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From: Nancy.Bagot@dynegy.com [mailto:Nancy.Bagot@dynegy.com]
Sent: Thursday, March 14, 2002 6:06 PM
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Cc: Sarah.Tomalty@dynegy.com; Mary.Doyle@dynegy.com;
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Subject: Presentation, discussion on El Paso FR vs. CD


Attached at the bottom of this email is the Staff powerpoint presentation
on their recommendation to the Commission on El Paso's Full Requirements
service (FR).  The Staff Recommendation is not yet available.

Summary

As noted in yesterday's email, Staff is recommending the following general
principles:
-  The Commission convert El Paso's Full Requirements service (FR) to
Contract Demand service (CD)
- Allocation of CD be based on the greater of (1) a shipper's billing
determinants from the 1996 settlement, or (2) coincidental peak (a
shipper's own usage) based on demand on Sept. 12, 2001
- The Commission assign specific receipt point rights to shippers based on
El Paso's proposed 20 pooling point configuration
- A technical conference be convened, that may include attendance by the
Commissioners, on the Staff recommendations

Background

Staff recounted the issue on El Paso's system, including the question to be
decided by the Commission: has El Paso's FR service become unjust and
unreasonable?  Staff believes it has, and explains that it is within the
Commission's jurisdiction to allocate El Paso's capacity in order to:
      (1) restore system flexibility
      (2) end uncertainty (in the form of pro rata capacity cuts) of firm
delivery
      (3) ensure full & fair utilization of El Paso's system

According to Staff's presentation, the problems on El Paso's system are due
to changes in system load since the pipeline's 1996 settlement.  A major
increase in CD load and the sale of all unsubscribed capacity since 1996
(which was nearly one half unsold at that time) has changed the operations
and capacity availability on El Paso, resulting in frequent capacity
constraints on the system.  This problem is aggravated by the settlement's
resultant rate freeze, which impedes any economic incentive for El Paso to
expand or upgrade its system.

Recommendations (Bob Petrocelli presenting)

Staff recommends that the Commission convert FR to CD, while maintaining
(1) the existing rate structure from the 1996 settlement, and 2) a small
amount of FT-2 FR contracts (for small customers, such as municipalities),
with an overall cap on the rate schedule.  This will "balance the interests
of all shippers and restore firm service on the El Paso system."  Also, it
will send the proper price signals for system expansions.

In comments on this and related proceedings, shippers have recommended four
allocation methods for the converted CD:
      (1) 1996 settlement bid determinants
      (2) system peak (coincidental demand)
      (3) individual peak (non-coincidental demand)
      (4) some combo of the above

Staff recommends utilizing the greater of #1 or #2 (using Sept. 12, 2001,
as benchmark demand day).  This reflects current usage mitigated by the
settlement capacity contracts.

Staff also recommends the Commission assign specific receipt point rights,
using El Paso's proposed expanded 20 pool system [in this proposal, El Paso
narrows its current six pools in three basin areas to 20 geographic pools].
As support of this recommendation, Staff noted:
      (1) it is consistent with the Commission's one-time delivery point
allocation in BR/Amoco/Topock complaint case
      (2) gives certainty for supply to all shippers
      (3) enhances the tradeability of capacity
      (4) eliminates daily pro rata curtailments in the basin

Commissioners' Discussion

Pat Wood:  He noted that 10-year settlements are far too prospective and
will never be approved by him.  Whether the Staff recommendation is the
best fix is the question that will be explored in the technical conference.
Chairman Wood also asked how the economic incentive to expand will be
different -- Staff answered that in 1995 the settlement's intent was to
keep the system viable at all, and changes are needed to move to next step.
Wood also noted that "this wouldn't have happened if El Paso had complied
with Order 636 -- it's a lesson on the power side that we not carve out
exceptions."

Nora Brownell:  Brownell asked questions about the current infrastructure,
how the takeaway capacity at Topock is being handled, and if this addresses
future capacity needs.  Staff responded that this is "an economic fix to
the current disincentives for El Paso expansions," and that there are
proposals out there to address future capacity and takeaway needs.

Bill Massey: Stated that the current situation is "intolerable" and that
Staff's presentation persuaded him that their plan is reasonable because
"bold Commission action is necessary here."

Linda Breathitt:  She asked if there are any other interstate pipelines
using FR service, and was told no, only some intrastate municipalities
still utilize FR on a commodity demand basis.

(See attached file: G-1March13.ppt)



===================
Nancy Bagot
Manager, Govt. Affairs
Northern Natural Gas Co.
1500 K Street, NW
Suite 400
Washington, DC  20005
202-216-1129 direct dial