FERC Withdraws Plan to Standardize Creditworthiness
Requirements for Pipeline Customers

By Barbara S. Jost
[June 2005]

Fifteen months after announcing plans to standardize creditworthiness requirements for natural gas pipeline shippers, the Federal Energy Regulatory Commission (FERC) has instead chosen to leave in place the preexisting system, where credit and collateral requirements vary by pipeline. In a Statement of Policy issued on June 16, 2005, FERC offers general guidelines that do not go much beyond preexisting policies. Having initially recognized that uniform standards for credit and collateral requirements would enhance shippers’ ability to obtain gas service across multiple pipelines and protect against discriminatory treatment, FERC now concludes that such standardization is “not necessary at this time and creditworthiness issues that arise in individual filings can be addressed on a case-by-case basis.” Since FERC’s pronouncements are made in a Policy Statement, instead of a final rule, they are neither binding on the agency nor subject to judicial review. Although, the Policy Statement provides little new guidance to the industry and largely restates existing precedent, FERC’s failure to issue a rule leaves significant discretion in the hands of the pipelines, who had staunchly opposed credit and collateral standardization.

One hotly debated issue left unresolved is the extent of the financial information that pipelines can demand of prospective shippers. This issue had been subject to much discussion by an industry-wide group, charged by the FERC several years ago to develop consensus standards on credit and collateral issues, the Wholesale Gas Quadrant of the North American Energy Standards Board (NAESB). The Policy Statement lists the extensive array of financial documentation identified by the NAESB group and notes that no industry-wide consensus on this topic was achieved. FERC finds that the NAESB list “is a reasonable compilation of information that, in most cases, will provide pipelines with sufficient data with which to evaluate shipper credit.” However, it also concludes that pipelines can still request additional information from shippers, but “should be able to justify why the additional data is necessary in the particular case.” FERC essentially says that the parties are free to battle out this issue on a case-by-case basis.

Some statements in the Policy Statement may, in fact, serve to create additional confusion. FERC opines that “pipelines must establish and use objective criteria for determining creditworthiness”, however, it then notes that there “may not be a defined set of criteria for evaluating each circumstance” and that “pipelines need to take into account the individual circumstances and complexities of different shipper relationships in making their determination.” In other words, pipelines are to use objective and transparent creditworthiness standards which they can then proceed to tailor to fit individual shipper circumstances. FERC’s vague statements only confuse matters further, with the end result that pipelines effectively retain the discretion to do whatever they want.

FERC’s Policy Statement does offer the limited benefit of restating in a single document most of the agency’s existing guidelines for collateral requirements, which had previously been scattered in a host of individual cases. FERC maintains the well-established distinction between the level of collateral required of shippers who contract for service using existing facilities (up to three months of reservation charges) versus the level required of shippers seeking new pipeline construction (generally 12 months). For lateral line construction connecting one or two shippers to the pipeline and where there is typically few other market participants interested in similar service, FERC continues its existing policy of allowing pipelines to require collateral up to the full cost of the project. FERC rejects pipeline efforts to boost collateral requirements for existing shippers whose credit status has declined since they entered into their contracts, but agrees that a shipper’s credit status may be a relevant factor for the pipeline in assessing the relevant value of shipper bids for released capacity.

FERC restates its timeline for how many days pipelines must give shippers before they either suspend or terminate service due to loss of creditworthiness status. Where the pipeline is terminating a releasing shipper’s contract for this reason, the pipeline must provide the replacement shipper with the opportunity to continue to receive service if it agrees to pay the lesser of the original shipper’s rate, the maximum tariff rate, or some other rate acceptable to the pipeline. FERC now extends this policy to segmented releases, but with the potentially expensive condition that the replacement shipper must agree to assume the cost of the full contract path (not just the cost of the segment it was using).

In a dissent to the Policy Statement, FERC Commissioner Nora Mead Brownell criticizes FERC’s failure to establish mandatory credit standards. She notes that “comments from all segments of the transportation market that use interstate pipeline services generally support the issuance of a final rule” and “consistent practices across markets and service providers” is needed to prevent undue discrimination by pipelines. She points out that electric generators need consistent credit terms to facilitate infrastructure investment, and that a final rule could have been crafted to provide objective credit principles without jeopardizing the ability of pipelines and the FERC to adapt to particular situations, as needed. Instead, she concludes, the industry is left with “a known problem still wanting a remedy.”

Please direct questions about this DWT Energy Advisory to:

Barbara S. Jost Washington, D.C. (202) 508-6607 BarbaraJost@dwt.com

This Advisory is a publication of the Energy Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in energy law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2005, Davis Wright Tremaine LLP.

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