RedRock

A couple of additional thoughts on this morning's conversation:

1. if we really think the next 6 or 8 months will sort out the takeaway and
receipt point capacity issues, why not bet the whole farm and try to hold
onto the whole 150 mm/d until next winter or fall and see if the perceived
value goes up? We could tell Calpine "no" on their bid and hold them off for
several months "negotiating" if that's what we thought would lead to the best
value. I don't personally think this would be a prudent approach, but its
where our logic leads in the extreme, so we'd better be prepared to explain
why getting the bird in the hand from Calpine is smart.

2. We'll research the question of whether we can reject any recourse bids
that come in over the next 6-8 months if we decide to hold onto the 60 mm/d
for awhile. I've thought about it a bit more and I'm pretty sure you're not
going to like the answer. First, FERC says we've got to have a recourse rate
in place for all capacity, new or old. One reason is that there needs to be
a max rate that applies to long term capacity releases. We have the option
on new projects to go with the existing max tariff rate or a new
incrementally designed rate. We are going with the existing tariff rate on
RedRock. Fine, but that makes the existing rate the recourse rate for all
purposes. FERC's logic will be that TW could sell all of the RedRock
capacity at recourse rates (currently $.38) and never suffer a revenue
shortfall even if future rate cases reduce TW's overall rates, because the
costs of all TW's facilities--including the new project--will be considered
in the next rate case. Think about it--our rates will only go down in the
future if the ENTIRE cost of service goes down. We'd never "lose money" on
RedRock, but we might not make as much as we could have made with an 15 year
fixed $.38 negotiated rate.

There is another approach. We could have Mavrix submit a binding bid right
now for the 60 mm/d and just flat out sell it to them. That would send a
pretty strong signal to the market that we are serious about deadlines. The
downside of that aggressive approach is that it would get us into the same
mess that El Paso finally got themselves out of, with Amoco, Dynegy and the
whole gang beating the crap out of us. I'm not to fired up about this
approach for that reason. I'll give you a call Monday after I've picked our
best regulatory brains on these issues. DF