Policy Statement on Creditworthiness for Interstate Natural Gas Pipelines and Order Withdrawing Rulemaking Proceeding, 37717-37723 [05-12874]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 70, Number 125 (Thursday, June 30, 2005)]
[Proposed Rules]
[Pages 37717-37723]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-12874]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket Nos. PL05-8-000 and RM04-4-000]


Policy Statement on Creditworthiness for Interstate Natural Gas 
Pipelines and Order Withdrawing Rulemaking Proceeding

Issued June 16, 2005.

AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Proposed rule; withdrawal; policy statement.

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SUMMARY: On February 2, 2004, the Federal Energy Regulatory Commission 
(Commission) issued a notice of proposed rulemaking (NOPR) proposing to 
amend its open access regulations governing capacity release and 
standards for business practices and electronic communications with 
interstate natural gas pipelines. The NOPR proposed to incorporate by 
reference ten creditworthiness standards promulgated by the Wholesale 
Gas Quadrant of the North American Energy Standards Board (NAESB) and 
adopt additional regulations related to the creditworthiness of 
shippers on interstate natural gas pipelines. The Commission adopted 
the NAESB creditworthiness standards in Docket No. RM96-1-026 (70 FR 
28204), and is now issuing a policy statement on creditworthiness. 
Therefore, the proposed rulemaking in Docket No. RM04-4-000 is 
withdrawn.

DATES: The withdrawal of the proposed rulemaking is made on the date of 
publication in the Federal Register.

FOR FURTHER INFORMATION CONTACT: David Faerberg, Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202)-502-8275, david.faerberg@ferc.gov.
    Frank Karabetsos, Office of the General Counsel, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
(202)-502-8133, frank.karabetsos@ferc.gov.

SUPPLEMENTARY INFORMATION:

    Before Commissioners: Pat Wood, III, Chairman; Nora Mead 
Brownell, Joseph T. Kelliher, and Suedeen G. Kelly.

    1. The Commission is issuing a policy statement setting forth its 
approach to credit issues relating to transportation on natural gas 
pipelines. The policy statement is intended to provide the industry 
with guidance on the Commission's policies with respect to credit and 
the way in which the Commission will evaluate future proceedings 
involving changes to the creditworthiness provisions of pipeline 
tariffs.

I. Background

    2. In 2002, a number of interstate natural gas pipelines made 
filings with the Commission to revise the creditworthiness provisions 
in their tariffs. These pipelines claimed that, due to increased credit 
rating downgrades for many energy companies, industry attention has 
focused on issues relating to a pipeline's risk profile and its credit 
exposure. The pipelines argued that tariff revisions are needed to 
strengthen creditworthiness provisions and minimize the risk to the 
pipeline and its shippers in the event that a shipper defaults on its 
obligations.
    3. In September 2002, the Commission issued orders that began to 
examine and investigate issues relating to a pipeline's ability to 
determine the creditworthiness of its shippers.\1\ Several parties in 
these proceedings requested that the Commission develop uniform 
guidelines for pipeline creditworthiness provisions. The parties argued 
that generic guidelines would reduce the potential burden faced by 
customers who otherwise would need to comply with inconsistent and 
overly burdensome credit requirements.
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    \1\ See Tennessee Gas Pipeline Co., 100 FERC ] 61,267 (2002); 
Northern Natural Gas Co., 100 FERC ] 61,278 (2002); Natural Gas 
Pipline Co. of America, 101 FERC ] 61,269 (2002).
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    4. The Commission concluded that developing generic standards for 
creditworthiness determination could be valuable since shippers would 
be able to provide the same documents to every pipeline to obtain 
capacity. The Commission encouraged the parties to initiate the 
standards development process at the Wholesale Gas Quadrant (WGQ) of 
the North American Energy Standards Board (NAESB) to see whether a 
consensus standard could be developed for creditworthiness 
determinations. In June 2003, NAESB filed a progress report with the 
Commission in Docket No. RM96-1-000 stating that its Wholesale Gas 
Quadrant had adopted ten standards relating to creditworthiness. A 
number of parties filed comments with the Commission after NAESB filed 
its report.
    5. On February 2, 2004, the Commission issued a Notice of Proposed 
Rulemaking (NOPR) in Docket

[[Page 37718]]

No. RM04-4-000 \2\ that proposed to amend the Commission's open access 
regulations governing capacity release and standards for business 
practices and electronic communications with interstate natural gas 
pipelines. The NOPR proposed to incorporate by reference the ten 
creditworthiness standards promulgated by NAESB's WGQ and to adopt 
additional regulations related to the creditworthiness of shippers on 
interstate natural gas pipelines.\3\ Forty-two comments were filed in 
response to the NOPR.\4\
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    \2\ Creditworthiness Standards for Interstate Natural Gas 
Pipelines, Notice of Proposed Rulemaking, 69 FR 8587 (Feb. 25, 
2004), FERC Stats. & Regs., Proposed Regulations ] 32,573 (Feb. 12, 
2004).
    \3\ On May 9, 2005, the Commission issued Order No. 587-S, in 
which the Commission incorporated by reference the most recent 
version, Version 1.7, of the consensus standards promulgated by the 
WGQ of NAESB. 111 FERC ] 61,203 (2005). Among other things, Version 
1.7 contains the ten standards regarding creditworthiness which the 
Commission proposed to adopt in its NOPR in Docket No. RM04-4-000. 
The standards include procedures for the following practices: 
requesting additional information for credit evaluation; 
acknowledging and responding to requests and receipt of information; 
notice regarding creditworthiness and notice regarding contract 
termination due to credit-related issues; forms of communication; 
reevaluation of determinations that a Service Requester is not 
creditworthy; and awarding capacity release offers only after a 
service requester has been determined to meet the creditworthiness 
requirements applicable to all services.
    \4\ The commenters and the abbreviations for each commenter are 
listed in the Appendix.
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II. Discussion

    6. The Commission has determined not to go forward with a final 
rule on creditworthiness, but to issue this policy statement to provide 
the industry with guidance as to the Commission's credit policies and 
the way in which the Commission will examine future proceedings in 
which creditworthiness issues are considered. Since the issuance of the 
NOPR, filings by pipelines to revise their creditworthiness standards 
have declined markedly, and, in general, the circumstances in the 
energy industry that led to concern about shippers' credit status and 
their effect on pipeline risk profiles have improved. Based on the 
comments filed in the NOPR and changes in the financial picture of the 
natural gas industry, we conclude that standardizing the 
creditworthiness process beyond the business practices adopted by NAESB 
is not necessary at this time and that creditworthiness issues that 
arise in individual filings can be addressed on a case-by-case basis. 
The guidance provided here will assist the industry in evaluating the 
issues that may arise in individual cases.

A. Shipper Information Provided to the Pipeline

    7. The WGQ Executive Committee considered, but did not adopt, a 
proposed standard which would have established a uniform set of 
documents that shippers would have to provide to pipelines, 
distinguishing between the various customer groups that use pipeline 
services. The list of information under this proposed standard was as 
follows:
    a. Audited Financial Statements;
    b. Annual Report;
    c. List of Affiliates, Parent Companies, and Subsidiaries;
    d. Publicly Available Information from Credit Reports of Credit and 
Bond Rating Agencies;
    e. Private Credit Ratings, if obtained by the shipper;
    f. Bank References;
    g. Trade References;
    h. Statement of Legal Composition;
    i. Statement of Length of Time Business has been in Operation;
    j. Most recent filed statements with the Securities and Exchange 
Commission (or an equivalent authority) or such other publicly 
available information;
    k. For public entities, the most recent publicly available interim 
financial statements, with an attestation by its Chief Financial 
Officer, Controller, or equivalent (CFO) that such statements 
constitute a true, correct, and fair representation of financial 
condition prepared in accordance with Generally Accepted Accounting 
Principles (GAAP) or equivalent;
    l. For non-public entities, including those that are state-
regulated utilities:
    i. The most recent available interim financial statements, with an 
attestation by its CFO that such statements constitute a true, correct, 
and fair representation of financial condition prepared in accordance 
with GAAP or equivalent;
    ii. An existing sworn filing, including the most recent available 
interim financial statements and annual financial reports filed with 
the respective regulatory authority, showing the shipper's current 
financial condition;
    m. For state-regulated utility local distribution companies, 
documentation from their respective state regulatory commission (or an 
equivalent authority) of an authorized gas supply cost recovery 
mechanism which fully recovers both gas commodity and transportation 
capacity costs and is afforded regulatory asset accounting treatment in 
accordance with GAAP or equivalent;
    n. Such other information as may be mutually agreed to by the 
parties;
    o. Such other information as the pipeline may receive approval to 
include in its tariff or general terms and conditions.
    In comments, Reliant argues that item ``o'', which makes the list 
non-exclusive, would create uncertainty as to exact requirements and 
could lead to discriminatory treatment of shippers.\5\ Pipelines urge 
the Commission to include item ``o'' in the regulations.\6\
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    \5\ See Comments of Reliant at 6.
    \6\ See Comments of National Fuel; INGAA; El Paso; NiSource; 
NFGD.
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    8. The Commission generally finds this list to be a reasonable 
compilation of information that, in most cases, will provide pipelines 
with sufficient data with which to evaluate shipper credit. Pipelines 
may, in appropriate cases, seek to require additional information, but 
they should be able to justify why the additional data is necessary in 
the particular case.

B. Criteria for Determining Creditworthiness

    9. Several shippers recommend in their comments that the Commission 
require that pipelines have defined, objective criteria in their 
tariffs that detail when a customer is creditworthy.\7\ Pipelines, as 
well as some shippers, maintain the Commission should not establish a 
defined set of criteria since pipelines need to take into account the 
individual circumstances and complexities of shipper relationships.\8\
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    \7\ See Comments of PGC; Reliant; SEMCO; Tenaska; AGA; APS/PWEC; 
EPSA; Calpine.
    \8\ Comments of AGA; NYISO; NRECA; Peoples; Amerada Hess; 
Alliance; Northern Natural; Vector; Dominion; Duke Energy; Kern 
River; National Fuel; NiSource; Williston Basin; INGAA; El Paso.
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    10. The Commission's policy is that pipelines must establish and 
use objective criteria for determining creditworthiness.\9\ However, 
the Commission recognizes that there may not be a defined set of 
criteria for evaluating the circumstances facing each shipper, and that 
pipelines need to take into account the individual circumstances and 
complexities of different shipper relationships in making their 
determinations. Pipelines, however, should promptly inform a shipper in 
writing of the reasons for any determination that the shipper is not 
creditworthy, so that the shipper can

[[Page 37719]]

evaluate and challenge the determination.\10\
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    \9\ See Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 41, 
order on reh'g, 103 FERC ] 61,275 at P 40-41 (2003), PG&E Gas 
Transmission, Northwest Corp., 103 FERC ] 61,137 at P 67 (2003).
    \10\ Tennessee, 102 FERC ] 61,075 at P 46; 103 FERC ] 61,275 at 
P 45.
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C. Collateral Requirements for Non-Creditworthy Shippers

    11. Since Order Nos. 436 and 636, the Commission's general policy 
in order to ensure that open access service is reasonably available has 
been to permit pipelines to require shippers that fail to meet the 
pipeline's creditworthiness requirements for pipeline service to put up 
collateral equal to three months' worth of reservation charges.\11\ The 
Commission has viewed a customer's on-going credit risk as a business 
risk of the pipeline that should be reflected in its rate of return on 
equity.\12\ The Commission has also recognized that in cases of new 
construction, particularly project-financed pipelines,\13\ pipelines 
and their lenders could require larger collateral requirements from 
initial shippers before committing funds to the construction 
project.\14\
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    \11\ See Florida Gas Transmission Co., 66 FERC ] 61,140 at 
61,261 n.5&6, order vacating prior order, 66 FERC ] 61,376 at 62,257 
(1994); Southern Natural Gas Co., 62 FERC ] 61,136 at 61,954 (1993); 
Valero Interstate Transmission Co., 62 FERC ] 61,197 at 62,397 
(1993); Texas Eastern Transmission Corp., 41 FERC ] 61,373 at 62,017 
(1987); Williams Natural Gas Co., 43 FERC ] 61,227 at 61,596 (1988); 
Pacific Gas Transmission Co., 40 FERC ] 61,193 at 61,622 (1987); 
Tennessee Gas Pipeline Co., 40 FERC ] 61,194 at 61,636 (1987); 
Natural Gas Pipeline Co. of America, 41 FERC ] 61,164 at 61,409, n.4 
(1987); Northern Natural Gas Co., 37 FERC ] 61,272 at 61,822 (1986).
    \12\ See Ozark Gas Transmission Co., 68 FERC ] 61,032 at 61,107-
108 (1994) (business and financial risk determine where the pipeline 
should be placed within the zone of reasonableness); Williston Basin 
Interstate Pipeline Co., 67 FERC 61,137 at 61,360 (1994) (``Bad 
debts are a risk of doing business that is compensated through the 
pipeline's rate of return'').
    \13\ Project-financed pipelines are projects in which the lender 
secures its loans to the pipeline by the service agreements 
negotiated with the contract shippers. See Kern River Gas 
Transmission Co., 50 FERC ] 61,069 at 61,145 (1990).
    \14\ Calpine Energy Services, L.P. v. Southern Natural Gas Co., 
103 FERC ] 61,273, reh'g denied, 105 FERC ] 61,033 (2003) (30 
months' worth of reservation charges found to be reasonable for an 
expansion project); North Baja Pipeline, LLC, 102 FERC ] 61,239 at P 
15 (2003) (approving 12 months' worth of reservation charges as 
collateral for initial shippers on new pipeline); Maritimes & 
Northeast Pipeline, L.L.C., 87 FERC ] 61,061 at 61,263 (1999) (12 
months prepayment); Alliance Pipeline L.P., 84 FERC ] 61,239 at 
62,214 (1998); Kern River Gas Transmission Co., 64 FERC ] 61,049 at 
61,428 (1993) (stringent creditworthiness requirements required by 
lenders); Mojave Pipeline Co., 58 FERC ] 61,097 at 61,352 (1992) 
(creditworthiness provisions required by lender); Northern Border 
Pipeline Co., 51 FERC ] 61,261 at 61,769 (1990) (12 months' worth of 
collateral for new project).
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    12. In the NOPR, the Commission requested comment on these policies 
and, in particular, requested comment on whether pipelines should be 
permitted to take into account a shipper's credit status in determining 
the amount of collateral to be required when prospective shippers are 
bidding for available capacity. The pipelines generally maintain that 
the three months collateral may not be sufficient.\15\ Pipelines and 
some shippers \16\ support flexibility in setting collateral 
requirements based on contract term, volume, rate, and credit status. 
Pipelines also support the proposal for allowing pipelines to take into 
account credit status in determining collateral requirements when 
allocating capacity among bidders. Most shippers generally support the 
three-month period or less.\17\ But some shippers support the proposal 
for considering creditworthiness as part of a non-discriminatory 
process for determining net present value when considering bids for new 
capacity.\18\
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    \15\ See, e.g., Comments of Alliance; Duke Energy; INGAA; 
National Fuel; NiSource; Northern Natural; Texas Gas; El Paso; 
Vector.
    \16\ See Comments of BP.
    \17\ See Comments of NWIGU; PG&E; PGC; PSEG; Reliant; SEMCO; 
Tenaska; APS/PWEC; Calpine.
    \18\ See Comments of BP; ConEd; O&R; Peoples.
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    13. The termination of an existing shipper's service is abandonment 
under the Natural Gas Act,\19\ and, accordingly, it is important to 
ensure that collateral requirements do not unnecessarily cause the 
termination of a shipper's service. The collateral requirement asked of 
existing shippers whose credit status has fallen below the pipeline's 
credit standards must be reasonable and directly related to the risks 
faced by the pipeline. In many if not most cases, the existing shipper 
is continuing to pay for service under its contracts even though its 
credit status has been lowered, and that shipper should not be pressed 
into default by overly onerous collateral requirements.
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    \19\ American Gas Ass'n v. FERC, 912 F.2d 1496, 1516-18 (D.C. 
Cir., 1990).
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    14. For existing shippers under contract, the Commission generally 
finds that its traditional policy of requiring no more than the 
equivalent of three months' worth of reservation charges reasonably 
balances the shippers' right to continued service with the pipelines' 
risk. Three months corresponds to the length of time it takes a 
pipeline to terminate a shipper in default and be in a position to 
remarket the capacity. Three months also is an appropriate measure of 
the pipeline's current remarketing risk. The amount of collateral 
advanced by a shipper under an existing contract does not directly 
reduce the current risk faced by the pipeline. When a shipper's credit 
rating has declined so that it is no longer creditworthy under the 
pipeline's tariff, the pipeline faces a risk no matter what the 
collateral requirement. If the shipper defaults, the pipeline is faced 
with remarketing the capacity. Similarly, if the shipper cannot meet a 
higher collateral requirement, and is terminated for that reason, the 
pipeline also would be faced with remarketing the capacity.\20\ 
Further, requiring more collateral will increase the current risk of 
default from a shipper that cannot provide such expensive 
collateral.\21\
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    \20\ Certainly, if the shipper could put up more collateral, the 
pipeline would be better protected for a potential future default, 
since it would have a longer period to try to remarket the capacity. 
But such a potential future benefit does not change the current 
remarketing risk to the pipeline.
    \21\ See PG&E Gas Transmission, Northwest Corporation, 105 FERC 
] 61,382, at P 18-28 (2003).
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    15. The Commission needs to consider on a case-by-case basis any 
pipeline proposal to take into account a shipper's credit status in 
determining whether more than three months collateral can be required 
when shippers are bidding for available capacity on the pipeline's 
existing system. In allocating available capacity, the pipeline is 
generally permitted to allocate capacity to the highest valued 
bidder.\22\ A shipper's credit status may be a relevant factor in 
assessing of the value of its bid as compared with bids by more 
creditworthy shippers, and in determining the amount of collateral that 
a non-creditworthy shipper must provide to have its bid considered on 
an equivalent basis.
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    \22\ See Tennessee Gas Pipeline Co., 76 FERC ] 61,101 at 61,518 
(1996) (accepting net present value formula for allocating 
capacity), aff'd, Process Gas Consumers Group v. FERC, 292 F.3d 831 
(D.C. Cir. 2002) (affirming no length of contract cap for NPV bids); 
Texas Eastern Transmission Corp., 79 FERC ] 61,258 (1997), aff'd on 
rehearing, 80 FERC ] 61,270 (1997) (use of net present value to 
allocate capacity), aff'd, Municipal Defense Group v. FERC, 170 F.3d 
197 (D.C. Cir. 1999) (finding use of NPV allocation method not 
unduly discriminatory when applied to small customers seeking to 
expand service).
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    16. However, the Commission is concerned that any such proposal not 
impede open access as well as competition and market development by 
reducing the pool of potential shippers that can acquire capacity. Any 
pipeline that puts forth such a proposal must ensure that its method 
for evaluating credit status is objective, non-discriminatory, and 
results in collateral requirements that are reasonably related to the 
risk posed by the non-creditworthy shipper. In addition, the pipeline 
will need to ensure that its proposal reasonably reflects risks 
associated with contract term or volumes and may need to apply a 
reasonable limit on the amount of collateral a non-creditworthy shipper

[[Page 37720]]

would have to provide in order to have its bid considered equivalent to 
that of creditworthy bidders.
    17. The Commission will continue its policy of permitting larger 
collateral requirements for construction projects. For new construction 
projects, pipelines need sufficient collateral from non-creditworthy 
shippers to ensure, prior to the investment of significant resources in 
the project, that it can protect its financial commitment to the 
project. For mainline projects, the pipeline's collateral requirement 
must reasonably reflect the risk of the project, particularly the risk 
to the pipeline of remarketing the capacity should the initial shipper 
default.\23\ Because these risks may vary depending on the specific 
project, no predetermined collateral amount would be appropriate for 
all projects. However, the collateral may not exceed the shipper's 
proportionate share of the project's cost.
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    \23\ See Calpine Energy Services, L.P. v. Southern Natural Gas 
Co., 103 FERC ]Sec.  61,273 at P 31 (2003) (approving 30 month 
collateral requirement based on the risks faced by the pipeline).
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    18. Issues relating to collateral for construction projects should 
be determined in the precedent agreements at the certificate stage, and 
collateral requirements for new construction projects should not 
ordinarily be included in the pipeline's tariff.\24\ In the absence of 
any specified collateral requirement in the precedent agreement, the 
pipeline's standard creditworthiness provisions in its tariff would 
apply once the facilities go into service.
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    \24\ North Baja Pipeline, LLC, 102 FERC ] 61,239, at P 15 
(2003).
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    19. The collateral requirements in the precedent agreements would 
apply only to the initial shippers on the project, and would continue 
to apply to these initial shippers even after the project goes into 
service.\25\ The pipeline also should reduce the amount of collateral 
it holds as the shipper's contract term is reduced.\26\ Once the 
contractual obligation is retired, the standard creditworthiness 
provisions of the pipeline's tariff would apply. In addition, in the 
event of a default by an initial shipper, the pipeline will be required 
to reduce the collateral it retains by mitigating damages.\27\
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    \25\ See Northern Natural Gas Co., 103 FERC ] 61,276, at P 17.
    \26\ See Natural Gas Pipeline Co. of America, 102 FERC ] 61,355 
at P 80-85; PG&E Northwest Corp., 103 FERC ] 61,137 at P 33, n.18, 
order on rehearing, 105 FERC ] 61,382 at P 64 (2003).
    \27\ One method of mitigation would be for the pipeline to 
determine its damages by taking the difference between the highest 
net present value bid for the capacity and the net present value of 
the remaining terms of the shipper's contract. The pipeline could 
then retain as much of the collateral as necessary to cover the 
damages. Pipelines could also develop alternative measures for 
determining mitigation.
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    20. For lateral line construction,\28\ consistent with the 
Commission's current policy, the Commission will allow pipelines to 
require collateral up to the full cost of the project.\29\ Unlike 
mainline projects, lateral lines are built to connect one or perhaps a 
few shippers, and the facilities may not be of significant use to other 
potential shippers. The likelihood of the pipeline remarketing that 
capacity in the event of a default by the shipper, therefore, is far 
less than for mainline construction. Because lateral line construction 
policies are part of a pipeline's tariff, collateral requirements for 
such projects should be included in the pipeline's tariff.
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    \28\ A lateral line includes facilities as defined in 18 CFR 
154.109(b) and 18 CFR 157.202 (2003).
    \29\ See Natural Gas Pipeline Co. of America, 102 FERC ] 61,355 
at P 80-85 (2003) (allowing pipeline to request security in an 
amount up to the cost of the new facilities from its customers prior 
to commencing construction of new interconnecting facilities). See 
also Panhandle Eastern Pipe Line Co., 91 FERC ] 61,037 at 61,141 
(2000).
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D. Forms of Security

    21. Pipelines should accept reasonable forms of security. Such 
security could include cash deposits, letters of credit, surety bonds, 
parental guarantees, security in gas reserves, gas in storage, 
contracts or asset liens. A pipeline must not unreasonably discriminate 
in the forms of security it determines to accept from customers.
    22. The Commission has held that a pipeline must provide its 
shippers with the opportunity to earn interest on collateral either by 
paying the interest itself, or giving the shipper the option to 
designate an escrow account to which the pipeline may gain access to 
payments for services provided, if needed.\30\ Under either option, the 
shipper could retrieve any interest that accrued on the principal 
amount. If a pipeline holds the collateral, the applicable interest 
rate will be at least the same rate that the pipeline earns.\31\ 
Moreover, in such situations, the Commission will require that the 
pipeline be responsible for any expenses related to the maintenance of 
this escrow account.
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    \30\ Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 38 
(2003).
    \31\ The pipeline will have the option, but is not required to, 
pay a higher interest rate if it chooses.
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E. Suspension and Termination of Service

    23. Termination of service is an abandonment of service, and the 
Commission's regulations, therefore, require a pipeline to provide 30 
days notice to the Commission prior to terminating service.\32\ This 
notice ensures that the Commission has the opportunity to determine if 
termination is in the public convenience and a necessity.\33\
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    \32\ See 18 CFR 154.602 (2003) (requiring 30 days of advance 
notice to the customer and the Commission prior to contract 
termination).
    \33\ Northern Natural Gas Co., 103 FERC ] 61,276, at P 51 
(2003).
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    24. The Commission allows pipelines to suspend service on shorter 
notice than termination, since it allows the pipeline to protect itself 
against potential losses arising from the continuation of service to a 
non-creditworthy shipper, such as the incurrence of large imbalances 
that may be extinguished in bankruptcy. Pipelines that suspend service 
are making an election of remedies: they are determining that the risks 
of continued service outweigh the potential collection of reservation 
or other charges during the time of the suspension. Since the pipeline 
is making an election to suspend and is not providing the service 
required under the contract during suspension, the Commission has not 
permitted pipelines to impose reservation charges during the period of 
suspension.\34\ At the same time, the Commission does not permit a 
suspended shipper to release or recall capacity.\35\ This permits the 
pipeline to resell the capacity as interruptible or short-term firm.
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    \34\ The Commission has not wanted to create an incentive for 
pipelines to suspend service by making this a more attractive 
alternative than contract termination.
    \35\ Trailblazer Pipeline Co., 103 FERC ] 61,225, at P 53 
(2003).
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    25. The Commission recognizes that when a pipeline suspends a firm 
shipper's contract, it is still providing some value to the shipper by 
reserving the capacity for the shipper's use.\36\ Pipelines may propose 
some lesser charge to reflect the value of reserving the capacity for a 
short period of time. Such a filing, however, must address the 
shipper's ability to release capacity or otherwise share in the 
pipeline's generation of revenue from the use of the capacity for which 
the shipper is paying.
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    \36\ In Tennessee Gas Pipeline Co. v. FERC, 400 F.3d 23 (D.C. 
Cir. 2005), the court affirmed the Commission's policy of not 
permitting a pipeline to recover full reservation charges during 
suspension. The court noted that the Commission had not yet 
considered whether the pipeline should be able to impose a lesser 
charge during suspension and left such an issue to the Commission 
when a case is properly filed.
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    26. Some of the pipelines contend that the Commission's suspension 
policy may result in pipeline's more quickly seeking to terminate 
service

[[Page 37721]]

rather than working with shippers to overcome financial 
difficulties.\37\ The Commission's policy on suspensions and 
termination goes only to unilateral decisions by the pipelines to 
terminate or suspend service. The Commission encourages pipelines and 
shippers to mutually negotiate suspension or other provisions to apply 
during the period when the shipper is trying to work out financial 
issues.
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    \37\ See Comments of INGAA; NiSource.
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    27. The Commission has required that pipelines provide shippers 
that have become non-creditworthy with a reasonable period of time to 
obtain the requisite collateral, taking into account the amount of 
money that may be involved and that the shipper may be faced with 
requests from multiple pipelines to provide collateral. The Commission, 
for instance, found proposals to require shippers to provide the total 
amount of collateral required within five days to be unreasonably 
short.\38\
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    \38\ Northern Natural Gas Co., 102 FERC ] 61,076, at P 49 
(2003); Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 18 
(2003).
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    28. The Commission has developed a timeline that applies to 
suspension and termination procedures that it finds reasonable,\39\ 
although pipelines may seek to justify alternative proposals. Under 
this timeline, when a shipper is no longer creditworthy, the pipeline 
may not terminate or suspend the shipper's service without providing 
the shipper with an opportunity to satisfy the collateral requirements. 
In this circumstance, the shipper must be given at least five business 
days within which to provide advance payment for one month's service, 
and must satisfy the collateral requirements within 30 days. This 
procedure would allow the shipper to have at least 30 days to provide 
the next three months of security for service. If the shipper fails to 
provide the required security within these time periods, the pipeline 
may suspend service immediately. Further, the pipeline may provide 
simultaneous written notice that it will terminate service in 30 days 
if the shipper fails to provide security. After a shipper either 
defaults or fails to provide the required collateral, pipelines would 
need to provide the shipper and the Commission with 30 days notice 
prior to terminating the shipper's contract.
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    \39\ See Northern Natural Gas Co., 102 FERC ] 61,076, at P 49 
(2003); Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 18 
(2003); Natural Gas Pipeline Co. of America, 102 FERC ] 61,355 at P 
52 (2003); Gulf South Pipeline Co., LP, 103 FERC ] 61,129 at P 49-52 
(2003).
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F. Capacity Release

    29. The Commission will clarify its policies relating to 
creditworthiness and capacity release in two areas: creditworthiness 
requirements for replacement shippers; and rights of releasing and 
replacement shippers upon contract termination or suspension.
1. Creditworthiness Requirements for Replacement Shippers
    30. Since Order No. 636, the Commission has held that in capacity 
release situations, both the releasing and replacement shippers must 
satisfy a pipeline's creditworthiness requirements.\40\ The Commission 
further found that releasing shippers could not establish 
creditworthiness provisions for released capacity different from those 
in the pipeline's tariff.\41\ As the Commission explained, the same 
criteria should be applied to released capacity and pipeline capacity 
in order to ensure that all capacity, including released capacity, is 
available on an open access, non-discriminatory basis to all 
shippers.\42\
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    \40\ See Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation; and 
Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, Order No. 636-A, FERC Statutes and Regulations, 
Regulations Preambles, January 1991-June 1996 ] 30,950 at 30,588 
(1992). Under the capacity release regulations, 18 CFR Sec.  
284.8(f) (2003), the releasing shipper remains obligated under its 
contract to the pipeline, and must, therefore, satisfy the 
creditworthiness and other obligations associated with that 
contract, regardless of how many subordinate releases take place. 
For example, even if a replacement shipper is creditworthy, it may 
default and the releasing shipper would be responsible for payment. 
Moreover, given the ability of releasing shippers to recall and 
segment releases, both the releasing and replacement shippers need 
to be creditworthy to ensure their respective obligations.
    \41\ See El Paso Natural Gas Co., 61 FERC ] 61,333 at 62,299 
(1992); Panhandle Eastern Pipe Line Co., 61 FERC ] 61,357 at 62,417 
(1992); Texas Eastern Transmission Corp., 62 FERC ] 61,015 at 61,098 
(1993); CNG Transmission Corp., 64 FERC ] 61,303 at 63,225 (1993).
    \42\ See Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 62 
(2003) (a releasing shipper cannot impose creditworthiness 
conditions on a replacement shipper that are different from the 
creditworthiness conditions imposed by the pipeline.)
---------------------------------------------------------------------------

    31. Most commenters favor the continuation of the Commission's 
current policy, although EPSA maintains that the releasing shipper 
should be permitted to set lower collateral requirements than the 
pipeline's requirements. Since the replacement shipper has obligations 
to the pipeline (usage charges, penalties, imbalance cash outs, etc.) 
that are not covered by the releasing shipper's underlying contract, 
the pipeline does have a legitimate independent interest in assuring 
sufficient creditworthiness (or collateral) to cover the replacement 
shipper's obligations. The Commission, therefore, would not require a 
pipeline to permit a releasing shipper to establish a lesser collateral 
requirement. However, a pipeline can propose a tariff change to permit 
a releasing shipper to establish a lower collateral requirement.
2. Termination and Suspension
    32. Pipelines will be permitted to terminate a release of capacity 
to the replacement shipper if the releasing shipper's service agreement 
is terminated, provided that the pipeline provides the replacement 
shipper with an opportunity to continue receiving service if it agrees 
to pay, for the remaining term of the replacement shipper's contract, 
the lesser of: (1) The releasing shipper's contract rate; (2) the 
maximum tariff rate applicable to the releasing shipper's capacity; or 
(3) some other rate that is acceptable to the pipeline.\43\
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    \43\ Tenaska Marketing Ventures v. Northern Border Pipeline Co., 
99 FERC ] 61,182 (2002). See Texas Eastern Transmission, L.P., 101 
FERC ] 61,071 at P 6 (2002); Trailblazer Pipeline Co., 101 FERC ] 
61,405 at P 32 (2002); Northern Border Pipeline Co., 100 FERC ] 
61,125 (2002); Natural Gas Pipeline Co. of America, 100 FERC ] 
61,269 at P 7-19 (2002); Canyon Creek Compression Co., 100 FERC ] 
61,283 (2002); Kinder Morgan Interstate Gas Transmission LLC, 100 
FERC ] 61,366 (2002).
---------------------------------------------------------------------------

    33. This policy establishes a reasonable balance between the 
pipeline and replacement shippers in the event a releasing shipper's 
contract is terminated. Although the replacement shipper has a contract 
with the pipeline, the releasing shipper, not the pipeline, has 
established the rate for the release. Under a release transaction, the 
contract of the releasing shipper serves to guarantee that the pipeline 
receives the original contract price for the capacity. Once the 
releasing shipper's contract has been terminated, the pipeline may no 
longer wish to continue service to the replacement shipper at a lower 
rate, and should have the opportunity to remarket the capacity to 
obtain a higher rate.\44\ On the other hand, the replacement shipper 
also has an investment in the use of the capacity, and should, 
therefore, have first call on retaining the capacity if it is willing 
to provide the pipeline with the same

[[Page 37722]]

revenue as the releasing shipper. Under this policy, the replacement 
shipper is given the opportunity to retain the capacity by paying the 
releasing shipper's contract rate or the maximum rate for the remaining 
term of the contract.
---------------------------------------------------------------------------

    \44\ The pipeline is not required to terminate the replacement 
shipper's contract. It could decide to continue to provide service 
under that contract at the rate prescribed in the release. In that 
event, the replacement shipper would not have the right to terminate 
its contractual obligation since it is receiving the full service 
for which it contracted. See Tenaska Marketing Ventures v. Northern 
Border Pipeline Co., 99 FERC ] 61,182 (2002) (replacement shipper 
could not cancel release contract upon bankruptcy of releasing 
shipper).
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    34. With respect to segmented releases, the Commission will apply 
the same general policy. A replacement shipper will have the right to 
continue service if it agrees to take the full contract path of the 
releasing shipper at the rate paid by the releasing shipper. The 
Commission will not require the pipeline to permit the replacement 
shipper under a segmented release to retain its geographic segment of 
capacity. The pipeline did not negotiate the release of the segment and 
should not be held to that segmented release agreement once the 
releasing shipper's contract terminates. The replacement shipper in 
that instance should be required to pay for the full capacity path of 
the defaulted shipper at the lower of the rate the defaulted shipper 
paid or the maximum rate applicable to the defaulted shipper's full 
capacity path.\45\ In the case of multiple replacement shippers with 
geographically segmented releases, a pipeline would have to propose a 
reasonable method of allocating capacity among them if they each 
matched the full rate under the releasing shipper's contract.\46\
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    \45\ National Fuel Gas Supply Corp., 101 FERC ] 61,063 at P12 
(2002).
    \46\ In the event of such multiple bids by replacement shippers, 
regardless of the allocation method used by the pipeline, the 
shippers should be able to replicate their geographically segmented 
capacity by releasing segments of capacity to each other.
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    35. AGA requests that upon suspension of a replacement shipper's 
contract, the capacity will revert to the releasing shipper. The 
Commission agrees that capacity will revert to the releasing shipper 
upon the suspension or termination of the replacement shipper, since 
the releasing shipper remains liable for reservation charges under its 
contract with the pipeline even if the replacement shipper's service is 
suspended, and the releasing shipper will no longer be receiving 
credits during the time the replacement shipper is suspended.\47\ In 
addition, the releasing shipper also can reserve recall rights that 
will permit it to recall capacity.\48\
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    \47\ See Tennessee Gas Pipeline Co., 103 FERC ] 61,275, at P 99 
(2003).
    \48\ Id. at P 74.
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    The Commission orders:
    The Notice of Proposed Rulemaking in this docket is withdrawn.

    By the Commission. Commissioner Brownell dissenting with a 
separate statement attached.
Magalie R. Salas,
Secretary.

Comments Filed in Response to the NOPR on Creditworthiness Standards for
        Interstate Natural Gas Pipelines in Docket No. RM04-4-000
------------------------------------------------------------------------
             Commenter                           Abbreviation
------------------------------------------------------------------------
Alliance Pipeline L.P..............  Alliance.
Amerada Hess Corporation...........  Amerada Hess.
American Gas Association...........  AGA.
American Public Gas Association....  APGA.
Aquila, Inc. d/b/a Aquila Networks.  Aquila.
Arizona Public Service Company and   APS/PWEC.
 Pinnacle West Energy Corporation.
BP America Production Company and    BP.
 BP Energy Company.
Calpine Corporation................  Calpine.
CenterPoint Energy Gas Transmission  CEGT/MRT.
 Company and CenterPoint Energy--
 Mississippi River Transmission
 Corporation.
Consolidated Edison Company of New   ConEd/O&R.
 York, Inc. and Orange and Rockland
 Utilities, Inc.
Dominion Resources, Inc............  Dominion.
Duke Energy Gas Transmission         Duke Energy.
 Corporation.
El Paso Corporation's Pipeline       El Paso.
 Group.
Electric Power Supply Association..  EPSA.
EnCana Marketing (USA) Inc.........  EnCana.
Energy America LLC and Direct        Direct Energy.
 Energy Marketing, Inc.
Gulf South Pipeline Company, LP....  Gulf South.
Interstate Natural Gas Association   INGAA.
 of America.
Kern River Gas Transmission Company  Kern River.
KeySpan Delivery Companies.........  KeySpan.
Memphis Light, Gas and Water         MLGW.
 Division.
National Fuel Gas Distribution       NFGD.
 Corporation.
National Fuel Gas Supply             National Fuel.
 Corporation.
National Rural Electric Cooperative  NRECA.
 Association.
New York Independent System          NYISO.
 Operator, Inc.
NiSource, Inc......................  NiSource.
Northern Municipal Distributors      NMDG/MRGTF.
 Group and Midwest Region Gas Task
 Force Association.
Northern Natural Gas Company.......  Northern Natural.
Northwest Industrial Gas Users.....  NWIGU.
Pacific Gas and Electric Company...  PG&E.
Peoples Gas Light and Coke Company,  Peoples.
 North Shore Gas Company and
 Peoples Energy Wholesale
 Marketing, LLC.
Process Gas Consumers Group,         PGC.
 American Forest & Paper
 Association, American Iron and
 Steel Institute, Georgia
 Industrial Group, Industrial Gas
 Users of Florida and Florida
 Industrial Gas Users.
PSEG Energy Resources & Trade LLC..  PSEG.
Public Service Commission of the     New York.
 State of New York.
Reliant Resources, Inc.............  Reliant.
SEMCO Energy Gas Company...........  SEMCO.
Sempra Energy Global Enterprises     Sempra.
 and Sempra Energy International.
Steuben Gas Storage Company........  Steuben.
Tenaska Marketing Ventures.........  Tenaska.
Texas Gas Transmission, LLC........  Texas Gas.
Vector Pipeline L.P................  Vector.

[[Page 37723]]

 
Williston Basin Interstate Pipeline  Williston Basin.
 Company.
------------------------------------------------------------------------

    Nora Mead Brownell, Commissioner dissenting:
    I have previously expressed my conviction that establishing 
mandatory creditworthiness principles will promote consistent 
practices across markets and service providers and provide customers 
with an objective and transparent creditworthiness evaluation. Such 
an approach would lessen the opportunity for applying these 
provisions in an unduly discriminatory manner. Therefore, I cannot 
support the majority's decision to issue mere guidance, as opposed 
to a binding final rule.
    The majority concludes that standardizing the creditworthiness 
process beyond the business practices adopted by NAESB is not 
necessary. Unfortunately, the NAESB business practices provide only 
the scantest of customer protections, for example, requiring a 
pipeline to state the reason it is requesting credit evaluation 
information from existing shippers and to acknowledge receipt of 
that requested information.\1\ Further, comments from all segments 
of the transportation market that use interstate pipeline services 
generally support the issuance of a final rule. The Electric Power 
Supply Association asserts that electric generators need consistent 
credit terms to facilitate infrastructure investment.\2\ The 
associations for local utilities argue that the proposed regulations 
reflect a balanced approach in providing the pipelines with 
protection against the risks of non-creditworthy shippers while at 
the same time assuring that pipelines can not impose unreasonable 
burdens on the shippers.\3\ Peoples Gas Light and Coke Company and 
EnCana Marketing (USA) Inc. point out that the proposed regulations 
reflect Commission's credit policy as it has evolved in several 
individual proceedings and declare that at this point it is 
appropriate to codify that policy and apply it to all pipelines.\4\ 
The Northwest Industrial Gas Users argue that, without consistent 
credit requirements, their ability to purchase unbundled service 
through interstate pipelines could be restricted.\5\ The Process Gas 
Consumers Group, the American Forest & Paper Association, the 
American Iron and Steel Institute, the Georgia Industrial Group, the 
Industrial Gas Users of Florida and the Florida Industrial Gas Users 
(Industrials) support the overwhelming majority of the proposed 
regulations as a fair balance between the needs of the pipelines and 
their shippers.\6\ Finally, even the New York Independent System 
Operator acknowledges that standardization is generally beneficial 
and suggests that a comprehensive credit program can serve as a 
rational, workable model for the electric industry.\7\
---------------------------------------------------------------------------

    \1\ See Order No. 587-S, 111 FERC ] 61,203 (2005).
    \2\ See Comments of Electric Power Supply Association at 2-3.
    \3\ See Comments of American Gas Association at 1-2 and American 
Public Gas Association at 1.
    \4\ See Comments of Peoples Gas Light and Coke Company at 3 and 
EnCana Marketing (USA) Inc. at 3.
    \5\ See Comments of The Northwest Industrial Gas Users at 2.
    \6\ See Comments of Industrials at 1 and 4-6.
    \7\ See Comments New York Independent System Operator at 4.
---------------------------------------------------------------------------

    The majority concludes that creditworthiness issues should be 
addressed on a case-by-case basis. This conclusion seems premised on 
the fear that mandatory principles will lead to institutionalizing a 
``one-size-fits-all'' approach. Let me be clear, I agree that such 
an approach is hazardous and I would not support it. What I am 
saying is that creditworthy provisions need to be more systematic, 
transparent, and non-discriminatory with sufficient flexibility to 
adapt to specific situations but with customer safeguards such as 
written explanations. Promulgation of a final rule would have 
accomplished the goal of providing objective credit principles in 
every pipeline tariff while retaining the necessary flexibility to 
adapt to particular situations.
    Commenters from all segments of the interstate transportation 
market supported the rulemaking approach and, I believe, the market 
would have been better served had we promulgated a final rule. As I 
stated in my dissent to the policy statement on electric 
creditworthiness,\8\ the non-binding effect of this policy statement 
seems to result in a known problem still wanting a remedy, and 
therefore, I dissent.

    \8\ Policy Statement on Electric Creditworthiness, 109 FERC ] 
61,186 (2004).

Nora Mead Brownell.
[FR Doc. 05-12874 Filed 6-29-05; 8:45 am]
BILLING CODE 6717-01-P