In a post-Enron market environment, interstate natural gas pipelines should be permitted to take into the account the creditworthiness of shippers when evaluating bids for transportation capacity on their existing systems, says the Interstate Natural Gas Association of America (INGAA).

FERC so far has focused on the “changes in credit standing of existing shippers,” but “creditworthiness is also critically important in allocating capacity on existing facilities,” noted Donald F. Santa Jr., INGAA’s new president, in a recent letter to FERC. “There can be significant differences in creditworthiness among shippers. Pipelines should be allowed to exercise ‘reasonable business judgment’ in evaluating these differences when executing contracts for service on existing facilities.”

INGAA has asked the Commission to rule on the issue. “Unless relative creditworthiness can be considered in evaluating bids and awarding capacity, shippers will have an incentive to utilize shell companies to contract for capacity,” which could significantly erode pipeline operations and finances, Santa said.

The pipeline group cited an example in which two companies seek the same capacity. An undercapitalized shell company, which has been set up solely for the purpose of bidding for capacity and has little concern about whether it can perform under a contract for its entire term, may bid for 25 years of service, while an investment-grade shipper might bid prudently for only 10 years because it is “very concerned” about its ability to perform on a long-term basis.

“Unless differences in creditworthiness are taken into account, the capacity would go to the undercapitalized shell that bids 25 years, given that bid’s higher net present value,” Santa, a former FERC commissioner, told the agency.

Pipelines should be allowed to use their “discretion” on this issue, so long as they are not discriminatory, said Joan Dreskin, general counsel for INGAA, during a press briefing with reporters last Tuesday. Pipeline facilities are not going to get built with non-creditworthy shippers, she noted. Santa echoed this sentiment, saying that a pipeline “is only as creditworthy as its shippers.”

Santa acknowledged that by allowing pipes to factor in shipper creditworthiness when allocating capacity, this could bar companies with less-than-established credit profiles from entering the market. “It may. There’s a trade-off there. But by…having somebody come into the marketplace [who] doesn’t satisfy some minimum criteria for credit, is that really in the best interests of the [consumer]” and market?

Unquestionably, INGAA’s position on this issue favors financially sound companies. “Don’t put on the backs of the pipelines and their shareholders the risk and burden that’s created merely because you want to encourage someone else into the market,” Santa said.

In its letter to FERC, the pipeline group also called on the agency to clarify a second issue — that a primary shipper should not be relieved of its contractual obligation to a pipeline by permanently releasing its capacity to a less-creditworthy shipper.

“No one contests a shipper’s right to release its capacity permanently to a less-creditworthy shipper. The issue is whether the existing shipper is completely relieved of all contractual liability thereafter,” Santa said.

“The capacity-release program was never intended to be an easy loophole whereby an existing shipper can terminate its contractual obligations by assigning its contract to a replacement shipper that meets only the minimum criteria set forth in the pipeline’s tariff,” he noted.

In an Aug. 1 order involving Dominion Cove Point LNG LP, FERC clearly stated a primary shipper is contractually obligated to the pipeline for capacity it releases to a replacement shipper who then defaults. Because pipes already are financially shielded from potential defaults of replacement shippers, the Commission frowned on a tariff proposal of Dominion’s that would have required the shippers bidding for capacity release in future auctions to first prequalify under a pipeline’s creditworthiness standards.

FERC said Dominion’s proposed prequalification requirement was redundant. If anything, “the Commission finds that each releasing shipper should have the option…to require bidders for its released capacity to prequalify under the pipeline’s creditworthiness standards” as a protection from default, the order said [RP03-545]. “Prequalification is not necessary to protect the pipeline.”

The agency ordered Dominion Cove Point to revise its tariff proposal to give a releasing shipper the option to “determine whether it wants to assume any risk in the event that a non-creditworthy replacement shipper makes the highest bid” on a release offer, or whether it wants to require a replacement shipper to prequalify under the pipeline’s creditworthiness standards.

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