Max rate issue on TW ,
 Steve and Lindy, as I mentioned in our staff meeting, it is probably not=20
going to be possible to solve our max rate cap dilemma by making a tariff=
=20
filing unless we can 1) get FERC to change its mind about its policy that=
=20
recourse rates always be available as an alternative to negotiated rates or=
=20
2) prove that Transwestern lacks market power and should therefore be allow=
ed=20
to charge market based rates.

The following is a very brief outline of what would be required to prove la=
ck=20
of market power.  A warning:  lack of market power is very difficult to=20
prove.  Koch, a pipeline that most in the industry would agree does lack=20
market power, tried and failed.  The deck is already stacked against us in=
=20
TW's case given the withholding of capacity by El Paso's affiliate and the=
=20
price conditions in California.  However, we do need to analyze the=20
possibilities for TW, if not to the Cal. border, then on other parts of our=
=20
system.  Additionally, we need to discuss acceptable incentives for shipper=
s=20
to pay negotiated rates if we do not end up changing our tariff.

Would you be availabile on Tuesday to discuss this?  Please let me know.  I=
n=20
the meantime, here is a summary of FERC's policy on market based rates.

***

To obtain authority to charge market based rates, TW would first have to=20
request a declaratory order, and in its application provide information=20
showing it meets the requirements outlined below.  If the Commission finds=
=20
all requirements have been met, it will issue an order and TW would then ma=
ke=20
the appropriate tariff filing to put market based rates into effect.
=20
Application for declaratory order must include:

1.  Detailed description of the services proposed for market-based rate=20
treatment.  I assume in our case it would be firm transportation service.

2.  A statement defining the relevant product and geographic markets=20
necessary for establishing the applicant lacks market power with respect to=
=20
the services at issue.  The Commission requires a narrow definition of the=
=20
market=01("firm transportation" is probably narrow enough, but for our purp=
oses=20
we might want to narrow it down more (i.e., firm transportation East of=20
Thoreau).  We have to define substitute services available to shippers=01(o=
ther=20
pipelines are a "good substitute" only if shippers can obtain the same=20
quality of service on a timely basis, and if the other pipelines offer such=
=20
service at a price that would deter TW from raising its prices more than=20
10%.  All relevant "origin markets" must be defined (Panhandle; West Texas)=
=20
as well as "destination markets," and alternatives for shippers in those=20
markets identified.  Transportation alternatives are only good alternatives=
=20
if they provide a netback to shippers that is roughly the same as if they=
=20
used TW.  Note that the Commission has rejected capacity release as a good=
=20
alternative since it does not guarantee a shipper its desired contract=20
quantity.

3.  Market share and HHI calculations; discussion of other relevant=20
competitive factors.  Commission looks at size of market share, mitigating=
=20
factors such as ease of entry, and market concentration as measured by HHI.=
 =20
Market concentration has to be calculated for each relevant receipt point a=
nd=20
delivery point.  HHI is calculated by adding up the total market share and=
=20
squaring it.  There is a presumption of no ease of entry for transportation=
=20
services  because of the expense involved in constructing facilities.

4.  Proposal for accounting for costs and revenues.
steven.harris@enron.com, lindy.donoho@enron.com