Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

The Coming Transmission Credit Crisis

How can transmission providers safely serve noncreditworthy customers?
Fortnightly Magazine - July 15 2003

their tariffs. Utilities should bear in mind the following principles:

  • Achieve consistency with the OATT. FERC will evaluate whether the proposal is consistent with or superior to the tariff provisions. 1 Creditworthiness standards that are more explicit than the provisions are likely to meet this requirement, provided that they also are objective and are not so stringent as to stifle competition.
  • Be understandable. The credit security provisions should be reasonably easy to comprehend and administer. 2 Such provisions have the most value when they provide sufficient detail to allow customers and tariff administrators alike to understand the rules and comply with them. Certainly, there should not be so much complexity that the utility customer does not bother to understand the utility's creditworthiness standards in the first place and the administrator has difficulty administering its own tariff provisions. Arguably, some of the existing RTO credit security provisions would not meet this criterion.
  • Adopt objective standards. Creditworthiness criteria should be objective, without interfering with the transmission provider's right to exercise business judgment in evaluating creditworthiness. 3 CP&L/FPC successfully based their creditworthiness standards on ratings from commercial rating agencies such as Standard & Poor's or Moody's, evaluation of financial statements under the standards of the credit rating agencies, other objective indicia of financial strength (such as a minimum x Interest Earned Ratio and Debt Service Coverage Ratio for rural electric cooperatives) and guarantees by parent companies that meet the creditworthiness criteria. 4
  • Relate general security requirements to default risk. Credit security requirements must be based on the risk of default. 5 Utilities should bear in mind that it may be more difficult to justify multiple levels of creditworthiness and corresponding levels of security than to justify the more simple creditworthy/noncreditworthy dichotomy that CP&L/FPC adopted.
  • Review creditworthiness periodically. The transmission provider should conduct periodic reviews of customer creditworthiness, including review at the request of a customer. 6
  • Notify customers of adverse creditworthiness decisions. The transmission provider should inform the customer in writing of the reasons why the customer is noncreditworthy and provide the customer an opportunity to challenge the decision. 7
  • Relate noncreditworthy security provisions to default risk. The enhanced credit security provisions for customers that do not meet the creditworthiness standards must relate to the risk posed to the transmission provider in the event of default. 8 CP&L/FPC met this requirement by demonstrating that they were at risk for at least 80 days of unpaid bills, and that therefore 90 days of security was necessary. 9 Transmission providers may be able to demonstrate the need for more security based on different facts.
  • Pay interest. Transmission providers either must pay interest on prepayments, or must allow the customer to place prepayments in an escrow account to which the transmission provider has access. 10
  • Set deadlines to provide security. Transmission providers can require customers that lose their creditworthy status to provide short-term credit security (prepayment or security against nonpayment for one month of service) within 5 days of notice by the transmission provider, and to meet all of the enhanced credit security provisions within 30 days of