[00:00:00] Speaker 00:
Case number 22-1116, adult.

[00:00:03] Speaker 00:
Shell Energy North America, US LP conditioner versus Federal Energy Regulatory Gotcha.

[00:00:14] Speaker 01:
Morning council.

[00:00:16] Speaker 01:
Mr. Einstein, please proceed when you're ready.

[00:00:23] Speaker 00:
Thank you, Chief Judge Srinivasan, members of the panel.

[00:00:26] Speaker 00:
Mobile Sierra requires Burke to presume that voluntarily negotiated contracts contain rates that are just and reasonable.

[00:00:34] Speaker 00:
And to overcome that presumption, Burke has to find that the rates seriously harm the public interest.

[00:00:40] Speaker 00:
Here, Burke agrees these were contracts freely and fairly negotiated between sophisticated counterparties, so Mobile Sierra applies to them.

[00:00:49] Speaker 00:
But where those parties agreed to rates above $1,000 a megawatt hour, Burke applied the opposite presumption that those rates are unjust and unreasonable, and it put the burden on the sellers to rebut that presumption.

[00:01:03] Speaker 00:
Burke's orders conflict with Mobile Sierra for both reasons.

[00:01:06] Speaker 00:
as the Supreme Court explained in Morgan Stanley and NRG Power Marketing.

[00:01:11] Speaker 00:
Now, Ferg says, well, what we were doing was enforcing an implicit term of the contracts that our soft cap orders put there.

[00:01:18] Speaker 00:
that included this standard that we applied.

[00:01:20] Speaker 00:
And there are two problems with that position.

[00:01:22] Speaker 00:
First, it's not what the orders say.

[00:01:25] Speaker 00:
It's telling that FERC has never answered dissenting Commissioner Danley's challenge.

[00:01:30] Speaker 00:
Point me to an order prior to this, where FERC, you have said that a soft cap, let alone this soft cap, has that effect.

[00:01:38] Speaker 00:
And the reason FERC can't do it, not in any of the 25 orders since Commissioner Danley issued that challenge or in its brief here, is because those orders don't exist.

[00:01:47] Speaker 00:
And second, although this court has found that FERC can, in rare circumstances, find that a class of contracts should not be subject to Mobile Sierra because it seriously harms the public interest, FERC actually has to make that finding to strip negotiated contracts of that protection.

[00:02:06] Speaker 00:
FERC didn't do it here.

[00:02:08] Speaker 00:
FERC doesn't say it did it here.

[00:02:09] Speaker 00:
I'm not sure if FERC could do it here.

[00:02:11] Speaker 00:
And again, as Commissioner Daly notes in dissent, FERC can't use the tariff condition to make the pesky Mobile Sierra doctrine disappear.

[00:02:20] Speaker 00:
Can I ask you about the first of those theories?

[00:02:23] Speaker 03:
Sure.

[00:02:23] Speaker 03:
So I take it that you don't dispute that the soft cap order has the language subject to justification and refund.

[00:02:34] Speaker 03:
And I understand your argument not to dispute that that justification and refund action language is incorporated into the contracts.

[00:02:44] Speaker 00:
I think it binds the parties that applies to parties as FERC orders do.

[00:02:48] Speaker 00:
We all obviously followed it by submitting our filings within seven days as the soft cap orders acquire.

[00:02:55] Speaker 00:
But I think you will search in vain for any order for the ones we're challenging here, where FERC describes its soft cap as a tariff condition.

[00:03:05] Speaker 00:
None of the orders mentions market-based rate tariffs.

[00:03:08] Speaker 00:
None of the orders mentions that.

[00:03:10] Speaker 00:
I understood your briefs, ultimately.

[00:03:13] Speaker 00:
not to dispute.

[00:03:14] Speaker 00:
I don't think we need to dispute that to prevail, Your Honor.

[00:03:17] Speaker 00:
I think the more important point is that justification has an obvious meaning in this context.

[00:03:22] Speaker 00:
What is that?

[00:03:23] Speaker 00:
What does it mean?

[00:03:23] Speaker 00:
It means just and reasonable.

[00:03:25] Speaker 00:
There's only one statutory standard that FERC can apply to determine the validity of wholesale energy rates, and it's the just reasonable standard.

[00:03:33] Speaker 00:
And how do you satisfy that?

[00:03:35] Speaker 03:
What would be the point of specifying?

[00:03:37] Speaker 03:
What do you mean?

[00:03:38] Speaker 03:
It says subjects to justification and refund.

[00:03:41] Speaker 00:
But the only standard FERC is allowed to judge rates by is whether they're just and reasonable.

[00:03:47] Speaker 00:
FERC doesn't have the power to insist on refunds of just and reasonable rates.

[00:03:51] Speaker 00:
It has to find that they're unjust and unreasonable to do that.

[00:03:54] Speaker 00:
Mobile Sierra, as Morgan Stanley and Energy Power Marketing explain, how that standard applies in the particular context of bilateral contracts.

[00:04:03] Speaker 00:
First question, were they freely and fairly negotiated?

[00:04:06] Speaker 00:
Was there market power, market manipulation that somehow tainted the negotiation of the contracts?

[00:04:12] Speaker 01:
Can I just ask, just to fuck on the language, the soft cap

[00:04:18] Speaker 03:
order says subject to justification and risk.

[00:04:22] Speaker 03:
And we know that in the context outside of contracts that subject to justification and refund means that the seller generator side has the burden to justify.

[00:04:35] Speaker 03:
And I think we know that because of the footnote footnote seven in the order.

[00:04:39] Speaker 03:
So at least in that context, whatever context that applies in, that calls for a justification by the generator.

[00:04:45] Speaker 00:
Well, I think let's be more specific.

[00:04:47] Speaker 00:
That footnote was about auction markets and specific to generators who at the time had a must offer obligation.

[00:04:53] Speaker 00:
So generators were saying, hey, look, sometimes my costs of running my plant are going to exceed

[00:04:59] Speaker 00:
this cap you put in place.

[00:05:01] Speaker 00:
And if I'm not allowed to bid based on my costs, you're going to force me to violate my must offer obligation or I have to violate your soft cap.

[00:05:09] Speaker 00:
That's an untenable position.

[00:05:11] Speaker 00:
And for just OK, if you're bidding into an auction market generator.

[00:05:15] Speaker 00:
and you need to bid above the cap, but we need to make sure you're not, you know, flouting this must-offer obligation surreptitiously, so we're going to make you do that.

[00:05:24] Speaker 03:
I appreciate that that particular language might be a different context, but I guess all I'm saying is in that context at least, the language presupposes that the justification burden is on the part of the generator.

[00:05:41] Speaker 00:
in auction markets where Mobile Sierra doesn't apply as a matter of course.

[00:05:46] Speaker 03:
So what I'm asking is if that's true, if we assume that in that context.

[00:05:50] Speaker 03:
justification burden is on the part of the generator is your position that the language subject to justification and refund still applies in the bilateral contract it does but but if i can just finish it yeah but it works differently so that even though it's the same word it says subject to justification and refund actually the justification burden

[00:06:12] Speaker 03:
is on the other side.

[00:06:13] Speaker 03:
The justification burden is on the part of the commission to show in the normal course of Mobile Sierra that there's a significant impairment of the public interest such that you don't give effect to the contract.

[00:06:26] Speaker 00:
So I quibble slightly.

[00:06:27] Speaker 00:
I agree with maybe 95% of what you just said.

[00:06:31] Speaker 00:
I think, you know, it does put an obligation on the sellers to come forward proactively and create dockets in which FERC is going to make a decision.

[00:06:40] Speaker 00:
So it has, you know, in addition to the normal market monitoring FERC is doing, we have this additional obligation to come forward and ensure that all of these above soft cap 250, a thousand, whatever it is, are going to be reviewed by FERC.

[00:06:53] Speaker 00:
But as part of that, remember, mobile series has two steps.

[00:06:57] Speaker 00:
One is, is this a fairly and freely negotiated contract?

[00:07:01] Speaker 00:
And I think we came forward with evidence that it is, none of our counterparties are on the other side of this case or were on the other side of any of the cases at FERC.

[00:07:10] Speaker 00:
I think once we put that evidence forward, yes, then it shifts to FERC.

[00:07:14] Speaker 03:
So what is the burden on you exactly?

[00:07:16] Speaker 03:
So you think that subject to justification and refund does put a burden on sellers to some extent?

[00:07:21] Speaker 00:
To some extent, but- What is it exactly?

[00:07:23] Speaker 00:
I think we had to come forward with evidence that these are in fact the kinds of contracts

[00:07:29] Speaker 00:
that warrant mobile Sierra protection that we don't have market power that no manipulation occurred.

[00:07:35] Speaker 00:
And we came forward with that evidence and it's uncontested.

[00:07:37] Speaker 00:
But I also point out, your honor, I think duty production is probably the better way to think about it.

[00:07:44] Speaker 00:
It might be a duty persuasion, but given that it's uncontested here, I'm not sure it matters terribly much, but yeah.

[00:07:55] Speaker 07:
Um,

[00:07:57] Speaker 07:
It could be persuasion, so you would have a duty to persuade as to the markets.

[00:08:02] Speaker 07:
Fair functioning, the lack of market power.

[00:08:05] Speaker 07:
Is that where your duty of persuasion that you alluded to?

[00:08:09] Speaker 00:
To any extent, there is one.

[00:08:11] Speaker 00:
I think it would be limited to that.

[00:08:12] Speaker 00:
But if I can get back to Chief Judge Schoenhausen's question.

[00:08:17] Speaker 00:
questions sort of seem to have been some skepticism that the words justification and refund might mean different things as applied to auction markets as opposed to bilateral contracts.

[00:08:28] Speaker 00:
Morgan Stanley makes clear that that's to the normal function of the way just and reasonable works in this context.

[00:08:33] Speaker 00:
And insofar as we're right, the justification is just and reasonable because there is no other standard FERC can apply.

[00:08:39] Speaker 00:
It shouldn't be at all surprising that the same phrase operates differently depending upon whether you're dealing with bilateral contracts.

[00:08:46] Speaker 00:
or you're dealing with auction markets.

[00:08:49] Speaker 08:
I'm sorry.

[00:08:52] Speaker 00:
I believe there is currently an energy imbalance market that covers parts of the Western Energy Coordinating Council.

[00:08:58] Speaker 00:
At the time, I don't believe they existed.

[00:09:01] Speaker 00:
But at the time, FERC doesn't say a word one way or another about mobile share, not in the 2002 order, 2006, 2010, even in 2021.

[00:09:10] Speaker 00:
When we have all already made these sales and we come forward to FERC and have already said,

[00:09:15] Speaker 00:
We think these are mobile Sierra sales and the public interest standard is the right standard.

[00:09:20] Speaker 00:
FERC acknowledges that in paragraph six of its 2021 guidance order and then doesn't say, which would be the obvious thing to say, why are you people talking about this?

[00:09:30] Speaker 00:
There is a tariff restriction that got rid of this for these above cap sales.

[00:09:34] Speaker 00:
And they don't say that until a full year later when they can't cite any precedent having put anyone on notice.

[00:09:41] Speaker 00:
then that is what the soft cap had actually done.

[00:09:45] Speaker 00:
This would be a very different case if FERC had actually said those words.

[00:09:48] Speaker 08:
Because justification refund is in the original soft cap award.

[00:09:53] Speaker 00:
It is, but it isn't until 2022 in the first refund order here, which I believe is against Pacific Court, that FERC actually says those words we said 20 years ago,

[00:10:07] Speaker 00:
What we meant was they were a condition on your market-based rate tariff that had the effect of removing the public interest standard as the relevant justification and replacing it with a new justification standard that we spent 18 years refusing to tell you what it is.

[00:10:24] Speaker 00:
Until 2021, after the sales, we gave you three non-exclusive methods

[00:10:29] Speaker 08:
Why isn't the better way to understand it is the standard justification model until the order broadening the types of justification was cost.

[00:10:43] Speaker 08:
And so then after, you know, sellers and market participants advocated for other means, including index based, I mean, I take you to be saying there's some kind of retroactivity here or some kind of lack of notice, but justification means

[00:10:59] Speaker 08:
cost-based justification until it means these opportunity costs plus index-based plus anything else.

[00:11:07] Speaker 00:
Energy Power Marketing explains that Morgan Stanley controls FERC itself.

[00:11:12] Speaker 00:
It explains the way FERC has to think about negotiated rates between sophisticated parties.

[00:11:19] Speaker 00:
At the time they make that agreement, it attaches.

[00:11:22] Speaker 00:
And it says FERC you have to presume.

[00:11:23] Speaker 08:
But Morgan Stanley doesn't speak to additional conditions and tariffs, and we have many cases where

[00:11:29] Speaker 08:
A condition in a tariff that is a market based tariff is violated.

[00:11:34] Speaker 08:
And there's a

[00:11:35] Speaker 08:
there's an enforcement there can be.

[00:11:37] Speaker 00:
There is no prior case where FERC has ever tried to claim that by putting a condition in the market based rate tariffs, it is displacing mobile Sierra protection and replacing it with something else, at least not without actually going through the public interest finding in the setting up of that condition, which it did not do here.

[00:11:59] Speaker 08:
Is a public interest finding required in a hard cap violation?

[00:12:04] Speaker 00:
I think so.

[00:12:04] Speaker 00:
If FERC had wanted to say we are going to prohibit sophisticated parties from agreeing to transact at rates that they think are appropriate in marketplace circumstances because we think they are harmful to the public, I think they would actually have to say that.

[00:12:18] Speaker 00:
Above a hard cap.

[00:12:20] Speaker 00:
To set the hard cap, to decide where the hard cap goes, yes, in the context of bilateral contracts, FERC would have to say, we are going to prohibit you, Judge Pillard, and you, Chief Judge Van Vassen, from voluntarily agreeing in your sophisticated business judgment that $1,200 is the right price for energy today, given current demand conditions and costs and whatever.

[00:12:44] Speaker 00:
To do that, to put that in place, FERC would have to find that we're doing that because we find that rates above that cap categorically would be one of those rare circumstances quite, categorically harm the public interest.

[00:12:58] Speaker 00:
That's why notwithstanding the reason to business judgment of two parties without market power and who are sophisticated and Morgan Stanley explains to us, we need to presume that those folks know what they're doing and are going to agree to just and reasonable rates.

[00:13:13] Speaker 00:
you would have to make that public interest finding.

[00:13:15] Speaker 00:
So that's why I think we have two different ways of getting too vaguer here.

[00:13:20] Speaker 07:
Can I just clarify your response to Judge Miller?

[00:13:24] Speaker 07:
Sound like you were saying that FERC would need to make that finding in imposing the hard cap, but once a hard cap is in place and unchallenged,

[00:13:35] Speaker 07:
And then contracts it.

[00:13:37] Speaker 00:
Yes.

[00:13:38] Speaker 00:
And as we agree with Commissioner Danley on this one, that if FERC had imposed a hard cap, there would be unenforceable contracts.

[00:13:45] Speaker 00:
Mobile Sierra doesn't apply to unenforceable contracts.

[00:13:48] Speaker 00:
But again, the hard cap would have to have been put in place in the correct way.

[00:13:53] Speaker 07:
What kind of soft cap would also give you legal implications for your agreements over the soft cap?

[00:14:00] Speaker 00:
I think we have two different arguments here.

[00:14:04] Speaker 00:
One is if FERC actually had written an order that said,

[00:14:08] Speaker 00:
We are imposing the soft cap.

[00:14:10] Speaker 00:
And as it applies to bilateral contracts, that means everybody should know that if you sell it above our soft cap, we are going to make the seller justify it.

[00:14:19] Speaker 00:
Ideally, they would tell us how they would approach that justification.

[00:14:22] Speaker 00:
But we are going to make the seller justify that.

[00:14:24] Speaker 00:
We are not going to presume them just and reasonable.

[00:14:27] Speaker 00:
We would have had litigation about that.

[00:14:29] Speaker 00:
And we think Morgan Stanley and Energy Power Marketing say FERC could only do that if it found

[00:14:34] Speaker 00:
that we need to do that and strip this protection because we're concerned or we have reasoned basis for concluding that those contracts seriously harm the public interest finding assistance with the existence of a soft cap.

[00:14:47] Speaker 07:
I get why a hard cap would say over here, bad things happen.

[00:14:50] Speaker 00:
I have trouble getting my brain wrapped around how far I might do it.

[00:14:55] Speaker 00:
I just can't have soft caps.

[00:14:58] Speaker 00:
I think the court doesn't need to go that far.

[00:15:01] Speaker 07:
I don't understand what the consequences of your position will be otherwise.

[00:15:04] Speaker 07:
I mean, I'm not sure your industry friends are going to be so happy with you if FERC has to turn everything into a hard cap.

[00:15:11] Speaker 00:
So I think FERC could try, and I think we could litigate that.

[00:15:14] Speaker 00:
I think the narrower ground here- Your position- No, but your position is- Our position is, I can't rule it out, John.

[00:15:20] Speaker 00:
I can't hypothesize every possible set of record evidence that FERC could come up with that could lead it to say, there are reasons to

[00:15:30] Speaker 00:
not refuse to allow these contracts to go forward categorically, but to subject them to a different level of scrutiny because of harm to the public interest in not doing that.

[00:15:42] Speaker 00:
I can't say for sure standing here, like I have trouble personally thinking how I'd write that if I were in for shoes, but I'm not gonna stand up here and say categorically, they couldn't do it.

[00:15:53] Speaker 03:
How could you say they couldn't do it categorically?

[00:15:56] Speaker 03:
conceptually under transmission that logic, I think that exactly your honor.

[00:16:00] Speaker 00:
And so I think the answer is I'm skeptical they could write a sustainable order.

[00:16:05] Speaker 00:
But I don't want our legal position is not that it's literally impossible to write a sustainable order, but the narrower ground, if I could end here is this is not that case for didn't write that kind of order in 2002.

[00:16:21] Speaker 07:
I get why it isn't.

[00:16:23] Speaker 07:
In that case, why isn't this an enormous step in the direction of they can't have enforceable soft caps?

[00:16:30] Speaker 00:
Because I think the narrowest ground to rule here is simply that when all you write are the words justification and refund, and you don't say anything more about what that means in the context of bilateral contracts, the only reasonable way to read that, particularly given Morgan Stanley and energy power marketing.

[00:16:48] Speaker 07:
We had a lot of background in the order about the circumstances or leading them to impose a soft cap.

[00:16:54] Speaker 07:
You know, the dire circumstances, the extreme demands, the price spikes and the harms that that causes, the diversions between different markets, the provision, the incentives to build better generation.

[00:17:12] Speaker 07:
I mean, they have a whole background section about the problems.

[00:17:16] Speaker 07:
They cause them to have, you know, hard cap and CAISO and a soft cap.

[00:17:21] Speaker 07:
Here, it's not like it just came in and said, hey, today is Tuesday, let's try a soft cap and we'll have justification and refund.

[00:17:29] Speaker 07:
There was a lot more going on.

[00:17:31] Speaker 00:
There was a lot more going on.

[00:17:32] Speaker 00:
And virtually all of it, as you mentioned, is specifically in the context of bidding markets.

[00:17:37] Speaker 00:
Burke didn't turn around and say, notwithstanding all of that, if two sophisticated parties absent market power, absent market manipulation, voluntarily agree to a higher rate,

[00:17:50] Speaker 00:
because that's what they in their sophisticated judgment think the circumstances warrant that we are nonetheless going to proactively say that those rates are nonetheless presumptively unjust and unreasonable.

[00:18:04] Speaker 00:
That's a radical departure from Mobile Sierra's normal approach.

[00:18:09] Speaker 00:
And it would be, I think it is the kind of thing FERC would actually have to say in an order if it wanted to do that.

[00:18:15] Speaker 01:
In the soft cap order,

[00:18:18] Speaker 03:
Everybody's litigated this case on the understanding that the soft cap order applies to contract prices, including you.

[00:18:27] Speaker 03:
Yes.

[00:18:28] Speaker 03:
But the language speaks in terms of bids.

[00:18:32] Speaker 03:
Where is it?

[00:18:33] Speaker 03:
I'm not meaning to dispute the proposition, but I'm just curious.

[00:18:38] Speaker 03:
Why is it that that language that refers to bids, and that's your answer to the footnote,

[00:18:44] Speaker 03:
footnote seven in the order.

[00:18:46] Speaker 03:
Why is it that it applies to prices?

[00:18:48] Speaker 03:
How does that come about?

[00:18:51] Speaker 00:
FERC described its order as applying to all spot market sales in the WECC.

[00:18:57] Speaker 00:
And you don't dispute that?

[00:18:58] Speaker 00:
We don't dispute that FERC.

[00:19:00] Speaker 00:
applied this to reach all spot market sales.

[00:19:03] Speaker 00:
These are spot market sales.

[00:19:05] Speaker 00:
We're not contesting that it applies.

[00:19:07] Speaker 00:
We're just saying the justification in the context of bilateral contracts has the meaning that Mobile Sierra Morgan Stanley and Energy Power Marketing say it has to have as applied to them, even if it means something different elsewhere.

[00:19:20] Speaker 03:
This is what I was trying to understand earlier.

[00:19:23] Speaker 03:
I don't think your position is that justification means you apply the mobile Sierra presumption because you think the justification requires you requires you to do something that in the normal mobile Sierra context you wouldn't have to do.

[00:19:37] Speaker 03:
It wouldn't be the absent the tariff and absence of soft cap order.

[00:19:41] Speaker 03:
I don't think

[00:19:43] Speaker 03:
parties who enter into a contract, every time they enter into a contract, have to show that there's no market manipulation, that the other things you said that you have a burden of either production or persuasion at the outset.

[00:19:57] Speaker 00:
You're right, Your Honor, and that's why we think this actually does some work even as applied to bilateral contracts.

[00:20:03] Speaker 00:
At the time FERC put this into place,

[00:20:05] Speaker 00:
Tarriers or sellers that had shown that they lacked or had mitigated market power and could sell under market-based rate tariffs had to provide quarterly reports.

[00:20:14] Speaker 00:
Now, FERC would investigate those, and FERC could then sua sponte open a proceeding if it wanted to, if it saw something in the data that was troubling.

[00:20:22] Speaker 00:
But here we have an affirmative obligation to actually open a docket ourselves as sellers, which we don't do when we just submit the quarterly reports.

[00:20:30] Speaker 00:
And FERC is going to call for comments without comments, not from our counterparties, but from interested parties.

[00:20:36] Speaker 00:
And it's going to issue a decision.

[00:20:37] Speaker 00:
It lets FERC proactively monitor individual sales in a way that the regime had set up more generally for market-based rates tariffs didn't apply.

[00:20:47] Speaker 01:
What is the practical difference there?

[00:20:51] Speaker 03:
Even if you didn't have what we're talking about as an affirmative obligation, work could still, for every single contract, do the same thing.

[00:20:59] Speaker 03:
They could reach out to the seller and they could say, hey, we need the following information because we need to make sure there hasn't been manipulation and there isn't an onset of market power that previously at the time in the market-based rate tariffs grant appeared to be absent.

[00:21:12] Speaker 03:
What's the practical difference between the mobile Sierra world absent the soft cap order and the mobile Sierra world with the soft cap?

[00:21:21] Speaker 00:
I think the practical difference is it takes that burden off of FERC.

[00:21:24] Speaker 00:
It makes it mandatory and regular, regularizes it.

[00:21:29] Speaker 00:
So FERC doesn't have to, it's the kind of thing, I could case by case, every time I see a rate above a thousand, send out a notice.

[00:21:39] Speaker 00:
seller please explain to me what went on here or I could as the soft cap orders did just set up that as a rule across the board.

[00:21:47] Speaker 00:
I see a real efficiency in that for FERC in putting that obligation and remember it's also simultaneously applying it not just to

[00:21:56] Speaker 00:
these bilateral contracts, but more generally.

[00:21:59] Speaker 00:
But as applied to the bilateral contracts, I think it facilitates FERC review in a way that at the time the quarterly reporting could have facilitated, but it does it more directly and more efficiently.

[00:22:12] Speaker 00:
We came forward with our justifications.

[00:22:15] Speaker 00:
Nobody disputes that these are free and fair contracts.

[00:22:18] Speaker 00:
Our counterparties are not complaining.

[00:22:21] Speaker 00:
And FERC nonetheless concludes that the two of us, or the many of us in the various contracts, nonetheless agreed to presumptively unjust and unreasonable rates.

[00:22:30] Speaker 00:
And that is entirely inconsistent with the notion that Mobile Sierra controls FERC itself.

[00:22:36] Speaker 08:
Does cost-based justification, is that available to non-producers?

[00:22:41] Speaker 00:
For example, you don't believe it is certainly, you know, when one of and this gets to some of the later, you know, when one of the sellers here said, I bought my power at an index plus non-spot contract and FERC said, and the first only answer is, well, you can get refunds

[00:23:02] Speaker 00:
despite the fact that that contract isn't actually subject to the soft cap, because it's not a spot contract.

[00:23:07] Speaker 00:
It extends for more than a 24-hour period.

[00:23:09] Speaker 00:
So that's one case where there was evidence that the actual cost to purchase was above the index price.

[00:23:17] Speaker 00:
And yet FERC didn't really grapple with that at all.

[00:23:21] Speaker 00:
I suppose there ought to be a way, if we're not going to be in the public interest world, for sellers to say that I purchased this power out of my portfolio.

[00:23:32] Speaker 00:
I fulfilled this order out of my portfolio, which includes a mix of longer-term and spot purchases.

[00:23:38] Speaker 00:
And my price for this was in excess, but FERC didn't seem to care about that here.

[00:23:45] Speaker 00:
I don't think in the normal course cost, I think in the normal course, at least to explain in the 2021 order, FERC seems to describe the cost of production and not the cost of purchase.

[00:23:57] Speaker 00:
So I don't, you have to ask Mr. Ediger, but I don't believe FERC thinks that the cost justification approach, the cost of production justification approach applies to anybody other than generators.

[00:24:09] Speaker 08:
And that's not something, I mean, so you're willing to give that up.

[00:24:13] Speaker 00:
As I said, I think in the specific context that we brought up in our brief of a sale that was a non-spot sale at index plus, FERC's only answer is, well, you'll get refunds there too, is not a valid answer.

[00:24:27] Speaker 08:
I recall that, but just more generally, if there is a situation in which the only power that your clients can find is above, you know,

[00:24:40] Speaker 08:
it's above index or with whatever reasonable adder is above index, that's not a justification that you would think is available to you to say, well, we were responding to this overcharged market and surely we have to at least be able to recover reasonable return.

[00:24:59] Speaker 00:
So this is, I think, a difficult position we're in because we spent 18 years with FERC refusing to give us any indication of what could satisfy.

[00:25:07] Speaker 00:
Now we have a non-exhaustive set of three.

[00:25:09] Speaker 00:
So I do think the justification you came up with is a perfectly valid one.

[00:25:13] Speaker 00:
It's not one listed in the guidance order.

[00:25:16] Speaker 00:
Certainly, it can't be.

[00:25:17] Speaker 08:
Wait, it is listed in the guidance order, isn't it?

[00:25:19] Speaker 00:
Cost-based.

[00:25:20] Speaker 00:
There is a particular variant of it.

[00:25:22] Speaker 00:
But even, I think this is, to be a non-exhaustive list,

[00:25:26] Speaker 00:
we need to be able to come forward again if we're in and outside the public interest world we need to be able to come forward with justifications that differ from the three non-exhaustive ones otherwise it's an exhaustive list and I do think it would be a possible justification for a seller to try to say exactly what you said that this is what the cost of power because the the other alternative is

[00:25:50] Speaker 00:
that during times of crisis, these marketers just leave the market.

[00:25:54] Speaker 00:
If the only thing these marketers can do is buy and sell at the index, because FERC is demanding a level of proof that nobody could come forward with, these are risky transactions.

[00:26:06] Speaker 00:
There's a risk of non-performance.

[00:26:07] Speaker 00:
There's a risk that the transmission won't come through.

[00:26:09] Speaker 00:
There are massive liquidated damages that are normally part of this.

[00:26:13] Speaker 00:
These sellers are just not going to participate.

[00:26:17] Speaker 00:
What is there?

[00:26:18] Speaker 08:
I mean, they're other than a kind of financial actor arbitrage trying to sort of understand the market better than others.

[00:26:27] Speaker 08:
I mean, they're not producers.

[00:26:29] Speaker 08:
They're not transmission owners.

[00:26:31] Speaker 08:
They're some kind of...

[00:26:34] Speaker 08:
Intermediaries.

[00:26:36] Speaker 00:
They're intermediaries.

[00:26:36] Speaker 00:
You're right.

[00:26:37] Speaker 00:
And I suppose a utility, the end purchaser of the power, could bring all that in-house and could do all of this work itself, reach out to the various potential sources of supply, arrange transmission to the various points and the various quantities.

[00:26:52] Speaker 00:
But it's not uncommon in complicated businesses to outsource those functions to somebody who specializes in that role.

[00:26:58] Speaker 08:
It's a broker.

[00:26:59] Speaker 00:
I think that's a fair.

[00:27:00] Speaker 00:
I suspect the people who do it might

[00:27:03] Speaker 00:
But between us, I'm good with that.

[00:27:05] Speaker 00:
Yes.

[00:27:07] Speaker 00:
And so that's the role they play.

[00:27:08] Speaker 00:
And I don't think they play that role if under the regime as FERC has created it in these orders in times of crisis.

[00:27:17] Speaker 00:
No further questions?

[00:27:17] Speaker 07:
I had one thing I was trying to figure out how the approach you propose works.

[00:27:27] Speaker 07:
These are just spot market transactions and above cap.

[00:27:32] Speaker 07:
So it's pretty likely to be exigent circumstances as it was.

[00:27:37] Speaker 00:
Assuming the cap is set at a sensible level.

[00:27:40] Speaker 07:
Well, you haven't challenged what this one is.

[00:27:42] Speaker 07:
So I'm talking about this one.

[00:27:44] Speaker 07:
And under your theory, if FERC thinks something's wrong, it has the burden

[00:27:54] Speaker 07:
of proof.

[00:27:56] Speaker 07:
And it can declare rates unjust and unreasonable.

[00:27:59] Speaker 07:
But you keep talking about the retroactivity here.

[00:28:02] Speaker 07:
It cannot, at least under 206, cannot impose retroactive relief.

[00:28:07] Speaker 07:
So it couldn't do refunds.

[00:28:09] Speaker 07:
It would only be prospective relief.

[00:28:12] Speaker 07:
And the same even at the 309 power there, at least there has to be like a filing, what's called, sort of a filing that triggers its ability to win refunds could happen

[00:28:22] Speaker 07:
None of that makes any sense in sort of an emergence spot market.

[00:28:29] Speaker 07:
There's no way that FERC could ever give prospective relief, nor could it make a sort of a 309 filing in time that would allow it to order refunds because these things are happening so fast and usually for short periods of time.

[00:28:50] Speaker 07:
And so one thing I'm worried about is your position in this case is that

[00:28:57] Speaker 07:
There's no way to fix.

[00:28:59] Speaker 07:
Imagine they came forward and found.

[00:29:02] Speaker 07:
In fact, the rates were unjust and unreasonable.

[00:29:05] Speaker 07:
There's nothing they can do to fix it.

[00:29:06] Speaker 07:
There's no prospective relief they can afford.

[00:29:09] Speaker 07:
And your position walls off any retrospective.

[00:29:13] Speaker 07:
Maybe I'm just misunderstanding.

[00:29:15] Speaker 00:
So tell us.

[00:29:16] Speaker 00:
So I think there are two possible reasons why prices could spike above this off cap.

[00:29:20] Speaker 00:
One is, as was the case here, there's extreme weather.

[00:29:23] Speaker 00:
events and extreme demand.

[00:29:26] Speaker 00:
But market power and market manipulation is another way in which prices can spike up.

[00:29:31] Speaker 00:
Not happening here.

[00:29:32] Speaker 00:
I want to be very clear about that.

[00:29:34] Speaker 00:
In that context, FERC would find that this was not a freely and fairly negotiated contract.

[00:29:40] Speaker 00:
Oval Sierra doesn't apply to it.

[00:29:42] Speaker 00:
And we would be in the normal, just and reasonable world.

[00:29:46] Speaker 00:
Or FERC could find...

[00:29:48] Speaker 00:
We're not challenging the ability to order refunds on contracts that exceed the soft cap where the appropriate justification standard isn't met.

[00:29:57] Speaker 00:
We're not challenging that.

[00:29:58] Speaker 07:
From under the actual contracts themselves?

[00:30:02] Speaker 00:
Yes, we have not challenged that aspect of the... We agree that if they... Which work authority would it be?

[00:30:09] Speaker 07:
We're exercising.

[00:30:12] Speaker 00:
We have not had an issue with that.

[00:30:14] Speaker 00:
I suspect it would have to be 309.

[00:30:17] Speaker 07:
I suspect we 309 requires there be either a complaint filing or something.

[00:30:22] Speaker 07:
for initiation by FERC itself.

[00:30:24] Speaker 07:
And that's what sets the refund, I don't have the terminology, but the refund sort of date.

[00:30:30] Speaker 07:
And they're not gonna be able to do that fast enough in a spot market unless they are sort of sitting there instantaneously, you know, lobbying in filings, which they're not gonna do.

[00:30:38] Speaker 07:
So I still don't understand.

[00:30:40] Speaker 07:
I think they can track to a third option that allow them to order.

[00:30:44] Speaker 00:
We are not contesting for purposes of this case.

[00:30:47] Speaker 00:
And I suspect we'd not contest more generally.

[00:30:49] Speaker 00:
Just explain to me how it works.

[00:30:51] Speaker 00:
I think for purposes of this case, we have accepted for contention that in so far as there was a carrier or a seller, for example, refused to submit its transaction reports, that would be a violation of SOFGAP.

[00:31:05] Speaker 07:
That's a personal problem.

[00:31:05] Speaker 07:
I'm talking about, imagine, you know, it's exigent circumstances here, but say a cell, and this is hypothetical, I'm not suggesting that it happened.

[00:31:13] Speaker 07:
And to be clear, there's no one's put evidence on this record that it did, but it's not uncommon that there are at least concerns raised.

[00:31:19] Speaker 07:
in extreme circumstances about people holding back and price gouging when demand is so high.

[00:31:26] Speaker 07:
And so if price gouging was happening, but it only happened for a few hours on the hottest day,

[00:31:34] Speaker 07:
And there was no time for FERC to have made a 309 filing or anybody else.

[00:31:39] Speaker 07:
So we did make our 309 filing.

[00:31:42] Speaker 00:
We made a relevant 309 filing in the market-based rate tariff.

[00:31:45] Speaker 00:
FERC has also issued an order.

[00:31:48] Speaker 00:
Our view is that its orders are enforceable whether we treat them as conditions on the tariff or we treat them as orders that bind us as sellers.

[00:31:55] Speaker 00:
If they applied the justification standard correctly and found that the rates were unjustified.

[00:32:03] Speaker 07:
and withholding.

[00:32:04] Speaker 00:
Then under the soft cap orders either because they're orders of FERC that we have to follow issued before the sale.

[00:32:12] Speaker 07:
On those very contracts.

[00:32:13] Speaker 07:
On those very contracts, yes.

[00:32:15] Speaker 07:
And that would just be a matter of in terms of your tariff not 206 or 309?

[00:32:20] Speaker 00:
It would be well 309 is the way this court has said FERC enforces the terms of our tariff so it would be 309 in that context.

[00:32:26] Speaker 00:
I think 309 is probably.

[00:32:28] Speaker 07:
309 normally requires a filing which defines when refunds

[00:32:33] Speaker 00:
That's 206.

[00:32:34] Speaker 00:
I believe that's 206 with the refund effective date.

[00:32:37] Speaker 07:
OK.

[00:32:38] Speaker 00:
So 309 is the authority.

[00:32:39] Speaker 00:
Then it works out a number of cases in brief.

[00:32:42] Speaker 07:
OK.

[00:32:43] Speaker 07:
So 309 does not require anything like a refund effective date?

[00:32:46] Speaker 08:
No.

[00:32:47] Speaker 08:
So just to make sure that I'm following this exchange, what you're saying is that under the soft cap, if there is evidence of market manipulation that for could enforce and

[00:33:03] Speaker 08:
to obtain retrospective relief, but the level of showing would have to be public interest under mobile Sierra.

[00:33:10] Speaker 08:
And in that case, Section 309.

[00:33:14] Speaker 08:
No.

[00:33:16] Speaker 00:
I think you're mushing together two different things.

[00:33:20] Speaker 00:
At the front end, we need a freely and fairly negotiated contract.

[00:33:24] Speaker 00:
And so Morgan Stanley talks about how market manipulation by a particular seller might have a causal connection to a contract in the way that made it not freely and fairly negotiated.

[00:33:36] Speaker 00:
So Mobile Sierra wouldn't need to be overcome, it wouldn't actually apply.

[00:33:40] Speaker 00:
But if we have a freely and fairly negotiated contract,

[00:33:44] Speaker 00:
this sort of fights hypothetical, Your Honor, because there wouldn't be the market manipulation.

[00:33:47] Speaker 00:
That's when the public interest standard.

[00:33:49] Speaker 08:
Well, what if there's a freely and fairly negotiated contract between two actors, both of whom would benefit, but they are, you know, collaborating in some exercise of market power for their benefit, leading to a rate that's way out of line with the public interest.

[00:34:09] Speaker 08:
So free and fair, I mean, it's throughout the cases, including Morgan Stanley, that just because something is bargained doesn't, and even if it's bargained by an actor who has ex ante been deemed not to, you know, to not have unmitigated market power, nonetheless, you could have an instance of an exercise of market power, market manipulation, or you say you couldn't.

[00:34:34] Speaker 08:
I mean, I did read your briefs partly to be saying, no, once we're,

[00:34:37] Speaker 08:
once we're deemed to not have market power, that's it.

[00:34:40] Speaker 00:
Well, no, that's the reason for proactively monitors and looks for changes in circumstances that could lead to the exercise of market power.

[00:34:48] Speaker 00:
Certainly it could possibly be the case.

[00:34:49] Speaker 08:
I take you to be, or correct me if I'm wrong, I take you to be looking at that more systematically if a seller is then going to be rendered ineligible for bilateral contracting or if it's eligible, but you don't look at

[00:35:03] Speaker 08:
transaction specific questions of exercise.

[00:35:10] Speaker 00:
I think it's baked into the mobile share approach that you do have to look at individual transactions.

[00:35:15] Speaker 00:
There are certainly proceedings at FERC that are looking at individual transactions and whether, for example, market manipulation caused a particular contract to

[00:35:23] Speaker 08:
So when you were saying I was mushing two things together, I'm not sure.

[00:35:27] Speaker 00:
I don't think the public interest, the question of was I manipulating the market?

[00:35:31] Speaker 00:
Did my market manipulation cause you and I to enter into this contract?

[00:35:35] Speaker 00:
I don't think the public interest is the right approach.

[00:35:38] Speaker 00:
I think that's just a factual question.

[00:35:40] Speaker 00:
Was there market manipulation?

[00:35:41] Speaker 00:
Did it cause the entry into the contract?

[00:35:44] Speaker 00:
at the rate that it was entered into.

[00:35:46] Speaker 08:
And so what is the standard of review for that?

[00:35:48] Speaker 08:
It's not just unreasonable.

[00:35:50] Speaker 00:
It's not public interest.

[00:35:51] Speaker 00:
I think it would be the normal R return capricious review.

[00:35:54] Speaker 00:
I think that's how courts have typically done it.

[00:35:58] Speaker 01:
Can I ask one last question?

[00:35:59] Speaker 01:
Sure.

[00:36:02] Speaker 03:
So Morgan Stanley talks about a middle option and the middle option that Morgan Stanley spells out is, and it says that this is something that the course appeals have authorized contract that does not allow the seller to supersede.

[00:36:15] Speaker 03:
I'm looking at five 34.

[00:36:18] Speaker 03:
A contract that does not allow the seller to supersede the contract rate by filing a new rate and nonetheless permit the commission to set aside the contract rate if it results in an unfair rate of return, not just if it violates the public interest.

[00:36:30] Speaker 03:
So that's a Memphis clause, I think you're referring to that part of it.

[00:36:33] Speaker 03:
Yes, exactly.

[00:36:34] Speaker 03:
None of these contracts have that.

[00:36:36] Speaker 03:
Right, so I guess what I'm wondering is, is the upshot of the

[00:36:40] Speaker 03:
It may not have a thing that can come to known in the industry as a Memphis.

[00:36:44] Speaker 03:
Actually, I don't think that's a Memphis clause, because it says this middle option is between Mobile Sierra and Memphis Light.

[00:36:49] Speaker 03:
OK.

[00:36:50] Speaker 03:
And so it's a contract.

[00:36:51] Speaker 03:
And I think that's, as I understand this.

[00:36:54] Speaker 03:
I grabbed the opinions I can read.

[00:36:55] Speaker 03:
Yeah.

[00:37:01] Speaker 03:
You were at $5.45, you said, John?

[00:37:02] Speaker 03:
$5.30.

[00:37:03] Speaker 03:
The new Memphis clause is when you contract out of Mobile Sierra.

[00:37:08] Speaker 03:
And what Morgan Stanley is describing is a middle option.

[00:37:12] Speaker 03:
And I understand that the middle option to be essentially what we're talking about in this case.

[00:37:17] Speaker 03:
And if you look at the US reports version, if you happen to have that, it's on the paragraph that begins over the past 50 years.

[00:37:28] Speaker 03:
Oh, 534, at least on my copy.

[00:37:30] Speaker 03:
Yeah, exactly.

[00:37:33] Speaker 03:
So it's a paragraph that begins over the past 50 years, decisions of this court, and then

[00:37:38] Speaker 03:
Then there's the specification of the Memphis clause, which I take it means contract out of Mobile Sierra.

[00:37:42] Speaker 03:
But then the court describes what it refers to as a quote, middle option, close quote, between Mobile Sierra and Memphis.

[00:37:50] Speaker 03:
And it says a contract that does not allow the seller to supersede the contract rate by filing a new rate may nonetheless permit the commission to set aside the contract rate if it results in an unfair rate of return, not just if it violates the public interest.

[00:38:04] Speaker 03:
And so that's when two parties get together and they can say,

[00:38:07] Speaker 03:
We're not contracting all the way out of Sierra, but we're going to put into effect.

[00:38:12] Speaker 03:
We acquiesce in the commissions coming in and saying the rate of return that we achieved under the contract is in excess of what's reasonable.

[00:38:20] Speaker 03:
Even if it doesn't go all the way to saying there's a significant impairment of the public interest.

[00:38:25] Speaker 00:
Yes, parties can agree to that voluntarily as part of the negotiations.

[00:38:29] Speaker 00:
Presumably, parties that did that would be trading off other aspects of the contract in exchange for making that kind of concession.

[00:38:37] Speaker 00:
But that also didn't happen here.

[00:38:39] Speaker 03:
That's the question in some ways, because when I read that language, I thought,

[00:38:45] Speaker 03:
That sort of sounds like the upshot of the commission's understanding of the effect of the soft cap order on the contracts in this case, which is to say, this soft cap order says you have to justify subject to refund any rate that's above the soft cap.

[00:39:02] Speaker 03:
And that applies to the contracts too.

[00:39:04] Speaker 03:
And so we don't need to do a violation of the public interest.

[00:39:10] Speaker 03:
We need to do something south of that.

[00:39:12] Speaker 03:
this middle option.

[00:39:13] Speaker 03:
And it's not because the parties voluntarily agreed to it in the context of a specific contract.

[00:39:18] Speaker 03:
It's because that's the across the board predicate that we established when we imposed the soft cap order.

[00:39:24] Speaker 03:
Now, if that conceptually, I'm understanding, understanding the upshot of the commission's approach correctly, then I guess I just want to make sure I understand your response.

[00:39:35] Speaker 03:
Your response would be

[00:39:36] Speaker 03:
Well, that would be one thing if contracts actually had a provision like that.

[00:39:41] Speaker 03:
But all we have here is a reference to justification.

[00:39:44] Speaker 03:
And when you look at the reference to justification,

[00:39:49] Speaker 03:
it wouldn't be thought to encompass this kind of provision.

[00:39:52] Speaker 03:
It's something less than that.

[00:39:53] Speaker 03:
And in order to overcome the normal operation of Oval Sierra, you need something that speaks more specifically to contracts.

[00:40:00] Speaker 00:
I think that's right at the first level, that if FERC had wanted to say, we are imposing this clause on parties to future contracts, notwithstanding their preference not to include that clause in their contract, they would have had to say that much more explicitly than they said that here.

[00:40:16] Speaker 00:
And then I think at a second level, I think to override

[00:40:18] Speaker 00:
prospectively the future decisions of freely contracting parties, they would have to justify imposing that clause consistent with mobile share.

[00:40:28] Speaker 00:
But once justified, then they wouldn't have to keep re-justifying it every time they reply.

[00:40:34] Speaker 00:
So yes, parties can agree to this.

[00:40:37] Speaker 00:
If they agree to it, FERC enforces it.

[00:40:39] Speaker 00:
But FERC didn't impose it on them here.

[00:40:42] Speaker 00:
And FERC can't impose it on them.

[00:40:43] Speaker 03:
I mean, this doesn't say anything about that you need to make a justification.

[00:40:47] Speaker 03:
It just says parties can voluntarily agree to it.

[00:40:50] Speaker 00:
Right.

[00:40:50] Speaker 00:
But if FERC wanted to impose that on the parties absent of voluntary, that's when FERC would need the authority to do that.

[00:40:56] Speaker 00:
And we think that's the public interest standard.

[00:40:58] Speaker 08:
The justification would have to be according to public interest standard.

[00:41:01] Speaker 08:
And what would that look like?

[00:41:03] Speaker 08:
I mean, there was justification for a cap initially, presumptively a hard cap and soft cap, but none of that, I take it, in your view, constitutes the kind of public interest justification that would be required ex ante.

[00:41:18] Speaker 00:
I think FERC, I don't read those orders to have said we are finding that bilateral contracts above our rates

[00:41:26] Speaker 00:
are whatever words they would need to use to explain why they should be allowed to happen sometimes, but not all the time.

[00:41:33] Speaker 00:
They didn't say those words.

[00:41:36] Speaker 00:
I think they would have to have said them.

[00:41:39] Speaker 00:
I don't think anything they said, you know, nobody challenged that we're not sort of dealing that world.

[00:41:43] Speaker 00:
And I think most importantly, it's never been first argument in this case.

[00:41:46] Speaker 03:
If it were, then you would, you, you might have a response, but you have to see the argument first.

[00:41:50] Speaker 03:
that they haven't justified it on that basis.

[00:41:53] Speaker 00:
The first argument has been when we said justification and refund that inserted a term into tariffs that incorporated the meaning of justification that we would later announce that flowed through to the contracts and all we are doing here is enforcing the contracts.

[00:42:06] Speaker 00:
They've never argued that they had to that they met Mobile Sierra in imposing that condition.

[00:42:13] Speaker 00:
they've just argued that they have free power to impose that condition and strip future contracts of mobile serial protection.

[00:42:19] Speaker 00:
And as Commissioner Danley explained that they've never answered, literally no precedent supports that notion.

[00:42:25] Speaker 01:
Should my colleagues don't have additional questions at this time.

[00:42:28] Speaker 01:
Hear from the commission.

[00:42:29] Speaker 01:
Thank you.

[00:42:30] Speaker 01:
Thank you.

[00:42:33] Speaker 01:
Mr.

[00:42:38] Speaker 04:
Employees of the Court, I'm Scott Etterger, appearing for the Federal Energy Regulatory Commission.

[00:42:43] Speaker 04:
Thank you for hearing this case today, this morning.

[00:42:47] Speaker 04:
Judge Schreiner-Boston, I want to go to your colloquy.

[00:42:51] Speaker 04:
One point about the commission did find that in the footnote 36 to this show, rehearing order, paragraph 16 at JA 1199, that these contracts here are presumed to have incorporated the lawful terms and conditions.

[00:43:08] Speaker 04:
And I think that goes to the call you just had.

[00:43:11] Speaker 04:
And now I would like to back up and discuss some of the history, the procedural history, and first address why sellers here had notice of the proper standard that the commission applied for the soft price cap.

[00:43:27] Speaker 04:
And then I'd like to move in to discuss why any other

[00:43:36] Speaker 04:
any other interpretation of this history doesn't make sense.

[00:43:40] Speaker 04:
And I'd start with the October 2002 order, paragraph 16.

[00:43:47] Speaker 04:
And the only previous order in this case for the soft cap that addressed soft cap justification filings, the CAISO order at 119 FERC 61230 at paragraph 23.

[00:44:04] Speaker 04:
This these orders both referred to the soft price cap as being subject to the just and reasonable standard.

[00:44:14] Speaker 04:
And as it was just point out that both of those orders were issued prior to Morgan Stanley and Morgan Stanley was

[00:44:25] Speaker 04:
was issued the following year.

[00:44:27] Speaker 04:
And that's where we get the explanation in Morgan Stanley about that.

[00:44:30] Speaker 04:
The commission and the courts referred to the mobile CIRA standard as the public interest standard, not the just and reasonable standard.

[00:44:40] Speaker 04:
So I would submit that explanation of that language of what the commission meant in those orders when it talked about the just and reasonable standard.

[00:44:49] Speaker 04:
It wasn't to apply the mobile CIRA presumption.

[00:44:55] Speaker 04:
The next, so that's a bit of history and some of the orders.

[00:45:00] Speaker 04:
And I would submit that the alternative reading of the soft price cap doesn't make sense.

[00:45:06] Speaker 04:
The commission had to apply the consistent standard in both the California market and in the Western market in order to accomplish its purpose of avoiding the distortions that could occur

[00:45:22] Speaker 04:
between the two markets.

[00:45:24] Speaker 04:
And for this, I would cite to the guidance order, paragraph four, at JA-254, where the commission pointed out that it would be unjust and unreasonable to have consistent price caps.

[00:45:37] Speaker 08:
And that- You mean inconsistent?

[00:45:39] Speaker 04:
In consistent price caps exactly and I would I would add to that that they were citing the in addition the October 2010 order paragraph 14.

[00:45:50] Speaker 04:
The Commission also makes this point in the shell justification order.

[00:45:55] Speaker 04:
that it would be inconsistent to have or that it would be unjust, unreasonable to have inconsistent standards.

[00:46:04] Speaker 04:
That's at JA 585.

[00:46:07] Speaker 04:
One specific thing that the commission listed in the guidance order at paragraph two,

[00:46:13] Speaker 04:
And I think the idea of JA-253 was, the commission there cited megawatt laundering, and is the idea that parties could flow power out of the California market.

[00:46:30] Speaker 04:
To take up the seller's position on this where the mobile period presumption would apply would be much easier to get the approval of a contract in the Western market and then and by that way they can.

[00:46:46] Speaker 04:
they can go around the cap in the California market.

[00:46:49] Speaker 04:
And the point the commission is trying to stay here is that they want to avoid that kind of behavior.

[00:46:56] Speaker 04:
And the only way to do that, I would submit, is to apply the same standard in both markets.

[00:47:03] Speaker 08:
It isn't the same standard in both markets because there's a hard cap in California and there's not in the rest of the West.

[00:47:14] Speaker 08:
their isn't that what creates that problem?

[00:47:19] Speaker 08:
I they're both subject to the to the thousand cap and cap and there's isn't there a hard cap in California that there isn't elsewhere?

[00:47:30] Speaker 04:
I'm I'm not sure your honor and and I think

[00:47:38] Speaker 04:
that the problem here that the commission's identifying in these orders is that to do something different here, to apply a much standard that would permit simply filing a contract and saying this is subject to the mobility or presumption, that that would not further the commission's objectives of watching, checking for manipulation of markets.

[00:48:08] Speaker 03:
Isn't the normal world with Mobile Sierra, one in which we have two different things going on, where with bilateral contracts, the contract rates are presumed to be just and reasonable.

[00:48:19] Speaker 03:
That's the whole point of Mobile Sierra.

[00:48:23] Speaker 03:
And so it does seem like it's not altogether anomalous to have a world in which

[00:48:33] Speaker 03:
the soft cap applies differently depending on whether it's a bilaterally negotiated contract or another world, because that's just the world of mobile CR.

[00:48:41] Speaker 04:
But here the sellers are operating under the market based rate authority, which allows them to which allows them basically to enter into contracts that don't have to be filed with the commission.

[00:48:52] Speaker 04:
And in order to enjoy those benefits, they agree to the conditions that that exist.

[00:48:59] Speaker 04:
And that's that's the commission's footnote 33 of the shell rehearing order, which just begs the question of what is the condition that exists because I

[00:49:07] Speaker 03:
I don't think the other side disagrees that there is some condition that exists, that justification and refund is a condition that exists.

[00:49:14] Speaker 03:
And the question is, what's the content of that?

[00:49:17] Speaker 03:
And just saying justification and refund doesn't necessarily mean that even in the world of bilateral contracts, that the normal mobile Sierra imbalance in favor of contracts doesn't continue to exist.

[00:49:32] Speaker 04:
Well, I'd submit that it doesn't because and I think I heard my friend for the seller say this in his presentation that the mobiles here perception doesn't exist in the in the organized market in California.

[00:49:44] Speaker 04:
And so so the problem is, is that it doesn't make sense to read these orders as permitting two different standards, one in California and one in the Western market.

[00:49:54] Speaker 04:
And they say that's also in their in the reply brief at page four to five.

[00:49:59] Speaker 04:
So in this instance, the only reason of these orders I would submit is that the commission signaled that it was not going to apply the presumption, the mobile seer presumption in its justification and refund analysis of the soft price cap.

[00:50:21] Speaker 08:
How is this situation before us

[00:50:25] Speaker 08:
relevant Lee different from Texaco versus Ferg, where there was a generic contract clause.

[00:50:33] Speaker 08:
Compelling both parties to comply with applicable commission regulations and performance of the contract.

[00:50:38] Speaker 08:
And we held mobile Sierra applied and there wasn't any sort of superseding specific duty.

[00:50:47] Speaker 04:
I think that

[00:50:49] Speaker 04:
What's going on here is the condition of the market-based rate authority.

[00:50:55] Speaker 04:
And the parties, the sellers here don't have any statutory right to exercise market-based rate authority.

[00:51:05] Speaker 04:
And they have voluntarily agreed to comply with those provisions when it exercises

[00:51:14] Speaker 04:
exercises without authority.

[00:51:16] Speaker 04:
In fact, the commission could not have the market-based rate program without these conditions.

[00:51:25] Speaker 04:
So I think that's the difference here.

[00:51:28] Speaker 04:
And what the commission is saying is that these conditions are part of the contracts.

[00:51:35] Speaker 04:
And that's where I started my presentation.

[00:51:36] Speaker 04:
These parties are presumed to incorporate all lawful provisions in its contracts.

[00:51:42] Speaker 04:
And we see that from Section 5 from the Shell tariff.

[00:51:49] Speaker 08:
I ask the same thing of Mr. Engstreich.

[00:51:50] Speaker 08:
What's your position on whether a seller, marketer,

[00:51:54] Speaker 08:
could use the cost based framework in the guidance order to justify above cap sales.

[00:52:04] Speaker 08:
If we could establish, for example, that it had to purchase electricity at above cap prices and then resell them at above cap plus some kind of

[00:52:15] Speaker 04:
for itself.

[00:52:17] Speaker 04:
I'm unaware of the production is the production is the cost of production of electricity.

[00:52:22] Speaker 04:
I'm aware of that is that provision, but the Christian was very clear and guidance order that that there could be other other methods of justification.

[00:52:32] Speaker 04:
They just have done anything like that here.

[00:52:35] Speaker 08:
So you're saying you wouldn't rule it out.

[00:52:37] Speaker 08:
You'd want to look at the context.

[00:52:39] Speaker 04:
I think that's what the commission is saying in these orders.

[00:52:43] Speaker 04:
And again, what the sellers did was to rely on the commission's index

[00:52:52] Speaker 04:
methodology and which was a methodology to justify prices up to the index because that was indicative of supply and demand conditions and a competitive market.

[00:53:05] Speaker 04:
But the problem here is that sellers didn't provide any evidence of anything above and beyond the index price.

[00:53:12] Speaker 08:
Why is it reasonable though?

[00:53:13] Speaker 08:
I mean, the logic of an index price is a weighted average of transactions.

[00:53:20] Speaker 08:
And in

[00:53:23] Speaker 08:
in including particular transactions in calculating that average, you're always going to include some that are above average as well as some that are below average.

[00:53:33] Speaker 08:
And I take the seller marketers here to be saying, well, then those are presumed to be valid and reasonable.

[00:53:42] Speaker 08:
But then you turn around and say, well, anything that's on the upside of the inputs to the index

[00:53:50] Speaker 08:
are unjust and unreasonable and anything that's at index or below is just unreasonable.

[00:53:56] Speaker 08:
And there just seems to be a logical tension between the basis for the index as a legitimate benchmark and disqualifying certain transactions that are inputs to that index.

[00:54:16] Speaker 04:
I would just say this about that, Judge, that this isn't a disqualification.

[00:54:21] Speaker 04:
The index methodology didn't disqualify per se any sales that were submitted.

[00:54:26] Speaker 04:
It just didn't justify any sales that were above the index.

[00:54:34] Speaker 04:
And what I'm saying and what the commission has said in these orders is that if the sellers want to come up,

[00:54:42] Speaker 04:
and file some additional authority, some additional explanation of why above index prices are justified.

[00:54:49] Speaker 04:
They're free to do that.

[00:54:51] Speaker 04:
But that didn't happen here.

[00:54:53] Speaker 04:
So I don't know that there's really a logical

[00:54:57] Speaker 04:
with relying on these indices, what the commission was saying was that the indices are, by taking a mix of transactions and resulting in a weighted average, that that is good evidence of how a competitive market behaves and supply and demand.

[00:55:18] Speaker 04:
And so that's a good benchmark for the commission to use.

[00:55:23] Speaker 08:
But the market behavior that it, I mean, I'm asking the same question.

[00:55:26] Speaker 08:
I don't mean to flog a dead horse, but the assumption is the weighted average that how a competitive market functions is that there's a smattering of prices and that one can distill from that for others that use, for example, contract prices in their, index prices in their contracts.

[00:55:49] Speaker 08:
One can distill one index price, but nonetheless,

[00:55:53] Speaker 08:
if, as you say, you're looking at competitive market behavior, part of that behavior is an array of prices, including above average and below average.

[00:56:02] Speaker 04:
I think I would agree with that, Your Honor.

[00:56:04] Speaker 04:
And I wouldn't stand here and cite the index as the reason I would discount an above-index price.

[00:56:12] Speaker 08:
I would say- You're saying it's not sufficient to justify- Exactly.

[00:56:18] Speaker 04:
Show me something else.

[00:56:19] Speaker 04:
What give me some justification?

[00:56:23] Speaker 08:
Opportunity cost for example something isn't that subject to the same problem the opportunity cost you might look at another index and Right is that or the opportunity cost is I had several offers to buy at this above index price.

[00:56:39] Speaker 08:
I chose this one

[00:56:40] Speaker 04:
Exactly, Your Honor, the latter.

[00:56:42] Speaker 04:
And if something like that had been presented, again, the commission was careful not to present these as non-exclusive.

[00:56:52] Speaker 04:
The index isn't a cap.

[00:56:56] Speaker 04:
But if the seller had presented an opportunity cost that it gave up and had adequate justification for that,

[00:57:06] Speaker 04:
I think the commission would approve it even if it was above the index.

[00:57:11] Speaker 04:
But again, the point of what I'm trying to say there is that that would be a different methodology, a different framework than what the commission definitely found that would be adequate in this case, which is the index methodology.

[00:57:25] Speaker 08:
I have a separate question about some of the sort of smaller challenges here.

[00:57:29] Speaker 08:
How does it work for FERC to subtract liquidated damages

[00:57:34] Speaker 08:
from refund order.

[00:57:36] Speaker 08:
So is this something that arises only where a seller is able to perform a contract in part but unable to perform and therefore incurs liquidated damages in a different part of the same contract?

[00:57:54] Speaker 08:
I'm trying to understand what's being offset against what in the liquidated damages offset?

[00:58:02] Speaker 04:
So the commission addressed the liquidated damages.

[00:58:04] Speaker 04:
And as the commission did say that the offsets were provided.

[00:58:09] Speaker 04:
So I think the commission adequately addressed this.

[00:58:12] Speaker 04:
And this is at the transalta rehearing order, paragraph 33, JA 1365.

[00:58:19] Speaker 04:
And the commission clarified in the, for example, the Brookfield Rehearing Order, paragraph 44 at JA 1290, that the sellers can deduct liquidated damages.

[00:58:30] Speaker 04:
And my understanding is that this

[00:58:32] Speaker 04:
would, this would make them hold and so that they wouldn't.

[00:58:35] Speaker 08:
Right.

[00:58:35] Speaker 08:
My question is how that works.

[00:58:37] Speaker 08:
When, if, if I were a seller and I completely was unable to perform.

[00:58:43] Speaker 08:
And so I'm, I'm subject to liquidated damages.

[00:58:47] Speaker 08:
There's no, there's no, um, above index price that I've earned to offset against.

[00:58:58] Speaker 08:
right?

[00:58:58] Speaker 08:
Because I haven't, I haven't earned a price.

[00:58:59] Speaker 08:
I've actually completely defaulted and I have to pay liquidated damages.

[00:59:03] Speaker 08:
So I'm just trying to understand that the mechanics of when the liquidated damages are, are offset against some, some income that revenue that I have as a seller, it has to be within one transaction.

[00:59:20] Speaker 08:
No.

[00:59:23] Speaker 08:
Maybe this is something that Mr. Angstreich is going to be able to answer more, more

[00:59:28] Speaker 04:
Yeah, beyond beyond that I don't think I know your honor I just know that was citing the orders, the provisions that the commission provided for address this concern.

[00:59:41] Speaker 04:
And so, so that's why we think that the index is adequate.

[00:59:48] Speaker 04:
that they talked about in addition.

[00:59:56] Speaker 04:
That's why the commission found the index to be to be an adequate measure of those.

[01:00:02] Speaker 08:
So you just shifting gears again.

[01:00:06] Speaker 08:
Um.

[01:00:09] Speaker 08:
So if if the Sellers are correct that, um.

[01:00:19] Speaker 08:
is subject to Mobile Sierra unless it's limiting, unless it's successfully in their contracts, that would be something that was present ex ante.

[01:00:32] Speaker 08:
Are you arguing that they are making a collateral attack on the orders based, that the Mobile Sierra argument is a collateral attack because they should have raised it?

[01:00:42] Speaker 08:
to challenge the scheme as soon as they were on notice that their market-based rate authority was going to be limited?

[01:00:47] Speaker 04:
We did not present that argument in our brief, and I don't believe the commission did, but I think that is one way to resolve the case.

[01:00:57] Speaker 04:
I think this is a collateral attack, but we didn't present that argument.

[01:01:01] Speaker 04:
But I do want to be clear that our reading of the orders is that the commission was clear that the mobile CR presumption wouldn't apply to the soft price cap.

[01:01:16] Speaker 03:
And you think it was clear because of the words subject to justification and refund.

[01:01:21] Speaker 04:
Well, the words just and reasonable that just and reasonable where we were used in the October, October 2002 order and again, in the October 2002 order.

[01:01:38] Speaker 04:
And the will also the July 2002 order where in the actual.

[01:01:49] Speaker 04:
So paragraph 16 in the October 2002 order, the commission there explained that the purpose of the cap in both California and the West was to ensure adjustment of reasonable rates.

[01:02:04] Speaker 04:
And what I'm trying to present it is it does not make sense

[01:02:09] Speaker 04:
to read that language as applying one way in the California market and a very different way, more permissive way, in the Western market.

[01:02:18] Speaker 04:
That just and reasonable language also appears in the CAISO order, June 2007, 119 FERC 61230, which addressed the previous filings.

[01:02:36] Speaker 04:
And then I would just like to point out that Morgan Stanley comes after that and explains that the commission and the courts, when it uses the phrase just and reasonable, was referring to the ordinary, just and reasonable, and referred to the public interest standard as the Mobile Sierra presumption, which is something different.

[01:03:05] Speaker 08:
Do you, so FERC in the order dealing with Tenaska, FERC claims that Tenaska would have been entitled to refunds of above index prices that it, I guess El Paso Electric paid it because that was under a term that it paid to El Paso because that, but that was under a term contract.

[01:03:32] Speaker 08:
So the sellers contend that that was arbitrary, because that's a mistake.

[01:03:37] Speaker 08:
It's under a term contract.

[01:03:38] Speaker 08:
It's not subject to the cap.

[01:03:40] Speaker 08:
And therefore, there's no refund.

[01:03:45] Speaker 04:
I'm not sure what your honor's referring to there.

[01:03:50] Speaker 08:
So in JA 1163, Burke concluded that Tanaska

[01:04:00] Speaker 08:
would that it would be entitled to refunds.

[01:04:04] Speaker 08:
This was an above index sale as to which FERC was saying the above index was subject to refund.

[01:04:16] Speaker 08:
And Tanaska is saying, no, look, we've justified our above index price.

[01:04:22] Speaker 08:
And FERC then in turn says, no, you haven't.

[01:04:25] Speaker 08:
You're going to get refunds.

[01:04:30] Speaker 04:
Because El Paso itself was subject to the soft price cap.

[01:04:36] Speaker 08:
Yes.

[01:04:36] Speaker 04:
Yes.

[01:04:38] Speaker 08:
But they say, no, El Paso wasn't subject to the price cap because that was a term contract.

[01:04:45] Speaker 08:
It's not subject to the soft cap.

[01:04:47] Speaker 08:
It's not a spot contract.

[01:04:52] Speaker 08:
And therefore, that's an error.

[01:04:54] Speaker 08:
I mean, this is just in their briefing.

[01:04:57] Speaker 08:
And the question is whether that's right, that that's an error, there's some other refund you're thinking about, and how that could be non-arbitrary with respect to Tanaska.

[01:05:10] Speaker 01:
I don't know.

[01:05:13] Speaker 03:
Can I go back to Paragraph 16 on the Mobile Sierra question, back to Mobile Sierra.

[01:05:24] Speaker 03:
Yeah, the October.

[01:05:27] Speaker 03:
It speaks in terms of raising the bid cap.

[01:05:30] Speaker 03:
And I asked this question earlier, but the language speaks in terms of raising the bid cap.

[01:05:35] Speaker 03:
And now we're talking about a contract price.

[01:05:40] Speaker 03:
So why is it that language that is pegged to bid cap, which I think is not the same thing as the ultimate price arrived at in a negotiated bilateral contract,

[01:05:54] Speaker 03:
Why is it that we assume all the same stuff that's said about the bid cap also applies to the price that's a result of a negotiated bilateral contract?

[01:06:07] Speaker 04:
I never just go back to it.

[01:06:10] Speaker 04:
It would not.

[01:06:10] Speaker 04:
It would not serve.

[01:06:11] Speaker 04:
It would serve the purpose here.

[01:06:18] Speaker 04:
The alternative is for the mobile CR presumption to apply in the Western market, which would be much more permissive and it would permit the megawatt laundering that the commission cited in the guidance order here and also cited in the previous order, the July 2002 order.

[01:06:38] Speaker 04:
So I don't think there's any other way to read the October 2002 order other than that it was applying the same standard to both markets.

[01:06:49] Speaker 04:
And I would point out the CAISA order that I referred to from June 2007 earlier, those four filings for both the California and the West market and the commission, they are clarified that they both, the soft cap applied to both markets to ensure gesturing reasonable rates.

[01:07:14] Speaker 03:
Yeah, I guess I don't, I think it's, I get that the soft cap applies to both markets.

[01:07:20] Speaker 03:
not entirely clear on is why justification and refund would have to what everybody would have assumed at the outset that it works exactly in the same way, regardless of whether you're talking about a contract rate that ordinarily would be subject to mobile Sierra and something other than a contract ordinarily subject.

[01:07:41] Speaker 04:
Again, the Morgan Stanley case tells us that that's the way the nomenclature was used at the time.

[01:07:47] Speaker 04:
So just unreasonable for a price, a soft price cap in the West meant something other than the Mobile Sierra presumption, public interest presumption.

[01:07:58] Speaker 08:
So if it's obvious from the

[01:08:01] Speaker 08:
justification and refund and the references to just reasonable rates in the soft cap order that Mobile Sierra would not apply to the extent that it was exceeded, then really one would have to see the seller petitioner's challenge as a 20 year too late collateral attack on the soft cap order.

[01:08:24] Speaker 04:
I wouldn't disagree with that.

[01:08:27] Speaker 04:
We didn't advance that argument, and the commission didn't state as such in the orders.

[01:08:32] Speaker 10:
But I think that's a consumer argument here.

[01:08:36] Speaker 03:
Yeah.

[01:08:37] Speaker 03:
How could you avoid that conclusion?

[01:08:39] Speaker 03:
I mean, it just seems like it all turns on whether it was sufficiently clear at that time that the relevant language meant mobile seers turned off.

[01:08:50] Speaker 03:
If it was, then yeah, you had to challenge it at that time.

[01:08:52] Speaker 03:
If it wasn't, then

[01:08:54] Speaker 03:
then I don't even think you defend what the commission did if it wasn't clear at the outset.

[01:09:03] Speaker 04:
The commission issued the guidance order in this case and to provide further guidance.

[01:09:09] Speaker 04:
Why it didn't make that finding, I don't know.

[01:09:12] Speaker 04:
I don't know that it was required to here, but I think that's a correct way to look at it.

[01:09:19] Speaker 03:
And can I ask you, your response to the dissenting commissioners

[01:09:24] Speaker 03:
hypothetical about any, um, the commission being able to order that any rate above zero is subject to a soft camp.

[01:09:31] Speaker 03:
Their form of the Sierra's out of the picture.

[01:09:34] Speaker 03:
Your response to that is, I think I know what your response is, but I just want to hear you just say they're obvious.

[01:09:39] Speaker 04:
That's not what the commission did here.

[01:09:41] Speaker 03:
Um, but, but, but I think the point was that that was the logical left product.

[01:09:48] Speaker 04:
I don't know.

[01:09:50] Speaker 04:
The commission found that the soft cap is a reasonable condition.

[01:09:56] Speaker 04:
And for evidence of that, I would just point out that we do only have the one order that addressed through filings previously.

[01:10:05] Speaker 04:
So this is a rarely invoked provision.

[01:10:09] Speaker 04:
And so the thing that dissent is talking about with the zero price cap that that would be extreme and whatever what I just submit is that we've done that the commission is not done anything close.

[01:10:22] Speaker 03:
What would happen in that if there were a zero soft cap instituted then I take it that at that point it would be clear to everybody.

[01:10:30] Speaker 03:
that the zero soft cap applies to bilaterally negotiated contracts.

[01:10:34] Speaker 03:
And so you would have had a challenge at that time and a back and forth at that time as to whether that soft cap was.

[01:10:41] Speaker 04:
I said it is zero.

[01:10:42] Speaker 04:
I think so.

[01:10:43] Speaker 04:
And I think

[01:10:44] Speaker 04:
I think that would be inconsistent with the market-based rate authority as well.

[01:10:50] Speaker 04:
That's the nature of the market-based rate authority is that contracts can be signed in without filing, but it sounds like a zero soft price cap would require each one to be filed.

[01:11:03] Speaker 03:
So there would have been a challenge at the time that a zero soft price cap was instituted.

[01:11:08] Speaker 03:
And that challenge, based on what you're saying, might have had a pretty darn good chance of success.

[01:11:12] Speaker 04:
I don't know about that.

[01:11:16] Speaker 04:
I think the commission had good reason to impose the soft price cap here.

[01:11:22] Speaker 04:
And I have no reason to think that it couldn't.

[01:11:26] Speaker 03:
But I guess all I'm saying is, if a zero price cap had been instituted, the way that would have all gotten shaken out is that that would be a challenge at the time that it was instituted.

[01:11:34] Speaker 03:
And that would have been, that challenge would have been considered.

[01:11:38] Speaker 03:
And here by the same token,

[01:11:40] Speaker 03:
If there's a challenge to the soft price gap that's above zero, a thousand or wherever it is, then the challenge should have been instituted at that time if there were a problem with the soft price gap, because everybody should have understood, just as with the zero soft price gap, that that's saying that Mobile Sierra doesn't apply for any values above soft price cap, whether it's zero or a thousand.

[01:12:01] Speaker 04:
I think that's right.

[01:12:03] Speaker 04:
But again, the commission didn't do anything like that here.

[01:12:06] Speaker 04:
And the commission found that this is a reasonable cap meant to check the possible exercise of market power.

[01:12:18] Speaker 08:
Potential market power, which you were just mentioning.

[01:12:21] Speaker 08:
So I take the seller marketer's position to be largely that

[01:12:31] Speaker 08:
for someone to have market authority, they have to be cleared as not having market power, kind of an ex ante eligibility determination.

[01:12:42] Speaker 08:
And then if there's an intentional market manipulation, that is a standalone that can be referred for enforcement.

[01:12:50] Speaker 08:
But I take FERC to be saying here that there's some kind of the potential exercise of market power is one of the risks against which the cap

[01:13:01] Speaker 08:
is there to protect.

[01:13:05] Speaker 08:
And you refer in your brief, for example, in times of scarcity, market flaws may permit the exercise of market power.

[01:13:15] Speaker 08:
And you talk about potential to produce unjust and unreasonable rates.

[01:13:22] Speaker 08:
in times of scarcity throughout.

[01:13:26] Speaker 08:
And can you just talk a little bit more concretely about what you mean?

[01:13:32] Speaker 08:
You know, the sellers are saying you're very forcefully market as a market.

[01:13:37] Speaker 08:
If you have scarcity, if you have high demand from some very unusual weather circumstance,

[01:13:44] Speaker 08:
of course the prices are going to spike.

[01:13:45] Speaker 08:
That's a market.

[01:13:47] Speaker 08:
And your response is, where does the market power, why is that also a significant opening for an exercise

[01:14:00] Speaker 04:
Well, excuse me, I would refer to the shell rehearing order a page paragraph 15 J a 1198.

[01:14:07] Speaker 04:
And this is where the commission refers to order 697.

[01:14:13] Speaker 04:
And this is the commission's order on the micro base rate.

[01:14:18] Speaker 04:
Yeah, 1198.

[01:14:24] Speaker 04:
And this is the order where the commission adopted the language that is in section five of the market based.

[01:14:34] Speaker 04:
rates here, which requires sellers to comply with commission orders.

[01:14:41] Speaker 04:
And the market-based rate tariff explained in paragraph 961 of order number 697 says that the market-based rate tariff includes the pertinent conditions, and that makes it the filed rate.

[01:15:02] Speaker 04:
And these conditions have been held by this court and the Morgan Stanley Court in this court and the public citizen case.

[01:15:18] Speaker 04:
And in addition, the Colorado Consumer Council case that the commission can set conditions on the market-based authority.

[01:15:25] Speaker 04:
And that's what the commission has done here, is that it perceives a potential

[01:15:31] Speaker 04:
problem for prices that exceed the cap and has set up the structure such that if there are prices above the cap, the sellers must file for justification and potential refund.

[01:15:48] Speaker 08:
Right.

[01:15:49] Speaker 08:
I think I'm asking not so much the legal formal question of how this is in how this view is reflected in

[01:15:57] Speaker 08:
works orders, but rather just really a real world market function question.

[01:16:02] Speaker 08:
Let's say each of the three of us has some power that we could sell and we could sell today, we could sell tomorrow, we could sell it the next day.

[01:16:12] Speaker 08:
And if we wait till the third day when the price is really high and

[01:16:19] Speaker 08:
the use is way more than most people forecast, then we're going to get a higher price.

[01:16:26] Speaker 08:
And so we wait and we sell it at the highest possible price.

[01:16:29] Speaker 08:
I mean, that's part of their role in the market is to be better at reading the market than everyone else.

[01:16:35] Speaker 08:
And there are people, there are entities, there are municipalities, utilities that really want the power that we have to sell.

[01:16:43] Speaker 08:
And what I'm saying is what differentiates a legitimate

[01:16:49] Speaker 08:
savvy, successful market sale from one that is an exercise of market power.

[01:16:59] Speaker 08:
Maybe we by this time are the only sellers that have power on offer.

[01:17:05] Speaker 08:
And is the is the

[01:17:08] Speaker 08:
speculation or the assumption that if we bought it at $800 per megawatt hour, and we would be making a handy profit if we sold it at $900 per megawatt hour, but because we realized no one else has it available, we're instead gonna sell it for $2,000 per megawatt hour, and that somehow the difference between the $900 and the 2,000 is an exercise in work about?

[01:17:37] Speaker 04:
I think the intentional withholding of, I don't know the contours of what would be manipulation exactly, but I think the intentional withholding of power could be such a thing.

[01:17:48] Speaker 08:
It's just deciding when to sell power.

[01:17:51] Speaker 08:
I mean, I guess that's part of what I meant as a sort of economic and practical matter trying to understand is the difference between choosing a profitable time to sell something that I own and withholding.

[01:18:04] Speaker 04:
Yeah, I'm not sure I can help with the specific contours of what would be considered manipulation.

[01:18:11] Speaker 04:
But that is what the commission is after when it surveils the market-based rate program.

[01:18:26] Speaker 07:
The question here did not find any market manipulation or abuse of market power, but did find unjust and unreasonable rates or at least unjustified rates.

[01:18:39] Speaker 07:
The commission's view is, I take it, that rates can be unjust and unreasonable even in the absence of market power, correct?

[01:18:47] Speaker 07:
Or does it consider when it finds unjust and unreasonable rates that that's a proxy for

[01:18:55] Speaker 07:
something must have been going on manipulative behind the scenes, which is it?

[01:18:58] Speaker 04:
I think what the commission was saying here was it found that the prices were not justified.

[01:19:08] Speaker 04:
Just makes them, which it makes them unjustified and it makes it makes them unjustified.

[01:19:15] Speaker 07:
The same as unjust is what I'm asking.

[01:19:17] Speaker 04:
I'm not sure.

[01:19:19] Speaker 04:
I think what the commission is saying is that they're inconsistent with the tariff.

[01:19:24] Speaker 04:
They're inconsistent with the tariff.

[01:19:25] Speaker 04:
They're inconsistent with the contracts that incorporate the tariff provision.

[01:19:33] Speaker 07:
The tariff is a market-based one and they didn't find that it was contrary to them.

[01:19:39] Speaker 07:
They just found it was unjustified.

[01:19:43] Speaker 04:
But the tariff is limited.

[01:19:48] Speaker 04:
I think that's right.

[01:19:49] Speaker 04:
It's saying that for.

[01:19:51] Speaker 08:
It's not shown to be consistent with what I'm trying to say.

[01:19:57] Speaker 08:
You're saying it hasn't been shown to be consistent with the tariff or inconsistent with the tariff.

[01:20:02] Speaker 04:
Well, it is inconsistent with the tariff because it wasn't justified here.

[01:20:06] Speaker 04:
The parties didn't, for amounts above the index.

[01:20:08] Speaker 07:
But to be clear, what you found was not that these rates were unjust.

[01:20:15] Speaker 07:
but just simply that it was a sort of procedural failure, lack of information that left the world in limbo as to whether these were actually appropriate products of the market, the appropriate market-based rates, or they were unjustified.

[01:20:31] Speaker 04:
Well, it found that any prices above the index, as shown here by the sellers, wouldn't be consistent with the tariff because they were not justified.

[01:20:43] Speaker 07:
Like the commission said no, we're not finding that either.

[01:20:46] Speaker 04:
They weren't presumptive.

[01:20:48] Speaker 07:
What is the commission's statutory authority to issue refunds for rates that have unproven status under the tariff?

[01:21:06] Speaker 04:
I think the statutory authority for that is section 309 of the Federal Power Act 16.

[01:21:14] Speaker 07:
site for allowing retroactive refunds like this.

[01:21:19] Speaker 07:
Not prospectively, refunds.

[01:21:22] Speaker 07:
Refunds are retroactive, but refunds, so changing the rate that's paid for something under 309, absent a finding of market manipulation or market power.

[01:21:35] Speaker 04:
I would point to the Morgan Stanley case and the public citizen case, which stated that the commission can enforce tariff provisions.

[01:21:45] Speaker 04:
And this is a tariff provision.

[01:21:52] Speaker 06:
Yes.

[01:21:53] Speaker 07:
It said that on which page of Morgan Stanley said that.

[01:22:05] Speaker 04:
I don't have the pinpoint citation.

[01:22:08] Speaker 04:
What I'm referring to is Morgan Stanley's statement that the commission can set conditions and issue refunds for violations of its regulations, of the commission's regulations.

[01:22:22] Speaker 07:
In that context, they were talking about the violation would be what?

[01:22:27] Speaker 04:
In that context, I think it's a more general statement.

[01:22:32] Speaker 04:
I don't know that it was a limited and I don't know.

[01:22:39] Speaker 07:
to order refunds for rates without finding a market manipulation or market power?

[01:22:46] Speaker 06:
No.

[01:22:47] Speaker 07:
So this is the first.

[01:22:49] Speaker 06:
I'm, I'm unaware there.

[01:22:50] Speaker 07:
Thanks.

[01:22:55] Speaker 07:
That's all I have.

[01:22:57] Speaker 01:
Okay.

[01:22:57] Speaker 01:
My colleagues, I know for the questions for you, we'll hear from intervenors council now.

[01:23:01] Speaker 01:
Thank you.

[01:23:12] Speaker 09:
Ms.

[01:23:12] Speaker 09:
Morrie.

[01:23:13] Speaker 02:
Good morning, Your Honors.

[01:23:24] Speaker 02:
I'm Candace Morrie on behalf of the Joint Consumer Interveners speaking in support of FERC's authority to order refunds.

[01:23:31] Speaker 02:
pursuant to its broad remedial powers under Section 309 of the Federal Power Act on these extraordinarily high priced WEK spot market sales that FERC determined were not just unreasonable.

[01:23:42] Speaker 02:
And first, FERC is entitled here to deference in its interpretation of the tariff.

[01:23:48] Speaker 02:
that sellers filed market-based tariffs incorporate the WEC price cap.

[01:23:53] Speaker 02:
Sellers are presuming that FERC can only order refunds pursuant to Section 206 complaint, but they are just disregarding that that's not the construct, that's not the scheme that FERC has set up and approved for how it reviews these prices.

[01:24:09] Speaker 02:
Sellers market-based rate authority is limited to the $1,000 per megawatt hour price cap by the long-standing orders.

[01:24:17] Speaker 02:
And sellers have always borne the risk of making sales above that price, knowing that they will be subject to a justification requirement and potential refund.

[01:24:27] Speaker 02:
And going to the questions earlier, if this were being brought under sections 206, for section 206 authority, well, FERC could never order refunds.

[01:24:38] Speaker 02:
There would never be a refund effective date that could reach these sales.

[01:24:43] Speaker 02:
And when asked on this, sellers I don't believe could really reconcile this question.

[01:24:47] Speaker 02:
They seem to say, well, then it would be section 309 authority.

[01:24:51] Speaker 02:
But the way FERC has set up this construct here and this construct sets the bargaining table on which these contracts are being negotiated.

[01:25:00] Speaker 02:
So River Project noted in its markets below that they are price takers on these days.

[01:25:07] Speaker 02:
And I think that is the market expectation that FERC should protect here.

[01:25:11] Speaker 02:
It's consistent with preserving the sanctity of contracts because the buyers are relying on their understanding that FERC will take a close look and will have their backs if needed.

[01:25:21] Speaker 02:
So here sellers are really asking the court to ignore the fact that the tariffs came first with their conditions and limitations.

[01:25:28] Speaker 02:
These contracts came later and this distinguishes all of the cases sellers have cited for the proposition that the mobile Sierra presumption must be overcome here before for can order refunds.

[01:25:41] Speaker 02:
And the NRG, FERC's Puget Sound Order, Morgan Stanley, they all addressed contracts executed in the energy crisis in an era where there was no limit on the seller's market-based rate authority.

[01:25:55] Speaker 02:
And that's the difference here.

[01:25:57] Speaker 02:
Since then, FERC has taken a more consumer protective approach.

[01:26:03] Speaker 02:
And finally, I just wanna point out that in 2006, FERC's order

[01:26:10] Speaker 02:
that made it clear these price justification and refund applies to all WEK sales and to all sellers, not just to generators, but it applies to sellers as well.

[01:26:24] Speaker 02:
Coral, which was Shell's predecessor, asked to clarify what kind of information does it need for these justification reviews.

[01:26:33] Speaker 02:
And they did not say, well, it's just Mobile Sierra.

[01:26:37] Speaker 02:
All we have to do is show you the contract price.

[01:26:40] Speaker 02:
You can't require anything more FERC.

[01:26:42] Speaker 02:
And FERC declined to give that guidance.

[01:26:45] Speaker 02:
So anyway, I just thank the court for listening to our comments here.

[01:26:49] Speaker 02:
And if there are no questions.

[01:26:50] Speaker 07:
Do you want to talk about your standing?

[01:26:52] Speaker 07:
Oh, I think when we switch to the.

[01:26:56] Speaker 07:
Oh, we're switching that.

[01:26:57] Speaker 07:
Sorry.

[01:26:57] Speaker 07:
Never mind.

[01:26:58] Speaker 02:
Yes, we're just the interveners on this posture.

[01:27:02] Speaker 08:
But if we conclude that you don't have standing to bring your affirmative challenges, can we consider the arguments that you raised in the intervener brief here?

[01:27:11] Speaker 02:
Well, that's an interesting question, Your Honor, because the sellers agreed not to test our standing as interveners.

[01:27:17] Speaker 02:
They haven't explained why they will.

[01:27:19] Speaker 02:
They, you know, they haven't explained that discrepancy because as you I'm sure all are aware, the interveners must also have Article three standing.

[01:27:30] Speaker 02:
So there's an interesting disconnect here on sellers agreeing not to contest our standing as an arena.

[01:27:38] Speaker 08:
But of course, we have to determine standing.

[01:27:40] Speaker 08:
So if we were to determine that you lacked standing, can we consider what you're raising as interveners?

[01:27:50] Speaker 02:
Your honor, I believe yes, and because this question of the facial applicability of the mobile Sierra presumption to these contracts is a question that would in turn apply to every WEK soft offer cap contract.

[01:28:07] Speaker 02:
It's not going to just apply to these particular set of 13.

[01:28:11] Speaker 02:
you know, consolidated groups of transactions.

[01:28:15] Speaker 02:
And clearly, if, for example, if this were brought in a rulemaking proceeding or in an order instituting investigation like FERC has instituted in numerous times over the past two and a half plus decades where it's set these soft offer price caps, then clearly the California, the consumer petitioners representing Californians

[01:28:36] Speaker 02:
must have standing to challenge that because our utilities regularly transact in the WEK market.

[01:28:44] Speaker 02:
We import 20% of our power approximately annually into California.

[01:28:49] Speaker 02:
Some of those purchases are made through spot market sales like the ones that issue it here.

[01:28:54] Speaker 02:
Some of them are made through longer term contracts whose prices are set and settle relative to the WEK index prices every day.

[01:29:02] Speaker 02:
So if this were an OII, we would

[01:29:05] Speaker 02:
clearly have standing to bring forth our intervener arguments supporting FERC on the mobile CIRA question.

[01:29:13] Speaker 08:
So the sellers are saying, well, this is basically trying to situate, trying to rest your standing on presidential effect.

[01:29:22] Speaker 08:
And it's a little, I mean, the way FERC orders operate

[01:29:26] Speaker 08:
it seems like it has aspects of the regulation, formal regulation that you talk about as well as aspects of sort of case by case application.

[01:29:33] Speaker 08:
How do we think about that?

[01:29:35] Speaker 08:
What's your best precedent for an order that is gonna set the interpretation going forward being subject to challenge by

[01:29:50] Speaker 08:
someone in your client's position that's trying to generally represent the interests of consumers.

[01:29:58] Speaker 02:
Well, I want to be mindful not to go too much into the consumer petitioners merits case because I believe we've agreed not to do that.

[01:30:06] Speaker 02:
But I'll just make one one observation, which is I think that this actually is in part why we've made the point that this is a collateral attack that sellers are bringing now.

[01:30:16] Speaker 02:
They've asked for clarity before on how FERC would would approach these justifications because it is a question of facial applicability.

[01:30:26] Speaker 02:
to these sales, to these prices, when the sellers make sales that exceed that pre-existing market-based rate authority that is limited.

[01:30:38] Speaker 02:
And I think, again, FERC's entitled to deference in how it's interpreting these tariffs to incorporate the soft offer caps.

[01:30:45] Speaker 02:
And that is also what distinguishes this case

[01:30:48] Speaker 02:
from the Texaco case, which you had asked about before.

[01:30:52] Speaker 02:
In that case, the court found FERC's interpretation was not reasonable, but it was looking specifically at that contract.

[01:31:01] Speaker 02:
The follow the law language in that contract was in a generic section of the contract distinct and set well apart from the rate making sections.

[01:31:11] Speaker 02:
And I think that's a key difference here.

[01:31:13] Speaker 02:
And again, in Texaco and the other cases that the sellers have cited,

[01:31:18] Speaker 02:
for when FERC has been vacated for modifying tariffs and contracts, FERC had accepted those tariffs, had accepted those contracts under settlement agreements, and then later was trying to modify them.

[01:31:34] Speaker 02:
And that's just not the construct that we have here.

[01:31:36] Speaker 08:
Go ahead.

[01:31:39] Speaker 08:
I just had one question on that.

[01:31:41] Speaker 08:
On your collateral attack point,

[01:31:46] Speaker 08:
Why isn't this functional music versus FCC where there's a rule in place, but it doesn't cut off later review of the rule where it's properly brought before the court of commission action applying it.

[01:32:06] Speaker 08:
And so I think the point would be on the seller's part, it wasn't until there's commission action applying it that we really see the stakes.

[01:32:15] Speaker 02:
Two points in that your honor first, as I noted coral which is shelves predecessor has been part of these proceedings.

[01:32:23] Speaker 02:
They participated in 2006.

[01:32:26] Speaker 02:
And so, they clearly were on notice here and had the opportunity.

[01:32:29] Speaker 02:
This is a facial applicability question.

[01:32:32] Speaker 02:
And I would refer the court to the California, X rail Harris case in which it's kind of different context, but the court there determined that the question of the facial applicability of the mobile Sierra presumption of Justin reasonableness.

[01:32:48] Speaker 02:
is a legal question that can be determined.

[01:32:51] Speaker 02:
And then you may also have contract-specific questions about how it applies, whether it's avoided, whether it's overcome.

[01:32:59] Speaker 02:
So that's why we can test.

[01:33:01] Speaker 02:
This is actually more like the PG&E case, where in the California ISO, FERC had said, well, I forget exactly what the rule was, but it required the California ISO to conduct certain transmission

[01:33:15] Speaker 02:
studies.

[01:33:16] Speaker 02:
There had been a number of orders enacted throughout the years determining that requirement.

[01:33:22] Speaker 02:
PG&E came in later and tried to contest that requirement as applying to them and the court held that that was a collateral attack.

[01:33:30] Speaker 02:
So we think that this actually demonstrates why it would be appropriate for the FERC to

[01:33:35] Speaker 02:
for the court to find that it lacks jurisdiction to hear sellers mobile.

[01:33:39] Speaker 03:
Sorry, just one question.

[01:33:40] Speaker 03:
I think when you started out, you said that what found is that the rates that emerged from the contracts are not just unreasonable.

[01:33:50] Speaker 03:
Is that what you understand?

[01:33:51] Speaker 03:
Yes, the effect of what the commission did.

[01:33:55] Speaker 02:
I understand the effect of what the commission did was it constructed a scheme here where it's reserved for itself a role to review the actual prices resulting in these contracts even after this price formation stage.

[01:34:12] Speaker 02:
And it determined based on the justifications the sellers provided that some had demonstrated, had met their burdens, seller's burden of proof here to demonstrate that those prices

[01:34:23] Speaker 02:
were just unreasonable.

[01:34:24] Speaker 02:
Some sellers had not met that burden to demonstrate they were just unreasonable because of how FERC was applying.

[01:34:31] Speaker 02:
this index-based framework.

[01:34:33] Speaker 02:
And I think it goes back to this question of when and how and why will FERC allow prices to be agreed to over this cap.

[01:34:45] Speaker 02:
But one thing, it's very clear that this applies not just to bids in the California markets, but to all contract prices.

[01:34:54] Speaker 02:
FERC said that in the July 2002 order at paragraph six.

[01:34:58] Speaker 02:
It's been very clear that it applies to all sellers, not just generators.

[01:35:03] Speaker 02:
FERC said that in the January 2006 order in footnote 2.

[01:35:08] Speaker 02:
And in October, 2002, when FERC changed it from a hard to a soft cap, it did so because it recognized in some circumstances, generators may have short run marginal costs exceeding that cap, and it needed to ensure against confiscatory rates.

[01:35:24] Speaker 02:
So it's a cost-based rationale from the beginning.

[01:35:27] Speaker 02:
So here we're kind of in the Netherlands of, well, FERC's never given the guidance on how a seller marketer who doesn't generate power, they're just transacting trades, they're creating price,

[01:35:37] Speaker 02:
we're going to be able to see.

[01:35:38] Speaker 02:
Um price spreads how they'll set satisfy these conditions, and we think that we'll get two more on our merits case, and that really goes to the guidance order.

[01:35:49] Speaker 01:
Thank you.

[01:36:01] Speaker 00:
Thank you,

[01:36:02] Speaker 00:
It's not a collateral attack.

[01:36:03] Speaker 00:
Functional music is more than sufficient.

[01:36:05] Speaker 00:
But the Southern case that we cited makes clear that we needed to be a much clearer notice that we had a thing to challenge in order to find that we can't challenge it now.

[01:36:14] Speaker 00:
As far as intervener standing, my understanding is that interveners without standing become amici.

[01:36:19] Speaker 00:
So you can consider what they say as amici if you find they lack standing.

[01:36:22] Speaker 00:
That's why we didn't bother challenging it on this side of the case.

[01:36:26] Speaker 00:
As for the merits, I heard a lot of new arguments from Mr. Editor today.

[01:36:31] Speaker 00:
the notion that, well, everybody should have known what we were doing with justification because we use the phrase just and reasonable.

[01:36:38] Speaker 00:
And Morgan Stanley notes that, well, the nomenclature at the time used just and reasonable and public interest differently.

[01:36:45] Speaker 00:
Justice Scalia also went on to say, we do not take this nomenclature to stand for the obviously indefensible proposition

[01:36:53] Speaker 00:
that a standard different from the statutory just and reasonable standard applies to contract rates.

[01:36:59] Speaker 00:
So I suppose FERC is now taking the obviously indefensible position.

[01:37:03] Speaker 00:
When we said just and reasonable, we meant not mobile Sierra, even though it is just an application of that standard.

[01:37:11] Speaker 00:
But then in response to your questioning, I believe it was Chief Judge Srinivasan,

[01:37:15] Speaker 00:
first council was like, well, actually, maybe the unjustified rates are just unjustified.

[01:37:19] Speaker 00:
They're sort of in another verse between just and reasonable and unjust and unreasonable.

[01:37:24] Speaker 00:
So it's both inconsistent with the statement that reportedly put us on notice, but also suggests that FERC was engaging in some standard list review here, detached from the statute.

[01:37:36] Speaker 00:
I agree with my colleague for the California Public Utilities Commission that what the commission did here was find that the rates were unjust and unreasonable by putting the burden on us to prove otherwise.

[01:37:47] Speaker 07:
As for potential- You just found that you didn't comply with your tariff obligation of coming forward with what we call the burden of production before, which you agreed is part of the contract.

[01:38:00] Speaker 07:
They just found that you didn't meet your contractual duty to come forward with that information.

[01:38:08] Speaker 07:
They would then still have the burden.

[01:38:14] Speaker 07:
They're just enforcing the tariff.

[01:38:16] Speaker 00:
They're presuming that the reason we have to come forward, the burden of demonstrating the justice and reasonableness of it is precisely because the rates are presumptively unjust and unreasonable, unless proven otherwise.

[01:38:29] Speaker 07:
Otherwise, they're just- And you have violated, we don't have to go that far.

[01:38:35] Speaker 07:
You have violated your contractual law.

[01:38:37] Speaker 07:
Imagine, again, this didn't happen in this case, but you agree that the contract required

[01:38:45] Speaker 07:
sellers, unlike in the normal mobile Sierra contacts, the normal below soft price cap contacts, get to come forward and, you know, at the time of sale with information and provide this information and sort of this sort of red phone goes off.

[01:38:59] Speaker 07:
The seller said, I'm going to finish my, I'm going to agree with you.

[01:39:02] Speaker 07:
I'm going to finish.

[01:39:03] Speaker 07:
And the seller says, no, I'm not doing it.

[01:39:09] Speaker 07:
What could FERC do then?

[01:39:11] Speaker 00:
To be fair, I agree there can be a world in which not just and reasonable might exist.

[01:39:17] Speaker 00:
I think FERC would say these are rates that we find that are not just and reasonable.

[01:39:21] Speaker 00:
They may not also be unjust and unreasonable because you have violated your obligation to come forward with evidence.

[01:39:27] Speaker 07:
They made a finding that you didn't come forward.

[01:39:29] Speaker 07:
You didn't comply with your contractual share of obligation to come forward.

[01:39:33] Speaker 07:
with evidence that would allow us to do a process that has all been set in place, and you all were clearly aware at the time of your tariffs, and you agree it's part of your tariff.

[01:39:42] Speaker 07:
It's a term of your tariff to come forward with this information, and you refused.

[01:39:47] Speaker 07:
What can FERC do?

[01:39:49] Speaker 00:
I do not disagree that FERC can penalize us.

[01:39:53] Speaker 07:
How can they penalize you?

[01:39:54] Speaker 00:
They can order refunds for failing to comply with FERC orders.

[01:39:57] Speaker 07:
So understand the order in its case.

[01:40:00] Speaker 07:
have done just that, to have said, to be clear, Sam, I can do anything.

[01:40:05] Speaker 07:
But they said, why?

[01:40:08] Speaker 07:
You gave us nothing helpful here.

[01:40:09] Speaker 07:
You didn't come forward with the type of information we asked you for.

[01:40:12] Speaker 00:
And so that, Your Honor, I think gets us to the fundamental.

[01:40:15] Speaker 00:
That gets us to the fundamental dispute about what is it we were supposed to come forward with.

[01:40:20] Speaker 00:
And Mobile Sierra tells us what we were supposed to come forward with.

[01:40:24] Speaker 00:
And I think

[01:40:26] Speaker 00:
going back to Judge Pilar's question about potential market power.

[01:40:30] Speaker 00:
Yes, that's the reason FERC made everybody rush in with reporting ahead of the normal schedule, the seven days instead of quarterly, so that they could police for potential market power.

[01:40:40] Speaker 00:
And if they had found market power, say manipulation that caused the prices to go up,

[01:40:46] Speaker 00:
that would have been a basis for not for a imposing refunds without making the public interest finding but of course for didn't find that here so the very thing they said they put this in place for didn't happen i see my time was up judge piller you had asked about

[01:41:01] Speaker 00:
liquidated damages.

[01:41:03] Speaker 00:
And I believe the answer you're looking for is on page J81289 in paragraph 43 explains how that would work as a practical matter.

[01:41:12] Speaker 00:
But it's narrow as between specific counterparties who both had a refund due to them and also had received liquidated damages, but had bought replacement power.

[01:41:23] Speaker 00:
It's a very narrow circumstance where that would apply.

[01:41:26] Speaker 00:
I'm happy to answer further questions, but also respectful of the time.

[01:41:29] Speaker 03:
I have one question, which is in response to the commission's counsel's argument, relying on paragraph 16, and I think paragraph 16 and 17 of the soft cap order, the October, 2001, I think it is.

[01:41:44] Speaker 03:
Yes.

[01:41:44] Speaker 03:
Just make sure I'm looking at the right one.

[01:41:47] Speaker 03:
Yes, the October, 2001.

[01:41:50] Speaker 03:
And I take it that what the Commission's Council saying is, look, if you look at that, if you look at those paragraphs, they just tell you that the ordinary operation of Mobile Sierra isn't in play here, that something else is going on.

[01:42:05] Speaker 03:
And the upshot of that may be that you needed to challenge it at that time.

[01:42:07] Speaker 03:
I think those issues essentially collapsed.

[01:42:11] Speaker 03:
Your response is that, no, even if you look at those paragraphs, it didn't tell us that mobile, the ordinary operation of Mobile Sierra.

[01:42:19] Speaker 03:
I mean, there's a single sentence.

[01:42:21] Speaker 03:
And why is that?

[01:42:22] Speaker 03:
What's your?

[01:42:23] Speaker 00:
Sure.

[01:42:23] Speaker 00:
There's a single sentence, and it just says, ensuring just and reasonable rates was also the reason for the commission's decision to establish a $250 megawatt bid cap level that balances the need to mitigate market power against the need to provide incentives for investment, infrastructure investment.

[01:42:41] Speaker 00:
I don't know how you can read that to say, and therefore you should know that while you're allowed to enter into bilateral contracts where both parties agree that a price above the rate is perfectly fine, unless we find that you've justified it in some unspecified way, actually it's not.

[01:43:02] Speaker 00:
It's a lot to pack in to that sentence.

[01:43:04] Speaker 00:
I think it's telling that in none of the FERC orders,

[01:43:08] Speaker 00:
26 of them.

[01:43:09] Speaker 00:
Do they say that as a response to Commissioner Danley?

[01:43:12] Speaker 00:
We didn't hear it in first brief.

[01:43:13] Speaker 00:
We hear an argument for the first time.

[01:43:16] Speaker 00:
I just don't see a world in which that sentence puts us on notice of the regime that came out 20 years later in the orders that were challenging here.

[01:43:27] Speaker 00:
I just don't see how we could have known that we had to argue then.

[01:43:32] Speaker 00:
that FERC was doing this thing that wouldn't become clear until 20 years later.

[01:43:35] Speaker 00:
And even if we did, I think functional music lets us challenge the application of that to us in a way that orders us to pay money to somebody else.

[01:43:47] Speaker 03:
Thank you, counsel.

[01:43:47] Speaker 03:
All right, thank you again.

[01:43:49] Speaker 03:
We'll take this case to your submission.

[01:43:51] Speaker 01:
Well, we'll hear the petitioner's challenges now.

[01:44:40] Speaker 02:
Okay, thank you, your honor.

[01:44:58] Speaker 02:
Candice Mori on behalf of the consumer petitioners, and I'd like to reserve four minutes of my time for rebuttal.

[01:45:04] Speaker 02:
I'd like to cover three points today why FERC's orders here are arbitrary and capricious and should be remanded where it allowed sellers to justify sales above the $1,000 per megawatt hour mitigated WEC energy price cap.

[01:45:19] Speaker 02:
First, the circularity in FERC's approach

[01:45:22] Speaker 02:
which lets sellers justify their very high price sales by pointing to an index comprised entirely of other above cap sales that require FERC's justification review and without FERC even taking a look under the hood to see what was going on in that index price formation.

[01:45:42] Speaker 02:
Second, because FERC failed to analyze that index price formation data, it missed obvious trends that should have raised an eyebrow whether this approach protects consumers from sellers capturing excessive profits on these very hot days.

[01:45:57] Speaker 02:
that should have prompted FERC to look closer at these trades.

[01:46:01] Speaker 02:
And the CAISO's Department of Market Monitoring asked FERC to do just that before it would accept any of seller's justification filings.

[01:46:09] Speaker 02:
And these data showed, for example, that one seller dominated that index price formation at Palo Verde and the Meat Hubs on August 19th.

[01:46:19] Speaker 02:
And those prices were 15 to 30 times higher than the average was over the rest of the period which that index liquidity was measured.

[01:46:29] Speaker 02:
We showed this in our opening brief using data from the record below and available to FERC.

[01:46:34] Speaker 02:
FERC never explained why that kind of seller dominance doesn't raise concerns about potential market power that might warrant price mitigation even without intentional market abuse.

[01:46:47] Speaker 08:
If you're right, how could an index

[01:46:49] Speaker 08:
How can an index ever work in a situation like this?

[01:46:53] Speaker 08:
I mean, there's a kind of assumption that the market reflects something.

[01:46:58] Speaker 08:
I mean, the whole point of relying on a market is it's more efficient.

[01:47:01] Speaker 08:
You don't have to analyze, reanalyze all the transactions.

[01:47:06] Speaker 08:
But under your theory, it seems like just when the justification is called for, you're going to have this kind of iterative problem.

[01:47:18] Speaker 08:
the circularity or the bootstrapping view?

[01:47:21] Speaker 02:
Well, Your Honor, I think we're not saying that the index based framework will never work.

[01:47:27] Speaker 02:
But the way FERC applied it here is unreasoned because it didn't do what it said it was going to do in that guidance order where it first sketched out this index based framework.

[01:47:38] Speaker 02:
And namely, that is to evaluate the index price formation

[01:47:43] Speaker 02:
to look at that index data on that day.

[01:47:45] Speaker 02:
In our opening brief and in our rehearings, we showed that on one of these days in particular, the volume dropped precipitously just as the prices rose extraordinarily.

[01:47:57] Speaker 08:
Say it has all these five data points, these five transactions that are making up the index, and it just looks at them all simultaneously, and it says, oh, wow, they're kind of, you know,

[01:48:12] Speaker 08:
referring to something that they're cross-referencing.

[01:48:16] Speaker 08:
They're kind of justifying with respect to each other.

[01:48:19] Speaker 08:
And once you see that, then there's no other there there, which is why I ask not just, I understand your argument about the shortfall on this case, but how could it work given that problem?

[01:48:33] Speaker 08:
And maybe that problem that we see in this case is unrepresentative of how an index might be comprised and work in other situations,

[01:48:41] Speaker 08:
doesn't strike me that that's obvious.

[01:48:44] Speaker 02:
Well, you know, I think this goes to what my third point today here is which first reasoning is really resting entirely on a 2004 policy order in which it said it set a policy for setting minimum necessary standards to use indices

[01:49:00] Speaker 02:
to set prices and for jurisdictional tariffs.

[01:49:04] Speaker 02:
And that order did not say that indices are always sufficient.

[01:49:09] Speaker 02:
And what it says is that FERC will determine, for example, if a seller section files a Section 205 filing,

[01:49:16] Speaker 02:
proposing to use an index to set a FERC jurisdictional price, it will look at whether it makes sense to use an index in that context.

[01:49:23] Speaker 02:
And so to your question about could you ever get around this circularity, well, it's FERC's duty here to explain why taking this pricing policy, this 2004 order, and mapping it here onto a construct where FERC is really doing a justification review for sales that exceed the market-based rate authority.

[01:49:45] Speaker 02:
The FERC and the sellers keep saying, well, the market is setting these prices.

[01:49:48] Speaker 02:
That's good enough.

[01:49:49] Speaker 02:
But they're completely ignoring the fact that the price cap offers have said, no, your market-based rate authority is limited here to $1,000 per megawatt hour.

[01:49:59] Speaker 02:
Anything above that, we're not assuming that market is going to presumably result in a just and reasonable price.

[01:50:05] Speaker 02:
So they have to take a closer look.

[01:50:07] Speaker 08:
So what is the natural way to justify, take the sellers to be saying, well, you know, arm's length bargaining, and that isn't

[01:50:15] Speaker 08:
satisfactory to either you or the commission.

[01:50:18] Speaker 08:
The cost-based, I gather, is not, at least in its traditional form, available to actors other than generators.

[01:50:28] Speaker 08:
I work to be saying, well, there could be something like that in the end-of-mind other category, other than the ones that are spelled out.

[01:50:37] Speaker 08:
And isn't an opportunity cost?

[01:50:40] Speaker 08:
Well, I guess it's not always referring to an index.

[01:50:44] Speaker 08:
But that seems to have some similar circularity to it.

[01:50:48] Speaker 08:
If there are two different buyers, both of whom are willing to buy at an unreasonably high price are available.

[01:50:57] Speaker 08:
I'm just not sure what the appropriate

[01:51:03] Speaker 08:
format is in a situation just like this one for making the justification.

[01:51:09] Speaker 02:
Right.

[01:51:09] Speaker 02:
So two points, Your Honor.

[01:51:10] Speaker 02:
FERC, I would direct the court to look back at the guidance order, which was starting to sketch out how seller marketers were not generators.

[01:51:21] Speaker 02:
might justify these sales.

[01:51:23] Speaker 02:
And in paragraph 21, FERC addressed, well, we also are going to allow sellers to put in this index based justification.

[01:51:34] Speaker 02:
And really, if you look at that paragraph, FERC was starting to sketch out a relationship between the indices as being a representative proxy for sellers costs under these circumstances, because

[01:51:47] Speaker 02:
indexes are used to set, they're used as a price signal for commodity costs in certain circumstances.

[01:51:56] Speaker 02:
And I think that's really the origin here of how FERC is starting to extend the cost-based justifications, which are the original basis for why FERC switched from a hard to a soft cap to begin with.

[01:52:09] Speaker 02:
That's set out in the October, 2004,

[01:52:12] Speaker 02:
2002 order.

[01:52:14] Speaker 02:
It started to sketch it out, but what FERC and Sellers have done here, they've taken the guidance order and they have myopically focused on paragraph 20.

[01:52:23] Speaker 02:
They have jettisoned paragraph 21 and they have jettisoned paragraph 25.

[01:52:29] Speaker 02:
Now paragraph 20, I would submit really just says in order to use an index,

[01:52:36] Speaker 02:
You have to prove that it's relevant.

[01:52:38] Speaker 02:
You have to prove, seller, that you could have made sales in that index.

[01:52:41] Speaker 02:
But again, that's the minimum necessary conditions to use the index.

[01:52:45] Speaker 02:
That doesn't mean it's sufficient.

[01:52:47] Speaker 02:
And if you look at paragraph 21 at J261, paragraph set, the FERC concludes here after it's talking about how index

[01:52:55] Speaker 02:
Prices can signal commodity prices.

[01:52:59] Speaker 02:
Consequently, we also find that a seller's reference to an appropriate price index price could be sufficient to justify sales above this cap.

[01:53:09] Speaker 02:
Now, in the justification orders, the problem is, again, FERC just dropped that.

[01:53:14] Speaker 02:
paragraph didn't address it at all, not even in response to the circularity arguments that the consumers and the Department of Market Monitoring raised.

[01:53:27] Speaker 02:
And it also just overlooks paragraph 25, where FERC said,

[01:53:32] Speaker 02:
we're gonna require sellers to provide sufficient information about their own transactions to allow the commission to evaluate how a particular seller sales contributed to the index formation.

[01:53:44] Speaker 02:
FERC didn't enforce that requirement for many of the sellers.

[01:53:49] Speaker 02:
Some sellers did submit that information, many of them didn't.

[01:53:53] Speaker 02:
And the problem with all of this is that if you look at the transactions on those days,

[01:53:59] Speaker 02:
In the Palo Verde index, one seller sales constituted 60% of those ice clear transactions.

[01:54:09] Speaker 02:
And in mean, one seller sales constituted 80% of the trends in that day.

[01:54:16] Speaker 02:
And so I'll refer you to table one of our opening brief where we put in that data.

[01:54:22] Speaker 02:
And so this means that one seller is essentially setting the index price at the hub.

[01:54:27] Speaker 02:
So what does it mean to have a potential exercise of market power under these circumstances?

[01:54:34] Speaker 02:
Well, FERC needs to explain what that means and how to make this connection between whether it's appropriate to use a price index.

[01:54:43] Speaker 02:
And the court has been clear throughout time that when FERC is using a prior policy or a prior order, taking it from one context

[01:54:55] Speaker 02:
and putting it into another context that forecasts to explain more than a modicum of factual similarity for why that's appropriate to do.

[01:55:04] Speaker 02:
And to do that here, it really just created this talismanic phrase saying that indices are a reasonable benchmark for competitive opportunity.

[01:55:13] Speaker 08:
Now, everybody's saying everybody's concerned about a potential exercise of market power.

[01:55:18] Speaker 08:
But I take it that everyone's also just claiming that there was an exercise of market power in this case.

[01:55:26] Speaker 08:
So I'm asking you, I think I asked Council for FERC the same question.

[01:55:35] Speaker 08:
Given the disclaimer that there was an exercise of market power, then the concern nonetheless is still,

[01:55:43] Speaker 08:
bearing on the review here?

[01:55:45] Speaker 02:
Well, I think FERC and Seller said they didn't find any market abuse.

[01:55:50] Speaker 02:
There's no market manipulation.

[01:55:53] Speaker 02:
But there could be a seller who's acting as a rational economic actor who's not intentionally manipulating these markets, but they see these index prices.

[01:56:03] Speaker 02:
They can watch them ticking throughout the day.

[01:56:06] Speaker 02:
And at three o'clock when that index price publishes, that whole market then knows, well, that's the price that