ROD:

This is the second memo, along with the note I sent to Blaine at the bottom.  So, suggest you read my note to Blaine first.

Regards.
Les

---------------------- Forwarded by Les Webber/ENRON_DEVELOPMENT on 02/20/2001 02:04 PM ---------------------------


"Yamagata, Blaine" <byamagata@AKINGUMP.COM> on 02/19/2001 11:33:52 AM
To:	"'Les.Webber@enron.com'" <Les.Webber@enron.com>
cc:	"'nancy.corbet@enron.com'" <nancy.corbet@enron.com> 

Subject:	RE: AKIN GUMP - Draft Enron Stripping Memo.DOC


Les:
	With regard to the conclusions you have drawn from my memo, I have the following initial thoughts:

(1)	While SLNG might have a difficult time demonstrating that the 1075 Btu/cf standard is necessary for the safe and efficient operation of the system, the allocation of the burden of proof would not require that SLNG prove its position.  The 1075 level currently is in SLNG's tariff and, I believe, would be presumed by the FERC to be the level that is necessary for the safe and efficient operation of its system.  If Enron wished to challenge the number now, it most likely would have to do
so pursuant to a Section 5 complaint proceeding initiated by Enron.  Assuming that the Commission agreed that the matter should be docketed and subject to further proceedings, Enron would bear the burden of proof for demonstrating that the 1075 level is not just and reasonable.  Further, while Gene would need to be consulted, challenging the Btu level arguably might be construed as a breach of the October 13 agreements.

(2)	While I obviously agree that there is no specific ceiling on the Btu content for gas in the tariff of Southern Natural Gas, it is likely that both the pipeline and its downstream customers, both direct and indirect, would raise the "merchantability" issue.

(3)	I agree that the gas treating and conditioning examples do not include removal of liquids and that the examples support the extraction of liquids as a processing function, rather than treatment or conditioning. Relying on those specific examples, however, is not without risk.  Specifically, the status of facilities will be decided on the basis of a "primary function" test, which looks at all of the facts and circumstances.  It is because of that uncertainty that I am unable to provide
Enron with a definitive statement that facilities used to strip liquids would be treated as non-jurisdictional.  I do think, however, we would have the better side of the argument, if we can show that there is an real economic benefit to be gained from removing the liquids and separately selling them.  The Commission recognizes that a single facility may be providing multiple services and if we can demonstrate that the primary purpose is to sell the liquids for a profit, I believe we can
qualify the plant as a processing facility.  Moreover, I think that SLNG and its downstream customers would be hard-pressed to object to the facility being treated as a non-jurisdictional facility.  First, if built by Enron and/or others, none of the costs would be included in SLNG's cost of service.  Second, downstream customers will get the benefit of additional gas supplies and would not "lose" any gas since the plant operator, as a matter of contract, will likely be required to return
"thermally equivalent" volumes, which are discussed in the memo.  Third, SLNG gets what it wants because it keeps downstream customers "happy" while also enabling the terminal to accept LNG from sources other than Trinidad.  Finally, if SLNG were to build the liquids extraction plant as a conditioning or treating plant and include the costs in its cost of service, it may also be required to credit back to those customers the "profits" from the sale of liquids.  Conversely, if SLNG builds the
plant as a processing plant, shippers could, by contract, retain title to the higher Btus and pay SLNG a processing fee.  Depending on the level of the processing fee and the liquids market, that might not be economically attractive to SLNG or a processing affiliate.

	On the matter of a "seat at the table" I now better understand what you desire.  That concept, however, needs further thought by me since I have no ready recommendation about how to achieve that goal through the regulatory process.

-----Original Message-----
From: Les.Webber@enron.com [mailto:Les.Webber@enron.com]
Sent: Sunday, February 18, 2001 5:40 PM
To: byamagata@AKINGUMP.COM; nancy.corbet@enron.com
Cc: Daniel.R.Rogers@enron.com
Subject: Re: AKIN GUMP - Draft Enron Stripping Memo.DOC



BLAINE:

I have read your draft memo and I have the following comments "off the top
of my head".

First, after you read my e-mail from earlier today, you will see that the
"seat at the table" concept is focused on El Paso Merchant Energy providing
us with "Customer" status in dealing with Southern LNG, in whatever manner
and to whatever extent would be reasonably consistent therewith.  This
would be intended to give us the best possible standing with the FERC.  It
would not limit our rights to those set forth in the Quality Letter
Agreement.  It would allow us to address a number of solutions to the
quality issue at Elba and give us rights to involve the FERC if Southern
LNG attempted to behave in an unduly discriminatory manner, etc.  In
summary, this a general concept, as opposed to one looking specifically at
the stripping alternative.

Second, I think your draft memo does actually address the issue of
jurisdictional and non-jurisdictional facilities, although I would like to
see a conclusion or two.  Let me tell you mine.
   Southern LNG would have a difficult time ever proving that LNG receipts
   above the 1075 Btu per cf spec at the Elba Island LNG Terminal
   represents a safety, operational or efficiency concern within the
   Terminal, even though, admittedly, it is outside their specs.  The other
   US LNG Terminals are proof of the opposite.
   Southern LNG would have a difficult time proving the same for the
   downstream Southern Natural Gas pipeline system, particularly since the
   vaporized LNG is not outside the specs of that system.
   The gas "conditioning" and "treating" examples never seem to include gas
   liquids removal per se.  "Treating" talks about removal of acid gases
   and water, not gas liquids.  "Conditioning" would appear to encompass
   the removal of gas liquids to the extent required in achieving
   "hydrocarbon dew point control".  Any LNG we would import would pass
   that standard.
   It could be argued that the addition of air or nitrogen would be open to
   arguments on both sides of the jurisdiction issue, although it involves
   an addition, not a removal.  Since it does not impact safety, operations
   or efficiency, the facilities could be non-jurisdictional.  However, you
   would have to have all the downstream customers on board or the
   customers, along with Southern LNG, would force the FERC to take
   jurisdiction by some mechanism.
   On the other hand, the gas liquids stripping alternative would most
   likely achieve non-jurisdictional treatment.  There are economics
   involved with the gas liquids, the downstream customers would be
   supportive, and one could argue that it is discretionary in terms of the
   LNG - i.e. it would not be intended to strip all LNG.

The next step would appear to be to conference with Nancy and agree upon
the path forward in your analysis.

Regards.
Les




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