[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Proposed Rules]
[Pages 8587-8600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4095]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM04-4-000]


Creditworthiness Standards for Interstate Natural Gas Pipelines

February 12, 2004.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission is proposing to amend 
its regulations to require interstate natural gas pipelines to follow 
standardized procedures for determining the creditworthiness of their 
shippers. The proposed regulations are intended to promote consistent 
practices among interstate pipelines and provide shippers with an 
objective and transparent creditworthiness evaluation. In addition, the 
Commission is proposing to incorporate by reference standards 
promulgated by the Wholesale Gas Quadrant of the North American Energy 
Standards Board (NAESB) dealing with creditworthiness requirements for 
pipeline service.

DATES: Comments on the proposed rule are due March 26, 2004.

ADDRESSES: Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. Commenters unable to 
file comments electronically must send an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Office of the 
Secretary, 888 First Street, NE., Washington, DC, 20426. Refer to the 
Comment Procedures section of the preamble for additional information 
on how to file comments.

FOR FURTHER INFORMATION CONTACT:

Jason Stanek, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426; (202) 502-
8403.
Marvin Rosenberg, Office of Markets, Tariffs and Rates, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426; 
(202) 502-8292.
Kay Morice, Office of Markets, Tariffs and Rates, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426; 
(202) 502-6507.

SUPPLEMENTARY INFORMATION:

                            Table of Contents
 
                                                              Paragraph
                                                                 No.
 
I. Background.............................................           2.

[[Page 8588]]

 
II. Discussion............................................           6.
    A. Adoption of WGQ Standards..........................          12.
    B. Criteria for Determining Creditworthiness..........          14.
    C. Collateral Requirements for Non-Creditworthy                 20.
     Shippers.............................................
        1. Collateral for Service on Existing Facilities..          22.
        2. Collateral for Construction Projects...........          26.
            a. Mainline Construction......................          27.
            b. Lateral Line Construction..................          31.
        3. Collateral for Loaned Gas......................          32.
            a. Imbalances.................................          33.
            b. Lending Services...........................          35.
        4. Interest on Collateral.........................          38.
    D. Timeline for Suspension and Termination of Service.          39.
    E. Capacity Release...................................          45.
        1. Creditworthiness Requirements for Replacement            47.
         Shippers.........................................
        2. Rights of Replacement Shipper on Termination of          48.
         Releasing Shipper's Contract.....................
        3. Time for Proffering Collateral for Biddable              51.
         Releases.........................................
        4. Notice to Releasing Shippers...................          59.
        5. Creditworthiness Requirements for Permanent              60.
         Releases.........................................
III. Notice of Use of Voluntary Consensus Standards.......          65.
IV. Information Collection Statement......................          66.
V. Environmental Analysis.................................          72.
VI. Regulatory Flexibility Act Certification..............          73.
VII. Comment Procedures...................................          74.
VIII. Document Availability...............................          77.
 


    1. The Federal Energy Regulatory Commission (Commission) proposes 
to amend Sec. Sec.  284.8 and 284.12 (18 CFR 284.8 and 284.12 (2003)) 
of its open access regulations governing capacity release and standards 
for business practices and electronic communications with interstate 
natural gas pipelines. The Commission is proposing to incorporate by 
reference 10 creditworthiness standards promulgated by the North 
American Energy Standards Board (NAESB) and adopt additional 
regulations related to the creditworthiness of shippers on interstate 
natural gas pipelines. These regulations are intended to benefit 
customers of the pipelines by establishing standardized processes for 
determining creditworthiness across all interstate pipelines.

I. Background

    2. Since Order Nos. 436\1\ and 636\2\, the Commission has 
established terms and conditions relating to the credit requirements 
for obtaining open access service on interstate pipelines in individual 
proceedings. Recently, a number of interstate natural gas pipelines 
have made filings before the Commission to revise the creditworthiness 
provisions in their tariffs. These pipelines claimed that, due to 
increased credit rating downgrades to many energy companies, industry 
attention has focused on issues relating to a pipeline's risk profile 
and its credit exposure. As a result, the pipelines have argued that 
tariff revisions are needed to strengthen creditworthiness provisions 
and minimize the potential exposure to the pipeline and its other 
shippers in the event that a shipper defaults on its obligations.
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    \1\ Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, Order No. 436, FERC Stats. and Regs., Regulations 
Preambles (1982-1985) ] 30,665, at 31,505 (1985).
    \2\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 
636, 57 FR 13267 (April 16, 1992), FERC Stats. and Regs., 
Regulations Preambles (January 1991-June 1996) ] 30,939 at 30,446-48 
(April 8, 1992); order on reh'g, Order No. 636-A, 57 FR 36128 
(August 12, 1992), FERC Stats. and Regs., Regulations Preambles 
(January 1991-June 1996) ] 30,950 (August 3, 1992); order on reh'g, 
Order No. 636-B, 57 FR 57911 (December 8, 1992), 61 FERC ] 61,272 
(1992); reh'g denied, 62 FERC ] 61,007 (1993); aff'd in part and 
remanded in part, United Distribution Companies v. FERC, 88 F.3d 
1105 (D.C. Cir. 1996); order on remand, Order No. 636-C, 78 FERC ] 
61,186 (1997).
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    3. In September 2002, the Commission issued orders that began to 
examine and investigate issues relating to a pipeline's ability to 
determine the creditworthiness of its shippers.\3\ Several parties in 
these proceedings requested that the Commission develop uniform 
guidelines for pipeline creditworthiness provisions. The parties 
claimed that the issuance of creditworthiness guidelines would require 
the pipelines to make good-faith determinations using transparent and 
commercially reasonable methods to assess the credit risks borne by the 
pipeline. The parties further argued that generic guidelines would 
reduce the potential burden faced by customers who otherwise would need 
to comply with inconsistent and overly burdensome credit requirements.
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    \3\ See Tennessee Gas Pipeline Co., 100 FERC ] 61,268 (2002), 
Northern Natural Gas Co., 100 FERC ] 61,278 (2002), and Natural Gas 
Pipeline Co. of America, 101 FERC ] 61,269 (2002).
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    4. The Commission agreed that it could be valuable to develop a 
generic standard for creditworthiness determinations since shippers 
would be able to provide the same documents to every pipeline to obtain 
capacity. The Commission therefore encouraged the parties to initiate 
the standards development process at the Wholesale Gas Quadrant (WGQ) 
of the North American Energy Standards Board (NAESB) to see whether a 
consensus standard could be developed for creditworthiness 
determinations. In addition, the Commission requested that NAESB file a 
report with the Commission by June 2003 indicating whether standards 
had been adopted, or if consensus could not be reached, an account of 
its deliberations, the standards considered, the voting records, and 
the reasons for the inability to reach consensus, so the Commission 
could determine if further action is necessary.
    5. On November 6, 2002, the WGQ Business Practices Subcommittee 
(BPS) initiated the standards development process and eventually 
prepared a

[[Page 8589]]

recommendation of 24 proposed standards to the Wholesale Gas Quadrant's 
Executive Committee of NAESB (WGQ EC).\4\ The WGQ EC, however, was 
unable to reach consensus on the ``package'' of 24 creditworthiness 
standards and adopted only ten of the BPS's proposed standards. 
Subsequently, on June 16, 2003, as supplemented on June 25, 2003, NAESB 
filed a progress report with the Commission in Docket No. RM96-1-000 
containing the approved standards, the voting record, and comments from 
WGQ EC members describing the reasons for their opposition to some of 
the proposed standards, or their abstention. A number of parties also 
filed comments with the Commission after NAESB filed its report.\5\ 
Many of these comments focused on issues relating to creditworthiness 
requirements for capacity release.
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    \4\ A complete list of the 24 proposed standards voted on by the 
WGQ EC, along with the voting record, can be found at: http://www.naesb.org/pdf/wgq_ec060503a1.pdf.
    \5\ Parties filing comments in Docket No. RM96-1-000 include the 
American Gas Ass'n; Consolidated Edison Co. of New York, Inc. and 
Orange and Rockland Utilities, Inc.; Encana Marketing (USA) Inc.; 
KeySpan Delivery Companies; Interstate Natural Gas Ass'n of America; 
Midland Cogeneration Venture, LP; National Fuel Gas Distribution 
Corp.; Reliant Energy Services, Inc.; and Stand Energy Corp.
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II. Discussion

    6. The Commission is proposing to incorporate by reference the 
creditworthiness standards adopted by NAESB. In addition, the 
Commission is proposing to amend its regulations to include its own 
creditworthiness standards as well as creditworthiness requirements for 
capacity release. These standards are intended to promote greater 
efficiency on the national pipeline grid by creating uniform rules 
under which shippers acquire and maintain service on interstate 
pipelines.
    7. In implementing Order Nos. 436 and 636, the Commission sought to 
establish policies regarding credit standards for obtaining open access 
service. However, as became clear after reviewing pipeline tariffs in 
the recent creditworthiness cases, the Commission's policies have at 
times conflicted with each other, or have not been applied 
consistently, resulting in pipeline tariff provisions on 
creditworthiness that are neither consistent nor uniform.
    8. The goal of the Commission in Order Nos. 436 and 636 was to 
create a seamless and integrated pipeline grid that promotes 
competition by enabling shippers to move gas from the most competitive 
supply areas, across multiple pipelines, to the burner tip. Varying and 
overly burdensome credit and collateral requirements on pipelines can 
defeat this goal. If shippers face a myriad of different requirements 
for obtaining or retaining service on individual pipelines, they may be 
unable to easily and efficiently transport gas across the pipeline 
grid. In the past, lack of uniform tariff creditworthiness provisions 
may not have been as critical since the number of pipeline customers 
facing credit issues was small. However, in the current environment in 
which credit is an issue for a number of pipeline customers, standards 
are important to ensuring non-discriminatory and open access service. 
The Commission believes that customers, and pipelines, should be able 
to rely upon common, and reasonable practices and procedures for 
obtaining such open access service.
    9. The 10 adopted WGQ standards provide procedural rules by which 
pipelines should deal with their customers with respect to credit 
issues, such as providing shippers with reasons for requesting credit 
information, procedures for communications between pipelines and 
customers, and the timeline for providing responses to requests for 
credit reevaluation. But the WGQ EC was unable to reach agreement on a 
number of important substantive policy questions relating to 
creditworthiness.
    10. While the WGQ consensus standards process has been invaluable 
in creating business practice and communication standards that have 
benefited the natural gas industry, the Commission recognizes that a 
standards organization composed of representatives from every facet of 
the gas industry may be unable to reach consensus on policy issues that 
have disparate effects on each of the industry segments. In the past 
when the WGQ has been unable to reach consensus on issues concerning 
Commission policy, the Commission has endeavored to resolve the policy 
disputes when standardization is necessary to create a more efficient 
interstate grid.\6\
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    \6\ Standards for Business Practices of Interstate Natural Gas 
Pipelines, Order No. 587-G, 68 FR 20072 (Apr. 23, 1998), FERC Stats. 
& Regs., Regulations Preambles (July 1996-December 2000) ] 31,062 at 
20,668-72 (Apr. 16, 1998) (resolving disputes over the bumping of 
interruptible service by firm service).
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    11. The Commission is therefore proposing regulations governing a 
range of creditworthiness issues to create a uniform and standardized 
policy. These include standards for the information shippers can be 
required to provide pipelines to establish creditworthiness, and a 
requirement that pipelines' creditworthiness determinations be made on 
the basis of objective and transparent criteria, collateral 
requirements for service on existing facilities as well as service 
obtained through pipeline construction, timelines for suspension and 
termination of service, and standards governing credit requirements for 
capacity release transactions. These proposals seek to balance the 
interests of the pipelines in obtaining reasonable assurances of 
creditworthiness against the need to ensure that open access services 
are reasonably available to all shippers. Like other Commission 
standards, the standards proposed here establish the minimum 
requirements that pipelines need to meet; pipelines can still choose to 
propose tariff provisions that are more lenient than the requirements 
contained in the standards.

A. Adoption of WGQ Standards

    12. The Commission proposes to incorporate by reference the ten 
consensus standards \7\ that were passed by the WGQ.\8\ Among the 
consensus standards, a pipeline would be required to state the reason 
it is requesting credit evaluation information from existing shippers. 
Additionally, shippers would be required to acknowledge the receipt of 
a pipeline's request for information for creditworthiness evaluation, 
and the pipeline would be required to acknowledge to the shipper when 
it received that requested information.\9\
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    \7\ Standards 0.3.zB, 0.3.zC, 0.3.zD, 0.3.zE, 0.3.zF, 0.3.zK, 
0.3.zL, 0.3.zQ, 5.3.zD, and 5.3.zF. Request No.: 2003 Annual Plan 
Item 6 (July 28, 2003).
    \8\ Pursuant to the regulations regarding incorporation by 
reference, copies of the creditworthiness standards are available 
from NAESB. The standards can be found in the Final Actions portion 
of the WGQ Web site, http://www.naesb.org/wgq/final.asp. They can 
also be viewed, but not copied, in the Commission's Public Reference 
Room. 5 U.S.C. 552(a)(1); 1 CFR part 51 (2001).
    \9\ The Commission is also proposing technical corrections to 
its regulations, including revising the regulations to reflect 
NAESB's name change and its recent change of address, and to correct 
an incorrect cross reference.
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    13. The WGQ approved the standards under its consensus 
procedures.\10\ As the Commission found in Order No. 587, adoption of 
consensus standards is appropriate because the consensus process helps 
ensure the reasonableness of the standards by requiring that the 
standards draw support from a broad

[[Page 8590]]

spectrum of all segments of the industry. Moreover, since the industry 
itself has to conduct business under these standards, the Commission's 
regulations should reflect those standards that have the widest 
possible support. In Sec.  12(d) of the National Technology Transfer 
and Advancement Act of 1995 (NTT&AA), Congress affirmatively requires 
Federal agencies to use technical standards developed by voluntary 
consensus standards organizations, like NAESB's WGQ, as means to carry 
out policy objectives or activities.\11\
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    \10\ NAESB's voting process first requires a super-majority vote 
of 17 out of 25 members of the WGQ's Executive Committee with 
support from at least two members from each of the five industry 
segments--pipelines, local distribution companies, gas producers, 
end-users, and services (including marketers and computer service 
providers). For final approval, 67% of the WGQ's general membership 
must ratify the standards.
    \11\ Pub L. 104-113, sec. 12(d), 110 Stat. 775 (1996), 15 U.S.C. 
272 note (1997).
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B. Criteria for Determining Creditworthiness

    14. In the recent orders on credit requirements, the Commission has 
found that pipelines must establish clear criteria governing the 
financial data and information shippers must provide to establish their 
creditworthiness as well as use objective criteria for determining 
creditworthiness.\12\ Standardizing the types of information shippers 
have to provide to the pipeline to establish their credit should 
increase a shipper's ability to obtain and retain service on multiple 
pipelines by ensuring that the shipper would not have to assemble 
different packages of documentation for each pipeline. Such standards 
also could benefit pipelines because shippers will be able to more 
quickly respond to credit inquiries by the pipelines.
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    \12\ See Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 41, 
order on rehearing, 103 FERC ] 61,275 at P 40-41 (2003), PG&E Gas 
Transmission, Northwest Corp., 103 FERC ] 61,137 at P 67 (2003).
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    15. The WGQ EC considered, but did not pass, a proposed standard 
(0.3z.A) which would have established a uniform set of documents that 
shippers would have to provide to pipelines, distinguishing between the 
various customer groups that use pipeline services. This standard was 
supported by a majority of voting members on the Executive Committee, 
but failed principally because it did not obtain the required two votes 
from each of the five sectors.\13\ The list of information under this 
standard is as follows:
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    \13\ The vote on this proposed standard was 15 Yes, 3 No, and 3 
Abstentions. To pass, a standard must secure a super-majority of 17 
votes, with at least two votes from each segment. Three members of 
the Producers segment were not present at the meeting. While the 
``Yes'' votes were two votes short of the required 17, the Committee 
did not poll the missing members, because the proposal failed to 
secure the requisite two votes from the Distribution segment.
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    a. Audited Financial Statements;
    b. Annual Report;
    c. List of Affiliates, Parent Companies, and Subsidiaries;
    d. Publicly Available Information from Credit Reports of Credit and 
Bond Rating Agencies;
    e. Private Credit Ratings, if obtained by the shipper;
    f. Bank References;
    g. Trade References;
    h. Statement of Legal Composition;
    i. Statement of Length of Time Business has been in Operation;
    j. Most recent filed statements with the Securities and Exchange 
Commission (or an equivalent authority) or such other publicly 
available information;
    k. For public entities, the most recent publicly available interim 
financial statements, with an attestation by its Chief Financial 
Officer, Controller, or equivalent (CFO) that such statements 
constitute a true, correct, and fair representation of financial 
condition prepared in accordance with Generally Accepted Accounting 
Principles (GAAP) or equivalent;
    l. For non-public entities, including those that are State-
regulated utilities:
    i. The most recent available interim financial statements, with an 
attestation by its CFO that such statements constitute a true, correct, 
and fair representation of financial condition prepared in accordance 
with GAAP or equivalent;
    ii. An existing sworn filing, including the most recent available 
interim financial statements and annual financial reports filed with 
the respective regulatory authority, showing the shipper's current 
financial condition;
    m. For State-regulated utility local distribution companies, 
documentation from their respective State regulatory commission (or an 
equivalent authority) of an authorized gas supply cost recovery 
mechanism which fully recovers both gas commodity and transportation 
capacity costs and is afforded regulatory asset accounting treatment in 
accordance with GAAP or equivalent;
    n. Such other information as may be mutually agreed to by the 
parties;
    o. Such other information as the pipeline may receive approval to 
include in its tariff or general terms and conditions.
    16. After reviewing this proposed standard, the Commission 
considers that, with the exception of item ``o'', this is a uniform 
list of reasonable information, which should provide pipelines with 
sufficient data to make creditworthiness evaluations. However, item 
``o'' would permit pipelines to require non-uniform information and 
defeat the goal of standardization. In order to ensure that the same 
information can be used to establish credit across the pipeline grid, 
the Commission is proposing to require that this list, without item 
``o'', constitute the complete list of information that pipelines can 
require shippers to provide.\14\
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    \14\ Several members of the Distribution segment (the segment 
failing to receive two positive votes), objected to the proposed 
standard because item ``o'' would have permitted pipelines to 
include different requirements in their tariffs. See comments by 
KeySpan Energy and other members of the Distribution segment. The 
Commission's proposal addresses this concern by removing item ``o'' 
from the list of information pipelines may require.
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    17. Process Gas Consumers Group and the American Forest & Paper 
Association filed comments included with NAESB's report stating that 
while they support a standard list of creditworthiness information, 
their support is conditioned on the premise that shippers will not be 
required to unnecessarily provide all the information included on the 
list. The Commission recognizes that not all items on the list are 
applicable to all shippers and is proposing that the pipelines can 
require shippers to provide information from the list only where 
applicable to that shipper.
    18. With respect to the criteria to be used to evaluate a shipper's 
status, the Commission is proposing to require that each pipeline's 
tariff disclose the objective criteria to be used in evaluating a 
shipper's creditworthiness. Requiring the disclosure of the criteria in 
the tariff is necessary to ensure that shippers will know the basic 
standards that a pipeline will apply in determining its 
creditworthiness status. The Commission is also proposing to require a 
pipeline to provide the shipper within five days of a determination 
that a shipper is not creditworthy, upon request, a written explanation 
of such determination.\15\
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    \15\ See Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 46, 
order on rehearing 105 FERC ] 61,120 at P 28 (2003) (explanation 
need be provided only upon a shipper's request); Gulf South Pipeline 
Co., LP, 103 FERC ] 61,129 at P 21 (2003); Northern Natural Gas Co., 
103 FERC ] 61,276 at P 43 (2003).
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    19. Encana Marketing (USA) Inc. submits that rigid creditworthiness 
criteria and ``hard triggers'' should not be included in pipeline 
tariffs because the inclusion of such provisions may prevent the 
pipeline from considering all factors that may be relevant when 
evaluating a shipper's creditworthiness. The Commission is not 
proposing a defined set of criteria for evaluating creditworthiness. 
There may not be a defined set of criteria for evaluating each shipper, 
and the pipelines need to take into account the individual 
circumstances of a shipper in making

[[Page 8591]]

their determinations. The proposed requirement to set forth objective 
criteria in the pipeline's tariff along with the requirement to inform 
the shipper in writing of any adverse determination should permit the 
shipper to protest any such decision to the Commission. The Commission, 
however, seeks comment on whether it should adopt a defined set of 
criteria for determining creditworthiness. Those supporting the 
development of such criteria should include in their comments proposals 
as to the criteria that they believe should be used.

C. Collateral Requirements for Non-Creditworthy Shippers

    20. Since Order Nos. 436 and 636, the Commission's general policy 
has been to permit pipelines to require shippers that fail to meet the 
pipeline's creditworthiness requirements for pipeline service to put up 
collateral equal to three months' worth of reservation charges.\16\ The 
Commission also recognized that in cases of new construction, 
particularly project-financed pipelines,\17\ pipelines and their 
lenders could require larger collateral requirements from initial 
shippers before committing funds to the construction project.\18\ 
However, in approving these larger collateral requirements the 
Commission would often permit the pipeline to include these collateral 
requirements in the pipeline's tariff so that even after the lending or 
other agreement had expired, the larger collateral requirements would 
continue for shippers taking service on the pipeline. Indeed, in one 
case, the Commission approved a tariff provision which provided for 
``security acceptable to [the pipeline's] lenders.''\19\ This tariff 
provision then continued even after the pipeline had refinanced the 
original lending agreement (requiring such collateral), and the 
succeeding lending agreements contained no such provision. As a result 
of these and possibly other determinations (such as acceptance of 
uncontested tariff filings), there appears significant variance in 
pipeline tariff provisions establishing collateral for non-creditworthy 
shippers.\20\
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    \16\ See Florida Gas Transmission Co., 66 FERC ] 61,140 at 
61,261 n.5&6, order vacating prior order, 66 FERC ] 61,376 at 62,257 
(1994); Southern Natural Gas Co., 62 FERC ] 61,136 at 61,954 (1993); 
Valero Interstate Transmission Co., 62 FERC ] 61,197 at 62,397 
(1993); Texas Eastern Transmission Corp., 41 FERC ] 61,373 at 62,017 
(1987); Williams Natural Gas Co., 43 FERC ] 61,227 at 61,596 (1988); 
Pacific Gas Transmission Co., 40 FERC ] 61,193 at 61,622 (1987); 
Tennessee Gas Pipeline Co., 40 FERC ] 61,194 at 61,636 (1987); 
Natural Gas Pipeline Co. of America, 41 FERC ] 61,164 at 61,409, n.4 
(1987); Northern Natural Gas Co., 37 FERC ] 61,272 at 61,822 (1986).
    \17\ Project-financed pipelines are projects in which the lender 
secures its loans to the pipeline by the service agreements 
negotiated with the contract shippers. See Kern River Gas 
Transmission Co., 50 FERC ] 61,069 at 61,145 (1990).
    \18\ Calpine Energy Services, L.P. v. Southern Natural Gas Co., 
103 FERC ] 61,273, reh'g denied, 105 FERC ] 61,033 (2003) (30 
months' worth of reservation charges found to be reasonable for an 
expansion project); North Baja Pipeline, LLC, 102 FERC ] 61,239 at P 
15 (2003) (approving 12 months' worth of reservation charges as 
collateral for initial shippers on new pipeline); Maritimes & 
Northeast Pipeline, L.L.C., 87 FERC ] 61,061 at 61,263 (1999) (12 
months prepayment); Alliance Pipeline L.P., 84 FERC ] 61,239 at 
62,214 (1998); Kern River Gas Transmission Co., 64 FERC ] 61,049 at 
61,428 (1993) (stringent creditworthiness requirements required by 
lenders); Mojave Pipeline Co., 58 FERC ] 61,097 at 61,352 (1992) 
(creditworthiness provisions required by lender); Northern Border 
Pipeline Co., 51 FERC ] 61,261 at 61,769 (1990) (12 months' worth of 
collateral for new project).
    \19\ E Prime, Inc. v. PG&E Gas Transmission, 102 FERC ] 61,062 
at P 26, order on rehearing and compliance, 102 FERC ] 61,289 
(2003).
    \20\ See Northwest Pipeline Corp., FERC Gas Tariff, Third 
Revised Volume No. 1, Fourth Revised Sheet No. 212 (proof of ability 
to pay, satisfactory to Transporter, including advance deposits); 
Questar Pipeline Co., First Revised Volume No. 1, Second Revised 
Sheet No. 70 (payment for six months' service); Centerpoint Energy 
Gas Transmission Co., Sixth Volume No 1, Original Sheet No. 475 (six 
months' contract demand).
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    21. The Commission is proposing here to standardize the collateral 
requirements applicable to shippers who fail to meet the 
creditworthiness standards of the pipeline's tariff.\21\ This proposal 
is intended to ensure that shippers using multiple pipelines will not 
be exposed to disparate collateral requirements depending on which 
pipelines they choose to use.
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    \21\ The Commission is not proposing any changes in alternative 
methods of satisfying creditworthiness standards, such as parental 
or third-party guarantees of payment.
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1. Collateral for Service on Existing Facilities
    22. For shippers seeking service on existing pipeline facilities, 
the Commission proposes to continue its traditional policy of requiring 
no more than the equivalent of three months' worth of reservation 
charges. The three months of reservation charges reasonably balances 
the risks to the pipeline from potential contract default against the 
need under open access service to ensure that existing pipeline 
services are reasonably available to all shippers. The three months 
corresponds to the length of time it takes a pipeline to terminate a 
shipper in default and be in a position to remarket the capacity.\22\ 
Three months' worth of collateral therefore protects the pipeline 
against revenue loss while it completes the termination process and 
puts the pipeline in a position to remarket the capacity. The 
Commission views the risk of remarketing capacity as a business risk of 
the pipeline which is reflected in its rate of return on equity.\23\
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    \22\ The three months for termination are as follows. The first 
month's collateral reflects the practice of billing shippers after 
the close of the prior month. See 18 CFR 284.12 (a)(1)(iiii), 
Standard 3.3.14 (billing by the 9th business day after the end of 
the production month). The second month accounts for the time period 
given the shipper to pay, and an opportunity to cure a default. The 
third month reflects the requirement that the pipeline provide 30 
days notice prior to termination. See Northern Natural Gas Co., 102 
FERC ] 61,076 at P 49, n.10; 18 CFR 154.602 (2003).
    \23\ See Ozark Gas Transmission Co., 68 FERC ] 61,032 at 61,107-
108 (1994) (business and financial risk determine where the pipeline 
should be placed within the zone of reasonableness); Williston Basin 
Interstate Pipeline Co., 67 FERC ] 61,137 at 61,360 (1994) (``Bad 
debts are a risk of doing business that is compensated through the 
pipeline's rate of return'').
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    23. The Commission requests comment on whether, as a variant of 
this approach, pipelines should be permitted to require a non-
creditworthy shipper to provide an advance payment for one month of 
service.\24\ The pipeline could then require the shipper to post 
collateral to cover the additional two months necessary to terminate 
the shipper's contract. Such an approach would recognize that non-
creditworthy customers in other industries are frequently required to 
provide advance payment for services.
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    \24\ See Trailblazer Pipeline Co., 103 FERC ] 61,225 at P 42 
(2003).
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    24. The Commission also requests comment on whether it should 
permit pipelines to take a shipper's creditworthiness and the extent of 
its collateral into account when the pipeline is allocating available 
firm capacity among various bidders. The Commission has allowed 
pipelines to allocate available capacity based on the highest valued 
bid for the capacity, without distinction as to customer class.\25\ A 
bid by a creditworthy customer, or one that is willing to put up a 
larger amount of collateral, would ordinarily appear to be of more 
value than a bid by a non-creditworthy customer, or one willing to put 
up only the required three months' worth of collateral. For instance, a 
10-year bid by a creditworthy customer could well be considered more 
valuable than a 25-year bid by a non-creditworthy customer. The 
Commission, therefore, requests

[[Page 8592]]

comment on whether it should permit the pipelines to implement a non-
discriminatory method of considering credit status as part of a bidding 
mechanism. Under such an approach, there would be two standards for 
collateral: (1) The traditional three-month collateral requirement for 
interruptible service and for an existing shipper to retain service 
after a change in credit status; and (2) a potentially larger 
collateral requirement that can be applied when there are bids for new 
service.\26\
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    \25\ See Tennessee Gas Pipeline Co., 76 FERC ] 61,101 at 61,518 
(1996) (accepting NPV formula for allocating capacity, aff'd, 
Process Gas Consumers Group v. FERC, 292 F.3d 831 (D.C. Cir. 2002) 
(affirming no length of contract cap for NPV bids); Texas Eastern 
Transmission Corp., 79 FERC ] 61,258 (1997), aff'd on rehearing, 80 
FERC ] 61,270 (1997) (use of net present value to allocate 
capacity), aff'd, Municipal Defense Group v. FERC, 170 F.3d 197 
(D.C. Cir. 1999) (finding use of NPV allocation method not unduly 
discriminatory when applied to small customers seeking to expand 
service).
    \26\ Different standards for retention and acquisition of 
capacity may well be justified given the statutory protections 
against abandonment of service, and the lack of already established, 
entrenched interests when shippers are in competition for available 
service. See Process Gas Consumers Group v. FERC, 292 F.3d 831, 838 
(D.C. Cir. 2002), (affirming; Tennessee Gas Pipeline Co., 94 FERC ] 
61,097 at 61,400 (2001)).
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    25. The comments on this issue should address whether such a 
proposal is consistent with open access service and practical methods 
by which pipelines could apply non-discriminatory criteria in seeking 
to value a shipper's credit position, including whether pipelines 
should be permitted to require bidders to increase their collateral 
offerings when competing for available capacity with creditworthy 
shippers and what outside limits (e.g., six months or one year of 
reservation charges) should be placed on collateral requirements before 
considering bids equal in value.
2. Collateral for Construction Projects
    26. For construction projects, the Commission proposes to continue 
its policy of permitting larger collateral requirements. Section 7 of 
the Natural Gas Act does not obligate pipelines to build new facilities 
for shippers.\27\ If pipelines are prevented from requiring collateral 
from initial subscribers sufficient to protect their investments in new 
capacity requested by shippers, the result may be that pipelines would 
decide not to construct needed facilities, or that the cost of capital 
for the pipeline itself would increase, raising rates to other 
shippers. Pipelines, as well as their lenders, therefore have a 
legitimate interest in ensuring a reasonable amount of collateral from 
the initial shippers supporting the project to ensure, prior to the 
investment of significant resources in the project, that they can 
protect that investment in the event of a potential shipper 
default.\28\ Construction projects can be of two types, mainline 
construction, and lateral line construction, and different collateral 
requirements are proposed for each type.
a. Mainline Construction
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    \27\ Panhandle Eastern Pipe Line Co. v. FERC, 204 F.2d 675 (3rd 
Cir. 1953); Panhandle Eastern Pipe Line Co., 91 FERC ] 61,037 at 
61,141-42 (2000).
    \28\ See PG&E Gas Transmission, Northwest Corp., 103 FERC ] 
61,137 at P 33 (2003).
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    27. The Commission has found that pipelines and their shippers 
should negotiate appropriate risk sharing agreements with respect to 
collateral requirements for mainline construction projects in their 
precedent agreements, so that any disputes over the collateral 
requirements can be resolved in the pipeline's certificate proceeding, 
rather than after the pipeline has committed the funds and the project 
is built.\29\ For mainline construction, the Commission is proposing 
that the pipeline's collateral requirement must reasonably reflect the 
reasonable risk of the project, particularly the risk to the pipeline 
of remarketing the capacity should the initial shipper default.\30\ 
However, under no circumstance, should the collateral exceed the 
shipper's proportionate share of the project's cost.
---------------------------------------------------------------------------

    \29\ See Calpine Energy Services, L.P. v. Southern Natural Gas 
Co., 103 FERC ] 61,273 at P 30-34 and n.21 (2003).
    \30\ See Calpine Energy Services, L.P. v. Southern Natural Gas 
Co., 103 FERC ] 61,273 at P 31 (2003) (approving 30 month collateral 
requirement based on the risks faced by the pipeline).
---------------------------------------------------------------------------

    28. The collateral requirements would apply only to the initial 
shippers on the project, because it is their contracts that support the 
construction. The collateral requirements would continue to apply to 
these initial shippers even after the project goes into service, since 
the collateral is designed to ensure payment of their reservation 
charges. The specifics of the pipeline's and shipper's risk sharing 
agreement are more appropriately negotiated and agreed to in the 
context of precedent agreements that may be reviewed in a certificate 
proceeding. The Commission is therefore proposing to require that all 
collateral agreements for construction be determined before the project 
is started. Requiring advance agreement as to the collateral for 
construction projects ensures that if there are disputes over the 
extent of collateral, they can be brought to the Commission's attention 
before the pipeline invests the funds to initiate construction.\31\ In 
the absence of any specified collateral requirement, the pipeline's 
standard creditworthiness provisions would apply once the facilities go 
into service.
---------------------------------------------------------------------------

    \31\ See Calpine Energy Services, L.P. v. Southern Natural Gas 
Co., 105 FERC ] 61,033 at P 24 (changes in collateral requirements 
need to be known prior to the start of the construction project).
---------------------------------------------------------------------------

    29. The pipeline would also be required to reduce the amount of 
collateral it holds as the shipper's contract term is reduced.\32\ Once 
the contractual obligation is retired, the standard creditworthiness 
provisions of the pipeline's tariff would apply. In addition, in the 
event of a default by an initial shipper, the pipeline will be required 
to reduce the collateral it retains by mitigating damages.\33\
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    \32\ See Natural Gas Pipeline Co. of America, 102 FERC ] 61,355 
at P 80-85; PG&E Northwest Corp., 103 FERC ] 61,137 at P 33, n.18, 
order on rehearing, 105 FERC ] 61,382 at P 64 (2003).
    \33\ One method of mitigation would be for the pipeline to 
determine its damages by taking the difference between the highest 
net present value bid for the capacity and the net present value of 
the remaining terms of the shipper's contract. The pipeline could 
then retain as much of the collateral as necessary to cover the 
damages. Pipelines could also develop alternative measures for 
determining mitigation.
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    30. Further, since the collateral requirements for mainline 
construction relate to the collateral from the initial subscribers to a 
project, the Commission will no longer permit pipelines to place these 
requirements in the pipeline's tariff to be applied generally to 
shippers seeking service.\34\ Once the facilities go into service, any 
subsequent shippers seeking service using these facilities will have 
the standard three-month collateral requirement applied to their 
request for service. For example, if an initial shipper on a project 
defaults, the pipeline faces its usual risk of remarketing that 
capacity. The subsequent shippers seeking to buy the now-available 
capacity should, therefore, be treated no differently than shippers 
seeking to purchase available, non-expansion capacity.
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    \34\ See North Baja Pipeline, LLC, 102 FERC ] 61,239 at P 15 
(2003).
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b. Lateral Line Construction
    31. For lateral line construction,\35\ the Commission proposes, 
consistent with its current policy, to allow pipelines to require 
collateral up to the full cost of the project.\36\ Unlike mainline 
expansions, lateral lines are built to connect one or perhaps a few 
shippers, and the facilities will not be of significant use to other 
potential shippers. The likelihood of the pipeline remarketing that 
capacity in the event of a default by the shipper, therefore, is far 
less than for mainline construction. Because lateral line construction 
policies are part of a pipeline's tariff, collateral requirements for 
such projects

[[Page 8593]]

should be included in the pipeline's tariff.
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    \35\ A lateral line includes facilities as defined in 18 CFR 
154.109(b) and 18 CFR 157.202 (2003).
    \36\ See Natural Gas Pipeline Co. of America, 102 FERC ] 61,355 
at P 80-85 (2003) (allowing pipeline to request security in an 
amount up to the cost of the new facilities from its customers prior 
to commencing construction of new interconnecting facilities). See 
also Panhandle Eastern Pipe Line Co., 91 FERC ] 61,037 at 61,141 
(2000).
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3. Collateral for Loaned Gas
    32. In three recent orders, the Commission permitted pipelines to 
impose collateral requirements with respect to gas that shippers borrow 
from the pipeline, either through imbalances \37\ or the use of lending 
services such as park and loan services,\38\ to protect itself from the 
risk that the loaned gas might not be returned. Including the value of 
loaned gas in the collateral protects pipelines and their customers 
against the risk of a shipper withdrawing gas from the system without 
replacing or paying for it, and the Commission has found that a 
pipeline's desire to cover the value of its gas is reasonable. The 
Commission requests comment on whether it should adopt standards 
governing collateral for loaned gas with respect to imbalances as well 
as with respect to services permitting the borrowing of gas, such as 
park and loan services.
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    \37\ See Gulf South Pipeline Co., LP, 103 FERC ] 61,129 at P 45-
46 (2003) (Gulf South).
    \38\ See North Baja Pipeline, LLC, 102 FERC ] 61,239 at P 11, 
order on reh'g, 105 FERC ] 61,374 at P 36-37 (2003) (North Baja); 
and PG&E Gas Transmission, Northwest Corp., 103 FERC ] 61,137 at P 
42-44, order on reh'g, 105 FERC ] 61,382 at P 65-70 (2003) (GTN).
---------------------------------------------------------------------------

a. Imbalances
    33. In Gulf South the Commission allowed the pipeline to use a non-
creditworthy shipper's highest monthly imbalance over the most recent 
12-month period on which to base the amount of collateral it could 
require for gas that is loaned to the shipper through imbalances. For 
new shippers, the valuation would be based on ten percent of a 
shipper's estimated monthly usage multiplied by the estimated imbalance 
rate. Gulf South explained that it proposed 10 percent of a projected 
month's volume as an imbalance surrogate for new shippers because its 
customers can incur up to a 10 percent imbalance without incurring 
imbalance penalties.\39\
---------------------------------------------------------------------------

    \39\ Gulf South at P 44.
---------------------------------------------------------------------------

    34. The Commission requests comment on whether to adopt as a 
general standard the one-month collateral requirement for imbalances by 
non-creditworthy shippers, or whether, due to variations in imbalance 
provisions, such determinations should be made on a case-by-case basis. 
Comments should address the method of calculating the imbalance (e.g., 
the highest monthly imbalance over the last 12 months), and how 
collateral should be determined for new shippers without an imbalance 
history. For instance, should imbalances for new shippers be based on 
estimates of usage and tolerance levels, as in Gulf South, or an amount 
that may vary as the shipper accumulates imbalances? For example, a 
shipper could be required to provide no collateral for the first month, 
and then be required to provide collateral based on its first month's 
imbalance in the second month. After that, the amount of collateral 
could be updated as a track record is developed. Comments also should 
address the gas or index price that would be used to determine the 
collateral and how frequently collateral should change as a result of 
changes in the gas or index price.
b. Lending Services
    35. With regard to park and loan (PAL) service, the Commission's 
decisions in North Baja and GTN permitted these pipelines to require 
collateral for any gas it loans to shippers under its PAL service. In 
these cases, the Commission allowed the pipelines to require collateral 
up to the shipper's maximum contract quantity multiplied by a reported 
per unit price. The Commission noted, however, that these PAL services 
may be different from PAL services offered by other pipelines in that 
they specify a total contract quantity rather than a maximum daily 
quantity.\40\
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    \40\ North Baja, 105 FERC ] 61,374 at P 37.
---------------------------------------------------------------------------

    36. The Commission requests comments on how to establish collateral 
requirements for PAL and other lending services. In particular, 
comments should address whether non-creditworthy shippers should be 
permitted to provide a certain amount of collateral and be able to 
borrow gas only up to the amount of the collateral. This is similar to 
a provision that was adopted in PJM, whereby PJM would be permitted to 
limit a market participant's ability to submit a bid that exceeds that 
participant's credit exposure.\41\ Similarly, the Commission accepted a 
proposal from PG&E allowing its interruptible transportation shippers 
to place a cash deposit with the pipeline and then have service up to 
the exhaustion of the defined balance account. Under this provision, 
unless the account is replenished by the shipper, service terminates 
when the balance becomes zero.\42\ In this regard, comments should 
address, as discussed above, the gas index price that would be used to 
determine the collateral and how frequently collateral should change as 
a result of changes in the gas or index price, as well as the issue of 
when collateral should be returned to a non-creditworthy shipper that 
no longer borrows gas.
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    \41\ PJM Interconnection, L.L.C., 104 FERC ] 61,309 (2003) (PJM) 
(permitting PJM to require sufficient collateral to cover the level 
of financial risk that may be incurred when a market participant 
places a virtual bid in PJM's day-ahead energy market.)
    \42\ See GTN, 105 FERC ] 61,382 at P 14.
---------------------------------------------------------------------------

    37. The Commission also requests comment on whether there may be 
other lending services for which collateral could be appropriate and 
whether, given the distinctions among PAL services, collateral 
determinations would be better addressed in individual cases where the 
Commission can consider the nature of the service being provided.
4. Interest on Collateral
    38. The Commission proposes to require pipelines to offer shippers 
the opportunity to earn interest on collateral payments. Pipelines 
could satisfy this requirement either by holding the collateral itself 
or allowing the shipper to establish an interest-bearing escrow account 
where the principal can be accessed by the pipeline, but from which 
interest is paid to the shipper.\43\ If the pipeline holds the 
collateral, it would pay interest based on the Commission's interest 
rate.\44\
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    \43\ See Northern Natural Gas Co., 102 FERC ] 61,076 at P 38-39, 
order on compliance and rehearing, 103 FERC ] 61,276 at P 46-47 
(2003).
    \44\ 18 CFR 154.501(d). See Tennessee Gas Pipeline Co., 103 FERC 
] 61,275 at P 21 (2003).
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D. Timeline for Suspension and Termination of Service

    39. Since the advent of open-access service with pre-granted 
abandonment, the Commission has permitted pipelines to suspend and 
terminate service when shippers default on contractual obligations. 
Although pipeline tariffs are not always clear on this point, 
suspension of service refers to the stoppage of transportation service, 
while termination of service reflects the pipeline's ability to cancel 
the contractual obligation with the shipper.\45\ In some cases, for 
instance, the Commission has required pipelines to provide 30 days 
notice prior to suspension of service.\46\
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    \45\ See Northern Natural Gas Co., 103 FERC ] 61,276 at P 51-56 
(2003); Kinder Morgan Interstate Gas Transmission LLC, 102 FERC ] 
61,230 at P 8 (2003); Columbia Gulf Transmission Corp., 79 FERC ] 
61,087 at 61,408 (1997).
    \46\ See Columbia Gas Transmission Corp., 64 FERC ] 61,060 at 
61,556 (1993); Panhandle Eastern Pipe Line Co., 61 FERC ] 61,076 
(1992).
---------------------------------------------------------------------------

    40. In the recent orders on creditworthiness, the Commission has 
sought to revise its policies and the timeline applicable to 
termination and suspension of service to take into account both the 
needs of the pipelines to be able to avoid future losses from

[[Page 8594]]

defaulting or non-creditworthy shippers as well as the needs of the 
shippers to be able to have a reasonable time period in which to obtain 
the needed collateral.\47\ The Commission, for instance, accepted 
tariff provisions that would permit pipelines to suspend or terminate 
service for failure to post required collateral.\48\
---------------------------------------------------------------------------

    \47\ Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 18 
(2003), Northern Natural Gas Co., 102 FERC ] 61,076 at P 43-50 
(2003), Natural Gas Pipeline Co. of America, 102 FERC ] 61,355 at P 
52 (2003), Gulf South Pipeline Co., LP, 103 FERC ] 61,129 at P 49-52 
(2003).
    \48\ Northern Natural Gas Co., 102 FERC ] 61,076 at P 43 (2003) 
(permitting pipeline to add provision for suspension or termination 
for failure to provide collateral); Tennessee Gas Pipeline Co., 102 
FERC ] 61,075 at P 16-19 (2003) (permitting provision for suspension 
or termination for failure to provide collateral).
---------------------------------------------------------------------------

    41. Under the proposed regulation, a pipeline may suspend the 
provision of service upon a shipper's default on its obligations or 
upon a finding that a shipper is no longer creditworthy. When a shipper 
is no longer creditworthy, the pipeline may not terminate or suspend 
the shipper's service without providing the shipper with an opportunity 
to satisfy the collateral requirements. In this circumstance, the 
shipper must be given at least five business days within which to 
provide advance payment for one month's service, and must satisfy the 
collateral requirements within 30 days. Upon default, where the shipper 
is permitted under the pipeline's tariff to continue service if it 
posts the required collateral,\49\ the same timetable must be applied 
(a minimum of five business days to provide one month's advance 
payment, and 30 days to satisfy the creditworthiness requirements). If 
the shipper fails to satisfy these requirements, service may be 
suspended immediately.
---------------------------------------------------------------------------

    \49\ See, e.g., Natural Gas Pipeline Co. of America, 102 FERC ] 
61,355 at P 36-40 (2003) (Providing that pipeline may determine to 
suspend service to a defaulting shipper upon providing 15 days of 
notice. If defaulting shipper commits a subsequent default within 
six months after the initial default, pipeline may suspend service 
upon a shorter notice period.)
---------------------------------------------------------------------------

    42. Under the proposed regulation, after a shipper either defaults 
or fails to provide the required collateral, pipelines would need to 
provide the shipper and the Commission with 30 days notice prior to 
terminating the shipper's contract.\50\ This approach provides an 
appropriate balance between the shipper's ability to obtain required 
collateral and the pipeline's need for protection against the 
possibility of default by a non-creditworthy shipper.
---------------------------------------------------------------------------

    \50\ See 18 CFR 154.602 (2003) (requiring 30 days of advance 
notice to the customer and the Commission prior to contract 
termination).
---------------------------------------------------------------------------

    43. Consistent with its recent orders, the Commission's policy will 
not allow a pipeline to bill a firm shipper for transportation charges 
while service is suspended.\51\ As the Commission explained in these 
cases, the non-breaching party to a contract must elect whether to 
continue the contract or suspend the contract, but it cannot suspend 
its performance while requiring performance by the other party. The 
pipelines retain full control of the shipper's obligation to pay. The 
pipeline can elect to suspend service or continue to provide service 
and sue the shipper for consequential, unmitigated damages caused by 
its contractual breach. When pipelines terminate service, they no 
longer can bill monthly reservation charges, and there appears no 
reason to treat suspension of service differently.
---------------------------------------------------------------------------

    \51\ Tennessee Gas Pipeline Co., 105 FERC ] 61,120 at P 10-14 
(2003).
---------------------------------------------------------------------------

    44. The Commission is proposing here to permit pipelines the added 
remedy of suspension of service on shorter notice than termination of 
service. But the provision of such added protection does not warrant 
providing the pipeline with the right to charge for service during 
suspension when it would not have that right if service is terminated. 
For instance, a shipper's contractual breach may consist only of 
failing to post required collateral due to a change in its 
creditworthiness evaluation. In this situation, the pipeline may deem 
the loss of creditworthiness sufficient to suspend service on short 
notice in order to protect against the incurrence of additional 
obligations. But the pipeline should not be given added incentive to 
suspend service by being protected against financial loss in the 
meantime. It must decide which remedy to elect: suspension of service 
or continuation of the contract and the shipper's obligation to pay.

E. Capacity Release

    45. Since Order No. 636, the Commission has held that in capacity 
release situations, both the releasing and replacement shippers must 
satisfy a pipeline's creditworthiness requirements.\52\ The Commission 
further found that releasing shippers could not establish 
creditworthiness provisions for released capacity different from those 
in the pipeline's tariff.\53\ As the Commission explained, the same 
criteria should be applied to released capacity and pipeline capacity 
in order to ensure that all capacity, including released capacity, is 
available on an open access, non-discriminatory basis to all 
shippers.\54\ However, these requirements were not included in the 
capacity release regulations.
---------------------------------------------------------------------------

    \52\ See Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation; and 
Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, Order No. 636-A, FERC Statutes and Regulations, 
Regulations Preambles, January 1991-June 1996 ] 30,950 at 30,588 
(1992). Under the capacity release regulations, 18 CFR 284.8(f) 
(2003), the releasing shipper remains obligated under its contract 
to the pipeline, and must, therefore, satisfy the creditworthiness 
and other obligations associated with that contract, regardless of 
how many subordinate releases take place. For example, even if a 
replacement shipper is creditworthy, it may default and the 
releasing shipper would be responsible for payment. Moreover, given 
the ability of releasing shippers to recall and segment releases, 
both the releasing and replacement shippers need to be creditworthy 
to ensure their respective obligations.
    \53\ See El Paso Natural Gas Co., 61 FERC ] 61,333 at 62,299 
(1992); Panhandle Eastern Pipe Line Co., 61 FERC ] 61,357 at 62,417 
(1992); Texas Eastern Transmission Corp., 62 FERC ] 61,015 at 61,098 
(1993); and CNG Transmission Corp., 64 FERC ] 61,303 at 63,225 
(1993).
    \54\ See Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 62 
(2003) (a releasing shipper cannot impose creditworthiness 
conditions on a replacement shipper that are different from the 
creditworthiness conditions imposed by the pipeline.)
---------------------------------------------------------------------------

    46. In the recent creditworthiness cases, and in the WGQ 
discussion, additional issues regarding creditworthiness conditions 
with respect to capacity release have been raised. These issues have 
included: (1) The effect on replacement shippers of a termination of a 
releasing shipper's contract; \55\ (2) the provision of notice to 
releasing shippers of a change in the creditworthiness status of the 
replacement shipper; \56\ (3) the timing of a non-creditworthy 
replacement shipper's obligation to provide collateral in order to bid 
on pipeline capacity; \57\ (4) the timing of notice provided to 
releasing shippers of changes to a replacement shipper's credit status; 
and (5) creditworthiness standards for replacement shippers under 
permanent capacity releases. In order to assure uniformity across 
pipelines, the Commission proposes to amend its capacity release 
regulations in each of the first three areas. The Commission, however, 
will not propose a regulation

[[Page 8595]]

to specify the timing of notice to releasing shippers of changes in a 
replacement shipper's credit status since an adequate consensus 
standard was passed by the WGQ. Additionally, the Commission is not 
proposing to amend its regulations regarding creditworthiness standards 
applicable to permanent capacity releases.
---------------------------------------------------------------------------

    \55\ Tenaska Marketing Ventures v. Northern Border Pipeline Co., 
99 FERC ] 61,182 (2002). See Texas Eastern Transmission, L.P., 101 
FERC ] 61,071 at P 6 (2002); Trailblazer Pipeline Co., 101 FERC ] 
61,405 at P 32 (2002); Northern Border Pipeline Co., 100 FERC ] 
61,125 (2002); Natural Gas Pipeline Co. of America, 100 FERC ] 
61,269 at P 7-19 (2002); Canyon Creek Compression Co., 100 FERC ] 
61,283 (2002); Kinder Morgan Interstate Gas Transmission LLC, 100 
FERC ] 61,366 (2002).
    \56\ Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at P 78 
(2003).
    \57\ Dominion Cove Point LNG, LP, 104 FERC ] 61,184 at P 7-8, 
order on compliance, 105 FERC ] 61,225 (2003).
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1. Creditworthiness Requirements for Replacement Shippers
    47. The Commission is proposing to include a regulation 
establishing its existing policy that a pipeline must apply the same 
creditworthiness requirements to a replacement shipper as it would if 
that shipper were applying for comparable capacity with the pipeline 
outside of the capacity release process. This regulation would ensure 
that a releasing shipper could not impose creditworthiness standards on 
a replacement shipper that are different from the creditworthiness 
standards imposed by the pipeline. Since the replacement shipper has 
obligations to the pipeline (usage charges, penalties, imbalance 
cashouts, etc.) that are not covered by the releasing shipper's 
underlying contract, the pipeline does have a legitimate interest in 
assuring sufficient creditworthiness (or collateral) to cover the 
replacement shipper's obligations. In addition, the application of 
creditworthiness requirements to replacement shippers protects 
releasing shippers, since it provides them with some assurance of 
payment for the release in the event the replacement shipper 
defaults.\58\
---------------------------------------------------------------------------

    \58\ In the event of a default by a replacement shipper, 
pipelines would be required to credit to a releasing shipper any 
collateral from the replacement shipper that is not used to defray 
the replacement shipper's obligation to the pipeline.
---------------------------------------------------------------------------

2. Rights of Replacement Shipper on Termination of Releasing Shipper's 
Contract
    48. The Commission proposes to permit a pipeline to terminate a 
release of capacity to the replacement shipper if the releasing 
shipper's service agreement is terminated, provided that the pipeline 
provides the replacement shipper with an opportunity to continue 
receiving service if it agrees to pay, for the remaining term of the 
replacement shipper's contract, the lesser of: (1) The releasing 
shipper's contract rate; (2) the maximum tariff rate applicable to the 
releasing shipper's capacity; or (3) some other rate that is acceptable 
to the pipeline.
    49. This provision establishes a reasonable balance between the 
pipeline and replacement shippers in the event a releasing shipper's 
contract is terminated. Although the replacement shipper has a contract 
with the pipeline, the releasing shipper, not the pipeline, has 
established the rate for the release. Under a release transaction, the 
contract of the releasing shipper serves to guarantee that the pipeline 
receives the original contract price for the capacity. Once the 
releasing shipper's contract has been terminated, the pipeline may no 
longer wish to continue service to the replacement shipper at a lower 
rate, and should have the opportunity to remarket the capacity to 
obtain a higher rate.\59\ On the other hand, the replacement shipper 
also has an investment in the use of the capacity, and should, 
therefore, have first call on retaining the capacity if it is willing 
to provide the pipeline with the same revenue as the releasing shipper. 
Under this proposal, therefore, the replacement shipper is given the 
opportunity to retain the capacity by paying the releasing shipper's 
contract rate or the maximum rate for the remaining term of the 
contract.
---------------------------------------------------------------------------

    \59\ The pipeline is not required to terminate the replacement 
shipper's contract. It could decide to continue to provide service 
under that contract at the rate prescribed in the release. In that 
event, the replacement shipper would not have the right to terminate 
its contractual obligation since it is receiving the full service 
for which it contracted. See Tenaska Marketing Ventures v. Northern 
Border Pipeline Co., 99 FERC ] 61,182 (2002) (replacement shipper 
could not cancel release contract upon bankruptcy of releasing 
shipper).
---------------------------------------------------------------------------

    50. With respect to segmented releases, the Commission proposes to 
apply the same general policy. A replacement shipper would have the 
right to continue service if it agreed to take the full contract path 
of the releasing shipper at the rate paid by the releasing shipper. As 
the Commission found in National Fuel:

    [W]e do not agree with DETM that the replacement shipper holding 
a geographically-segmented portion of the defaulted releasing 
shipper's capacity should be able to retain that geographic segment 
of capacity. The pipeline did not negotiate the release of the 
segment and should not be held to that segmented release agreement 
once the releasing shipper's contract terminates. The replacement 
shipper in that instance should be required to pay for the full 
capacity path of the defaulted shipper at the lower of the rate the 
defaulted shipper paid or the maximum rate applicable to the 
defaulted shipper's full capacity path.\60\
---------------------------------------------------------------------------

    \60\ National Fuel Gas Supply Corp., 101 FERC ] 61,063 at P12 
(2002).

    In the case of multiple replacement shippers with geographically 
segmented releases, a pipeline would have to propose a reasonable 
method of allocating capacity among them if they each matched the 
releasing shipper's rate for the full rate.\61\
---------------------------------------------------------------------------

    \61\ In the event of such multiple bids by replacement shippers, 
regardless of the allocation method used by the pipeline, the 
shippers should be able to replicate their geographically segmented 
capacity by releasing segments of capacity to each other.
---------------------------------------------------------------------------

3. Time for Proffering Collateral for Biddable Releases
    51. The Commission proposes to require pipelines to establish 
procedures that allow releasing shippers to require potential 
replacement shippers to post any necessary collateral prior to the 
awarding of capacity. In Order No. 637, the Commission required 
pipelines to provide for scheduling equality between released capacity 
and pipeline capacity. \62\ As part of establishing such equality, the 
Commission encouraged pipelines to establish procedures by which 
replacement shippers could obtain pre-approval of creditworthiness.\63\ 
The Commission found that the releasing shipper should have the option 
whether to: (1) require bidders for its released capacity to pre-
qualify under the pipeline's creditworthiness standards, or (2) waive 
the prequalification requirement and post a bond or assume liability 
for the usage charge in the event of the replacement shipper's 
default.\64\
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    \62\ Regulation of Short-Term Natural Gas Transportation 
Services and Regulation of Interstate Natural Gas Transportation 
Services, FERC Stats. & Regs., Regulations Preambles (July 1996-
December 2000) ] 31,091 at 31,297 (Feb. 9, 2000); order on 
rehearing, Order No. 637-A, FERC Stats. & Regs., Regulations 
Preambles (July 1996-December 2000) ] 31,099 (May 19, 2000); order 
on rehearing, Order No. 637-B, 92 FERC ] 61,062 (July 26, 2000); 
aff'd in part and remanded in part, Interstate Natural Gas Ass'n of 
America v. FERC, 285 F.3d 18, (D.C. Cir. Apr. 5, 2002); order on 
remand, 101 FERC ] 61,127 (2002).
    \63\ In order to be ``pre-qualified'' the pipeline would have 
determined that the shipper bidding on the release offer is either: 
(1) Creditworthy as defined in the pipeline's tariff; or (2) 
sufficiently collateralized (i.e., the shipper has posted a level of 
collateral, at the time it submits its bid, that would cover the 
amount of capacity on which it is bidding, up to a maximum of three 
months' worth of reservation charges.)
    \64\ See Dominion Cove Point LNG, LP, 104 FERC ] 61,184 at P 7-8 
(2003).
---------------------------------------------------------------------------

    52. But the Commission did not address how a non-creditworthy 
replacement shipper could pre-qualify to bid on releases in the event 
it would have to post collateral in order to satisfy the pipeline's 
creditworthiness standards. Although shippers easily can pre-qualify by 
meeting the pipeline's creditworthiness requirements, providing 
collateral on an ongoing basis is more difficult. For example, the 
amount of capacity posted for bid on each pipeline will change over 
time,

[[Page 8596]]

and the replacement shipper, therefore, would not be able to determine 
how much collateral to maintain on an ongoing basis on any pipeline. 
Moreover, if the replacement shipper seeks to obtain capacity on 
multiple pipelines, maintaining collateral on each pipeline on an 
ongoing basis to cover any potential bids could be financially 
impractical.
    53. By the same token, the Commission did not address when non-
creditworthy shippers should be required to post collateral and how 
capacity would be allocated in a bidding situation when the replacement 
shipper is not creditworthy. Allowing the replacement shipper winning 
the bid to post collateral after the award of capacity could compromise 
the speed and certainty of capacity release transactions the Commission 
sought to achieve in Order No. 637. Under the capacity release 
standards of the WGQ, releases of less than one year, subject to bid, 
are only posted once a day, at 12 p.m. CCT \65\, with the award of 
capacity communicated by 2 p.m., unless there is a match involved, in 
which case the award is posted by 3 p.m.\66\ If the replacement shipper 
were permitted to post collateral after the final award, and it was 
unable to do so quickly, the capacity release would not take place, 
because the releasing shipper would be unable to repost the capacity 
until the next day. Thus, other shippers would lose the ability to 
obtain that capacity and the releasing shipper would lose at least one 
day of release revenues. In some cases, however, the releasing shipper 
might decide to waive the prequalification requirement, for example, if 
it thought that doing so would enlarge the number of potential 
bidders.\67\
---------------------------------------------------------------------------

    \65\ CCT refers to central clock time (which takes daylight 
savings into account).
    \66\ 18 CFR 284.12(a)(1)(v), Capacity Release Related Standards 
5.3.2 (Version 1.6).
    \67\ If the releasing shipper waived the prequalification 
requirement, the pipeline would not have to flow gas for the 
replacement shipper until the replacement shipper satisfied the 
creditworthiness requirement.
---------------------------------------------------------------------------

    54. Among the NAESB standards that were passed, Standard 5.3zD 
provides that a pipeline should not award a release to a replacement 
shipper until and unless that shipper meets the pipeline's 
creditworthiness requirements. While this standard comports with basic 
Commission policy, it does not appear sufficient to resolve the issue 
of non-creditworthy bidders. The standard does not specify when a non-
creditworthy shipper must post collateral to have its bid considered, 
nor does it address what happens to the allocation of capacity in a 
bidding situation where the winning bidder is non-creditworthy, but 
other bidders are creditworthy.
    55. The Commission, therefore, proposes to supplement the WGQ 
standard by allowing the releasing shipper to determine whether it 
wants all bidders to be qualified prior to having their bids 
considered.\68\ If the releasing shipper insists on pre-qualification, 
all potential non-creditworthy replacement shippers would be required 
to post collateral prior to the award of capacity at 2 p.m. This 
approach ensures that a potential non-creditworthy replacement shipper 
will not be required to maintain collateral on an ongoing basis with 
multiple pipelines.\69\ Although the Commission recognizes that this 
approach does not provide potential non-creditworthy replacement 
shippers with a surfeit of time to obtain collateral, it appears as the 
only workable method of ensuring that capacity release transactions can 
be consummated quickly, as required by Order No. 637, while protecting 
the releasing shipper against losing its release revenue in the event 
the replacement shipper fails to post collateral. The Commission is 
also proposing to require pipelines to return any collateral or 
security posted by potential replacement shippers prior to the next 
nomination opportunity.\70\ This will ensure that the replacement 
shipper has the collateral or security available to acquire released 
capacity through a pre-arranged deal on the same or another pipeline.
---------------------------------------------------------------------------

    \68\ Pipelines could insert a default provision in their 
tariffs, but would have to provide the releasing shipper an option 
to waive that provision. See Dominion Cove Point LNG, LP, 105 FERC ] 
61,225.
    \69\ See Dominion Cove Point LNG, LP, 105 FERC ] 61,225 at P 18 
(rejecting a pipeline's tariff requiring the replacement shipper to 
maintain collateral on a ``continuing basis.'')
    \70\ Under the WGQ nomination timeline, the collateral or 
security would have to be returned prior to the Evening Nomination 
cycle at 6 p.m. CCT.
---------------------------------------------------------------------------

    56. There also appear to be ways a potential non-creditworthy 
replacement shipper can avoid the need to obtain collateral quickly. 
For instance, the potential non-creditworthy replacement shipper could 
obtain a standing letter of credit from a financial institution that it 
could apply to any pipeline as it bids on releases. If its bid did not 
prevail, the letter of credit would then be available for use on 
subsequent bids.
    57. In its comments, Reliant Energy Services, Inc. (Reliant) states 
there is much confusion among the pipelines as to when a non-
creditworthy shipper must provide collateral in connection with a bid. 
Some pipelines, it asserts, want the shipper to maintain collateral 
prior to making a bid, while others require that collateral be posted 
at the time of the bid, or even at the time of the award. Instead, 
Reliant submits that it would not be unreasonable to permit a winning 
bidder with some amount of time, after notification of an award, to 
arrange for the necessary collateral. Reliant contends that providing a 
substantial amount of collateral at the time of the award (or earlier) 
can be problematic, especially if the shipper is making bids over 
multiple pipelines. Moreover, Reliant argues that a shipper should not 
have to provide collateral prior to being awarded the capacity since no 
service had yet been rendered.
    58. Reliant's proposal, however, would not ensure that capacity 
releases can take place quickly, as required by Order No. 637, nor does 
it address the potential revenue loss to the releasing shipper. The 
Commission's proposal appears to better meet the scheduling 
requirements of Order No. 637 and protect releasing shippers against a 
potential loss of revenue, while also providing a means by which non-
creditworthy shippers can arrange for collateral prior to the award of 
capacity.
4. Notice to Releasing Shippers
    59. In several of the creditworthiness orders, the Commission 
required pipelines to provide simultaneous notice to a releasing 
shipper and a replacement shipper upon determining that a replacement 
shipper is not creditworthy.\71\ The Commission, however, finds no need 
to propose such a regulation since the membership of NAESB's WGQ passed 
a consensus standard (Standard 5.3.zF) that appears to adequately 
address this issue. Standard 5.3.zF, which we propose to incorporate by 
reference into the Commission's regulations, provides that a pipeline 
should provide notice to the original releasing shipper reasonably 
proximate in time to when it gives notice to the releasing shipper's 
replacement shipper(s) of an event pertaining to the replacement 
shipper(s) creditworthiness. Such events include when a replacement 
shipper is: (1) Past due or in default of the pipeline's tariff; (2) 
having its service suspended or its contract terminated for cause; and 
(3) no longer creditworthy and has not provided credit alternative(s) 
pursuant to the pipeline's tariff.
---------------------------------------------------------------------------

    \71\ See, e.g., Tennessee Gas Pipeline Co., 102 FERC ] 61,075 at 
P 78 (2003), Northern Natural Gas Co., 103 FERC ] 61,276 at P 43 
(2003).

---------------------------------------------------------------------------

[[Page 8597]]

5. Creditworthiness Requirements for Permanent Releases
    60. The WGQ EC considered a proposed standard (5.3.zE) that would 
have required pipelines to relieve releasing shippers from any 
liability arising from their transportation contracts if they 
permanently released capacity to a replacement shipper that meets the 
pipeline's creditworthiness provisions. This proposed standard failed 
as a result of the Pipelines segment's opposition to the language.
    61. Many parties filed comments in support of or opposition to the 
proposed standard. However, some of the comments appear to confuse the 
basic definition of a ``permanent release.'' \72\ Under the 
Commission's policy, a permanent release occurs when a pipeline 
relieves a releasing shipper from all of its obligations to the 
pipeline under its service agreement upon the assignment of such 
obligations to a replacement shipper on a permanent basis (i.e., for 
the remainder of the contract term).\73\
---------------------------------------------------------------------------

    \72\ The Pipelines segment appears to argue that a permanent 
release means only the ability to release capacity for the full 
remaining term of the contract, with the releasing shipper remaining 
liable for the reservation charges. National Fuel Gas Distribution 
Corp. (National Fuel Distribution) maintains that a permanent 
release means that the releasing shipper's obligation under the 
contract is terminated.
    \73\ See El Paso Natural Gas Co., 61 FERC ] 61,333 at 62,312 
(1992) (El Paso).
---------------------------------------------------------------------------

    62. The Pipelines segment contends that the proposed standard would 
require pipelines to relieve shippers of their obligations, even when 
the creditworthiness of the replacement shipper does not warrant such 
relief. Similarly, the Interstate Natural Gas Association of America 
(INGAA) fears such a standard would strip the pipeline of the ability 
to employ reasonable business judgment in assessing whether a shipper 
that releases its capacity should be relieved of its contractual 
liability once the capacity is assigned. INGAA states that the capacity 
release program was never intended to be an easy loophole whereby an 
existing shipper can terminate contractual obligations by assigning its 
contract to a replacement shipper that meets only the minimum criteria 
set forth in the pipeline's tariff.
    63. American Gas Association (AGA), however, argues that the 
proposed standard is consistent with the Commission's permanent release 
policy in El Paso, and as such AGA requests that the Commission clarify 
that permanent releases must be made to creditworthy shippers that 
otherwise meet pipeline tariff requirements. Similarly, National Fuel 
Distribution and KeySpan Delivery Companies (KeySpan) state that 
pipelines must be prevented from unreasonably holding the releasing 
shipper liable under an otherwise reasonable, full-term release of its 
capacity at the pipeline's maximum rate. KeySpan contends that in 
determining whether to allow a permanent release, pipelines must apply 
the same creditworthiness criteria as they would in a situation 
involving an equivalent request for new service, as any other result 
would be unduly discriminatory and unlawful.
    64. The Commission is not proposing a standard for creditworthiness 
for permanent releases. The Commission's policy with respect to 
permanent releases is that a ``pipeline may not unreasonably refuse to 
relieve a releasing shipper of liability under the contract where there 
is a permanent release of capacity.'' \74\ If there is a dispute 
regarding the reasonableness of the pipeline's decision in allowing a 
permanent release, that dispute must be judged by the Commission on a 
case-by-case basis.\75\ Because disputes as to permanent releases must 
be adjudged on a case-by-case basis, a regulation establishing a 
standard creditworthiness criteria does not appear appropriate.
---------------------------------------------------------------------------

    \74\ Id.
    \75\ See Texas Eastern Transmission Corp. 83 FERC ] 61,092 at 
61,446 (1998) (permitting pipeline to refuse to permit a permanent 
release when the pipeline has a reasonable basis to conclude that it 
will not be financially indifferent to the release.)
---------------------------------------------------------------------------

III. Notice of Use of Voluntary Consensus Standards

    65. Office of Management and Budget Circular A-119 (Sec.  11) 
(February 10, 1998) provides that Federal agencies should publish a 
request for comment in a NOPR when the agency is seeking to issue or 
revise a regulation proposing to adopt a voluntary consensus standard 
or a government-unique standard. In this NOPR, the Commission is 
proposing to incorporate by reference voluntary consensus standards 
developed by NAESB, in addition to proposing new regulations in areas 
where standards were not passed.

IV. Information Collection Statement

    66. The following collections of information contained in this 
proposed rule have been submitted to the Office of Management and 
Budget (OMB) for review under section 3507(d) of the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3507(d). The Commission solicits 
comments on the Commission's need for this information, whether the 
information will have practical utility, the accuracy of the provided 
burden estimates, ways to enhance the quality, utility, and clarity of 
the information to be collected, and any suggested methods for 
minimizing respondents' burden, including the use of automated 
information techniques. The following burden estimates include the 
costs to implement the WGQ's creditworthiness standards and the 
Commission's proposed creditworthiness regulations. The burden 
estimates are primarily related to start-up to implement these 
standards and regulations and will not result in on-going costs.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                 Data collection                     Number of     responses per     Hours per     Total number
                                                     responses      respondent       response        of hours
----------------------------------------------------------------------------------------------------------------
FERC-545........................................              93               1              38           3,534
FERC-549C.......................................              93               1             924          85,932
----------------------------------------------------------------------------------------------------------------

    Total Annual Hours for Collection: (Reporting and Recordkeeping, 
(if appropriate)) = 89,466
    Information Collection Costs: The Commission seeks comments on the 
costs to comply with these requirements. It has projected the average 
annualized cost for all respondents to be the following:

------------------------------------------------------------------------
                                             FERC-545        FERC-549C
------------------------------------------------------------------------
Annualized Capital/Startup Costs........        $182,111      $4,428,183

[[Page 8598]]

 
Annualized Costs (Operations &                         0               0
 Maintenance)...........................
                                         -----------------
    Total Annualized Costs..............         182,111       4,428,183
------------------------------------------------------------------------

    67. OMB regulations \76\ require OMB to approve certain information 
collection requirements imposed by agency rule. The Commission is 
submitting notification of this proposed rule to OMB.
---------------------------------------------------------------------------

    \76\ 5 CFR 1320.11.
---------------------------------------------------------------------------

    Title: FERC-545, Gas Pipeline Rates: Rate Change (Non-Formal); 
FERC-549C, Standards for Business Practices of Interstate Natural Gas 
Pipelines.
    Action: Proposed collections.
    OMB Control No.: 1902-0154, 1902-0174.
    Respondents: Business or other for profit (interstate natural gas 
pipelines (not applicable to small business)).
    Frequency of Responses: One-time implementation (business 
procedures, capital/start-up).
    Necessity of Information: This proposed rule, if implemented, would 
upgrade the Commission's current business practice and communication 
standards to include the latest creditworthiness standards approved by 
the WGQ as well as promulgate Commission regulations governing 
creditworthiness. The implementation of these standards and regulations 
is necessary to increase the efficiency of the pipeline grid.
    68. The information collection requirements of this proposed rule 
will be included in pipeline tariffs or reported directly to the 
industry users. The implementation of these data requirements will help 
the Commission carry out its responsibilities under the Natural Gas Act 
to monitor activities of the natural gas industry to ensure its 
competitiveness and to assure the improved efficiency of the industry's 
operations. The Commission's Office of Markets, Tariffs and Rates will 
use the data in rate proceedings to review rate and tariff changes by 
natural gas companies for the transportation of gas, for general 
industry oversight, and to supplement the documentation used during the 
Commission's audit process.
    69. Internal Review: The Commission has reviewed the requirements 
pertaining to business practices and electronic communication with 
natural gas interstate pipelines and made a determination that the 
proposed revisions are necessary to establish a more efficient and 
integrated pipeline grid. Requiring such information ensures both a 
common means of communication and common business practices which 
provide participants engaged in transactions with interstate pipelines 
with timely information and uniform business procedures across multiple 
pipelines. These requirements conform to the Commission's plan for 
efficient information collection, communication, and management within 
the natural gas industry. The Commission has assured itself, by means 
of its internal review, that there is specific, objective support for 
the burden estimates associated with the information requirements.
    70. Interested persons may obtain information on the reporting 
requirements by contacting the following: Federal Energy Regulatory 
Commission, Attn: Michael Miller, Office of the Executive Director, 888 
First Street, NE., Washington, DC 20426. Tel: (202) 502-8415/fax: (202) 
273-0873; e-mail: [email protected].
    71. Comments concerning the collection of information(s) and the 
associated burden estimate(s), should be sent to the contact listed 
above and to the Office of Management and Budget, Office of Information 
and Regulatory Affairs, Washington, DC 20503 (Attention: Desk Officer 
for the Federal Energy Regulatory Commission, phone: (202) 395-7856, 
fax: (202) 395-7285).

V. Environmental Analysis

    72. The Commission is required to prepare an Environmental 
Assessment or an Environmental Impact Statement for any action that may 
have a significant adverse effect on the human environment.\77\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human 
environment.\78\ The actions proposed here fall within categorical 
exclusions in the Commission's regulations for rules that are 
clarifying, corrective, or procedural, for information gathering, 
analysis, and dissemination, and for sales, exchange, and 
transportation of natural gas that requires no construction of 
facilities.\79\ Therefore, an environmental assessment is unnecessary 
and has not been prepared in this NOPR.
---------------------------------------------------------------------------

    \77\ Order No. 486, Regulations Implementing the National 
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & 
Regs., Regulations Preambles, 1986-1990 ] 30,783 (1987).
    \78\ 18 CFR 380.4 (2003).
    \79\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27) 
(2003).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act Certification

    73. The Regulatory Flexibility Act of 1980 (RFA)\80\ generally 
requires a description and analysis of final rules that will have 
significant economic impact on a substantial number of small entities. 
The regulations proposed here impose requirements only on interstate 
pipelines, which are not small businesses, and, these requirements are, 
in fact, designed to benefit all customers, including small businesses. 
Accordingly, pursuant to Sec.  605(b) of the RFA, the Commission hereby 
certifies that the regulations proposed herein will not have a 
significant adverse impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \80\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

VII. Comment Procedures

    74. The Commission invites interested persons to submit comments on 
the matters and issues proposed in this notice to be adopted, including 
any related matters or alternative proposals that commenters may wish 
to discuss. Comments are due March 26, 2004. Comments must refer to 
Docket No. RM04-4-000, and must include the commenter's name, the 
organization they represent, if applicable, and their address in their 
comments. Comments may be filed either in electronic or paper format.
    75. Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. The Commission 
accepts most standard word processing formats and commenters may attach 
additional files with supporting information in certain other file 
formats. Commenters filing electronically do not need to make a paper 
filing. Commenters that are not able to file comments electronically 
must send an original and 14 copies of their comments to: Federal 
Energy Regulatory Commission, Office of the Secretary, 888 First 
Street, NE., Washington, DC 20426.
    76. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to

[[Page 8599]]

serve copies of their comments on other commenters.

VIII. Document Availability

    77. In addition to publishing the full text of this document in the 
Federal Register, the Commission provides all interested persons an 
opportunity to view and/or print the contents of this document via the 
Internet through FERC's home page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. 
eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    78. From FERC's home page on the Internet, this information is 
available in the eLibrary. The full text of this document is available 
in the eLibrary both in PDF and Microsoft Word format for viewing, 
printing, and/or downloading. To access this document in eLibrary, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    79. User assistance is available for eLibrary and the FERC's Web 
site during our normal business hours. For assistance contact FERC 
Online Support at [email protected] or toll-free at (866) 208-
3676, or for TTY, contact (202) 502-8659.

List of Subjects in 18 CFR Part 284

    Continental shelf, Incorporation by reference, Natural gas, 
Reporting and recordkeeping requirements.

    By direction of the Commission.
Linda Mitry,
Acting Secretary.
    In consideration of the foregoing, the Commission proposes to amend 
part 284, chapter I, title 18, Code of Federal Regulations, as follows.

PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE 
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES

    1. The authority citation for part 284 continues to read as 
follows:

    Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352; 
43 U.S.C. 1331-1356.
    2. Section 284.8 is amended by revising paragraph (i) to read as 
follows:


Sec.  284.8  Release of firm capacity on interstate pipelines.

* * * * *
    (i) In effectuating capacity releases, pipelines must adhere to the 
following requirements applicable to creditworthiness and default:
    (1) The pipeline must apply to replacement shippers the same 
creditworthiness criteria applied to shippers holding or obtaining 
capacity from the pipeline.
    (2) The pipeline is permitted to terminate the contract of a 
replacement shipper upon the termination of the releasing shipper's 
contract, provided that the pipeline provides the replacement shipper 
with the opportunity to continue receiving service if it agrees to pay, 
for the remaining term of the replacement shipper's contract, the 
lesser of:
    (i) The releasing shipper's contract rate;
    (ii) The maximum tariff rate applicable to the releasing shipper's 
capacity; or
    (iii) Some other rate that is acceptable to the pipeline.
    (3) The pipeline must include procedures in its tariff under which 
a releasing shipper may require potential replacement shippers to 
establish creditworthiness prior to the award of capacity in order for 
the replacement shipper's bid to be considered in making the award. If 
a potential replacement shipper's bid is not accepted, collateral or 
other security posted by potential replacement shippers for bidding 
must be returned to the bidder prior to the next nomination cycle.
    3. Section 284.12 is amended as follows:
    a. Redesignate paragraphs (a)(1)(i) through (a)(1)(v) as paragraphs 
(a)(1)(ii) through (a)(1)(vi).
    b. In paragraph (a)(1), revise the reference to ``North American 
Energy Standards Board'' to read ``Wholesale Gas Quadrant of the North 
American Energy Standards Board;''
    c. In paragraph (a)(2), revise the reference to ``1100 Louisiana, 
Suite 3625'' to read ``1301 Fannin, Suite 2350''.
    d. In paragraph (b), revise the reference to ``Gas Industry 
Standards Board standards incorporated by reference in paragraph (b)(1) 
of this section'' to read ``standards promulgated by the Wholesale Gas 
Quadrant of the North American Energy Standards Board incorporated by 
reference in paragraph (a)(1) of this section.''
    e. Newly designated paragraph (a)(1)(vi) is revised, and paragraphs 
(a)(1)(i) and (b)(4) are added to read as follows:


Sec.  284.12  Standards for pipeline business operations and 
communications.

    (a) * * *
    (1) * * *
    (i) General Standards 0.3.zB, 0.3.zC, 0.3.zD, 0.3.zE, 0.3.zF, 
0.3.zK, 0.3.zL, 0.3.zQ (Request No.: 2003 Annual Plan Item 6, July 28, 
2003);
* * * * *
    (vi) Capacity Release Related Standards (Version 1.6, July 31, 
2002), with the exception of Standards 5.3.6 and 5.3.7, and including 
the standards contained in Recommendations R02002 and R02002-2 (October 
31, 2002) and Standards 5.3.zD, 5.3.zF (Request No.: 2003 Annual Plan 
Item 6, July 28, 2003).
* * * * *
    (b) * * *
    (4) Creditworthiness standards--(i) Criteria applied in determining 
creditworthiness. (A) In determining a shipper's, or potential 
shipper's, credit status, pipelines can require no more than the 
following information, where such information is applicable to the 
shipper, and must maintain any non-public information included in such 
information on a confidential basis:
    (1) Audited financial statements;
    (2) Annual report;
    (3) List of affiliates, parent companies, and subsidiaries;
    (4) Publicly available information from credit reports of credit 
and bond rating agencies;
    (5) Private credit ratings, if obtained by the shipper;
    (6) Bank references;
    (7) Trade references;
    (8) Statement of legal composition;
    (9) Statement of length of time business has been in operation;
    (10) Most recent filed statements with the Securities and Exchange 
Commission (or an equivalent authority) or such other publicly 
available information;
    (11) For public entities, the most recent publicly available 
interim financial statements, with an attestation by its Chief 
Financial Officer, Controller, or equivalent (CFO) that such statements 
constitute a true, correct, and fair representation of financial 
condition prepared in accordance with Generally Accepted Accounting 
Principles (GAAP) or equivalent;
    (12) For non-public entities, including those that are State-
regulated utilities:
    (i) The most recent available interim financial statements, with an 
attestation by its CFO that such statements constitute a true, correct, 
and fair representation of financial condition prepared in accordance 
with GAAP or equivalent;
    (ii) An existing sworn filing, including the most recent available 
interim financial statements and annual financial reports filed with 
the respective regulatory authority, showing the shipper's current 
financial condition;

[[Page 8600]]

    (13) For State-regulated utility local distribution companies, 
documentation from their respective state regulatory commission (or an 
equivalent authority) of an authorized gas supply cost recovery 
mechanism which fully recovers both gas commodity and transportation 
capacity costs and is afforded regulatory asset accounting treatment in 
accordance with GAAP or equivalent;
    (14) Such other information as may be mutually agreed to by the 
parties.
    (B) Each pipeline must set forth in its tariff objective criteria 
for evaluating creditworthiness.
    (C) Upon a determination that a shipper or potential shipper is 
non-creditworthy, the pipeline must provide, within five days of the 
request of the shipper, a written explanation of the basis for its 
determination.
    (ii) Collateral requirements. Upon a pipeline's determination that 
a shipper or potential shipper is non-creditworthy, the shipper must be 
given the option to provide the pipeline with collateral in order to 
receive or retain service.
    (A) Service on existing facilities. Collateral for service on 
existing facilities may not exceed three months' worth of charges for 
the service.
    (B) Construction of new facilities. (1) Collateral for construction 
of mainline facilities, as defined in Sec.  157.202 (b)(5) of this 
chapter, must be reasonable in light of the risks of the project, 
provided that the amount of collateral cannot exceed the shipper's 
proportionate share of the cost of the facilities.
    (2) Collateral for construction of lateral line facilities, as 
defined in Sec.  154.109(b) of this chapter, must not exceed the 
shipper's proportionate share of the cost of the facilities.
    (3) Collateral for construction of facilities must be determined 
prior to the initiation of construction.
    (4) The outstanding amount of collateral for construction of 
facilities must be reduced as the shipper pays off the obligation.
    (C) Interest on collateral. Pipelines must provide shippers with an 
opportunity to earn interest on collateral. On collateral held by the 
pipeline, interest will be calculated using the interest rate required 
to be used in calculating refunds, as defined in Sec.  154.501(d) of 
this chapter.
    (iii) Suspension and termination of service.
    (A) Pipelines may not terminate a shipper's service without 
providing 30 days notice to the shipper and to the Commission.
    (B) Pipelines may suspend the provision of service upon a shipper's 
default or a finding that the shipper is no longer creditworthy. 
Pipelines may not charge a shipper for service during suspension.
    (C) When a shipper loses its creditworthiness status, the pipeline 
cannot suspend or terminate service without permitting the shipper to 
continue service as provided in paragraph (b)(4)(iii)(D) of this 
section.
    (D) When a non-creditworthy shipper, or defaulting shipper is 
permitted to continue service by providing collateral, the shipper may 
continue service by providing an advance payment of an amount equal to 
one month's charges for service, and satisfying the requisite 
creditworthiness requirements within 30 days of the date of the notice.

[FR Doc. 04-4095 Filed 2-24-04; 8:45 am]
BILLING CODE 6717-01-P