[00:00:01] Speaker 01: Case number 15-1009, Petro Star, Inc. [00:00:04] Speaker 01: Petitioner versus Federal Energy Regulatory Commission at L. Mrs. Cichron for the petitioner, Ms. [00:00:10] Speaker 01: Chu for the respondent, and Mr. Bender-Nagel for the interveners. [00:01:11] Speaker 02: Mr. Citron, please. [00:01:15] Speaker 05: May it please the court, Eric Satrung for Petitioner Petro Star. [00:01:19] Speaker 05: The minimum the APA required of the FERC in this proceeding was to provide some rational explanation for how the quality bank could be functioning correctly according to its premises, and yet value all of the components of a barrel of oil as somehow less valuable than the barrel itself with three years running. [00:01:36] Speaker 05: And we've explained at length that that result is inconsistent with the fundamental premises of the quality bank. [00:01:41] Speaker 05: The basic problem is that although FERC didn't have to design the quality bank to rely on actual market prices, that's what it did. [00:01:49] Speaker 05: It uses the actual market prices for the six marketable cuts and then tries to synthesize actual market prices that would be commensurate with the non-market cuts. [00:01:58] Speaker 05: And once it's designed it that way, the only way the nine cuts can all be worth less together than a raw barrel is if the distillation that the quality bank relies on somehow removes value from a barrel of oil. [00:02:12] Speaker 04: But let's be clear. [00:02:14] Speaker 04: I mean, the ALJ supported by the Commission certainly gave one explanation. [00:02:19] Speaker 04: I mean, your whole case relies on your assumption about [00:02:24] Speaker 04: you know, the validity of your theory that the less than a barrel anomaly really is an anomaly. [00:02:31] Speaker 04: Now, both the ALJ and the Commission say there is no anomaly here because there are considerations that would cause what you're suggesting. [00:02:41] Speaker 04: ALJ says since the hypothetical quality bank refinery does not incorporate any of the advanced processing equipment, [00:02:46] Speaker 04: A real world refinery would include the quality bank valuation couldn't possibly reflect, as the Alaska North Slope Common Stream Market Value Plat attempts to estimate. [00:02:58] Speaker 04: I mean, that's the part of it. [00:02:59] Speaker 04: As soon as you read this case, that's the one piece of it you're not addressing. [00:03:02] Speaker 04: We don't really understand the inputs. [00:03:05] Speaker 04: on the other side. [00:03:06] Speaker 04: So you could have exactly what you call an anomaly. [00:03:09] Speaker 04: I don't know why that's so strange. [00:03:11] Speaker 04: It could happen, especially during the period, this depressed period that occurred. [00:03:17] Speaker 05: So it actually doesn't make sense that that would be true. [00:03:20] Speaker 05: And this is actually absolutely critical to our case. [00:03:24] Speaker 05: The six marketable cuts are actual market prices for the intermediate products that come out of distillation before final finishing. [00:03:32] Speaker 05: Everybody agrees about that. [00:03:34] Speaker 05: The three non-market cuts, the Quality Bank attempts to synthesize the value of those cuts by working backwards, but they're supposed to be commensurate. [00:03:44] Speaker 05: They're supposed to be nine market values. [00:03:46] Speaker 05: And they're supposed to be after the first step where they're initially refined from raw crude into distilled crude and then to finished products. [00:03:54] Speaker 05: And there's no way they're going to lose value. [00:03:56] Speaker 04: But there's more to be done with respect to the three disputed cuts. [00:03:59] Speaker 04: There's more to be done. [00:04:01] Speaker 04: There's more processing to be done. [00:04:03] Speaker 04: We've got to take account of that. [00:04:04] Speaker 05: For sure there's more to be done. [00:04:05] Speaker 02: For which you would need to have equipment. [00:04:07] Speaker 05: For which you would need to have equipment, absolutely. [00:04:09] Speaker 05: The thing is, having that equipment raises the value of the underlying inputs, because you can make valuable stuff out of it. [00:04:17] Speaker 05: That's actually our point, that it would raise the value of the distilled product, the intermediate product, and that the quality bank isn't doing that enough. [00:04:25] Speaker 05: It's not actually reflecting the increased value of those intermediate components. [00:04:30] Speaker 05: And I just want to point out, this isn't actually, although the ALJ later says that point, my proposition that the intermediate products are worth more than the raw crude, it's not even actually disputed. [00:04:43] Speaker 05: The ALJ says that the presumption of the quality bank is that the intermediate products reflect the cost of doing the initial distillation. [00:04:53] Speaker 05: And there's no dispute that initial distillation is the first step in every single refinery. [00:04:57] Speaker 02: But what do we do with the language that Judge Edwards pointed to? [00:05:00] Speaker 02: Because that's the same language that I was fixated on in paragraph 136, which is on JA 451. [00:05:05] Speaker 02: Because I think a lot of the force of your submission is that, look at your own decisions. [00:05:10] Speaker 02: You have Tesoro. [00:05:11] Speaker 02: At least we need to get some kind of response to a facially plausible argument. [00:05:15] Speaker 02: And you rely a great deal on a certain anomaly. [00:05:18] Speaker 02: And at least this language reads to me as a response. [00:05:22] Speaker 02: And now, it may not be one that you think is satisfactory, but it seems different to say that there's no response, and therefore you need to remand to give a reasoned explanation, as opposed to saying there is a response, but it's not altogether persuasive. [00:05:34] Speaker 05: I want to say a few different things about it. [00:05:36] Speaker 05: The first is, it's a one-sentence response. [00:05:38] Speaker 05: And that doesn't matter. [00:05:39] Speaker 05: I mean, I think what we need is some explanation with precision. [00:05:43] Speaker 05: I understood it. [00:05:44] Speaker 05: I mean, I understood what they're saying, but it's also... No, that can't be your argument. [00:05:49] Speaker 04: You've got to have better than that, seriously. [00:05:51] Speaker 04: Fair enough. [00:05:51] Speaker 05: Okay? [00:05:52] Speaker 05: The real problem is that it's inconsistent with what the ALJ says in other places of his own opinion. [00:05:57] Speaker 05: And that makes it very hard to understand what he means. [00:05:59] Speaker 05: As I said, there is a footnote. [00:06:01] Speaker 05: where he says that you actually expect, this is on JA 396, he says, it is assumed that the published market price for each of the six cuts includes the simple refining cost of producing the cut. [00:06:14] Speaker 04: It is assumed. [00:06:16] Speaker 04: Well, that's an assumption. [00:06:17] Speaker 04: But the board later said, the commission later says, we're just looking to do the best we can relatively. [00:06:24] Speaker 04: We can't guarantee you that this is going to be absolutely right at every moment. [00:06:28] Speaker 04: I mean, that's what they're really saying. [00:06:31] Speaker 04: You're talking as if there is a number in the sky, all you have to do is reach and grab it, and it's all done. [00:06:38] Speaker 04: And they're saying, no, that's not the way it works. [00:06:40] Speaker 04: And there's another problem you're going to have to address in all of this, because it takes in your whole sunk cost argument, which I find very perplexing. [00:06:49] Speaker 04: This has been going on a long time. [00:06:52] Speaker 04: And I don't understand what the new arguments are. [00:06:54] Speaker 04: This has all been here for a long time. [00:06:58] Speaker 04: And so you need to incorporate that in your answer, because I really want you to understand that part I don't get at all. [00:07:04] Speaker 04: Where are you coming from? [00:07:05] Speaker 04: This has been here for a long, long time. [00:07:07] Speaker 05: I'd like to address that, and I want to just put a pin in it for one second, because I also want to be really clear about the inconsistencies surrounding the point that we were discussing a minute ago. [00:07:18] Speaker 05: And so one of the inconsistencies is this point on JA 396, that it's assumed that the distilled products, the intermediate products, reflect the additional cost of distillation. [00:07:29] Speaker 05: That is a built-in premise of the quality bank, and this result is inconsistent with the premise. [00:07:35] Speaker 05: That's problematic. [00:07:36] Speaker 05: The model should not reach results that are inconsistent with its own premises. [00:07:40] Speaker 05: Well, no, no, what? [00:07:41] Speaker 04: They're saying that's not so. [00:07:43] Speaker 04: They're saying you can have fluctuations in certain periods, and now the model looks like what you say it should look like, right? [00:07:50] Speaker 04: It changed back again. [00:07:51] Speaker 04: That's true. [00:07:53] Speaker 04: See, as I just want you to understand, I read, I said, yeah, well, that's a perfectly fair explanation going through different economic periods. [00:08:03] Speaker 04: No, we may not always achieve exactly what you're saying. [00:08:07] Speaker 04: There may be some slides, but now we're back again. [00:08:09] Speaker 04: And again, this has been going on for a long time. [00:08:12] Speaker 04: It's never been challenged. [00:08:14] Speaker 04: It's an assumption and not a guarantee. [00:08:16] Speaker 05: That may be so. [00:08:17] Speaker 05: I just, if the situation, if the suggestion is that there was a three year period of time where distillation, contrary to the testimony of their own experts at 287, J287, was removing value from a barrel of oil, not unprofitable, actually taking value out somehow. [00:08:35] Speaker 05: doing the initial, I would like to see some evidence, some explanation for why that was so. [00:08:40] Speaker 05: There's nothing like that in the Commission's opinion, so it's very hard for us to respond, engage in dialogue, try to figure out what the Commission actually thinks is going on. [00:08:49] Speaker 05: There is a sentence that says, you know, it's possible that that's what was happening, but without any evidence to point to and without any way of understanding that, [00:08:57] Speaker 05: That just doesn't cut it, I think, from the APA status. [00:09:00] Speaker 02: And the sentence you're talking about is the one that starts, since the hypothetical quality bank? [00:09:03] Speaker 02: That one? [00:09:03] Speaker 02: Yeah. [00:09:04] Speaker 02: Okay. [00:09:04] Speaker 02: And you said there were other inconsistencies besides. [00:09:07] Speaker 05: Yes, the other inconsistency, which we discussed in our brief, it's a little complicated, but the ALJ actually recognizes that you can [00:09:16] Speaker 05: calculated QB value for Resid to the real-world value of Resid as a blend stock for oil. [00:09:24] Speaker 05: He says that comparison, I reject their view that that comparison is inappropriate. [00:09:28] Speaker 05: That comparison is appropriate, but I'm going to reject the result for other reasons. [00:09:33] Speaker 05: But recognizing that comparison is appropriate is exactly our point, that the way the quality bank actually functions is that it's supposed to calculate real-world values for the nine cuts. [00:09:46] Speaker 05: and that the nine cuts together should therefore add up to more than a barrel of oil. [00:09:50] Speaker 05: If you agree with that premise, which he then does for the blend stock argument, you can't actually make the argument he's making before, which is that you would do not expect the nine to add up to the value of a barrel of oil. [00:10:02] Speaker 05: I think those inconsistencies indicate that Furchishly doesn't have a solid theory for what it thinks is going on with the anomaly. [00:10:09] Speaker 05: And I do think that this sort of half-hearted explanation. [00:10:12] Speaker 02: And is that still, you think, is a Tesoro problem? [00:10:15] Speaker 05: Yes, I think that is a Tesoro problem. [00:10:18] Speaker 05: And I want to return to your point that this has been going on for a long time. [00:10:22] Speaker 05: Because this case actually is, if you go back and look at the briefing in Tesoro, a complete redux of Tesoro. [00:10:28] Speaker 05: What happened in Tesoro was this. [00:10:30] Speaker 05: Several years into the distillation method, Exxon came back and said, [00:10:35] Speaker 05: Look, we've looked at a bunch of real-world data. [00:10:37] Speaker 05: We've compared the way that the distillation method would value various crude streams all over the West Coast. [00:10:43] Speaker 05: And the numbers aren't adding up. [00:10:45] Speaker 05: It looks like the distillation method doesn't work. [00:10:47] Speaker 05: So we want to go back to the gravity method or something like it. [00:10:50] Speaker 05: And FERC said, look, we don't have to do that. [00:10:53] Speaker 05: We've already concluded that the gravity method is unjust and unreasonable. [00:10:57] Speaker 05: So we're not going back to it. [00:10:58] Speaker 05: And then Exxon came to this court and said, look, before we discuss whether our proposed solution is just and reasonable, before we discuss how long this has been going on, FERC owes us an explanation for what it thinks is going on with the data that we provided. [00:11:14] Speaker 05: And that's exactly what Judge Williams' decision says FERC had to provide. [00:11:18] Speaker 05: They had to explain, before we start talking about how long it's been going on or anything like that, [00:11:22] Speaker 05: why it is that the data that Exxon provided to the FERC was not actually problematic. [00:11:29] Speaker 05: And that's what we want here. [00:11:30] Speaker 05: I'm not trying to get this court to tell FERC exactly how the quality bench should work. [00:11:34] Speaker 05: We really just want to understand what FERC thinks is going on with the less than a barrel anomaly so we know how to respond to it. [00:11:41] Speaker 05: It may actually not be the case that we're right about capital costs being zero. [00:11:45] Speaker 05: Maybe it should be something else. [00:11:47] Speaker 05: Maybe it's that plus other things. [00:11:49] Speaker 05: Also an issue in this proceeding was what exactly you can make out of RISD and how valuable it would be. [00:11:54] Speaker 04: Yeah, but the thing is you still haven't responded to what you call the one sentence answer because that is an answer. [00:12:01] Speaker 04: And then they've returned, the market has now, the figures coming from the market are now doing what you say they ought to be doing. [00:12:08] Speaker 04: Why is that? [00:12:09] Speaker 04: Why did they switch back after the three-year period? [00:12:12] Speaker 04: Well, they certainly do fluctuate. [00:12:13] Speaker 04: They've also gone back since they went back. [00:12:15] Speaker 04: That's all we're saying, right? [00:12:16] Speaker 04: That's all we're saying. [00:12:17] Speaker 04: There is some fluctuation, and it may be for precisely the reasons stated in the one sentence. [00:12:23] Speaker 04: I don't need one-to-one sentence to understand that. [00:12:26] Speaker 04: In other words, in terms of judicial review, I'm not talking about what the right answer should be, but in terms of review. [00:12:33] Speaker 04: I mean, I understand what they're saying here. [00:12:35] Speaker 05: I understand what they're saying, too. [00:12:36] Speaker 05: There's two problems with it. [00:12:38] Speaker 05: One is they are not saying, actually, we think the Quality Bank is extraordinarily inaccurate, and over periods of time, it will dip to theoretically impossible prices. [00:12:47] Speaker 05: But that's OK. [00:12:48] Speaker 05: It's just a rough cut. [00:12:49] Speaker 05: You know, we're not doing it perfectly. [00:12:52] Speaker 05: This is what we want. [00:12:54] Speaker 05: It's OK that it's inaccurate. [00:12:55] Speaker 05: If that's their argument, I want to see the commission say that. [00:12:58] Speaker 05: Because maybe we can propose a better solution that doesn't have that problem. [00:13:01] Speaker 05: But apart from that, that one said this. [00:13:03] Speaker 04: That's what the commission said. [00:13:04] Speaker 04: The methodology is not to determine the actual market values of the cuts or streams, but to assign accurate relative values among the various cuts. [00:13:13] Speaker 04: So that proposition is false. [00:13:15] Speaker 05: That is not rational. [00:13:17] Speaker 05: And this is our main point. [00:13:19] Speaker 05: Because it says the goal of the quality bank is not to assign accurate values. [00:13:24] Speaker 05: That is absolutely and incontrovertibly false. [00:13:27] Speaker 02: It doesn't have to be. [00:13:30] Speaker 02: You don't mean that it's actually false in some organic abstract, but you're just saying it's inconsistent with their own. [00:13:35] Speaker 02: notion of the pricing model, which is that it's supposed to be based on market conditions and not based on relativity alone. [00:13:41] Speaker 05: That's exactly right. [00:13:42] Speaker 05: What it says is the goal, suppose it's true, that the goal is not to assign accurate market values, but for deciding to use actual market values and having adopted that view that there'll be accurate market values, this result is totally unexpected. [00:13:58] Speaker 05: And to see it for three years is [00:14:01] Speaker 05: genuinely baffling. [00:14:03] Speaker 05: It's not like this is some short-run economic program. [00:14:05] Speaker 04: You may be missing something, but when you say actual market values, you're drawing from different sources, and the one sentence that you keep rejecting is suggesting, yeah, we're drawing from the source that everyone agrees we should, but at certain times the input in from that one source [00:14:23] Speaker 04: may cause the problem that you're now or the situation that you're now pointing to. [00:14:28] Speaker 04: So actual is not actual in the sense that we can guarantee anything. [00:14:33] Speaker 04: They're saying you're not opposing them going to the source for the quote unquote actual market figure. [00:14:44] Speaker 04: But that actual market figure may be inaccurate in any given moment. [00:14:48] Speaker 04: It is accurate only in the sense that we all say, well, that's actual market. [00:14:53] Speaker 04: But market, more stated market figures are not absolutely accurate at all moments in time. [00:14:59] Speaker 04: They're the best we can do at any given moment in time, right? [00:15:02] Speaker 05: I agree with that. [00:15:04] Speaker 05: Here's what I want to say. [00:15:05] Speaker 05: And it's two separate points. [00:15:07] Speaker 05: One is, as your opinion in Blue Water points out, what we need from the agency is an explanation of what they think is going on with precision. [00:15:15] Speaker 05: Because unless we have that precision, we don't understand what FERC's position is going forward. [00:15:20] Speaker 05: We can't go back to the agency with better information. [00:15:21] Speaker 04: Well, I thought you just told me you understood the sentence, too. [00:15:23] Speaker 04: We all understand what it means. [00:15:24] Speaker 04: So what more do we require? [00:15:26] Speaker 04: Well, I don't understand it to mean what you just said. [00:15:27] Speaker 05: Oh, I thought you said you and I both understood. [00:15:29] Speaker 05: Well, maybe we don't understand how to say what, which I think is indicative of the problem. [00:15:34] Speaker 05: You know, there's a lot of ways to read one sentence. [00:15:36] Speaker 05: What I think they think is going on is that if you, you know, that they're saying, actually, maybe they don't all have to add up to more than a barrel. [00:15:46] Speaker 05: You wouldn't hypothesize that. [00:15:48] Speaker 05: But if you look at the evidence that they point to, again, this is on JA 287, their expert [00:15:56] Speaker 05: And the ALJ says the premise of the quality bank is that distillation prices will reflect the price of, or the cost of doing the distillation. [00:16:08] Speaker 05: If those premises are not true, I want FERC to say actually they're not always true. [00:16:13] Speaker 05: And that's a problem because I need to know exactly how they propose to address it. [00:16:17] Speaker 05: But apart from that, even that suggestion relies on a confusion between cost and value. [00:16:25] Speaker 05: There's really no way that the first step in the refining process at every single refinery, which is what we agree distillation is, is going to somehow make a raw barrel of crude less valuable. [00:16:37] Speaker 05: There's nothing else you can do with crude other than refining. [00:16:40] Speaker 05: If you could have the nine cuts already made better, [00:16:43] Speaker 05: It would be very strange for them to lose value, and not just for very short-run periods, but three years running. [00:16:49] Speaker 02: And that's a design. [00:16:50] Speaker 02: Can I ask you one question about your argument, which is that suppose just bear with me and indulge the assumption that we disagree with you on whether this one sentence is an adequate response to your point about the anomaly, the pricing anomaly. [00:17:04] Speaker 02: You've got some other arguments to the effect that there were things raised, like the linear programming models, if I'm using the correct term. [00:17:10] Speaker 02: that should have generated a response, but as to which we don't see a response in the ALJ's opinion or the FERC order. [00:17:18] Speaker 02: Does the presumed answer in the one sentence vis-a-vis the pricing anomaly address the linear program reception? [00:17:27] Speaker 02: That's just an independent argument as far as you're concerned. [00:17:30] Speaker 05: There are two separate points we want to make. [00:17:31] Speaker 05: One extremely important point, on which I really do still want to know exactly what the agency's position is, is what's wrong, you know, what's going on with that anomaly? [00:17:39] Speaker 05: How could that be true for three years? [00:17:42] Speaker 05: Apart from that, we suggested that as a matter of basic economic theory, you would not expect capital costs to be included in the resist valuation because the other prices are short-run market clearing prices. [00:17:54] Speaker 02: Well, I guess I wasn't quite clear that that was a matter of basic economic theory as much as it was a matter of economic reality in the sense that if you look at what actually goes on, capital prices aren't taken into account because it's short-term market pricing that doesn't take into account the capital expenses. [00:18:12] Speaker 05: Yeah, I think this is one of those happy situations where economic theory and economic reality actually intersect. [00:18:17] Speaker 05: But yes, our point is both that no one is reaping anywhere close to a 20% capital return in the market, and the other prices are actually functioning as short-run prices. [00:18:28] Speaker 05: That's exactly what they are, not by hypothesis, but [00:18:32] Speaker 05: as designed by the quality bank. [00:18:35] Speaker 05: And so if those are short-run prices, in order to create compatibility. [00:18:37] Speaker 02: This is as to which there's a real market. [00:18:39] Speaker 02: There's a functioning market already. [00:18:40] Speaker 05: Yeah, there are functioning spot markets. [00:18:41] Speaker 05: They're short-run. [00:18:42] Speaker 05: And in fact, that's why you get the fluctuations that you get. [00:18:45] Speaker 05: Those can go up and down. [00:18:48] Speaker 02: Now, as to that, your argument is this is also a Tesoro problem. [00:18:53] Speaker 02: We raise these issues, and we don't see a response. [00:18:55] Speaker 02: And the court should remand to give the agency an opportunity to hazard a response. [00:19:00] Speaker 02: That's exactly right. [00:19:01] Speaker 02: And my question is this. [00:19:02] Speaker 02: Is the response a conceptual one? [00:19:05] Speaker 02: In other words, is the response one that's already embedded within the fabric of what the ALJ said and what the commission signed on to, to the effect that, well, yes, there is a distinction between the six and the three, because as to the six, of course we're dealing with short-term market responses because the long-term investments have already been made. [00:19:26] Speaker 02: As to the three, the long-term investments are something that we have to work into the formula because they're not something that otherwise exists. [00:19:33] Speaker 05: Yeah, I mean, I guess I struggle with the idea that the correct conceptual response is embedded in the agency's answer. [00:19:41] Speaker 05: I think the APA requires a little bit more than that from the agency. [00:19:45] Speaker 05: But apart from that, I think it's also problematic that what they're going to say is that this relies on [00:19:52] Speaker 05: We want to build in investment because there is also investment necessary to do the other forms of refining. [00:19:59] Speaker 05: You can't ignore it for the short-run prices for the six and include it for the three without creating an oxy problem, which is that these actually aren't commensurate values. [00:20:08] Speaker 05: One of them is sufficient to sustain long-run investment. [00:20:11] Speaker 05: The other is not. [00:20:13] Speaker 05: That would be the commensurate value. [00:20:17] Speaker 04: I read those four points that you added, and I went back and looked at the ALJs. [00:20:22] Speaker 04: the transcript. [00:20:23] Speaker 04: I really didn't see all those points being raised with any clarity until you wrote exceptions. [00:20:30] Speaker 04: So it was like you had a lot of testimony being offered and then you came up with some exceptions. [00:20:36] Speaker 04: Now, I thought the fourth exception subsumed the preceding three. [00:20:41] Speaker 04: It's essentially a sunk cost argument, and the Commission surely answered that, your sunk cost argument. [00:20:47] Speaker 04: Whether you agree with it or not, they answered it. [00:20:50] Speaker 04: Specifically, the ALJ did, as did the Commission, as did your expert when firms are building Cokers. [00:20:57] Speaker 04: There's a demand for new co-courts. [00:20:59] Speaker 04: This would explain why the ALJ and the Commission, you know, your expert was not disagreeing with that, that the capital cost deduction was appropriate under those conditions and the ALJ and the Commission tried to show those were the conditions that were existing. [00:21:15] Speaker 04: Now, the preceding three to me are just blah, blah, blah. [00:21:19] Speaker 04: And I could not figure what they were in real case terms. [00:21:25] Speaker 04: My instinct, just in case you understand, I would never send three things like that back, which are theoretical concepts, which have nothing to do that I can understand with the real case argument, which is some cost. [00:21:38] Speaker 04: The some cost argument was raised and answered by the commission specifically, and I don't know why it's wrong. [00:21:45] Speaker 05: So two things. [00:21:46] Speaker 05: One is that FERP does not say you didn't argue this below, so we're rejecting these exceptions, which is what you would have to, they would have had to say that. [00:21:54] Speaker 04: No, no, no, no. [00:21:55] Speaker 04: Hear what I'm saying as a judge now. [00:21:57] Speaker 04: I'm saying I reviewed those four very carefully. [00:21:59] Speaker 04: So you're right. [00:22:00] Speaker 04: I may be seeing more than the commission stated. [00:22:03] Speaker 04: But in my mind, it's only number four that's really in play. [00:22:06] Speaker 04: The other three are icing on the birthday cake. [00:22:10] Speaker 04: But four is really the issue. [00:22:12] Speaker 04: It's that your son caused theory, which is what they're getting at, and they got at it. [00:22:17] Speaker 04: They answered it. [00:22:18] Speaker 05: Yeah, I'm not sure exactly what FERC's answer to this uncostly reason is. [00:22:21] Speaker 05: That's interesting. [00:22:23] Speaker 05: You know, they say that these Cokers appear to be repaying profits. [00:22:28] Speaker 05: But we say, look, even whether they're repaying profits or not, we have a short-run market price that doesn't include a guaranteed return. [00:22:36] Speaker 04: Your expert said the capital cost deduction is appropriate under certain circumstances. [00:22:41] Speaker 04: That FERC say exists. [00:22:44] Speaker 04: Your expert. [00:22:45] Speaker 05: Yeah, I don't see how they can say that those conditions exist. [00:22:48] Speaker 05: That is, everybody is refining profitably, and yet say there was a three-year period where the distillation was actually removing value. [00:22:54] Speaker 04: Well, that comes back to your anomaly, whether there really is an anomaly. [00:22:57] Speaker 05: Well, it doesn't come back to the anomaly. [00:22:59] Speaker 05: It's a question of consistency in the first explanation. [00:23:02] Speaker 05: What they're saying is, no, there wasn't a period. [00:23:05] Speaker 05: where this was declining so precipitously that there wasn't demand and everybody was refining unprofitably, that didn't actually happen. [00:23:12] Speaker 05: By the way, that might be the only explanation that we're going to offer for why, over an extended period of time, all the internal cuts in a barrel of oil are somehow worth less than the barrel itself. [00:23:23] Speaker 05: These things have to make sense together in order to affirm the Commission's reasoning. [00:23:28] Speaker 05: I think what we're going to do if we go down the unfortunate route of affirming the Commission based on its very brief explanation, or the ALJ, you know, the ALJ is one sentence not endorsed by the Commission, [00:23:41] Speaker 05: that that was what was going on. [00:23:44] Speaker 05: And then, you know, use a very similar form, but opposite form of analysis to deal with the sunk cost issue, is we're not actually going to test the internal consistency of the agency's position. [00:23:54] Speaker 04: And I think that's the one thing about it. [00:23:56] Speaker 04: Last thing before the – because I think it's – I raised it a long time ago. [00:24:00] Speaker 04: I'm just curious to hear your answer. [00:24:02] Speaker 04: Again, this is old news. [00:24:03] Speaker 04: This framework has been in existence for a long time, and generally, we don't revisit things merely because part of your second argument is it fundamentally, this has just been wrong all along. [00:24:19] Speaker 04: If I see that proposition, that to me raises the problem we face in review of administrative law. [00:24:25] Speaker 04: It may or may not be true, but it's here what's new now. [00:24:29] Speaker 04: I never did like it. [00:24:30] Speaker 04: We don't allow people to come in and say, I never did like that thing you created as you smile, because you understand. [00:24:36] Speaker 04: And so I got to find a way to get back to you. [00:24:40] Speaker 04: And so I'm coming back now. [00:24:41] Speaker 04: I've always hated it. [00:24:42] Speaker 04: It was wrong in 2005, even when there was no anomaly. [00:24:45] Speaker 04: Well, I don't know how you are here making that argument. [00:24:49] Speaker 05: I apologize for it, but it's really Judge Williams and Judge Tatel's fault, because this is exactly what DeSoto says you can do. [00:24:56] Speaker 05: Several years into the distillation method, Exxon looked at the data. [00:25:00] Speaker 05: And the distillation method order had specifically rejected what Exxon wanted. [00:25:05] Speaker 05: Exxon looked at the data and said, look, this data doesn't add up. [00:25:08] Speaker 05: You now need to give us an answer, and our proposal is to go back to the old method, even though the new one has been in place for several years. [00:25:15] Speaker 05: And the court said, what FERC has to do is, even if it's going to reject Exxon's proposed alternative, the FERC has to give a reasoned, intelligible... It can't be that easy. [00:25:27] Speaker 04: It may be that if the agency chooses to respond, [00:25:32] Speaker 04: It's reviewable. [00:25:33] Speaker 04: That would fit with ad law principles. [00:25:36] Speaker 04: There's several things going on here. [00:25:37] Speaker 04: But you see, one possibility is the agency could say, at least theoretically under ad law, we're not listening to this. [00:25:45] Speaker 05: So there are three, actually, things that are specific to this case that wouldn't require you to endorse anything like that broader principle, even though I think it's right. [00:25:53] Speaker 05: One is the agency initiated this hearing itself. [00:25:55] Speaker 05: This is the agency's own hearing. [00:25:56] Speaker 05: So it's very weird for them to say, you know, it's been too long. [00:26:04] Speaker 04: That's your answer. [00:26:05] Speaker 04: That's a narrow answer. [00:26:07] Speaker 04: Because you're stating a broad composition that in my mind is too broad. [00:26:11] Speaker 05: There's also a strong materiality requirement that's announced. [00:26:14] Speaker 02: I mean your view is the agency took it upon itself to look at this anew and having done that they have to do the job. [00:26:18] Speaker 02: I mean this is their hearing. [00:26:19] Speaker 04: We're trying to help them reach the audience. [00:26:21] Speaker 04: Now you're in safer territory. [00:26:23] Speaker 04: Now we're standing with Judge Williams, and Judge Statham may not have said. [00:26:27] Speaker 04: I don't think they disagree with what I said. [00:26:28] Speaker 05: All right, fair enough. [00:26:29] Speaker 05: This is their hearing. [00:26:30] Speaker 05: They wanted to figure it out. [00:26:31] Speaker 05: We actually tried to help them. [00:26:32] Speaker 05: And we said we have this really serious anomaly in the data that is theoretically inconsistent with the premises of the quality bank. [00:26:38] Speaker 05: I really don't understand what they think is going on. [00:26:40] Speaker 05: And I think we need to before we can move forward. [00:26:43] Speaker 02: Thank you. [00:26:44] Speaker 02: Thank you. [00:26:59] Speaker 02: It's true. [00:27:01] Speaker 01: Thank you, Your Honor. [00:27:02] Speaker 01: May it please the court, Susanna Chu, for the Federal Energy Regulatory Commission. [00:27:09] Speaker 01: Your Honor, the agency orders on review fully responded to Petra Star's arguments. [00:27:13] Speaker 01: It's true. [00:27:14] Speaker 01: The Commission called this hearing to hear all of Flint Hill's and Petro Star's evidence on why they believe the Coker capital investment factor should be removed from the Resid valuation. [00:27:26] Speaker 01: The Commission fully heard all of the arguments and fully addressed all of them. [00:27:32] Speaker 01: On the issue of the less than a barrel argument, [00:27:38] Speaker 04: the so-called anomaly. [00:27:40] Speaker 01: The so-called anomaly, correct. [00:27:41] Speaker 01: As a preliminary matter, I want to explain what, you know, in addition to the one-sentence answer, which I believe is how it's described, first of all, [00:27:55] Speaker 01: the so-called anomaly was not probative on the issue of whether the Resid formula should factor in Coker capital costs. [00:28:03] Speaker 01: And that's because there is direct evidence in the record demonstrating that refiners were earning profits throughout the entire period that was at issue in this hearing. [00:28:13] Speaker 01: And in particular, Flint Hills' witness conceded that this was so. [00:28:22] Speaker 04: Where did the commission say it's not probative? [00:28:25] Speaker 04: I mean, I understand what you're arguing, but again, this is about what the Commission say. [00:28:29] Speaker 04: Where'd they say that? [00:28:30] Speaker 01: In the initial decision at paragraph 144, Joint Appendix 455 to 56, the Commission says that refiners were earning profits throughout this time period. [00:28:47] Speaker 01: And also, [00:28:50] Speaker 01: The commission cites Mr. Verlager's testimony. [00:28:54] Speaker 01: Mr. Verlager was the expert put forth by Clint Hills. [00:29:02] Speaker 01: His testimony appears at JA 351 through 52. [00:29:10] Speaker 01: In that testimony, Mr. Verlager acknowledges that market prices used by the West Coast refineries include the recovery of capital fixed and variable costs. [00:29:21] Speaker 02: So I thought this was a response to the argument on the rural conditions of the West Coast, right? [00:29:27] Speaker 02: Isn't that what this is addressing? [00:29:29] Speaker 01: Right. [00:29:29] Speaker 01: Well, this fully addressed the sub-cost argument, and it also explains, it shows why the less than a barrel anomaly is not probative. [00:29:39] Speaker 01: It's simply not a meaningful piece of evidence. [00:29:43] Speaker 01: And it wasn't probative on the issue of whether it should actually factor in the COCA costs or not. [00:29:48] Speaker 02: I guess the question is what Judge Edwards was saying earlier, which is at this point, one could perhaps repackage statements that are made in the ALJ's treatment in a way that is made to answer other things. [00:30:03] Speaker 02: But the question is whether what we're reviewing does the answering already. [00:30:07] Speaker 01: It does, Your Honor. [00:30:09] Speaker 02: And that's the tricky part of this case, because there may be a lot of data points in the voluminous stuff that's in here and everything that they eligible together and then what the Commission ultimately ratified. [00:30:18] Speaker 02: But do they pointedly respond to the presentation that was made in a way that's consistent with our decisions, expectations of the Commission? [00:30:28] Speaker 02: And so, for example, the sort of things that you're pointing to, it's not entirely clear to me. [00:30:32] Speaker 02: that on the face of the ALJ's opinion, they're responsive in the way that you're now repackaging it as suggesting it would be? [00:30:40] Speaker 01: Well, Your Honor, the ALJ opinion and together with the Commission's affirming order fully address all of the arguments as they were presented to the Commission. [00:30:49] Speaker 04: Well, the anomaly argument was presented, no? [00:30:52] Speaker 01: Correct. [00:30:53] Speaker 04: So the Commission says very little other than we affirm [00:30:57] Speaker 04: And this is all relative. [00:30:59] Speaker 04: They say very little that I can find anyway. [00:31:02] Speaker 04: And the ALJ says some things, and the response on the remedy seems beside the point. [00:31:10] Speaker 04: That is, if they haven't come up with the right remedy, [00:31:13] Speaker 04: It seems to me if the Commission agreed with the proposition on the anomaly, there'd be no answer to say your remedy is not a really good choice. [00:31:23] Speaker 04: They got to say something better than that. [00:31:24] Speaker 04: So I take that out. [00:31:26] Speaker 04: Where's the answer on the anomaly? [00:31:28] Speaker 04: Where do you think the best answer is, other than that one sentence, which even though I can tease something out of it, is that really you want to rely on Edwards' teasing things out of it or the Commission's explanation? [00:31:42] Speaker 01: Your Honor would be pleased to rely on that. [00:31:43] Speaker 01: Yeah, I'm sure you would. [00:31:45] Speaker 04: There have been other cases when you haven't been so pleased. [00:31:48] Speaker 01: Well, Your Honor, in addition to that sentence, they... Well, first, let me back up. [00:31:58] Speaker 01: Of course, the court may affirm on the basis of the reasoning appearing in the ALJ opinion that cities of Bethany... No, I'm assuming that, but I'm trying to figure out what you think is a quality explanation there. [00:32:10] Speaker 01: Right. [00:32:11] Speaker 04: Well, so in addition to that... Apart from this remedy, forget the remedy. [00:32:14] Speaker 01: Understood. [00:32:15] Speaker 01: Okay. [00:32:16] Speaker 01: So in addition to that single sentence appearing, I mean, there is also a footnote that on JA 451, which goes to the fact that Petrostar, well, Petrostar didn't offer any [00:32:33] Speaker 01: witnesses in the record, but Petra Star did not offer any evidence that simple distillation actually adds value, and if so, how much? [00:32:41] Speaker 01: And moreover, the record indicates that there are no simple distillation refineries on the West Coast. [00:32:47] Speaker 01: This is what the ALJ noted at footnote 71 at JA 451. [00:32:51] Speaker 01: And in fact, Flint Hills' witness conceded that [00:32:56] Speaker 01: There is no one out there who's operating a refinery that looks like the quality bank model refinery. [00:33:03] Speaker 01: And he acknowledges that no one's out there doing it. [00:33:07] Speaker 01: No one's just taking Alaska crude and distilling it through a distillation tower and then selling what comes out. [00:33:14] Speaker 01: And he moreover acknowledges that you probably couldn't earn money. [00:33:18] Speaker 01: operating refinery that way. [00:33:20] Speaker 01: And that appears at Mr Verlager's transcript testimony, page 360, JA 346. [00:33:31] Speaker 01: So that is an explanation. [00:33:32] Speaker 01: We have to recall that simple distillation is the very first step in the refining process. [00:33:39] Speaker 01: And what comes out of the simple distillation tower are these intermediate products. [00:33:44] Speaker 01: Refiners typically do a lot more to these products before they can actually be sold as regular gasoline, premium gasoline, asphalt, fuel oils. [00:33:57] Speaker 01: That's the real value added. [00:34:00] Speaker 01: Value added is what happens downstream of the distillation tower. [00:34:04] Speaker 02: So there may be other responses, but it at least puts into play the footnote earlier in the ALJ's opinion that was referenced by your colleague about intermediate values. [00:34:14] Speaker 01: Yes. [00:34:15] Speaker 02: And what's your response to that? [00:34:20] Speaker 02: And because I think that the point that was being made was that the statements, the sentence here, which I think probably encompasses the footnote you're referring to, can't be squared with the earlier footnote. [00:34:33] Speaker 01: Oh, I'm sorry. [00:34:34] Speaker 01: Your Honor's saying that it can't be squared with the footnote. [00:34:37] Speaker 02: The footnote that started, I've now lost, oh, it's footnote 21. [00:34:41] Speaker 02: It is assumed that the public market prices for each of these six cuts includes the simple refining distillation cost of producing the cut. [00:34:54] Speaker 01: an assumption appearing in the order. [00:34:56] Speaker 01: I mean, there's actually no evidence that was put into the record about the actual cost of distillation or whether distillation even adds any value. [00:35:06] Speaker 01: I mean, it is solely the initial step at a refinery. [00:35:10] Speaker 01: And the record evidence indicates that [00:35:13] Speaker 01: This isn't what's really profitable at a refinery. [00:35:17] Speaker 02: It is a conceptual point that's being made. [00:35:19] Speaker 02: I mean, I think the point that's being made is if you understand theoretically the way this works, this should always be the case. [00:35:24] Speaker 02: And if this doesn't happen, there's got to be some kind of answer. [00:35:27] Speaker 02: That's an anomaly. [00:35:29] Speaker 04: And is the commission contesting that it should work the way the petitioners say? [00:35:36] Speaker 04: Yes, well, the commission found that... Where's the... I'm sorry, I don't mean to interrupt you, but I want to tell you what my full question is. [00:35:44] Speaker 04: And if they're really contesting it, I know the ALJ made some strong statement on it as flat wrong or whatever, so then I'm looking for an explanation. [00:35:54] Speaker 04: How do you explain what the commission is suggesting? [00:35:59] Speaker 04: The commission is essentially saying there's some variabilities which might cause [00:36:05] Speaker 04: this a not so-called anomaly. [00:36:07] Speaker 04: And how do they explain that? [00:36:09] Speaker 04: What are the variabilities? [00:36:10] Speaker 04: And how do they know their variabilities? [00:36:13] Speaker 04: What do I look to, to know that that's right? [00:36:16] Speaker 01: Well, the opinion explains that, first of all, the Quality Bank is not designed to generate actual market values. [00:36:25] Speaker 01: It's designed to generate relative values. [00:36:28] Speaker 02: But that just seems to fly in the face of the Commission's own theory all along. [00:36:32] Speaker 02: Oh, it certainly does. [00:36:34] Speaker 02: You didn't have to do that. [00:36:36] Speaker 02: But it seems like the position all along is this is supposed to replicate market conditions. [00:36:40] Speaker 02: And yes, with respect to at least these three cuts, there's not a real functioning market. [00:36:44] Speaker 02: So we have to come at it in a different way and try to approximate what would be a market. [00:36:48] Speaker 02: But the goal is to try to replicate what a market would do. [00:36:52] Speaker 02: And yes, it's not to the exclusion of a relative component, because under our decisions, there's got to be relative consistency. [00:36:59] Speaker 02: But you didn't have to own up to creating the functional equivalent or reasonable facsimile of a market, but it seems like that bridge has been crossed, and that's the world that you're operating in. [00:37:09] Speaker 01: Well, Your Honor, I think not exactly. [00:37:12] Speaker 01: The Commission is really not trying to approximate precise market values here. [00:37:20] Speaker 01: And going back to paragraph 136, the Commission is that the Quality Bank is [00:37:30] Speaker 01: is not designed to assess all of the products that come out of processing a barrel of crude. [00:37:38] Speaker 01: It's just using, it's a legal fiction. [00:37:40] Speaker 01: It uses the distillation tower as a model for a hypothetical extraordinarily simplified refinery to generate some market prices that could be used to compare. [00:37:54] Speaker 01: But to generate market prices. [00:37:56] Speaker 01: Well, in some cases to generate [00:38:00] Speaker 01: a synthetic market price, not an actual market price. [00:38:04] Speaker 01: So it comes back to the fact that this is not a meaningful comparison. [00:38:10] Speaker 01: Again, simple distillation is not truly profitable. [00:38:16] Speaker 01: And going back to the original premise, [00:38:19] Speaker 01: The most direct evidence on why it's appropriate for the calculation to include capital investments is that refiners are earning profits. [00:38:31] Speaker 01: Refiners are profit-seeking entities. [00:38:33] Speaker 01: They're not sinking hundreds of millions of dollars into the ground and walking away. [00:38:39] Speaker 01: And that's fully borne out by the entire record that was before the ALJ and as summarized by the ALJ and the Commission's findings. [00:38:51] Speaker 04: That's a slightly separate, I realize these are connected, but the preceding question, which really underlines their argument, is how can you have this anomaly? [00:39:04] Speaker 04: What explains it? [00:39:07] Speaker 04: And you've been very hesitant. [00:39:08] Speaker 04: You have used the reference to market prices. [00:39:12] Speaker 04: That's the Commission's choice. [00:39:14] Speaker 04: And with respect to the certain cuts, the Commission believes there are market prices to be found. [00:39:22] Speaker 04: And then with respect to three, you come up with, they come up with it as best they can. [00:39:29] Speaker 04: So with propane and normal butane and light straight run, et cetera, there are prices and you take it. [00:39:34] Speaker 04: Now you're saying, are you saying that the commission is saying there's some variability in that, that we really can't explain? [00:39:43] Speaker 01: I don't think so, your honor. [00:39:49] Speaker 04: How can you have the anomaly is what they're asking. [00:39:53] Speaker 04: You're the one who said we're going to use market prices. [00:39:56] Speaker 04: And with respect to six of them, I thought the premise is, my colleague has said, you've always assumed there are market prices that are for real. [00:40:03] Speaker 04: Now, I could understand you're saying, yeah, someone else creates those market prices. [00:40:08] Speaker 04: We'll accept them. [00:40:10] Speaker 04: And I thought this was part of what the ALJ was saying. [00:40:13] Speaker 04: But there's some variability in there. [00:40:15] Speaker 04: And sometimes it shows up more rather than less. [00:40:19] Speaker 04: I'm not getting it now. [00:40:20] Speaker 04: What are you saying? [00:40:21] Speaker 01: Um, well, Your Honor, it's uh... [00:40:25] Speaker 01: I mean, it's certainly possible. [00:40:26] Speaker 01: I mean, the LJ said that at best this was a temporary anomaly. [00:40:30] Speaker 01: I mean, certainly market conditions in 2009 through 2012 and the aftermath of the recession were anomalous. [00:40:38] Speaker 01: But it isn't necessary to, and it's not appropriate to try to sum up all of these distillation cuts. [00:40:48] Speaker 01: There's not designed to be an absolute measure of market value. [00:40:53] Speaker 01: And actually, significantly, [00:40:55] Speaker 01: The ALJ also indicated at paragraph 138, JA 453, that Petrosara offered no relative valuation evidence that suggested that a quality bank was assigning inaccurate relative valuations among the different distillation cuts. [00:41:16] Speaker 01: And specifically, the evidence submitted by other parties indicates that Rezid's relative valuation actually remained stable by comparison with the other quality bank cuts throughout the 2004 to 2013 time period. [00:41:32] Speaker 01: This is footnote 74 at J453. [00:41:36] Speaker 01: The ALJ cites various parties' witnesses on the issue of relative valuation. [00:41:45] Speaker 02: I'm not sure I followed that because I thought their point all along has been that resit is just misvalued. [00:41:51] Speaker 01: Correct, but as the ALJ was indicating, [00:41:56] Speaker 01: What matters here is relative valuation. [00:41:59] Speaker 01: Is RISD misvalued by comparison with the other cuts? [00:42:03] Speaker 01: And so in this particular footnote, the ALJ says that actually the evidence indicates that RISD, its valuation has remained constant. [00:42:14] Speaker 01: So it just suggests that- Well, vis-a-vis the others. [00:42:16] Speaker 02: But I think the point is, as I understood the argument and as I understood what the commission would have been expected to respond to, is that these are supposed to be as accurate as possible. [00:42:26] Speaker 02: Resid has been just inaccurate because there's an embedded problem with the formula. [00:42:30] Speaker 02: Now, there may well be a response to that. [00:42:33] Speaker 02: I get that. [00:42:33] Speaker 02: I think their point, though, is not necessarily there's not a response to it. [00:42:37] Speaker 02: It's just that whatever the response is, I don't know what it is. [00:42:39] Speaker 02: And then to come back and say, well, relatively, it's been constant. [00:42:43] Speaker 02: It doesn't answer whether, as an absolute matter, the value is just wrong. [00:42:49] Speaker 01: Oh, right. [00:42:49] Speaker 01: Well, Your Honor, just to back up a little bit, what's not at issue here is the specific level of the residual valuation in the sense that Petra Star is arguing that the entire Coker capital cost factor needs to be removed. [00:43:05] Speaker 01: It needs to be permanently eliminated from the formula. [00:43:07] Speaker 02: Because it renders the residual, the price for residual inaccurate. [00:43:12] Speaker 02: It just renders it wrong. [00:43:13] Speaker 01: So what's not an issue, though, is the level of capital recovery costs, and it's just whether as a conceptual matter this factor belongs in the equation or not. [00:43:23] Speaker 01: At all. [00:43:24] Speaker 01: Right. [00:43:25] Speaker 01: And I think the evidence overwhelmingly demonstrates that it is appropriate to include it because [00:43:31] Speaker 01: Profiters are, in fact, earning profits, and these profits are allowing them to recover their capital investments, which is conceded by the primary witness relied upon by Petra Star. [00:43:46] Speaker 01: Thank you, Your Honor. [00:43:47] Speaker 01: Petition should be denied. [00:43:54] Speaker 03: Mr. Benenagle. [00:43:55] Speaker 03: Thank you, Your Honor. [00:43:56] Speaker 03: Jim Benenagle, Sidley and Austin, and I'm carrying on behalf of the interveners in support of the appellate. [00:44:03] Speaker 03: Let me start where everybody's left off, which is paragraph 136. [00:44:09] Speaker 03: And I'd like you to look at 137 first, because there's a sentence that bears on this. [00:44:14] Speaker 03: In the middle, the judge is sort of, the ALJ is sort of repeating his finding. [00:44:19] Speaker 03: And he makes the statement, the two have no meaningful connection for quality bank purposes. [00:44:24] Speaker 03: And what he's talking about that is the composite value of the nine cuts [00:44:29] Speaker 03: and the price of ANS. [00:44:31] Speaker 03: And that takes you directly to the last sentence that Judge Edwards focused on, which is the value of ANS in the marketplace is driven not by what comes off the distillation tower, but what comes out of the refinery and total. [00:44:47] Speaker 03: That's what's being discussed in the reference to CPA 1, 16 to 19. [00:44:52] Speaker 03: It was our expert's testimony. [00:44:54] Speaker 02: Just to understand the architecture of this, [00:44:56] Speaker 02: As I understood paragraph 137, that's making the relative versus absolute point. [00:45:01] Speaker 03: Well, I think he's transitioning to the relative to absolute. [00:45:05] Speaker 03: The relative is talked about more extensively in paragraph 138. [00:45:08] Speaker 03: I think the sentence I'm focusing on, he's referencing back, as he says, as previously demonstrated. [00:45:16] Speaker 02: Just immediately above the portion you were talking about. [00:45:19] Speaker 02: 137 says, Oxy confirms that QB methodology's objective is to assign accurate relative values italicized among the various quality bank cuts. [00:45:27] Speaker 02: The methodology's objective is not to determine the, again, emphasize actual market values of the cuts or trades for comparison purposes. [00:45:34] Speaker 02: And as I read everything that followed, it was by reference to the asserted distinction that was being made between relative and absolute. [00:45:41] Speaker 03: Yeah, but we're missing a key distinction here between relative value, actual value, and the price of ANS. [00:45:48] Speaker 03: There is no evidence in the record, and the evidence in the record that does exist says there's no meaningful connection between the values created from distillation [00:46:01] Speaker 03: and the value of ANS. [00:46:03] Speaker 03: This proposition that they have that you necessarily add value simply by making the first step in the refining process isn't true. [00:46:13] Speaker 03: And secondly, it hasn't been proved. [00:46:16] Speaker 03: There's extensive testimony in the joint appendix where our experts explain why Mr. Verlagher's [00:46:23] Speaker 03: concept that you could derive, that you could essentially back into the net product value of ANS off of the nine composite cuts was wrong. [00:46:34] Speaker 03: That's at JA 161 to 167, and at Mr. Keeley's testimony, it's at JA 286 to 293. [00:46:43] Speaker 03: And what they're basically saying is essentially what Judge Edwards focused on, and that is that the value of ANS [00:46:51] Speaker 03: What refiners are willing to pay somebody to buy the ANS is driven by what they can produce after distillation, not before distillation. [00:47:01] Speaker 03: So the price of ANS is related to what comes out of the total refinery, not what comes off of the distillation process. [00:47:09] Speaker 03: It's not hard to imagine that the first step in the manufacturing process does not add value that has recognizable market value. [00:47:17] Speaker 02: And where would you point us as for [00:47:21] Speaker 02: for the basis on which to conclude that that's the rationale on which the ALJ and the commission. [00:47:26] Speaker 03: Well, that's what the ALJ is saying in this sentence at the end of paragraph 1, fix 36. [00:47:33] Speaker 03: The two sentences. [00:47:34] Speaker 03: So we're back to the sentences that we were talking about earlier. [00:47:36] Speaker 03: Oh, absolutely. [00:47:37] Speaker 03: That is the core of the response. [00:47:39] Speaker 03: But it isn't, well, I can't understand it. [00:47:42] Speaker 03: What he's basically saying is the methodology prices everything at. [00:47:48] Speaker 03: the distillation tower. [00:47:50] Speaker 03: So you've got to get the prices at the distillation tower. [00:47:53] Speaker 03: We have six prices at the distillation tower for that purpose, and now we have three other products that don't have prices. [00:48:01] Speaker 03: So we have to look further downstream, come up with a price, and then back into a price at the distillation tower. [00:48:07] Speaker 03: And to do that, you've got to take out all the costs. [00:48:11] Speaker 03: Otherwise, and this comes right out of Oxy, you're going to overvalue those cuts because you're essentially leaving in the costs that created the more valuable products downstream. [00:48:22] Speaker 03: And what he's basically saying is that's where the value is being added in the refining process. [00:48:28] Speaker 03: And as a consequence, there's no meaningful connection between the ANS price and these [00:48:34] Speaker 03: prices that are supposed to be actual prices. [00:48:37] Speaker 03: Just because they're two actual prices doesn't establish that they're related. [00:48:41] Speaker 03: What they're essentially saying is there's no connection here. [00:48:44] Speaker 03: So whether there's an anomaly, it's not meaningful. [00:48:47] Speaker 02: Yeah, I mean, I think the question, just to tell you what I'm thinking, I think the question is whether this kind of explanation is what the ALJ is saying. [00:48:58] Speaker 03: Well, one other factor to take into account in this connection is footnote 72. [00:49:03] Speaker 03: What is he saying? [00:49:05] Speaker 03: Why is this footnote here at this juncture? [00:49:07] Speaker 03: Now, in paragraph 106, the judge goes on and on about the fact you've got to back out these costs in doing the quality back. [00:49:14] Speaker 03: And he says, he repeats that here and then says, Mr. Verlegger reaffirmed a misunderstanding at this point throughout the proceeding. [00:49:22] Speaker 03: And if you look at the reference, FR 51 at 7 and 8, and that's at JA 233 and 38, [00:49:30] Speaker 03: The reality is he is not valuing all the cuts at the distillation tower. [00:49:37] Speaker 03: The major problem the judge had with Mr. Verlager is he was valuing these cuts when they came off the different portions of the hypothetical construct. [00:49:47] Speaker 03: And he's essentially valuing the Coker products as if they came off the Coker, as opposed to the Dissolation Tower. [00:49:55] Speaker 03: The whole back-out concept is whatever costs are incurred downstream got to come out. [00:50:02] Speaker 03: The evidence in this case is overwhelming that coking refineries make money. [00:50:06] Speaker 03: So coking is profitable. [00:50:08] Speaker 03: So you've got to take capital costs out. [00:50:11] Speaker 03: And then you back into, for the residual price, a residual price at [00:50:17] Speaker 03: the Coker. [00:50:18] Speaker 03: And in answer to the question, well, how is that consistent with footnote 21? [00:50:22] Speaker 03: It's absolutely consistent with footnote 21. [00:50:25] Speaker 03: The methodology assumes that whatever costs are incurred in distillation are recovered in those prices. [00:50:36] Speaker 03: So for the six cuts, well, it's in there. [00:50:39] Speaker 03: With respect to this, since we're only backing out costs related to the downstream processing, [00:50:45] Speaker 03: the resulting price has whatever costs of distillation are in it. [00:50:50] Speaker 03: So it's perfectly consistent in that regard. [00:50:53] Speaker 03: And the final point that I'd make on this is this argument that spot prices don't include capital costs. [00:51:01] Speaker 03: It's just wrong. [00:51:02] Speaker 03: I mean, for two reasons. [00:51:04] Speaker 03: One is if you look at JA 352, Mr. Verlager admits that they do. [00:51:09] Speaker 03: He was asked the question, as we sit here today, that the market prices that are used by the West Coast refineries include the recovery of capital fixed and variable costs, the full component. [00:51:21] Speaker 03: Yes, they include the recovery of capital and full cost as they were incurred and as they are measured. [00:51:26] Speaker 03: So this argument that spot prices don't include capital costs is just wrong, and you can tell that from the Blatt's netback analyses. [00:51:36] Speaker 03: Plans only use the spot prices. [00:51:39] Speaker 03: And in its netback analysis, what it's doing is trying to figure out. [00:51:42] Speaker 02: Again, as to that, too, I think the question is not, at the end of the day, whether there's an answer. [00:51:48] Speaker 02: Because I mean, I think the seeds of an answer are there, and you're elucidating them. [00:51:52] Speaker 02: The question is whether the commission and beforehand the ALJ gave the answer. [00:51:58] Speaker 03: Oh, and I think they did. [00:52:00] Speaker 03: And look, the real answer, the best part of the answer in this thing, [00:52:04] Speaker 03: is if you look at paragraphs 119 and 120, where the court talks about the conceptual underpinnings of the quality bank as it relates to capital costs, it says from a conceptual standpoint, you can't assume the culprit and not assume the costs. [00:52:22] Speaker 03: He then goes on to say, but that doesn't mean there's a guaranteed return. [00:52:26] Speaker 03: And he talks about the concepts of stranded cost [00:52:30] Speaker 03: and sum costs, which are really two sides of the same coin for these purposes. [00:52:35] Speaker 03: And then he says, the proof is in the pudding. [00:52:37] Speaker 03: What is going on in the real world? [00:52:41] Speaker 03: And if you go over to paragraph 143 and 144 in his decision, he then picks up at the end of 143 by saying, now we've got to revisit the sum cost theory and see what's going on. [00:52:53] Speaker 03: And then in 144, he lays out [00:52:56] Speaker 03: His conclusion that in the real world, these costs are being incurred, that they haven't lost their value, and that as a consequence, that capital cost factor has to be in there. [00:53:08] Speaker 03: He doesn't say it has to be in there at 20%. [00:53:10] Speaker 03: He goes out of his way to say, look at 20%, maybe the wrong number. [00:53:15] Speaker 03: But that wasn't the issue that was presented. [00:53:17] Speaker 03: The issue was presented is, should capital costs be excluded? [00:53:21] Speaker 03: And the answer to that is clearly no. [00:53:24] Speaker 03: Thank you. [00:53:24] Speaker 03: Thank you. [00:53:28] Speaker 02: Mr. Citron will give you two minutes. [00:53:32] Speaker 05: I think this argument has become a little bit of a Rorschach test for that sentence, paragraph 136, with lots of people reading it differently. [00:53:40] Speaker 05: And I think that that tells you mostly what you need to know, which is that it's not entirely clear exactly what the ALJ meant by it. [00:53:46] Speaker 05: And I think that's most obvious because Ferck's attorney here, even with the benefit of post hoc hindsight, won't exactly tell you what parts of that reasoning they endorse or why. [00:53:56] Speaker 05: I will tell you what I think is going on in paragraph 136. [00:54:00] Speaker 05: And I think that it actually strengthens our argument [00:54:02] Speaker 05: But my main point is, this is a rational explanation challenge, not a substantial evidence challenge. [00:54:08] Speaker 05: So it's not, as Judge Srinivasan was pointing out, the question is not whether there's some evidence in the record that might be used to formulate an answer, but whether the answer is there. [00:54:18] Speaker 05: What they seem to be saying in paragraph 136 is, look, the real world value of a barrel of oil is going to be higher, because there's a bunch of awesome stuff that we can make out of it at the end of the day. [00:54:29] Speaker 05: that in place. [00:54:31] Speaker 05: If that's true, it will make the anomaly worse, because it means that out of light distillate, heavy distillate, and resin, you can make a lot of extremely valuable things that should be reflected in the value of those cuts too. [00:54:46] Speaker 05: I think it's an awfully pleasant coincidence that their theory is that will somehow raise the value of the underlying barrel, but not the intermediate products that you could then use to make all that stuff. [00:54:58] Speaker 05: Everybody agrees the first step in the refining process is distillation, unless the distillation products are in fact more valuable than the underlying rock root, which is, I think, agreed that they are more valuable, that the costs are reflected in those intermediate cuts. [00:55:17] Speaker 05: What you would see refiners do is go out into the real world and buy resit or buy light distillate or buy propane and use it to make this stuff, because it's cheaper. [00:55:28] Speaker 05: But that never happened because it was just an accountant. [00:55:30] Speaker 05: It's just the way the quality mechanism is designed. [00:55:33] Speaker 05: It's not a real world feature. [00:55:35] Speaker 05: And if they think that this unusual thing is happening, they need to explain that. [00:55:38] Speaker 02: With respect to your Tesoro argument, you may have seen more than one explanation offered. [00:55:42] Speaker 02: I'm not sure, but you may have seen more than one explanation offered. [00:55:45] Speaker 02: But from your perspective, we have to decide whether there's enough of an explanation in there already. [00:55:51] Speaker 02: If what has been argued in opposition to you had been in the ALJ's opinion, I take it you wouldn't have a Tesoro argument. [00:55:57] Speaker 05: All right, then I would have to fall back on either the absence of substantial evidence or the fundamental irrationality of them. [00:56:03] Speaker 05: I think, you know, I'm very happy to agree that that's where the deference to the agency lies. [00:56:08] Speaker 05: But this is just what Judge Edward's decision in Bluewater and Judge Garland's decision in Torres says. [00:56:13] Speaker 05: The reason we require an explanation with specificity more than we see in paragraph 136 [00:56:18] Speaker 05: I think results in disagreement among the lawyers about what that sentence means is precisely because once we get a good explanation or a clear explanation of what the agency thinks, we will defer to its technical judgments about it. [00:56:32] Speaker 05: But that's just why we need to know exactly what they think, and I don't think we do. [00:56:37] Speaker 02: Thank you. [00:56:37] Speaker 02: Thank you, counsel. [00:56:38] Speaker 02: The case is submitted.