Re: TW Expansion ,
 Drew, I think your last question is the one most critical to us at this poi=
nt. The marketers can go out and start selling the project but are having a=
 hard time defining how the capacity will be allocated. I left a message ye=
sterday for Mary K. regarding these same issues. Thanks. =20




Drew Fossum
02/14/2001 04:38 PM
To:=09Susan Scott/ET&S/Enron@ENRON, sstojic@gbmdc.com, Mary Kay Miller/ET&S=
/Enron@ENRON, Keith Petersen/Enron@EnronXGate
cc:=09Shelley Corman/Enron@EnronXGate, Maria Pavlou/Enron@EnronXGate, Steve=
n Harris/ET&S/Enron@ENRON, Jeffery Fawcett/ET&S/Enron@ENRON, Kevin Hyatt/ET=
&S/Enron@Enron, Lorraine Lindberg/ET&S/Enron@ENRON=20

Subject:=09TW Expansion

There were several questions left for legal/regulatory to work on at the cl=
ose of our meeting today.  I'll try to restate them, and add my initial tho=
ughts, so we can all be sure to focus on the correct problems. =20

Q 1. Can TW use "negotiated rate" agreements for its new 150 mm/d expansion=
? =20

A.  Yes.  Independence, Guardian, and other new pipeline projects were cert=
ificated on the basis of negotiated rate contracts.  The only restriction i=
s that we need to always offer cost-based recourse rate service as an alter=
native to negotiated rates.  We hope to use negotiated rate agreements for =
the entire 150 mm of capacity, but we won't know until the contracts are ex=
ecuted how much of it will be negotiated rate contracts and how much of it =
will be under recourse rate contracts.  I guess that means that in the cert=
. app., we just tell the commission that we will be 100% at risk and that g=
iven the huge interest in the open season, we have no doubts about our abil=
ity to sell the full 150.  We should also tell the Commission we expect to =
sell the capacity using negotiated rate contracts or recourse rate contract=
s or a combination of both. =20

Q 2.  Can we give prospective customers a "cafeteria style" menu of options=
 (to steal Jeff's term), like the following:
=091.  5 yr. neg. rate deal at a locked in $.60 plus fuel and surcharges (o=
r whatever number we decide on)
=092.  10 y. neg. rate deal at a locked in $.45 plus fuel and surcharges
=093.  15 yr. neg rate deal at a locked in $.35 blah blah
=094 .  15 yr cost based recourse rate plus fuel and surcharges (importantl=
y this option is not locked in and will float with TW's actual rate levels =
and fuel retainage percentages)

A.  I think the answer here is "yes."  Whatever options we come up with for=
 1, 2, and 3, we will always have to offer 4 as well.  Susan and Steve Stoj=
ic:  please confirm that we have the right to define specific negotiated ra=
te options and stick to them.  Otherwise, this negotiated rate approach cou=
ld get completely unstructured such that we end up with some guys taking ou=
r specific options and other guys custom tailoring weird variations (like a=
 7 yr, 231 day contract at $.51764, for example).  I'm not sure that would =
be a bad thing, but we need to think about it.  We need to be sure we can t=
ell a customer "no" and make it stick if he tries to mix and match by askin=
g for the 5 yr term and the $.35 rate, for example.  I think we can lay out=
 options of our choosing and then enforce a "no substitutions" policy (this=
 is sticking with the "cafeteria" theme) but we need to be sure. =20

Q.3.  If we can use the "cafeteria options" approach, how much flexibility =
do we have in structuring the options? =20

A:  This one is hard.  We need to be sure that the price and term we choose=
 to offer for options 1-3 is solely within our discretion.  We don't want t=
o be second guessed by FERC as to whether we should have offered option 1 a=
t $.58 instead of $.60.  Susan and Steve: if you guys confirm that we have =
discretion in how to structure our negotiated rate options, does that mean =
we can slant the economics of the negotiated rate options so they are a bet=
ter deal than the recourse option (for most shippers)?  I.e., could we deli=
berately  incent shippers to sign on for the short term deals--i.e., by off=
ering options 1-3 at $.55, $.45 and $.40 instead of the $.60, $.45, and $.3=
5 shown above.  I suspect that is what Guardian and the other pipes did to =
obtain 100% subscription under neg. rate deals.           =20

Q.4.  How do we allocate capacity to customers if demand exceeds supply???

A.  Ideally, we'd be able to allocate the 150 to the guys who want to buy i=
t the way we'd prefer to sell it.  Under the above example, assuming Stan, =
Danny and Steve decide short term deals are better, what if we get 100 mm/d=
 of offers on each of the 4 rate/term options described above.  That's 400 =
mm/d of demand for a 150 mm/d project.  Can we sell 100 to the guys who wan=
t option 1 ($.60/5 yrs) and the remaining 50 to the 10 yr/$.45 guys?  That =
really hoses the recourse bidders.  Do we have to cover the recourse demand=
 first and then allocate the remaining capacity pro rata to everyone else? =
 Pro rata to everyone?  Under the rule that negotiated rate bids have to be=
 deemed to be at max rate for purposes of allocation, pro rata to everyone =
may be the right answer.  Or at least its the answer until we've filled the=
 recourse rate guys' orders, then we can give the remaining capacity to the=
 neg. rate guys whose bids we value most highly (using some objective nondi=
scriminatory calculation of course).   Ugh.=20

Susan and Steve--please take a crack at questions 2-4.  I think 1 is answer=
ed already.  I haven't done any research yet, so maybe these questions are =
easier than they currently seem to me.  Get me and MKM on the phone at your=
 convenience to discuss.  We've gotta move quick so the marketers can get o=
ut and sell this stuff.  DF
    =20
drew.fossum@enron.com