RULES AND REGULATIONS
Title 52—PUBLIC UTILITIES
PENNSYLVANIA PUBLIC UTILITY COMMISSION
[ 52 PA. CODE CH. 62 ]
[41 Pa.B. 30]
[Saturday, January 1, 2011][ L-2008-2069115 ]
Licensing Requirements for Natural Gas Suppliers The Pennsylvania Public Utility Commission (Commission) on June 16, 2010, adopted a final rulemaking order which revises the Commission' natural gas supplier licensing regulations regarding level of security needed and forms of security used to satisfy statutory security requirements for licensing.
Executive Summary
In its October 2005 Report to the General Assembly, the Commission found that there was not effective competition in this Commonwealth's retail natural gas market. The finding was based in part on the low number of natural gas suppliers (NGSs) participating in the market. Docket No. I-00040103. The amount of financial security required for NGS licensing was identified as a possible barrier to market entry and participation.
Based on the Commission's finding, stakeholders met to discuss ways to increase effective competition. The Staff's Report on the SEARCH collaborative suggested the use of reasonable criteria for adjusting the security amount required for NGS licensing and the use of NGS accounts receivable in natural gas distribution company (NGDC) Purchase of Receivables (POR) Programs as an acceptable type of security. On September 11, 2008, the Commission issued a proposed rulemaking order revising PUC NGS licensing regulations. The order was published at 39 Pa.B. 1657 (April 4, 2009). A 60-day comment period was established. Seven parties and the Independent Regulatory Review Commission filed comments. The Commission issued its final rulemaking order on June 16, 2010.
This final rulemaking revises § 62.111: (1) to permit the use of NGS accounts receivable in a Commission-approved POR program to satisfy part of, or all of an NGS' security requirement; and (2) to list possible triggering events for adjusting the security amount and reasonable criteria for the adjustment of the security amount. This section also includes an annual reporting requirement for NGDCs on the adjustment of security amounts, and a list of Commission procedures, formal and informal, that an NGS may use to resolve a dispute over security with an NGDC. The Commission believes that the final regulation better balances an NGS's ability to provide adequate security to maintain its license with an NGDC's actual risk of financial loss in the event of supplier default.
Public Meeting held
June 16, 2010Commissioners Present: James H. Cawley, Chairperson; Tyrone J. Christy, Vice Chairperson, statement follows; Wayne E. Gardner; Robert F. Powelson
Licensing Requirements for Natural Gas Suppliers;
SEARCH Final Order and Action Plan:
Natural Gas Supplier Issues;
Doc. No. L-2008-2069115, I-00040103F0002
Final Rulemaking Order On December 8, 2008, we issued a proposed rulemaking order that set forth revisions to the security requirements for licensing natural gas suppliers at 52 Pa. Code § 62.101—62.114. In its September 11, 2008 Final Order and Action Plan regarding the Commission's Investigation into the Natural Gas Supply Market: Report on Stakeholder's Working Group,1 Docket No. I-00040103F0002 (SEARCH Order), the Commission had determined that one way to increase effective competition in the retail natural gas market was to revise the security requirements in regard to the amount of security that was needed and the types of security that could be used. Before us today is an order that finalizes the revisions to the Commission's NGS licensing regulations on these matters.
Discussion
Background
Section 2208(c)(1)(i) of the Public Utility Code establishes the security requirements for the issuance and maintenance of an NGS license. The section also authorizes the natural gas distribution company (NGDC) to determine the amount and form of the bond or other security that is required for an NGS license. This section reads as follows:
(c) Financial fitness.—(1) In order to ensure the safety and reliability of the natural gas supply service in this Commonwealth, no natural gas supplier license shall be issued or remain in force unless the applicant or holder, as the case may be, complies with all of the following:(i) Furnishes a bond or other security in a form and amount to ensure the financial responsibility of the natural gas supplier. The criteria each natural gas distribution company shall use to determine the amount and form of such bond or other security shall be set forth in the natural gas distribution company's restructuring filing. In approving the criteria, commission considerations shall include, but not be limited to, the financial impact on the natural gas distribution company or an alternative supplier of last resort of a default or subsequent bankruptcy of a natural gas supplier. The commission shall periodically review the criteria upon petition by any party. The amount and form of the bond or other security may be mutually agreed to between the natural gas distribution company or the alternate supplier of last resort and the natural gas supplier or, failing that, shall be determined by criteria approved by the commission.66 Pa.C.S. § 2208(c)(1)(i) (emphasis added).
The Commission's NGS licensing regulations became effective on publication in the Pennsylvania Bulletin on July 21, 2001. 31 Pa.B. 3943. Licensing Requirements for Natural Gas Suppliers, Order entered April 19, 2001 at Docket No. L-00000150. Section 62.111 addresses bonds and other security. See 52 Pa. Code § 62.111.
In the SEARCH Order, the Commission identified NGDC security requirements as one barrier to supplier participation in the retail market.2 Referencing the SEARCH Report, the SEARCH Order discussed the criteria used by the NGDC in establishing a security level and the extent of the Commission's authority under the law to modify security requirements:
The criteria that are to be used by the NGDC to set the amount and form of the security were established in each company's restructuring proceeding. The level of security is based on a formula that takes into account the NGDC's exposure to costs. For the retail supply market, this formula involves the peak day demand estimate for capacity, number of days' potential exposure in a billing cycle, and commodity estimates for quantity and cost. Offsets to the amount of security that a NGS must provide may include calls on capacity, receivable purchases or receivable pledges. NGDC costs related to supplier default as set forth in section 2207(k) of the Public Utility Code may also be taken into account when establishing the amount of security required. 66 Pa.C.S. § 2207(k). SEARCH Report, pp. 18-19.If a NGDC and NGS cannot come to a mutual agreement, the level or form of security is determined by criteria approved by the Commission. See 66 Pa.C.S. § 2208(c)(1). These criteria were established in the Commission's NGS licensing regulations and are to be used to determine security levels and acceptable forms for the security when voluntary agreement is not reached. See 52 Pa. Code § 62.111. Section 62.111(c) permits the use of the irrevocable letters of credit, corporate parental or other third party guaranty, and real or personal property. Personal property would include the use of escrow account or the pledge or purchase of receivables. 52 Pa. Code § 62.111(c). SEARCH Report, pp. 18-19.Also, an individual NGDC's security requirement, including the level of security, is subject to periodic review by the Commission. 66 Pa.C.S. § 2208(c). See also, UGI Utilities, Inc.—Gas Division v. PA PUC, 878 A. 2d 186 (Pa. Cmwlth. 2005) appeal den. 586 Pa. 732; 890 A.2d 1062 (2005) (the Commission has discretion to approve criteria to be used to determine the financial security necessary based upon financial impact on the NGDC by a default by an NGS). Thus, a supplier is not without a remedy to address unreasonable security requirements of an NGDC on a case-by-case basis.SEARCH Order, pp. 23-24.
The SEARCH Order also discussed the suppliers' position that uniformity in the use of security instruments across NGDC service territories, and greater acceptance of other types of security by the NGDCs would decrease costs for suppliers and remove a barrier to supplier entry and participation.
However, the SEARCH Report states that suppliers observe that the use of security instruments is not uniform among the companies and contend that this variability is a barrier to market entry and multi-system participation. Suppliers also raised concerns about the escalating cost of security to match the growth of their sales, and opined that there should be a limitation on the frequency of review of required security levels, with specific triggers for that review, such as a percentage change in pool size. SEARCH Report, p. 19.Suppliers also view the NGDC's acceptance of only certain financial instruments as a barrier to market entry. Suppliers prefer to use corporate guarantees as the predominant practice. Further, to ensure fairness and remove a possible barrier for market entry, suppliers believe that specific criteria for acceptable financial instruments should be established in a regulation or order rather than permitting companies to set those through tariffs. SEARCH Report, p. 19.Establishing standard language for the form of the financial instrument used for security and reasonable criteria for the amount of security should assist NGSs in obtaining security in an acceptable form and amount, while aiding the NGDC in collecting a claim against the security in the event of supplier default. North American Energy Standards Board (NAESB) forms and business practices could be reviewed for appropriateness to develop uniform language to address this issue. SEARCH Report, p. 21. Also, the use of a POR program should be examined as a way to reduce the level of required security, to lessen the need for frequent credit reviews and to ameliorate adjustments in security level that might normally be triggered by changes in a company's creditworthiness rating, which can occur for reasons unrelated to its immediate business interaction and relationships. SEARCH Report, p. 21.SEARCH Order, pp. 24-25.
After our review of the SEARCH Report, we determined that it was in the public interest to initiate a rulemaking to address security requirements related to NGS licensing. SEARCH Order, p. 25. Our goal was to update the security requirement in the regulations ''to better balance the ability of NGS firms to provide adequate security with the NGDC's risk of a supplier default.'' Specific matters that were to be addressed included: (1) the use of NGS accounts receivable in purchase of receivables programs as fulfillment of some part, or all of security requirements; (2) the adoption of standard language for financial instruments used for security; and (3) the development of reasonable criteria for NGDCs to use to establish the amount of security necessary for licensing purposes. SEARCH Order, p. 26.
The proposed rulemaking order was entered on December 8, 2008, and was published on April 4, 2009, in the Pennsylvania Bulletin at 39 Pa.B. 1657. The order established a 60-day comment period. No reply comments were permitted to be filed.
Comments were filed by seven interested parties: the Energy Association of Pennsylvania (EAPA)3 ; the NGS Parties,4 the Retail Energy Supply Association (RESA)5 ; Philadelphia Gas Works (PGW); National Fuel Gas Distribution Company (NFG); PECO Energy Company (PECO) and Equitable Gas Company (Equitable). The Independent Regulatory Review Commission (IRRC) also filed comments.
We have reviewed and addressed these comments below.
Comments
§ 62.111—Suppliers Serving Large Customers (over 300 Mcf annually)
As a general comment, Equitable states that modifications to § 62.111 should make it clear that the security provisions apply only to those natural gas suppliers who offer service to residential customers and small commercial and industrial customers that consume less than 300 Mcf annually. Equitable also expresses the opinion that an NGS that offers service to large commercial and industrial customers should be permitted and required to determine appropriate security with the NGDC outside the parameters of this section. Equitable Comments, Appendix A, p. 1.
Resolution
The definition of ''natural gas supplier'' at 66 Pa.C.S. § 2202 does not categorize a supplier by the class of customers it serves, nor by the volume of natural gas its customers consume. In fact, the only criterion in the definition is that the natural gas supplier provides retail natural gas supply service as opposed to wholesale gas service. For this reason, we see no need to make a distinction between suppliers based on the volume of gas that customers consume, especially since we are attempting to create a more competitive retail market by adopting consistent requirements for suppliers. Accordingly, we will not make the requested change.
As to Equitable's comment that it should be able to determine appropriate security for an NGS that offers service to large commercial and industrial customers outside the parameters of this section, we will note that an NGDC and a supplier can always come to a mutual agreement on the amount of security that the NGS must provide. 66 Pa.C.S. § 2208(c)(1)(i) (relating to requirements for natural gas suppliers; financial fitness). The only caveat is that the NGDC must apply the criteria used as the basis for such an agreement to other agreements with other similarly situated suppliers so as to avoid discriminatory or anticompetitive conduct. See 66 Pa.C.S. § 2209 (relating to market power remediation); 52 Pa. Code §§ 62.141—62.142 (relating to standards of conduct).
§ 62.111(c)(1)(i)—Security Amount
RESA proposes the addition to the regulation of a formula that would be used to calculate the amount of security that will be required to operate on an NGDC's system. The formula is that ''security cannot exceed the NGS' customers' MDQ [Maximum Daily Quantity] times the peak forecasted NYMEX [New York Mercantile Exchange] price for the next 12 months and for upstream capacity to the city gate times 10 days.'' RESA Comments, p. 4.
RESA also suggests a baseline creditworthiness standard, which if met, would satisfy the section 2208(c) security requirement and would obviate the need for the supplier to post additional security. The standard would entail the supplier having a minimum investment grade credit rating or its equivalent from two of three credit rating agencies. RESA Comments, pp. 5-6. RESA states that the minimum threshold security requirement is warranted to reflect the reduced risk associated with an NGS that has a favorable investment grade/credit rating. RESA Comments, p. 7.
EAPA comments that financial security requirements for NGSs are necessitated by section 2207(k) that permits the NGDC, acting as the supplier of last resort (SOLR), to charge customers returning from a defaulting supplier the rates the supplier would have charged the customer for the remainder of the billing cycle. 66 Pa.C.S.§ 2207(k) (relating to rate after service discontinued [by a defaulting supplier]). EAPA Comments, pp. 1-2. This section specifically provides that:
any difference between costs incurred by the supplier of last resort and the amounts payable by the retail gas customer shall be recovered from the natural gas supplier or from the bond or other security provided by the natural gas supplier without recourse to any retail gas customer not otherwise contractually committed for the difference.66 Pa.C.S. § 2207(k).
The supplier's bond or other security pays the NGDC or the SOLR the difference between the cost of the replacement gas supply for returning customers from a defaulting supplier and the amount that the NGDC or SOLR can collect from those customers for the gas supply under the defaulting supplier's agreement.
EAPA also comments that financial risks imposed by section 2207(k) vary from NGDC to NGDC. For NGDCs that have on-system storage facilities, native natural gas production and ample pipeline capacity, the financial risk of obtaining supply during peak periods may be relatively small. EAPA Comments, p. 2. For those NGDCs who do not, the financial risks may be relatively large. The bond or other security provided by the NGS ensures the financial responsibility of the supplier, but ultimately ensures ''the safety and the reliability of the natural gas supply service in this Commonwealth.'' See 66 Pa.C.S. § 2208(c)(1)(i). EAPA Comments, p. 2.
Resolution
Section 2208(c)(1) requires that a supplier provide a bond or other security to ensure its financial responsibility so it can be licensed as an NGS. 66 Pa.C.S. § 2208(c)(1). The purpose of the security is to ensure the financial responsibility of the supplier and the safety and the reliability of the natural gas supply. 66 Pa.C.S. § 2208(c)(1). Specifically, the security can be used to pay, in part, for the costs of replacement gas supply for customers of suppliers who return to default service.
Section 62.111(c)(1) has always recognized that the starting point for setting the security for a licensee was the amount that would satisfy the statutory requirement in 66 Pa.C.S. § 2207(K). Section 62.111(c)(1) reads as follows:
(1) The amount of the security should be reasonably related to the financial exposure imposed on the NGDC or supplier of last resort resulting from the default or bankruptcy of the licensee. At a minimum, the amount of security should materially reflect the difference between the cost of gas incurred and the supplier's charges, if any, incurred by the NGDC or supplier of last resort during one billing cycle.52 Pa. Code § 62.111(c)(1).
This preliminary security amount could then be adjusted upward or downward based on the criteria set forth in § 62.111(c)(1)(i)(A)—(E).
In reviewing the comments to this rulemaking, we discovered that the use of the phrase ''at minimum'' in the second sentence as well as the paraphrasing of statutory language from section 2207(k) has created some confusion. For this reason, we will revise this sentence by deleting the phrase ''at minimum'' and the word ''material,'' and by incorporating the exact statutory language from section 2207(k). This revision should make the method for establishing the preliminary security amount required for licensing more understandable. This amount will then be the security amount ordinarily required, unless one or more of the criteria set forth in § 62.111(c)(1)(i)(A)—(E) warrant an upward or downward adjustment to that amount.
While we agree that an NGS's credit rating may be taken into account by an NGDC in establishing the amount of security, we cannot adopt RESA's proposal to eliminate the security requirement upon the showing of some baseline creditworthiness standard. Risks vary from supplier to supplier, and thus, financial exposure posed by suppliers operating on NGDC systems vary from NGDC to NGDC making a baseline creditworthiness standard based solely on credit or investment ratings difficult, if not impossible, to establish for use in the statewide retail market. However, we understand that some NGDCs do not require an NGS to post additional security when the NGS has a high credit rating, or is backed by a highly rated parental or other corporate guaranty. To the extent that an NGDC has adopted such a standard, we will direct that the NGDC include this standard in its tariff. This will ensure that all NGSs have notice of the standard and will further ensure that the standard is applied in a non-discriminatory manner to all NGSs. We have also revised § 62.111(c) to require NGDCs to include this information in their tariffs.
In regard to the RESA's suggestion to use a standardized formula to calculate the security amount, the law provides NGDCs with the discretion to set the security amount for licensing, and states that the criteria used ''shall include, but not be limited to, the financial impact on the natural gas distribution company . . . of a default or subsequent bankruptcy of a natural gas supplier.'' 66 Pa.C.S. § 2208(c)(1)(i). Because the NGDC may take into account criteria other than the cost of replacement gas when establishing a security amount for a supplier, we do not believe that it appropriate to adopt one standard formula to calculate the security amount for use by all NGDCs. Accordingly, we will not adopt RESA revision to the regulations at this time.
We note, however, that some NGDCs may use their own formulas to calculate the level of security for NGSs operating on their systems. These formulas were established in the NGDCs' restructuring proceedings for the retail supply market. These formulas involve the peak day demand estimate for capacity, the number of days potential exposure in the billing cycle and the commodity estimates for quantity and cost. SEARCH Report, p. 18-19. Again, to promote transparency of credit requirements for licensing, we will direct an NGDC that uses a formula to calculate security amounts to include the formula with other applicable rules for its use in its tariff. We have also revised § 62.111(c) to require NGDCs to include this information in their tariffs.
While the NGDC has the discretion to set the level of security, the Commission has the authority to approve criteria to be used to determine the appropriate amount of security based upon financial impact on the NGDC of a supplier's default, and may review NGDC decisions regarding the application of these criteria. Nevertheless, we expect that the NGDC will establish a security amount that is reasonably related to its financial exposure. See UGI Utilities v. Pennsylvania Public Utility Commission, 878 A.2d 186, 192 (Pa. Cmwlth. 2005) (UGI Utilities) (the law provides for a ''reasonably related'' financial security requirement, not the worst case scenario as determined by the NGDC, which is contrary to the intentions of the statute to promote competition and choice in the natural gas industry).
However, when an NGS believes that the amount of security that it is being required to post to obtain a license is too high and it cannot come to an agreement with the NGDC regarding an alternative amount, it may file a formal complaint against an NGDC. The Commission has adjudicated complaints from suppliers against NGDCs alleging high security amounts, and, based on the record presented, has adjusted security when it was warranted. See UGI Utilities, supra. Alternatively, a supplier may follow the procedures to dispute an NGDC's determination of the security amount set forth in § 62.111(c)(8)(i) and (ii) that are discussed below.
§ 62.111(c)(1)(ii)—Adjustment of Security Amount
Section 62.111(c)(1)(ii) states that the amount of the security may be adjusted, but not more often than every six months, and the adjustments must be reasonable. It then lists criteria upon which these adjustments must be based. In response to suppliers' complaints about the frequency of security level adjustments and the need for specific triggering events for creditworthiness reviews and security adjustments, we proposed to revise the criteria to make them more stringent. The regulation was revised so that only changes in the NGS's operation that would materially affect the NGDC system operation or reliability or changes that would materially affect the NGS's creditworthiness could trigger a review and adjustment of security.
We have divided the comments filed to this section into two parts to facilitate their disposition.
A. Six Month Time Restriction
EAPA and NFG propose eliminating the six months limit on adjusting security and recommends reliance on reasonableness of the requirement to protect against rapid and random changes in security. The argument is that allowing changes more frequently than every 6 months will permit the NGS to maintain different security levels in the winter and the summer because the NGDC will no longer fear being locked into a security amount in the event of a change in circumstances. This would not be a burden to the NGSs and would provide greater flexibility for both parties. As an alternative, NFG suggests a limit or freeze on NGS customer enrollments. EAPA Comments, p. 3; NFG Comments, p. 5.
Resolution
The Commission understands the utility of eliminating the six months restriction on adjusting security amounts and will delete it from § 62.111(c)(1)(ii). We believe that elimination of this restriction will allow the NGDC to establish seasonable levels of security for NGSs operating on its system. We will substitute the phrase ''as circumstances warrant'' for the deleted language.
B. Triggering Events for Adjustment in Security Amount; Adjustments in Advance of Possible Default; Need to Define Modifiers ''Significant'' and ''Materially'' for Clarity
The EAPA offers revisions to the proposed regulation to achieve two purposes: (1) to ensure that security is provided in advance of supplier default that it is sufficient to cover the financial risk to the NGDC; and (2) to allow for adjustment of the security amount when there is a significant increase in customer number, change in class of customer served or significant change in the volume of gas supplied by the NGS.
PGW states that security levels should be adjusted when there is a significant change in volume of gas provided by the supplier. This change in volume would be independent of an increase in the number of customers since a current commercial or industrial customer could significantly increase its purchase of gas from a supplier and thus significantly increase the financial exposure of PGW and its customers. PGW and Equitable suggest that a 10% increase in volume would represent a significant increase in volume that would justify an adjustment in the amount of security. NFG and Equitable agree that an increase in gas volume may be more important than an increase in the number of customers. NFG also suggests that the Commission should evaluate a means of tying the ability to adjust security requirements to commodity prices. Equitable Comments, Appendix A, p. 1; NFG Comments, p. 3. PECO supports a threshold of a 25% increase in the projected quantity of natural gas that suppliers deliver or an increase in the projected volume of gas consumed to trigger an increase in security requirements. PECO Comments, pp. 2-3.
The EAPA states that the ''25% change in customers'' trigger for adjustment of security amount is arbitrary and does not consider a change in the volume of natural gas supplied. If the parties cannot agree on the meaning of the term ''significant,'' the proposed § 62.111(c)(6) provides a means to resolve the dispute. Thus, prescriptive triggers can be avoided and the final sentence of the proposed regulation at § 62.111(c)(i)(ii)(C) can be deleted. EAPA Comments, p. 3.
IRRC states that this provision should be revised to reflect the impact on the NGDC's financial risk of changes in volume delivered or consumed as well as changes in the number of customers. IRRC also states that the PUC should specify the percentage change in volume that could trigger an adjustment to the amount of security required. IRRC Comments, p. 2.
In regard to timing, NFG states that directing a change in security only if an event materially affects system operations or reliability potentially subjects all customers to unnecessary risk that could have been avoided if an NGS was required to post appropriate security before it materially impacted system operations. In other words, NFG believes it is appropriate to have sufficient security to cover material impacts on the system operations before, and not after, the event occurs. In addition, NFG states that an early warning of a supplier's default could be discerned from a pattern of operating violations that may not, at the time, have been material. NFG Comments, pp. 2-3.
PGW recommends that the criteria that would trigger an adjustment in the level of security for an NGS should be expanded to include ''significant changes in a licensee's recent operating history that materially affected NGDC system operations or reliability on other NGDC systems.'' PGW Comments, pp. 2-3.
NFG objects to the use of the phrases ''significant changes'' and ''materially affects'' because they are too broad and ambiguous for regulations. NFG also characterizes the ''materiality'' clause (as affecting system reliability) as a loophole that would only benefit potentially unreliable NGSs. NFG Comments, pp. 3-4. NFG recommends deletion of this language.
IRRC states that ''significant changes'' should be defined or clearly explained in § 62.111(c)(1)(ii)(A) and (B). IRRC also states that the term ''material affects'' in § 62.111(c)(1)(ii)(A), (B) and (E) should be defined in each instance or include the criteria that are to be used in each instance to determine if there is a material effect. IRRC's Comments, p. 1.
Resolution
In regard to circumstances that may warrant a change in the level of security, we agree that a substantial change in volume of gas sold by a supplier could warrant an adjustment of the security amount, and so we will revise § 62.111(c)(1)(i)(C) to add ''change in volume of gas'' as a triggering event for adjusting security amounts.
However, security adjustments for changes in the price of natural gas require more careful consideration. We can foresee that price volatility could cause an NGDC to request an ever escalating amount of security for a short term period. The NGS would then be obliged to request a change in security when prices fell. Accordingly, we will add a provision that a 25% change in the unit price of gas averaged over a consecutive 30 day period will constitute a significant change in price that would support a change in security level.
In regard to the percentage change in the number of customers served, we will follow IRRC's comment and better define the changes that may be considered to be a significant change that could trigger a change in security levels. Specifically, we have revised § 62.111(c)(1)(ii)(C) to add a time element so that a significant change in customer number would be a change of 25% averaged over a consecutive 30 day period. We have added this same qualification to better define a change in volume of gas delivered that could trigger a change in security amount. We note that a 25% benchmark may appear to be overly generous, but it cuts both ways. Just as a 25% increase in customers would act as a triggering event that would allow an NGDC to increase an NGS's security amount, a 25% decrease in customers would act as an event that would allow a supplier to request a decrease in security amount.
We have revised the following sections to add language that explain circumstances relating to credit rating services and investment rating services that could materially affect a licensee's creditworthiness:
• Section 62.111(c)(1)(ii)(B)—when two of five listed credit rating companies change the licensee's credit rating.
• Section 62.111(c)(1)(ii)(D)—when a two of the five listed investment ratings service change the licensee's ratings of its issued securities.
As now revised, § 62.111(c)(1)(ii)(B) would be applicable to a supplier's credit score for obtaining a bond or letter of credit from an insurance company or bank or other surety. Section 62.111(c)(1)(ii)(D), as now revised, may be most applicable to situations where the NGDC has agreed to to accept a corporate, parental or other third-party guaranty as security. See § 62.111(c)(2)(iii). To ensure that a supplier's change in rating was not a mistake or fluke, we added the requirement that two of the five listed major ratings companies would need to make the change in rating to trigger an adjustment in the security amount.
In response to IRRC's comment, we have also revised § 62.111(c)(2)(ii)(E) to explain that an NGDC system's operation or reliability could be materially impacted when a supplier fails to deliver natural gas supply sufficient to meet its customers' needs on five separate occasions within a 30 day period, or fails to comply with NGDC operational flow orders as defined at 52 Pa. Code § 69.11 (relating to definitions). These are only two examples of how an NGDC could be impacted when a supplier defaults on gas delivery volumes.
In regard to the comments that urge that changes in an NGS's operating history on other NGDC systems that materially affect system operation and reliability should also be considered as a basis for adjusting the security amount, we agree. A record of an NGS's compliance with other NGDC system requirements is a fair predictor of its future compliance with another NGDC's system requirements. For this reason, we believe that the operating history of an applicant or a licensee on other NGDC systems may also be considered by an NGDC when it establishes the initial security amount necessary for the applicant to be licensed as an NGS in Pennsylvania. Accordingly, we have revised both §§ 62.111(c)(1)(i)(A) and 62.111(c)(1)(ii)(A) consistent with this discussion.
Finally, for consistency, we added a reference to § 62.111(c)(i)(A)—(E), as now revised, in § 62.111(c) (1)(i)(D) to better explain the phrase ''information that materially affects a licensee's creditworthiness'' in regard to establishing the initial security amount for NGS licensing requirement.
§ 62.111(c)(2)—Types of Security
This section lists the legal and financial instruments that shall be acceptable for security. In the proposed rulemaking order, we revised the list to include escrow accounts, accounts pledged to the NGDC or sold by the supplier in an NGDC purchase of receivables program, and ''calls on capacity'' or other operational offsets that may be mutually agreeable to NGDC and NGS.
In its comments, NFG argues that accounts receivable that are 'sold' cannot be used as security by anyone. NFG states that the financial exposure imposed by an NGS on an NGDC may be reduced by a purchase of receivables program. The accounts receivable will not be a security instrument, but it will lower the financial exposure of the NGDC through the ability of the NGDC to ''off-set'' any potential liabilities incurred by the NGS with payments due under the POR. NFG Comments, pp. 5-6.
Equitable states that the final regulations for POR programs have not yet been established so it is premature to include receivables as a type of acceptable security. Currently Equitable forwards NGS receivables once per calendar month. Equitable questions whether it would be acceptable for the NGDC to retain 100% of the NGS receivables if the NGS fails to deliver gas during a winter month. Equitable also states that an NGDC should be allowed to retain 100% of NGS receivables in the event of a mid-month NGS failure to deliver, and receivables considered to be acceptable security. The receivables would be used to satisfy the NGS obligations with the balance, if any, payable to the NGS. Equitable notes that NGSs have historically failed during periods of a run-up in gas prices. Equitable Comments, Appendix A, pp. 1-2.
PECO states that if an NGDC purchases NGS customer receivables, the receivables belong to the NGDC and the NGDC acquires the increased risk of uncollectible accounts. NGDCs should not be required to use those receivables to satisfy NGS security requirements. PECO Comments, p. 4.
IRRC states that the PUC needs to provide further justification for including accounts receivable as acceptable security. This direction is based on comments that receivables cannot quickly be converted to cash, and alone, should not be an acceptable form of security. IRRC Comments, p. 2.
RESA suggests adding an additional operational offset to be used as security in § 62.111(c)(2)(vi): ''netting NGDC gas supply purchases against NGS collateral requirements.'' RESA Comments, p. 7.
NFG comments that ''cash'' should be added as a form of security. NFG also comments that ''escrow accounts'' should be deleted as a type of security because of the administrative expenses involved in maintaining such an account. NFG Comments, p. 5.
Resolution
The use of the word ''sold'' in the provision that permitted purchase of receivables to be used as security collateral was to provide flexibility to NGDCs in designing ''purchase of receivables'' programs (POR). Because of the legal ambiguity unintentionally created, we have replaced the word ''sold'' with ''assigned.''
In response to IRRC's comment regarding the need to justify the use of receivables as a security, we note that accounts receivable represent a future stream of income owed to the NGS, and thus, are an asset. As such, receivables are NGS personal property, a type of security that has been recognized as an acceptable form of security since the regulations were first promulgated on July 21, 2001. See 52 Pa. Code § 62.111(c)(3); 31 Pa.B. 3943. By way of further explanation, in POR programs NGS receivables are pledged or are assigned to the NGDC, thereby transferring an asset to the NGDC which, in turn, reduces the financial risk to the NGDC in the event of an NGS default on its obligations, e.g., failure to deliver gas in the necessary quantities. The discounting of NGS receivables in an NGDC's POR accounts for the risk of uncollectibles, and reduces the NGDC's overall financial exposure by improving the quality of those NGS accounts receivable which now belong to the NGDC. For these reasons, we believe that receivables in a POR program are an acceptable form of security. We will also adopt RESA's suggestion and will add the ''netting'' of ''NGDC gas supply purchases from the NGS'' against ''NGS security requirements'' as another example of an operational offset that is acceptable as security in § 62.111(c)(2)(vi).
In addition, we will clarify that NGS receivables in a POR program, or any of the other financial or legal instruments or property, real or personal, listed as acceptable forms of security in § 62.111(c)(2) need not by itself satisfy the entire security amount. The NGS may offer to provide one or more these forms of security to satisfy the total security amount required for licensing.
We will also revise this section to add ''cash'' as an acceptable type of security at § 62.111(c)(2)(vii). However, we will not eliminate the use of ''escrow accounts'' as suggested by NFG. We understand that there may be additional costs involved with maintaining an escrow account, but if the NGDC and NGS are both agreeable to its use, responsibility for the maintenance cost is just another point for agreement.
Ideally, the NGS and the NDC will come to an agreement on the amount and the form of security that the NGS will need to provide to maintain its license. However, the NGDC's determinations in regard to the security amount or the forms of security it will accept is subject to Commission review and must be reasonable in regard to the individual supplier and consistent in regard to all suppliers to guard against discriminatory or anti-competitive conduct. See 52 Pa. Code § 62.111(c).
§ 62.111(c)(4)—Use of NAESB Standards
This proposed section states that, when practicable, the NGDC shall use applicable North American Energy Standards Board (NAESB) forms or language for financial and legal instruments.
In its comments, Equitable believes that the use of forms and language in security instruments should also be at the discretion of the NGDC and proposes the following language:
When practicable and in the NGDC's discretion, the NGDC shall use applicable North American Energy Standards Board forms or language for financial and legal instruments that are used for security.In regard to § 62.111(c)(4), Equitable states that the use of forms and language in security instruments should be at the discretion of the NGDC. Equitable Comments, Appendix A, p. 2.
Resolution
The Commission declines to revise this section. The standardization of business practices, including forms, was identified as a means to increase supplier participation in the statewide retail natural gas supply market. SEARCH Order, pp. 26-33. NAESB has developed numerous forms that are in use in the natural gas industry today. While NAESB business practices, forms and language for financial and legal instruments will be examined more thoroughly in the rulemaking, Natural Gas Distribution Company Business Practices, Order entered May 1, 2009 at Docket No. L-2008-2069117, we see no reason not to encourage their use, where practical, here.
§ 62.111(c)(5)—Annual Reporting Requirements
Proposed § 62.111(c)(5) imposes an annual reporting requirement on the NGDCs. The purpose of this reporting requirement is to gather information about the NGDC's application of established criteria to set and adjust levels of security for suppliers that operate on the NGDC's system. The report will be filed with the Commission's Secretary.
PGW comments that § 62.111(c)(5)(iv), which requires that the NGDC report ''the number of times in the last quarter that the NGDC determined that a change in the level of security was needed for a supplier to maintain its license,'' should be changed to the number of times in the last year. PGW Comments, p. 5. EAPA provided the same comment. EAPA Comments, p. 4.
In its comments, EAPA offers revisions to streamline and consolidate the new reporting requirements and clarifies that it is not the NGDC, but the Commission who grants the license. EAPA states that its revisions underscore that the amount and form of the security should be reasonably related to the financial exposure imposed on the NGDC or SOLR resulting from a potential default or bankruptcy of the NGS. The criteria established for security must ''ensure the financial responsibility'' of the licensee in the event of default or bankruptcy, and EAPA's proposed revisions use that specific wording. EAPA Comments, p. 4.
Resolution
The Commission has proposed an annual reporting requirement to gather information about the criteria used by NGDCs to establish security amounts and the rules used by NGDCs to adjust security amounts to obtain, and maintain an NGS license. See 52 Pa. Code § 62.111(c)(5). The information collected will be used to study the criteria and rules used by the NGDCs to establish and adjust security amounts for NGSs operating on their systems. The data will also be used to evaluate the consistency of the application by an NGDC of its criteria and rules to NGSs operating on its system. It is envisioned that the collected data may also be used to standardize these criteria and rules so that they may be included for use by all NGDCs in a standardized supplier coordination tariff.
Based on the comments, we have revised the reporting requirements to clarify that it is the Commission and not the NGDC that grants an NGS a license. While § 62.111(b) makes it clear that the purpose of the security requirement for licensing is to ensure the licensee's financial responsibility, we have added EAPA's suggested language that reiterates this point in regard to security that the licensee must have in place to maintain its license in § 62.111(c)(5)(ii). We also revised § 62.111(c) (5)(iv) to delete language that requests data be reported ''for the last quarter'' as being inconsistent with an annual reporting requirement.
§ 62.111(c)(6)—Dispute Resolution Procedures
Proposed § 62.111(c)(6) lists four Commission processes that an NGS may pursue if it is unable to reach an agreement with the NGDC on the form or amount of security to be provided: informal mediation; alternate dispute resolution with the OALJ; litigation of a formal complaint; and petition for Commission review of NGDC criteria for security levels. The first alternative presented, informal mediation, may be requested by filing a dispute with the Commission's Secretary. The Secretary will assign the complaint to the appropriate bureau that will act as the mediator between the NGS and the NGDC.
In its comments, RESA suggests that the Commission add a provision that lists the Commission processes, formal and informal that an NGS may pursue to resolve a dispute with the NGDC on the form and/or amount of security. RESA Comments, p. 9.
NFG states that there is no mention of the Office of Competitive Market Oversight6 in the dispute resolution section and states that attempting to resolve the dispute through the OCMO should be required before an NGS can attempt to obtain other Commission intervention by filing a formal complaint. NFG Comments, p. 6. PECO comments that supplier complaints should be initially referred to the OCMO for mediation and advisory purposes. PECO Comments, p. 5.
NFG also states that the section does not explain how the financial security should be handled pending the resolution of the dispute. NFG suggests that in order to protect system reliability and NGDC ratepayers, an NGS must post the required security in order to provide or continue to provide service on the NGDC system pending the dispute resolution. NFG Comments, p. 7. PECO comments that the Commission should clarify its intent that NGSs continue to provide service to customers during disputes. PECO Comments, p. 5.
Equitable states that the NGDC should have the right of appeal to the Commission from a bureau decision concerning NGS security. Equitable Comments, Appendix A. p. 3. EAPA supports the dispute resolution provision and suggests revising it to require the NGS first to attempt to resolve the issue with the NGDC: to assign the dispute to the OCMO; and to require an existing licensee to post the adjusted security amount requested by the NGDC until the dispute is resolved. The rationale is to ensure that there is adequate security in place to cover the financial exposure of the NGDC while the dispute is being resolved. EAPA Comments, p. 5.
IRRC states that several commentators noted that the regulation does not address the NGS's responsibilities to customers during the dispute resolution process. IRRC suggests that, in the final form regulation, the Commission should clarify the responsibilities of all parties during the pendency of the dispute. IRRC Comments, p. 2.
Resolution
We have not identified the Office of Competitive Market Office as the Commission office that will mediate a dispute about the amount of security because we did not want to limit our ability in making such assignments. In § 62.111(c)(8)(1), we did expand the list of bureaus that will be involved in informal mediation to include an ''office, or other designated unit.'' The term ''other designated unit'' is intended to include working groups composed of staff and other stakeholders.
We have included a requirement that the NGS must contact the NGDC and attempt to resolve the dispute over the security amount before filing for Commission intervention through informal mediation, alternative dispute resolution or litigation. We agree that the parties should make an initial attempt to resolve the differences between themselves. However, we do not see the necessity of requiring an existing licensee to go through an informal mediation process before it may file a formal complaint with the Commission. Accordingly, we will not adopt this suggestion.
We also will not adopt the suggestion that we provide for a right of appeal to the Commission from a bureau decision concerning NGS security because it is unnecessary. Section 5.44 of the Commission's Rules of Practice and Procedure already permits a party to appeal the decision of Commission staff. See 52 Pa. Code § 5.44 (relating to petitions for appeal from actions of the staff).
In response to IRRC's comment, we have added § 62.111(c)(9) that clarifies the responsibilities of the NGS and the NGDC to all parties, including customers, during the pendency of a dispute, including the requirement that the NGS post the amount of security requested by the NGDC. The Commission notes that it expects that the security amount requested by the NGDC will be a good faith estimate necessary to ensure the financial responsibility of the supplier as this amount may be subject to change or refund depending on the ultimate resolution of the dispute.
§ 62.111(c)(7)—NGS Request for Change in Security
RESA states that the NGDCs should be permitted to request a peak (winter) and off-peak (summer) security calculation to reflect the decrease in customer load and thus, a reduction to the NGDC's risk of supplier default, during the off-peak period. This formula, which is based on the New York's Uniform Business Practices, would calculate security based on the published gas price forecasts, as well as the cost of capacity (generally calculated as the weighted average cost of capacity), which would most accurately reflect the costs and risks an NGDC would face upon supplier default. RESA Comments, p. 4.
RESA also requests the addition of a provision that permits an NGS to request a reduction in security upon certain conditions including a rating upgrade to the minimal rating level of two of the three following agencies: Standard and Poor's Rating Services, Moody's Investor Service, Inc. and Fitch, Inc., or a significant decrease in the total usage of the supplier's customers for 30 days; or a significant decrease in gas supply cost lasting for 30 days. RESA further proposes that a significant reduction be defined as a reduction of 25% in total customer load or in gas supply costs. This addition would further reduce market entry barriers for suppliers and ensure broader participation by existing suppliers. RESA Comments, p. 6.
IRRC suggests that the regulation permit suppliers to request a reduction in security under certain circumstances where it is apparent that there is a reduction in the risk of supplier default. IRRC states that RESA recommends that specific criteria be used in demonstrating the reduction of risk and a 5-calendar day time limit within which the NGDC must make its decision. IRRC questions if there is an existing process by which the supplier can seek decreased security requirements. If there is a process, then it should be included in this regulation. If there is no process in place, the Commission should consider including one in the final form regulations. IRRC Comments, p. 1.
Resolution
The Commission first notes that the elimination of the 6 month restriction on adjusting security amounts in § 62.111(c)(1)(ii) should facilitate seasonal levels of bonding, and permit a supplier to ask for reduction in security when the risk of financial exposure to the NGDC decreases.
The Commission has provided criteria for the adjustment of security in § 62.111(c)(1)(ii)(A)—(E) that may be used by the NGDC to increase the security amount when financial risk to the NGDC is increased, and by the NGS to request a reduction in security amount when the financial risk to the NGDC decreases. Section 62.111(c)(7) sets forth a procedure, including specific deadlines for response, that may be used by the NGS to request a decrease in security amount when the NGS is unable to come to agreement with an NGDC for a lower security amount. We believe that these revisions are consistent with and satisfy RESA's and IRRC's comments on this issue.
Conclusion
The Commission adopts the regulation revised herein as final. This rulemaking revises § 62.111 to include, inter alia, the development of reasonable criteria for establishing the initial security amount and for adjusting the security amount for an NGS license, regardless of whether the request for the adjustment is made by the NGDC or the NGS. Also established is an NGDC annual reporting requirement that will permit the Commission to collect data relating to the adjustment of security amounts and the triggering events, financial or operational, or both, that triggered the adjustment. The revision also permits the use of escrow accounts, cash, and NGS accounts receivable in a Commission-approved POR program to reduce the total security requirement. Finally, § 62.111(c)(7) establishes a process by which a supplier can request a reduction in security amount, and § 62.111(c)(8) sets forth an informal procedure that may be used by the NGS in lieu of filing a formal complaint to resolve a dispute with an NGDC over the amount of security required for licensing. The Commission believes that these regulations, as revised, better balance the ability of an NGS to provide adequate security to maintain its license with an NGDC's actual risk of financial loss in the event of supplier default.
Accordingly, under 66 Pa.C.S. §§ 501, 2203(12) and 2208, sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202), known as the Commonwealth Documents Law, and the regulations promulgated thereunder in 1 Pa. Code §§ 7.1, 7.2, and 7.5, section 204(b) of the Commonwealth Attorneys Act (71 P. S. § 732.204(b)), section 745.5 of the Regulatory Review Act (71 P. S.§ 745.5) and section 612 of The Administrative Code of 1929 (71 P. S. § 232) and the regulations promulgated thereunder in 4 Pa. Code §§ 7.231—7.234, the Commission adopts as final the amendments to § 62.111 as set forth in Annex A; Therefore,
It Is Ordered That:
1. The regulations of the Commission, 52 Pa. Code Chapter 62, are amended by amending § 62.111 to read as set forth in Annex A.
2. The Secretary shall submit this order and Annex A to the Office of Attorney General for approval as to legality.
3. The Secretary shall submit this order and Annex A to the Governor's Budget Office for review of fiscal impact.
4. The Secretary shall submit this order and Annex A for review by the designated standing committees of both houses of the General Assembly, and for review and approval by IRRC.
5. The Secretary shall certify this order and Annex A with the Legislative Reference Bureau for publication in the Pennsylvania Bulletin.
6. This amendment shall become effective upon publication in the Pennsylvania Bulletin.
7. The contact persons for this final-form rulemaking are Annunciata Marino, FUS, (717) 772-2151 (technical) and Patricia Krise Burket, Assistant Counsel, (717) 787-3464. Alternate formats of this document are available to persons with disabilities and may be obtained by contacting Sherri DelBiondo, Regulatory Review Assistant, Law Bureau, (717) 772-4597.
8. A copy of this order and Annex A shall be served on all jurisdictional natural gas distribution companies, natural gas suppliers, the Office of Consumer Advocate, the Office of Small Business Advocate and all other parties that filed comments at Doc. No. L-2008-2069115, Licensing Requirements for Natural Gas Suppliers.
9. Within 30 days after the date that this amendment becomes effective, all natural gas distribution companies shall file with the Commission's Secretary revised tariff pages consistent with this order and this amendment. The natural gas distribution company shall serve a copy of this compliance filing on all natural gas suppliers licensed in its service territory.
ROSEMARY CHIAVETTA,
Secretary
Statement of Vice Chairman Tyrone J. Christy Before the Commission for consideration is the Final Rulemaking Order in the above captioned matter, recommending approval of revisions to the Commission's security requirements for licensing of natural gas suppliers (NGSs) at 52 Pa. Code §§ 62.101—62-114. This rulemaking resulted from our September 11, 2008 Final Order and Action Plan regarding the Commission's Investigation into the Natural Gas Supply Market: Report on Stakeholder's Working Group (SEARCH Order), Docket No. I-00040103F0002. In the SEARCH Order, the Commission determined that one way to increase effectivecompetition in the retail natural gas market was to revise the NGS licensing regulations in regard to the level of security needed and the forms of security that could be used to satisfy the statutory security requirement for licensing. Seven parties filed comments in response to the proposed rulemaking order: the Energy Association of Pennsylvania (EAPA); Philadelphia Gas Works (PGW); National Fuel Gas Distribution Company (NFG); Equitable Gas Company (Equitable); PECO Energy (PECO); the NGS Parties and the Retail Energy Supply Association (RESA).
I am concerned about one aspect of the proposed revisions to our licensing requirements, that being the inclusion of accounts receivable pledged or assigned to a natural gas distribution company (NGDC) by a supplier participating in a NGDC purchase of receivables (POR) program as an acceptable form of security. It is important to note that financial security requirements for NGSs are necessitated by Section 2207(k) of the Public Utility Code, 66 Pa.C.S. § 2207(k), which requires a NGDC, acting as supplier-of-last-resort, to charge customers returning from a defaulting NGS the rates the NGS would have charged the customer for the remainder of the billing cycle. The statute provides, ''Any difference between the cost incurred by the supplier of last resort and the amount payable by the retail gas customer shall be recovered from the natural gas supplier or from the bond or other security provided by the natural gas supplier. . . .'' The purpose of the bond or other security is to ensure the financial responsibility of the NGS.
The addition of accounts receivable as a form of security has created significant concerns from several of the parties submitting comments to this rulemaking proceeding. The EAPA states that participation in a NGDC POR program by a NGS may reduce the financial risk or exposure created by the default or bankruptcy of a NGS and may impact the amount of security necessary, but participation in the program cannot in itself be the security. NFG states that the notion that an entity could use something it has sold or pledged as security is fundamentally flawed. NFG avers that the receivables may reduce the financial exposure imposed by a NGS on a NGDC, but the impact will not be a security instrument. PGW states that receiving a pledge of accounts receivable is not as simple as receiving a bond, a letter of credit or being the beneficiary of money deposited into escrow. PGW avers that it is simply not possible for a supplier to provide a security interest in accounts receivable that it does not own. Equitable and PECO have submitted similar concerns on this issue and state that receivables do not adequately mitigate risk for NGDCs and should not be eligible for use as security.
I must respectfully dissent, partially, from the majority's decision today on this one aspect of the proposed rulemaking as I agree with the aforementioned comments that receivables pledged or assigned to a NGDC by a NGS participating in the NGDC's POR program should not be included as an acceptable security instrument or property. While I agree that the amount of receivables under a POR program may reduce the financial exposure by a NGS on a NGDC, that reduced financial exposure should be considered in the context of the overall NGDC formula for security. This formula would consider, among many details, the current level of customers, the volume of natural gas delivered and the average price of natural gas. As a result, I would have preferred that the proposed regulations rely upon adjustments to the level of security by the aforementioned issue and excluded the use of POR program receivables as a form of NGS security.
TYRONE J. CHRISTY,
Vice Chairperson(Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 40 Pa.B. 6752 (November 20, 2010).)
Fiscal Note: Fiscal Note 57-266 remains valid for the final adoption of the subject regulation.
Annex A
TITLE 52. PUBLIC UTILITIES
PART I. PUBLIC UTILITY COMMISSION
Subpart C. FIXED SERVICE UTILITIES
CHAPTER 62. NATURAL GAS SUPPLY CUSTOMER CHOICE
Subchapter D. LICENSING REQUIREMENTS FOR NATURAL GAS SUPPLIERS § 62.111. Bonds or other security.
(a) A license will not be issued or remain in force until the licensee furnishes proof of a bond or other security. See section 2208(c)(1)(i) of the act (relating to requirements for natural gas suppliers).
(b) The purpose of the security requirement is to ensure the licensee's financial responsibility. See section 2208(c)(1)(i) of the act.
(c) The amount and the form of the security, if not mutually agreed upon by the NGDC and the licensee, shall be based on the criteria established in this section. The criteria shall be applied in a nondiscriminatory manner. The Commission will periodically review the established criteria upon petition by any party. The NGDC shall include the rules, formulas and standards it uses to calculate and adjust security amounts in a tariff.
(1) The amount of the security should be reasonably related to the financial exposure imposed on the NGDC or supplier of last resort resulting from the default or bankruptcy of the licensee. The amount of security should reflect the difference between the cost of gas incurred by the NGDC or supplier of last resort and the amount payable by the licensee's retail gas customers during one billing cycle.
(i) The amount of security established under this paragraph may be modified based on one or more of the following:
(A) The licensee's past operating history on the NGDC's system and on other NGDC systems, including the length of time that the licensee operated on the NGDC system, the number of customers served and past supply reliability problems.
(B) The licensee's credit reports.
(C) The number and class of customers being served.
(D) Information that materially affects a licensee's creditworthiness as set forth in subparagraph (ii)(A)—(E).
(E) The licensee's demonstrated capability to provide the volume of natural gas necessary for its customers' needs.
(ii) The amount of the security may be adjusted as circumstances warrant. The adjustments must be reasonable and based on one or more of the following criteria:
(A) A change in a licensee's recent operating history on the NGDC system or on other NGDC systems that has materially affected NGDC system operation or reliability. A change that could materially affect NGDC system operation or reliability may occur when a supplier fails to deliver natural gas supply sufficient to meet its customers' needs, or fails to comply with NGDC operational flow orders as defined in § 69.11 (relating to definitions).
(B) A change in a licensee's credit reports that materially affects a licensee's creditworthiness. A licensee's creditworthiness could be materially affected when two of the following credit rating companies change the licensee's credit rating:
(I) Dun & Bradstreet.
(II) Standard & Poor's Rating Services, Inc.
(III) TransUnion LLC.
(IV) Equifax, Inc.
(V) Experian Information Solutions, Inc.
(C) A significant change in the number of customers served, in the volume of gas delivered, or in the unit price of natural gas or a change in the class of customers being served by the licensee. A change over a consecutive 30- day period of 25% in the number of customers served, in the volume of gas delivered or in the average unit price of natural gas would represent a significant change.
(D) A change in operational or financial circumstances that materially affects a licensee's creditworthiness. A licensee's creditworthiness could be materially affected when two of the following investment rating companies change the licensee's rating of its issued securities from an investment grade or good rating to a speculative or moderate credit risk rating, and vice versa:
(I) Standard & Poor's Rating Services, Inc.
(II) Moody's Investment Service, Inc.
(III) Fitch, Inc.
(IV) A. M. Best Company, Inc.
(V) DBRS, Inc.
(E) A change in the licensee's demonstrated capability to provide the volume of natural gas necessary for its customers' needs that materially affects NGDC system operation or reliability. A change that could materially affect NGDC system operation or reliability may occur when a supplier fails to deliver natural gas supply sufficient to meet its customers' needs on five separate occasions within a 30-day period, or fails to comply with NGDC operational flow orders as defined in § 69.11.
(2) The following legal and financial instruments and property shall be acceptable as security:
(i) Bond.
(ii) Irrevocable letter of credit.
(iii) Corporate, parental or other third-party guaranty.
(iv) Escrow account.
(v) Accounts receivable pledged or assigned to an NGDC by a licensee participating in the NGDC's purchase of receivables program that has been approved by the Commission as being consistent with Commission orders, guidelines and regulations governing the programs.
(vi) Calls on capacity, netting NGDC gas supply purchases from the NGS against NGS security requirements, or other operational offsets as may be mutually agreed upon by the NGDC and the NGS.
(vii) Cash.
(3) In addition to the requirements in this section, small suppliers with annual operating revenues of less than $1 million may utilize real or personal property as security with the following supporting documentation:
(i) A verified statement from the licensee that it has clear title to the property and that the property has not been pledged as collateral, or otherwise encumbered in regard to any other legal or financial transaction.
(ii) A current appraisal report of the market value of the property.
(4) When practicable, the NGDC shall use applicable North American Energy Standards Board forms or language for financial and legal instruments that are used as security.
(5) The NGDC shall file an annual report with the Secretary no later than April 30 of each year. The report must contain the following information for the prior calendar year:
(i) The criteria that is used to establish the amount of security that an applicant must provide to the NGDC in order to be granted a license by the Commission.
(ii) The criteria that is used to determine the amount of security that a licensee must provide to ensure its financial responsibility in order to maintain a license.
(iii) The criteria that is used to determine that a change in the amount of security is needed for the licensee to maintain a license.
(iv) The number of instances in the last year that the NGDC determined that a change in the amount of security was needed for a licensee to maintain its license. For each instance, the following information shall be reported:
(A) The name of the licensee involved.
(B) The date of the NGDC's determination.
(C) The reason for the determination.
(D) The licensee's response to the NGDC determination.
(v) The types of legal instruments, financial instruments and property, real and personal, that the NGDC accepted as security for licensing purposes. For each security type reported, the following information shall be reported:
(A) The name of the applicant or licensee involved.
(B) The name and address of the bank, company or other entity that is acting as the surety or guarantor.
(C) The amount of security.
(D) The date that the security was posted.
(6) When an NGDC determines that an adjustment in the amount or type of security that a licensee must provide to maintain its license is warranted, the NGDC shall provide notice of its determination to the licensee in writing. The NGDC's determination must be based on the criteria in paragraphs (1), (2) and (3). The licensee shall comply with the NGDC's determination no later than 5 business days after the date that the licensee was served with notice of the NGDC's determination. When the licensee disagrees with the NGDC's determination, the licensee may file a dispute with the NGDC in accordance with paragraph (8).
(7) A licensee may request that the NGDC adjust the amount or type of security the licensee must provide to maintain its license. The licensee shall provide its request in writing to the NGDC. The request must be based on criteria in paragraphs (1), (2) and (3). The NGDC shall make its determination on the request and provide a written response to the licensee within 5 business days after the date that the request was made. When the NGDC agrees to the requested adjustment in security, the licensee shall post the security within 5 business days after the date that the licensee was served with notice of the NGDC's determination. When the licensee disagrees with the NGDC's determination, the licensee may file a dispute with the NGDC in accordance with paragraph (8).
(8) When there is a dispute relating to the form or amount of security, the applicant or licensee shall notify the NGDC of the dispute and attempt to resolve the dispute. If a resolution is not reached within 30 days after the date that the NGDC is notified of the dispute, the applicant or the licensee may:
(i) Submit the dispute to the Secretary for assignment to the appropriate bureau, office, or other designated unit for informal mediation and resolution. A party dissatisfied with the staff determination may file a petition for appeal from a decision made by the Bureau under § 5.44 (relating to petitions for appeal from staff) or may file a formal complaint with the Commission under §§ 5.21 and 5.22 (relating to formal complaints generally; and content of formal complaint).
(ii) File a formal complaint with the Commission and request alternative dispute resolution by the Office of Administrative Law Judge.
(iii) File a formal complaint with the Commission and proceed with the litigation of the complaint.
(iv) File a petition with the Commission and request review of the criteria used by the NGDC.
(9) When a licensee submits a dispute or files a formal complaint relating to an adjustment in security by an NGDC, the following obligations apply:
(i) The licensee shall provide to the NGDC the adjusted security amount as directed by the NGDC. The licensee shall maintain the adjusted amount of security until the dispute or complaint is resolved or until directed otherwise by the Commission.
(ii) The licensee shall continue to operate on the NGDC system in accordance with system operation and business rules and practices until the dispute or complaint is resolved or until directed otherwise by the Commission.
(iii) The licensee shall cause to be delivered to the NGDC system natural gas supply in the volume necessary to fulfill its customers requirements and provide customer support services until the dispute or complaint is resolved or until directed otherwise by the Commission.
(iv) The NGDC shall permit the licensee to continue to operate on the NGDC system until the dispute or complaint is resolved or until directed otherwise by the Commission.
(d) The licensee shall submit to the Commission documentation demonstrating that it has complied with the bonding or security requirement. One copy of each bond, letter of credit, or other financial or legal instrument or document evidencing an agreement between the licensee and the NGDC shall be submitted to the Commission.
(e) Licensee liability for violations of 66 Pa.C.S. (relating to the Public Utility Code) and Commission orders and regulations is not limited by these security requirements.
[Pa.B. Doc. No. 11-5. Filed for public inspection December 30, 2010, 9:00 a.m.] _______
1 The Stakeholders had been convened based on the Commission finding that ''effective competition'' did not exist in the retail natural gas market in accordance with 66 Pa.C.S. § 2204(g) (relating to investigation and report to General Assembly). See Investigation into the Natural Gas Supply Market: Report to the General Assembly on Competition in Pennsylvania's Retail Natural Gas Supply Market, Order entered at Docket No. I-00040103.
2 This subject is fully discussed in the SEARCH Report in Section I (Creditworthiness/Security) at pp. 18-21.
3 Natural gas industry members of EAPA include Columbia Gas of PA, Dominion Peoples, Equitable Gas, National Fuel Gas Distribution Corp., PECO Energy Co., Philadelphia Gas Works, and UGI Utilities, Inc.
4 The NGS Parties include Agway Energy Services, LLC, Gateway Energy Services Corporation, Interstate Gas Supply, Inc., and Vectren Retail, LLC.
5 RESA is a non-profit trade association whose members are involved in the wholesale generation of electric generation and the competitive supply of natural gas to residential, commercial and industrial customers. RESA's members include Commerce Energy, Inc., Consolidated Edison Solutions, Inc., Direct Energy Services, LLC, Exelon Energy Company, Gexa Energy, Green Mountain Energy Company, Hess Corporation, Integrys Energy Services, Inc., Liberty Power Corporation, RRI Energy, Sempra Energy Solutions LLC, SUEZ Energy Resources NA, Inc., and US Energy Savings Corporation.
6 In the SEARCH Action Plan, the Commission directed that an independent unit be created within the Commission to oversee the development and the functioning of the competitive retail natural gas market. SEARCH Order, pp. 8-10 and Ordering Paragraph 5. The unit, the Office of Competitive Market Supply, was created within the Office of the Director of Operations by Secretarial Letter dated January 9, 2009 at Docket No. M-2009-2082042.
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