Message-ID: <22230916.1075845747433.JavaMail.evans@thyme> Date: Tue, 20 Jun 2000 12:34:00 -0700 (PDT) From: boyd_j._springer@jonesday.com To: dtucker@bracepatt.com, cdade@bracepatt.com, kay.mann@enron.com Subject: Regulatory Issues Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "Boyd J. Springer" X-To: dtucker@bracepatt.com, cdade@bracepatt.com, Kay.mann@enron.com X-cc: X-bcc: X-Folder: \Kay_Mann_June2001_1\Notes Folders\Chicago X-Origin: MANN-K X-FileName: kmann.nsf _______________________________________________________________ This message and any attachments are intended for the individual or entity named above. If you are not the intended recipient, please do not read, copy, use or disclose this communication to others; also please notify the sender by replying to this message, and then delete it from your system. Thank you. _______________________________________________________________ The following discusses the regulatory issues raised at our June 14 meeting with Peoples. 1. Expanded termination right for unacceptable "Regulatory Approval". As discussed prior to the meeting, language of Sects. 1.1, 1.11, 10.2 and 15.1(f) was changed to provide a termination right in the event that an unacceptable regulatory order is issued after initial approval of the Agency Agreement, but during its term. Peoples explained at the meeting their view that a termination right should exist in the event of an adverse rate order (e.g., Illinois Commission order imputing what Peoples believes to be an unreasonably high level of Hub revenue and, therefore, unaccpetably lowering retail gas rates) or FERC determination that, based on Hub operations, Peoples is in jeopardy of losing its status as a Hinshaw pipeline. These were examples of the types of orders Peoples has in mind. As proposed in our draft, either party would have a termination right in the event that the Agency Agreement is not initially approved by the ICC on acceptable terms. Under our approach, however, the parties would have to live with ;later adverse regulatory orders unless an order had the effect of revoking the Hub's operating authority. My view is that we could reasonably agree to a termination right (similar to Sect. 11.1 (vi) and (vii) of the LLC Agreement) which grants a termination right, "in the event that a Jugment determines that, as a result of Hub Transactions, Peoples is subject to comprehensive rate regulation as a natural gas company or public utility by the FERC; or loses its status as an exempt Hinshaw pipeline under Section 1(c) of the Natural Gas Act." I would suggest that we otherwise stay with our original language re regulatory approvals. Once Peoples obtains an order from the ICC which both parties accept, Peoples should be willing to assume the risk (which,in my opinion is minimal) that an adverse rate decision would cause it to wish to terminate the Agency Agreement. (David suggested at the meeting that, as another option, we could agree to a termination right due to an adverse regulatory order if Peoples chooses to discontinue all Hub Transactions, but I am not sure that we need to offer this at this stage.) The word "required" should be restored to Definitions 1.1 and 1.11. 2. Extended Hub Services. Peoples agreed at the meeting that there should be compensation after termination of the Agreement for an extended Hub Service presented during the Agreement's term. To make this clear,the words "during the term of this Agreement" should be deleted from Sect. 7.1(ii). The deleted wording of 7.2 should be restored, and to that Section we could add a sentence: "The right to compensation established under Section 7.2 (ii) for an Extended Hub Service shall survive the termination of this Agreement." Also, in Section 15.4, I believe the reference to Sect. 3.3 should be to 7.2. 3. "Hub Services"-Sect. 1.17. Based on discussion at the meeting, I understand that there is a need to address the "two county rule" in the Agreement. In connection with this, there was discussion of the need to change the description of the Hub Services to make clear that the services are incidental to the primary uses of the Hub Facilities. As I understand it, the description of the services both for the Agreement and the GTC may be changed to replace the existing references to transportation services a reference to "wheeling" serivces. This should be addressed when the revised terms of the GTC are available. I believe the business people also are discussing a procedure for approval of transactions to ensure compliance with the two county rule, and are preparing a list of types of transactions which will be pre=approved. 4. Adjustment of Administrative fee for refunds. Our position, as discussed at the meeting, is that Sect. 7.3 which provides for retroactive adjustment of the administrative fee in the event of a refund should be deleted. In support, we point out that MEH relies on a specific fee value in seeking out transactions and the fee shouldn't change after-the-fact as the result of a refund. Peoples argues that a revenue-based fee should be adjusted if there is a change in the realized level of revenue. This was left as an open point. Peoples acknowledged at the meeting that the proposed fee adjustment would occur only due to a rate refund. This means that the administrative fee could be adjusted retroactively only if a transaction occurs under a newly proposed rate which is part of the Operating Statement, but subject to refund at a level higher than the previously approved rate but lower than the maximum price under the new rate. The only portion of the fee which is at risk is the portion produced by use of a rate above the previously approved level. If, for example, a 10% increase is proposed and made effective subject to refund. A risk arises only if the negotiated price is at 90% of the maximum or above. If it is, the refund risk to MEH is its percentage of the revenue produced by the rate above the 90%above. If the rate is 95% of the maximum, the amount at risk is 5% of MEH's 20% portion of the revenue, or 1% of the fee. A refund at this level would occur in the example only if FERC approves no rate increase and requires a refund of all subject to refund revenue. If FERC approves all or part of the increase, the refund risk is reduced. Therefore, the decision should not greatly effect the economics of the deal. If we decide to allow some adjustment of the fee for refunds, the language should make clear that we are including only "refunds related to a finding by FERC that a rate in effect subject to refund is excessive and should be reduced." 5. Also with respect to refunds (required for any cause), Peoples agreed at the meeting to provide the necessary funds. We could adjust the language of Sect. 3.3 to read: "Peoples will pay to MEH all funds necessary to effect such refunds on or before the earlier of : (i) the date prescribed by a Law or Judgment for payment of such refunds; or (ii) ten (10) business days after receiving written notice of the need for such payment." (Note: Because refunds are required by FERC Order, Peoples would always know when the refund has to be paid.) 6. Admin. Fee. After the business discussion of intended coverage of the monthly fixed fee, we should reconsider the deleted language in 18.3 regarding reimbursement of costs incurred by MEH on Peoples' behalf. 7. Nomination and Scheduling on Pipelines. Sect. 2.5. Peoples proposes to delete the language we added which requires Peoples to make any necessary nominating or scheduling changes on interstate pipelines for receipt and delivery of gas at its city gate for its own account in order to effectuate Hub transactions. The language went on to also require Peoples to arrange for delivery of gas at a secondary delivery point by Displacement Delivery. At the meeting, Peoples took the position that it is already required to handle nominations and scheduling on pipelines by terms of the GTC. Peoples also indicated that, due to the nature of the Hub Facilities and transactions, the Delivery Points must be on Peoples' system and that Displacement Delivery to a point which Peoples can access under one of its pipeline agreements is not feasible for a Hub Serivce. (Note: In the Northern Illinois Gas Hub Agreement, the utility agreed to the provision we proposed.) With regard to the second part of our proposed sentence re delivery by displacement at a secondary point off-system, I agree that the GTC seems to contemplate delivery on Peoples system for the various types of transactions covered. Perhaps we can delete section "(b)" of our proposed sentence. I would like to know whether the business people have comments on this. With regard to the part (a) (the requirement that Peoples make nominanting and scheduling changes needed to effectuate Hub transactions), however, I do not find any language in the GTC which makes clear that this is Peoples' responsibility. Also, at our preliminary meeting, Laura indicated that this was an important provision to restore. (I believe Laura mentioned only part a, but need to check this.) Therefore, I believe we should propose, at least, to restore the sentence through part a, subject to verification with Laura and Gregg. 8. Grounds to Refuse Trransaction. Also, in 2.5, Peoples included as one of the grounds to refuse a Hub Service presented by MEH, a conclusion by Peoples that "Hub Capacity is deemed unavailable by Peoples due to the service requirements of Peoples' utility customers." We pointed out at the meeting that the GTC (Sect. 8) specifies all circumstances when a Hub Serivce can be refused and that this provision is not one of the specified situations. Once a firm transaction is established under the GTC, it has equal scheduling priority with other firm interstate and intrastate firm transactions. Peopels agreed that this item (Item 3) can be deleted. I believe Peoples wishes to revise (1) to read: " permitted by the terms of the GT&C, or required by any Law and Judment:. 9. Sect. 3.5. Peoples proposes to delete our proposed Section 3.5 which requires Peoples to use its best efforts to minimize imbalances experienced by Hub Shippers through use of management services offered under pipeline tariffs. Such services should be offered soon under Order 637 compliance filings. This provision was inserted as part of a paragraph in Peoples' initial draft which would have required MEH to compensate Peoples for imbalances experienced on pieplines as a result of Hub Transactions. Peoples had taken this provision from the NIGAS Hub agreement. In response, we had included the wording of 3.5 to, at least, require best efforts to minimize imbalances on the pipelines. Peoples now proposes to delete all of this on the ground that imbalances on the pipelines are the responsibility of the Hub Shippers, and not of Peoples or MEH. The GTC has provisions covering the responsibility of shippers to address imbalances on the Hub Facilities, and Peoples points to the Parking and Loaning Service for Shippers to address imbalances. In reviewin g this, I believe Peoples is right. Because the language requiring MEH to address imbalnaces on the pieplines has been deleted, I think we can delete the language of 3.5 requiring Peoples to use best efforts to minimize those imbalances. 10. Sect. 2.2 Responsibility for regulatory compliance. Peoples proposed changes to the language we inserted in 2.2 in the second sentence from the end which indicated that Peoples is responsible for compliance with the GTC. Peoples proposed that each party be responsible. At the meeting, we explained that this language was included to recognize FERC precedent requiring that, in circumstances such as this, the agreement must identify the party responsible for regulatory complaince and that party must be the certificate holder. Peoples agreed at the meeting that our original language for this sentence should be restored. 11. The Agreement (6.1) presently provides that Peoples, in its sole discretion, may propose changes in the GTC. David indicated at the meeting that, at a minimum, MEH should be advised of changes in advance and provided with an opportunity for comments before such changes are proposed. Peoples agreed to include such a provision. Also, Peoples agreed that Section 5.1 should include a representation that Peoples has provided MEH with a current copy of the presently effective GT&C. 12. Section 1.13. GTC. Peoples agreed at the meeting that the definition of GT&C should be changed to end after the words "from time to time". (This eliminates the refernce to modification in Peoples' sole discretion.) 13. Section 1.22 and 1.26. Peoples agreed that the definitions should refer only to MEH and Peoples (and not to "controlled" persons) 14. Section 1.15. Peoples agreed that the definition of Hub Capacity could be changed to eliminate the reference to determination by Peoples in its sole discretion. The determination should be "in accordance with the GT&C." Peoples suggested that a standard of "good faith" or "commercially reasonable" would be acceptable. 15. Section 5.1. Peoples agreed at the meeting that Section 5.1 could be revised to eliminate the refernce to Laws and Judgments with a materially adverse effect. Peoples agrees that there should be a representation that the Agreement does n ot violate "any Judgment or Law applicable to it",as originally proposed. 16. Section 2.9. The discussion at the meeting indicated that Peoples may accept use of a standard of "commercially reasonable" with regard to its judgment under 2.9(i) and MEH's obligation to perform in accordance with the Operating Statement, Laws and Judgments in 2.9(ii). I was surprised that Peoples suggested this re 2.9. As I understand it, the concern is that MEH should not be liable for contract damages in the event that it acts in a commercially reasonable manner, but cannot, for some reason, comply with the GTC or a Law or Judgment. I wonder if we can accomplish this result with language in a later section of the Agreement regarding liability. My concern is that a provision indicating that MEH's responsibility for compliance with regualtory requirements, Laws and Judgments is limited to best efforts or items it knows about may raise a red flag for the regulators. I would like to discuss whether there is another way to deal with potential liability without changing 2.9(ii) to refer to "best" or "commercially reasonable" efforts. Let's discuss tomorrow. 17. Section 10.1. Filing for Governmental Approval. At the meeting, Peoples indicated that, although it believes it should have sole control over regulatory filings, Peoples will agree to include a provision indicating that:"Prior to the filing of applications, pleadings or testimony related to approval for operation of the Hub, Peoples will provide copies of such materials to MEH, and consider comments provided by MEH." We should discuss with the business peoples whether this is sufficient, and how specific this provision should be. The language here would be comparable to that inserted in 6.1 regarding the right to review and comment on changes to the GTC. 18. Dissolution of MEH. Peoples agreed that a portion of our proposed 15.1(f), up to the word "terminated" on line 2 should be restored. Peoples only concern in proposing deletion was that the LLC Agreement might be requested by the ICC Staff due to the reference. As revised, the reference is removed. 19. Confidentiality. Peoples agreed to re-think the provisions of 17.1 re confidentiality of the compensation provions of Articles 3 and 7. This was not confidential in the NIGAS approval proceeding. Because the ICC Staff will be aware of the provisions, I do not know why Peoples proposes to require the procedures needed to maintain confidentiality of these provisions in the approval proceeding. 20. Section 18.4. Peoples agreed to mutual review and agreement re forward-looking statements re the Hub. 21. Section 2.4. At the meeting, Peoples agreed that the third sentence is confusing and should be revised. I would suggest: " Peoples will inform MEH promptly after it learns of information indicating that a revision to information regarding Hub Capacity should be made or proposed in accordance with this Section." Tomorrow, I will re-review my notes to make sure that I have covered the regulatory areas. I have notes on other sections also if you have any need for them. I'll give you a call tomorrow after I return from a morning hearing around 11:00am.