[00:00:02] Speaker 01: Case number 14-1281, Oklahoma Gas and Electric Company Petitioner versus Federal Energy Regulatory Commission. [00:00:09] Speaker 01: Mr. Driver for the petitioner, Mr. Fulton for the respondent. [00:01:11] Speaker 04: May it please the Court, the question presented in this appeal is whether the government can disregard the fact that a valid contract is a contract when it decides whether or not it can modify that contract under Section 206 of the Federal Power Act. [00:01:31] Speaker 04: The basis of the tension here is the Mobile Sierra Doctrine, which is based on the role of private contracting in the energy industry, which was developed in contrast to the way in which these matters were handled under the Interstate Commerce Act. [00:01:48] Speaker 04: So there's a special role for private contracting within the Federal Power Act and Natural Gas Act scheme established by Congress. [00:01:56] Speaker 01: I thought there was a special rule for private contracting of rates. [00:02:02] Speaker 01: under. [00:02:02] Speaker 01: That's what Sierra involved. [00:02:04] Speaker 01: That's what every Supreme Court decision is involved. [00:02:07] Speaker 01: And that's every decision I've been able to find in this circuit is involved, rate setting. [00:02:13] Speaker 04: Your Honor, the reason that most of the cases that arise in this context relate to rates is that is the primary area of the government's authority here. [00:02:21] Speaker 04: And so if the government's area of primary authority must give way to private contracting, [00:02:27] Speaker 04: So, too, should the government's authority give way in areas that are removed from rates, or secondary to rates. [00:02:35] Speaker 01: Well, when you say primarily, is it, I couldn't, and you're much more expert in this area than I am, I could not find a case from the Supreme Court or this court that did not involve applying mobile CRO outside the context of rates, [00:02:50] Speaker 01: methodology for calculating rates, or the process and procedures for determining rates. [00:02:56] Speaker 01: But if I'm missing something, please point me to it. [00:02:59] Speaker 04: Well, Your Honor, the one case that comes to mind is a 2007 Wisconsin public power case in which the issue there was scheduling issues. [00:03:10] Speaker 04: It did... Schedule what? [00:03:12] Speaker 04: Your Honor, it would... [00:03:15] Speaker 04: my knowledge of that case is simplified enough. [00:03:18] Speaker 04: I'm sure that it relates to rates to some degree, right, that ultimately there's almost no case that would come, which would have jurisdiction in which either it didn't directly set or affect rates. [00:03:29] Speaker 03: And so... This is an unusual situation, right? [00:03:31] Speaker 03: The contract is among horizontal competitors. [00:03:37] Speaker 03: and seems like something that's, by granting a right of first refusal, restricting entry by future competitors, which seems unusual in terms of granting this protection that you're asking for to this kind of country. [00:03:56] Speaker 04: Your Honor, in fact, that same Wisconsin case that I just mentioned a moment ago from 2007, which I can refer to more specifically, perhaps at rebuttal, also addressed elements of the Midwest ISO transmission owners agreement and ultimately indicated that the respect for contracts that is sort of at the heart of the Mobile Sierra Doctrine also applied [00:04:26] Speaker 04: to that agreement related to how things should be handled generally in the Midwest ISO, including between horizontal entities. [00:04:34] Speaker 03: Mm-hmm. [00:04:34] Speaker 03: But, well, what about Judge Posner's opinion? [00:04:37] Speaker 03: What's wrong with his opinion? [00:04:41] Speaker 04: Well, Your Honor, with respect to Judge Posner's decision in the Midwest transmission owner's case, [00:04:48] Speaker 04: The one point of difference, I hope, is that that case did not actually discuss at any length the Morgan Stanley decision. [00:04:57] Speaker 04: It ultimately, I believe, shorthanded the Mobile Sierra doctrine by relying specifically on the Sierra case. [00:05:06] Speaker 04: But there's important elements of the doctrine that were discussed and described in Morgan Stanley. [00:05:10] Speaker 04: It's really the modern understanding of the doctrine that is really what [00:05:16] Speaker 04: what FERC is reacting to at this stage, you know, in issuing a rule in 2011, it was really dealing with the Morgan Stanley case and the Energy Power Marketing case. [00:05:27] Speaker 04: And those cases have an understanding of the doctrine that is not matched by sort of the relatively simple discussion, I think, of Sierra from the Seventh Circuit's decision. [00:05:40] Speaker 03: Well, the theory here is, or the theory of the doctrine, correct me if I'm wrong, is that if you agree by contract to a rate for it can't come in and upset the contract, because that would be, because both sides bargain at arm's length, customer, supplier, what have you, and for it can't come in. [00:05:59] Speaker 04: But when you have... Well, Your Honor, but it's just a presumption, meaning that what happens is that if it's a contract... Yeah, no, no, it's just, I was shorthanding, it'd be right. [00:06:07] Speaker 03: Understood. [00:06:07] Speaker 03: And there's the public interest override. [00:06:11] Speaker 03: But in protecting settled expectations, it just seems that that goal is not an issue in a situation like this. [00:06:21] Speaker 03: We were talking about, and again, correct me if I'm wrong, but for the most part, horizontal players in the same market agreeing about, well, if someone else wants to enter and do what we're doing, we're going to grant ourselves the right of first refusal. [00:06:36] Speaker 04: Well, first of all, on the facts here with respect to the SPP membership agreement, it was a negotiation between not just transmission owners, but also transmission customers who were going to pay the rates at the end of this process. [00:06:49] Speaker 04: It was a membership agreement, not an ownership agreement, meaning it defined the obligations of not only the transmission-owning members of the Southwest Power Pool, but also of non-transmission-owning members. [00:07:02] Speaker 04: And in addition to that, those negotiations included the Southwest Power Pool itself, which is the entity to whom the membership agreement was going to be transferring control over the businesses of the transmission owners. [00:07:16] Speaker 04: And I just sort of want to go back to where this originated, which is that this was a world in which each of the transmission owners was a monopolist. [00:07:24] Speaker 04: at that point in terms of providing service in its own local area. [00:07:28] Speaker 04: And what that agreement did was establish a contractual basis for regionalizing that service and handing control of their facilities to an independent entity that would arrange for transmission service. [00:07:41] Speaker 04: handle planning, and instruct the owners to construct facilities. [00:07:46] Speaker 04: And so although there were horizontal business interests as part of that, there were also vertical business interests. [00:07:54] Speaker 04: And I would argue both vertically in terms of the customers, but also at some level vertically in terms of the SPP. [00:08:00] Speaker 01: Would you agree, at least, that the mobile Sierra decision from the Supreme Court and the decisions that's issued since then, Morgan Stanley, [00:08:12] Speaker 01: do not, by their terms, answer this question as to whether this presumption should apply to this type of contract? [00:08:19] Speaker 04: I don't think that there's a single sentence out of one of those orders where we all knew the result here. [00:08:24] Speaker 04: I don't know that we'd be here if it did. [00:08:25] Speaker 04: And so there is phrasing that's picked up by the government in their orders. [00:08:32] Speaker 04: But there's certainly no intent in the Morgan Stanley order to develop a whole new test that is a predicate [00:08:40] Speaker 01: I'll just put aside the test. [00:08:41] Speaker 01: You have, the statute talks about rate setting and different ways of setting rates, either through tariff or contract. [00:08:48] Speaker 01: And on the assumption, I think Mobile Sierra was talking about on the assumption that when people are, [00:08:53] Speaker 01: People parties are negotiating rates themselves. [00:08:56] Speaker 01: They'll be very self-interested on both sides in doing that. [00:09:01] Speaker 01: But that this is, as Judge Kavanaugh has said, an entirely different type of contractual arrangement. [00:09:09] Speaker 01: And you have good arguments for why there should be a similar assumption there, and they have their arguments for why there shouldn't be. [00:09:18] Speaker 01: But my understanding of your position was that mobiles here are controlled. [00:09:22] Speaker 04: Your Honor, the way I would interpret Morgan Stanley is that any contract that's a valid contract, one that's not the result of fraud, duress, or unlawful market activity, would be a contract where you would start the analysis with the presumption in place. [00:09:37] Speaker 01: How does Morgan Stanley support that extension to all contracts in the energy sector as opposed to rates? [00:09:45] Speaker 01: Is there stuff in Morgan Stanley that says this shouldn't be limited to rates? [00:09:49] Speaker 01: This is a general principle of contracts in the energy area. [00:09:53] Speaker 04: Well, there is language in Morgan Stanley that talks about the policy role of the significance of the preservation of contract stability, which is not stated in a way that says there's an important goal in the stability of bilateral contracts or any particular form of contract. [00:10:15] Speaker 04: It's the fact that the regulatory regime is layered over top of what already exists, which is the ability of companies to enter into contracts. [00:10:23] Speaker 04: And there's nothing. [00:10:24] Speaker 04: And so there's policies that relate to the significance of contract stability, which come out of cases like Verizon and Permian Basin and Mobile itself are talking about the role of contracts independent of the regulatory overlay. [00:10:41] Speaker 03: How does the public interest analysis work? [00:10:47] Speaker 03: So I think part of your argument is they effectively did the public interest analysis [00:10:52] Speaker 03: And how should it work if we were in that box? [00:10:55] Speaker 03: And I don't need you to go into great detail. [00:10:57] Speaker 03: What do you think the basics of the public interest analysis would be? [00:11:01] Speaker 04: You know, in my mind, the distinction that's always made is showing about how the contract affects third parties, as opposed to necessarily the parties to the contract. [00:11:12] Speaker 04: So if you can, if you identify that, and the standard is it shares the arms. [00:11:17] Speaker 03: The argument would be that people who want to come in and compete or build, as I understand it, can't do so if the right of first refusal is exercised. [00:11:29] Speaker 04: Well, one point I want to make is that, of course, the first analysis is of that single sentence or single provision of this contract. [00:11:37] Speaker 04: And so one of the errors in the first order that I've tried to highlight for the court is that they've taken an integrated agreement that does multiple things. [00:11:48] Speaker 04: And I would argue pro-competitively. [00:11:51] Speaker 04: and snatches out one provision of that contract and says, this provision has some inherent quality that we don't like about it. [00:12:00] Speaker 04: And so this provision doesn't need the mobile Sierra doctrine. [00:12:02] Speaker 04: In fact, your whole agreement doesn't get the mobile Sierra doctrine because that one sentence is in your contract. [00:12:07] Speaker 03: But you're, and so one question is- Right, so in the public interest, you'd say even if one provision in isolation looks arguably any competitive, look at the whole thing because the whole thing together is, [00:12:19] Speaker 03: pro-competitive. [00:12:20] Speaker 04: I would, Your Honor. [00:12:21] Speaker 04: And then, but then ultimately, regardless of whether that's an entire contract style or not. [00:12:27] Speaker 02: Is that analysis consistent with Morgan Stanley? [00:12:34] Speaker 02: Didn't the Supreme Court just hone in on one particular [00:12:38] Speaker 02: provision of a contract in Morgan Stanley, and in fact, didn't they like refer that to the mobile Sierra provision or something of that nature, is Justice Ginsburg's opinion? [00:12:52] Speaker 04: I think that there are likely are cases that look at just the rate as sort of the last defining characteristic in a bilateral agreement, as you've got all these terms, but the fight ultimately settles in on the rate. [00:13:05] Speaker 04: And I think partly it depends on what FERC itself was modifying. [00:13:09] Speaker 04: And then how many challenges to what the did raise here, of course, they're not taking any actions related to rates. [00:13:16] Speaker 04: In fact, this contract doesn't set rates. [00:13:19] Speaker 04: It's a membership agreement that allows the transmission owners and the other members of SPP to coordinate. [00:13:26] Speaker 04: And it ultimately has some effect on rates. [00:13:29] Speaker 04: And so here, you have an agreement that doesn't even have a rate term. [00:13:33] Speaker 04: in which the government decided that one particular part of that agreement needs to be revised. [00:13:43] Speaker 03: Okay. [00:13:43] Speaker 03: Thank you. [00:13:44] Speaker 03: We'll give you the time for rebuttal. [00:13:45] Speaker 03: Thank you. [00:14:00] Speaker 00: Ross Fulton here on behalf of the commission. [00:14:02] Speaker 00: Your honors, and may it please the court, the commission here reasonably found that the mobile CR presumption does not apply to the membership agreement because the agreement lacks the characteristics necessary to justify the presumption of just and reasonable rates. [00:14:18] Speaker 00: To reach that decision, the commission had to decide two things. [00:14:21] Speaker 00: One, as a matter of law, what type of agreements are subject to the mobile CR presumption? [00:14:27] Speaker 00: And two, is the membership agreement that type of agreement? [00:14:31] Speaker 00: To take the first issue, all agreements affecting rates must be just and reasonable. [00:14:37] Speaker 00: And as the Supreme Court held in Morgan Stanley and this court has found as well, Mobile Sierra is just an example or a subset of just and reasonable rates. [00:14:46] Speaker 00: It's a method by which the commission can presume that a contract is just and reasonable. [00:14:54] Speaker 00: So to have that presumption, however, the Supreme Court has found that certain premises must be in place to provide the assurances necessary for that presumption to exist. [00:15:05] Speaker 01: Why wasn't your obvious basis for saying that Mobile Sierra doesn't control, that this doesn't involve [00:15:11] Speaker 01: rates, methodology for rates, or the procedures for setting rates? [00:15:16] Speaker 01: That seems much easier than the complicated approach you've taken here and kind of find yourselves bumping into yourself on whether it's a whole contract or a single provision or what it seems. [00:15:26] Speaker 00: You are correct, Judge Millett, that all of the case law regarding Mobile Sierra has involved contract rates. [00:15:33] Speaker 00: And it's for this reason, I think, that this Court and many public utilities expressed doubt that Mobile Sierra should apply to a regional transmission organization agreement that affects all market participants, as Judge Kavanaugh pointed out. [00:15:47] Speaker 00: not adverse parties reaching a contract for rates. [00:15:52] Speaker 00: This is horizontal competitors that are contracting together to prevent future participants from entering the marketplace. [00:15:58] Speaker 00: And I believe that's why Judge Posner in his recent decision went back to Sierra because [00:16:04] Speaker 00: Again, the court was looking at what was the premise? [00:16:08] Speaker 00: Why is this doctrine exists in the first place? [00:16:11] Speaker 00: And this year decision, again, was based on having a bilateral power sale contract between two adverse parties, not what Judge Poser referred to as a cartel to effectively prevent other competitors from entering the market. [00:16:27] Speaker 03: To Judge Millett's question, [00:16:29] Speaker 03: I agree with her question. [00:16:31] Speaker 03: First of all, that was my thought as well. [00:16:35] Speaker 03: But the second argument you have, the arm's-length argument, does seem to have some overlap with the whole rates point that she and Judge Mallett's question raised. [00:16:47] Speaker 03: So if you had said rates and arm's length, what is not completely overlapping between those two theories, if you understand the question? [00:16:56] Speaker 00: I do, Your Honor. [00:16:57] Speaker 00: And you're correct. [00:16:58] Speaker 00: The Commission did not just decide on rates, even though that has been where Mooshear has been applied. [00:17:03] Speaker 00: And I think [00:17:06] Speaker 00: I think that there is significant overlap. [00:17:09] Speaker 00: I think that rates are sort of the, again, the paradigm example of where Mobile Sierra has been applied. [00:17:15] Speaker 00: And the reason it's been applied in that great context is because you have these arms-like negotiations. [00:17:21] Speaker 00: As the commission discusses in its re-hearing order, page 98, the reason that we can presume these sort of paradigm Mobile Sierra contracts to be just and reasonable is because [00:17:32] Speaker 00: negotiations between adverse parties are economically efficient. [00:17:36] Speaker 00: They're going to result in lower costs because you have parties trying to reach what's in their best interest. [00:17:41] Speaker 00: But here, as the court has already found in South Carolina, by definition, rights of first refusal are reached in a common interest, which prevent competition and thus raise costs. [00:17:53] Speaker 03: So is the commission preserving the possibility that the presumption could apply to contracts dealing with things other than rates? [00:18:01] Speaker 00: I'm not to speak for the Commission, Your Honor, but I believe the Commission is, and part of the reason is the Commission in certain instances has found that although Mobile Sierra is not required as a matter of law, the Commission has the discretion to apply Mobile Sierra. [00:18:18] Speaker 00: In fact, it just did so in [00:18:21] Speaker 00: the Ninth Circuit California v. FERC case that we pointed out in supplemental authority. [00:18:27] Speaker 00: And in fact, there's a subsequent case that's pending before this court involving the New England Regional Transmission Organization, where the commission said, we don't have to apply Mobile Zero, we will out of our discretion, but the public interest argues against Mobile Zero. [00:18:43] Speaker 03: So when I first read everything, I thought that what FERC was really doing was the public interest analysis. [00:18:49] Speaker 03: and but you didn't go through the hoops. [00:18:54] Speaker 03: Now I understand your arms length arguments that don't assume I'm reaching a conclusion one way or another, but what's, doesn't it seem like what's happened here is there's been a contract negotiated among the parties and FERC saying that contract is against the public interest because for the reason you said and I asked earlier, it's a horizontal agreement to restrict competition and therefore it's against the public interest. [00:19:18] Speaker 03: And why didn't it go through that hoop? [00:19:20] Speaker 03: Or why isn't that a better way to go? [00:19:22] Speaker 03: Or why shouldn't, to ask the third question, why shouldn't we remand for FERC to go, the commission to go through that analysis? [00:19:29] Speaker 00: Sure. [00:19:29] Speaker 00: Well, let me see if I can take those one at a time. [00:19:33] Speaker 00: I do think that there is obviously some overlap between whether the mobile CR presumption applies in the first place and what is the public interest. [00:19:41] Speaker 00: Because again, to go back to sort of the base, it's all about what constitutes just and reasonable rates. [00:19:47] Speaker 00: And so just and reasonable rates are in themselves in the public interest. [00:19:52] Speaker 00: And so with Mobile Sierra contracts, again, the commission can presume that they are just and reasonable because there are indicia that exist that show that that contract is in the public interest. [00:20:03] Speaker 00: And one of those is arm's length negotiations. [00:20:06] Speaker 00: With regards to why didn't the commission go through a public interest finding here, again, the commission found that it wasn't necessary to do so because mobile CR did not apply. [00:20:19] Speaker 00: Again, the court will be faced with that issue in a subsequent decision that's pending before this court right now, where the commission found that it was not. [00:20:28] Speaker 01: Because I don't understand what you need to preserve. [00:20:30] Speaker 01: It's been recognized that you can, as a matter of your own policy, determine [00:20:35] Speaker 01: if you do it through appropriate reason decision making, that even when we're outside the realm of Supreme Court controlling precedent on Mobile Sierra, we think it makes good sense under this statute to apply it to different contexts. [00:20:49] Speaker 01: You don't need to preserve anything about what the Supreme Court was talking about in Mobile Sierra as long as it's agreed we're not in that environment, we're not in the rate setting environment. [00:21:01] Speaker 01: We'll make a public interest determination on whether we choose or not choose to apply that policy, a similar policy, as a matter of discretion, as the cases arise. [00:21:11] Speaker 00: If I understand you correctly, Your Honor, I agree that the Commission does have discretion to determine when Moble's here applies, obviously, within the precedence set by the Supreme Court. [00:21:21] Speaker 01: I'm sorry, maybe I wasn't clear. [00:21:22] Speaker 01: It's not a question of saying Mobile Sierra applies, it's that the commission comes up with its own Mobile Sierra Prime theory of contracts for other contexts and it's not, it just seemed like both sides had this very tortured, lengthy briefing on whether the Supreme Court meant this to apply here or not when it seems the easier answer is the Supreme Court didn't decide that and it's up to the commission if it makes the appropriate [00:21:50] Speaker 01: reason decision-making to say whether it wants similar principles to apply to other types of contracts. [00:21:56] Speaker 00: I agree, your honor. [00:21:57] Speaker 00: That's a good theory for you. [00:21:58] Speaker 00: I agree. [00:22:01] Speaker 00: Just say yes. [00:22:03] Speaker 00: Yes, you are correct, your honor. [00:22:04] Speaker 00: The commission, basically working within what precedent exists out there, tried to engage in reasoned decision making to determine these are the type of contracts to which Mobile Sierra presumption should apply. [00:22:16] Speaker 03: Now, the other side would say, but the logic of Mobile Sierra applies to all contracts in this [00:22:22] Speaker 03: field and therefore you have to go through the public interest too. [00:22:26] Speaker 03: So I guess that's the question we ultimately have to decide is whether the logic does go beyond the rate setting, the rate setting or the rate contracts. [00:22:36] Speaker 00: That's correct Your Honor. [00:22:37] Speaker 00: I think that this court obviously has to decide what the Supreme Court met in Morgan Stanley. [00:22:42] Speaker 00: I think that the [00:22:45] Speaker 00: And the harm and the problems from that [00:23:01] Speaker 00: The harm and the problems from that are, well, it's inconsistent with the presumption that all contracts result in just and reasonable rates. [00:23:10] Speaker 00: It's inconsistent? [00:23:11] Speaker 00: It's inconsistent because there's no, as Morgan Stanley pointed out, there's certain instances where a contract should not be presumed to be just and reasonable. [00:23:21] Speaker 00: where the premises of arm's-length individual negotiations don't exist. [00:23:25] Speaker 00: You have the public interest backstop. [00:23:27] Speaker 03: That's – so their theory, as I understand it, is contracts are different and the commission should respect contracts unless it concludes that the contract's not in the public interest. [00:23:41] Speaker 03: Nice, simple, clear rule. [00:23:44] Speaker 03: What's wrong with that? [00:23:45] Speaker 00: The problem is that the public interest standard flips the burden and puts the burden on the commission to demonstrate... You don't doubt you could meet it here, do you? [00:23:55] Speaker 00: I do not doubt that the commission can meet it. [00:23:57] Speaker 00: In fact, the commission has found in the Amero case, it's pending before this court, that this type of agreement is not in the public interest for right of first refusal. [00:24:07] Speaker 00: That being said, there's obviously [00:24:09] Speaker 00: cases down the road that may be closer calls, it's obviously hard to predict. [00:24:15] Speaker 00: But by flipping the burden, it's allowing. [00:24:19] Speaker 03: Is that all that's really at stake here is flipping the burden? [00:24:22] Speaker 03: Maybe it is. [00:24:23] Speaker 03: And that's not a minor deal. [00:24:25] Speaker 03: I get that. [00:24:25] Speaker 03: But if we do it your way, you don't have the burden to show just and reasonable if we do it the other way. [00:24:38] Speaker 03: you'd have the burden to ship not in the public interest. [00:24:41] Speaker 00: I'd say at an even bigger level it's about how much authority does the Commission have to determine what are just and reasonable rates as opposed to how much must be presumed to be just and reasonable and have to defer to private contracts that obviously private contracts can go to the point of [00:25:01] Speaker 00: precluding competitors from competing. [00:25:05] Speaker 00: And so it's, again, how much discretion and authority does the agency have to be able to determine what's in the public's, what's just and reasonable and in the public's interest in the first instance. [00:25:18] Speaker 03: So one way to interpret what you're saying is [00:25:22] Speaker 03: Don't extend the presumption, the mobile Sierra presumption, to be on the rates because those may not be in the public interest. [00:25:32] Speaker 03: That's correct, Your Honor. [00:25:33] Speaker 03: And don't put the burden on us to show that, but put the burden on them to demonstrate that those contracts outside the rates context are just and reasonable. [00:25:41] Speaker 00: That's correct, Your Honor. [00:25:43] Speaker 00: Yes. [00:25:44] Speaker 00: And I would also point out, I know that we've discussed arm's length negotiations aspect of this, but the commission also had a separate basis for finding that mobile CR should not apply, which is that this was a generally applicable contract. [00:26:02] Speaker 00: The vast majority of the members after this agreement was filed had to accept the entire agreement as is. [00:26:08] Speaker 00: If you go to the Southwest Powerful website, there's a signature page that any party can sign. [00:26:14] Speaker 00: To alter the agreement, it requires the agreement of all 90 members. [00:26:20] Speaker 00: I think it's pretty self-evident that the incumbent transmission owners are not going to agree to alter their rights of first refusal. [00:26:27] Speaker 00: It would certainly not be in their interest to do so. [00:26:29] Speaker 00: And so the commission had both the fact that rights of first refusal are not results in arms length negotiations, as well as the fact that this was a generally applicable form contract. [00:26:41] Speaker 01: Can you answer one question for me? [00:26:42] Speaker 01: My understanding is that [00:26:46] Speaker 01: Some years past, the commission really supported and wanted transmission companies to enter into these group, these organizations, these system operations like this. [00:26:57] Speaker 01: So to come together, these horizontal competitors, to come together and consolidate their operations. [00:27:04] Speaker 01: And in doing so, they came forward with these agreements, and those agreements were all filed with the commission, correct? [00:27:11] Speaker 00: That's correct, Your Honor, yes. [00:27:13] Speaker 01: Did the Commission bless them at that time in the public interest? [00:27:17] Speaker 00: The Commission in certain instances has found, for instance here, it did find the membership agreement just and reasonable when it was filed. [00:27:27] Speaker 01: So now, is the problem that they just didn't look that closely? [00:27:33] Speaker 01: I mean, so now we're told that at least one part of this, a lot of these contracts have these provisions, and those things are not just and reasonable and against the public interest. [00:27:40] Speaker 01: I'm just trying to figure out what to do with that prior determination. [00:27:43] Speaker 00: Sure. [00:27:43] Speaker 00: I think there's two issues. [00:27:45] Speaker 00: As a matter of law, Morgan Stanley has said, just because a commission at one point finds a contract just and reasonable does not mean that it's already made a mobile CR determination. [00:27:54] Speaker 00: I think as a practical matter, the reality is, and Judge Posner discussed this in his decision, [00:28:00] Speaker 00: The fact is that the electricity market has changed, and Order 1000 was a big part of that change. [00:28:06] Speaker 00: And the Commission has found – this agreement was entered in 1999. [00:28:10] Speaker 00: In the last five to 10 years, the Commission has found that competition is now possible in these income and transmission territories. [00:28:18] Speaker 00: So we're once – our first refusal was [00:28:21] Speaker 00: that this competition is possible. [00:28:24] Speaker 00: And as Judge Poser puts it, it's a non-incumbent could come in with a great plan to, you know, make sure that it's not just a non-incumbent. [00:28:36] Speaker 00: It's a non-incumbent [00:28:38] Speaker 00: increased competition which would lower cost for consumers and the incumbent can say thank you very much, we'll take that plan and we'll build it and then competition does not exist. [00:28:49] Speaker 01: I get that, but then you have these folks who enter into contractual agreements with trading one thing, horse trading and we get this and we'll agree to do that as long as we get this and then a decade or two after the fact, after FERC already said [00:29:05] Speaker 01: Good to go. [00:29:06] Speaker 01: From our end, FERC comes in and says, actually, we're just going to take one of those things out of your contract bargain. [00:29:12] Speaker 01: What are they supposed to do about the loss of that aspect of their contract bargain? [00:29:17] Speaker 00: Well, I think to take a step back, Your Honor, in South Carolina, this court upheld the commission having substantial evidence that rights of first refusal should be removed because there's a common interest in preventing competition, which in turn creates market inefficiency and increased rates. [00:29:35] Speaker 00: At that time, the commission said, come back to us on compliance filing and offer any evidence that you would like that these are somehow, nonetheless, the mobile Sierra applies. [00:29:48] Speaker 00: And to prove the mobile Sierra applies, [00:29:51] Speaker 00: they have to show, again, that these were arm's-length negotiations. [00:29:55] Speaker 00: And there's the petitioners and interveners here at Ample opportunity to show, no, we had arm's-length negotiations. [00:30:03] Speaker 00: In other words, this agreement was actually reached with non-incumbent transmission providers that wanted to increase competition in these regions. [00:30:10] Speaker 01: No, I understand that. [00:30:12] Speaker 01: Even if Mobile Sierra doesn't apply, are there other provisions that protect [00:30:17] Speaker 01: Are there other principles that protect the bargain that these folks talk about, or is that just the nature of bargaining in a highly regulated area that things can change? [00:30:26] Speaker 00: Absolutely, Your Honor. [00:30:27] Speaker 00: It's still a valid contract. [00:30:29] Speaker 00: It's still subject to adjust and reasonable determination. [00:30:33] Speaker 00: So this is not abrogating a contract or changing the membership agreement. [00:30:39] Speaker 00: It's simply that this provision is not just and reasonable. [00:30:42] Speaker 00: And so it needs to be removed. [00:30:45] Speaker 03: But it was multiple parties bargaining at the time. [00:30:49] Speaker 03: And this was not the only provision. [00:30:51] Speaker 03: That's the point that your opposing counsel makes. [00:30:54] Speaker 03: And this was all, as these multiple party negotiations would be, a number of different issues that people are giving and taking. [00:31:01] Speaker 03: And part of that was this provision, which protects their contract rights. [00:31:06] Speaker 00: Well, as Judge Wilkins pointed out earlier, Your Honor, the NRG, for instance, looked at just one provision in terms of whether mobile CR should apply. [00:31:16] Speaker 00: So it's not, it's... No, but just on my broader point, isn't there in kind of a public fairness, public interest [00:31:25] Speaker 03: kind of analysis, this wasn't the only provision that was negotiated. [00:31:29] Speaker 03: There were lots of provisions. [00:31:31] Speaker 03: And so to the point, yeah, this is one anti-competitive provision from your perspective, but it's within a overall agreement that, to Judge Millett's point, served a broader purpose and was pro-competitive. [00:31:43] Speaker 03: And why should we pull that one thread out, therefore? [00:31:47] Speaker 03: And again, the at least without you showing the public interest, the burden being on you to show the public interest. [00:31:53] Speaker 00: Again, at the administrative level, your honor, the petitioners interveners had ample opportunity to they could have pointed out, but we gave up X, Y and Z to to preserve our right of first refusal. [00:32:06] Speaker 00: That type of evidence is not in the record. [00:32:08] Speaker 00: And I think there's again sort of two layers. [00:32:12] Speaker 03: Just obvious, though. [00:32:13] Speaker 03: I mean, that's obvious from the nature of a [00:32:15] Speaker 03: large agreement involving all sorts of parties with different interests? [00:32:19] Speaker 00: I suppose it depends on again whether there were any parties to the membership agreement that had the contrary interest of wanting to increase competition in these areas where the incumbents if there wasn't they may have horse traded on separate issues but they would have been fine saying [00:32:37] Speaker 00: No, here you go. [00:32:39] Speaker 00: We'll have at it. [00:32:39] Speaker 00: And as the commission found, for instance, SPP isn't a adverse party itself. [00:32:45] Speaker 00: So it by definition can't bargain. [00:32:48] Speaker 00: And I think it's sort of the bigger point. [00:32:50] Speaker 00: Again, there's sort of the two issues of as a matter of law is. [00:32:54] Speaker 01: I thought they said customers were also part of this agreement. [00:32:58] Speaker 00: The initial task force members list, the petitioners and interveners did not ever introduce in the record who was actually a member of this task force that negotiated it. [00:33:10] Speaker 00: Now, as it stands today, there are 90 members, and there presumably are customers involved in that. [00:33:16] Speaker 00: However, that runs into then the problem of [00:33:19] Speaker 00: Once this agreement was filed with the Commission, to join the Southwest Power Pool, you just have to accept the agreement. [00:33:26] Speaker 00: It's as a practical matter impossible for them to negotiate. [00:33:28] Speaker 01: But at the time it was negotiated, were customers there too? [00:33:32] Speaker 00: Again, there's not evidence in the record of who precisely were these task members. [00:33:41] Speaker 01: Other than the parties to the agreement weren't listed when it was first filed? [00:33:46] Speaker 00: The commission did not make any finding about that, Your Honor. [00:33:51] Speaker 00: The petitioners in their request for a hearing stated that there were non-transmission owners. [00:33:58] Speaker 00: Again, the commission was working from the baseline in order of 1,000 that these were not just unreasonable, but feel free to present evidence to us on compliance that nonetheless, mobile CR should apply. [00:34:10] Speaker 00: So as a practical matter, I would expect [00:34:13] Speaker 00: parties that were very interested in their right of first refusal to say, no, look, here, we have arms-length negotiations over this provision. [00:34:21] Speaker 00: And also, I should say, in South Carolina, where this evidence is difficult, and it's obviously empirically difficult to go back in time and see precisely what those parties were thinking, this court held that the commission can rely on principles of economic theory, basically competition theory. [00:34:36] Speaker 00: And that's why the court in South Carolina upheld the finding that the right of first refusal was a common, occlusive agreement to prevent competition. [00:34:44] Speaker 00: And that same basic principles apply here for why the right of first refusal. [00:34:49] Speaker 01: I guess it just seems odd to say you're going to argue you're going to apply these economic principles on the assumption that there was actually no arms-like negotiating, when in fact, if there were customers there, wouldn't that change your whole image of whether there was arms-like negotiations? [00:35:07] Speaker 00: I suppose it would depend on who the customers were. [00:35:10] Speaker 00: Again, this would be a second order issue of once we agree as a matter of law that arms-like negotiations need to exist for the mobile Sierra presumption to apply, then as applied specifically to this membership agreement, were there arms-like negotiations? [00:35:26] Speaker 01: It sounds like another reason to say mobile Sierra is confined to rates and then you don't have to do this. [00:35:31] Speaker 00: Yes, Your Honor, as I said, the paradigm example is... I didn't think there were any purchasers in the original agreement. [00:35:41] Speaker 00: Again, there's no evidence that there were purchasers, you're correct, Your Honor. [00:35:46] Speaker 00: Well, that's not exactly what I said, but yeah. [00:35:50] Speaker 03: I'm sorry if I repeated myself nicely. [00:35:53] Speaker 00: I apologize if I... No, that's fine. [00:35:56] Speaker 00: Yes, and again, I think that the... [00:35:59] Speaker 00: If there are consumers or purchases after the initial agreement was reached, then it's a separate issue. [00:36:06] Speaker 00: Thank you very much for your time. [00:36:11] Speaker 03: Two minutes for a bottle. [00:36:14] Speaker 04: I don't want to read them out, but at the joint appendix at page [00:36:22] Speaker 04: 809, footnote 5 on that page is the list of the people on that task force, which include, it's hard to tell when you don't know who they are, but there are entities on this that are known as transmission dependent utilities. [00:36:34] Speaker 04: I'm sorry, it's 809 of the joint appendix. [00:36:37] Speaker 01: Was the task force the same as members, parties to the agreement? [00:36:42] Speaker 04: Your honor, these are the parties that negotiated the terms of the agreement. [00:36:47] Speaker 04: I believe that each member then signed a separate page. [00:36:54] Speaker 04: version that is attached in the joint appendix, I think, probably has primarily transmission owner signature pages. [00:37:02] Speaker 04: But these are the people that negotiated the agreement. [00:37:05] Speaker 04: And in addition to that, it was ultimately approved by the SPP board, which itself is divided between transmission owner interest, customer interests, and additional grouping there. [00:37:16] Speaker 04: But this is the evidence in the record as to who negotiated the agreement as part of this task force. [00:37:21] Speaker 04: So the record is not silent on that point. [00:37:24] Speaker 04: Another point that the record is not silent on is that the Southwest Power Pool itself in its initial compliance filing submitted information saying that the membership agreement is in the public interest and benefits the public interest. [00:37:36] Speaker 04: And paragraph 108 of the rehearing order, which is joint appendix, page 723, the government decided that because we found that the presumption does not apply, it is not necessary to consider SBP's arguments and evidence regarding benefits to the public interest. [00:37:55] Speaker 04: the only evidence in the record on public interest is submitted in support of the agreement. [00:38:00] Speaker 04: And because they didn't have to apply the presumption, they didn't consider it. [00:38:03] Speaker 04: And so it's not, in fact, this case that they did a light-handed version of a public interest test at the front end. [00:38:10] Speaker 04: Instead, they looked at different factors in order to make their determination. [00:38:13] Speaker 03: And finally... Explain that to me, because I'm stuck on that. [00:38:17] Speaker 03: They... [00:38:20] Speaker 03: They conclude that the burdens on you, in essence, to show that this right of first refusal provision is just and reasonable. [00:38:30] Speaker 03: And you say the burden should be on them to show that the right of first refusal provision is reasonable. [00:38:37] Speaker 03: unjust and unreasonable, or not in the public interest. [00:38:40] Speaker 04: In every instance, the burden was on the government here, because it was under Section 206 of the Federal Power Act. [00:38:45] Speaker 04: The question was whether you apply the ordinary, just and reasonable standard, or the public interest version of the just and reasonable standard. [00:38:53] Speaker 03: Okay, let me pause on that. [00:38:54] Speaker 03: In every instance, the burdens on them, and distinguish those two things again, the burden on them, the question is whether A or B, what were the A and B? [00:39:02] Speaker 04: I think that the A and B are the [00:39:05] Speaker 04: Yeah, Morgan Stanley warned us not to call this a standard of review, but it's the standard you apply to assess the evidence, right? [00:39:13] Speaker 04: It's the ordinary standard or the public interest standard, which focuses on harm to third parties. [00:39:18] Speaker 03: So they have the burden of showing it's unjust and unreasonable, or they have the burden of showing [00:39:25] Speaker 03: that it's not in the public interest. [00:39:26] Speaker 03: That's what the case comes down to, in your view. [00:39:30] Speaker 03: And then what's the difference between those two things? [00:39:32] Speaker 04: Well, that's the outcome, right, of this case. [00:39:34] Speaker 04: And this case isn't about that. [00:39:37] Speaker 04: It's really about whether they could just decide which of those standards of review applies. [00:39:43] Speaker 04: No, I know. [00:39:44] Speaker 03: But under your theory, the presumption applies, so they have to show that it's not in the public interest. [00:39:50] Speaker 03: Under their theory, [00:39:51] Speaker 03: as modified by you, they have to show that it's unjust and unreasonable. [00:40:00] Speaker 04: That's right. [00:40:04] Speaker 03: Ultimately, I'm trying to figure out what's the delta between unjust and unreasonable and not in the public interest. [00:40:11] Speaker 04: To me, to me, it always hangs on the type of evidence that you would use, and the focus would primarily be on harm to third parties. [00:40:19] Speaker 04: And maybe the level of that harm, because the Supreme Court has said that once the presumption applies, it's only when the contract seriously harms the public interest that it ought to be abrogated or modified. [00:40:33] Speaker 04: And I just want to get really quickly to the point [00:40:35] Speaker 03: I'll give you time. [00:40:36] Speaker 03: I just wanted to make sure I understood that. [00:40:38] Speaker 04: If the way this all turns is that suddenly we're talking about just whole classes of contracts that have nothing to do with Mobile Sierra, what you'll have is a policy like this one, a new policy that comes up. [00:40:51] Speaker 04: The government will simply decide that there's a basis for the policy. [00:40:54] Speaker 04: And then they'll apply that policy, and the fact that you have contracts in place that say whatever they say now becomes effectively irrelevant, right? [00:41:02] Speaker 04: Because they're all just tariffs in the government's, in the agency's mind. [00:41:06] Speaker 04: And the fact that you had this elaborate negotiation, perhaps a negotiation that made all of this possible, because there wouldn't be a Soutless Power Pool without this agreement, [00:41:15] Speaker 04: there wouldn't be a regional transmission service, there wouldn't be a question of other people wanting to join this group, right? [00:41:21] Speaker 03: Because people can build lines without this group. [00:41:23] Speaker 03: If I can interpret what you're saying there, you're saying if we lose, if you lose, you don't want to lose on the ground that the presumption only applies to rates. [00:41:32] Speaker 03: You'd rather lose, and again, you don't want to lose, but if you were going to lose, you'd rather lose on the ground that at least this particular type of contract is outside the presumption. [00:41:41] Speaker 04: And in particular, that wasn't the reason. [00:41:43] Speaker 03: Is that a correct interpretation of what you're saying? [00:41:45] Speaker 03: I know you don't want to lose, so I'm just saying. [00:41:48] Speaker 04: The broader you're holding on the number of contracts you then throw out of Moles Yerba, the more harm done. [00:41:54] Speaker 03: OK, and specify the harm again, so I understand that. [00:41:57] Speaker 04: Is that you would disregard the underlying contractual negotiations on the contract interest that were at the heart of that. [00:42:05] Speaker 04: And it just has striked me as [00:42:07] Speaker 04: So odd that what we're talking about is giving FERC more power the further it gets away from rates. [00:42:12] Speaker 04: Their maximum level of jurisdiction and authority here has got to be on rates. [00:42:16] Speaker 04: And as you move away from that, are you saying that they can, every contract that gets further away from the heart of what the FERC does is easier to modify? [00:42:23] Speaker 04: Because the reason there's a doctrine on rates is that's where they have the most power. [00:42:28] Speaker 04: When they focus on the rates historically, that's where you've gotten a doctrine that limits some of their powers. [00:42:33] Speaker 04: But don't adopt a doctrine that gives them more and more power the further they get from the heart of their jurisdiction. [00:42:39] Speaker 02: But isn't part of the issue here that it's all going to come back to rates because of the cost recovery for whatever the work is that's done? [00:42:49] Speaker 04: That's the only basis for jurisdiction over the membership agreement at all, is on the theory that it affects rates. [00:42:56] Speaker 04: And so it does affect rates. [00:42:59] Speaker 04: So if we want to say that the doctrine applies to contracts that affect rates, then I'm on board. [00:43:05] Speaker 04: But if we say that it's only rate-setting contracts and things that affect rates might have, for example, this contract talks about reliability of the grid. [00:43:15] Speaker 04: It talks about when people have to take their units out or redispatch their units. [00:43:22] Speaker 04: They have obligations to the region to do that. [00:43:23] Speaker 04: There's all sorts of topics in here that have some effect. [00:43:26] Speaker 04: But all of those things are now much easier to modify in light of the orders that we have below. [00:43:32] Speaker 04: And I would just like to say that the way this test gets applied on the facts demonstrates some of the weaknesses of the test. [00:43:37] Speaker 04: It ignores the fact that the customers were in the negotiations. [00:43:40] Speaker 04: It ignores the fact that people amended the agreements later. [00:43:43] Speaker 04: It's not really a tariff. [00:43:44] Speaker 04: It is an agreement. [00:43:46] Speaker 03: It's hard for a newcomer to get any change, correct? [00:43:50] Speaker 04: It is, but it's a joint venture that's covering a giant region in which everyone is agreed to transfer control over their assets. [00:43:58] Speaker 04: I mean, the transmission unit here gave up contractual privity with their own customers that now rely on the region. [00:44:04] Speaker 04: to give them the revenue. [00:44:06] Speaker 04: They used to collect the revenue directly, now they hand it to a different entity. [00:44:08] Speaker 04: They'd like to control that and not have those sorts of powers taken away, modified so that suddenly their business is completely different. [00:44:15] Speaker 03: So if we agreed with you, we'd of course be creating a circuit split with the Seventh Circuit, and we're not afraid of doing that, but you would say that Judge Posner and Easterbrook and Hamilton missed the boat. [00:44:27] Speaker 03: They didn't understand. [00:44:28] Speaker 03: What didn't they understand? [00:44:30] Speaker 04: The one thing they did is they focused, it seemed as if the presumption was that this was an agreement about a right of first refusal. [00:44:40] Speaker 04: So you understand the broader context. [00:44:42] Speaker 04: This is a broader contract than that. [00:44:45] Speaker 04: Um, one distinguishing fact, although I really don't want to put on the effects. [00:44:48] Speaker 04: I want to win bigger than that is that there were other interests involved in this negotiation. [00:44:54] Speaker 04: Um, and then the question that just Posner asked was, well, no one showed me that this was in the public interest. [00:45:00] Speaker 04: Well, first of all, in our record, the only evidence that this was in the public interest was submitted that the agreement was in the public interest. [00:45:07] Speaker 04: And the folk said that didn't matter to them. [00:45:09] Speaker 04: But I think that's the wrong question, right? [00:45:11] Speaker 04: It's not really, the scene is not, can I demonstrate a benefit to the public interest? [00:45:15] Speaker 04: It's whether the government can demonstrate a harm to the public interest. [00:45:17] Speaker 03: So you think he flipped the burden on the public interest. [00:45:20] Speaker 03: Yeah, and he said you didn't show that, or not you, but didn't show that MISO is likely to fall apart as a consequence of the repeal of the right. [00:45:28] Speaker 03: And so I guess- Is that true though? [00:45:30] Speaker 03: You're not suggesting it's gonna fall apart? [00:45:33] Speaker 03: I know you think that's the wrong question, but- [00:45:35] Speaker 04: I don't know whether this would fall apart. [00:45:38] Speaker 04: You don't want to say yes to that. [00:45:41] Speaker 04: There's a lot of benefits to that contract, and so I think people would probably stay in it. [00:45:45] Speaker 04: But of course, if the standard of review can't depend on it, well, if I make seven changes and you live with the contract, but I want to make eight changes and now you want to bust up the region, well, that's a different legal standard. [00:45:58] Speaker 01: Again, your briefing came across as very much the Supreme Court requires, mandates this, and Mobile Sierra applies here, and their efforts to wiggle out of it fail. [00:46:08] Speaker 01: And that was your whole reason for why we don't give them any deference is because this is an interpretation of Supreme Court precedent. [00:46:14] Speaker 01: And if we thought, just hypothetically, that the Supreme Court precedent didn't answer this question, [00:46:23] Speaker 01: that doesn't mandate an answer. [00:46:27] Speaker 01: But it's also been recognized that the commission has the discretion to apply Mobile Sierra principles more broadly. [00:46:36] Speaker 01: How would the burden of proof work there, and is there a pattern that you can point to where the commission has already been doing that, that this was a departure from? [00:46:45] Speaker 04: Well, the way I have always thought of this case is trying to decide whether you're going to make certain decisions based on contractual rights versus [00:46:53] Speaker 04: the government's authority, and the more authority we give FERC here to say, well, none of these precedents apply, the more it's all going to be in their discretion again. [00:47:02] Speaker 04: It'll apply sometimes, it'll apply other times, but that's incredibly disruptive of the idea of contractual stability. [00:47:08] Speaker 04: If you're a member of the SVP and you make this negotiation and then you pluck a provision out under this lower and discretionary standard of review, [00:47:20] Speaker 04: the idea that you're making contractual commitments that you thought would be respected. [00:47:28] Speaker 04: So that was directly responsive to your question. [00:47:34] Speaker 03: Thank you very much. [00:47:35] Speaker 03: Thank you. [00:47:35] Speaker 03: Case is submitted.