Message-ID: <24569981.1075842472041.JavaMail.evans@thyme> Date: Mon, 27 Nov 2000 10:28:00 -0800 (PST) From: susan.scott@enron.com To: maria.pavlou@enron.com Subject: Recourse rate dilemma: the sequel Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Susan Scott X-To: Drew Fossum@ENRON, Maria Pavlou X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\Discussion threads X-Origin: FOSSUM-D X-FileName: dfossum.nsf Maria and Drew, this is a long-winded e-mail but please bear with me... The problem: As you probably remember, several months ago several of us met to discuss the following language in the ROFR portion of Transwestern's tariff: "if the rate bid exceeds the maximum tariff rate, then the rate will be considered to be the maximum tariff rate," and the additional frustrating language "[a]ll available capacity shall be allocated under these procedures . . .." At our last meeting, we concluded that probably the best way to ensure that TW could capture the true value of the capacity would be to link the negotiated rate to index prices. However, since this usually involves an unacceptable amount of risk to both the shipper and TW, the marketers haven't done any index-based rates and have no current plans to enter into any such deals. I have been asked by the Commercial Group to revisit this issue and to think of other ways we could increase our ability to charge more than the maximum rate. Ideally they would like to eliminate the language I've quoted above. However, my research has indicated that absent our 1) bringing about radical change in the way FERC thinks about recourse rates or 2) showing that TW lacks market power, we are probably stuck with this language. Why the problem exists (you may already know): Steve Stojic and I did some looking into why the language is in our tariff in the first place. In the Alternative Rates Policy Statement (RM95-6-000), the Commission explained that it is willing to entertain individual requests for negotiated rates, but only where customers retain the ability to choose a cost-of-service based tariff rates. "[T]he availability of a recourse service would prevent pipelines from exercising market power by assuring that the customer can fall back to cost-based, traditional service if the pipeline unilaterally demands excessive prices or withholds service. Thus, the recourse rate mitigates market power." The Commission went on to confirmed that under ROFR provisions the highest rate that an existing shipper must match if it wishes to continue its transportation arrangement is the maximum tariff rate. This policy is clearly not limited to ROFR situations: when capacity is constrained, a shipper willing to pay only the recourse rate cannot lose access to capacity merely because someone else is willing to pay a negotiated rate. "When there are more requests for capacity than there is capacity available, then the pipeline must allocate capacity among those shippers willing to pay either the negotiated rate or the maximum recourse rate, for example on a pro rata basis if required by its tariff." The example cited by the Commission: If a pipeline has 100 Dth/d available and two shippers request that capacity, one who is willing to pay no more than the recourse rate of $5 and another a negotiated rate of $6, then each would be allocated 50 Dth/d on a pro rata basis (assuming the tariff provided for pro rata allocation and not some other allocation method such as lottery). When TW filed for authority to charge negotiated rates, it voluntarily added the statement that "if the rate bid exceeds the maximum tariff rate, then the rate will be considered to be the maximum tariff rate." Presumably we had concluded that we needed to add this recourse rate related provision in order to receive negotiated rate authority. Solutions?? I would like to know whether you concur that changing our tariff language outright is probably out of the question. I feel as if I've really been chasing my tail here. I have owed Lindy an answer for some time now. But I keep coming back to our having to prove lack of market power (which, Drew, is where I believe you were headed when we talked about this in mid-October). Steve Harris has asked whether we can just start small and remove the recourse rate cap as to only a portion of our system. I think we would still have to show lack of market power in order to do this. Do you agree? Stojic warns that proving lack of market power is a lengthy and expensive proposition. Might be worth it to us, though. Another idea is to somehow provide shippers with an incentive to pay more than max rate. After all, we do have authority to charge negotiated rates. We've seen one instance in which one of our marketers was able to get more than max rates for IT space based on good customer relations alone. However, despite our wonderful relationships with most of our customers, it's unlikely we can pull this off with any consistency. We wondered whether we might be able to get more than max rates in the context of an auction procedure. But I just am not convinced we could get around the Commission's requirement that recourse rates be available. That requirement has not changed. Have either of you seen anything to the contrary? I would like to meet with you two, plus several others I have in mind, to discuss this, preferably early this week (Tues. or Wed.), but would like to discuss briefly with you first. Please call me so we can talk for a few minutes. Thanks.