Free Response to Motion - District Court of Federal Claims - federal

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Case 1:98-cv-00126-JFM Document 792-5 Filed 04/16/2004 Page 1 of 14
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Figure 4 Supply and Demand -for Acceptance Slots

Breach World

80~000

60,000

Possible Breach World
Acceptance Rate

i:

40~00O

, Total Must-Move

- 20, 000

Q\ ,
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\C,

\""'C

\""'C

00 . ' \""'C

(f)

, In addition to this, DOE' s failure to accept spent fuel on any schedule approaching its initially " announced plans threatens ' overall confidence in the program. This is' likely to make significan
numbers of Purchasers unwilling to swap away their allocated OFF acceptance slots at any price, or
at least demand a premium well in excess of their actual avoidable cost. This reluctance would
, interfere strongly with- the development of an efficient, effective exchange market for acceptance
slots. At the very

least, the fact that the quantity of Must~Move spent fuel

Constantly and

significantly exceeds the cumulative supply of acceptances dictates that the price orany available
swaps could be quite high indefinitely. Further, some Purchase~ with no immediate need for spent

fuel removal (no true Must-Move situation) might choose to use rather than swap their OFF slots,
or even try to "swap up" for earlier removal , as insurance agay,st further DOE performance failure.
\0

Thus , the trading dynamics would be considerably more complex in the Breach World-so much

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so that the ,Economic Sequence Model is not an appropriate tool. for evaluating swaps in the Breach,

Wodd.

VI.

CONCLUSION

I have described an economic analysis and projection of the government' s (and the swap' market.s) "

perfo~~ce in the Non-Breach . World" using economic efficiency principles thatpnoritize '
acceptance to niinimize avoidable costs. This ~ysis allows me to specify With reasonable certainty
the' date at which,

Plaintitrs site would have been free of spent fuel , and ' to identify the coSts of
mic

, obtaining the acceptance slots necessary to achieve this. 'lJtat analysis shows that Y anIcee Ato

would have its spent fuel removed in 1999.

hfcontrast, such Malysis is speculative and more difficult in the Breach World , beca~:

of the

substantial unresolvable uncertainties about overallprograrit performance and ,the

existence

performance of a market for exchanges ' of acceptance slots. Thus, ' in the Brr.ach WorId it is not
possible to develop a reasol.1ably accurate estimate of when or at what cost the Plaintiffs sites will
be free of spent , fuel. Any given set of a$sumptions could of course be mechanically analyzed, but

there is so much uncertainty surrounding these assumptions that one could not rely on the resu1~.

VII. : QUALIFICATIONS
I have 19 years experience in assisting utilities in the design and implementation of long-range
planning, investment, and operating policies , and I assist their counsel with regulatory compliance

, and policy review. This work has involved market design and performance evaluation, capacity
" expansion and netWork modeling, investment and contract prudence reviews estimation of marginal

costs, design and pricing of new services, and financial simulation and valuation techniques. I have

testified on the economics of electric and gas industry restrucfUring before the FERC ' and State
regulatory commissions on numeroUs topics , including market entry, antitrust, retail and wholesale
transmission access ,

power contract interpretations, service unbundling, new services , and cost of

capital.' I.am the author of several papers on approaches to and impacts of restructuring of the

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electri~ and gas industries in theU .S., and am a ~embet of professional socicges for.matb~~
electrical engineenng, eiWrgy ecOnomics, and

'

~ce. rreceived an M.S. with a concentration,

finan~ from the M~I.T. SloanOSch~l ofManageinent in 1980, and Jl' 1;1A." U1 MathematiCs~: '
, Indiana University in 1975. My experience andqualificaiions to offer the opinions included in thiS' ,
report are set out in greater d~tail in Exhibit 3 of this report.

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VIII. ' COMPENSATION
The Brattle' Group
is being paid $325 per hour for my time. w()rking ontbis
matter.

IX.

. OTHER EXPERT T~IMONY

ExlUbit 4 lists the caSes in which I, have testified as an expert at mal 'or
. preceding four years and my publications for the last ten years.

by deposition Within the

Respectfully submitted, ,

~I.:.June 30 , 1999
. Frank

Graves

00043

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Exhibit 1

LiSt of Data and Documents Consid~red in FonningOpinions

U~S. Dep3rtmeni

of

" Nuclear Fuel mid/or

DE-CR-Ol-83NE44428, Contract for Di$posalof ffigh-Level.Radioactive Waste (lune 22,
Energy ContractNo.

1983).

Spent

M,ssioii Plan for the Civilian Radioactive Waste Ma,;agem~nt Program,
DOFJRW-OOO5. '
OCRWMMission Plan Amendment,

S~DO~, June , 1985,

June 198.7, US DOE,DOFJRW-OI28.

Draft

1988

Mission Plan Amendment,

June 1988, US DOE, DOFJRW-O187.
011982,

Nuclear Waste Policy 1/6197.

Act

as presented in 42 USC Chapter 108 - Nu~ear Waste Policy,

Nuclear

Waste Policy Amendments

Act

of

198,7. as presented in 42 USC Chapter 108 - N~clear

Waste Policy, 1/6/97.
Report to Congress on ReaSsessment of
the

Civilian Radioactive' Waste Management Prograin,

November 1989, US DOE,

DOElRW;0247.
S. DOE, Ann,ual series
of

Annual Capacity Reports
1992 Acceptance Priority Ranking,

reports, 1987 - 1994.

May 1993; Revision 1 , U. S. DOE, DOElRW-0419.

Acceptance Priority Ranking

Annual Capacity Report

S. DOE, Match 1995.

Spent Fuel Storage Requireillents 1994-2042

S. DOE, June 1995 , DOEiRW- 0431-Rev. 1.
Revision OS, U. S.

January 1999.
Viabi/ityAssessmentof a Repository at YuccaMountain, Analysis of the Total System Program; Life

Civilian Radioactive Waste Management System Requirements Document,

DOE,

US DOE, December 1998, DOElRW-0508.

Cycle Cost of the Civilian Radioactive ' Waste Manage!1'ent

U.s. DOE, December 1998, DOEIRW-OSI0.
DOE Position on the MRS Facility,

The

S. DOE, June 1989, DOEIRW-0239.
- The

MRS

Systems Study Task

Report

Role and Functions of Surface Storage of Radioactive

.M/Jter.if11 in

the Federal Waste Afol1agcl1len.t.Syslem P4lcificNorthwest Laboratory, Apr. 1989.

MRS

System Study SummalY R~port.

S. DOE. June 1989. DOFJRW-O235.

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Preliminary A"cl1ysis. Spent Fuel Acceptance Scenarios, Devoted to Shutdown Reactors: A

P~ific

Northwest LaboratOI)', October 1989.
CampaignedSpen~Fuel Shipments.

. J.W~ Doman (WESTON/Roser$& Associates) and T~E. Tehan (pacificNucl~), "Significance of '
August 17, 1993. Civilian, Radioactive Waste Management System ThroughputRate' Anizlysis. S. 'Department of Energy, Prepared by System Analysis, Civilian Radioactive Waste Prepared for U.
Management System Management and Operating Contractor.

Gottlieb, PeterandW. Bailey III, F. Emami, L M. Ford, andiF~J(iQg~ ThroughpufStudY'for; the
, Civilian Radioactive Waste ' Management

System," from theProceCdings RadioactiveW~e Management Conference, Las Vegas, NY, April 12 " 16,

1992.

of the High Level'

. McKee, RoW. and H. D. Huber, "Determination of CostEffective Waste Management System Receipt Rates Paciflc Northwest Laboratory, from the Proceedings of the High' Level Radioactive Waste Management Conference, Las Vegas , NY, Apri128- May 3,

1991

Lette~ from Darii~l Dreyfus, OCRWM Director, to Dr. Andrew Kad3k, President and CEO of YaDkee Atomic, d~ted September 28;1995. "
, U.S. Commercial S~nt Fuel Inventory; data on, historicand projected spent fuel inventory and , discharges , provided by NAC International (spread$heet U. S. Commercial Spent Fuel Inventory .xIs)
Memorandum provided by NAC International on ISFSI inventories as of 1/31/98 (ISFSI.doc).
Deposition of Nancy Slater
April 21, 1999.

John W. Bartlett Expert Witness Report
James p~ Malone Expert Witness Report
Ivan F.

Stuart Expert Witness Report

Expert Witness Report of Kenneth T. Wise

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Exhibit 2
Inputs for Economic Sequence Model
, AssuIJIPti9n '
(1) Cask

Data.
10.

Units
MTU

Size:

(2) GE Morris WetO&M CoSts per year:
(3) Wet

800,000
OOO OOn

O&MCosts per year:

(41, Dry O&MCosts per year:
(5) Dry Fixed Setup:
(6) Dry Decomrnissioning, Cost:

3;500 000
461 000

240 000
887; 000

($)/cask
($)/cask

(7) , Variable Cask Costs:
Crane Up~rade Threshold:
(9) Small
Crane Upgrade

MetricTons
500,000
. 5, 500,000

Cost: Cost:

(to) Large Crane Upgrade
(11) Real Discount

Rate:

1.3%

Notes: ofJames P. Malone. (1): Expert Report
, (2): Connecticut Yankee At()mic PowerCoinpany.

(3) - (10): Expert Report of James P. Malone. .
(11): Expert Report of Kenneth T. Wise.

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EXhibit 3

Qualifications of Frank C. Graves

~C.

GRAVES

Principal

, Mr. Graves assists utilities ill the design and implementation oflong~range plamiiitg, investment, and operating. policies, and he. assists their counsel with regulatory compliance and ,poUcy review~ He

bas e~nsive experience with capacity ~"Pansion and network modelirig, invesunentand cOntract

estimation of margiital costs, design and pricing of new servi~s, an.dfinancial sim,ulation and valuation techniques. lie has testified on thee~onomics ofrestructurhigforretail and wholesatetransmi$sion access, powercontraci interpretations, service unbui1dling, marketentry, and new services before the FERC and State regulatory cofi!II1issions. H~received an M. S. with a
concentration in finaricefrom the M.I. T.

pn1denee reviews ,

Sloan School of Management in 1980;

and a B.A. in

Mathematics from Indiana University in 1975.

RtPRESENT A TIVE CONSULTING EXPERIENCE

Mr. Graves has assisted several utilities in forecasting market prices, revenues, and risks for generation assets being shifted from regulated cost recovery to competitive deregulated whol~sale power markets. . Such studies have facilitated planning decisions, such as whether to divest generation or retain it, and have been used as the
basis for quantifying stranded costs associated with

restructuring in. regulatory hearings~ Mr. Graves work i~ this area has pelped several utilities develop long term

, planning models for managing their generation assets in a competitive market.
A major concern associated with electric utility industiy restructuring is whether or

not generation markets will prove adequately competitive to allow complete
deregulation of generation

prices. Because of the state- dependent

nature or

transmission transfer capability between regions, itselfa function of generation use the extent of viable competition in the generation market can vary significantly and may be susceptible to market power abuse by dominant suppliers. Mr. Graves is . leading an engagement to develop market monitoring procedures on behalf of one of
the largestISOs in the U. S., to detect and discoUfage any market manipulations that

would impair competition.

00047

Many utilities find the prospects for participation in overseas power markets
contractil1g and pricing that

appealing. because of the similarities to re.gulatoD'

they

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Frank C. Graves Priil.cipal

have experienced in the U. S., prior to restructuring. Howevet, itis cleat, thauhere are many new risks associated with operations in a foreign countrY , related to the stability ofits currency, its macroeconomy, itsforeign investment policiC$~ and even itspolitica1, syStem. Mr. , Graves has assisted finns facing these new dimensions to
assess thefisks, identify strategic ~dy.mitages,

and choose an appropriate,

risk.;.

adjusted hurdle rate for the market conditions and contractingtennsthey ~face.
The val\le of hydroelectric generation assets in a competitive power market is heavily dependent on operating practices thafastut~lyshift between real power and ~ci11ary services markets, while still observing a,host of non~electric hydrological cOl1;Straints.
Mr~ Graves has lead studies forseveralmajorhydrogenefationownersinregardto

forecasting of marketconditions~d corresponding hydro schedule optimization. He

pricing procedtires ' that create an internal market for , diverting hydro assets from rea1.power to system support services fmns that do not " t have explicit, observable market prices.
The naturaJ gas pipeline indus~ is wedged between competitive gas production and

has also designed" transfer

competitive resale of gas delivered to end userS. In principle, the resulting basis , differentials between locations around the pipeline ought to provide efficient uSage and expansion signals, but traditional pricing rules prevent the pipeline companies , from participating in the margim;tl value of their own services. Mr. Graves has
worked to develop' alternative pricing mechanisms and service mixes for pipelines,

that would provide more dynamically efficient signals and incentives.
generation capacity that helped usher in electric industry restructuring in the US lead to asset devaluationS in many places , even where no retail access was
The glut of

allowed. In some cases,

this has lead to bankruptcy, especially of a few large rural electric cooperatives. Mr. Graves assisted one such coop with its long tenn fInancial

modeling and rate design under its..plan of reorganizati~n, which was approved.

, Testimony oRcostofservicewas provided.

Power plants often provide a significant contribution to the property tax revenues of the townships where they are located. A common valuation policy for such assets has been that they are worth at least their book value, because that is the foundation
for their cost recoveIT under cost-Qf~.s,efYjce " utility. xate.making.

However.

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Frank C. Graves Principal
restrUcturing 'thrOws , away th8t .

~tee,

requiring reasseSsment. of these ' assets..

" Traditi~naias$e~Sme1ittestsi ~~g~ ,

based on the replacement costs ofcompatable

assets, can be eXtremely misleading, because they do ' not consider inarketCQndiuQns.
Utility property' tax

asses$ments must be based on sound concepts of how value is captured in compe,titive power markets, requiiing careful eduCation and presentation,
tax ,assessm~~t boards. Mr. Graves has testified o~ SUClt ,matters on

, :' to

~f

of the

whei'S of a small,

out-of-market coal unit in Massachusetts;

Much atten~on has been payed to horizontal marketpoweritt the electric generation ' iJ..1dustty, but less so to the possibility ' of vertical marketpower, Wh~by sufficient

control of an upstream market c):'eates competitive advantage in a downstream market. It is possible for thi$ problem to arise in fuels, in settings whe~ the likely,
marginal gene~ti?n are dependent on one or a very few fuel suppliers who also have economic interests ' in the local generation market. Mr. ' Graves, has analyzed this proble~ in thecoiltext of the California gaS and electric markets and. filed testimony

to explain the magnitude and manifestations of the problem.
Overseas markets for energy services provide intriguing investment prospects for U $. electric and gas utiJities, but the type and degree of risk involved is generally unfamiliar. Mr. Graves has assisted several developers of power plants and energy , infrastrUcture VIlith adjusting their invest.'11cnt criteria for different international environments. , Generally, political risk indexes and relative bond yields are not , sufficient indicators of when, why, or how much of a higher discount rate for project valuations may be necessary.

The impacts of transn1ission open access and generation competition on utility
financial health are well documented. In contrast, the effects on fuel use have been

largely ignored, though there are many reasons to believe that relative fuel use will change , due to revised dispatch, repO"w~rings and retireme~ts, changes in expanSion mix, and altered load shapes and load growth under more cOmpetitive pricing. For EPRI , Mr. Graves has contributed to a st~dy thattprojects changes in fuel use within and, between ten large power market regions spanning the country under different scenarios for the pace and success of restructuring.

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Frank C. Graves , PriDdpal
Several states ~inoving

rapidly on implementing retail access

for

electric Utlliti~.

Mr. Graves has, worked with the , executive" commi~ofs(?yeral utiliti~ ~ designiDga regUlatory strategy for influencing thiS transition and developing comprebensive business Strategies and integrated planning ' tOQls , for , servic:e" :unbundling ~dpri~ingt incentive ratemaking corporate reorganiZation,ritarket, , , forecasting.. assetvaluation ai1d risk management.
, Stranded ' costs, and, out-of~market , contracts from ' restructuring , Ctm affeet:

municipalities and cooperatives as well as!nvestor-oWIiedutilities. Mr. Graves has assisted , one debt-financed utility, in an evaluation, of its , possibilities for

reorganization, ref1i1ancing,

and ie-engineering to improve Jimincialh~thaIidto

lower rates. Sale arid leaseback of generation" fuel contract renegotiation, targeted downsizing, spinoff of transmission, and new marketitig' programs were among the
many~ componentsofthe proposed new

business plan.

Regulatory and legal approvals of utility mergers require evidence that the combined
entity, ' will not have Undue n12fkct power and ~hat it will creare operatingsY:1crgies

that produce benefits for electric customers. Mr. Graves has assisted several utilities
in evaluating potential

mergers and acquisitions. He bas identified ways inwbicb

transmission constraints' reduce thenumber andt;ype of suppliers, creating a risk

anticompetitive impacts unless structural , ownershie, and pricing adjustmentS are put in plaCe. He has also, determined which benefitS can be attributed to a merger and
which Can be accomplished without Conning the oombinedorganization.,

Mr. Graves has lead a gas distribution company in the development of an incentive ratemaking system to replace all aspects oftraditiona:I costofservice regulation. The base rates (for non-fuel operating and capital costs) were indexed on a priee-capbasis

(RPI-X), while the gas and ~pstream transportation costs allowances were tied to
of a refere~ce portfolio of supply 3!ld transportation contracts. The gas company will also make numerous adjustments to itS rate design, g. designing new standby rates so that custo~er choice win not be distorted by
optimal average annual' usage

pricing inefficiencies.
As a means of reducing supply commitment risk, several utilities have solicited offers for power contracts that grant the at..some

00050
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righthutnotth.e.obligation to take power

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C: Graves PriD.cipa~
Frank

future date at it predetermined price, in exchange for an initial ~ption , premiUm

c' ,

several of these utilities in the development of valuation models for comparing the asking prices to fair market values for option contracts~ In addition, he has helped these clients develop, estimates of the critical option valUation p~etets, such as trend" voJatility, and correlatiQUS of the future prices ,of~lectric power and the variQUs fuel indexes proposed forpncing the optional , power. . Training seminars on options , valuation methods were also presented~
The ability to recover sunk costs of generati~m assets under open transmission access, . is of great concem to utilities. Mr~ Graves has assisted one electric . utitity , in the . design and itnplementation of a method for forecasting probable. capital recovery , . levels in t4eregional power market over the coming decade. The atJproach involves, calculating a fixed cost contribution per kWh based on the marginal customer s value oflost load an~ the hourly loss ofload probability, coupled with iterative ~djustInents

payment. Mr. Graves bas , assisted

c:~

to. the quantity and mix of generation reserves, in the regional pool. based on the implied financial viability of each generating unit at the forecasted market prices.
, Mr. Graves J1asparticipated as a facilitator and advisor to one electric utility' s task force on transmission strategy fonnulation and service pricmg. Of particular concern were how much. to unbundl~ and where to draw the line between generation and transmi$sion functions. The efficiency and cost recpvery merits:of"nonconformiitg" . ra~es (not based on embedded cost of'service) were weighed against the potential regulatory controversy. Straw-man alternatives reflecting time- or location-of-use in rate design were mocked up for assessment of competitive position and customer
impact. The need to revise existing interconnection contracts to achieve

comparability of service was also evaluated.

Ane'lectric utility with several out-of-marketindependent power contracts wanted
to determine the value of making those plants dispatchableand to

devise a

negotiating strategy for restructuring the IPP agreements. Mr. Graves developed a

range offorecasts for the delivered pace of natqral gas to this area of the country through the year 2000. Alternative ways of sharing the potential dispatch savings were proposed as incentives for the IPPs to renegotiate their utility contracts.

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Frank.' C. Graves

Priitdpal
For an electric uti1ityconsid~ the conveciioQ of so.~e large oil-fired unit$ to natural gas, Mr. Graves conducted a study of the advantages of altemative means of obtaining, gas supplies and gas transportation services. A combmation of monthly . and daily spot gas supplies, interruptible pipelfue transportation over sevefal routes, gas storage services" and , swing" (contingent) , supply contracts with gas marketers

was shown to be attractive. ~estimoliYwas presented on why tlte additional services of:a local distribution company would be unneeded and unecOnomic. .

A power engineering

firm

entered. into - it contract to provide . operatioIl$ and

. maintenance services , for a . cogenerator, with incentives fees. tied to the . unit' availability and operating cos~ When the fees increased, due to changes in the , e~ectric utility tariff to which they wei;e ~ed :a dispute arose. Mr. Graves provided analysis and testimony on the avoided costs associated with improved cogeneration , performance under a variety of economic ' scenarios and under several 8ttemative
utility tariffs.

Fora division of a large telecommunications firm, Mr. Graves assisted i~ a cost benchmarking study, in which the costs and management processes for billing, . service order and inventory, and software development were compared to the practices of other affiliates and competitors. Unit costs were developed atalevel far more detailed than the company normally tracked , and numerical measures of drivers thatexplained the structural and efficiency causes of variation in cost performance
\Vete identifie~. . Potential costs savings of 10-50 percent were estimated ' and , procedures for better identification ofinefficiencies were suggested.

Mr. Graves has helped several pipelines design incentive pricing mechanisms for recovering their expected costs and reducing their regulatory burdens. Among these have been Automatic Rate Adjustment Mechanisms (ARAMs) for indexation operations and maintenance expenses , construction-cost variance..sharing for routine capital expenditures that included a procedure for eliciting unbiased estimates of future costs , and market-based prices capped atleplacement costs when near-term future expansion was an uncertain but probable need.
On behalf of the Electric Power Research InStitute cEPRI), Mr. Graves has written a primer on how to define . ADd, measurethe cost , of electric utility .transmission

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Frauk C. Graves Principal
capacity for better pl~g~

pricing, and regUlatory policies.

The text (:Overs the '
~t1sl1)issioti
diSpatCh subject

b3$ic electrical engineering of power circUits. utility practices to exploit

economies of scale, means of assuring system stability, econo~c

to transmission constraints, and (he estimation of marginal costs of 'transmissi~n. '

The implications for a variety of policy' issues are also discussed. ,
. Fol"a majQr industrial gas user, he prepared a critique of the transportation balancing
charges proposed by thelocal gas distribution company. ' Those charges were shown

to be arbitrarily sensitive to the measui~ment period as well as to inconsistent attribution of storage versus replacement supply costs to imbalance volumes. The tariff design, a commodity ~harge on aper-cash:-inlcash-out at spotmarketgas prices with penalties for very deep imbal~ces, or an incremental storage inventory, and , , Withdrawal capacity used on-peak, were shown to. be cheaper, more efficient, and less
complex to. administer. . This analysis helped the parties reach a settlement based on

the cash-inlcash-out design.
The , Clean Air Act Aniendment authodzes electric utilities to. trade emission
2 emissions' reductions targets. For the Electric Power Research Institute (EPRI), Mr. Graves has
developed multi-stage planning models to illustrate how the co.nsiderableuncertainty

allowances (EAs) as part of, their approach to complying with S0

surrounding future EA prices justifies waiting to invest

in irreversible control

.technologies, such as scrubbers, until the present value cost of such investments is significantly below that projected from relying on EAs.
Mr. Graves has contributed to the design and pricing of new, unbundled services on
several natural gas pipelines. To identify attractive alteI1)atives , the marginal costs

of possible changes , in a pipeline s service mix were quantified' by simulating the

least~~ operatiIlg practices subject to the network's

physical and contractual

constraints. , Such analysis helped one pipeline to justify a zone-based rate design for

its firm transportation service. Another pipeline used this technique to demonSttate that unintended degradations of system perform~ce and increased costs could ensue from certain proposed unbundlings that were insensitive to system operations.

For several natural gas pipeline companies, Mr. Graves has evaluated the cost of eQuity capital in lieht of the requirements .of FERC Order , 636 .to .u.'lbundle,and

00053