Subject: TW Options update

Transwestern held its Transport Options Workshop on August 31.
Commercial  and regulatory representatives of BP-Amoco, Burlington, Conoco, Coral,  Dynegy, Phillips and Reliant attended.
After a brief overview of the  proposed filing, TW opened the floor for questions and comments.
Here is a  summary of the comments.
Marketing affiliate concerns.
BP's regulatory representative expressed  concern that TW's marketing affiliates would be able to use options to game  the system.
In BP's example, since TW and ENA are both Enron companies, ENA  could purchase an "out of the money" call option essentially cost free, since  its affiliate (TW) would have the ability to buy the option back.
Proceeds  from ENA's ability to then "move the market" through the establishment of the  long basis position would go directly to Enron's bottom line.
BP suggested  that TW's marketing affiliates be banned from purchasing options, or that the  marketing affiliate be required to credit 100% of the option proceeds to  other shippers.
Although BP admits that Transwestern's prior dealings with  ENA have not been suspect, BP fears that TW's filing will set a precedent for  other pipelines to offer a similar service.
Since TW will be the first  pipeline to offer such services, BP wants TW's program to be as restricted as  possible.
Dynegy echoed BP's concern regarding possible affiliate abuse, but  rather than shelve the program entirely, Dynegy reiterated an earlier  suggestion that Transwestern be required to credit back the difference  between the option fee paid by an affiliate and the next highest bidder, if  the affiliate's bid exceeds the next highest by a certain percentage.
TW's response was that while actual abuse of an options program by a  marketing affiliate may be a legitimate concern, owing to its unassailable  record in this area, TW should be entitled to a presumption that it has  complied and will continue to comply with Commission policy covering the sale  of capacity to marketing affiliates, and was not inclined to voluntarily  include any limitations on the options program.
If BP and others have  serious concerns regarding the Commission's overall policy on marketing  affiliates, those issues should be raised in a separate proceeding that  applies to all interstate pipelines.
Right of first refusal.
Burlington asked whether options would replace the  right of first refusal.
TW's  response was that ROFR will still be available  pursuant to the terms and conditions of our tariff.
Negotiated rate.
BP's representative claimed that option contracts will  constitute a negotiated rate and that each deal will need to be filed as  such.
TW did not respond to this or discuss it further.
However, TW's  position at this point is that since the option fee is part of the  transportation rate, transportation deals that include the option amendment  will only be considered negotiated rate deals if the total rate including the  option fee exceeds the maximum transport rate.
Hoarding capacity.
Using the recent large block sale of capacity on El Paso  as an example, several customers expressed concern that the options program  would make it easier for a shipper to hoard capacity.
It was not clear why  some of the workshop participants thought that the sale of options would  create more opportunity for hoarding capacity than already exists.
Perhaps  because the option fee is a lesser cost than the transport rate for the  underlying capacity, their perception was that options would simply make  hoarding cheaper and easier.
TW acknowledged that the potential for  withholding capacity from the market is one reason for FERC's current policy  against reserving capacity for shippers.
Although TW did not commit to  placing any limits on the either the quantity of capacity or options for  capacity that any one shipper may own, it is possible that FERC may require  TW to do so in a final order.
Our plan is to meet with PG&E and SoCalGas in California the week of  September 11 to go over details of the program, and to finalize the FERC  filing by mid-September.