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A credit crisis is rippling through all sectors of the energy industry. One leading credit-rating agency reported recently that nearly one-third of its power utilities are rated negative or are on credit watch. Moreover, industry analysts are predicting that 2003 will be even worse than 2002, with more defaults and bankruptcies on the horizon. Because they are having trouble securing financing, power developers are postponing or canceling plans to construct new gas-fired generation plants — the very projects that had fueled bullish projections for natural gas. Interstate pipelines that stood to gain from the nation’s increasing reliance on natural gas have instead found themselves in a potentially precarious position as shippers become less creditworthy. The pipelines have tried to protect themselves and their creditworthy shippers with more stringent tariff provisions governing the circumstances under which customers that become noncreditworthy, bankrupt, or insolvent may continue receiving service. Now the Federal Energy Regulatory Commission is grappling with the implications of these new creditworthiness provisions. In a series of recent cases, FERC has developed a new policy regarding creditworthiness provisions, which it has begun to apply to all interstate natural gas pipelines. Many participants in these cases have urged FERC to institute a rule-making proceeding in which all interested parties could participate, rather than adjudicate these tariff changes on a pipeline-by-pipeline basis. FERC, however, has determined that proceeding case by case will let it accommodate the individual circumstances of a given pipeline, while at the same time creating a policy that can be applied to all pipelines. In addition, FERC has enlisted the North American Energy Standards Board to help create standards for creditworthiness based upon the policy that FERC establishes through these various proceedings. Critics argue that, ironically, FERC’s case-by-case approach has established a one-size-fits-all policy, which fails to make allowances for the specific credit portfolios and corporate structures of individual pipelines — and thus does not fit anyone. Moreover, critics contend that FERC’s approach will have the devastating effect of impeding, rather than encouraging, the development of new pipeline infrastructure needed to meet the nation’s growing energy demands. NEW POLICY EMERGES The first of FERC’s decisions regarding creditworthiness provisions involved tariff proposals submitted by the Tennessee Gas Pipeline Co. and the Northern Natural Gas Co. In its order regarding Tennessee’s proposal, 102 FERC ¶61,075 (2003), FERC found that: Tennessee must afford a noncreditworthy shipper more than five days within which to provide security. It may not confiscate gas left on its system by a defaulting noncreditworthy shipper. It may not collect transportation charges upon suspension of service. It may not require a shipper to confirm that there are no business conditions that could affect the shipper’s financial condition and no outstanding legal proceedings regarding solvency. And it must allow shippers’ prepayments to earn interest. In the companion order regarding Northern’s proposed tariff provisions, 102 FERC ¶61,076 (2003), FERC accepted Northern’s offer to reduce the amount of collateral it could require, from noncreditworthy shippers that wish to continue receiving service, from 12 months’ to three months’ worth of transportation charges. FERC also found that Northern could not require that shippers be free of any pending litigation that might adversely affect their financial condition; that the pipeline must allow shippers’ prepayments to earn interest; and that it must afford shippers more than five business days to provide security. One month after FERC issued its Tennessee and Northern orders — and over mounting criticism from the Interstate Natural Gas Association of America (INGAA), the pipelines’ trade group, as well as from individual companies — FERC pushed its policy one step further. Rather than focus solely on pipelines who voluntarily submit new creditworthiness provisions, FERC made clear that it intended to apply the policy established in the Tennessee/Northern rulings to all pipelines. Invoking its authority under Section 5 of the Natural Gas Act, FERC found sua spontethat the tariff provisions it had previously approved for North Baja Pipeline had since become unlawful. 102 FERC ¶61,239 (2003). Acting without any complaint from North Baja’s shippers, FERC ordered the pipeline to bring its tariff provisions into compliance with the newly established Tennessee/Northern policy. In a holding that reverberated throughout the industry, FERC found that pipelines must restrict the amount of collateral they require from noncreditworthy shippers on an existing pipeline to three months’ worth of transportation charges. A pipeline may, however, require up to 12 months from noncreditworthy shippers who subscribe for capacity on a new system expansion or other new pipeline project. FERC noted that pipelines and their lenders face increased risk with respect to new construction, thus necessitating a higher collateral requirement. Yet that risk, FERC found, is substantially reduced once a pipeline goes into service. CRITICISM MOUNTS Based on the North Baja decision, it appears that FERC has abandoned a case-specific approach in favor of a generic policy that does not consider the unique facts and circumstances facing each pipeline. According to INGAA Chairman Fred Fowler (as reported April 10 in The Energy Daily), FERC’s policy for addressing creditworthiness could indeed end up discouraging pipelines from investing in new infrastructure. One problem is that while FERC is limiting collateral requirements to a mere 12 months for new projects, pipelines are attempting to secure financing for new construction requiring a decades-long financial investment. As a result of FERC’s decision, Fowler argued, pipelines will “have to pay a tremendous risk premium.” Moreover, facing the uncertainty that FERC may now declare already existing tariff provisions unlawful without first scrutinizing an individual pipeline’s situation, pipelines considering new construction may fear that they will be left holding the bag, unable to recoup their investments. Such a result would be antithetical to FERC’s often-stated goal of supporting the development of new infrastructure. Fortunately, the action doesn’t end here. While FERC has recently found that the creditworthiness proposals of the Natural Gas Pipeline Company of America must be made consistent with its Tennessee and Northern orders, 102 FERC ¶61,355 (2003), several other creditworthiness proceedings are currently ongoing, including those involving the Gulf South Pipeline Co. and PG&E Gas Transmission, Northwest Corp. (GTN). In addition, Calpine Energy Services recently filed a complaint against the Southern Natural Gas Co. regarding the level of collateral required for Southern’s pipeline expansion project. The latter proceedings afford FERC an opportunity to review and refine the direction in which it has taken its creditworthiness policy. With several critical creditworthiness proceedings still pending (including the requests for rehearing in the Tennessee, Northern, and North Baja cases), plus Calpine’s complaint awaiting action and the energy standards board’s report due June 1, FERC’s work is far from over. In light of the growing criticism from the pipeline community, FERC may choose to re-evaluate its creditworthiness policy. Its challenge is to craft a policy that protects all industry participants, from power developers with restricted credit to pipelines trying to protect their investment. Only a policy that strikes a balance among energy industry players will adequately address the credit crisis. Stefan M. Krantz is a partner and Debra H. Rednik is an associate in the energy and natural resources practice of Dickstein Shapiro Morin & Oshinsky. They represent North Baja Pipeline and PG&E Gas Transmission, Northwest Corp., in FERC proceedings regarding their creditworthiness provisions. Krantz and Rednik may be reached at [email protected]and [email protected].

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