FERC has denied a request by Kern River Gas Transmission to reconsider an order that curbs the amount of collateral that may be collected from a noncreditworthy shipper to continue receiving service. Noncreditworthy shippers have credit ratings that are below investment grade.
The Federal Energy Regulatory Commission’s general policy has permitted pipelines to require shippers that fail to meet creditworthiness requirements to put up collateral equal to three months’ worth of reservation charges to continue to receive services. However, for project-financed pipelines, such as Kern River, “which are projects in which the lender secures its loans to the pipeline by the service agreements negotiated with the contract shippers, the pipelines and their lenders could require larger collateral requirements.”
In Kern River’s case FERC held that the pipeline could require 12 months of collateral from noncreditworthy shippers.
However, in an order issued in June 2012, the Commission stated that at the expiration of Kern River’s debt as it existed on Aug. 12, 2010, the pipeline would no longer be able to require collateral of 12 months from existing or new firm shippers, but rather would have to adhere to the Commission’s policy applicable to all pipelines for no more than three months of collateral.
Kern River, a subsidiary of Utah-based MidAmerican Energy Holdings Co., sought a rehearing of the 2012 order, which FERC denied Tuesday. “We do not find that any future refinanced or new debt will serve to extend the date upon which the 12-month collateral requirement for existing or new firm shippers will apply,” the order stated [RP12-250].
“Kern River advances a number of arguments why it should not be required to revise its tariff [with respect to collateral requirements]. But…we do not find that Kern River warrants an exception from the usual three-months’ collateral requirement as applied to existing shippers or to new shippers on its existing system. Kern River’s prospective lenders also have been on notice since Aug. 12, 2010 that upon the expiration of the existing lending agreements their collateral requirement from existing shippers would be limited to three months collateral…
“We…find no reason to treat Kern River any differently than other natural gas pipelines are treated with respect to the collateral requirement for non-creditworthy shippers to continue to receive service.”
In 2007, the U.S. Court of Appeals for the District of Columbia Circuit upheld the Commission’s policy of permitting pipelines to generally collect no more than the equivalent of three months of reservation charges as collateral from noncreditworthy shippers (see Daily GPI, Oct. 17, 2007). Gas Transmission Northwest Corp. and North Baja Pipeline challenged the FERC policy, calling it arbitrary and unreasonable. The two pipelines, stung by shipper defaults, sought to amend their tariffs to require noncreditworthy shippers to post 12 months of reservation charges as collateral to maintain capacity on their systems.
At the time, FERC said it would consider on a case-by-case basis pipeline requests to collect more than three months of charges as collateral from shippers that were bidding for available capacity on a pipe’s system. For new mainline construction, FERC noted that it would consider permitting larger collateral requirements that reasonably reflected the risk of the project (see Daily GPI, June 16, 2005).
Kern River is a 1,717-mile pipeline that can deliver up to 2.17 Bcf/d from the gas fields of Wyoming to Bakersfield, CA. The line delivers gas into Utah, Nevada and California.
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