Section 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.

The provisions of this § 62.111 amended December 31, 2010, effective January 1, 2011, 41 Pa.B. 30. Immediately preceding text appears at serial pages (314759) to (314760) and (318339).

Notation

Notes of Decisions

Financial Security Determination

PUC has discretion to approve criteria to be used to determine the appropriate financial security based upon financial impact on natural gas distribution company (NGDC) by natural gas supplier default; criteria is for a ‘‘reasonably related’’ financial security requirement, not the worst case scenario as determined by the NGDC, which was contrary to the intentions of the statute to promote competition and choice in the natural gas industry. UGI Utilities v. Pennsylvania Public Utility Commission, 878 A.2d 186, 192 (Pa. Cmwlth. 2005).

Penalties

Natural gas distribution company did not present any evidence supporting its proposition that penalties were in any way related to the financial exposure that it would have in the event of natural gas supplier’s default or bankruptcy, which is a necessary requirement for including penalty as an element of financial security; additionally, there is no language in the Commission’s regulations regarding the inclusion of penalties in a calculation of security. UGI Utilities v. Pennsylvania Public Utility Commission, 878 A.2d 186, 193 (Pa. Cmwlth. 2005).

Public Utility Commission

The Pennsylvania Public Utility Commission is the administrative agency charged with regulating utilities under the Pennsylvania Code, and its expert interpretation of those issues is entitled to great deference unless clearly erroneous; when there is substantial evidence to support the PUC’s decision, the court will not substitute its discretion for the discretion of the PUC. UGI Utilities v. Pennsylvania Public Utility Commission, 878 A.2d 186, 192 (Pa. Cmwlth. 2005).