From: susan.scott@enron.com
To: steven.harris@enron.com, lindy.donoho@enron.com
Date: 2000-11-30 10:24:00+00:00
Subject: Max rate issue on TW

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

The following is a very brief outline of what would be required to prove lack 
of market power.  A warning:  lack of market power is very difficult to 
prove.  Koch, a pipeline that most in the industry would agree does lack 
market power, tried and failed.  The deck is already stacked against us in 
TW's case given the withholding of capacity by El Paso's affiliate and the 
price conditions in California.  However, we do need to analyze the 
possibilities for TW, if not to the Cal. border, then on other parts of our 
system.  Additionally, we need to discuss acceptable incentives for shippers 
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.  In 
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 
request a declaratory order, and in its application provide information 
showing it meets the requirements outlined below.  If the Commission finds 
all requirements have been met, it will issue an order and TW would then make 
the appropriate tariff filing to put market based rates into effect.
 
Application for declaratory order must include:

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

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

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

4.  Proposal for accounting for costs and revenues.