FERC denied requests for rehearing and stay by numerous pipeline customers and approved stiffer creditworthiness standards for Natural Gas Pipeline Company of America (NGPL), including a plan to suspend service within five business days if a shipper falls behind in payments a second time within six months and another plan that would halve the time period to 15 days for suspending service when a shipper is delinquent in payments.

The order, which went into effect Tuesday, also denied some of the stringent provisions proposed by NGPL, such as a 12-month prepayment and gas confiscation.

FERC said the shorter time period for suspending service after delinquency “will provide greater financial protection” when a shipper is unable to remedy its own financial problems.

The Kinder Morgan interstate pipeline company had filed revised tariff sheets last October, seeking to strengthen the creditworthiness requirements on its system in light of the growing number of energy companies that were being downgraded to non-investment grade status by credit rating agencies. More than 10% of the shippers on NGPL’s system have seen their credit ratings plummet over the last two years. The Commission issued an order last fall accepting and suspending the proposed tariff changes subject to refunds, certain conditions and a technical conference, which was held in December.

This order on the technical conference denied a request for stay by a group of industrial customers who wanted to see industry standards on pipeline creditworthiness requirements be put in place by the Commission through a generic proceeding before the NGPL tariff changes would take effect.

After making several similar determinations in other pipeline creditworthiness cases, the Commission denied a request for rehearing by the NGPL industrial customers and reiterated its position that the National Energy Industry Standards Board (NAESB) should develop the creditworthiness standards.

“The Commission has already started a generic proceeding to examine creditworthiness by requesting the Wholesale Gas Quadrant (WGQ) of NAESB to consider whether standards relating to creditworthiness can be developed,” FERC said in its order. “While the rehearing petitioners maintain that the consideration of creditworthiness is beyond the scope of NAESB, the NAESB board of directors at its meeting on Sept. 23, 2002 found that creditworthiness is within NAESB’s scope and approved a resolution directing the WGQ to consider the development of creditworthiness standards.”

However, the Commission rejected a number of NGPL’s proposed provisions as overly stringent. It rejected a proposal to require non-creditworthy shippers to prepay for up to one year of service. After many shippers blasted that provision, NGPL backed off and was planning to use a sliding scale of prepayments from four to 12 months based on the contract term.

Calpine said that the 400% increase in collateral (from $8 million to $32 million) it would cause would be “harmful to shippers, reducing their debt capacity, thereby removing funds for the capital market necessary for market liquidity and infrastructure investment.”

A group of NGPL shippers said a civil lawsuit would be the proper vehicle for seeking relief of economic harm resulting from a breach of contract. Furthermore, the shippers said a 12-month security would “aggravate the liquidity problems that already plague the gas industry.”

NGPL, however, said that an increased level of prepayment would help assure that the pipeline capacity would “get into the hands of entities that can actually pay for it.” The pipeline also said higher prepayment would provide reasonable protection in the event of a bankruptcy filing by a customer.

FERC ruled that the 12-month requirement would be “excessive,” and decided prepayment could not exceed three months of service.

The Commission also rejected a proposal that would allow NGPL to confiscate gas left in the pipeline if a shipper defaults on its payment obligations. FERC said the pipeline can assert any liens allowed under state law.

It rejected a number of other provisions, including the following:

FERC modified one provision that would have required a shipper that has been determined not creditworthy to provide three months of collateral within 10 business days. The Commission said NGPL failed to justify the provision and recommended that it adopt the approach proposed in two other recent pipeline cases, one involving Northern Natural and another involving Tennessee Gas Pipeline.

Under that approach, when a shipper loses its creditworthiness status, it must within five business days pay for one month of service. In 30 days it must provide security for another three months of service. FERC said this “establishes a reasonable balance between [NGPL’s] legitimate need to obtain security and the shippers need for a sufficient time to arrange for such a security.”

FERC also added a provision that requires NGPL to include language in its tariff allowing a shipper the right to request that its credit status be reevaluated at any time. “If Natural determines a shipper is creditworthy, Natural must terminate the security requirement” for the shipper.

In addition, the Commission told NGPL it must provide prepaying shippers with the opportunity to earn interest on their payments. The pipeline can either pay the interest itself or give the shipper the option to deposit the prepayment funds in an interest bearing escrow account established by the shipper to which NGPL can gain access if necessary.

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