Lindy -- FYI.  This is just really informal so I'd prefer you not forward to 
anyone yet.  Drew and Maria are most familiar with this so I'm going to get 
their feedback first before setting up a meeting.  I'll get with you before I 
set a meeting time to see when you're available.
---------------------- Forwarded by Susan Scott/ET&S/Enron on 11/27/2000 
06:27 PM ---------------------------


Susan Scott
11/27/2000 06:28 PM
To: Drew Fossum@ENRON, Maria Pavlou/ET&S/Enron@ENRON
cc:  

Subject: Recourse rate dilemma: the sequel

Maria and Drew, this is a long-winded e-mail but please bear with me...

The problem:

As you probably remember, several months ago several of us met to discuss the 
following language in the ROFR portion of Transwestern's tariff: "if the rate 
bid exceeds the maximum tariff rate, then the rate will be considered to be 
the maximum tariff rate," and the additional frustrating language "[a]ll 
available capacity shall be allocated under these procedures . . .."  At our 
last meeting, we concluded that probably the best way to ensure that TW could 
capture the true value of the capacity would be to link the negotiated rate 
to index prices.  However, since this usually involves an unacceptable amount 
of risk to both the shipper and TW, the marketers haven't done any 
index-based rates and have no current plans to enter into any such deals.  I 
have been asked by the Commercial Group to revisit this issue and to think of 
other ways we could increase our ability to charge more than the maximum 
rate.   Ideally they would like to eliminate the language I've quoted above.  
However, my research has indicated that absent our 1) bringing about radical 
change in the way FERC thinks about recourse rates or 2) showing that TW 
lacks market power, we are probably stuck with this language.

Why the problem exists (you may already know):

Steve Stojic and I did some looking into why the language is in our tariff in 
the first place.  In the Alternative Rates Policy Statement (RM95-6-000), the 
Commission explained that it is willing to entertain individual requests for 
negotiated rates, but only where customers retain the ability to choose a 
cost-of-service based tariff rates.  "[T]he availability of a recourse 
service would prevent pipelines from exercising market power by assuring that 
the customer can fall back to cost-based, traditional service if the pipeline 
unilaterally demands excessive prices or withholds service.  Thus, the 
recourse rate mitigates market power."  

The Commission went on to confirmed that under ROFR provisions the highest 
rate that an existing shipper must match if it wishes to continue its 
transportation arrangement is the maximum tariff rate. This policy is clearly 
not limited to ROFR situations:  when capacity is constrained, a shipper 
willing to pay only the recourse rate cannot lose access to capacity merely 
because someone else is willing to pay a negotiated rate.  "When there are 
more requests for capacity than there is capacity available, then the 
pipeline must allocate capacity among those shippers willing to pay either 
the negotiated rate or the maximum recourse rate, for example on a pro rata 
basis if required by its tariff."  The example cited by the Commission:  If a 
pipeline has 100 Dth/d available and two shippers request that capacity, one 
who is willing to pay no more than the recourse rate of $5 and another a 
negotiated rate of $6, then each would be allocated 50 Dth/d on a pro rata 
basis (assuming the tariff provided for pro rata allocation and not some 
other allocation method such as lottery).  

When TW filed for authority to charge negotiated rates, it voluntarily added 
the statement that "if the rate bid exceeds the maximum tariff rate, then the 
rate will be considered to be the maximum tariff rate."  Presumably we had 
concluded that we needed to add this recourse rate related provision in order 
to receive negotiated rate authority.  

Solutions??

I would like to know whether you concur that changing our tariff language 
outright is probably out of the question.  I feel as if I've really been 
chasing my tail here.  I have owed Lindy an answer for some time now.  But I 
keep coming back to our having to prove lack of market power (which, Drew, is 
where I believe you were headed when we talked about this in mid-October).  
Steve Harris has asked whether we can just start small and remove the 
recourse rate cap as to only a portion of our system.  I think we would still 
have to show lack of market power in order to do this.  Do you agree?  Stojic 
warns that proving lack of market power is a lengthy and expensive 
proposition.  Might be worth it to us, though.

Another idea is to somehow provide shippers with an incentive to pay more 
than max rate.  After all, we do have authority to charge negotiated rates.  
We've seen one instance in which one of our marketers was able to get more 
than max rates for IT space based on good customer relations alone.  However, 
despite our wonderful relationships with most of our customers, it's unlikely 
we can pull this off with any consistency.  We wondered whether we might be 
able to get more than max rates in the context of an auction procedure.  But 
I just am not convinced we could get around the Commission's requirement that 
recourse rates be available.  That requirement has not changed.  Have either 
of you seen anything to the contrary?  

I would like to meet with you two, plus several others I have in mind, to 
discuss this, preferably early this week (Tues. or Wed.), but would like to 
discuss briefly with you first.  Please call me so we can talk for a few 
minutes.  Thanks.