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Case number 11-1479 at L. United Airlines, Inc.

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at L Petitioners versus Federal Energy Regulatory Commission at L. Mr. Eastman for Shipper Petitioners, Mr. Caldwell for Petitioner SFPPLP, Mr. Fulton and Ms.

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Luftin, both respondents for the FERC.

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Good morning.

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Judge Griffith will consider these cases based on the audio recording of the oral argument.

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You can proceed.

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May it please the court.

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I would assume that you would like me to address the jurisdictional issue that you raised in the order of about a week ago.

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Your honor, I think.

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that the missing piece of the jurisdictional puzzle is the DOE Organization Act, specifically provision 42 USC 7192, which much like the more general saving provision whereby in the DOE Act, the authority of the ICC over oil pipelines was transferred to FERC.

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So too, in the provision that I cited, the judicial review provisions as then existed over ICC orders was preserved and made applicable to orders thereafter issued by FERC.

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And I would cite to the court two instances in the court's orders where, indeed, that provision was relied on for this missing case.

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Before that, can you tell us what the wording of that provision is that covers this?

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I'm sorry.

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Could you tell us

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Says in 7192A, that judicial review of agency action taken under any law, the function of which are vested by law in or transferred or delegated to the secretary of the commission, which would be the FERC, or any officer, employee, or component of the department shall not withstanding such vesting transfer or delegation be made in the manner specified in or for such law.

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And so the judicial review, as it existed over an ICC order, now is the same procedure and process, same venue under the Hobbs Act, and I believe under Section 1710 of the Interstate Commerce Act,

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gives this court jurisdiction over the FERC order, much as you had jurisdiction over orders back before 1976 over ICC orders.

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And there are two cases of the court, the Mark West case, which can be found at

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I'm sorry, Earth Resources versus FERC, 628, Fed 2nd, 234, which is a 1980 decision, and a second decision, AOPL versus FERC, which I believe was found at 83, Fed 3rd, 1424 at note 14.

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That's the court's decision of 1996.

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And I would note that Judge Griffith was sitting in that panel.

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And specifically, it's interesting in the footnote I just referenced, cites to the very provision I'm citing.

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And interestingly, in that citation, he points to the 1976 version of that, which is how it existed at the time of transfer.

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And I would just add, please don't be confused by the fact that the current Hobbs Act speaks in terms of the Surface Transportation Board orders.

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In 1995, the Congress

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amended the applicable provisions of the Hobbs Act to change ICC to STB.

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There was no substantive intent to vacate anybody's jurisdiction at that time.

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And in fact, in the AOPL Act case... We need a little more than your H.D.

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Dix has to do with no substantive intent.

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Well, I think there's two ways... We usually go by what Congress says in the Act.

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Yes sir, I agree.

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There are two reasons I think that that's the proper reading of the decision.

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And that or of the statute.

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And first of all, it is a savings provision.

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It's a snapshot in time, much like the ICA as it existed at the time of the transfer to FERC.

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That statute continues to exist in that

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archaic form, if you will, just as it existed at the time of 1976.

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So I believe that as the judicial review provisions existed at that time are preserved forevermore until Congress substantively changes that as they were written, another way of looking at it is changing the name from ICC to STB in 1995

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has no substantive fact that STD is simply the successor to the ICC and I think it's reasonably read as

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not substantively changing the court's jurisdiction over ICC orders, it's simply a reflection of the fact that ICC doesn't exist.

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The Hobbs Act currently applies to cases from the STB.

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This clarifies that the Hobbs Act applies to those orders, but in no way changes the fact that in a snapshot in time in 1976,

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the court's jurisdiction was preserved by the DOE Act.

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Okay, I'm going to address the merits.

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Thank you, Your Honor.

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Your Honor, or may it please the court, I believe that the essential critical fact

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that is central to your decision here has to do with who pays the taxes on income derived by a partnership pipeline that's regulated by FERC.

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And why do I say that's so centrally important?

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There's no dispute that if investors pay a tax,

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under the discounted cash flow methodology for determining rate of return, it is necessarily incorporated in that return, which is a pre-investor tax return, that that's large enough to cover the investor's taxes.

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In contrast, if the tax is borne by the pipeline, much like the corporation bears a tax,

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The rate of return on equity derived under the DCF method does not include that and therefore that's why you need an income tax allowance.

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So how would we remedy this if you were correct?

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If I am correct is that you direct the Commission to address

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and to remedy the double recovery.

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We believe... Is that consistent with our precedent in ExxonMobil?

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Right.

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So that's what I was going to ask, and I'll just add one thing.

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Go ahead.

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Add one thing to that was, is it one of the two ways to correct it precluded by ExxonMobil?

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But answer Judge Santel's question first.

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I don't think so, but I apologize.

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I didn't hear you, Judge Santel.

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I asked if this was not what you were asking for wasn't inconsistent with ExxonMobil.

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I don't think so.

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I think that ExxonMobil addressed the question.

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And its derivative, remember the orders on review in ExxonMobil were in fact the orders that FERC came up with on remand from BP West.

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So the focal point of the debate

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was, well, these taxes are borne by the investors, the partners, and not by the pipeline.

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How can you put it in a pipeline cost of service?

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And in BP West, the court suggested, much like Ferck had said, that would be like having a fictitious tax being recovered.

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Fert comes back in the policy statement and says, well, it's true that the pipe, that the... You're not getting far on distinguishing your case today from the ExxonMobil question.

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You're giving us a nice discussion of the background.

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What is it that keeps this from being inconsistent, your request from being inconsistent with ExxonMobil?

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Because I don't think the issue of double recovery was resolved in ExxonMobil.

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Exxon Mobil never addressed the question whether, OK, if it may be included in the cost of service, all the court said was it can be included once.

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The issue we're bringing forward.

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But it said the income tax allowance was OK.

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They said the income tax allowance was OK on the assumption that there was no other

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recovery of the income tax allowance?

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Well, it didn't say on the assumption, right?

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It just said the income tax allowance was OK.

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And that's why I was asking, is there another way for you to, if you're correct about the double taxation, just as the premise, is there another way for you to prevail other than the income tax allowance?

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And I noticed in the brief there's talk about designing a mechanism to eliminate it from the ROE.

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is that how that work is that possible.

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Yes, it is.

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But I think it's more complicated.

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We say that it's recovered twice.

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Once in the income tax allowance, once in the rate of return.

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The income tax allowance is easy.

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You just eliminate it.

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If, however, you say, no, you've got to have an income tax allowance.

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Because we've already said that's OK.

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Because that's one reading of ExxonMobil, that it necessarily has to be there, regardless of the double recovery problem.

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Then let's look at the ROE.

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And in the ROE, since it's a pre-investor tax ROE, let's figure out a way of taking out of the ROE the component of the income tax recovery and then we'll have no double recovery.

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I would suggest that either of those remedies on remand is available to the Commission.

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I would also suggest that the far more straightforward remedy, and that's why I think all this is, is which remedy do you choose to the problem of double recovery, is that

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The rate of return is sort of an elegant market-based solution to the question, how much tax are the partners actually incurring?

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The marketplace is a dynamic system, and the DCF tries to capture that by looking at actual market data.

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If if we were not bound by precedent, would you be if we were not bought for it, would you be up here asking us to simply overrule?

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Say we were wrong.

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Your honor, I believe that you need to distinguish ExxonMobil.

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You don't have to overturn it.

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Much like in ExxonMobil, you distinguish BP West.

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You said to us... Right, you think ExxonMobil is inconsistent with BP West, at least at the time.

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We did, and we argued BP West is telling FERC that it's a fictitious tax, it can't be in the cost of service.

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And you disagreed and said all we said in BP West is that FERC may decide not to include an income tax allowance, but we didn't say they couldn't.

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So that was... And FERC considered at the time, it considered both options.

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And it chose this option, and we said that was OK in ExxonMobil.

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And the language we used in ExxonMobil was grudging because of the deference we give on rate setting, rate making cases.

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Your honor, I mean, to get maybe skipping down the logic train of this, I think the court understands my argument regarding the double recovery and appears you're concerned about having to reverse yourself.

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And I'm trying to say that you can't reverse yourself.

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But I believe that

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that it is not a reversal for the reason I tried to share, but in addition, even if you want to go to the position of, gee, our hands are tied, they still have issued, they took our arguments regarding double recovery, and they revisited the question.

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The orders here on review are a substantive

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decision by the agency that is here subject to your scrutiny as to whether it makes sense.

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In our view, this order is independently reviewable on its own merits.

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because they reopen the question based on our argument.

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Commission, we think you've gone wrong.

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You're resulting in unjust and unreasonable rates by permitting a double recovery.

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What does FERC answer?

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FERC says, no, there's no double recovery with mathematically proven it.

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I mean, it's well over 100 paragraphs of dense, substantive discussion charts

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12 new commission related charts, an appendix that comes up with a new theory about gross up that simply takes the income tax allowance and say, no, it's not there.

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I've just taken it out.

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See, it's not there.

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That's this gross up idea that they implement.

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And all of those decisions, all are premised on one factual error.

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All of those charts, all of the discussion, all of the tables are based on the premise that this tax should be treated as a pipeline level tax.

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But they get that, of course.

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They get it's not actually a tax on the pipeline.

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So it's not that they don't understand.

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I don't, they don't, it's not like they don't understand perhaps the difference in the corporate and the partnership structure.

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That may be where we went wrong in affirming them in ExxonMobil, but we did do it.

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We did.

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But what they said is not withstanding the fact that it's the

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partner who pays it and not withstanding the fact that our own admission in paragraph 244 of 511 says investor taxes are recovered in the ROE so they're in the ROE nonetheless we're going to persist in giving it to them again in the interest in the

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And they say, well, it's really double taxation for the shareholder, the corporate shareholders, rather than double recovery.

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And that's a feature of the tax code.

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That's one of their responses.

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Which is, yeah, the partners are getting a break here relative to the corporate shareholders.

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At least that's one way to read it.

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But it's all within the bounds of reasonableness here.

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It's not within the bounds of reasonableness because the fact that the partnership has less of a tax burden.

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Remember, these are cost-based rates.

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Taxes are, as the courts have repeatedly said, just like any other cost.

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Now the partnership pipeline has gotten a break.

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They have less costs.

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That means their cost of service should go down.

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That should be good news because that makes them more competitive.

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They should be able to charge lower rates.

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So all the benefits, as the BP Westport observed, all the benefits of this tax break, of the tax provision, was captured once the partnership enjoyed the benefits of the tax reduction.

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They didn't say a word that FERC should do anything at that point.

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What FERC has done is go beyond the benefits of a lower cost of service, which should make them less risky and more competitive, even if it was an unregulated market.

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And instead, they're going to say, we're going to add on an additional benefit.

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And like they added in that point, remember the policy statement which you affirmed in ExxonMobil was premised

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your decision on the fact that their goal was to reach parity.

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you will not find in 511 and 511A that parity notion.

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In fact, I cited in my brief, the commission specifically says that if we don't give an income tax allowance, there will be parity to the after-tax returns of the partnership and the corporation.

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Now, the commission has fundamentally changed

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the goals and the justification for their policy.

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And that's why this is a reopening that you should review on its own merits.

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Now they say, no, we want to do more than parity.

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We want to give the partnership an advantage.

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That's a completely different justification.

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And another reason why I don't think you have to reverse yourself in Exxon Mobil.

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You affirm them on the basis that they were saying, we need parity.

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And the court said, well, that seems reasonable to us.

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That's a nice goal.

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In fact, it's consistent with HOPE Natural Gas.

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But that's exactly what HOPE wants.

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pipelines of comparable risks should get the same after tax return.

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But the commission has now changed their tune.

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They said, no, that's not enough.

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We want to give them an advantage.

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I think that gives this court

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all the grounds that can to distinguish ExxonMobil, say to the Commission, you've come up with new reasoning, you basically have a new policy, you have new rationales for that policy, you have a new factual predicate for your policy, and we can review it.

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If we were to say it's wrong to give them an advantage, it's wrong to give them an advantage because

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It's wrong to give them the advantage because, as you said, NexonMobil, the goal under HOPE Natural Gas is that there should be parity.

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So it all stems from HOPE putting the outer bounds on what they can do in terms of favoring one type over the other.

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That's right.

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And that's what you were trying to do is make sure that one wasn't favored.

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In that context, you didn't want to favor the corporation.

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Well, it's more that we were allowing the commission to do it rather.

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And as we said, even then, I think our opinion says, well, not without force on the phantom taxation issue and things like that.

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So we were clearly speaking the language of deference in that opinion.

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and basically what we now have given you is the reason why this policy has now fundamentally altered by the commission and their reasoning in this decision.

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They haven't changed the policy.

[00:19:50] Speaker 06:
They may have changed their rhetoric, but the policy hasn't been changed from the one we've run in ExxonMall.

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But that's not the test on whether they've reopened the issue and made their new orders subject to your review.

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I think that that's

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So in sum, in Hope Natural Glass, a pipeline is entitled to reasonable costs plus a reasonable return.

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I submit to you that it's absolutely arbitrary and capricious for the commission to permit a pipeline to recover more than their actual costs by double recovering a component

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simply based on an error of fact.

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It is not a pipeline-level tax.

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It is an investor-level tax.

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One follow-up.

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Is parity not just permissible but required?

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I think under hope it's required.

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It all stems from hope then.

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Anything else in the statute or case law other than hope that you say demands parity as opposed to allows parity?

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Because hope is at the heart of this as is just and reasonable.

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Just and reasonable and hope all say you're allowed your costs.

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There is no precedent that I know of in the court or at the commission that has ever permitted and found just and reasonable a rate based on a double recovery of any cost component.

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We cited those orders to you in our brief.

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That's true under the Federal Power Act, the Natural Gas Act, and the Interstate Commerce Act.

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That's the heart of this case.

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Their whole case is based on an erroneous premise.

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When you change that premise,

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and apply the correct fact that this is an investor tax, you find that Exxon Mobil decision does not limit the sport.

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They've come up with a new rationale, they reopen the issue, and you can judge this decision without big concern that you're overturning yourself.

[00:21:57] Speaker 04:
Okay, thank you very much.

[00:21:58] Speaker 04:
Thank you.

[00:22:12] Speaker 05:
Good morning.

[00:22:13] Speaker 05:
Good morning, Your Honors.

[00:22:15] Speaker 05:
May it please the Court, I am Charles Caldwell here on behalf of SFPP to address two other issues.

[00:22:21] Speaker 05:
SFPP seeks review with regard to the 2009 index and the rate of return on equity.

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First, with regard to indexing, the rates here – just some background – the rates here were set as of August 1st, 2008.

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And in practice, those rates were then indexed forward to determine just and reasonable rates in future periods.

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But in this instance, the Commission only permitted SFPP to apply one quarter of the 2009 index to those 2008 rates.

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It did that on the theory that the 2009 index is actually a backward-looking adjustment.

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It looks back to see whether or not the 2008 rates have 2008.

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The unexceptional observation that 2008 rates have 2008 costs.

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as opposed to the index for 2009 being a forward-looking adjustment, saying, let's take those 2008 rates and say, well, what inflation can we anticipate in the 2009 index year?

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And I'll just clarify something in case it's not perfectly clear, because it's something I trip up on.

[00:23:25] Speaker 05:
When I say the 2009 index year, Your Honors,

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that actually starts off calendar.

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It starts July 1st of 2009 and goes all the way to June 30th of 2010.

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So with that with that premise, these are forward looking adjustments.

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And for the support for that, you can look at the commission's own indexing regulations at 342.3 D five

[00:23:50] Speaker 05:
addresses these exact circumstances.

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Where the pipeline comes in and files a rate, that changes the ceiling, the rate ceiling for that index year.

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In this case, that was in 2008.

[00:24:02] Speaker 05:
When the commission comes back and issues an order as to that rate, and in this case lowers it, and that's what the regulation precisely says, it changes the ceiling level in that year, in the 2008 index year, and then the regulations require that that becomes the base

[00:24:18] Speaker 05:
for the next year's index adjustment.

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And in this case, that's 2009.

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That's what the regulations provide.

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And in fact, this court's seen all of this before.

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In the BP West Coast opinion, we all live in that world.

[00:24:33] Speaker 05:
We can't get away from SFPP.

[00:24:35] Speaker 05:
In the BP West Coast case,

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It was the opinion 435 series of orders.

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And that's where this indexing forward arose.

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The commission came up with it as a way of determining just and reasonable rates forward in time, because time passes.

[00:24:48] Speaker 05:
The regulatory process takes time.

[00:24:50] Speaker 05:
So in that situation, here's what the facts were.

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Because I'll suggest, I'll submit, that if the rulings in the 435 orders, affirmed by this court in BP West Coast, were applied in this case,

[00:25:03] Speaker 05:
there would be a full 2009 index, and here's why.

[00:25:07] Speaker 05:
If you look back at BP West Coast, here were the facts.

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There was a 1993 base period that SFPP had, and then that was adjusted forward to 1994 for 1994 costs.

[00:25:20] Speaker 05:
And then that 1994 rate was then indexed into 1995 and subsequent years to determine just and reasonable rates, reparations, and refunds.

[00:25:30] Speaker 05:
Well, let's move forward to today.

[00:25:32] Speaker 05:
In this case, what you had was a 2007 base period adjusted partially for 2008 costs and then taking that 2008 rate and indexing it into 2009, applying the 2009 index and so forth.

[00:25:48] Speaker 05:
Same process.

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Difference is only one quarter of that 2009 index was applied.

[00:25:55] Speaker 05:
on this theory that you're supposed to be looking backwards.

[00:25:58] Speaker 05:
Well, that never happened in the 4 35 orders.

[00:26:01] Speaker 05:
Or was that explained that that would be the case to this court and BP West Coast.

[00:26:06] Speaker 05:
The commission attempts to Yes, your honor.

[00:26:08] Speaker 06:
Does the BP order on this issue compel

[00:26:13] Speaker 05:
what you're adding for are simply for me.

[00:26:16] Speaker 05:
It permits it, Your Honor.

[00:26:17] Speaker 05:
It permits it.

[00:26:18] Speaker 05:
I would say it's a matter of consistency because I will.

[00:26:20] Speaker 05:
I will acknowledge your honor that there are other orders of the commission can and does cite.

[00:26:25] Speaker 05:
But your honor,

[00:26:27] Speaker 05:
Twice wrong doesn't make right.

[00:26:28] Speaker 05:
Three times wrong doesn't make right and so forth.

[00:26:30] Speaker 05:
There are orders where the commission's gone off in a different direction and turned indexing around to look backwards.

[00:26:36] Speaker 05:
SFPP submits that's inconsistent with the commission's original formulation of indexing forward, and it also doesn't make good sense.

[00:26:45] Speaker 05:
The way they try and distinguish themselves to try and get away from the 435 orders is they say, well, that was a complaint case.

[00:26:52] Speaker 05:
This is a case where the carrier came in and filed a rate, and there were protests.

[00:26:57] Speaker 05:
Under the statute, that's a distinction without a difference.

[00:27:02] Speaker 05:
There's two provisions of the Interstate Commerce Act.

[00:27:06] Speaker 05:
A complaint would arise under Section 13, Paragraph 1.

[00:27:10] Speaker 05:
The protest of the carrier rate would arise under section 15, paragraph 7.

[00:27:15] Speaker 05:
But in both instances, the commission has to determine what the just and reasonable rate is, whether complaint or protest, and then it now indexes those forward in time.

[00:27:25] Speaker 05:
So whatever setting you're in, you end up at section 15, paragraph 1, which is the commission's authority in either setting, this setting or a complaint setting, to determine what the just and reasonable rate is forward in time.

[00:27:37] Speaker 05:
And that's what they use indexing forward for.

[00:27:39] Speaker 05:
So the distinction the commission uses to try and get away from its prior precedent, and this court's order in BP West simply doesn't apply.

[00:27:47] Speaker 05:
It's not a real distinction.

[00:27:51] Speaker 05:
And the other difficulty with what the commission has done here is they've ignored their test.

[00:27:57] Speaker 05:
They have it right there in their eggs.

[00:27:58] Speaker 05:
In 343.2C1, we reference in our briefs,

[00:28:03] Speaker 05:
sets forth a comparison.

[00:28:05] Speaker 05:
And the comparison would be, you look here, you would look at the change in costs from 2007 to 2008 and compare that to the 2009 percentage, whether it's substantially in excess of the actual cost change, whether to apply it or not.

[00:28:19] Speaker 05:
That was never applied in this case.

[00:28:22] Speaker 05:
The commission on brief notes, page 47 and 49 of their brief, they assert that the shippers raised in their protest

[00:28:31] Speaker 05:
343.2C1.

[00:28:32] Speaker 05:
I would submit, Your Honor, you can go through the reference portions of 511 and 511A, and it's not in there.

[00:28:41] Speaker 05:
There was no reference in the protest.

[00:28:43] Speaker 05:
There's no reference anywhere in these orders to actually applying what the Commission calls the percentage comparison test.

[00:28:49] Speaker 05:
They stake everything on their theory of looking backwards and saying, were the costs recovered in the past as to whether or not we make a future adjustment that's a prediction of future costs?

[00:29:00] Speaker 05:
They're confusing the test with the purpose of indexing.

[00:29:04] Speaker 05:
If I can move on to, unless there are questions, I'll move on to equity return.

[00:29:08] Speaker 05:
Thank you.

[00:29:09] Speaker 05:
Okay, with regard to equity return, there's not in dispute here that the condition standard practice is to look to the freshest, the most recent ROE data.

[00:29:19] Speaker 05:
Okay, so there's no dispute there.

[00:29:21] Speaker 05:
In this case, that data was vintage April 2009.

[00:29:24] Speaker 05:
Okay, that was the freshest data in the record.

[00:29:28] Speaker 05:
The commission said, let's not look to that because that was affected by anomalous economic conditions.

[00:29:35] Speaker 05:
We all remember the Great Recession.

[00:29:37] Speaker 05:
Why is that unreasonable for them to say that?

[00:29:39] Speaker 05:
It's not unreasonable, Your Honor, not at this point focusing on that.

[00:29:43] Speaker 05:
I would say the commission has a policy.

[00:29:45] Speaker 05:
It has the advantage of being objective, but it can choose to evaluate and say, well, let's use something else.

[00:29:52] Speaker 05:
And that's what they did here.

[00:29:54] Speaker 05:
The point is that in doing that, they said, well, the April 2009 data is unrepresentative.

[00:30:01] Speaker 05:
But then they turned around and said, well, let's use September 2008 data.

[00:30:04] Speaker 05:
And they made no such analysis.

[00:30:07] Speaker 06:
They made no such analysis.

[00:30:08] Speaker 06:
They said let's use September without saying why that data was represented.

[00:30:13] Speaker 05:
That's right, Your Honor.

[00:30:14] Speaker 05:
There is a standard there of representativeness.

[00:30:17] Speaker 05:
You can search around, I've done it.

[00:30:20] Speaker 05:
You look down to the ALJ's analysis, the ALJ said nothing about whether the September 2008 data was representative.

[00:30:27] Speaker 05:
He rejected the April 2009 data.

[00:30:30] Speaker 05:
Let's move forward to the opinions.

[00:30:32] Speaker 06:
The only year is not the rejection of April, which they did just by the anomalous condition.

[00:30:41] Speaker 06:
Rejection is to the acceptance of September, which they did not.

[00:30:45] Speaker 05:
Well, your honor, we would deeply prefer for the commission to have picked April 2000.

[00:30:53] Speaker 05:
But I'm trying to focus on the conditions before you start.

[00:30:56] Speaker 06:
There is error.

[00:30:57] Speaker 06:
the error is in the lack of foundation for the September choice, rather than for the April module.

[00:31:04] Speaker 05:
That's right, Your Honor.

[00:31:05] Speaker 05:
That's right, Your Honor.

[00:31:06] Speaker 05:
And if you look, let's look at that earlier September 2008 data.

[00:31:12] Speaker 05:
What the Commission did was the real return on equity was 7.69% and I realize I'm getting close to it.

[00:31:21] Speaker 05:
Okay, sorry.

[00:31:23] Speaker 05:
was 7.69%.

[00:31:24] Speaker 05:
And that was driven downward by an anomalously high inflation factor back then in September 2008 of 4.94%.

[00:31:34] Speaker 05:
What the commission did was they picked an inflation factor out of a brief period of peak inflation out of a stretch of 20 years of lower inflation, data that SFPP put into the record.

[00:31:49] Speaker 05:
On the basis of that, they ended up with this low 7.69%.

[00:31:53] Speaker 05:
Well, then what did they do next?

[00:31:54] Speaker 05:
They went and reached out to a different SFPP case, different record, and they plucked two real rate of return percentages, 8.72% and 9.09%.

[00:32:06] Speaker 05:
Oh, now let me say, there's no analysis of those numbers.

[00:32:10] Speaker 05:
They're just put in a chart on a page in the opinion.

[00:32:14] Speaker 05:
The suggestion is made, oh, well, therefore the 7.69 is not a big deal.

[00:32:19] Speaker 05:
Well, I would submit, Your Honor, it is, in technical language, a big deal.

[00:32:23] Speaker 05:
Because that's 100 basis point difference or 140 basis point difference.

[00:32:28] Speaker 05:
Out in the real world, that's real money.

[00:32:30] Speaker 05:
I can run you through an example of the compliance filings are in the record.

[00:32:34] Speaker 05:
They're record item 1016.

[00:32:36] Speaker 05:
If you look on statements C and D, they will show you that that's real money.

[00:32:40] Speaker 05:
Even the narrowest difference there

[00:32:42] Speaker 05:
could translate into over a million dollars in change in the cost of service.

[00:32:47] Speaker 05:
Those were significant differences, and the Commission used those to try and make 7.69 look better.

[00:32:53] Speaker 05:
All it does is emphasize that there's no real evaluation supporting this outcome in this proceeding.

[00:32:59] Speaker 05:
The Commission falls back on an argument that we're working at a more fundamental principle of rate-making.

[00:33:05] Speaker 05:
that cost of service is supposed to be a reasonable forecast of the future.

[00:33:10] Speaker 05:
Okay, well that's fine, but there's no evidence here that they evaluated the September 2008 data to find it to be a reasonable forecast.

[00:33:18] Speaker 05:
And on the basis of that non-evaluation, what they've done is saddled SFPP with a real rate of return on equity that was driven down by an anomalously high inflation factor.

[00:33:29] Speaker 05:
On that basis, Your Honor, we would submit, and in both instances, that commissions acted without reasoned decision making.

[00:33:34] Speaker 05:
And it should be vacated and remanded so they can address these matters and address the record that SFPP attempted to make below.

[00:33:41] Speaker 05:
Thank you.

[00:33:42] Speaker 05:
Thank you, Your Honor.

[00:33:55] Speaker 02:
Your honors may please the court.

[00:33:57] Speaker 02:
Ross Fulton here on behalf of the Commission, along with my colleague Lisa Loftig.

[00:34:01] Speaker 02:
I will be addressing the jurisdictional issues as well as the shippers petition for review and Miss Loftig will address the pipelines petition for review.

[00:34:10] Speaker 02:
Your honors, the commission agrees with the petitioners that this court has direct appellate jurisdiction under the Hobbs Act pursuant to the Department of Energy Reorganization Act.

[00:34:21] Speaker 02:
Hopefully I won't repeat too much of what was already said.

[00:34:24] Speaker 04:
Is there anything you want to add specifically or different from what was said?

[00:34:29] Speaker 02:
Just your honor, I think a couple of quick points.

[00:34:36] Speaker 02:
The shippers petitioner said the Savings Act 42-71-92A transferred the jurisdiction that existed over the substantive law.

[00:34:48] Speaker 02:
This court in Shell Oil

[00:34:52] Speaker 02:
which is 47 F3rd at 1194 held that that savings provision should be interpreted to provide jurisdiction, the same jurisdiction that existed for the substantive law that was transferred.

[00:35:06] Speaker 02:
For that basis, as this court held in the Earth Resources case that was already cited, this court has the same jurisdiction over

[00:35:13] Speaker 02:
commission oil rate making decisions as it had over those that were issued by the ICC.

[00:35:20] Speaker 02:
The one other thing I would like to add regarding the 1995 ICC Termination Act and its lack of effect on jurisdiction, as my colleague already mentioned,

[00:35:33] Speaker 02:
This act, it was, if you look at the actual Section 305A, which actually amended the relevant provisions of the Hobbs Act, all it did was simply insert the service transportation board for the ICC.

[00:35:47] Speaker 02:
And has this court held in all and back versus FHWA, which is 103rd

[00:35:54] Speaker 02:
That case dealt with analogous transferred authority from the ICC to the Department of Transportation.

[00:36:04] Speaker 02:
And the challenge was whether those decisions were still subject to direct jurisdiction.

[00:36:09] Speaker 02:
This court found that the savings provision at issue there was still applicable.

[00:36:14] Speaker 06:
This court still had direct jurisdiction because... Just to be clear now, that's before the 95 or 90, the change in the Hobbs Act.

[00:36:24] Speaker 02:
Well, the decision was issued in 1997, Your Honor, and an issue was whether anything had changed or whether, I should say, whether changes to the Hobbs Act

[00:36:35] Speaker 02:
altered jurisdiction.

[00:36:36] Speaker 02:
And this court found there was no alteration because there was no indication that Congress intended a contrary result other than for the savings statute to apply.

[00:36:46] Speaker 02:
And all in box reasoning should apply equally here.

[00:36:51] Speaker 02:
And in fact, in another case cited by petitioners, the Association of Oil Pipelines, VFIRC, this court applied the savings statute after that 1995 ICC Termination Act.

[00:37:06] Speaker 02:
Turning to the merits here, Your Honors, the commission here allowed the pipeline operating as a partnership to take an income tax allowance based on the ExxonMobil decision, which also upheld a tax allowance for a pipeline partnership as reasonable.

[00:37:25] Speaker 02:
There were... Is there double recovery or none?

[00:37:28] Speaker 02:
There's not double recovery, Your Honor.

[00:37:30] Speaker 02:
Two reasons.

[00:37:31] Speaker 02:
The commission found that the discount model did not, in fact, recover the taxes as claimed.

[00:37:38] Speaker 02:
The commission extensively considered and rejected the shipper's arguments that the tax was captured by the discount model.

[00:37:50] Speaker 02:
For example, on paragraphs 324, 325, J, 886, 887, the commission explicitly

[00:37:58] Speaker 02:
looked at that issue and rejected it.

[00:38:00] Speaker 02:
The commission instead found that the discount model informs of what the rate of return need, but it does not actually provide the revenue or returns necessary.

[00:38:12] Speaker 02:
That's done with the rate methodology.

[00:38:14] Speaker 02:
And the commission distinguished the two and explained, because the rate methodology is not grossed up to include income taxes, those will not be recovered absent an income tax allowance.

[00:38:27] Speaker 02:
I also wanted to point out that the shippers make much of this argument that this results in an advantage to the partnership relative to a corporation, which is different than the reasoning in ExxonMobil.

[00:38:43] Speaker 02:
But as the commission actually talked about in its order,

[00:38:47] Speaker 02:
For instance, at paragraph 317, J881, 882, it actually does not.

[00:38:54] Speaker 02:
What happens, it results in a commensurate return to both the partnership and the corporation to allow both to have an income tax allowance consistent with HOPE National.

[00:39:05] Speaker 06:
Because... At the risk of oversimplifying in the real world,

[00:39:09] Speaker 06:
That's correct.

[00:39:15] Speaker 06:
Right.

[00:39:19] Speaker 06:
Yes.

[00:39:26] Speaker 02:
It will not, your honor, because to take it outside the commission context for a minute, because of the tax code, as we discussed, a partnership, partners will have a higher return after tax take home, or I should not say return, I should say they will have a higher after tax take home than the corporate shareholders will have.

[00:39:44] Speaker 02:
But because of that, partners pay a higher amount for their shares of a partnership than corporate shareholders do.

[00:39:52] Speaker 02:
So in a competitive market, the actual returns are going to be the same because those partners are paying more for their shares.

[00:40:00] Speaker 02:
So as the commission discussed, and in fact, part of why on page 952 of Exxon Mobil, part of the reason this court upheld as reasonable the commission's determination there is because the commission found that absent in tax laws for both, the partners would have lower returns than corporate shareholders because they would have the same take home, perhaps, but they would have paid more for their actual shares.

[00:40:26] Speaker 02:
So to ensure parity and commensurate returns, a tax loss for both is actually necessary.

[00:40:36] Speaker 02:
And to take us back a step, as this was discussed.

[00:40:40] Speaker 04:
This is like the tail wagging the dog there in terms of how you're addressing that.

[00:40:45] Speaker 04:
OK, the market, because of how we do this, the market adjusts.

[00:40:49] Speaker 04:
But does that make how you do it correct in the first place?

[00:40:53] Speaker 02:
I understand your point, Your Honor.

[00:40:55] Speaker 02:
I guess the question is whether the commission should alter the tax code.

[00:41:00] Speaker 02:
Because outside of the commission.

[00:41:01] Speaker 06:
No.

[00:41:02] Speaker 06:
No, it's when it should recognize the tax code.

[00:41:05] Speaker 02:
I guess what I'm trying to say is the tax code results in a higher after take home to partners.

[00:41:12] Speaker 06:
The tax code results in a different tax code.

[00:41:14] Speaker 06:
That's correct.

[00:41:15] Speaker 06:
It's not going to result in one more layer of taxation for corporations than there is for partners.

[00:41:20] Speaker 06:
That's the way it is.

[00:41:21] Speaker 06:
Yes.

[00:41:22] Speaker 06:
Nobody's going to alter that.

[00:41:23] Speaker 06:
That's the way it is.

[00:41:25] Speaker 02:
Yes, so the tax code results in a higher.

[00:41:27] Speaker 06:
And then you're saying because the market reflects the difference, we should treat that as

[00:41:35] Speaker 06:
coaching you to need to make another adjustment.

[00:41:38] Speaker 02:
No, we're saying that we don't want to make further adjustments.

[00:41:40] Speaker 02:
We want to let the tax code function as it does.

[00:41:43] Speaker 04:
But you don't because of the way you give the income tax allowance to the partnership, even though the partnership doesn't pay the income tax.

[00:41:54] Speaker 04:
So you're not just taking the tax code as it lies?

[00:41:57] Speaker 02:
Well, I think what the Commission found and what this Court upheld in ExxonMobil is that for purposes of Commission rate-making, partner taxes, even though they're paid by the partners, are operating-level taxes because they're a real, the Court's language, I believe, is a real, if indirect, cost to the partnership when it's raising capital.

[00:42:17] Speaker 02:
So again, Shipper's arguments ultimately focus on a disagreement with ExxonMobil, which is that they want to say that these are investor-level taxes, which we can all agree these are literally investor-level taxes.

[00:42:31] Speaker 06:
Leave the word literally out and the statement's equally true.

[00:42:40] Speaker 02:
say their investor-level taxes is to ignore what the court held in Exxon Mobil, which is that these are operating-level costs for the partnership.

[00:42:49] Speaker 02:
And to maintain parity between the corporation and the partnership, they are both entitled to a tax allowance, which this court upheld as reasonable.

[00:42:59] Speaker 04:
There's another way to remedy it, I think, which is to design a mechanism to eliminate it from the ROE.

[00:43:10] Speaker 02:
or is there not?

[00:43:11] Speaker 02:
I assume that's correct, Your Honor.

[00:43:13] Speaker 02:
The Commission obviously hasn't addressed it.

[00:43:15] Speaker 02:
I think the bigger point is that the Commission found that it's already, it's not captured by the return on equity.

[00:43:21] Speaker 06:
Did the petitioners raise the possibility that Judge Kavanaugh doesn't

[00:43:28] Speaker 02:
that it could be addressed.

[00:43:29] Speaker 02:
They did, Your Honor.

[00:43:30] Speaker 02:
Obviously, as I said, the commission has not addressed it.

[00:43:34] Speaker 02:
But the commission has found that the return on equity does not capture those taxes.

[00:43:39] Speaker 02:
The commission, again, considered that argument.

[00:43:43] Speaker 04:
In fact, it's on mobile, as was pointed out in the briefs.

[00:43:48] Speaker 04:
This was in the air, but we were told, don't worry about that.

[00:43:53] Speaker 04:
That will be dealt with separately.

[00:43:57] Speaker 02:
I think there's a couple of problems with that argument that was brought up.

[00:44:02] Speaker 02:
I should know for the first time.

[00:44:03] Speaker 02:
It seems like a bait and switch a little bit.

[00:44:05] Speaker 02:
Well, I'm not so sure, Your Honor, because looking at the language from the commission brief, which was cited for the first time on reply, this is not raised by the... Well, it's a public... Don't worry about that.

[00:44:17] Speaker 02:
It's a public record.

[00:44:18] Speaker 02:
I think the commission says that it is addressing the issue.

[00:44:24] Speaker 02:
It does not say that the court should not consider it, but the commission has... That's pretty thin.

[00:44:38] Speaker 02:
What else do you have?

[00:44:42] Speaker 02:
The commission has taken a consistent position.

[00:44:44] Speaker 04:
My point being that ExxonMobil doesn't necessarily resolve everything that's been presented here because one of the things that was in the background, I suppose, at the time of ExxonMobil was this issue that's now being raised of the double recovery.

[00:45:00] Speaker 04:
And we said, OK, it's OK for the income tax allowance to the extent there's an issue.

[00:45:05] Speaker 04:
We can say this explicitly, but from the briefing, obviously implicitly, that can be dealt with down the road.

[00:45:10] Speaker 04:
Well, here we are down the road, and now we're being told, oh, no, ExxonMobil will resolve that.

[00:45:15] Speaker 02:
Well, I think what the commission's saying is that ExxonMobil, it's consistent with ExxonMobil to allow an operating level tax allowance, but as the shippers pointed out, Your Honor, the commission goes into extensive detail with tables, charts, paragraphs, as to why the discount model

[00:45:36] Speaker 02:
contrary to what the shippers claim, does not actually capture this tax relief.

[00:45:39] Speaker 02:
So for instance, if you look at table two in the re-hearing order on J-A-58, which is very similar to what's cited in Exxon Mobil with the same type of figures.

[00:45:53] Speaker 04:
Sure.

[00:45:53] Speaker 04:
Keep going.

[00:45:54] Speaker 04:
Sorry.

[00:45:54] Speaker 02:
No.

[00:45:55] Speaker 02:
The charts consistently show that without an income tax allowance, the partnership is not going to recover its return on equity.

[00:46:06] Speaker 02:
tax costs without a tax allowance.

[00:46:10] Speaker 02:
Because as we discussed earlier, the commission fully agrees that a partnership is going to have a higher after-tax take-home than a corporation.

[00:46:21] Speaker 02:
And again, that's just a result of how the tax point functions.

[00:46:25] Speaker 02:
What about HOPE?

[00:46:25] Speaker 04:
HOPE is cited as the precedent that says parity is not just permissible but is required, that you're just acknowledging there that there's not parity.

[00:46:36] Speaker 02:
Well, again, I think that there is parity because those partners, again, if they have a $100 return versus a $50 return for a shareholder, but they pay $10 for their share as opposed to the $5 the shareholders pay, ultimately, they have the same return.

[00:46:56] Speaker 02:
That, again, is a function of how the tax code works.

[00:46:59] Speaker 06:
That seems to be chasing its tail.

[00:47:02] Speaker 06:
Would it not be equally true that if you change the way you're treating it, that could have the effect of changing the market value shared back in the other day.

[00:47:11] Speaker 02:
All you're really saying is price is going to reflect what we're doing here.

[00:47:15] Speaker 02:
That would seem to justify anything you wanted to do.

[00:47:21] Speaker 02:
The market will respond, Your Honor, that is correct.

[00:47:25] Speaker 02:
It will harm, as Exxon Mobil found, it will harm the, or I should say upheld the commission's finding, it will harm people that have currently bought shares who assumed that they would have a higher after-tax take home and a partnership than at corporation.

[00:47:41] Speaker 02:
But yes, down the road, the market will adjust.

[00:47:43] Speaker 02:
And in fact, the commission showed

[00:47:46] Speaker 02:
in the order that when the income tax allowance was taken away, the price for partnership shares dropped.

[00:47:55] Speaker 02:
But the commission found that as evidence that the taxes are not recovered without the tax allowance because it clearly was not baked in, so to speak, to the return on equity.

[00:48:08] Speaker 02:
So is your primary argument here that there is not, in fact, double recovery?

[00:48:13] Speaker 02:
Yes.

[00:48:13] Speaker 02:
The commission did not find double recovery.

[00:48:16] Speaker 02:
The, as I said, the commission goes into great detail, such as in paragraphs 290 to 296, JA-59-862, that the discount model does not recover.

[00:48:28] Speaker 02:
And in fact, the shippers cite no evidence to the contrary.

[00:48:31] Speaker 02:
The shippers don't offer any empirical evidence that there is a double recovery or that taxes are somehow recovering the discount model.

[00:48:41] Speaker 02:
They also respond to theoretical arguments

[00:48:43] Speaker 02:
But ultimately, the commission is entrusted with determining whether the discount model or any other method could recover the taxes other than a tax allowance.

[00:48:59] Speaker 02:
And so in sum, the commissions, the same bases that were played ExxonMobil are applicable here.

[00:49:07] Speaker 02:
And to the extent that this argument was not already covered or addressed in ExxonMobil, the commission found that there is no double recovery and that the discount method does not recover the tax burden.

[00:49:27] Speaker 02:
Thank you.

[00:49:37] Speaker 01:
Good morning, Your Honors.

[00:49:38] Speaker 01:
May it please the Court, Lisa Loftick for FERC.

[00:49:41] Speaker 01:
I will first address the indexing issue, which I just want to say this notion that this is a forward-looking adjustment is a bit of a distraction.

[00:49:51] Speaker 01:
I think the clearest statement about the index is at JA929.

[00:49:56] Speaker 01:
The Commission says the indexing methodology is to account for industry Watt cost changes during the prior year.

[00:50:03] Speaker 01:
So the commission always uses actual producer price index for finished goods, what actually occurred to figure out what the index is, and that gets applied forward for future rates, but it's based on actuals.

[00:50:18] Speaker 01:
And so I also want to address that BP West Coast, as was raised, as you noted Judge Sintel, it does not compel

[00:50:27] Speaker 01:
a different outcome than the commission's orders here.

[00:50:32] Speaker 01:
The issue was never raised in BP West Coast and the challenge wasn't made that these costs the year after, or the index the year after a cost of service would be so substantially in excess of the actual cost of service.

[00:50:49] Speaker 01:
The commission did apply its regulations here and found that

[00:50:54] Speaker 01:
It would be inequitable to allow the full index for this year and allowed one quarter, which was based on reason decision making in the orders.

[00:51:02] Speaker 01:
And I'll note in note 687 of 511A,

[00:51:12] Speaker 01:
The commission explains, which is on JA 934, the commission explains that although it didn't apply the percentage comparison test here, the commission still applies the percentage comparison test.

[00:51:24] Speaker 01:
It just sees no reason to do so where there's

[00:51:27] Speaker 01:
record evidence to show why the index wouldn't be appropriate under these circumstances.

[00:51:34] Speaker 01:
And this is fully consistent with its precedent.

[00:51:37] Speaker 01:
It cites two orders, one case, their regular order and every hearing order involving SFPP where the commission denied an index in the year after a cost of service study.

[00:51:52] Speaker 01:
If there are no questions on indexing, I can move on to the ROE.

[00:51:58] Speaker 01:
The commission did have substantial evidence in the record for its findings.

[00:52:03] Speaker 01:
I will just for which finding that

[00:52:06] Speaker 01:
for its findings that the September 2008 real ROE is an appropriate ROE for SFPP going forward.

[00:52:17] Speaker 06:
What's the best place in the JA or the record?

[00:52:21] Speaker 06:
Well, in 511... Excuse me a moment.

[00:52:23] Speaker 06:
Oh, sorry.

[00:52:25] Speaker 06:
Where the commission says why September 11th is a proper period.

[00:52:33] Speaker 06:
Okay.

[00:52:33] Speaker 06:
Why September is a proper period.

[00:52:36] Speaker 01:
Well, in 511 at JA 485 to 486, the commission explains its reasoning for rejecting the later update.

[00:52:49] Speaker 01:
And it says that updating the record, this is on JA 486, is subject to the more fundamental principle that the cost of service be a reasonable forecast.

[00:52:59] Speaker 01:
So it's saying what its standard is.

[00:53:02] Speaker 01:
And then in 209, it says financial information that SFPP included shows that the updated data is not representative.

[00:53:12] Speaker 06:
And then it looks at the, it does a comparison of different real.

[00:53:23] Speaker 01:
Well, the commission is comparing real ROEs, which is the nominal less inflation.

[00:53:31] Speaker 01:
And it has record evidence here showing... I'm afraid there may be evidence.

[00:53:37] Speaker 06:
There may be evidence in all kinds of directions.

[00:53:39] Speaker 06:
Where does the commission best tell us what its reasoning is for using September?

[00:53:45] Speaker 01:
I think the best sentences in paragraph 209

[00:53:49] Speaker 01:
where it says that the record evidence includes 7.20% for 2008, as updated to 7.64% for September 2008.

[00:54:04] Speaker 01:
You have to look at the testimony that these decisions were based on.

[00:54:09] Speaker 01:
SFPP's own witness, at the time it submitted this information, never said that there was an anomaly in the 4.94% inflation rate.

[00:54:23] Speaker 01:
At the time, and you should judge data by at the time it was submitted, that's the Indiana and Michigan Municipal Distributors Association case,

[00:54:33] Speaker 01:
And in fact, if you look at JA 29 through JA 35, this is a list of consumer price index inflation rates dating back to 1983.

[00:54:46] Speaker 01:
And SFPP is selective in the data it chooses, and it chose 1992 forward.

[00:54:55] Speaker 01:
This exhibit shows inflation rates much higher than 4.94.

[00:55:01] Speaker 01:
for the late 80s and early 90s.

[00:55:04] Speaker 01:
So there was record evidence to support the 7.69% real ROE, and the commission justified its reasoning for why it selected that by stating what its standard is, looking at comparison of data, and then selecting that data.

[00:55:24] Speaker 01:
And in fact, it also rejected, the commission has to rely on record evidence.

[00:55:29] Speaker 01:
And the commission also, in paragraph 259 of 511A, it also rejected SFPP's proposal to do an averaging, saying, well, if we were to do that, it would result in an artificially inflated return.

[00:55:55] Speaker 01:
And you can't adjust one input to the cost of service without making corresponding inputs that might lower it.

[00:56:06] Speaker 01:
So do you have any further questions?

[00:56:10] Speaker 04:
OK, thank you.

[00:56:11] Speaker 01:
Thank you very much.

[00:56:16] Speaker 04:
Yeah, a few minutes for rebuttal.

[00:56:18] Speaker 03:
I'd like to just address two points that the commission made.

[00:56:25] Speaker 03:
because they're really central here.

[00:56:26] Speaker 03:
The council said that the commission said that this tax, in fact, is not in the DCF ROE.

[00:56:35] Speaker 03:
And he cited several paragraphs.

[00:56:38] Speaker 03:
And I just want to emphasize to you that those paragraphs, like all of their tables and appendices and charts and examples, all are premised on calling that a pipeline-level tax.

[00:56:54] Speaker 03:
You're just, they're saying much like a corporate tax.

[00:56:59] Speaker 03:
The corporate tax is not recovered in the DCF ROE.

[00:57:04] Speaker 03:
You don't gross up the ROE, not only to get the investor level tax, but then you don't turn around and say, oh, and now we have to pump the ROE up again for the corporate level tax.

[00:57:16] Speaker 03:
No, as I said in my opening remarks,

[00:57:18] Speaker 03:
That's taken care of in an income tax allowance, because it's not in the ROE.

[00:57:23] Speaker 03:
All that the Commission has said is, number one, paragraph 244 of 511, if it's an investor tax, it's in the TCF ROE.

[00:57:34] Speaker 03:
And when they, in 511A, attempted to back away from that,

[00:57:40] Speaker 03:
that entire discussion is based on the assumption that it's a pipeline-level tax, and it's not an investor tax.

[00:57:48] Speaker 03:
Thereby definition, it's not in the DCFROE.

[00:57:52] Speaker 03:
It's all circular reasoning.

[00:57:54] Speaker 03:
If you look carefully at paragraph 295 of 511A, and again in their discussion of their gross up appendix,

[00:58:05] Speaker 03:
In paragraph 327 of 511A, please read those carefully and you will see that embedded in that is again this erroneous assumption.

[00:58:16] Speaker 03:
They're not saying that the DCF ROE doesn't collect all investor taxes.

[00:58:22] Speaker 03:
They're saying it's not, this tax is not in the DCF ROE because we're considering a pipeline level tax.

[00:58:30] Speaker 03:
If you're a fan of Star Wars, it's like a Jedi mind trick.

[00:58:34] Speaker 03:
These are not the double recoveries that you're looking for.

[00:58:37] Speaker 03:
That's what's happening here.

[00:58:41] Speaker 03:
The second point is...

[00:58:44] Speaker 03:
this the market resets to be sure the more cost the more cost you put in the cost of service if years over recoveries of any sort whether it's a double recovery of a component or anything else that helps the market share market share goes up

[00:59:04] Speaker 03:
And therefore, the rate of return ultimately resets to that particular number.

[00:59:10] Speaker 03:
The same would be true if you didn't allow the pipeline to collect their full cost of service.

[00:59:16] Speaker 03:
They would have under recoveries.

[00:59:19] Speaker 03:
Their revenues would go down.

[00:59:20] Speaker 03:
Their distributions and dividends would suffer.

[00:59:23] Speaker 03:
And the market price would go down.

[00:59:25] Speaker 03:
But once again, the share value goes down.

[00:59:28] Speaker 03:
We're back to the same ROE after tax.

[00:59:33] Speaker 03:
I guess what hope is saying is it's the Goldilocks zone.

[00:59:38] Speaker 03:
Not too much.

[00:59:40] Speaker 03:
Don't over recover.

[00:59:41] Speaker 03:
Yeah, you'll get your return at the end of the day, but you're going to over recover your costs and that hurts ratepayers.

[00:59:47] Speaker 03:
Not too little because if we don't give you your full costs,

[00:59:52] Speaker 03:
There's not going to be enough revenues to distribute to the dividends or distributions.

[00:59:58] Speaker 03:
And that's going to affect the price, because investors will now pay less for the share.

[01:00:03] Speaker 03:
But again, the rate of return resets.

[01:00:06] Speaker 03:
That's just part of the show game here.

[01:00:09] Speaker 03:
Of course, the market resets it.

[01:00:12] Speaker 03:
The question, though, is, is the cost of service too high?

[01:00:17] Speaker 03:
We say yes, because we're getting a double recovery.

[01:00:22] Speaker 03:
That's all I have unless you have further questions.

[01:00:25] Speaker 04:
All right, thank you very much.

[01:00:27] Speaker 04:
A few minutes for a vote.

[01:00:33] Speaker 05:
I will be brief.

[01:00:36] Speaker 05:
Here, and I'll focus on the ROE, here the Commission had an established practice taking the freshest ROE data.

[01:00:48] Speaker 05:
They decided to step away from that.

[01:00:51] Speaker 05:
They needed to provide a reasoned basis for what they chose instead.

[01:00:56] Speaker 05:
There was a presumption in favor of one set of data.

[01:00:58] Speaker 05:
They said, OK, Great Recession, no, we're not going to use that, though this entire period was a period of turbulent economic, because prior to the Great Recession, there was a bubble.

[01:01:07] Speaker 05:
So I can even remember that.

[01:01:09] Speaker 05:
So you have a situation where they opted away, so they had to provide reasoned decision making.

[01:01:15] Speaker 05:
I did not hear any citation to an actual evaluation

[01:01:18] Speaker 05:
And to get real specific about it, Your Honor, if you'll indulge me, with regard to the real ROE, there was a citation to the SFPP witness, Professor Williamson, with regard to, oh, well, he presented the September 2008 data.

[01:01:31] Speaker 05:
Well, that was the test period presentation.

[01:01:34] Speaker 05:
It would have been odd for there not to be a presentation of the ROE in the case in chief for the test period.

[01:01:40] Speaker 05:
So that was in there.

[01:01:42] Speaker 05:
Nowhere in his testimony did he indicate that the September 2008 figures were, in fact, representative.

[01:01:47] Speaker 05:
They were presented because that was the vintage that was available at the time that supported the original filing.

[01:01:52] Speaker 05:
The commission's practice is to take the latest soak.

[01:01:55] Speaker 05:
In fact, Professor Williamson did two subsequent updates, the last of which was the April 2009 set of data.

[01:02:02] Speaker 05:
If the commission wants to cite to, well, there was other testimony in the record, I would submit that none of the other witnesses who addressed ROE ever said that the September 2008 data was representative, either the real ROE or the inflation.

[01:02:16] Speaker 05:
And I can cite you.

[01:02:17] Speaker 05:
I'll say it slowly for the transcript, because I don't want you to have to rush writing it.

[01:02:22] Speaker 05:
But I would suggest, one, you can look at Professor Williamson.

[01:02:26] Speaker 05:
It's at JA 51 and 67 to 68 and 82.

[01:02:31] Speaker 05:
And the other witnesses that you could look to would be J a 16 11 and 19 to 23.

[01:02:37] Speaker 05:
I submit that there's no indication there that any of the witnesses below did such an analysis of the representativeness of the September 2000 and eight data.

[01:02:49] Speaker 05:
What was done was the update was the normal course of things.

[01:02:54] Speaker 05:
So nobody, as to the initial test period submission, would make that type of analysis.

[01:02:58] Speaker 05:
I would submit that there was no such analysis made by the commission, and it should be remanded so they could properly engage with a real record in light of the anomalous conditions affecting the September 2008 data.

[01:03:09] Speaker 05:
That's their question, Your Honor.

[01:03:12] Speaker 04:
Thank you.

[01:03:12] Speaker 04:
Thank you to all the counsel, well argued, to the cases submitted.