an asset retirement cost, the Commission
recognizes that no actual cash expenditures are made or required until

[[Page 69822]]

the long-lived assets are retired from service.
44. Therefore, it would be inappropriate for public utilities,
licensees, and natural gas companies to include these asset retirement
costs in rate base and collect a rate of return allowance and related
income taxes on these amounts in jurisdictional rates. To ensure that
all rate base amounts related to these assets can be identified and
excluded from the rate base calculation in a rate change filing, the
Commission is proposing to add new Sec. Sec. 35.18 and 154.315 to its
rate change filing requirements. These new regulations require that
public utilities, licensees, and natural gas companies which have
recorded an asset retirement obligation on their books in accordance
with this proposed rule must, as part of any initial rate filing or
general rate change filing, provide a schedule identifying all cost
components related to the asset retirement obligation that are included
in the book balances of all accounts reflected in the cost of service
computation supporting the proposed rates. In addition, the proposed
regulations require that all rate base items related to asset
retirement obligations be removed from the rate base computation
through an adjustment. If the public utility, licensee or natural gas
company is seeking recovery of an asset retirement obligation in rates,
it must also provide a detailed study supporting the amounts proposed
to be collected in rates. If the public utility, licensee or natural
gas company is not seeking recovery of the asset retirement obligation
in rates, then it must remove all cost components related to asset
retirement obligations from its cost of service.
45. The Commission is aware that a number of natural gas companies
are currently collecting an allowance in jurisdictional rates to cover
the future cost of retiring and removing facilities. This allowance is
referred to as a negative salvage allowance. The Commission believes
that these negative salvage allowances do not necessarily reflect the
existence of a legal asset retirement obligation. Therefore, the
Commission will require that negative salvage allowances that are not
established due to an asset retirement obligation be identified for
rate making purposes separately from asset retirement obligation
allowances. The current rate change filing requirements for natural gas
companies at Sec. 154.312(d), Statement D, requires that any
authorized negative salvage must be maintained in a separate subaccount
of account 108, Accumulated provision for depreciation of gas utility
plant. The Commission proposes to amend this section to ensure that
this subaccount must not include any amounts related to asset
retirement obligations.

IV. Discussion of Proposed Revisions to Regulations for Oil Pipeline
Companies

A. General

46. Similar to the accounting changes for public utilities,
licensees and natural gas companies, the Commission proposes to provide
accounting requirements for asset retirement obligations in the Uniform
Systems of Accounts for oil pipeline companies in part 352 of the
Commission's regulations. Therefore, the following changes are proposed
to the Commission's existing accounting regulations to provide
transparent accounting and reporting of these amounts to this
Commission and other users of the FERC Form 6.

B. Proposed New Accounts for Asset Retirement Obligations

47. The Commission proposes to create a new noncurrent liability
account entitled account 67, Asset retirement obligations, in part 352
of the Commission's regulations to record legal liabilities related to
the future decommissioning or retirement of carrier and noncarrier
property. The Commission also proposes to create a new income statement
account entitled account 591, Accretion expense, to record the increase
in the liability due to the passage of time.

C. Proposed New Accounts for Capitalized Asset Retirement Costs

48. Under the new accounting requirements, when an oil pipeline
records a liability for its asset retirement obligation, it
concurrently capitalizes that amount in the carrier property accounts.
In order to separately identify this cost in the carrier property
records, the Commission proposes to create new carrier primary property
accounts within existing account 30, Carrier property, for oil
pipelines in part 352 of the Commission's regulations to separately
identify these amounts throughout the life of the asset. The new
proposed carrier primary property accounts are shown on the following
table below:

------------------------------------------------------------------------
Proposed new primary property
Oil pipeline companies accounts
------------------------------------------------------------------------
1 Gathering Lines..................... 117, Asset retirement costs
for gathering lines.
2 Trunk Lines......................... 167, Asset retirement costs
for trunk lines.
3 General Property.................... 186.7, Asset retirement costs
for general.
------------------------------------------------------------------------

49. The Commission proposes the amounts in the above carrier
primary property accounts be depreciated over the life of the carrier
property that gives rise to the asset retirement obligations. In order
to identify the depreciation expense recorded on capitalized asset
retirement costs, the Commission proposes to create a new depreciation
expense account entitled account 541, Depreciation expense for asset
retirement costs, to separately record these amounts on the income
statement.

D. Proposed New General Instruction for Accounting for Asset Retirement
Obligations

50. The Commission also proposes to create a new General
Instruction 1-19, Accounting for asset retirement obligations, to
provide the accounting for the recognition of asset retirement costs
and obligations, in part 352 of the Commission's regulations. The new
proposed General Instruction 1-19 will provide for the liability to be
recorded in the new proposed noncurrent liability account entitled
account 67, Asset retirement obligations, and the capitalization of the
asset retirement costs in carrier and noncarrier property accounts.
51. Under proposed General Instruction 1-19, the Commission
proposes to provide for recording the accretion of the liability for
carrier property in the new proposed account 591, Accretion expense,
and for noncarrier property in the existing account 620, Income (net)
for noncarrier property.
52. Under proposed General Instruction 1-19, the Commission
proposes that gains or losses resulting from the difference between the
amount of the liability for the asset retirement obligation in account
67, Asset

[[Page 69823]]

retirement obligations, and the actual amount of the settlement of the
obligation for carrier property be recorded directly in the new
proposed account 592, Gains or losses on asset retirement obligations,
and for noncarrier property in the existing account 620, Income (net)
from noncarrier property. The Commission proposes to add a new account
592, Gains or losses on asset retirement obligations, in part 352 of
the Commission's regulations to include gains and losses resulting from
the settlement of asset retirement obligations.
53. The Commission also proposes in General Instruction 1-19 that
oil pipeline companies maintain for purposes of analyses subsidiary
records and supporting documentation for each asset retirement
obligation to be able to furnish accurately and expeditiously the full
details of the nature of the legal obligations and full particulars of
the components and computations relating to the recognition and
measurement of the asset retirement obligation.

E. Other Revisions to the Uniform Systems of Accounts

54. The Commission also proposes to revise certain existing
definitions, certain existing general instructions, and the text of
certain balance sheet accounts in the Uniform Systems of Accounts for
oil pipeline companies in part 352 of the Commission's regulations to
incorporate the accounting for asset retirement obligations.
1. Proposed Revisions to the Cost of Removal Definition
55. Under the Uniform Systems of Accounts under part 352 of the
Commission's regulations, certain oil pipelines record cost of removal
related to the disposition and retirement of long-lived assets as a
component of depreciation expense. The Uniform Systems of Accounts
definition of cost of removal as presently written includes the cost of
demolishing, dismantling, tearing down or otherwise removing the
property.\23\ Certain cost of removal activities falling within this
definition may relate to a legal obligation associated with the
retirement of a long-lived asset while others may not relate to the
legal obligation to retire the long-lived asset. The Commission
proposes to amend the definition of cost of removal to exclude legal
obligations related to the retirement of long-lived assets at the end
of their service life because the asset retirement costs and related
obligations will be separately recognized on the balance sheet and
income statement.
---------------------------------------------------------------------------

\23\ See Definition 12 in 18 CFR part 352 (Oil Pipeline
Companies) (2002).
---------------------------------------------------------------------------

2. Proposed Revisions to Instructions for Carrier Property Accounts
56. Under the Uniform Systems of Accounts in part 352 of the
Commission's regulations for oil pipelines, there are no specific
provisions to allow for the capitalization of an asset retirement cost
related to a legal obligation that was incurred during the construction
of tangible long-lived assets. The Commission proposes to revise the
instructions for carrier property accounts, Instruction 3-3, Cost of
property constructed, to add a new item for asset retirement costs
incurred during the construction that will constitute a component of
construction costs. The Commission proposes to exclude this cost from
the construction work in progress base for calculating interest during
construction because there will be no immediate cash expenditure during
the construction phase for this cost.
3. Proposed Revisions to Account 34, Noncarrier Property
57. The Commission proposes to include the asset retirement costs
associated with noncarrier property that gives rise to the obligation
in account 34, Noncarrier property, in part 352 of the Commission's
regulations. The Commission also proposes that depreciation expense
related to the capitalized retirement costs included in account 34,
Noncarrier property, must be recorded in account 620, Income (net) from
noncarrier property.
4. Proposed New Account for Operating Expenses
58. As discussed above under the new proposed General Instruction
1-19, the Commission proposes to add a new account 592, Gains or losses
on asset retirement obligations, in part 352 of the Commission's
regulations to include gains and losses resulting from the settlement
of asset retirement obligations for carrier property.

F. Proposed Accounting for Transition Adjustments

59. The Commission proposes that at the adoption of the final rule,
oil pipeline companies recognize the liability for existing asset
retirement obligation and recognize the cumulative accretion of the
liability, associated asset retirement costs and the related
accumulated depreciation for the capitalized costs. The transition
adjustment for the cumulative effect of the accretion of the liability
and the accumulated depreciation on the related capitalized asset
retirement costs is measured from the date the obligation would have
been incurred and recognized through January 1, 2003, the initial date
of adoption of the final rule.
60. The Uniform Systems of Accounts for oil pipeline companies in
part 352 of the Commission's regulations provides that any change in
accounting principle must be referred to this Commission for
approval.\24\ For oil pipeline companies the cumulative effect of a
change in accounting principle is ordinarily reflected in account 697,
Cumulative effect of changes in accounting principles, in the year of
adoption. The Commission proposes that the final rule in this
proceeding will constitute the requisite authorization for oil pipeline
companies to reflect the change as a cumulative effect of a change in
accounting principles in account 697.
---------------------------------------------------------------------------

\24\ See General Instruction 1-6, Extraordinary, unusual or
infrequent items, prior period adjustments, discontinued operations
and accounting changes, paragraphs (e) and (g) and the instructions
to account 697, Cumulative effect of changes in accounting
principles. See 18 CFR part 352 (Oil Pipeline Companies) (2002).
---------------------------------------------------------------------------

61. The Commission proposes that the difference of any amount
previously recognized for the asset retirement obligation recorded in
account 31, Accrued depreciation--carrier property, and the amount
recognized under the proposed rule, must be charged to account 697. The
Commission also proposes that oil pipeline companies must charge the
cumulative accretion expense on the liability for existing legal
obligations to account 697 as a cumulative effect of a change in
accounting principle.
62. In summary, the Commission proposes that oil pipeline companies
must record the liabilities associated with asset retirement
obligations for those existing assets that would be incurred at the
initial date of adoption of the final rule in the new proposed account
67, Asset retirement obligations, and capitalize the related asset
retirement costs in the new proposed primary carrier property accounts
within the carrier property class related to the carrier property that
gives rise to the legal obligations. The Commission proposes that oil
pipeline companies must include the cumulative accretion of the
liability for the legal obligations in account 67, Asset retirement
obligations, from the date incurred through the initial date of
adoption of the final rule by charging account 697. The Commission also
proposes that oil pipeline companies

[[Page 69824]]

must adjust the accrued depreciation in account 31, Accrued
depreciation--carrier property, for the cumulative depreciation from
the date incurred through the initial date of adoption of the final
rule with the offsetting adjustment to account 697.

G. Proposed Revisions to Tariff Filing Requirements Under 18 CFR Part
346

63. The Commission's proposed rule will require oil pipeline
companies to recognize for accounting purposes asset retirement
obligations. The Commission is not requiring oil pipeline companies
with stated rate tariffs to make any tariff filings with the Commission
due to this rulemaking at this time. However, oil pipeline companies
with formula rate tariffs must not include any cost components related
to asset retirement obligations in their formula rate tariffs for
automatic recovery in their billing determinations prior to obtaining
Commission approval.
64. For the same reasons discussed above for public utilities,
licensees and natural gas companies, the Commission proposes that to
the extent, if any, a particular asset retirement cost should be
allowed recovery through oil pipeline companies rates, it shall be
addressed on a case by case basis in the individual rate change
proposals filed by oil pipeline companies. The Commission proposes to
add a new Sec. 346.3 to cost-of-service filing requirements for oil
pipelines. These new regulations require that oil pipelines who have
recorded an asset retirement obligation on their books in accordance
with this proposed rule must, as part of any initial rate filing or
general rate change filing, provide a schedule identifying all cost
components related to the asset retirement obligation that are included
in the book balances of all accounts reflected in the cost of service
computation supporting the proposed rates. In addition, the proposed
regulations require that all rate base items related to asset
retirement obligations be removed from the rate base computation
through an adjustment. Oil pipeline companies seeking recovery of an
asset retirement obligation in rates must also provide a detailed study
supporting the amounts proposed to be collected in rates. If the oil
pipeline is not seeking recovery of the asset retirement obligation in
rates, then it must remove all asset retirement obligation related cost
components from its cost of service.
65. The Commission is aware that a number of oil pipelines are
currently collecting an allowance in jurisdictional rates to cover the
future cost of retiring and removing facilities referred to as a
dismantling, removal and restoration (DR&R) allowance. The Commission
believes that these DR&R allowances do not necessarily reflect the
existence of a legal obligation for the retirement of long-lived
assets. Therefore, the Commission will require that DR&R allowances
that are not established due to an asset retirement obligation be
identified for rate making purposes separately from asset retirement
obligation allowances.

V. Proposed Effective Date

66. The Commission proposes the rule for accounting and reporting
purposes be effective January 1, 2003, for public utilities, licensees,
natural gas companies and oil pipeline companies. This is the date
jurisdictional entities that file FERC Forms 1, 1-F, 2, 2-A and 6, will
record the transitional adjustment to recognize asset retirement
obligations in their books and records.\25\ The proposed reporting will
be effective for the FERC Forms 1, 1-F, 2 and 2-A and 6 annual reports
for the reporting year 2003.\26\
---------------------------------------------------------------------------

\25\ On February 20, 2002, the Commission's Chief Accountant
issued interim guidance stating that jurisdictional entities may not
early adopt this accounting standard for financial accounting and
reporting to the Commission pending the Commission action on this
matter. See All Jurisdictional Public Utilities, Licensees, Natural
Gas Companies, and Oil Pipeline Companies, 98 FERC ] 62,222 (2002).
\26\ The FERC Forms 1-F and 2-A and 6 annual reports for the
year 2003 are due on or before March 31, 2004. The FERC Forms 1 and
2 annual reports for the year 2003 are due on or before April 30,
2004.
---------------------------------------------------------------------------

VI. Proposed Changes to the FERC Annual Report Forms

67. The proposed changes, if adopted, will require revising the
existing schedules in the FERC Forms 1, 1-F, 2, 2-A, and 6 filed with
the Commission. A table summarizing the changes to the various
schedules is shown in Appendix A. As a result of the Commission
proposed accounting changes referred to above for public utilities,
licensees, natural gas and oil pipeline companies, the Commission
proposes to report in the Forms 1, 1-F, 2, 2-A and 6 the new noncurrent
liability account for asset retirement obligations in the comparative
balance sheet schedules, the new depreciation expense accounts and new
accretion expense accounts in the income statement schedules.
68. The Commission also proposes to report in the Forms 1, 1-F, 2,
2-A and 6 the new primary plant accounts for asset retirement costs for
each function for electric and gas utility plant and oil pipeline
carrier property. The Commission proposes to report in the Forms 1, 1-
F, 2, 2-A and 6 the depreciation expense related to the asset
retirement costs separately in the accumulated provision for
depreciation schedules for electric and gas utility plant and the
accrued depreciation schedules for carrier property. In addition, the
Commission proposes for public utilities and licensees to change the
plant statistical schedules to include the asset retirement costs
related to electric utility plant.
69. The Commission is proposing to revise the reporting
requirements in the Forms 1, 1-F, 2, 2-A and 6 financial reports
consistent with the changes in the proposed rule to promote consistent
reporting practices for asset retirement obligations to the Commission
by jurisdictional entities. The Commission believes that asset
retirement obligations must be identified and reported in the Forms 1,
1-F, 2, 2-A and 6 separately in the financial statements and supporting
schedules because of the long-term nature of the obligations to retire
long-lived assets. Furthermore, the Commission believes separate
reporting of the accounts for asset retirement obligations on the
balance sheet, income statement and certain other schedules in the
Forms 1, 1-F, 2, 2-A and 6 provides more transparent reporting of the
asset retirement obligations to meet the Commission's information
needs.
70. The reporting would include certain disclosure for asset
retirement obligations in the ``Notes to Financial Statements'' in the
FERC Forms 1, 1-F, 2, 2-A and 6.\27\ The Commission expects that
financial statement disclosures provided by jurisdictional entities in
the FERC Forms 1, 1-F, 2, 2-A and 6 must be no less than that provided
in their general purpose financial statements that are provided to
shareholders and the Securities and Exchange Commission.
---------------------------------------------------------------------------

\27\ See the instructions to the Notes to Financial Statements
schedule for FERC Forms 1, 1-F, 2, 2-A and 6 that requires
respondents to report important notes and information related to the
financial statements.
---------------------------------------------------------------------------

71. The Commission proposes that jurisdictional entities that
report a liability for asset retirement obligations must disclose the
following: (1) A general description of the asset retirement
obligations and the associated long-lived assets; (2) the fair value of
assets that legally are restricted for purposes of settling the asset
retirement obligations; (3) a reconciliation of the beginning and
ending aggregate carrying amount of asset retirement obligations
showing separately the changes attributable to (i)

[[Page 69825]]

liabilities incurred in the current period, (ii) liabilities settled in
the current period, (iii) accretion expense, and (iv) revisions in
estimated cash flows, whenever there is a significant change in one or
more of those four components during the reporting period. If the fair
value of an asset retirement obligation cannot be reasonably estimated,
that fact and the reasons therefore must be disclosed.
72. The Commission proposes jurisdictional entities must report on
a separate line in the Statement of Cash Flows in FERC Forms 1, 1-F, 2,
2-A and 6 under the ``Operating Activities'' classification any cash
payments made to settle asset retirement obligations.\28\ Although, the
transition adjustment requirements as discussed above does not permit
jurisdictional entities to go back and restate prior year balances in
the initial year of adoption of this rule, the Commission proposes
jurisdictional entities must provide pro forma disclosure of the effect
of adopting this change in accounting for asset retirement obligations
in the Notes to the Financial Statements in the FERC Forms 1, 1-F, 2,
2-A and 6. The pro forma disclosure must disclose in a footnote in the
Notes to the Financial Statements of the FERC Annual Reports what the
asset retirement obligation would have been at the beginning of the
earliest year presented in the Balance Sheet and Income Statement, and
at the end of the year of each year presented, as if this rule had been
applied during those periods. This is the same disclosure requirement
that jurisdictional entities will have to include in their general
purpose financial statements that are provided to shareholders and the
Securities and Exchange Commission.
---------------------------------------------------------------------------

\28\ See FASB's Emerging Issues Task Force (EITF) No. 02-6,
Classification in the Statement of Cash Flows of Payments Made to
Settle an Asset Retirement Obligation within the Scope of FASB
Statement No. 143, issued in March 2002. The accounting publication
may be obtained from FASB at http://accounting.rutgers.edu/raw/
fasb/.
---------------------------------------------------------------------------

73. The Commission concludes that the above reporting requirements
would not be a significant reporting burden since the information would
be captured in jurisdictional entities accounting systems for internal
and external reporting as needed.

VII. Regulatory Flexibility Act Statement

74. The Regulatory Flexibility Act (RFA) requires agencies to
prepare certain statements, descriptions, and analyses of proposed
rules that will have a significant economic impact on a substantial
number of small entities.\29\ The Commission is not required to make
such analyses if a rule would not have such an effect.
---------------------------------------------------------------------------

\29\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

75. The Commission does not believe that this proposed rule would
have such an impact on small entities. Most filing companies regulated
by the Commission do not fall within the RFA's definition of a small
entity.\30\ Further, the Commission concludes that this reporting would
not be a significant burden because the information jurisdictional
entities will be required to report to the Commission specifically
focuses on the activities of the jurisdictional entities that will be
captured in their accounting systems and generally be reported to their
shareholders and others at a company, or at a consolidated business
level. Therefore, the Commission certifies that this proposed rule will
not have a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------

\30\ 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 dominant in its field of
operation.
---------------------------------------------------------------------------

76. 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.

VIII. 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.\31\ No environmental consideration is necessary for the
promulgation of a rule that is clarifying, corrective, or procedural or
does not substantially change the effect of legislation or regulation
being amended,\32\ and also for information gathering, analysis, and
dissemination.\33\ The proposed rule updates the parts 35, 101, 154,
201, 346 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.
---------------------------------------------------------------------------

\31\ Regulations Implementing National Environmental Policy Act,
52 FR 47,897 (Dec. 17, 1987), FERC Stats. & Regs. ] 30,783 (1987).
\32\ 18 CFR 380.4(a)(2)(ii).
\33\ 18 CFR 380.4(a)(5).
---------------------------------------------------------------------------

IX. Information Collection Statement and Public Reporting Burden

78. The following collections of information contained in this
proposed rule have been submitted to the Office of Management and
Budget (OMB) for review under section 3707(d) of the Paperwork
Reduction Act of 1995.\34\ OMB's regulations require OMB to approve
certain information collection requirements imposed by agency rule.\35\
The Commission identifies the information provided for under this rule
as FERC Forms 1, 1-F, 2, 2-A and 6.
---------------------------------------------------------------------------

\34\ 44 U.S.C. 3507(d).
\35\ 5 CFR 1320.11.
---------------------------------------------------------------------------

79. Comments are solicited on the need for this information,
whether the information will have practical utility, the accuracy of
the provided burden estimates, ways to enhance the quality, utility,
and clarity of the information to be collected, and any suggested
methods for minimizing respondents' burden, including the use of
automated information techniques. The following burden estimates are
for complying with this proposed rule as follows:
Estimated Annual Burden:

----------------------------------------------------------------------------------------------------------------
Number of Number of Hours per Total annual
Data collection respondents responses response hours
----------------------------------------------------------------------------------------------------------------
FERC Form 1..................................... 216 216 17 3,672
FERC Form 1-F................................... 26 26 8 208
FERC Form 2..................................... 57 57 13 741
FERC Form 2-A................................... 53 53 8 424
FERC Form 6..................................... 159 159 10 1,590
-----------------
Totals...................................... 511 511 .............. 6,635
----------------------------------------------------------------------------------------------------------------

[[Page 69826]]

80. In addition, the Commission will address changes to tariffs on
a case by case basis, it has not provided estimates for the number of
entities that will make filings under FERC-516, FERC-545 or FERC-
550.\36\ However, the Commission will entertain comments on what
resources and time will be placed on jurisdictional entities in order
to make the appropriate filings with the Commission.
---------------------------------------------------------------------------

\36\ These information collection requirements are covered by
OMB Control Nos. 1902-0096, 1902-0154 and 1902-0089.
---------------------------------------------------------------------------

81. Total Annual Hours for Collection (reporting + recordkeeping,
if appropriate) = 6,635 hours. The total hours associated with this
proposed rule is equal to 6,635 hours. It should be noted that burden
if the proposed rule if adopted, applies only for jurisdictional
entities to comply with the Commission's Uniform Systems of Accounts,
Annual Reports, and Rate Schedule Filings. Jurisdictional entities must
maintain much of this information in order to implement the accounting
for asset retirement obligations for reporting under generally accepted
accounting principles. The proposed rule will eliminate the need by
jurisdictional entities to maintain duplicate sets of books.
82. Information Collection Costs: The Commission seeks comments on
the cost to comply with these requirements. It has projected the
average annualized cost of all respondents to be: Annualized Capital
Startup Costs: 6,635 hours / 2080 x $117,041 = $373,350. This is a one-
time cost for the initial implementation of the proposed schedules.
83. Annualized Costs (Operations & Maintenance)--If adopted, costs
for performing the proposed schedules will be rolled into the total
costs for completing the Commission's annual financial reports.
84. Total Annualized costs--$373,350.
85. OMB's regulations require it to approve certain information
collection requirements imposed by agency rule. The Commission is
submitting notification of this proposed rule to OMB.\37\
---------------------------------------------------------------------------

\37\ 5 CFR 1320.11
---------------------------------------------------------------------------

86. Title: FERC Form 1, Annual Report of Major Electric Utilities,
Licensees, and Others; FERC Form 1-F, Annual Report for Non-Major
Public Utilities and Licensees; FERC Form 2, Annual Report for Major
Natural Gas Companies; FERC Form 2-A, Annual Report for Nonmajor
natural gas companies; FERC Form 6, Annual Report of Oil Pipeline
Companies.
87. Action: Proposed Data Collections.
88. OMB Control Nos. 1902-0021; 1902-0029; 1902-0028; 1902-0030;
and 1902-0022.
89. The applicant will not be penalized for failure to respond to
these collections of information unless the collection of information
displays a valid OMB control number or the Commission has provided
justification as to why the control number should not be displayed.
90. Respondents: Businesses or other for profit.
91. Frequency of Responses: Annually.
92. Necessity of the Information: The proposed rule would revise
the Commission's regulations to specifically address the proper
accounting and reporting for asset retirement obligations. This
requires the reporting of obligations associated with the retirement of
tangible long-lived assets and their associated retirement costs. The
addition of these new accounts and their corresponding general
instructions are intended to provide accounting standards for
recognition and measurement of liabilities for asset retirement
obligations and associated asset retirement costs in reports to the
Commission. The addition of these new accounts and related general
instructions is intended to improve the visibility, completeness and
consistency of accounting practices for asset retirement obligations.
Without specific instructions and accounts for recording and reporting
the above transactions and events, inconsistent and incomplete
accounting will result.
93. Internal Review: The Commission has reviewed the requirements
pertaining to the Uniform Systems of Accounts and to the financial
reports it prescribes and has determined the proposed revisions are
necessary because the Commission needs to establish uniform accounting
and reporting requirements for asset retirement obligations. All of the
companies regulated by the Commission are capital-intensive and
therefore involve substantial risk. The reporting of this information
ensures that regulated companies' balance sheets clearly reflect the
economic realities of the retirement obligations associated with long-
lived assets and review by the Commission provides both regulated
companies and their customers with timely regulatory treatment.
94. These requirements conform to the Commission's plan for
efficient information collection, communication, and management within
the electric, natural gas and oil pipeline industries. The Commission
has assured itself, by means of internal review, that there is
specific, objective support for the burden estimates associated with
the information requirements.
95. Interested persons may obtain information on the reporting
requirements by contacting the following: Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426 [Attention:
Michael Miller, Office of the Chief Information Officer, Phone (202)
502-8415, fax: (202) 208-2425, e-mail: michael.miller@ferc.gov]
96. For submitting comments concerning the collection of
information(s) and the associated burden estimate(s), please send your
comments to the contact listed above and to the Office of Management
and Budget, Office of Information and Regulatory Affairs, Washington,
DC 20503, [Attention: Desk Officer for the Federal Energy Regulatory
Commission, phone: (202) 395-7856, fax: (202) 395-7285].

X. Public Comment Procedures

97. The Commission invites interested persons to submit written
comments on the matters and issues proposed in this notice to be
adopted, including any related matters or alternative proposals that
commenters may wish to discuss. Comments are due within 45 days from
publication in the Federal Register. Comments must refer to Docket No.
RM02-7-000, and may be filed either in electronic or paper format.
Those filing electronically do not need to make a paper filing.
98. Documents filed electronically via the Internet can be prepared
in a variety of formats, including WordPerfect, MS Word, Portable
Document Format, Real Text Format, or ASCII format, as listed on the
Commission's Web site at [chyph]http://ferc.gov, under the e-Filing
link. The e-Filing link provides instructions for how to Login and
complete an electronic filing. First time users will have to establish
a user name and password. The Commission will send an automatic
acknowledgment to the sender's e-Mail address upon receipt of comments.
User assistance for electronic filing is available at 202-502-8258 or
by e-mail to efiling@ferc.gov. Comments should not be submitted to the
e-mail address.
99. For paper filings, the original and 14 copies of such comments
should be submitted to the Office of the Secretary, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington DC 20426.
100. All comments will be placed in the Commission's public files
and will be available for inspection in the

[[Page 69827]]

Commission's Public Reference Room at 888 First Street, NE., Washington
DC 20426, during regular business hours. Additionally, all comments may
be viewed, printed, or downloaded remotely via the Internet through
FERC's Homepage using the FERRIS link.

XI. Document Availability

101. In addition to publishing the full text of this document in
the Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's
Public Reference Room during normal business hours (8:30 a.m., to 5
p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC
20426.
102. 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 of this
document, excluding the last three digits in the docket number field.
User assistance is available for FERRIS and the FERC's Web site during
normal business hours from our 103.Help Line at (202) 502-8222 (e-mail
to WebMaster@ferc.gov) or the Public Reference at (202) 502-8371 Press
0, TTY (2020) 502-8659 (e-mail to public.reference.room@ferc.gov).

List of Subjects

18 CFR Part 35

Electric power rates, Electric utilities, Electricity, Reporting
and recordkeeping requirements.

18 CFR Part 101

Electric power, Electric utilities, Reporting and recordkeeping
requirements, Uniform System of Accounts.

18 CFR Part 154

Alaska Natural gas, Natural gas companies, Pipelines, Rate
schedules and tariffs, Reporting and recordkeeping requirements.

18 CFR Part 201

Natural gas, Reporting and recordkeeping requirements, Uniform
System of Accounts.

18 CFR Part 346

Pipelines, Reporting and recordkeeping requirements.

18 CFR Part 352

Pipelines, Reporting and recordkeeping requirements, Uniform System
of Accounts.
By direction of the Commission.

Magalie R. Salas,
Secretary.
In consideration of the foregoing, the Commission proposes to amend
parts 35, 101, 154, 201, 346 and 352, chapter I, title 18, Code of
Federal Regulations, as follows.

Regulatory Text

PART 35--FILING OF RATE SCHEDULES

1. The authority citation for part 35 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.
2. Section 35.18 is added to read as follows:

Sec. 35.18 Asset retirement obligations.

(a) A public utility that files a rate schedule under Sec. 35.12
or Sec. 35.13 and has recorded an asset retirement obligation on its
books must provide a schedule, as part of the supporting work papers,
identifying all cost components related to the asset retirement
obligations that are included in the book balances of all accounts
reflected in the cost of service computation supporting the proposed
rates. However, all cost components related to asset retirement
obligations that would impact the calculation of rate base, such as
electric plant and related accumulated depreciation and accumulated
deferred income taxes, may not be reflected in rates and must be
removed from the rate base calculation through a single adjustment.
(b) A public utility seeking to recover nonrate base costs related
to asset retirement costs in rates must provide, with its filing under
Sec. 35.12 or Sec. 35.13, a detailed study supporting the amounts
proposed to be collected in rates.
(c) A public utility who has recorded asset retirement obligations
on its books but is not seeking recovery of the asset retirement costs
in rates, must remove all asset retirement obligations related cost
components from the cost of service supporting its proposed rates.
* * * * *

PART 101--UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR PUBLIC
UTILITIES AND LICENSEES SUBJECT TO THE PROVISIONS OF THE FEDERAL
POWER ACT

3. 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.
4. In Definitions, Definition 10 is revised to read as follows:

Definitions

* * * * *
10. Cost of removal means the cost of demolishing, dismantling,
tearing down or otherwise removing electric plant, including the cost
of transportation and handling incidental thereto. It does not include
the cost of removal activities associated with asset retirement
obligations that are capitalized as part of the tangible long-lived
assets that give rise to the obligation. (See General Instruction 25).
* * * * *
5. In General Instructions, Instruction 20, paragraphs C. and D.
are redesignated as paragraphs D. and E. and new paragraph C. is added;
and a new Instruction 25 is added to read as follows:

General Instructions

* * * * *
20. Accounting for leases.
* * * * *
C. The utility, as a lessee, shall recognize an asset retirement
obligation (See General Instruction 25) arising from the plant under a
capital lease unless the obligation is recorded as an asset and
liability under a capital lease. The utility shall record the asset
retirement cost by debiting account 101.1, Property under capital
leases, or account 120.6, Nuclear fuel under capital leases, or account
121, Nonutility property, as appropriate, and crediting the liability
for the asset retirement obligation in account 230, Asset retirement
obligations. Asset retirement costs recorded in account 101.1, account
120.6, or account 121 shall be amortized by charging rent expense (See
Operating Expense Instruction 3), or account 518, Nuclear fuel expense
(Major only), or account 421, Miscellaneous nonoperating income, as
appropriate, and crediting a separate subaccount of the account in
which the asset retirement costs are recorded. Charges for the periodic
accretion of the liability in account 230, Asset retirement
obligations, shall be recorded by a charge to account 411.10, Accretion
expense, for electric utility plant, and account 421, Miscellaneous
nonoperating income, for nonutility plant and a credit to account 230,
Asset retirement obligations.
* * * * *
25. Accounting for asset retirement obligations.

[[Page 69828]]

A. An asset retirement obligation represents a liability for the
legal obligation associated with the retirement of a tangible long-
lived asset that a company is required to settle as a result of an
existing or enacted law, statute, ordinance, or written or oral
contract or by legal construction of a contract under the doctrine of
promissory estoppel. An asset retirement cost represents the amount
capitalized when the liability is recognized for the long-lived asset
that gives rise to the legal obligation. The amount recognized for the
liability and an associated asset retirement cost shall be stated at
the fair value of the asset retirement obligation in the period in
which the obligation is incurred.
B. The utility shall initially record a liability for an asset
retirement obligation in account 230, Asset retirement obligations, and
charge the associated asset retirement costs to electric utility plant
(including accounts 101.1 and 120.6), and nonutility plant, as
appropriate, related to the plant that gives rise to the legal
obligation. The asset retirement cost shall be depreciated over the
useful life of the related asset that gives rise to the obligations.
For periods subsequent to the initial recording of the asset retirement
obligation, a utility shall recognize the period to period changes of
the asset retirement obligation that result from the passage of time
due to the accretion of the liability and any subsequent measurement
changes to the initial liability for the legal obligation recorded in
account 230, Asset retirement obligations, as follows:
(1) The utility shall record the accretion of the liability by
debiting account 411.10, Accretion expense, for electric utility plant,
account 413, Expenses of electric plant leased to others, for electric
plant leased to others, and account 421, Miscellaneous nonoperating
income, for nonutility plant and crediting account 230, Asset
retirement obligations; and
(2) The utility shall recognize any subsequent measurement changes
of the liability initially recorded in account 230, Asset retirement
obligations, for each specific asset retirement obligation as an
adjustment of that liability in account 230 with the corresponding
adjustment to electric utility plant, electric plant leased to others,
and nonutility plant, as appropriate. The utility shall on a timely
basis monitor any measurement changes of the asset retirement
obligations.
C. Gains or losses resulting from the settlement of asset
retirement obligations associated with utility plant resulting from the
difference between the amount of the liability for the asset retirement
obligation included in account 230, Asset retirement obligations, and
the actual amount paid to settle the obligation shall be accounted for
as follows:
(1) Gains shall be credited to account 411.6, Gains from
disposition of utility plant, and;
(2) Losses shall be charged to account 411.7, Losses from
disposition of utility plant.
D. Gains or losses on the settlement of asset retirement
obligations associated with nonutility plant resulting from the
difference between the amount of the liability for the asset retirement
obligation in account 230, Asset retirement obligations, and the amount
paid to settle the obligation, shall be accounted for as follows:
(1) Gains shall be credited to account 421, Miscellaneous
nonoperating income, and;
(2) Losses shall be charged to account 426.5, Other deductions.
E. Separate subsidiary records shall be maintained for each asset
retirement obligation showing the initial liability and associated
asset retirement cost, any incremental amounts of the liability
incurred in subsequent reporting periods for additional layers of the
original liability and related asset retirement cost, the accretion of
the liability, the subsequent measurement changes to the asset
retirement obligation, the depreciation and amortization of the asset
retirement costs and related accumulated depreciation, and the
settlement date and actual amount paid to settle the obligation. For
purposes of analyses a utility shall maintain supporting documentation
so as to be able to furnish accurately and expeditiously with respect
to each asset retirement obligation the full details of the identity
and nature of the legal obligation, the year incurred, the identity of
the plant giving rise to the obligation, the full particulars relating
of each component and supporting computations related to the
measurement of the asset retirement obligation.
* * * * *
6. In Electric Plant Instructions, paragraph 3.A.(17)(a) the (W)
element is revised; and a new paragraph 3.A.(21) is added to read as
follows:

Electric Plant Instructions

* * * * *
3. Components of construction cost.
A. * * *
(17) * * *
(a) * * *
(W) = Average balance in construction work in progress plus nuclear
fuel in process of refinement, conversion, enrichment and fabrication,
less asset retirement costs (See General Instruction 25) related to
plant under construction.
* * * * *
(21) Asset retirement costs. The costs recognized as a result of
asset retirement obligations incurred during the construction and
testing of utility plant shall constitute a component of construction
costs.
* * * * *
7. Balance Sheet Accounts is amended as follows:
(a) Account 101.1 is amended by adding a sentence to the end of
paragraph C.;
(b) Account 103 paragraph C. is revised;
(c) Account 108 paragraph A.(2) through A.(7) are redesignated as
paragraphs A.(3) through A.(8) and a new paragraph A.(2) is added;
(d) Account 110 paragraph A.(2) through A.(4) are redesignated as
paragraphs A.(3) through A.(5) and a new paragraph A.(2) is added;
(e) Account 121, paragraph A. is amended by adding a sentence to
the end of the paragraph; and
(f) Account 230 is added.
The revision and additions read as follows:

Balance Sheet Accounts

[[Page 69829]]

undepreciated amounts, will be established.
* * * * *
108 Accumulated provision for depreciation of electric utility
plant (Major only).
A. * * *
(2) Amounts charged to account 403.1, Depreciation expense for
asset retirement costs, for current depreciation expense related to
asset retirement costs in electric plant in service in a separate
subaccount.
* * * * *
110 Accumulated provision for depreciation and amortization of
electric utility plant (Nonmajor only).
A. * * *
(2) Amounts charged to account 403.1, Depreciation expense for
asset retirement costs, in electric utility plant in service in a
separate subaccount.
* * * * *
121 Nonutility property.
A. * * * This account shall also include, where applicable, amounts
recorded for asset retirement costs associated with nonutility plant.
* * * * *
230 Asset retirement obligations.
A. This account shall include the amount of liabilities for the
recognition of asset retirement obligations related to electric utility
plant and nonutility plant that gives rise to the obligations. This
account shall be credited for the amount of the liabilities for asset
retirement obligations with amounts charged to the appropriate electric
utility plant accounts or nonutility plant account to record the
related asset retirement costs.
B. The utility shall charge the accretion expense to account
411.10, Accretion expense, for electric utility plant, account 413,
Expenses of electric plant leased to others, for electric plant leased
to others, or account 421, Miscellaneous nonoperating income, for
nonutility plant, as appropriate, and credit account 230, Asset
retirement obligations.
C. This account shall be debited with amounts paid to settle the
asset retirement obligations recorded herein.
D. The utility shall clear from this account any gains or losses
resulting from the settlement of asset retirement obligations in
accordance with the instructions prescribed in General Instruction 25.
* * * * *
8. In Electric Plant Accounts, new primary plant accounts, 317,
326, 337, 347, 359.1, 374, and 399.1 are added to read as follows:

Electric Plant Accounts

* * * * *
317 Asset retirement costs for steam production plant.
This account shall include asset retirement costs on plant included
in the steam production function.
* * * * *
326 Asset retirement costs for nuclear production plant (Major
only).
This account shall include asset retirement costs on plant included
in the nuclear production function.
* * * * *
337 Asset retirement costs for hydraulic production plant.
This account shall include asset retirement costs on plant included
in the hydraulic production function.
* * * * *
347 Asset retirement costs for other production plant.
This account shall include asset retirement costs on plant included
in the other production function.
* * * * *
359.1 Asset retirement costs for transmission plant.
This account shall include asset retirement costs on plant included
in the transmission plant function.
* * * * *
374 Asset retirement costs for distribution plant.
This account shall include asset retirement costs on plant included
in the distribution plant function.
* * * * *
399.1 Asset retirement costs for general plant.
This account shall include asset retirement costs on plant included
in the general plant function.
* * * * *
9. Amend Income Accounts as follows:
a. Account 403.1 is added,
b. Accounts 411.6 and 411.7 are amended by designating the current
paragraph as A., and adding a new paragraph B.,
c. Account 411.10 is added,
d. In account 421, paragraphs 4. through 6. are added, and
e. In account 426.5 paragraph 6 is added.
The additions read as follows:

Income Accounts

* * * * *
403.1 Depreciation expense for asset retirement costs.
This account shall include the depreciation expense for asset
retirement costs included in electric utility plant in service.
* * * * *
411.6 Gains from disposition of utility property.
A. * * *
B. The utility shall record in this account gains resulting from
the settlement of asset retirement obligations related to utility plant
in accordance with the accounting prescribed in General Instruction 25.
* * * * *
411.7 Losses from disposition of utility property.
A. * * *
B. The utility shall record in this account losses resulting from
the settlement of asset retirement obligations related to utility plant
in accordance with the accounting prescribed in General Instruction 25.
* * * * *
411.10 Accretion expense.
This account shall be charged for accretion expense on the
liabilities associated with asset retirement obligations included in
account 230, Asset retirement obligations, related to electric utility
plant.
* * * * *
421 Miscellaneous nonoperating income.
* * * * *
4. This account shall include the accretion expense on the
liability for an asset retirement obligation included in account 230,
Asset retirement obligations, related to nonutility plant.
5. This account shall include the depreciation expense for asset
retirement costs related to nonutility plant.
6. The utility shall record in this account gains resulting from
the settlement of asset retirement obligations related to nonutility
plant in accordance with the accounting prescribed in General
Instruction 25.
* * * * *
426.5 Other deductions.
* * * * *
6. The utility shall record in this account losses resulting from
the settlement of asset retirement obligations related to nonutility
plant in accordance with the accounting prescribed in General
Instruction 25.
* * * * *

PART 154--RATE SCHEDULES AND TARIFFS

10. The authority citation for part 154 continues to read as
follows:

Authority: 15 U.S.C. 717-717w; 31 U.S.C. 9701; 42 U.S.C. 7102-
7352.
11. In Sec. 154.312 paragraph (d), introductory text, is amended
by removing the sentence ``Any authorized negative salvage must be
maintained in a separate subaccount of account 108,''

[[Page 69830]]

and adding in its place the following sentence to read as follows:

Sec. 154.312 Composition of Statements.

(d) * * * Any authorized negative salvage must be maintained in a
separate subaccount of account 108, and shall not include any amounts
related to asset retirement obligations.* * *
* * * * *
12. Section 154.315 is added to read as follows:

Sec. 154.315 Asset retirement obligations.

(a) A natural gas company that files a tariff change under this
part and has recorded an asset retirement obligation on its books must
provide a schedule, as part of the supporting workpapers, identifying
all cost components related to the asset retirement obligations that
are included in the book balances of all accounts reflected in the cost
of service computation supporting the proposed rates. However, all cost
components related to asset retirement obligations that would impact
the calculation of rate base, such as gas plant and related accumulated
depreciation and accumulated deferred income taxes, may not be
reflected in rates and must be removed from the rate base calculation
through a single adjustment.
(b) A natural gas company seeking to recover nonrate base costs
related to asset retirement obligations in rates must provide, with its
filing under Sec. 154.312 or Sec. 154.313, a detailed study
supporting the amounts proposed to be collected in rates.
(c) A natural gas company who has recorded asset retirement
obligations on its books but is not seeking recovery of the asset
retirement costs in rates, must remove all asset retirement obligations
related cost components from the cost of service supporting its
proposed rates.

PART 201-- UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR NATURAL GAS
COMPANIES SUBJECT TO THE PROVISIONS OF THE NATURAL GAS ACT

13. 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.
14. In Definitions, Definition 10 is revised to read as follows:

Definitions

* * * * *
10. Cost of removal means the cost of demolishing, dismantling,
tearing down or otherwise removing gas plant, including the cost of
transportation and handling incidental thereto. It does not include the
cost of removal activities associated with asset retirement obligations
that are capitalized as part of the tangible long-lived assets that
give rise to the obligation. (See General Instruction 24).
* * * * *
15. In General Instructions, Instruction 20 paragraphs C. and D.
are redesignated as paragraphs D. and E. and a new paragraph C. is
added; and a new Instruction 24 is added to read as follows:

General Instructions

* * * * *
20. Accounting for leases.
* * * * *
C. The utility, as a lessee, shall recognize an asset retirement
obligation (See General Instruction 24) arising from the plant under a
capital lease unless the obligation is recorded as an asset and
liability under a capital lease. The utility shall record the asset
retirement cost by debiting account 101.1, Property under capital
leases, or account 121, Nonutility property, as appropriate, and
crediting the liability for the asset retirement obligation in account
230, Asset retirement obligations. Asset retirement costs recorded in
account 101.1 or account 121 shall be amortized by charging rent
expense (See Operating Expense Instruction 3) or account 421,
Miscellaneous nonoperating income, as appropriate, and crediting a
separate subaccount of the account in which the asset retirement costs
are recorded. Charges for the periodic accretion of the liability in
account 230, Asset retirement obligations, shall be recorded by a
charge to account 411.10, Accretion expense, for gas utility plant, and
account 421, Miscellaneous nonoperating income, for nonutility plant
and a credit to account 230, Asset retirement obligations.
* * * * *
24. Accounting for asset retirement obligations.
A. An asset retirement obligation represents a liability for the
legal obligation associated with the retirement of a tangible long-
lived asset that a utility is required to settle as a result of an
existing or enacted law, statute, ordinance, or written or oral
contract or by legal construction of a contract under the doctrine of
promissory estoppel. An asset retirement cost represents the amount
capitalized when the liability is recognized for the long-lived asset
that gives rise to the legal obligation. The amount recognized for the
liability and an associated asset retirement cost shall be stated at
the fair value of the asset retirement obligation in the period in
which the obligation is incurred.
B. The utility shall initially record a liability for an asset
retirement obligation in account 230, Asset retirement obligations, and
charge the associated asset retirement costs to gas utility plant and
nonutility plant, as appropriate, related to the plant that gives rise
to the legal obligation. The asset retirement cost shall be depreciated
over the useful life of the related asset that gives rise to the
obligations. For periods subsequent to the initial recording of the
asset retirement obligation, a utility shall recognize the period to
period changes of the asset retirement obligation that result from the
passage of time due to the accretion of the liability and any
subsequent measurement changes to the initial liability for the legal
obligation recorded in account 230, Asset retirement obligations, as
follows:
(1) The utility shall record the accretion of the liability by
debiting account 411.10, Accretion expense, for gas utility plant,
account 413, Expenses of gas plant leased to others, for gas plants
leased to others, and account 421, Miscellaneous nonoperating income,
for nonutility plant and crediting account 230, Asset retirement
obligations; and
(2) The utility shall recognize any subsequent measurement changes
of the liability initially recorded in account 230, Asset retirement
obligations, for each specific asset retirement obligation as an
adjustment of that liability in account 230 with the corresponding
adjustment to gas utility plant, gas plant leased to others, and
nonutility plant, as appropriate. The utility shall on a timely basis
monitor any measurement changes of the asset retirement obligations.
C. Gains or losses resulting from the settlement of asset
retirement obligations associated with utility plant resulting from the
difference between the amount of the liability for the asset retirement
obligation included in account 230, Asset retirement obligations, and
the actual amount paid to settle the obligation shall be accounted for
as follows:
(1) Gains shall be credited to account 411.6, Gains from
disposition of utility plant, and;
(2) Losses shall be charged to account 411.7, Losses from
disposition of utility plant.
D. Gains or losses on the settlement of the asset retirement
obligations associated with nonutility plant resulting from the
difference between the amount of the liability for the asset retirement
obligation in account 230, Asset retirement obligations, and the

[[Page 69831]]

amount paid to settle the obligation, shall be accounted for as
follows:
(1) Gains shall be credited to account 421, Miscellaneous
nonoperating income, and;
(2) Losses shall be charged to account 426.5, Other deductions.
E. Separate subsidiary records shall be maintained for each asset
retirement obligation showing the initial liability and associated
asset retirement cost, any incremental amounts of the liability
incurred in subsequent reporting periods for additional layers of the
original liability and related asset retirement cost, the accretion of
the liability, the subsequent measurement changes to the asset
retirement obligation, the depreciation and amortization of the asset
retirement costs and related accumulated depreciation, and the
settlement date and actual amount paid to settle the obligation. For
purposes of analyses a utility shall maintain supporting documentation
so as to be able to furnish accurately and expeditiously with respect
to each asset retirement obligation the full details of the identity
and nature of the legal obligation, the year incurred, the identity of
the plant giving rise to the obligation, the full particulars relating
of each component and supporting computations related to the
measurement of the asset retirement obligation.
* * * * *
16. In Gas Plant Instructions, paragraph 3.A.(17)(a) the (W)
element is revised; and new paragraph 3.A.(23) is added to read as
follows:

Gas Plant Instructions

* * * * *
3. Components of construction cost.
A. * * *
(17) * * *
(a) * * *
(W) = Average balance in construction work in progress less asset
retirement costs (See General Instruction 24) related to plant under
construction.
* * * * *
(23) ``Asset retirement costs.'' The costs recognized as a result
of asset retirement obligations incurred during the construction and
testing of utility plant shall constitute a component of construction
costs.
* * * * *
17. Balance Sheet Accounts are amended as follows:
(a) Account 101.1, is amended by adding a sentence to the end of
paragraph C.;
(b) Account 103, paragraph C. is revised;
(c) Account 108, paragraphs A.(2) through A.(7) are redesignated as
paragraphs A.(3) through A.(8) and a new paragraph A.(2) is added;
(d) Account 121, paragraph A. is amended by adding a sentence to
the end of the paragraph; and
(f) Account 230 is added.
The additions and revisions read as follows:

Balance Sheet Accounts

* * * * *
101.1 Property under capital leases.
* * * * *
C. * * * Records shall also be maintained for plant under a lease,
to identify the asset retirement obligation and cost originally
recognized for each lease and the periodic charges and credits made to
the asset retirement obligations and asset retirement costs.
* * * * *
103 Experimental gas plant unclassified.
* * * * *
C. The depreciation on plant in this account shall be charged to
account 403, Depreciation expense, and account 403.1, Depreciation
expense for asset retirement costs, as appropriate, and credited to
account 108, Accumulated provision for depreciation of gas utility
plant. The amounts herein shall be depreciated over a period which
corresponds to the estimated useful life of the relevant project
considering the characteristics involved. However, when projects are
transferred to account 101, Gas plant in service, a new depreciation
rate based on the remaining service life and undepreciated amounts,
will be established.
* * * * *
108 Accumulated provision for depreciation of gas utility plant.
A. * * *
(2) Amounts charged to account 403.1, Depreciation expense for
asset retirement costs, for current depreciation expense related to
asset retirement costs in gas plant in service in a separate
subaccount.
* * * * *
121 Nonutility property.
A. * * * This account shall also include, where applicable, amounts
recorded for asset retirement costs associated with nonutility plant.
* * * * *
230 Asset retirement obligations
A. This account shall include the amount of liabilities for the
recognition of asset retirement obligations related to gas utility
plant and nonutility plant that gives rise to the obligations. This
account shall be credited for the amount of the liabilities for asset
retirement obligations with amounts charged to the appropriate gas
utility plant accounts or nonutility plant accounts to record the
related asset retirement costs.
B. This account shall also include the period to period changes for
the accretion of the liabilities in account 230, Asset retirement
obligations. The utility shall charge the accretion expense to account
411.10, Accretion expense, for gas utility plant, account 413, Expenses
of gas plant leased to others, for gas plant leased to others, or
account 421, Miscellaneous nonoperating income, for nonutility plant,
as appropriate, and credit account 230, Asset retirement obligations.
C. This account shall be debited with amounts paid to settle the
asset retirement obligations recorded herein.
D. The utility shall clear from this account any gains or losses
resulting from the settlement of asset retirement obligations in
accordance with the instructions prescribed in General Instruction 24.
* * * * *
18. In Gas Plant Accounts, new primary plant accounts, 321, 339,
348, 358, 363.6, 364.9, 372, 388, and 399.1 are added to read as
follows:

Gas Plant Accounts

* * * * *
321 Asset retirement costs for manufactured gas production plant.
This account shall include asset retirement costs on plant included
in the manufactured gas production plant function.
* * * * *
339 Asset retirement costs for natural gas production and gathering
plant.
This account shall include asset retirement costs on plant included
in the natural gas production and gathering plant function.
* * * * *
348 Asset retirement costs for products extraction plant.
This account shall include asset retirement costs on plant included
in the products extraction plant function.
* * * * *
358 Asset retirement costs for underground storage plant.
This account shall include asset retirement costs on plant included
in the underground storage plant function.
* * * * *
363.6 Asset retirement costs for other storage plant.
This account shall include asset retirement costs on plant included
in the other storage plant function.
* * * * *
372 Asset retirement costs for transmission plant.

[[Page 69832]]

This account shall include asset retirement costs on plant included
in the transmission plant function.
* * * * *
388 Asset retirement costs for distribution plant.
This account shall include asset retirement costs on plant included
in the distribution plant function.
* * * * *
399.1 Asset retirement costs for general plant.
This account shall include asset retirement costs on plant included
in the general plant function.
* * * * *
19. Income Accounts are amended as follows:
a. Account 403.1 is added,
b. Accounts 411.6 and 411.7 are amended by designating the current
paragraph as A. and adding a new paragraph B.,
c. Account 411.10 is added,
d. In account 421, paragraphs 4. through 6. are added, and
e. In account 426.5 paragraph 6. is added.
The additions read as follows:

Income Accounts

* * * * *
403.1 Depreciation expense for asset retirement costs.
This account shall include the depreciation expense for asset
retirement costs included in gas utility plant in service.
* * * * *
411.6 Gains from disposition of utility property.
A. * * *
B. The utility shall record in this account gains resulting from
the settlement of asset retirement obligations related to utility plant
in accordance with the accounting prescribed in General Instruction 24.
* * * * *
411.7 Losses from disposition of utility property.
A. * * *
B. The utility shall record in this account losses resulting from
the settlement of asset retirement obligations related to utility plant
in accordance with the accounting prescribed in General Instruction 24.
* * * * *
411.10 Accretion expense.
This account shall be charged for accretion expense on the
liabilities associated with asset retirement obligations included in
account 230, Asset retirement obligations, related to gas utility
plant.
* * * * *
421 Miscellaneous nonoperating income.
* * * * *

4. This account shall include the accretion expense on the
liability for an asset retirement obligation included in account
230, Asset retirement obligations, related to nonutility plant.
5. This account shall include the depreciation expense for asset
retirement costs related to nonutility plant.
6. The utility shall record in this account gains resulting from
the settlement of asset retirement obligations related to nonutility
plant in accordance with the accounting prescribed in General
Instruction 24.

* * * * *
426.5 Other deductions.
* * * * *

6. The utility shall record in this account losses resulting
from the settlement of asset retirement obligations related to
nonutility plant in accordance with the accounting prescribed in
General Instruction 24.

* * * * *

PART 346--OIL PIPELINE COST-OF-SERVICE FILING REQUIREMENTS

20. The authority citation for part 346 continues to read as
follows:

Authority: 42 U.S.C. 7101-7352; 49 U.S.C. 60502; 49 App. U.S.C.
1-85.
21. Section 346.3 is added to read as follows:

Sec. 346.3 Asset retirement obligations.

(a) A carrier that files material in support of initial rates or
change in rates under Sec. 346.2 and has recorded asset retirement
obligations on its books must provide a schedule, as part of the
supporting workpapers, identifying all cost components related to the
asset retirement obligations that are included in the book balances of
all accounts reflected in the cost of service computation supporting
the proposed rates. However, all cost components related to asset
retirement obligations that would impact the calculation of rate base,
such as carrier property and related accumulated depreciation and
accumulated deferred income taxes, may not be reflected in rates and
must be removed from the rate base calculation through a single
adjustment.
(b) A carrier seeking to recover nonrate base costs related to
asset retirement costs in rates must provide, with its filing under
Sec. 346.2 of this part, a detailed study supporting the amounts
proposed to be collected in rates.
(c) A carrier who has recorded asset retirement obligations on its
books but is not seeking recovery of the asset retirement costs in
rates, must remove all asset retirement obligations related cost
components from the cost of service supporting its proposed rates.

PART 352--UNIFORM SYSTEMS OF ACCOUNTS PRESCRIBED FOR OIL PIPELINE
COMPANIES SUBJECT TO THE PROVISIONS OF THE INTERSTATE COMMERCE ACT

22. 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).
23. In List of Instructions and Accounts, under Definitions,
Definition 12 is revised to read as follows:
Definitions. * * *
12. Cost of removal means cost of demolishing, dismantling, tearing
down, or otherwise removing property including costs of handling and
transportation. It does not include the cost of removal activities
associated with asset retirement obligations that are capitalized as
part of the tangible long-lived assets that give rise to the
obl