Subject: TW Expansion
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Wed, 14 Feb 2001 08:38:00 -0800 (PST)

There were several questions left for legal/regulatory to work on at the 
close of our meeting today.  I'll try to restate them, and add my initial 
thoughts, so we can all be sure to focus on the correct problems.  

Q 1. Can TW use "negotiated rate" agreements for its new 150 mm/d expansion?  

A.  Yes.  Independence, Guardian, and other new pipeline projects were 
certificated on the basis of negotiated rate contracts.  The only restriction 
is that we need to always offer cost-based recourse rate service as an 
alternative to negotiated rates.  We hope to use negotiated rate agreements 
for the entire 150 mm of capacity, but we won't know until the contracts are 
executed how much of it will be negotiated rate contracts and how much of it 
will be under recourse rate contracts.  I guess that means that in the cert. 
app., we just tell the commission that we will be 100% at risk and that given 
the huge interest in the open season, we have no doubts about our ability to 
sell the full 150.  We should also tell the Commission we expect to sell the 
capacity using negotiated rate contracts or recourse rate contracts or a 
combination of both.  

Q 2.  Can we give prospective customers a "cafeteria style" menu of options 
(to steal Jeff's term), like the following:
 1.  5 yr. neg. rate deal at a locked in $.60 plus fuel and surcharges (or 
whatever number we decide on)
 2.  10 y. neg. rate deal at a locked in $.45 plus fuel and surcharges
 3.  15 yr. neg rate deal at a locked in $.35 blah blah
 4 .  15 yr cost based recourse rate plus fuel and surcharges (importantly 
this option is not locked in and will float with TW's actual rate levels and 
fuel retainage percentages)

A.  I think the answer here is "yes."  Whatever options we come up with for 
1, 2, and 3, we will always have to offer 4 as well.  Susan and Steve 
Stojic:  please confirm that we have the right to define specific negotiated 
rate options and stick to them.  Otherwise, this negotiated rate approach 
could get completely unstructured such that we end up with some guys taking 
our specific options and other guys custom tailoring weird variations (like a 
7 yr, 231 day contract at $.51764, for example).  I'm not sure that would be 
a bad thing, but we need to think about it.  We need to be sure we can tell a 
customer "no" and make it stick if he tries to mix and match by asking for 
the 5 yr term and the $.35 rate, for example.  I think we can lay out options 
of our choosing and then enforce a "no substitutions" policy (this is 
sticking with the "cafeteria" theme) but we need to be sure.  

Q.3.  If we can use the "cafeteria options" approach, how much flexibility do 
we have in structuring the options?  

A:  This one is hard.  We need to be sure that the price and term we choose 
to offer for options 1-3 is solely within our discretion.  We don't want to 
be second guessed by FERC as to whether we should have offered option 1 at 
$.58 instead of $.60.  Susan and Steve: if you guys confirm that we have 
discretion in how to structure our negotiated rate options, does that mean we 
can slant the economics of the negotiated rate options so they are a better 
deal than the recourse option (for most shippers)?  I.e., could we 
deliberately  incent shippers to sign on for the short term deals--i.e., by 
offering options 1-3 at $.55, $.45 and $.40 instead of the $.60, $.45, and 
$.35 shown above.  I suspect that is what Guardian and the other pipes did to 
obtain 100% subscription under neg. rate deals.            

Q.4.  How do we allocate capacity to customers if demand exceeds supply???

A.  Ideally, we'd be able to allocate the 150 to the guys who want to buy it 
the way we'd prefer to sell it.  Under the above example, assuming Stan, 
Danny and Steve decide short term deals are better, what if we get 100 mm/d 
of offers on each of the 4 rate/term options described above.  That's 400 
mm/d of demand for a 150 mm/d project.  Can we sell 100 to the guys who want 
option 1 ($.60/5 yrs) and the remaining 50 to the 10 yr/$.45 guys?  That 
really hoses the recourse bidders.  Do we have to cover the recourse demand 
first and then allocate the remaining capacity pro rata to everyone else?  
Pro rata to everyone?  Under the rule that negotiated rate bids have to be 
deemed to be at max rate for purposes of allocation, pro rata to everyone may 
be the right answer.  Or at least its the answer until we've filled the 
recourse rate guys' orders, then we can give the remaining capacity to the 
neg. rate guys whose bids we value most highly (using some objective 
nondiscriminatory calculation of course).   Ugh. 

Susan and Steve--please take a crack at questions 2-4.  I think 1 is answered 
already.  I haven't done any research yet, so maybe these questions are 
easier than they currently seem to me.  Get me and MKM on the phone at your 
convenience to discuss.  We've gotta move quick so the marketers can get out 
and sell this stuff.  DF