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Case number 23-1348, FETRA STAR INC.

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Petitioner versus Federal Energy Regulatory Commission and United States of America.

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Mr. Meinsinger, a petitioner at FETRA STAR INC.

[00:00:15] Speaker 01:
Mr. Oduchi, a petitioner at Phonico-Phillips.

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Ms.

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Pott, a petitioner at Zaps Carriers.

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Mr. Edgar, for the respondent.

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Ms.

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Marciel, for the shipper interveners.

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Morning, Mr. Meinzinger.

[00:00:27] Speaker 03:
Morning.

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May it please the court, Ken Meinzinger for Petro Star.

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I'd like to reserve one minute for rebuttal.

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In 2016, this court found there had been minimal investment in Cokers in California, but the market situation has gotten much worse with California refiners now retiring Cokers due to what they themselves call a low profit environment projected to continue for years to come.

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Given that environment, the 20% return in the quality bank is clearly too high.

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And similarly, the perpetually increasing

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$700 million quality bank investment base is also too high because, among other things, it assumes California refiners are building costly new Cokers instead of retiring.

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The quality bank then compounds those two errors.

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by requiring Petra Star to pay for a costly 21st century Coker, even though the Quality Bank only gives Petra Star the inferior output or yields of a less expensive 1960s Coker, incredibly FERC even ignored the author of those yields, Mr. Geddes, who testified that the yields should not be used here because they are for much older Cokers.

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Now, most of what you're about to hear from FERC and the other parties to try to justify the 20%, yes.

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Can I ask you about your mismatch theory?

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Certainly.

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So you're concerned that FERC is using the capital costs of newer Cokers while relying on the yields of older.

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And they're sort of a mismatch.

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So I understand that argument.

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But FERC says that these calculations actually reflect what's happening in the real world in terms of both yield and cost.

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So even if there's sort of a theoretical mismatch,

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Why would it be unjust and unreasonable to rely on values that essentially reflect some underlying real world reality because this is a real world mismatch, not a theoretical one.

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When you look at the evidence, there's only 14 Cokers left.

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on the west coast.

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Petro Star disputing the fact that these numbers reflect the actual yield and costs?

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We are, we agree that these numbers reflect the 12 Cokers on the west coast that are older, much older than this hypothetical Coker which was built in 2003.

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The two newer Cokers on the West Coast have much higher liquid yields, consistent with what we've proposed.

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So in fact, what FERC is doing here is actually the opposite of reality.

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We've paid for a newer Coker

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And yet we're not getting those yields.

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And the record shows that the two newer Cokers have yields consistent with what we've proposed and with what our other witnesses, including Getty's, have said are consistent with newer Cokers.

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So it's re- The two newer Cokers are just, I mean, a fraction of the existing Cokers.

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And that's right.

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And FERC calls that cherry picking, but that's the only real apples to apples comparison.

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It's not just those two, by the way, Judge Rao, the record is very detailed, involving Cokers across the world, which we cited to in our briefs to FERC.

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Now, if I could, on the 20% issue, most of what you're about to hear

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to justify the 20% involves mere projections of what refiners hope to earn, not what they actually earn, and on very tiny projects not comparable to a $700 million cocker.

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And that's all they have in the difficult California market.

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We proposed using the refiners weighted average cost of capital, which is only 7% to 9%.

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But there's across the industry, it's not present.

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And that just seems like a very different enterprise.

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At least FERC found that in.

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Well, importantly, there is no evidence of actual Coker earnings on this record.

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Why?

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A Coker is an integrated part of a refinery.

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You can't separate out the Coker earnings.

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Or there's not access to confidential business data.

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It doesn't mean they couldn't separate.

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They're integrated and you really can't, you could go through some complex cost allocation, but that frankly would be a fool's errand.

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And so what you have here is FERC has tried to manufacture Coker earnings in two ways.

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First, it's used something called hurdle rates and other projections.

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Hurdle rates are just what a refiner hopes to make.

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And by the way, those are refiner level hurdle rates, not Coker.

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Okay, those are what's one example.

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Phillips 66.

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We discussed this in our brief.

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It has a 30% harder rate.

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The same Phillips document where FERC plucks this out as evidence.

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Phillips talks about how actual refiner earnings

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of it and four other major refiners are only in the 5 to 12% range.

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Nowhere near the hurdle rates that it uses.

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Similar for Marathon, 20% hurdle rate.

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It's already retired the Coker, which clearly didn't meet that hurdle rate.

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The court has said we can't value cuts haphazardly.

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What could be more haphazard than using what our refiner hopes to make

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instead of what they actually do.

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All we have is actual returns for refiners as a whole.

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But what are the inputs that you're going to propose for setting this alternative cost reduction?

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We propose using the weighted average cost of capital, very similar to what FERCES uses for pipelines and utilities like the Constellation.

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But how is that going to project for inflation?

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Well, inflation, that is used in the formula to inflate the investment base.

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And that has doubled the cost of the Coker to $700 million.

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We have a change in circumstances, though.

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No one would build a new Coker in California today.

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It's unthinkable.

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And the other thing, Your Honor, is in terms of inflation, the original $350 million cost of this Coker, it's a sunk cost.

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sunk costs like the principal on your mortgage do not increase.

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Petro Star basically saying like 20 years ago, you know, this was all reasonable and now no one's building any new Cokers.

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And so we just shouldn't, you know, factor in these capital costs into

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into the pricing mechanism.

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We're saying, Your Honor, there have been major changes in circumstances.

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We are not seeking to eliminate any capital cost recovery.

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We're saying instead of the 20%, you should use the WAC.

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So you basically want to reduce the capital cost recovery to something exceedingly low.

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It should be reduced to something much lower for a couple reasons.

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I've already mentioned no one would build a $700 million cocker.

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That doesn't comport with reality.

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And the reality is,

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We've paid for the cost of this $350 million cocker more than six times already.

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It'll be more than 18 times if this isn't changed by 2050.

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And so this court has recognized in quality bank cases and elsewhere that a rate is subject to change circumstances.

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We have that in abundance here.

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You're treating this, though, as if it's like cost of service rate making.

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And it's not.

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It's a projection.

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based on a very frankly problematic raw material, what is going to make it going business proposition?

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for somebody to either build or maintain, run a Coker.

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And so it's just an analytically, the cost of service way of looking at this.

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I grant that the references to capital, it isn't about the depreciation of a capital resource.

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It's about what would it take for this to continue to be a going concern?

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Because we're not a market.

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a market value.

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We do think you should use the weighted average cost of capital because the quality bank is based on costs.

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Even if you didn't do that, if you wanted to look to profits instead, something that's not rake baking, those are low five to 12%.

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And then in terms of the investment base, your honor, I mean, we have to look at what has changed here.

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The costs have been fully recovered multiple times.

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It's a sunk cost.

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It probably should have never been increased in the first place.

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But particularly now that the market has changed, look at California.

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No one would or probably could build a coker or a coking refinery there now.

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So we have to, FERC says you need to reflect market reality.

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The market reality is that the cost of coking is much lower now.

[00:09:35] Speaker 07:
So- Does anybody, any major refiner endorse the 79% CFR rate?

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Any major refiner endorsed the seven to nine percent CRF rates, excuse me, method?

[00:09:48] Speaker 03:
Well, they haven't endorsed it, but the seven to nine percent weighted average cost of capital is determined by third-party financial analysts, the same ones that used to set returns in pipeline and electric utility cases.

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This is the CAPM model.

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So the refiners haven't endorsed it, but the information is based on third-party objective

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estimation of what those capital costs are, your honor.

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I could just make one point about remedy.

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I guess I mean, it is Petro Star's burden to show that the existing rate is unjust and unreasonable.

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we feel like just to say that like there's a different rate that would also be just and reasonable agreed but the we feel like we've done that the 20 percent is higher than either the cost of capital or actual refiner profits there are no such thing as cocker earnings i want to say one thing about the cocker earnings they've manufactured it's important they rely on a proprietary

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two proprietary models.

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FERC has no idea the basis for those models.

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And in fact, FERC's own staff rejected them for that reason.

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The alleged Coker margins also disregard two of this court's opinions.

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They're relying a significant part on the price of fuel oil, which this court rejected in Oxy and in Exxon.

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They also continue to rely

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on margins that exclude capital costs.

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They have not sufficiently explained that.

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Platts says they exclude capital costs.

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And finally, and this is really important, those three reasons are enough to reject these alleged margins.

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But the fourth reason, they allocate all the incremental profit of a coking refinery to one unit, the coker,

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and ignore what they themselves in their order in discussing the anomaly say are these other units of the Coker.

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Look at paragraph 35 of the order.

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They say it's the other units that take the intermediate Coker products and turn them into real valuable gasoline and jet fuel.

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They don't allocate any of the profit to those units at all.

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So these alleged margins, they're just completely overstated.

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Thank you.

[00:12:28] Speaker 08:
Good morning, Mr. Ducey.

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See you when you're ready.

[00:12:29] Speaker 02:
Good morning.

[00:12:30] Speaker 02:
Steve Ducey on behalf of Conoco Phillips.

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I'd like to reserve one minute.

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The proper functioning of the Quality Bank depends on assigning accurate relative values to the nine ANS crude oil cuts.

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And the Quality Bank's goal is to assign a value to each cut, reflecting its actual price as closely as possible.

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For the Resid cut, there's no published market price, so it needs to be reverse engineered.

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you take the product yields that result from the coking and you subtract from that the Coker processing costs, which are made up fixed and variable operating costs and the Coker capital costs.

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The Coker capital costs are derived by the CRF, the Coker refining factor.

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That factor is developed as the type of financial return or cash flow that refiners will typically require to invest in a Coker.

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It's designed to reflect earnings, an earnings metric similar to EBITDA, earnings before interest, tax depreciation, and amortization.

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Because the CRF is premised on earnings and expected financial returns, the only way to properly assess the reasonableness of the CRF is to look at the actual market-based evidence showing earnings, margins, and hurdle rates that the market is currently requiring to invest in a Coker-type project.

[00:13:53] Speaker 02:
Here, FERC got it exactly right when it said Petro Star had failed to meet its burden to show that the CRF shouldn't be reduced because it looked extensively at that market-based data.

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The critical error here is that every piece of that market data that they used to reject Petro Star's analysis was never brought to bear on our analysis.

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Paragraph 178 is the entirety of the analysis saying that ConocoPhillips did not meet its burden.

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Yet, the record and the agency itself in its findings

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indicate and show that that's a false premise.

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For example, the presiding judge's ID at paragraph 146, PIN site JA0470471, specifically found that ConocoPhillips witnesses justified a quality bank CRF of well over the current 20%.

[00:14:53] Speaker 05:
Well, the fact that Tonico Phillips has shown that another rate might be just and reasonable doesn't also mean that FERC's rate is unjust and unreasonable.

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Those things aren't necessarily equivalent.

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I mean, we have lots of cases saying that the just and reasonable rate doesn't mean whether those are

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They disagree with them, but it doesn't have to be the most accurate rate.

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It just has to be just and reasonable.

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Correct.

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And you have to show that it's unjust and unreasonable.

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That's correct.

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And part of that here is that the Quality Bank puts the responsibility on FERC to show that and get the value as close as to the market value as possible.

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For instance.

[00:15:35] Speaker 05:
Where does it say that it has to be as close to the market value as possible?

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Is that the only thing that would be just and reasonable?

[00:15:41] Speaker 02:
Yes, your last order in Petro Star v. FERC also indicated that, and from the very beginning, the Quality Bank's goal is to get the value as close as to the market value as possible.

[00:15:51] Speaker 05:
Maybe we should just have the private market then figure it out.

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You have market pricing, no FERC pricing at all.

[00:15:57] Speaker 02:
Well, actually FERC's not pricing it, right?

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We are looking at the market.

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For all but three of those cuts, you're looking at publicly posted market prices.

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For Resid, you have to pull it back and reverse engineer it.

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And here,

[00:16:10] Speaker 08:
Every CRF in the record that was based on the market-based evidence is above 20%, which means... I thought the cash flow model from the trial staff was a CRF of 22.26.

[00:16:26] Speaker 02:
22.26, and that's 11% higher than the original 20%.

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And we calculated that FERC did not dispute any of our calculations on the record.

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That's a $29 million over recovery annually.

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And that cash flow analysis we actually looked at and we said it's artificially low because of certain problems with the input to that.

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But Bert never addressed those questions.

[00:16:55] Speaker 08:
Estimates from 15% to 30%, I mean, there's some inexactitude, given the lack of the precise data that one would want, and that this has to be reconstructed based on models, and inferences have to be made.

[00:17:10] Speaker 08:
So are you arguing that the difference, you are arguing, I gather, the difference between the 20% and the 22.25% that's arbitrary and capricious, because it's unexplained?

[00:17:20] Speaker 02:
We believe that's unexplained because, again, that overvalues the residual value by $29 million annually.

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But more importantly, it's the fact that all of the evidence that FERC used to reject Petro Star's argument was never brought to bear on our question on whether it should be increased.

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They only referenced one cash flow analysis.

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Now, if you could look at page 20 of our opening brief,

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And it's a graph.

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It's the very first graph.

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And that depicts exactly what our problem is here.

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And I'll let you get that out before I talk about it.

[00:18:04] Speaker 02:
Now that may have some confidential information, but I am not going to talk about any of the confidential information.

[00:18:09] Speaker 02:
I'm just going to explain what this graph is showing.

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Do you all have it?

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Okay.

[00:18:15] Speaker 02:
So if you look near the left, there's a current methodology of 20%.

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That's the current quality bank methodology.

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And that's the current CRF.

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And what Conoco Phillips Witnesses did, everything to the right of that, that's the market-based evidence in the record.

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They're hurdle rates.

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internal rates of return, there's the margin data from Platts, the margin data from IHS, all converted to CRM so that you can look at it on an apples to apples basis.

[00:18:45] Speaker 02:
All of that information to the right of the 20%, FERC relied on to dispel the inappropriate claims of Petro Star that it should be, that the capital recovery factor should be reduced.

[00:18:58] Speaker 02:
And that's to the left of the 20%.

[00:19:02] Speaker 02:
All of the evidence to the right was never even brought to bear on whether the CRF should be increased, simply the 22.26%.

[00:19:11] Speaker 02:
Bertha simply says, on balance, we haven't met a burden.

[00:19:17] Speaker 02:
On balance, actually requires a balance.

[00:19:20] Speaker 02:
And right now you've got the 22.26 and the 20, but they completely ignore all of the rest of the market-based evidence they found reliable.

[00:19:27] Speaker 05:
Market-based evidence, how much of that is based on

[00:19:30] Speaker 05:
information that can't be verified.

[00:19:36] Speaker 02:
I would say that you can't be verified.

[00:19:40] Speaker 02:
You can verify it.

[00:19:41] Speaker 02:
They can subpoena it, and they did.

[00:19:43] Speaker 02:
So they can verify that data.

[00:19:46] Speaker 02:
And those, like for instance, internal rates of return, those are the AFEs that you see there, where they're listed as AFEs.

[00:19:53] Speaker 02:
Where you're seeing hurdle rates, those are public.

[00:19:56] Speaker 02:
And remember a company, let's say like the record has Valero's evidence publicly.

[00:20:01] Speaker 02:
They're building a one billion dollar Coker and their hurdle rate is roughly, I believe, 25%.

[00:20:07] Speaker 02:
That's public.

[00:20:09] Speaker 02:
They're telling their investors they're going to invest a billion dollars because they think they can get that 25%.

[00:20:16] Speaker 02:
That's not an ask for some type of a wing of prayer.

[00:20:21] Speaker 02:
These things are, hurdle rates are actually well thought out, gated plans.

[00:20:25] Speaker 02:
The record has a DOJ and EIA study, which specifically says, yes, it's ordinary to use hurdle rates to make these investments and to look at them and qualify them and decide on them.

[00:20:36] Speaker 02:
And that for the most part, you're within 5%.

[00:20:39] Speaker 02:
But my question here is, in looking at whether it should be increased,

[00:20:44] Speaker 02:
Burke needed to actually balance that and actually apply the evidence.

[00:20:49] Speaker 08:
It did balance.

[00:20:50] Speaker 08:
I mean, it considered your claims, and it considered what would it mean to wholesale rely on hurdle rates, projected earnings.

[00:21:00] Speaker 08:
Burke decided that's inappropriate.

[00:21:02] Speaker 08:
And moreover, wouldn't if

[00:21:04] Speaker 08:
FERC adopted the 30% CRF that you posed, that would undercut some of the responses that FERC relied on to Petro Star's arguments.

[00:21:14] Speaker 08:
So it's taking people, you know, challenging from all sides and doing what it thinks is the best with all the different criticisms that it's getting.

[00:21:24] Speaker 02:
However, your honor, I don't believe that's correct.

[00:21:27] Speaker 02:
And I believe that FERC is drastically inconsistent.

[00:21:30] Speaker 02:
As I was saying, if you look at opinion 588, and it's paragraph 143, JA site 62.

[00:21:38] Speaker 02:
They cite, Conoco-Philips witness Flesner has demonstrated that CRFs derived from Platts West Coast Coker earnings far exceeded quality bank CRF of 20%.

[00:21:53] Speaker 02:
Then commission found again, relying on ConocoPhillips evidence, and this is paragraph 144, pin site JA6263.

[00:22:04] Speaker 02:
And they quote, the record includes extensive testimony that refiners are recovering coping margins above the current per barrel CRF of slightly under $10.

[00:22:15] Speaker 02:
Again, citing ConocoPhillips witness of the Laughlin and Flessner.

[00:22:19] Speaker 02:
And finally, at opinion 58, at paragraphs 155 and 171, JA cites 68, 69, and 77, they cite ConocoPhillips evidence showing that West Coast Cokers historically had higher CRFs and earnings than the Quality Bank Coker.

[00:22:38] Speaker 02:
This inconsistency is arbitrary and capricious.

[00:22:43] Speaker 02:
They have yet to actually apply and to address the question whether it should be increased

[00:22:49] Speaker 02:
based on the market-based evidence, which their own staff said was 22.26, which is higher.

[00:22:57] Speaker 02:
I think I'm over.

[00:22:58] Speaker 08:
Yeah.

[00:22:59] Speaker 02:
All right.

[00:22:59] Speaker 08:
Thank you.

[00:23:04] Speaker 08:
Thank you.

[00:23:04] Speaker 08:
We'll hear from Ms.

[00:23:05] Speaker 08:
Hoff.

[00:23:19] Speaker 06:
Good morning, Your Honor.

[00:23:23] Speaker 06:
May it please the court?

[00:23:25] Speaker 06:
Amy Hoff on behalf of the TAPS carriers.

[00:23:28] Speaker 06:
The issue of whether the administrator violated Section 3G5 of the tariff is not a question of whether the TAPS carriers have complied with or violated the filed rate doctrine, which is how FERC has attempted to portray this.

[00:23:42] Speaker 06:
This is purely an issue of tariff interpretation.

[00:23:45] Speaker 06:
And in this case, there is only one reasonable interpretation of Section 3G5.

[00:23:51] Speaker 06:
And that is that the administrator will monitor the common stream through periodic testing, but that he will replace the RISD values that are set forth in the tariff only if he determines that there is a significant change that will have an impact on the value of RISD.

[00:24:09] Speaker 06:
And I will note that this is the interpretation that the administrator has applied without difficulty for almost 20, the almost 20 years.

[00:24:17] Speaker 05:
Does the tariff say there has to be a significant change?

[00:24:21] Speaker 05:
Your honor.

[00:24:21] Speaker 05:
Is that just the understanding?

[00:24:23] Speaker 05:
Is that actually in the tariff?

[00:24:24] Speaker 06:
It is in the tariff, your honor.

[00:24:26] Speaker 05:
Can you give me a second?

[00:24:28] Speaker 05:
I'm sorry.

[00:24:28] Speaker 05:
Can you give me a second?

[00:24:29] Speaker 06:
Yes.

[00:24:37] Speaker 06:
If you look at, it's in, I think the language is set forth in the initial decision and that's in JA0554.

[00:24:52] Speaker 06:
And I will note this is an excerpt of section 3G5.

[00:24:55] Speaker 06:
It's not the entirety of the section, but the first sentence that you see in the quoted section, which is in paragraph 375,

[00:25:05] Speaker 06:
It states that the Quality Bank Administrator shall have the discretion to retest, let's see, when he believes that there may be a change in the common stream that will, and I quote, significantly affect the residual component unit values.

[00:25:20] Speaker 06:
So the word significantly is in fact set forth in the tariff.

[00:25:31] Speaker 08:
But then we have, isn't this the provision that is under the prospective tariff amendment that once the quality bank administrator elects to retest that that should all be taken into account?

[00:25:45] Speaker 08:
So the significance kind of drops away prospectively.

[00:25:48] Speaker 06:
Your Honor, that is certainly how FERC is interpreted, right?

[00:25:52] Speaker 06:
Is that the quality bank administrator's discretion only comes into play after, right?

[00:25:58] Speaker 06:
His only discretion is whether to test or not to test, right?

[00:26:01] Speaker 06:
And if he does test, then under FERC's interpretation, then he is required to use those test results.

[00:26:08] Speaker 06:
But I will say that interpretation, I think, is inconsistent with the totality of Section 3G5.

[00:26:14] Speaker 06:
primarily because I think if you focus on the second sentence of this excerpt, which FERC has done, it effectively reads the first sentence out of existence, right?

[00:26:24] Speaker 06:
In other words, it sets aside the quality bank administrator's discretion to do anything.

[00:26:30] Speaker 05:
And from a practical perspective... I understand that argument though, because the significantly effect goes to whether

[00:26:38] Speaker 05:
So the administrator, for some reason, believes that there might be a significant change.

[00:26:42] Speaker 05:
And so he elects to test.

[00:26:45] Speaker 05:
And so that second test, sorry, the second sentence seems to be the one that's relevant to what he then has to do once he has elected to test.

[00:26:55] Speaker 06:
The issue, Your Honor, is a practical one.

[00:26:58] Speaker 06:
And that is that, right, so the Quality Bank administrator has been tasked with monitoring the common stream.

[00:27:04] Speaker 06:
I think that's very clear if you look back at the 2004 initial decision, which was the genesis of the section of the tariff.

[00:27:11] Speaker 06:
And the issue is that the only way the quality bank administrator can monitor, right, the only way he can have any idea whether or not there has been any change in the common stream is to test.

[00:27:22] Speaker 06:
You can't look at the crude oil and decide, okay, the residual values have changed.

[00:27:26] Speaker 06:
you have to test in order to make the initial determination of, okay, is there a reason to think that the results may have changed?

[00:27:35] Speaker 05:
What you say makes a lot of sense in terms of, well, we shouldn't update the formula unless there has been some kind of real change.

[00:27:45] Speaker 05:
But that just doesn't seem to be what the tariff says.

[00:27:49] Speaker 06:
And your honor, I think certainly the tariff is not great.

[00:27:52] Speaker 06:
The tariff is not perfect.

[00:27:54] Speaker 06:
It is great.

[00:27:55] Speaker 06:
It isn't.

[00:27:55] Speaker 06:
I will say, however, that I think at least for great for the last nine on, you know, 20 plus years, the quality bank administrator has interpreted the tariff in exactly this way.

[00:28:08] Speaker 06:
He submitted a memo in 2006 at the time that the section three G five was implemented indicating that he was doing monthly testing and that he would continue to monitor the common stream.

[00:28:19] Speaker 06:
Right.

[00:28:20] Speaker 06:
And so this has been the interpretation for 20 for almost 20 years until this issue was raised by Petro Star and the formula wasn't updated during that time.

[00:28:28] Speaker 06:
The.

[00:28:29] Speaker 06:
Well, what's in the tariff is the 2001 that the resid properties that are set forth in the 2001 Caleb Brett assay.

[00:28:37] Speaker 06:
And so the idea was, again, if you go back and look at the 2004 initial decision, that they were going to use the 2001 Kayla Brett assay as a starting point going forward until someone decided, not someone, the Quality Bank administrator determined that there had been a significant change.

[00:28:57] Speaker 06:
And so that was supposed to be the starting point.

[00:29:00] Speaker 06:
There was going to be continuous monitoring.

[00:29:02] Speaker 06:
right, that was going to be done through periodic testing.

[00:29:05] Speaker 06:
And that can be seen, I believe, in paragraphs 1147 of the 2004 initial decision.

[00:29:10] Speaker 06:
And it was only then, after the administrator had made a determination that there, in fact, had been a significant change, that there would be a subsequent, right, a subsequent formal retest and the values would be updated.

[00:29:23] Speaker 07:
So has the volatility in the resid properties

[00:29:31] Speaker 07:
made these individual monthly tests unreliable with respect to a pricing model?

[00:29:36] Speaker 06:
Yes, your honor.

[00:29:36] Speaker 06:
And in fact, that is actually what the commission itself found.

[00:29:40] Speaker 06:
If you look at paragraph 79 and 80 of opinion 588, and that's in, let's see, that's the joint appendix 36 and 37.

[00:29:51] Speaker 06:
That's specifically what the commission said.

[00:29:55] Speaker 06:
So they found there that as described in the record, the current tariff language in section 3G5 places the administrator in a no-win situation that leads to unjust and unreasonable results.

[00:30:07] Speaker 06:
And then in the rest of that paragraph, they talk about all of the problems with using the results of the monthly tests and set forth in the initial, the original initial decision, not the 2004 initial decision, but the initial decision in this case.

[00:30:21] Speaker 06:
There are a number of graphs that I began on approximately paragraph

[00:30:26] Speaker 06:
Let's see.

[00:30:31] Speaker 06:
That it begins on approximately JA, let's see, JA 545.

[00:30:39] Speaker 06:
And they show the 2001 Kayla bread assay as compared to the results of the monthly test.

[00:30:47] Speaker 06:
And they show the volatility.

[00:30:48] Speaker 06:
And that's what FERC is referencing when they're talking about this in paragraphs 79 and 80 of opinion 588.

[00:30:56] Speaker 07:
And have you all conducted any kind of like independent audits to determine the financial impact with respect to non-compliance?

[00:31:05] Speaker 06:
Your honor, I'm not aware of that.

[00:31:06] Speaker 06:
I will say that the TAPS carriers and the Quality Bank Administrator administered the Quality Bank on behalf of the shippers and have no financial, we have no financial stake in this.

[00:31:20] Speaker 06:
And so no, as far as I know, that analysis has not been done.

[00:31:25] Speaker 08:
Just a big picture question.

[00:31:26] Speaker 08:
I'm just not sure how following your logic, wouldn't it mean that shippers can ignore the text of the tariff if they have an analysis showing that it leads to unjust results?

[00:31:37] Speaker 08:
How can it be enforced in the meantime?

[00:31:41] Speaker 06:
I'm not sure I fully understand your question, Your Honor.

[00:31:43] Speaker 06:
But in terms of how the tariff can be enforced, again, so I think what the quality bank administrator has done and what he was tasked with in the 2004 initial decision was to

[00:31:53] Speaker 06:
was to perform, we're going to start with the 2001 Caleb Redd assay, and we're going to monitor the common street, right, to see if something, see if anything changes that is going to significantly impact the value of Rezit.

[00:32:04] Speaker 06:
And again, the only way he can do that is through, right, is through testing.

[00:32:08] Speaker 06:
And so the quality bank,

[00:32:10] Speaker 06:
test the common stream on a monthly basis.

[00:32:13] Speaker 06:
They look at the Resid, right?

[00:32:14] Speaker 06:
They look at the Resid results.

[00:32:16] Speaker 06:
And, you know, the Resid results, they do vary, right?

[00:32:19] Speaker 06:
Significantly on a monthly basis due to differences, you know, difference in the equipment at the lab, differences in the lab technician.

[00:32:26] Speaker 06:
There's sometimes just a lack of precision.

[00:32:28] Speaker 06:
And so what the, and this is in the record, but the quality bank administrator was looking for overall trends.

[00:32:34] Speaker 06:
In other words, is there a significant change in one direction, right?

[00:32:37] Speaker 06:
In one direction or another,

[00:32:39] Speaker 06:
that is sustained, a sustained trend.

[00:32:41] Speaker 06:
And if so, then the quality bank administrator would take, would follow section three G five of the tariff, say I've identified a change that will have an impact on the value of resisted and then update those properties in the tariff.

[00:32:54] Speaker 06:
And so I think if I don't know if that answers your question, judge, but I think that's how they will write.

[00:32:59] Speaker 06:
That's how someone can ensure that again, that

[00:33:03] Speaker 06:
That again, the goal of the tariff is met, which is to ensure that the values that the quality bank administrator uses for resid are appropriately reflective of the values that are in the common stream.

[00:33:20] Speaker 06:
So I would just like to point out that I think it is, Park acknowledges in opinion 588 that they have put their interpretation of the tariff

[00:33:33] Speaker 06:
has put the administrator in a no win situation.

[00:33:36] Speaker 06:
And if you look, you can see that.

[00:33:37] Speaker 06:
And again, in paragraph 79 and 80.

[00:33:39] Speaker 08:
You're wrapping.

[00:33:42] Speaker 06:
Oh, I'm sorry.

[00:33:42] Speaker 06:
Yes, your honor.

[00:33:43] Speaker 06:
I am.

[00:33:44] Speaker 06:
I will simply say that I think FERC's interpretation contradicts basic principles of tariff interpretation that are set forth in the cases that are cited in our brief, as well as the cases that are cited by the commission.

[00:33:57] Speaker 06:
And based on that, we think their interpretation is

[00:33:59] Speaker 05:
illogical what you think the no win situation is for the administrator.

[00:34:03] Speaker 06:
Yes, so the no win situation is it again.

[00:34:06] Speaker 06:
I think this is what FERC is talking about in paragraphs at paragraph 80 where they they say this.

[00:34:11] Speaker 06:
The issue is that.

[00:34:13] Speaker 06:
What they what they've said is that OK, we recognize that the quality that the tariff requires you right that the tariff requires you to monitor the common stream and we recognize that the only way you can monitor the common stream is through periodic testing.

[00:34:28] Speaker 06:
But the language of your tariff also says that if you monitor and if you do testing, then you must use the results of those tests, even if those results are not representative of the common strain and therefore not just unreasonable.

[00:34:41] Speaker 06:
So I think FERCS acknowledges that it's a no-win situation for the administrator because we're going to violate the law on one hand,

[00:34:50] Speaker 06:
by failing to follow the tariff.

[00:34:52] Speaker 06:
But if we were to follow the tariff, then that would also equal evaluation, right, of the Interstate Commerce Act because we would be using test results that were not just unreasonable and therefore applying an unjust and unreasonable valuation to REZID.

[00:35:06] Speaker 05:
Have they sought a revision of the tariff?

[00:35:11] Speaker 06:
No, your honor.

[00:35:12] Speaker 06:
There's been, well, blame backup.

[00:35:14] Speaker 06:
There certainly, right?

[00:35:16] Speaker 05:
The tariff has- That's also an option, right?

[00:35:17] Speaker 05:
If this seems to produce strange results in a no-win situation, one possibility is to petition to change the tariff.

[00:35:26] Speaker 06:
The tariff has now been revised, right?

[00:35:28] Speaker 06:
In the wake of opinion 588.

[00:35:29] Speaker 06:
However, again, for 20 years since the tariff was put in place in 2006,

[00:35:36] Speaker 06:
this is how it was administered and no one thought that it was producing unjust and unreasonable results.

[00:35:42] Speaker 06:
In other words, I recognize that in the opinion FERC says, well, if it, or I'm sorry, in their brief, FERC says, well, you know, if it's producing unjust and reasonable results, then you can ask to modify it.

[00:35:53] Speaker 06:
But I think it wasn't producing unjust and unreasonable results because even as FERC recognizes, the use of the 2001 Caleb Brett assay continued to be representative.

[00:36:04] Speaker 06:
And so,

[00:36:05] Speaker 06:
produced a just and reasonable valuation of resist during that period.

[00:36:09] Speaker 06:
And so there was under the taps carriers interpretation, there was no reason to seek a change to the tariff.

[00:36:17] Speaker 06:
All right.

[00:36:17] Speaker 06:
Thank you, your honor.

[00:36:34] Speaker 04:
May please the court.

[00:36:35] Speaker 04:
I'm Scott Edgar, hearing for the Federal Energy Regulatory Commission.

[00:36:39] Speaker 04:
Thank you for hearing this case this morning.

[00:36:41] Speaker 04:
This case is primarily about the valuation of resid.

[00:36:45] Speaker 04:
No party, neither Petra Star nor ConocoPhillips, has demonstrated sufficient evidence to show that the methodology used to value RESID results in an unjust and unreasonable result.

[00:37:04] Speaker 04:
Rather, the commission found, looking at the record as a whole, that the tariff accurately reflects the market value of RESID.

[00:37:15] Speaker 04:
And it is just and reasonable.

[00:37:17] Speaker 04:
I would like to start briefly with the yield issue.

[00:37:23] Speaker 04:
And I'd like to point this court to two particular paragraphs that I think are very key to this issue.

[00:37:30] Speaker 04:
The first one is paragraph 53, JA 25.

[00:37:34] Speaker 05:
What specific yield issue are you talking about?

[00:37:36] Speaker 04:
The yield, the base yields.

[00:37:40] Speaker 04:
And this will be wrapped up with the mismatch theory and all of that.

[00:37:44] Speaker 04:
And where I'd like to start is with paragraph 53, where the commission makes clear that the name of the game here is to get at the, to mimic the typical West Coast poker.

[00:37:58] Speaker 04:
My friends for Petro Star would like us to look at particular, what they consider high performing

[00:38:04] Speaker 04:
um, Cokers.

[00:38:05] Speaker 04:
And if I can diverge just for a second, the commission doesn't even buy that premise because the commission notes that it's a lot more complicated than that and that the newest Cokers are not necessarily more productive than the oldest ones.

[00:38:18] Speaker 04:
But setting that aside for a second, the real important key here that we're after is to mimic the typical West Coast Coker.

[00:38:27] Speaker 04:
What Petro Star suggests wouldn't get to that.

[00:38:30] Speaker 04:
They would only look at, um,

[00:38:33] Speaker 04:
certain cokers and we can't be sure that the crude oil is actually going to go to those cokers.

[00:38:39] Speaker 04:
this crude is going to go to the entirety of the West Coast Coker.

[00:38:43] Speaker 04:
So that would actually create a problem if we were to adopt that theory.

[00:38:48] Speaker 04:
The second paragraph I would like to highlight is the actual facts of how the base yields reflect what's actually happening on the West Coast Coker market.

[00:39:00] Speaker 04:
That's paragraph 54 at JA27.

[00:39:05] Speaker 04:
The commission relies on the testimony of Flesner

[00:39:07] Speaker 04:
at page 125 and 127 to 133 and this is at JA 2516 and 2518 to 24 who looked at eight west coast Cokers

[00:39:20] Speaker 04:
and also the testimony of Ruckert at pages 54 to 58, and 60 to 65, JA 1648 to 50, and 3132 to 38, and 1651 to 52.

[00:39:35] Speaker 04:
And Ruckert looked at 12 Cokers.

[00:39:38] Speaker 04:
Both of them concluded that the West Coast coking market has yields that are very close to what the base yields are in the Terra.

[00:39:48] Speaker 04:
So the actual mismatch, I would argue, would be to embrace Petro Star's theory of using particular cookers that they think are high performing.

[00:40:02] Speaker 05:
So would you say that the mismatch is only theoretical and not a real world mismatch?

[00:40:08] Speaker 05:
that one.

[00:40:09] Speaker 04:
It is definitely not real world mismatch.

[00:40:11] Speaker 04:
And certainly I would rely on paragraph 54 on the commission's findings in that paragraph.

[00:40:18] Speaker 04:
And so there is no mismatch.

[00:40:22] Speaker 04:
And this ties into the theory about sunk costs and all of that.

[00:40:29] Speaker 04:
And I think both of them are consistent with the commission.

[00:40:33] Speaker 04:
Both of those theories are consistent.

[00:40:35] Speaker 04:
We're using

[00:40:37] Speaker 04:
we're using base yields that exist today, and we're also using a capital cost that is consistent with today's dollars.

[00:40:48] Speaker 04:
We started with a base of 2,000 and the commission reasonably has applied the indexing to that base in order to bring those costs, capital costs, up to today's dollars.

[00:41:02] Speaker 04:
And in fact, as we pointed out in our briefing,

[00:41:04] Speaker 04:
at times that has actually gone down.

[00:41:07] Speaker 04:
So we're just matching the prices.

[00:41:11] Speaker 07:
But does it differentiate based on technological improvements?

[00:41:18] Speaker 04:
I would say it does account.

[00:41:23] Speaker 04:
First of all, again, the commission disagreed that the new COCRs are actually any better and that any technological advancements actually are available to any COCR.

[00:41:35] Speaker 04:
And the commission made that finding.

[00:41:38] Speaker 04:
But then again, I would go to paragraph 54 and that the base yields again are actually very close, very close to what's going on in the West Coast market.

[00:41:53] Speaker 05:
the tax carriers arguments and the tariff interpretation there.

[00:41:58] Speaker 05:
What would be your response to Ms.

[00:42:02] Speaker 05:
Hoff's arguments?

[00:42:05] Speaker 04:
The response is I have a couple of points.

[00:42:09] Speaker 04:
Clearly the commission said it's a no when situation for the administrator and

[00:42:15] Speaker 04:
But the commission also said, I would point the judge out to footnote 176, and this is to paragraph 81 at JA 37.

[00:42:24] Speaker 04:
And the administrator didn't have to do any testing.

[00:42:31] Speaker 04:
And so this gets to your point.

[00:42:33] Speaker 05:
This argument seems a little, I mean, the administrator is seeming to want to diligently monitor the composition of the stream.

[00:42:42] Speaker 05:
I mean, that seems and was doing so for many years on a monthly basis.

[00:42:47] Speaker 05:
That does seem like something that the administrator maybe was required to do or in the diligent exercise of his duties was performing.

[00:42:56] Speaker 04:
Fair enough, Your Honor, and I appreciate that.

[00:42:59] Speaker 04:
I don't think the commission meant to indicate that the administrator wasn't diligent.

[00:43:04] Speaker 04:
This is just a disagreement about what this tariff means.

[00:43:07] Speaker 04:
I think that my response is, at the end of the day, the proper thing to do would have been to amend this tariff earlier.

[00:43:13] Speaker 05:
Well, so I asked Ms.

[00:43:14] Speaker 05:
Hoppe, and she said, well, nobody, I mean, this was just what was being done, and no one suggested that it was inappropriate.

[00:43:20] Speaker 05:
So there was no reason to try to modify the tariff after so many years of sort of constant practice.

[00:43:26] Speaker 04:
I'm not sure that's an answer, because no one thought to comply with the tariff.

[00:43:34] Speaker 04:
I'm not sure that's an answer.

[00:43:35] Speaker 04:
I think at the end of the day, we want compliance with the tariff.

[00:43:39] Speaker 04:
And all the commission has done here.

[00:43:40] Speaker 04:
And I think Your Honor sees, in particular, the second sentence of the relevant language here.

[00:43:47] Speaker 04:
And it's pretty clear that,

[00:43:52] Speaker 04:
that once the test is made, that it shall be incorporated.

[00:43:56] Speaker 04:
And I think the volatility that could occur in that situation, if that had been a problem, I think the proper response would have been to amend the tariff.

[00:44:05] Speaker 08:
What's your response to Ms.

[00:44:06] Speaker 08:
House's assertion that there's almost like a circularity built into those two sentences of the tariff, because the only way

[00:44:14] Speaker 08:
that the quality bank administrator can tell if there's been any changes to test.

[00:44:21] Speaker 08:
So it's not like there's a reason to believe there's been a change, and then testing goes on.

[00:44:26] Speaker 08:
And the reason to believe has to be that there's been a significant change.

[00:44:32] Speaker 08:
There's no such information unless and until you test.

[00:44:37] Speaker 08:
And therefore, the substantiality qualifier has to apply.

[00:44:40] Speaker 04:
I guess I will.

[00:44:42] Speaker 08:
Results as well.

[00:44:43] Speaker 04:
I guess I would make a few points.

[00:44:47] Speaker 04:
I would go back to the footnote that says the- Test it all.

[00:44:50] Speaker 04:
It wouldn't have to test it all.

[00:44:52] Speaker 04:
That's number one.

[00:44:53] Speaker 04:
And then number two is there could be a lapse of time.

[00:44:56] Speaker 04:
If there isn't testing and then a year goes by or something like that, that might be a reason.

[00:45:00] Speaker 04:
I think Your Honor is searching for a reason to test without a test.

[00:45:06] Speaker 04:
And so a lapse of time in that circumstance might be a reason

[00:45:12] Speaker 04:
Do a retest and then the second sentence of that tariff is very clear.

[00:45:16] Speaker 04:
Once that's done it shall be Shall shall be used shall be Used in the tariff and I I also want to point out one other thing and I think all parties agree that

[00:45:29] Speaker 04:
that the testing here is just as credible, it's reliable, there's no suggestion that it was some sort of informal test or anything like that.

[00:45:43] Speaker 04:
And this is paragraph 74 at JA34.

[00:45:47] Speaker 08:
It's more that it can be variable and

[00:45:52] Speaker 08:
And so FERC has resolved that by doing that.

[00:45:56] Speaker 04:
In paragraph 79 to 82, JA 36 to 38, the commission did amend the tariff.

[00:46:03] Speaker 04:
So to somewhat codify the existing practice of the monthly testing, but then do an annual update, which would address the

[00:46:17] Speaker 04:
or address the volatility issue.

[00:46:19] Speaker 05:
The annual updating is now part of the new tariff.

[00:46:22] Speaker 04:
Yes.

[00:46:27] Speaker 08:
Significant or substantial or not.

[00:46:29] Speaker 03:
Yes.

[00:46:32] Speaker 04:
Could I could I back up and go to I want to make it just a few points on the CRF and in particular ConocoPhillips and I I think I just want to.

[00:46:46] Speaker 04:
a highlight what the commission has done in paragraph 178 and highlight what the commission meant when it looked at the record as a whole.

[00:46:59] Speaker 04:
And I just want to emphasize that this is a very long record.

[00:47:03] Speaker 04:
There were a lot of witnesses.

[00:47:05] Speaker 04:
The hearing was very long.

[00:47:09] Speaker 04:
Judge Hurt, she did a very thorough and excellent evaluation of

[00:47:14] Speaker 04:
of all the evidence and the Commission had to grapple with all that.

[00:47:17] Speaker 04:
My friends for ConocoPhillips would like us to hone in on their particular evidence, but there was more than that.

[00:47:24] Speaker 04:
There was this Commission staff, Zachary Ruckert's cash flow analysis,

[00:47:30] Speaker 04:
which resulted in a CRF that was 2.26, very close to the existing just-in-reasonable rate.

[00:47:42] Speaker 04:
And it bears mentioning as well that it is the burden on the proponent of a change to first demonstrate that the existing rate is not just-in-reasonable.

[00:47:53] Speaker 08:
Why not just go for 22.26?

[00:47:55] Speaker 08:
that's been demonstrated to your satisfaction, and they point out that there's a non-trivial difference between that and 20 percent?

[00:48:03] Speaker 04:
There's much more than that.

[00:48:05] Speaker 04:
There's the hurdle rates.

[00:48:08] Speaker 04:
And I also want to make a

[00:48:10] Speaker 04:
a reference to the WAC, to the Weighted Average Cost of Capital.

[00:48:13] Speaker 04:
Sorry for that acronym.

[00:48:15] Speaker 04:
And the commission said in footnote 423 at JA82 that the weighted average cost of capital is one source of data.

[00:48:26] Speaker 04:
And it also said that it was outweighed by hurdle rates and earnings.

[00:48:31] Speaker 04:
And also ordered paragraph 169 at JA74

[00:48:35] Speaker 04:
the commission said that the weighted average cost of capital provides some information.

[00:48:40] Speaker 04:
And then again, at paragraph 171, JA77, the weighted average cost of capital is one data point.

[00:48:48] Speaker 04:
So the commission did not entirely dismiss this evidence.

[00:48:51] Speaker 04:
So there's a staff witness record, there's the weighted average cost of capital, there's hurdle rates.

[00:48:58] Speaker 04:
So circle back, Judge Pillard, to your question, why didn't the commission just go with

[00:49:04] Speaker 04:
that one data point and I believe the answer is there's so much more out there and the Commission explicitly said that when it referred to the extensive record and that was making a decision here on balance and that's in paragraph 179 at JA 81.

[00:49:22] Speaker 08:
It's a little analytically unsatisfying because it's sort of, you know, I mean, you can see where kind of Phillips is coming from.

[00:49:30] Speaker 08:
You're using these arguments against Petro Star, but then sort of saying, yeah, but there's a lot of static in here.

[00:49:38] Speaker 08:
So we're going to stick with 20%.

[00:49:41] Speaker 04:
I think these are difficult.

[00:49:42] Speaker 04:
I think this is a difficult issue.

[00:49:43] Speaker 04:
And I think the volume of paper that we're dealing with in this case, I think that speaks to the grappling that the commission did

[00:49:51] Speaker 04:
and Judge Hurd dead with this case.

[00:49:55] Speaker 08:
Does this come down to the theory that the information about how much is actually spent on coking is proprietary information?

[00:50:05] Speaker 08:
So that all this reconstruction of actual costs to come up with a

[00:50:12] Speaker 08:
The first engineered market market price is is because is it is it because of proprietary information?

[00:50:19] Speaker 04:
Well, it's an integrated it's an integrated process.

[00:50:23] Speaker 04:
I think that must make it very difficult.

[00:50:26] Speaker 04:
But I can turn to I mean, the commission addressed the Platts data and the and the commission found it credible.

[00:50:35] Speaker 04:
And the commission considered Petro Star's arguments trying to turn to those pages.

[00:50:42] Speaker 04:
and I think the commission is entitled to deference on that question.

[00:50:53] Speaker 05:
There's a lot of paper, so Ferg win.

[00:50:56] Speaker 04:
I would refer, Your Honors, to Pair of 158.

[00:51:00] Speaker 04:
And this is JA 70.

[00:51:02] Speaker 04:
And it's referring to both the Platts data and the IHS data.

[00:51:06] Speaker 04:
And they say they're well-known data aggregators.

[00:51:09] Speaker 04:
And the Commission, and I think it's entitled to deference on this, has said that their margins data is a useful metric for analyzing earnings.

[00:51:24] Speaker 04:
Thank you, Your Honor.

[00:51:28] Speaker 08:
And lastly, we hear from shipper intervenors.

[00:51:33] Speaker 08:
Miss Marcelle.

[00:51:36] Speaker 09:
I pronounce it Marcelle.

[00:51:38] Speaker 09:
Marcelle.

[00:51:38] Speaker 09:
Thank you.

[00:51:39] Speaker 09:
Thank you.

[00:51:41] Speaker 09:
Thank you, Your Honor.

[00:51:42] Speaker 09:
And good morning, Lori Marcelle for the shipper intervenors.

[00:51:47] Speaker 09:
I have a couple of points to make, but I'd like to start by just responding to a few of the questions and and

[00:51:54] Speaker 09:
and comments that have been made so far.

[00:51:56] Speaker 09:
And I believe early on there was a question about market prices and how do we know this is supposed to be based on market prices.

[00:52:03] Speaker 09:
And that is a very well established precedent with respect to the quality bank.

[00:52:10] Speaker 09:
I think Mr. Aduchi referred to the fact that this court in its remand order said that the quality bank, the values assigned to each of the quality bank cuts are supposed to mirror market prices as closely as possible.

[00:52:22] Speaker 09:
And that principle goes all the way back to this court's decision in OXIE in 1995.

[00:52:27] Speaker 09:
And in our brief at footnote 7, we have a string site where we cite a lot of the precedent.

[00:52:33] Speaker 09:
And so the FERC has always tried to apply those principles as has this court.

[00:52:38] Speaker 09:
Mr. Meinsinger was talking about, and they've made a lot of claims in their briefs about how much they've paid.

[00:52:45] Speaker 09:
And they've paid for this COCR so many times, allegedly.

[00:52:50] Speaker 09:
FERC ruled correctly because FERC saw this for what it was.

[00:52:54] Speaker 09:
And FERC said even if that's true, the COCR continues to add value and there needs to be a charge for that processing because you really need to go back and remember what's going on here.

[00:53:05] Speaker 09:
So Petro Star is taking the crude oil out of taps

[00:53:09] Speaker 09:
It's taking what it wants out of that crude oil and it's rejecting what it and it's turning what it doesn't want into the common stream.

[00:53:18] Speaker 09:
Right.

[00:53:19] Speaker 09:
And that includes a lot more resit.

[00:53:22] Speaker 09:
And it's in here saying basically we shouldn't have to pay for that.

[00:53:28] Speaker 09:
We're going to make that resit all the other shippers problems.

[00:53:31] Speaker 09:
To be fair, we should pay less for that.

[00:53:34] Speaker 09:
Well, we should pay 10 cents a barrel.

[00:53:36] Speaker 09:
That's what they're saying.

[00:53:37] Speaker 09:
So.

[00:53:38] Speaker 09:
Almost nothing, right?

[00:53:40] Speaker 09:
So that's what they're saying.

[00:53:41] Speaker 09:
And that's what's important.

[00:53:42] Speaker 09:
That's what you have to remember here.

[00:53:43] Speaker 09:
And there was never any expectation when this 20% Calper recovery factor was adopted back in the days of Judge Silverstein and his order in 2000 that this was going to expire.

[00:53:53] Speaker 09:
And the initial decision points this out at paragraph 115, 109, and 231.

[00:54:01] Speaker 09:
Because at the time Judge Silverstein adopted it in 2004, it was retroactive to 1993.

[00:54:06] Speaker 09:
And so at that point in time, the COCA already would have been paid for multiple times over.

[00:54:11] Speaker 09:
And nobody, including Petro Star, argued then, wait a minute, we shouldn't have to pay for this.

[00:54:16] Speaker 09:
In fact, Petro Star supported the 20% CRF.

[00:54:20] Speaker 05:
How do we think about, though, the real world fact that they have

[00:54:23] Speaker 05:
suggested that no new Cokers are really being built or very few.

[00:54:29] Speaker 05:
Well, these are things that are, you know, they've been built a long time ago.

[00:54:32] Speaker 05:
And and that's a market reality as well.

[00:54:36] Speaker 09:
Well, the commission found correctly that, well, I mean, all that means is that the West Coast has the capacity it needs for Coke.

[00:54:43] Speaker 09:
I mean, there are 14 Cokers on the West Coast.

[00:54:47] Speaker 05:
Yeah, I mean, that good is that out of Cokers?

[00:54:50] Speaker 05:
I mean,

[00:54:50] Speaker 09:
And PectorStar suggests that, oh, well, there have been a couple of conversions to renewable fuels and things along those lines.

[00:54:58] Speaker 09:
And they just take the fact that that's happened without any actual evidence and say, oh, well, that means Cokers aren't valuable.

[00:55:05] Speaker 09:
There is evidence in the record, and we cite to it in our brief.

[00:55:09] Speaker 09:
And the initial decision, and it's a joint appendix,

[00:55:13] Speaker 09:
2605 and in our brief we cite to it at note 41 where we actually got through a through a subpoena we got some evidence and the commission relies on it about what the causes were for those conversions and it wasn't the Cokers.

[00:55:28] Speaker 09:
So you cannot look at evidence of some conversions or the fact that Cokers aren't being built to say, oh, well, it's not valuable.

[00:55:35] Speaker 09:
Nobody's paying for coking anymore, because that is not true.

[00:55:37] Speaker 09:
In fact, the commission found very recently there were a lot of witnesses that testified to this, including Petro Star's own expert witness on Cokers, Mr. Romero, testified that Cokers are valuable.

[00:55:48] Speaker 09:
They are adding a lot of value, because they're taking resid, which is literally the bottom of the barrel, and they're turning it into valuable products.

[00:55:56] Speaker 09:
Coking's expensive.

[00:55:58] Speaker 09:
and Cokers provide a very valuable service.

[00:56:03] Speaker 09:
The fact that the initial decision found correctly that the fact that some Cokers are no longer in service only makes the other Cokers more valuable.

[00:56:11] Speaker 09:
That's what Witness Lido testified to and that's what the judge pointed to.

[00:56:16] Speaker 07:
But if the residual value is really low, you know, based on market data.

[00:56:20] Speaker 07:
Well, it has no value until it's coked into saleable products.

[00:56:24] Speaker 07:
That's the cost of that.

[00:56:26] Speaker 09:
who's bearing the cost of, well, it has to be converted by a Coker into saleable products.

[00:56:32] Speaker 09:
And so that's what we're doing here is that's how it's valued because there's no market price for it.

[00:56:39] Speaker 09:
you work backwards, you start at the price of the saleable products, and then you have to deduct the cost of coking.

[00:56:46] Speaker 09:
This court has found that the cost of coking must be deducted in order to get all the cuts on an equal basis.

[00:56:55] Speaker 08:
She says it's low value, and you say, well, it has no value.

[00:56:58] Speaker 08:
It has no valuation.

[00:57:00] Speaker 08:
Because, honestly, the whole project here is figuring out what its value is.

[00:57:03] Speaker 08:
Right.

[00:57:03] Speaker 09:
In and of itself before it's coked, right?

[00:57:07] Speaker 08:
it doesn't have a market price, but once it's, once- It's never had a negative value or a pre-processing or a zero value, some value, it's just not enough.

[00:57:18] Speaker 09:
Well, there was a time, because through the history of the resident valuation cases that have come before this court, and we've been litigating about this a lot for many years, where it can be, if you need to sell it or dispose of it, it has to be blended with fuel oil.

[00:57:40] Speaker 09:
But this court said a while ago, that's not an acceptable way to value it.

[00:57:46] Speaker 09:
That is way too inaccurate.

[00:57:47] Speaker 09:
We're not going to accept that.

[00:57:50] Speaker 09:
Go back and do it again for her.

[00:57:55] Speaker 09:
So I'd like to go a little bit to the mismatch point.

[00:58:00] Speaker 09:
That is a true red herring, OK, because

[00:58:03] Speaker 09:
First of all, when Petra Star says we're paying for a newer Coker, what they point to is equipment that Judge Silverstein added to make this a modern Coker, because Petra Star is quoting this language from Judge Silverstein's order, saying we're going to make this a modern Coker.

[00:58:19] Speaker 09:
We're going to bring these costs forward.

[00:58:21] Speaker 09:
from 1996, and there's equipment that I want to add to make this a modern Coker.

[00:58:26] Speaker 09:
Well, it was demonstrated, and the commission relies on this as did the judge, and Petra Starr's own witnesses admitted that none of that equipment increases yields.

[00:58:37] Speaker 09:
So whether it's a newer Coker or not a newer Coker, that equipment doesn't increase yields.

[00:58:44] Speaker 09:
And the fact of the matter is, and FERC did rely on that, yes.

[00:58:51] Speaker 09:
What does it mean to increase yields though?

[00:59:02] Speaker 09:
Well, when you add that equipment, it's not the kind of equipment that's going to enable the Coker to produce.

[00:59:08] Speaker 09:
What Petra Star is saying is a modern Coker is producing more liquid, more of the valuable liquid yields.

[00:59:17] Speaker 09:
And none of the equipment that was added, that Judge Silverstein added to the Coker to make it a modern Coker, would have the effect, it was mostly for safety or environmental reasons or things like that, not anything that would increase yields.

[00:59:32] Speaker 09:
Mr. Luca, who both the judge and the commission cite, he was a cooking expert that we sponsored, testified that, and Mr. Flessner as well, and Petra Starr's witnesses agreed that the Cokers operate to maximize refiners and Cokers, to maximize profitability.

[00:59:53] Speaker 09:
And that isn't always the same thing as maximizing yields, right?

[00:59:57] Speaker 09:
And there are many reasons that

[01:00:00] Speaker 09:
a cocker would not operate its cocker at maximum level to just get increased yields, because as the commission found, the incremental yields that you're going to get are not as valuable.

[01:00:14] Speaker 09:
And there are detrimental effects to your cocker for running it that way purely for the purpose of increasing yields.

[01:00:20] Speaker 09:
So it's a little more complicated than PectoStar would have you believe.

[01:00:23] Speaker 08:
All right.

[01:00:24] Speaker 08:
Unless you have another point, we're ready to wrap up.

[01:00:27] Speaker 09:
OK.

[01:00:28] Speaker 09:
Yeah, I would like to just wrap up by saying, and I think this is something that I know that my colleague, Mr. Ediger, touched on.

[01:00:36] Speaker 09:
But FERC conducted a very thorough review here.

[01:00:40] Speaker 09:
It was a nine-week hearing with 17 expert witnesses.

[01:00:43] Speaker 09:
When the court remanded this case, it identified a limited set of issues pertaining to the capital recovery factor for FERC to revisit.

[01:00:52] Speaker 09:
And FERC actually broadened its scope of review.

[01:00:57] Speaker 09:
It broadened its scope of review to include things that Petro Star didn't even appeal, like the yields issue.

[01:01:03] Speaker 09:
And it made a very thorough and sound, well-reasoned decision that the capital recovery factor and the yields, the yields continue to accurately be reflected in

[01:01:21] Speaker 09:
in the PIMS yields and that the cow recovery factor should not be reduced below 20%.

[01:01:27] Speaker 09:
Thank you for your time.

[01:01:30] Speaker 09:
I appreciate your indulgence going over.

[01:01:32] Speaker 08:
Thank you.

[01:01:34] Speaker 08:
And now we have some short rebuttal.

[01:01:40] Speaker 08:
I think Mr. Meinsinger had reserved one minute.

[01:01:45] Speaker 03:
Just to have a few quick points, Your Honor.

[01:01:47] Speaker 03:
First, Ms.

[01:01:48] Speaker 03:
Marshall said,

[01:01:50] Speaker 03:
Resid has no value until it's processed.

[01:01:52] Speaker 03:
Neither does crude oil.

[01:01:53] Speaker 03:
You have to process it.

[01:01:54] Speaker 03:
You can't just put crude oil in your car.

[01:01:58] Speaker 03:
Second, Judge Rao, you asked Mr. Aduchi about

[01:02:01] Speaker 03:
think whether there was any visibility into the models.

[01:02:05] Speaker 03:
There is no visibility into the models at all that are used to construct these artificial Coker margins.

[01:02:11] Speaker 03:
FERC has no idea how they're calculated.

[01:02:13] Speaker 03:
That's why staff disavowed those margins.

[01:02:16] Speaker 05:
There were subpoenas for some of that proprietary information?

[01:02:19] Speaker 03:
I don't believe there were subpoenas for that information.

[01:02:25] Speaker 03:
Someone mentioned that the quality bank is based on market prices, true.

[01:02:29] Speaker 03:
Actual market prices for cuts like propane and butane, not projections.

[01:02:34] Speaker 03:
There's lots of projections out there for the price of propane.

[01:02:37] Speaker 03:
We don't use those, we use actuals.

[01:02:39] Speaker 08:
If we had the analogous market prices for the bottom three cuts, I'm sure they would be.

[01:02:44] Speaker 03:
Yes.

[01:02:45] Speaker 08:
But we're in a different situation with them.

[01:02:46] Speaker 03:
We are, but.

[01:02:47] Speaker 08:
The point is that we're not doing cost of service rate making, we're projecting a market.

[01:02:51] Speaker 03:
And that's fine, Your Honor.

[01:02:53] Speaker 03:
But the 22.6 that you mentioned is based on purely projections, not actuals.

[01:03:00] Speaker 03:
And staff's own testimony is based on four hurdle rates, the average.

[01:03:04] Speaker 03:
Staff's own testimony says those are rarely achieved, citing the EIA and other evidence.

[01:03:09] Speaker 03:
They're rarely achieved.

[01:03:11] Speaker 03:
Much lower returns are achieved in reality.

[01:03:14] Speaker 03:
And so if anything, the hurdle rates are only substantial evidence of what a refiner would hope

[01:03:19] Speaker 03:
We can't base the Quality Bank on that any more than we would base, you know, let FERC get away with some other judgment about something that doesn't comport with reality, like whether there's a need for a pipeline in New Jersey or not.

[01:03:34] Speaker 08:
Need for what?

[01:03:35] Speaker 03:
A pipeline in New Jersey.

[01:03:36] Speaker 03:
There was a case Judge Shileswell is nodding.

[01:03:39] Speaker 03:
But, you know, FERC said there was a need for this pipeline, and you looked at the evidence.

[01:03:44] Speaker 03:
You didn't let it get away with that.

[01:03:45] Speaker 03:
There's a study there in New Jersey that says, no, we don't need a pipeline.

[01:03:49] Speaker 03:
And so we deal with actuality here, not just broad brush.

[01:03:55] Speaker 03:
The reality here is that refiners are closing refineries in California.

[01:04:03] Speaker 03:
Ms.

[01:04:03] Speaker 03:
Marcel mentioned the conversions.

[01:04:05] Speaker 03:
Two major refineries have been converted to renewable fuels.

[01:04:09] Speaker 03:
When that happens, the Coker's gone.

[01:04:11] Speaker 03:
It's not earning a thing.

[01:04:13] Speaker 03:
The refinery still is though.

[01:04:15] Speaker 03:
processing soybeans or something.

[01:04:17] Speaker 03:
But that shows that if anything, the seven to nine percent whack is generous.

[01:04:22] Speaker 03:
Judge Rao, you had a question earlier about how low Petro Star's calculated value is.

[01:04:29] Speaker 03:
But that only goes to remedy, specifically more about the investment base.

[01:04:34] Speaker 03:
If the court thinks our remedy is too low, we talked about several alternatives.

[01:04:38] Speaker 03:
One would be the original $350 million rate base to go back to that.

[01:04:44] Speaker 03:
because clearly you don't inflate a sunk cost and circumstances have changed.

[01:04:49] Speaker 03:
If you think our proposal is too low, it's not a justification for the $700 million investment base, which is completely out of whack with the right reality of this market, whether you used cost-based analysis to look at this or more of a market realities standard.

[01:05:08] Speaker 03:
Last thing I would say is Mr. Edinger said,

[01:05:11] Speaker 03:
that we're trying.

[01:05:12] Speaker 03:
The yields are reflective of a typical West Coast Coker.

[01:05:16] Speaker 03:
Fine.

[01:05:17] Speaker 03:
We agree.

[01:05:18] Speaker 03:
But the Quality Bank Coker isn't typical.

[01:05:21] Speaker 03:
It costs $350 million to construct.

[01:05:25] Speaker 03:
The typical Coker was built in the 60s for less than $100 million.

[01:05:29] Speaker 03:
We're not getting what we paid for.

[01:05:32] Speaker 03:
And that's just unjust and unreasonable.

[01:05:36] Speaker 03:
Thank you, Your Honors.

[01:05:37] Speaker 08:
Thank you very much.

[01:05:39] Speaker 08:
The case is submitted.

[01:05:41] Speaker 08:
Oh, I'm so sorry.

[01:05:42] Speaker 08:
There were, there was one more.

[01:05:45] Speaker 08:
And did you also, okay, we have a couple of minutes here.

[01:05:48] Speaker 08:
Everybody, sorry.

[01:05:55] Speaker 02:
Thank you, honor.

[01:05:55] Speaker 02:
And thank you.

[01:05:56] Speaker 08:
To comment on what a good argument did in your primary.

[01:06:00] Speaker 02:
Um, first I'd like to say Petro star eight 53 F third at 100 is the reference to as close to the market as possible.

[01:06:10] Speaker 02:
And that's citing Oxy.

[01:06:11] Speaker 02:
64 F3rd at $6.93.

[01:06:17] Speaker 02:
Mr. Rucker talked about cash flow analysis, $22.26.

[01:06:22] Speaker 02:
On our brief, we specifically point out that it's basically this pattern in dealing with ConocoPhillips arguments.

[01:06:29] Speaker 02:
We specifically challenged the legitimacy of the $22.26.

[01:06:31] Speaker 02:
We said it was artificially low.

[01:06:34] Speaker 02:
We challenged specific inputs to that cash flow model.

[01:06:38] Speaker 02:
That was on a brief on exceptions.

[01:06:40] Speaker 02:
Trial staff did not oppose those exceptions.

[01:06:43] Speaker 02:
On opinion 58, it doesn't address them at all.

[01:06:46] Speaker 02:
It just didn't address them at all.

[01:06:48] Speaker 02:
So the 22.26 has to have a checkmark by it.

[01:06:53] Speaker 02:
We believe it's artificially low, and we believe our arguments to that will go directly to whether

[01:06:59] Speaker 02:
the CRF should be increased because if they're relying on the 22.26 and that's actually what as we showed if you corrected it equals more like 30% that goes directly to our argument.

[01:07:13] Speaker 02:
Council for FERC staff said hurdle rates as a reference to, hey, look at the hurdle rates in relation to the CRF.

[01:07:20] Speaker 02:
You got to remember that a hurdle rate is not a CRF.

[01:07:23] Speaker 02:
Hurdle rate is an expected return.

[01:07:25] Speaker 02:
The CRF is a cash flow analysis where you look at what is an investor looking for.

[01:07:30] Speaker 02:
It's an EBITDA value.

[01:07:31] Speaker 02:
It's a recovery of your investment, on your investment, and income taxes.

[01:07:36] Speaker 02:
There are two separate things.

[01:07:38] Speaker 02:
You can convert a hurdle rate into a CRF

[01:07:41] Speaker 02:
And then you can compare the CRS based on those hurdle rates.

[01:07:45] Speaker 02:
That's what we did in that on page 20 in that in that in that graph.

[01:07:50] Speaker 02:
Mr. Edgar also said.

[01:07:52] Speaker 02:
and told you PLAT's IHS data margin was very good data and it was well done.

[01:07:58] Speaker 02:
He forgot to tell you that that's conical field to witness that he's relying on.

[01:08:04] Speaker 02:
And that data showed, as I indicated in my early arguments, that you could justify a CRF much higher than the 30%.

[01:08:13] Speaker 02:
It's just beyond my imagination where staff and FERC can say, we're relying on your data to show that a CRF can be justified much higher than 20%.

[01:08:22] Speaker 02:
And then turn around and say the same data that you just presented, that doesn't meet your burden to show that it should be higher than 20%.

[01:08:30] Speaker 02:
That doesn't make any sense.

[01:08:32] Speaker 02:
Lastly, he said that this case is complicated and it's large.

[01:08:37] Speaker 02:
Just because a case is complicated and large doesn't allow you to do arbitrary and capricious things like not apply evidence to the issue.

[01:08:47] Speaker 02:
And lastly, I would note for you all, about two and a half weeks ago, this court issued a case in Cigar Association v. FDA, case number 23-5220, 2025 Westlaw,

[01:09:01] Speaker 02:
286514 strikingly similar to this case, where this court reinforced the fact that if you base your decision on a false premise, it's going to be found arbitrary and capricious.

[01:09:13] Speaker 02:
And if you don't apply the relevant evidence to the question, including when you're choosing between options, you're going to be found arbitrary and capricious.

[01:09:22] Speaker 02:
Thank you.

[01:09:23] Speaker 08:
Thank you.

[01:09:32] Speaker 06:
Yes.

[01:09:33] Speaker 06:
Thank you, your honor.

[01:09:34] Speaker 06:
So the commission is advocating an overly literal interpretation of Section three G five that defeats the intent of the terror.

[01:09:42] Speaker 06:
And that is contrary to case law.

[01:09:44] Speaker 06:
That includes the national van lines case, as well as the Pennsylvania central case that are cited in our briefs.

[01:09:50] Speaker 06:
The intent of Section three G five, just like the intent of the 2004 initial decision was to have the quality bank administrator monitor the common stream right through testing.

[01:10:00] Speaker 06:
and then only update the values that are used to value resid if he determined in his discretion that there had been a significant change.

[01:10:10] Speaker 06:
Under Mr. Editor's interpretation, apparently, we can do nothing.

[01:10:15] Speaker 06:
But if the Quality Bank Administrator had actually done that, then that would violate the intent and the spirit of Section 3G5, if not the specific letter of the tariff itself.

[01:10:27] Speaker 06:
And I will just note that if a tariff is subject to different constructions, that which is reasonable and consistent with the purpose of the tariff is preferred to the one that is impractical or leads to absurd consequences.

[01:10:39] Speaker 06:
Thank you, Your Honor.

[01:10:40] Speaker 08:
Thank you.

[01:10:42] Speaker 08:
I believe now the case is submitted.