Subject: 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.