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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:
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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