Creditworthiness INGAA Comments 4-2-04

In the NOPR, the Commission appropriately has recognized the importance of creditworthiness commitments in relation to the financing of new construction. Such commitments, however, are also critically important for new service agreements over existing pipeline capacity. This is especially true for new long-term agreements on existing capacity. Pipelines should be able to obtain high quality, creditworthy customers for service on both existing and new capacity.

The Commission’s suggestion that it may be appropriate to allow consideration of creditworthiness in conjunction with awarding capacity is a good start toward crafting a solution that both protects the right of a prospective shipper to service but at the same time protects the pipeline, and its existing and future creditworthy shippers. Creditworthiness standards should allow pipelines both to obtain and retain good quality, creditworthy shippers while managing a diverse portfolio of credit quality shippers. Pipelines should not be required to award the long-term rights to capacity to shippers that qualify for service only through their ability to post a few months of demand charges.

Creditworthiness regulations must not become tools by which shippers may radically shift financial and contractual risk. New rules should not, for example, permit a thinly-capitalized shell company or any other non-creditworthy customer to post a letter of credit for a few months’ service and thereby commit the pipeline to a ten year firm agreement. Since initial firm contracts on new facilities seldom cover the full life of the facilities, it is important to allow pipelines to award new capacity with good quality, creditworthy shippers over less creditworthy shippers for the same capacity.

Pipelines should be permitted to limit shippers seeking service on existing capacity that wish to post only three months of collateral to contracts of one year or less. This fairly balances the risks inherent in providing new long-term service to parties that pose a credit risk. Any shipper who pays the maximum rate for a contract for one year or more can continue to obtain service by utilizing its rights of first refusal (“ROFR”) to renew the contract. In addition, a non-creditworthy shipper could obtain long-term capacity by posting additional collateral to protect the pipeline from default during the term of the contract. On the other hand, non-creditworthy shippers should not be permitted to contract for long-term pipeline capacity with only three months’ collateral.

Further, it is critical that FERC not abandon current policy on permanent releases of capacity. Such releases, if made to a shipper that is less creditworthy than the releasing shipper, must require the original shipper to remain liable under the contract, absent the consent of the parties. Even if creditworthiness standards allow pipelines to attract good-quality, creditworthy shippers at the outset of a contract, such standards would be seriously undermined if shippers could permanently release the capacity, possibly for years, to a shipper whose only claim to creditworthiness is its ability to post three months’ collateral. The Commission has already made the correct call on the issue of permanent capacity releases and its current policy should not be altered.