In its first orders providing industry guidance on pipeline creditworthiness standards, FERC last Wednesday appeared to take the middle ground by offering protections to both interstate natural gas pipelines and their shippers.

“I hope…parties on the outside can start to get a sense of the policy cuts that the Commission makes on creditworthiness concerns,” said Federal Energy Regulatory Commission Chairman Pat Wood, as the agency voted out two orders approving proposed changes to the creditworthiness provisions in the tariffs of Northern Natural Gas Co. and Tennessee Gas Pipeline Co. [GT02-38, GT02-35].

“These two cases…and I think the others to come will give us the opportunity to really [flesh] out a good policy on what we think the creditworthiness criteria and implications…ought to be for all the gas pipelines,” he said during the agency’s regular meeting.

Both Northern Natural and Tennessee in August proposed the changes to their transportation tariffs to shield themselves and their paying pipeline customers from the financial risks posed by insolvent or credit-risky shippers. Their actions were a response to the severe credit downgrades in the energy industry, and have come under fire from shippers.

The Tennessee order called on the El Paso Corp. pipeline to establish “objective criteria” in its tariff to determine the creditworthiness of its shippers. Northern Natural, which is owned by MidAmerican Energy, already meets this standard by identifying a creditworthy shipper as one who has an investment grade credit rating, a FERC staff member said.

Both orders rejected proposals that would have required non-creditworthy shippers, in order to continue receiving service on Tennessee and Northern Natural, to post three months of security within five days of being notified of suspension or termination. The pipelines “have not shown five days to be a sufficient period of time for shippers to obtain [the] requisite security,” according to the staff member. The Commission suggested the two pipes seek a “specific notice period” that would offer shippers a “reasonable period to provide collateral.”

As an alternative recommendation, FERC proposed that Tennessee and Northern Natural could demand that non-creditworthy shippers pre-pay one month’s worth of reservation charges within five business days to continue receiving service. But the shippers would have at least 30 days to pay the pipelines security for the next three months of service, the orders said. Failure by shippers to provide the security in the allotted times would then result in immediate suspension of service.

The orders called on the North American Energy Standards Board (NAESB) to consider the issue as part of its standards development process, and recommend an appropriate notice period.

Furthermore, the Commission rejected the pipelines’ proposals to confiscate gas as partial payment for a bill of a non-creditworthy shipper whose contract has been terminated. “This confiscation mechanism has not been justified by the pipelines, [and] may not adequately protect the rights of the shippers and other parties who may have an interest in the gas,” noted the staff member.

But Tennessee and Northern are “free to assert any carrier liens or other interests that would be permitted under the applicable state law or the Uniform Commercial Code against gas remaining on its system,” the orders said.

Lastly, FERC said it supported Northern Natural’s proposal to require non-creditworthy interruptible shippers to provide additional security to cover any gas loaned over a three-month period under the pipeline’s Interruptible Deferred Delivery rate schedule. However, the Commission objected to the pipeline basing the security on the value of the entire amount of gas loaned over that period, saying it was “unsupported and appears excessive.”

FERC recommended that the pipeline file a “more reasonable security requirement that better reflects the nature of the service.”

Commissioner Nora M. Brownell, who worked closely on the orders, said “My overriding concern [was] that we don’t do what we’ve seen happen in the last year, and that is, be unnecessarily onerous in such a way to cause a death spiral.”

While noting that pipeline credit issues aren’t “headline stuff,” Brownell said “this is the underlying important work that we need to do to bring some stability and certainty to the marketplace.”

Commissioner William Massey suggested perhaps FERC should consider development of a generic rule on pipeline credit matters, rather than addressing it on a case-by-case basis.

“We’re got five [total pipeline credit cases] to do. I would like to suggest that…we get through the batch of those and then at that point, if there is still some need to kind of pull it altogether in a different [form],” FERC could consider some type of generic action, possibly in the spring, said Wood.

In speaking to reporters last Wednesday, both Wood and Brownell agreed that generic action would be warranted only “if there is a need for further work after all [of] those decisions have been made.”

NAESB, which is to report back to FERC in June, is developing standards for some of the issues addressed in the orders, “such as the kind of documentation shippers need to provide to the pipelines” to show they are creditworthy, said a FERC staff member. “It might be worthwhile to see what their report is like, and then see what issues are left over if we want to proceed generically,” he advised the Commission.

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