[BETA] Fortnightly

How can transmission providers safely serve noncreditworthy customers?

In 2001, with California and Midwest energy markets in turmoil, the Federal Energy Regulatory Commission (FERC) warned that such market uncertainty had sounded a "wake-up call" for electricity transmission providers to assure customer creditworthiness to pay for services. ¹ While the natural gas pipeline industry has responded to increased credit risk with an industrywide initiative and numerous tariff filings that enhance credit security, most electric utilities have failed to heed FERC's warning by modifying their tariffs.

The precarious financial situation of some market participants has ceased to be headline news, but the potential for significant financial risk remains. Electric utilities owe it to their ratepayers and their stockholders to focus with care on their credit security issues. Plainly, how utilities address the issues of whether to do business with companies that do not meet creditworthiness standards, the amount and type of credit security to require, and how and when to suspend or terminate service to noncreditworthy customers can have significant financial consequences.

Inadequate Protection Against Today's Credit Risks

The credit security provisions of FERC's Open Access Transmission Tariff (OATT) reflect the period in which they were developed. In 1995 and 1996, most transmission customers were integrated public utilities, rural electric cooperatives, or municipalities that had substantial physical assets. The industry as a whole was financially stable. Consistent with that economic environment, the OATT contains only minimal credit security provisions. OATT Section 11, "Creditworthiness," authorizes transmission providers to require "reasonable credit review procedures," while under other OATT sections customers must pay deposits equal to the cost of up to one month of service in connection with requests for firm point-to-point transmission service and network integration transmission service (but not non-firm point-to-point transmission service). ² Transmission providers may apply to FERC for termination of service to customers that default on their payments.

The tariff provisions are entirely inadequate to deal with today's heightened volatility in the electric industry and the resulting financial instability of some market participants. The vague reference to reasonable credit review procedures provides no guidance as to the customers a transmission provider may refuse to do business with, leaving customers potentially vulnerable to discrimination and transmission providers vulnerable to charges (both founded and unfounded) that they may have acted unfairly. The one-month deposit requirement does not apply to non-firm service, and even with regard to firm transmission customers it is generally inadequate to protect a transmission provider against the risk of nonpayment. The provisions of the OATT for termination of service for default cannot be implemented in less than five months, ³ leaving transmission providers exposed to the risk of at least four months of unrecoverable charges in the event of default. Additionally, except for such termination for default provisions, the OATT gives transmission providers no ability to protect themselves against customers that are creditworthy when they apply for service but then become financially unstable after transmission service commences.

Credit Security Activity by Interstate Gas Pipelines

In the natural gas industry, recent downgrades of shipper credit ratings to below investment-grade quality (e.g., Enron,