Transco Rate Case

Mark-

Sorry for the delay in getting this to you...I've been struggling to find some more concrete information to rest an analysis on, but until we see Transco's supplemental testimony and the Commission Staff's "top sheets", it's very hard to predict where the case will come out. Following, however, are some known variables that will effect the outcome of Transco's proposed increase:

Rate of Return on Equity

Transco filed for a 15.05% equity return (compared with the 12.4% recently affirmed by the FERC in the RP97-71 docket).
Transco based their filed number on a restructured "proxy group", which was revised by their witness to include Kinder Morgan, ElPaso Energy Partners, and Northern Border Partners (these were added to ElPaso, Enron and Williams).
Adding these entities has the effect of raising the high end of the range of DCF returns from 14.56& to 17.52%
The effect of the 260 basis point increase to return on equity amounts to $61million, or approx. 27% of the requested increase.
Protests on this issue were filed chiefly by the New York PSC and PSE&G.
The NYPSC Protested mainly the change in the structure of the proxy group, citing the fact that the new entities added by Transco's witness are owned in substantial part by existing members of the proxy group.
The NYPSC asked for an expedited hearing on the development of a new proxy group--FERC declined to establish an expedited hearing but did set this issue for the hearing to be conducted before Judge Harfield.
PSE&G's complaint was based primarily on the fact that Transco cannot failed to demonstrate significant financial risk sufficient to justify the higher return rate.
PSE&G cited Transco's continuance of SFV rate design as a risk mitigation factor that cannot allow Transco to seek a higher return. (PSE&G and UGI have indicated that they will be seeking a "Substantial Shift" from SFV rates in this case. They sought a 35% shift in the Texas Gas case.

1Line costs

Transco's filing contains approx. $60million representing their allocation of costs for Williams new 1Line system.
Several parties (including NYPSC, KeySpan, PECO) protested the level of costs, questioning the allocation of over 1/2 of the total costs to Transco.
Transco's main risk with respect to these costs is the fact that the FERC accepted and suspended the 1Line tariff sheets until September 1, making it nearly impossible for Transco to move the system into production prior to the end of the RP01-245 base period. If Transco cannot demonstrate that the 1Line system is "used and useful" prior to the end of the base period, they will technically be unable to recover these costs in this docket.
However, nothing precludes the costs being included in any settlement of the docket. Essentially, Transco will eventually recover these costs (whether at the $60m level or somewhere near that), but if they cannot get the system up and running prior to the end of the base period, they'd have to make a separate limited Section 4 filing to recover them.

Roll-in
Mobile Bay
Transco included a roll-in of the $120m Mobile Bay project in this case, based on a previously granted predetermination in favor of roll-in from FERC
The roll-in was protested by several LDC customers, who claimed that the $40m cost over run associated with the project represents enough of a change in circumstances to negate any presumption in favor of roll-in.
SunBelt, Pocono & Cherokee
Transco filed for prospective roll-in of these projects. The suspension order set out the appropriate Policy Statement to be applied to the projects, applying the 1999 Policy Statement which eliminates any presumption in favor of roll-in and places the burden of the costs squarely on the incremental shippers. Since roll-in is generally not a "settleable" issue, determination of this issue will be dependent on the outcome of the hearing.

The main issue with respect to predicting the rate level for the 2001-02 season is that the FERC Staff has indicated that settlement discussions should not begin until all of the testimony rounds are completed and the Staff files it's top sheets...meaning that the motion rates could go into effect on September 1 before a single settlement session is held. Transco has indicated that they'd like to speed up the process so they can move rates into effect in September that reflect settlement progress.

It's difficult to predict the net effect of disposition of these issues--but it's safe to assume that the FERC will act to bring the return number down to a level consistent with the January order, which would knock out 25-27% of the requested increase. I'll continue to update you as soon as any new information comes in or when I can get a better sense for what rate we'll be looking at for September. Please let me know if you have any questions.

Suzanne