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Understanding the Tariff Form Language from Pipelines and RTO’s in the Retail Gas & Electric Landscape, and What Their Potential Changes Mean for You

Wednesday, April 17, 2019

We often have our retail energy clients ask us if we can help make sense of the payment language found in many of the North American Regional Transmission Organizations’ and Pipelines’ Tariff Forms. While at the end of the 20th Century many of these organizations allowed timeframes for supplier responses to payment defaults to be accepted within a 30-day window, it is now commonplace for them to stipulate payment must be made “on-demand,” or within a 24-hour window.

Due to this difficult “on-demand” payment language, many obligations can only be met by posting a Letter of Credit, or Cash. This, of course, ties up capital, and in the case of Letters of Credit also means higher frictional costs of operations. Surety Bonds are a more cost-effective engine to use as a guaranty, and using a Bond frees up that business capital. However, and herein lies the dilemma: Sureties cannot adhere to the 24-hour payment window, making a Bond – while technically accepted by these entities – an option that is not feasible. A surety company simply does not have the mechanics in place to respond to most correspondence within 24 hours, let alone formally respond to a claim via an immediate and indisputable payout on said claim.

We have recently had an open dialogue regarding the above issue with many of the well-known Pipelines and RTO’s in various regions, and the future for utilizing surety bonds looks promising. There are ongoing negotiations that appear to be leading to many of these entities adjusting their payment default language from “on-demand” to 5- and 10-day response windows – and maybe as soon as first quarter 2019. Our discussions with numerous Sureties have also been positive: they are much more likely to agree to these 5- and 10-day payment terms.

That spells good news for owners in the retail gas and electric space. Being able to supply a Bond as opposed to a Letter of Credit or Cash means improved cost of credit and excess free capital to bring on new deals. We plan on staying at the forefront of this matter and will continue to update our clients throughout the process.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

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