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Northern Natural Gas Company Volumetric Rates Project Status Report December 21, 1999

Northern Natural Gas Company Volumetric Rates Project Status Report December 21, 1999. The Question: “Would a pure volumetric rate design yield benefits to Northern and its customers?” Objectives:

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Northern Natural Gas Company Volumetric Rates Project Status Report December 21, 1999

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  1. Northern Natural Gas CompanyVolumetric Rates ProjectStatus ReportDecember 21, 1999 The Question: “Would a pure volumetric rate design yield benefits to Northern and its customers?” Objectives: 1. Develop a volumetric rate proposal that customers and regulators will perceive as innovative and a valuable addition to Northern’s current range of services. 2. Obtain at least an incremental $5 million in revenue based on the addition of the new service.

  2. Potential Margin UpsideAvailable Under Volumetric Rate Design • Total “Secondary Market” on Northern was about 700 BCF for year ended 10-99 (capacity release volumes, gray market, TI and short-term TFX). • Average margin on that 700 Bcf was about 5.5 cents. • Assuming margin flexibility on 50% of that market, margin would need to increase to 9 cents to cover a $5 mm NNG revenue bump and $5 mm increased value for customers.

  3. Sample Volumetric Rates Volumetric Rates will be developed for individual customers based on actual current rates, release and gray market revenues, and historical load factors Northern Natural Gas Company Volumetric Rates 1/Market Field Winter Summer Winter Summer MIDAM $0.43 $0.25 $0.07 $0.74 MGO $0.52 $0.37 $0.38 $17.99 NICOR $0.32 $0.17 $0.28 2/ 1/ Rates are based on 2000 Plan revenue and volumes; less customer capacity release credits for 11/98-10/99 2/ $0.5 MM demand revenue but no volumes

  4. Critical IssuesTo Be Addressed 1. “Critical Mass” • Determine which customers we need to convert • Figure out how to persuade key customers to convert • Can we lock in critical mass of conversions before we file at FERC? 2. Calculate Probable margin Impact 3. Develop Rules to Prevent “gaming” • Minimum load factor requirement • Usage limitations • Must lock in a minimum revenue stream for field area 4. Rate Schedule SF-V 5. Negotiated Rates vs. Discounted Rates 6. Design of customer specific rates • Preserve current discounts • Reflect release and gray market revenue • “Sweetener” (impact of state PBR and other state issues) 7. TF-V Customers Would continue to Have Access to Secondary Market 8. Hedging • Does Northern need to hedge? Costs? • Do current customers need to hedge? Costs?

  5. Marketing Strategy:Customers I. Our “Pitch”: • Lower total cost of transportation, assuming normal weather. • In a warm winter, additional cost savings possible. • In a cold winter, payments to Northern increase, but customer is “self hedging.” Alternately, customer can buy commercial hedge products. • TF-V service allows customer to elect to stop subsidizing secondary market, but still have access to it. • We will structure each customer’s specific “deal” to preserve current benefits under PBR or other state rate programs. II. Problems to be solved: • LDC’s will fear loss of upside under state P.B.R. or capacity release credit mechanisms. • Loss of gray market revenue upside. • Loss of flexibility if volumetric rates require rigid usage restrictions (particularly, resistance to commit to field area usage). • Concerns about competitive dislocations of one LDCs vs. one another • Fear of the unknown.

  6. Marketing Strategy:FERC I. Our “Pitch”: • Innovative expansion of existing service offerings. • Opportunity for increased voluntary seasonality. • Completely optional; no customer is forced to use. • All customers retain access to secondary market. • Cost-based rates since derived from existing rates. • TF-V service generically available to all; no discrimination. • Shifts risk to pipeline which will be in a better position to aggregate risk and lay off externally or absorb internally. II. Problems to be solved: • Marketers, producers and industrials will allege adverse impact on secondary market. • Requiresdeparture from SFV.

  7. Timetable • Begin negotiations with customers as soon as possible. • Complete FERC filing and prepare to file when “critical mass” of customers have agreed to support. • October 1, 2000 implementation requires FERC filing by April 1, 2000 (assuming six month FERC notice and suspension period).

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