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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.