[00:00:01] Speaker 00:
Case number 14-1103 at L, TransCanada Power Marketing LTD, Petitioner, versus Federal Energy Regulatory Commission.

[00:00:09] Speaker 00:
Mr. Wiseman for the petitioner, Ms.

[00:00:11] Speaker 00:
Banta for the respondent.

[00:01:13] Speaker 03:
You may have pleased the court, Kenneth Wiseman, for petitioners, and I've reserved five minutes for rebuttal.

[00:01:21] Speaker 03:
The first two core rulings in this case, the ruling concerning cost allocation and the ruling that accepted as-bid prices as just and reasonable, unnecessarily and we submit unlawfully increased consumers' electricity costs.

[00:01:37] Speaker 03:
I'd first like to address FERC's decision to allocate the costs of ISO New England's winter reliability program to load-serving entities rather than accepting ISO New England's proposal to allocate those costs to transmission owners.

[00:01:53] Speaker 03:
FERC conducted no analysis to determine whether ISO New England's proposal to allocate the program's cost to transmission owners was just and reasonable, and it made no conclusion that the allocation methodology proposed by ISO New England was unjust and unreasonable.

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But instead of allocating the cost to transmission owners, which is required under this court's precedent,

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FERC allocated the costs to load serving entities, and it did that on two bases.

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One, it said that it allocated the costs of a predecessor program in 2005-2006 to load serving entities.

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And secondly, it said that cost causation principles purportedly supported the allocation of costs to load because load is the beneficiary

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of the costs and it causes the incurrence of the costs.

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Both of those rulings are in contradiction of this Court's long-standing precedent, and the latter ruling is in contradiction of the facts.

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This court said in Atlantic City Electric Company v. FERC, cites 295 F1, and the specific discussion is at page 9, that under FBA section 205D, when a public utility proposes to change its rates, FERC can reject the utility's proposal only if it finds that the proposal is unjust and unreasonable.

[00:03:33] Speaker 03:
In City of Bethany v. FERC, this court said that FERC is only to determine whether the proposed rates are just and reasonable.

[00:03:41] Speaker 02:
Is your point that it didn't use the words just, unjust and unreasonable?

[00:03:46] Speaker 03:
It certainly did not use the words, but our argument is... We've never said FERC has to use the magic words, right?

[00:03:57] Speaker 03:
You have said that FERC doesn't have to use the magic words, but here it didn't conduct the analysis.

[00:04:01] Speaker 02:
But here it said, as you pointed out, that ISO's proposal violated principles of cost causation.

[00:04:09] Speaker 03:
And it didn't analyze – I'm sorry, Your Honor.

[00:04:12] Speaker 03:
What's the problem with that?

[00:04:14] Speaker 03:
The problem is that FERC didn't actually analyze the argument that was made to show why its decision, in fact, was inconsistent with cost causation principles.

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We had argued to FERC that what happens under this – under its methodology of

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allocating the cost to load serving entities.

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That load serving entities would not have the ability to pass through those costs to load because load serving entities have fixed rate contracts.

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When a surcharge comes out of the blue after 10 years, they can't simply renegotiate their contracts, their existing contracts.

[00:05:01] Speaker 02:
built into future contracts in terms of risk premiums.

[00:05:06] Speaker 03:
And that's the two-fold problem.

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First of all, with respect to the costs of the 2013 program, instead of load, which is the cause of the costs and the beneficiary of the costs, absorbing those costs, they escape those costs.

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But in the long run, directly to your question,

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What happened is that now load serving entities have to include risk premiums.

[00:05:35] Speaker 02:
That's exactly what FERC wants.

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It thinks that's the most equitable way to pass along these increased costs.

[00:05:43] Speaker 03:
Well, but what it's passing along in some instances are non-existent costs as a result.

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If you think about this, it's kind of like an insurance policy.

[00:05:52] Speaker 01:
Exactly, but wouldn't you be on, I mean, wouldn't the load serving entities be on notice since this is New England and in particular since the 2005-2006 experience that this kind of thing arises and that's a risk that they would have to self-insure against?

[00:06:11] Speaker 03:
Well, again, first of all, there were, from the time of 2005 until this program in 2013,

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there were no surcharges of this kind.

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So whatever notice was provided in 2005, I would suggest to you that if load serving entities had included this risk premium in their rates for that eight-year period, load, meaning consumers, would have been paying for nothing.

[00:06:40] Speaker 01:
No, I mean, we all know how insurance works.

[00:06:44] Speaker 01:
You're going to give a small buffer against it over time, then it comes up 10 years later, and they paid more during the warmer times, and then they pay less during the colder times.

[00:06:56] Speaker 01:
And that's the nature of a long-term contract, right?

[00:06:59] Speaker 03:
But there's a distinct difference here in that this is a regulated industry where the entities that were making the sales in this instance, the generators,

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they're regulated by FERC, that they are permitted to charge only just in reasonable rates.

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And when they then, they charge whatever they're gonna charge, the load serving entities take that charge, and they're effectively taking the costs they incur and passing them on to rate payers, with obviously a profit margin.

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But in this instance, if the cost had been allocated to transmission owners,

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then the rate payers would have paid much less because they don't have to absorb these risk premiums in prior years because of the guaranteed right of transmission owners to pass through the costs under not to hail it, the Thornburg and Narragansett v. Burke.

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would submit to you that actually FERC didn't complete the net when it said it applied cost causation principles, but it didn't conduct, it didn't analyze the facts in this case.

[00:08:10] Speaker 04:
Well, it did.

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They said the cost should be allocated to those who benefit from the incurrence of the cost.

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I understand your quibble.

[00:08:18] Speaker 04:
If I'm on your side, it's pretty easy to argue.

[00:08:20] Speaker 04:
You're arguing essentially that

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It's harder for you to collect from the end user than the transmission folks.

[00:08:28] Speaker 04:
Yeah, that's fine, but that doesn't result in a win for your position because FERC did justify what it had done, and if you have to have an insurance-type premium going forward, so be it.

[00:08:40] Speaker 03:
Well, you know, this court has said that you can't just pluck a rate out of thin air, and that's effectively what the court's done.

[00:08:46] Speaker 03:
No, no, that's your second argument.

[00:08:48] Speaker 03:
I'm sorry?

[00:08:48] Speaker 03:
That's your second argument.

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Well, I agree, but I think it relates to this as well.

[00:08:52] Speaker 04:
The allocation argument, I mean, you really climb a high hill, at least as far as I can see.

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Your second argument's a different argument.

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You mix them up.

[00:08:59] Speaker 03:
OK, well, let's go put aside the cost side of it for now, and let's just talk about the allocation.

[00:09:07] Speaker 03:
Again,

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The first justification was, well, it said, we dealt with this argument back in 2005.

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Well, if you go back to the 2005 order, you'll see that, first of all, there was most certainly a similar argument made.

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But it wasn't identical.

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Are you still talking about the allocation?

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I'm talking about allocation.

[00:09:28] Speaker 04:
No, no.

[00:09:29] Speaker 04:
What about the reasonableness of the rate?

[00:09:32] Speaker 03:
Oh, I'm sorry, the reasonableness of the rate itself?

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In terms of the reasonableness of the rate, there was no record.

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There was no record evidence taken at all.

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We knew that it was established by ISO New England that it estimated the costs of the program at $16 million to $43 million.

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And that later on, it acknowledged that that actually didn't include risk premiums and profit margins for the suppliers.

[00:10:04] Speaker 03:
When the bids came in, they were at $78.8 million for 83% of the targeted level of service.

[00:10:13] Speaker 03:
So ratepayers ended up paying, depending upon how you look at the range of costs, 1.8 to 5 times the original estimate, without any evidence of what costs went into that calculation of the $78.8 million.

[00:10:28] Speaker 04:
In my personal analysis, that while the bidding was

[00:10:32] Speaker 04:
So the request for profits must have been reasonable, but you didn't buy that?

[00:10:36] Speaker 03:
Well, no, because there was no – you know, it's very interesting, I think, that the FERC said that the product that's being delivered here is unique in each instance because

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The suppliers are at different locations, they're providing a different level of service, and that justifies a different rate for each of those suppliers.

[00:11:01] Speaker 03:
Well, I'll accept that as a given.

[00:11:04] Speaker 03:
If that's a given, then you have to make a determination of whether each of those sellers has market power.

[00:11:11] Speaker 03:
There was no determination here.

[00:11:13] Speaker 02:
Wasn't this an auction?

[00:11:14] Speaker 03:
No.

[00:11:16] Speaker 03:
Suppliers have bid in, but they were taken at their asking prices.

[00:11:22] Speaker 02:
Suppose FERC had simply said, had simply expressly applied the mobile seer doctrine to this.

[00:11:28] Speaker 02:
It said this is an auction, cited New England power generator, and said it satisfies mobile seer.

[00:11:34] Speaker 02:
Would you have been satisfied with that?

[00:11:37] Speaker 03:
No, because still, FERC still didn't... It didn't do that.

[00:11:42] Speaker 02:
I wouldn't say it didn't do it, but would you... Well, suppose it did do that.

[00:11:47] Speaker 02:
What would be the problem with that?

[00:11:48] Speaker 03:
Well, I think had it done that, you'd still have to go backwards and determine, well, is the program itself just and reasonable such that even under Mobile Sierra, that these contracts should be adhered to?

[00:12:02] Speaker 02:
But that's not the question under Mobile Sierra.

[00:12:06] Speaker 03:
Well, okay, reverse it.

[00:12:07] Speaker 03:
The answer would be, does the public interest require rejection of these contracts in this instance?

[00:12:14] Speaker 03:
And I'd say yes, because there was never an investigation, there's absolutely no evidence to determine that these sellers

[00:12:22] Speaker 03:
didn't individually have market power and charge prices that were dictated by their market power.

[00:12:29] Speaker 01:
If the burden is flipped, though, under Mobile Sierra, and you're saying that it's contrary to public interest, isn't it your, as a challenger, your burden to say, there is market power, and let me show you why, or there's at least a reason to fear that there's market power?

[00:12:45] Speaker 01:
Is there any, I mean, can't you just sketch out that concern?

[00:12:49] Speaker 03:
Of course, we tried to make the argument.

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We made the argument based upon the evidence that was available to us, and FERC said – FERC shut us down and said no.

[00:12:58] Speaker 03:
We actually asked for an evidentiary hearing, I believe.

[00:13:03] Speaker 03:
FERC said no.

[00:13:04] Speaker 03:
This is just and reasonable, and it just moved on.

[00:13:06] Speaker 03:
So we dealt with what the evidence was that we had available to us.

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We would have liked to have developed more.

[00:13:15] Speaker 03:
I can see my 10 minutes is up.

[00:13:19] Speaker 01:
It would be useful if you would sketch what you think, even if there's not evidence in the record, what is the basis for concern that these as-bid prices reflect market power, given that if you look at the record there were

[00:13:34] Speaker 01:
you know, many different suppliers opting to put forward bids.

[00:13:39] Speaker 01:
In fact, they first offered terms that weren't attractive enough.

[00:13:42] Speaker 01:
They didn't get enough bids.

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When they did offer terms that were attractive enough, they got a bunch of bids.

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They saw the curve.

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They said, we're not going to buy the most expensive of these.

[00:13:49] Speaker 01:
We're going to buy the less expensive.

[00:13:52] Speaker 01:
We're also going to look at reliability and location.

[00:13:54] Speaker 01:
And do we have any reason to believe, for example,

[00:13:58] Speaker 01:
that there was collusion among those bidders, or that there's market power.

[00:14:03] Speaker 01:
There's not a competitive market there.

[00:14:06] Speaker 03:
There's certainly no evidence of collusion, and we never made an allegation of that sort.

[00:14:11] Speaker 03:
But there was evidence of a cost estimate of $16 to $43 million.

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And there is evidence that suggests that the excess was due to risk premiums and profit margins.

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So since there never was an analysis of whether individual sellers had market power, I think there's certainly reason to believe that that possibly was exercised in this instance.

[00:14:37] Speaker 03:
And our concern is that load serving entities are the ones that had to absorb the cost of that 2013 program because of their fixed rate contracts.

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They couldn't pass those costs on to load.

[00:14:52] Speaker 01:
So it's just the idea is, I mean, if you're bidding for something that you want, and I gather that a lot of these bidders were somewhat ambivalent about whether they wanted to provide here, but to the extent that they're putting in a bid, you're assuming or hypothesizing that it's possible and it needs to be investigated, whether they are bidding high to get more of a whispering and more profit.

[00:15:17] Speaker 01:
even though they might then not be selected, and that somehow the whole group of them is doing that, is gouging the public by, because typically you have, as a bidder, and this is why auctions work, you have an incentive to say, well, I want a bid high enough to get my profit margin on my risk.

[00:15:35] Speaker 01:
But I don't want to get so high that I'm in that right hand of the curve, and I'm not going to get the business, and that's the discipline.

[00:15:42] Speaker 01:
And the question is, why isn't that discipline working here?

[00:15:45] Speaker 01:
And I understand your point about the estimate and then the prices as they came in.

[00:15:50] Speaker 01:
But just structurally, I want to understand your case.

[00:15:53] Speaker 03:
Sure.

[00:15:54] Speaker 03:
The reason that's not working is that generators in this instance are obviously located at various places all across the ISO New England grid.

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And to provide reliability, it's simply not a matter of any generator at any time generating power.

[00:16:11] Speaker 03:
It's a matter that there are certain places on the system where that power is needed.

[00:16:16] Speaker 03:
So if a power – if a generator was located in a specific location which is known to be subject to reliability problems,

[00:16:25] Speaker 03:
That generator could go into this bidding process knowing more or less with some certainty that it was going to get selected regardless of what price it charged.

[00:16:35] Speaker 03:
So did generators charge?

[00:16:39] Speaker 03:
Did every single generator take advantage of that potentiality?

[00:16:45] Speaker 03:
Probably not.

[00:16:45] Speaker 03:
I don't have any evidence of that.

[00:16:47] Speaker 03:
But did some?

[00:16:48] Speaker 03:
Very possibly.

[00:16:49] Speaker 03:
And that's what FERC should have investigated and didn't.

[00:16:55] Speaker 02:
Thank you.

[00:16:57] Speaker 02:
Thank you.

[00:17:13] Speaker 05:
Good morning.

[00:17:14] Speaker 05:
I'm Carol Banta for the Commission.

[00:17:16] Speaker 05:
I'd like to begin by picking up on this last point, Judge Pillard, and looking at exactly what the Commission saw when the bid results came in.

[00:17:25] Speaker 05:
At JA 605, there's a footnote in the bid results, I think it's the first bid results order, noting that the ISO had explained that the accepted bids

[00:17:35] Speaker 05:
43% of the bids that came in, I think, not just 43% of the accepted bids, but 43% of the bids that came in were less than $10 per megawatt hour, 25% were between 10 and 20, and 20% were between 20 and the $31 cutoff point.

[00:17:53] Speaker 05:
That's sort of a numerical expression of the graph that was in our brief and that's also in the bid results.

[00:18:00] Speaker 05:
So the Commission said in its orders that this was a competitive bidding process.

[00:18:05] Speaker 05:
The ISO had said from the start that it expected it to be competitive.

[00:18:09] Speaker 05:
The ISO had said in its initial filing, we expect this to be competitive, and I don't think there was ever any dispute about that.

[00:18:19] Speaker 01:
Well, typically when you are saying this is market-based, these rates are market-based, there has to be some finding as a predicate to going that route, a finding that the market is competitive, that there's no market dominance, and I don't see that.

[00:18:34] Speaker 01:
I see general statements about need and bidding, but that typically hasn't been enough, and I don't see any case that really supports this kind of thin market, this kind of thin record on

[00:18:48] Speaker 01:
You know, it was just the FERC saying we're confident that it's competitive.

[00:18:52] Speaker 05:
Well, and the Commission did not say it was market-based.

[00:18:55] Speaker 05:
And of course, it of course was a novel approach, and the Commission didn't think it was a model for the best way to do this going forward.

[00:19:03] Speaker 05:
It was an interim program that was urgently needed.

[00:19:06] Speaker 05:
So the Commission, it's kind of a hybrid.

[00:19:09] Speaker 05:
It was not market-based in the way the Commission

[00:19:12] Speaker 05:
uses that term and approves a market and then lets it run.

[00:19:15] Speaker 05:
It also was looking at the ISO had discretion.

[00:19:19] Speaker 05:
For instance, discretion not to buy the full amount.

[00:19:22] Speaker 05:
That was one way to keep costs down.

[00:19:24] Speaker 05:
And in fact, the ISO did decide to buy less than the full amount approved.

[00:19:29] Speaker 05:
And the commission noted in the bid results order that the ISO had been trying to keep the costs down.

[00:19:34] Speaker 05:
So it had some market characteristics, like a competitive bidding process.

[00:19:40] Speaker 05:
the criteria that were tailored very much based on the reliability needs that were to be met, with the ISO exercising a lot of discretion to choose more reliable resources over ones that offered fewer benefits, but also to keep the costs down.

[00:19:57] Speaker 02:
I understand.

[00:19:59] Speaker 02:
Go ahead.

[00:19:59] Speaker 02:
You go ahead.

[00:20:00] Speaker 02:
Go ahead.

[00:20:01] Speaker 02:
Did you have a follow-up question?

[00:20:03] Speaker 02:
No, go ahead.

[00:20:04] Speaker 02:
Go ahead, Eric.

[00:20:06] Speaker 04:
The thing that bothers me is that

[00:20:09] Speaker 04:
The other side's making a perfectly legitimate argument that we can't figure out how much is attributable to profit and risk markup, which presumably you're supposed to say something about.

[00:20:24] Speaker 04:
Because it's clearly a question here.

[00:20:27] Speaker 04:
So when I'm preparing a case, I understand what the challenge is, and I'm looking for the agency's explanation.

[00:20:34] Speaker 04:
And their explanation responds to that.

[00:20:37] Speaker 04:
under a competitive as-been program in which resources are selected based on both price and non-price factors, it's reasonable that participants with greater reliability benefits will be paid higher prices, and the record in this case does not persuade us that participants included excess profits unrelated to actual risks and costs in submitting their bids.

[00:20:59] Speaker 04:
And I say, well, that's interesting.

[00:21:00] Speaker 04:
What else?

[00:21:01] Speaker 04:
There's nothing else.

[00:21:03] Speaker 04:
There's absolutely

[00:21:08] Speaker 04:
to anything to support the suggestion.

[00:21:11] Speaker 04:
Now they had played it out and explained that.

[00:21:14] Speaker 05:
I would add to that that earlier in that paragraph the Commission said it also was looking at the total cost of this program and balancing it against the need to do something.

[00:21:24] Speaker 02:
Where did it actually do that?

[00:21:26] Speaker 02:
Where did it do that?

[00:21:27] Speaker 02:
That's what I couldn't find.

[00:21:31] Speaker 02:
Where did it do that?

[00:21:32] Speaker 05:
I think that this paragraph 15 is where the Commission said we looked at the overall cost of this and we're okay with this for the purpose of keeping the lights on in New England for three months.

[00:21:42] Speaker 05:
And this did turn out to be a winter in which 88% of the oil procured under this program was burned.

[00:21:48] Speaker 05:
It was the polar vortex winter.

[00:21:52] Speaker 05:
These decisions are being made in, now we're looking now at the bid results for hearing order, which happened after the fact in April when the Commission knew

[00:22:00] Speaker 05:
what had happened.

[00:22:01] Speaker 05:
But the tariff was approved in September.

[00:22:04] Speaker 05:
The bid results were approved in October.

[00:22:06] Speaker 05:
The oil tanks had to be filled by December 1st.

[00:22:09] Speaker 05:
So this was all being done on an extremely fast timeline.

[00:22:13] Speaker 02:
And the ISO had put together a program that... But still, even if the circumstances were extraordinary and the timeline short, FERC still had to make the ultimate determination in some way that this ultimate cost was just and reasonable.

[00:22:30] Speaker 05:
And it did decide that the $75 million ultimate cost was the reasonable cost of addressing these reliability concerns.

[00:22:38] Speaker 02:
I had a slightly different question from Judge Edwards, I see his point, which is that I thought the commission's response to the petitioner's argument here was that the commission had looked at each of these individual contracts.

[00:22:55] Speaker 02:
and they were all okay, but I didn't, I never saw anywhere where the commission concluded that the overall cost of the program was just in reason.

[00:23:03] Speaker 02:
But when they added them all up, that the result was just in reason.

[00:23:07] Speaker 02:
You didn't use Mobile Sierra, you could have, the commission could have done that.

[00:23:11] Speaker 02:
But it didn't do that, right?

[00:23:12] Speaker 02:
It didn't do that, no.

[00:23:14] Speaker 01:
And why wasn't this reviewed as an emergency program?

[00:23:18] Speaker 01:
I noticed there's a provision for that, and it's not looked at that way.

[00:23:22] Speaker 01:
It wasn't looked at under the abbreviated cost base showing.

[00:23:30] Speaker 01:
How do you categorize this program?

[00:23:32] Speaker 01:
I guess that's another question.

[00:23:33] Speaker 01:
I mean, we have to review it.

[00:23:34] Speaker 01:
You have to review it.

[00:23:36] Speaker 01:
You're basically saying, here are some characteristics of the situation, here are some characteristics of the program, trust us.

[00:23:46] Speaker 05:
Well, it's not quite trust us.

[00:23:48] Speaker 05:
It is a hybrid approach because the commission was looking at the overall costs rather than each individual contract.

[00:23:56] Speaker 05:
That's true.

[00:23:56] Speaker 05:
And it had market-like aspects, like the competitive bidding.

[00:24:01] Speaker 05:
But the commission was looking at it as a rate design.

[00:24:03] Speaker 05:
It did refer to it as a rate design in paragraph 21 of the tariff for hearing order.

[00:24:08] Speaker 05:
And it was just putting together.

[00:24:11] Speaker 05:
And again, I don't want to

[00:24:12] Speaker 05:
rushed past the considerations that it emphasized numerous times in the orders about the reliability needs, the urgency of the approaching winter, the temporary nature of the program, as well as the prospective costs as much as they could be estimated in advance.

[00:24:28] Speaker 05:
In the rate design, it had the competitive bidding, the acknowledgement that non-price factors,

[00:24:34] Speaker 05:
that a resource with better turnaround time, a better history of reliability in terms of outage percentages, location in one of the heavier load pocket areas would be worth more money.

[00:24:47] Speaker 05:
And the criteria that the ISO would apply, again, the cap on the total that the ISO

[00:24:53] Speaker 05:
could buy, as well as its discretion to buy less than that.

[00:24:57] Speaker 05:
The commission really did look at this as a package of measures that taken together for the purposes of this short-term emergency program, with the commission reviewing it as well, was just reasonable.

[00:25:13] Speaker 01:
So why not ask for cost data?

[00:25:14] Speaker 01:
I mean, the bidders presumably had their cost data.

[00:25:17] Speaker 01:
They had to have it to put together the bids.

[00:25:19] Speaker 01:
And yet, it's not in the record.

[00:25:21] Speaker 05:
They were not asked to submit that with the bits.

[00:25:24] Speaker 04:
See, they're setting a standard for themselves.

[00:25:26] Speaker 04:
That's what affects my thinking right away.

[00:25:30] Speaker 04:
In writing what I read to you before, they're saying that the participants could not

[00:25:36] Speaker 04:
include excessive profits unrelated to actual risks and costs.

[00:25:41] Speaker 04:
They're acknowledging, in effect, in their judgment, that would not be permissible.

[00:25:45] Speaker 04:
And then they're saying, well, our look at the record suggests they did not.

[00:25:50] Speaker 04:
And I'm saying, where?

[00:25:51] Speaker 04:
How do you reach that conclusion?

[00:25:53] Speaker 04:
In other words, don't you agree they are saying there cannot be excessive profits unrelated to actual risks and costs, right?

[00:26:00] Speaker 04:
Right.

[00:26:00] Speaker 04:
OK.

[00:26:01] Speaker 04:
How do they prove that point?

[00:26:02] Speaker 04:
How do they show me

[00:26:04] Speaker 04:
and indeed, all they say is the record doesn't show it.

[00:26:09] Speaker 05:
That doesn't mean it doesn't.

[00:26:10] Speaker 04:
But you have to explain to generalist judges

[00:26:20] Speaker 05:
they're basing it on right they're basing it on they're looking at how this actually played out again the graph and what I said 68% of the bids came in under $20 43% of them were under 10 so there wasn't a rush to the top they the ones at the top they bid too high they got cut off which they didn't know was going to happen because the ISO had the discretion to

[00:26:43] Speaker 05:
to cut off at less than the total.

[00:26:45] Speaker 05:
It didn't say that it would.

[00:26:46] Speaker 05:
It didn't say where it would.

[00:26:47] Speaker 05:
It made that judgment based on the break point that it saw in the graph.

[00:26:51] Speaker 01:
But that's not alone enough.

[00:26:52] Speaker 01:
I mean, if there are three of us bidding for something and we know that the demand is for the amount equal to what two of us could provide, we've been on a market.

[00:27:02] Speaker 01:
And we can say, well, you know, I may be cut off, but gee, I'm going to shoot high because I've got market power here.

[00:27:09] Speaker 01:
And we just don't have any record.

[00:27:10] Speaker 01:
I mean, you're asking us to assess this as a court.

[00:27:15] Speaker 01:
And I don't even know what standard you're asking us to look at.

[00:27:18] Speaker 01:
What do we have to find?

[00:27:21] Speaker 01:
Cost?

[00:27:21] Speaker 01:
Do we have to find market power?

[00:27:23] Speaker 01:
No, no.

[00:27:24] Speaker 01:
What do we have to find?

[00:27:26] Speaker 05:
Again, it was a hybrid approach, which is what makes the standard difficult.

[00:27:29] Speaker 01:
So what's the new standard?

[00:27:30] Speaker 01:
If we were going to go gung-ho, we see this brave new world, what standard do you propose that we apply?

[00:27:37] Speaker 01:
The showing needed in a hybrid situation like this going forward is what?

[00:27:43] Speaker 02:
I think, well, the commission just didn't see evidence that something, that something... Let me just modify Judge Pillard's question, because to me she just got to the core of it for me too, which is not what do you propose, but would you point to language in the commission's order?

[00:28:02] Speaker 02:
which explains the methodology they use.

[00:28:05] Speaker 02:
That's what we're looking for.

[00:28:07] Speaker 02:
What explains the methodology the Commission used in this case and its ultimate judgment that the cost it was imposing was just and reasonable?

[00:28:19] Speaker 02:
Where do you find that in the

[00:28:22] Speaker 05:
Well, it could be clear.

[00:28:25] Speaker 05:
It could.

[00:28:26] Speaker 02:
Right.

[00:28:26] Speaker 02:
I know.

[00:28:27] Speaker 05:
I know.

[00:28:28] Speaker 05:
But I do want to.

[00:28:29] Speaker 02:
So what would you point to that's unclear that could be clear?

[00:28:33] Speaker 02:
Give us the best language in the order you have.

[00:28:36] Speaker 02:
So when we go back and talk among ourselves, we're looking at the part of the order which you think most persuasively explains the answer to Judge Pillard's question.

[00:28:52] Speaker 02:
That's fine.

[00:28:54] Speaker 05:
Well, I think, I mean, the core of the polling is in the tariff re-hearing order in 15 through 18.

[00:29:01] Speaker 02:
But although also... And what particularly in 15 through 18 would you point to?

[00:29:09] Speaker 02:
Do you want to use my paragraph?

[00:29:12] Speaker 05:
No.

[00:29:13] Speaker 05:
There are several places that I wanted to point to, and I don't know whether I found the best one.

[00:29:17] Speaker 02:
This is in the re-hearing order?

[00:29:20] Speaker 05:
Yes.

[00:29:21] Speaker 05:
And I think that the commission was looking at this bucket of factors and the criteria that were based on the reliability, the discretion given to the ISO, and the inability to know in advance what the actual cost would be, but that

[00:29:43] Speaker 02:
Okay, so we can go back.

[00:29:47] Speaker 02:
These are the three paragraphs, right?

[00:29:49] Speaker 02:
These are the ones you, the commission, lives or dies on.

[00:29:53] Speaker 02:
These three paragraphs.

[00:29:55] Speaker 05:
Well, I think they're probably... 15 to 18?

[00:29:59] Speaker 05:
Probably not.

[00:30:01] Speaker 05:
I mean, it's in several places, because the commission was grappling with this.

[00:30:05] Speaker 02:
Tell us where.

[00:30:05] Speaker 02:
Every place you want us to look at.

[00:30:07] Speaker 02:
Don't tell me the whole order.

[00:30:08] Speaker 05:
No, no, no.

[00:30:10] Speaker 05:
In the first order, in the tariff order, there's paragraph 31 and 32, where the commission is talking about what this design entails, with the ISO having discretion, what the factors are going to be.

[00:30:22] Speaker 01:
And looking at JA, I'm sorry.

[00:30:24] Speaker 05:
Oh, I'm sorry, JA 471 and 472.

[00:30:28] Speaker 05:
And in paragraph 32, it's talking about there being a cap on how big this program is even allowed to be, with the ISO having discretion to go lower.

[00:30:39] Speaker 05:
And it refers, I mean, the commission's focusing, rather than on the individual bids that might come in, because it does understand that this is expected to be a competitive bidding process, it is focusing on the total cost.

[00:30:53] Speaker 05:
And that is how it looked at this program, what is going to be the total cost

[00:30:58] Speaker 05:
of providing this reliability.

[00:31:01] Speaker 05:
And again, it doesn't hold this up as a model or an approach going forward.

[00:31:06] Speaker 04:
They weren't capping the cost.

[00:31:07] Speaker 04:
Well, they were capping the amount.

[00:31:09] Speaker 05:
They were capping the amount because they couldn't be sure of the cost.

[00:31:12] Speaker 04:
I mean, they were not attending to the cost at all.

[00:31:14] Speaker 05:
No, they were attending.

[00:31:15] Speaker 05:
They weren't.

[00:31:16] Speaker 04:
Well, you've got one estimate, which turned out to be terribly low, and then a much higher figure.

[00:31:22] Speaker 04:
The commission, as far as I can read the record, was not attending to cost.

[00:31:25] Speaker 04:
They were attending to quantity.

[00:31:27] Speaker 04:
well it quantity as as a sort of proxy for cost the commission's talking about total cost in paragraph thirty two see that doesn't make sense except in the sense that the quantity you're talking about is very limited but the rate within is incredibly high it gets worse the more the higher the quantity that's true but you still have to figure out whatever the quantity is you still have to figure out whether the rate

[00:31:56] Speaker 04:
attributable to it is reasonable, right?

[00:32:00] Speaker 04:
And they said, indeed, they were going to do that.

[00:32:03] Speaker 01:
And the same question pertains there.

[00:32:05] Speaker 01:
When they did that, when they reviewed the actual bids accepted, what was the standard that should assure us and assure the public that there was actual scrutiny of anything, that you had a tool that you were using to say, well, here we were with a special purchase.

[00:32:25] Speaker 01:
And ISO New England said, you know, we may opt to purchase less than the full amount if costs are very high.

[00:32:32] Speaker 01:
And then you're looking at it after the fact and you're saying, well, did they make the right judgment there?

[00:32:37] Speaker 01:
You know, did they draw the line between high and very high in a place that is just and reasonable?

[00:32:43] Speaker 01:
What tool, what standard did the commission use there?

[00:32:47] Speaker 05:
But I don't think there's a tool that it set up.

[00:32:50] Speaker 05:
I think it looked at the graph with the breakpoint.

[00:32:53] Speaker 05:
It looked at the number of megawatt hours.

[00:32:56] Speaker 05:
The ISO didn't buy the full amount, which would have been much more expensive.

[00:33:01] Speaker 05:
But that $31 breakpoint, it justified.

[00:33:04] Speaker 05:
And again, $31 was only the top.

[00:33:07] Speaker 05:
Most of the bids were far lower than that.

[00:33:09] Speaker 05:
But it justified that breakpoint by looking, if we went a little lower,

[00:33:13] Speaker 05:
you spend a little bit less and lose a lot more reliability.

[00:33:17] Speaker 05:
If you go a little bit higher, you spend a lot more for a little bit of reliability.

[00:33:21] Speaker 05:
In addition, on the next page in the bid results, the ISO said that that level of megawatt hours, which was about 200, correlated with about when mid-season replenishment had happened in previous years.

[00:33:35] Speaker 05:
So there were multiple justifications for

[00:33:37] Speaker 05:
uh... buying that number of megawatt hours and i think the commission looked at it the total uh... after a couple of adjustments for generators that made mistakes was seventy five million dollars

[00:33:48] Speaker 05:
And because the bids mostly were at the lower end and didn't show some massive, some pattern of being especially high, I don't think there's, I don't think we know, we have the list of which generators got which amounts of money, but I don't think we have the information on which ones were in which regions.

[00:34:12] Speaker 05:
to suggest whether they had been bidding higher or not.

[00:34:16] Speaker 01:
On the question about reliability, I was actually a little bit confused by that in terms of geography.

[00:34:20] Speaker 01:
I know the record does refer to where different generators are located.

[00:34:23] Speaker 01:
But I thought one of the distinctive aspects of the power grid was precisely that it doesn't so much matter where you are.

[00:34:30] Speaker 01:
I guess it matters because the line goes down between Nantucket and West Lowell.

[00:34:36] Speaker 01:
And so you get cut off.

[00:34:38] Speaker 05:
And I know there's some discussion of that in the record, and I don't remember what it is now, that when they were looking for some geographic diversity, they were kind of, I think they were assuming a worst case scenario where a lot of things are

[00:34:50] Speaker 05:
are going wrong, I think.

[00:34:52] Speaker 01:
So what's typically an integrated grid becomes... Constrained in places.

[00:34:57] Speaker 01:
Broken sub-pieces for a period of time, and that's why it's good to have... Possibly.

[00:35:01] Speaker 01:
...generation going on at diverse locations.

[00:35:05] Speaker 05:
I think that's right.

[00:35:06] Speaker 05:
Now the commission, the ISO did not, ultimately, because the bids broke out in that graph a certain way, it did not end up substituting a more expensive, more reliable resource for

[00:35:17] Speaker 05:
for a less expensive one because geographically they had broken out the way they needed to so that there were substantial resources in the eastern Massachusetts and Connecticut areas which are the heavier load pockets.

[00:35:30] Speaker 05:
I do want to point out also that there were, although there were 20 generators that participated in the program, the selected bids were actually 56 generating assets as well as three demand response.

[00:35:42] Speaker 05:
So it was not the hypothetical of three, for example, just to... Well, maybe the last question, my last question.

[00:35:52] Speaker 02:
Yeah, we were talking about Mobile Sierra a little while ago.

[00:35:55] Speaker 02:
Do you know why the Commission didn't simply do what we said it could do in New England, power generator, and treat this capacity auction and apply Mobile Sierra as contract rates?

[00:36:09] Speaker 05:
I don't know.

[00:36:10] Speaker 05:
That's getting exceeding my knowledge on this, unfortunately.

[00:36:16] Speaker 05:
I do know that in the future, one reason this was an interim process is that a few years out, New England is introducing a capacity performance auction.

[00:36:29] Speaker 05:
I don't know how it relates to Mobile Sierra exactly, but it will attach

[00:36:36] Speaker 05:
I think different payments and also penalties for non-performance in, for instance, winter.

[00:36:42] Speaker 05:
So I know that that's why this was an interval program.

[00:36:46] Speaker 02:
OK, thank you.

[00:36:47] Speaker 05:
Don't need to hear about allocation then.

[00:36:49] Speaker 02:
We're OK with that.

[00:36:52] Speaker 02:
Let's see.

[00:36:52] Speaker 02:
Mr. Weissman, I think we used up all your time.

[00:36:55] Speaker 02:
So you can take two more minutes.

[00:36:57] Speaker 03:
I have very limited rebuttal.

[00:37:00] Speaker 03:
I just want to make one point.

[00:37:03] Speaker 03:
That Council was discussing the fact that the bids came in at $10 and $20 and $30.

[00:37:09] Speaker 03:
And at least my take on the commentary was a suggestion that those were all in a very low range as compared to other bids that were significantly higher.

[00:37:22] Speaker 03:
But it has to be remembered that

[00:37:24] Speaker 03:
These suppliers were being paid for capacity separate from this program.

[00:37:29] Speaker 03:
They were being paid for energy separate from this program.

[00:37:33] Speaker 03:
They were being paid for ancillary services separate from this program.

[00:37:37] Speaker 03:
Basically what they're being paid for here is to procure oil and

[00:37:42] Speaker 03:
So in that context, the difference between $10 per megawatt hour and $31 per megawatt hour is actually very significant, and it's in fact what drove this price up from an original cost estimate of $45 million max to almost $80 million.

[00:38:02] Speaker 01:
Can you break that down a little bit?

[00:38:04] Speaker 01:
I've been wondering about that.

[00:38:05] Speaker 01:
Just what is the, how does the program work and what are these payments accounting for?

[00:38:11] Speaker 01:
Like somebody's, so let's say it's a year where I've been a successful bidder and I've offered to provide this reliability service and it turns out to be warm and the ISO any doesn't need the service.

[00:38:27] Speaker 01:
Am I being paid anyway, and what am I being paid for if I'm not a dual fuel, I'm just an oil-based provider?

[00:38:38] Speaker 03:
Yes, my understanding is that you put in the bid, you were paid, and that was how the program was designed.

[00:38:49] Speaker 03:
What am I paid for?

[00:38:51] Speaker 03:
Whatever your bid was.

[00:38:53] Speaker 03:
whole thing, so they don't use it.

[00:38:55] Speaker 03:
Because remember, the way the program was designed, and this gets back to the allocation issue, the commission said to the load serving entities, well, you need to pass through those costs now.

[00:39:05] Speaker 03:
That's not your risk.

[00:39:06] Speaker 03:
Well, so the commission defined, here's the cost, $78.8 million.

[00:39:12] Speaker 03:
We're not saying that service is going to be provided or not be provided.

[00:39:15] Speaker 03:
It's up to you to now go collect that from your customer.

[00:39:19] Speaker 01:
I thought if they didn't need it, there was this provision about how the bidder has to resell it, and they're basically left with it, or store it.

[00:39:29] Speaker 03:
I apologize, I'm not familiar with that element.

[00:39:34] Speaker 03:
If that is part of the program, I'm not familiar with that.

[00:39:38] Speaker 03:
That's it.

[00:39:38] Speaker 03:
OK, thank you.

[00:39:40] Speaker 03:
Thank you very much.