[00:00:01] Speaker 00:
Case number 16-1176, Northwestern Corporation Petitioner versus Federal Energy Regulatory Commission.

[00:00:08] Speaker 00:
Mr. Shepard for the petitioner, Ms.

[00:00:10] Speaker 00:
Kafer for the respondent, and Ms.

[00:00:11] Speaker 00:
Gomez for the interveners.

[00:00:38] Speaker 07:
Good morning.

[00:00:39] Speaker 07:
You may please the court.

[00:00:40] Speaker 07:
In January 2011, Northwestern began operating Gate Station, a small 150-megawatt generating facility used exclusively to provide mandatory Schedule III regulation service to the company's transmission customers.

[00:00:52] Speaker 07:
The service was previously purchased from third parties and passed through to customers, but the state law did not allow a transmission company to own generation.

[00:00:59] Speaker 07:
But the station was needed to meet known increases in demand for regulation reserve caused by the advent of internet and wind generation, and that scarcely caused enormous increases in the price of regulation services provided in third parties, which went up by several hundred percent.

[00:01:13] Speaker 07:
This is the first case in which a transmission company has operated a facility for the sole purpose of meeting a mandatory ancillary service that FERC requires.

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And FERC's orders punish Northwestern for taking that innovative approach to an untenable situation by imposing a confiscatory rate far below the revenue requirement all parties stipulated at the outset of this case.

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The rate is also a windfall for wholesale transmission customers who represent 35% of Northwestern's demand and now bear only 4.4% of the responsibility for regulation service.

[00:01:44] Speaker 07:
There are numerous disputed issues in this case, and given our time constraints, I'd like to focus on the three most egregious aspects of FERC's rate adjustments.

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First, FERC's complete denial of regulation down cost.

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Second, FERC's use of the station's maximum output or nameplate capacity to overstate the quantity of regulation reserve the gate station could reliably deliver.

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And third, FERC's denial of replacement capacity costs when gate station required emergency maintenance in 2012.

[00:02:09] Speaker 07:
Finally, and I'll stop abruptly when I have four minutes left, it's critical to address FERC's decision toward refunds in this case because it's diametrically opposed to FERC precedent as announced in two very recent decisions on remand from the support issued before the re-hearing order in this case.

[00:02:22] Speaker 07:
and judicial precedent governing the question of refunds, getting all the way back to Judge Randolph Seminole's opinion in 1992 in Townsville.

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Before we talk about the specific rate components, I think it's important to recognize the enormous impasse that we have with FERC over what the heart of this case is about.

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FERC's theory is that the gate station should have been operated like the generation fleet of a vertically integrated utility, where the majority of the system is used to provide energy.

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And then if you have available capacity, you slot it to meet a bunch of specific services.

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It could be schedule three.

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It could be schedule four.

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It could be schedule five.

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So they go up to 10 in terms of the ones that are required to present.

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And this trial went through all these.

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It went through schedule 10, all the way up through schedule 2, through schedule 10, looked at Black Start, looked at all kinds of other ways that the company could have gained additional revenue from the way that it operated the station.

[00:03:18] Speaker 04:
Can I try to get to a fundamental question I have about this case?

[00:03:22] Speaker 04:
Yes, Judge, welcome.

[00:03:23] Speaker 04:
So this was a rate proceeding under section 205, right?

[00:03:30] Speaker 04:
Yes.

[00:03:31] Speaker 04:
At some point in your briefing, you argue that FERC is treating this case as if it's proceeded under Section 206.

[00:03:39] Speaker 07:
Yes.

[00:03:40] Speaker 07:
That's the first of the issues that is the biggest cost loss to Northwestern as a result of this.

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And one of the reasons why it's a deadweight loss to us is that they denied a regulation down service.

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Regulation that changed the numerator from 60 down to 19.

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And what regulation down service is that you have to maintain a certain set point in order to be able to instantaneously drop down to meet sudden drops in load.

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And so you have to engage fuel costs in order to be able to maintain that set point so you have some place to drop from.

[00:04:14] Speaker 07:
That's the third of the reasons why we have, why we take issue with that, is that they didn't have jurisdiction to modify that 16 megawatts.

[00:04:22] Speaker 04:
So if you're right about that, that they proceeded in more than just a minor rate adjustment under a recent decision,

[00:04:36] Speaker 04:
pinned by our presiding judge, NRG marketing, and older decisions like Western resources.

[00:04:43] Speaker 07:
Well, it's not just NRG power marketing, which is also my case, but AmeriMain as well, issued earlier this spring.

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So there's been a lot of traffic on this particular subject.

[00:04:52] Speaker 04:
So if we accept that premise and that argument, then don't we grant the petition, just remand, and then FERC can

[00:05:05] Speaker 04:
I guess you can try again under 205, or FERC could under 206.

[00:05:12] Speaker 07:
You could, and we invite you indeed to do that.

[00:05:15] Speaker 07:
The legal question and issue is, what did that, that 60 megawatts has been the rate for a very, very long time?

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And the Northwestern's rate proposal went out of its way to make sure that it did not get touched.

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Anything which was added on that by one generation or anything else all got slotted to retail customers because they did not want to change something that had been established through litigation in advance.

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I mean, this was litigated in 2007, for example, when the intervenors were arguing that it should have only been 45 megawatts.

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So this had been the practice for more than a decade.

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And FERC's position and response is, well,

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What you're, you can't treat the 60 megawatts as something old which hasn't been changed because now you're purporting to collect, now you're purporting to serve schedule three needs by building a new facility.

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And so now that it's coming from a different source, we now need to change this amount.

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So we just fundamentally, we're at complete impasse over whether or not something has changed.

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We went out of our way to make sure that we did not change the numerator.

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And to the extent anything has changed by the addition of a generation station, it's only changed to the benefit of wholesale customers.

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Because when we were getting 60 megawatts of service from third parties, we got a bill and we passed it straight through.

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No muss, no fuss.

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It was a very, very high bill because they were charging outrageous prices, but it didn't cause us any issues.

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Now, because we built a generation station, we now have a denominator.

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And any denominator is necessarily going to reduce the amount that they're going to have to pay.

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So to the extent there's been any rate change in terms of the methodology, it's only down to their benefit.

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Does that answer your question about that?

[00:06:52] Speaker 04:
So I guess I'm trying to get down to the brass tacks here.

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You don't want to remand because you want the rate that you proposed.

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You want your petition to be granted because you want basically this litigation in and you want the rate that you propose to continue because you feel that that

[00:07:18] Speaker 04:
It is a continuation of the same methodology and the same rate that it's been for years and that FERC had essentially previously approved or it had been signed off on in settlements, I guess.

[00:07:32] Speaker 07:
Not just settlements.

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There's two published decisions and two orders approving settlements.

[00:07:37] Speaker 07:
So four different orders to avoid settlements, right?

[00:07:40] Speaker 07:
But that's just one component, Your Honor.

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The numerator is a very important piece of this pie, but there are at least two other reasons why we have a problem, even if you found that they did have jurisdiction to make that change, why they're wrong.

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FERC is now saying, oh, well, you may have needed regulation down in the past, but we're just going to erase it at this point.

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They didn't erase it before, but for some reason, because we're doing it from a generation station, they're going to erase it.

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Because their new approach says, if you're going to be providing from your own station, we expect you to provide evidence that you could not possibly get any revenue from any other place before you try to pass it on through schedule three.

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And their verbatim paragraphs in the opinion, which is a summary opinion, and then again repeated in the rehearing order, is that we failed to provide any evidence that we couldn't get this income from any other source.

[00:08:30] Speaker 03:
And- Mr. Schaffer, let me ask you, go ahead.

[00:08:32] Speaker 03:
To try to simplify, in the usual situation, tell me where, if I have this right, in the section 205 proceeding, it finds the revised rate unjust and unreasonable.

[00:08:46] Speaker 03:
They suspend it, and if they order refunds, they revert back to the difference between the previous rate and what was charged.

[00:08:57] Speaker 03:
But they can't do that in this case.

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Because the previous rate was the third party, which is gone.

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The company is not dealing with it.

[00:09:09] Speaker 03:
So what is FERC to do in trying to decide what the proper amount of refund would be after they find that the revised rate of 60 over 150 was?

[00:09:20] Speaker 07:
I think, Your Honor, the way they would articulate it is, they will only allow us so much of the rate we proposed, instead of comparing it to the prior rate.

[00:09:28] Speaker 07:
They're saying, here is your proposal.

[00:09:29] Speaker 07:
This is how much we're disallowing.

[00:09:31] Speaker 07:
So that's the way they would say they're just going to say, here's what you wanted, which was $1.28 per kilogram.

[00:09:37] Speaker 03:
I don't read your brief.

[00:09:38] Speaker 03:
I look for this.

[00:09:39] Speaker 03:
But I don't read your brief as raising the question that Judge Wilkins posed to you.

[00:09:44] Speaker 03:
Because the way I read your brief is that the

[00:09:48] Speaker 03:
The 60 megawatt figure was one that FERC had approved again and again and again, and they can't come back and change it.

[00:09:55] Speaker 03:
I didn't see any suggestion that what FERC had to do in determining the amount of refunds is instituted to a 6%.

[00:10:03] Speaker 07:
Well, your honor, the 60 megawatts measures exactly the same thing, regardless of whether we're passing it through from third party purchase or whether we are, whether we're now going to divide it by the amount that we're going to attribute the cost of the plant by.

[00:10:21] Speaker 07:
That is the question.

[00:10:23] Speaker 07:
What does it measure?

[00:10:24] Speaker 07:
It measures how much regulation service you need.

[00:10:26] Speaker 07:
That is a critical component to setting the rate, and that should not have changed.

[00:10:30] Speaker 07:
By reducing it from 60 to 19 and declaring for the first time ever, you don't need to have regulation down reserves.

[00:10:37] Speaker 07:
We're paying for regulation down reserves when we bought the 60 megawatts from third-party providers, and they just decide now all of a sudden it's not just unreasonable, even though they're not going to allow us to recover that, because it was what?

[00:10:48] Speaker 07:
It was never just unreasonable before?

[00:10:51] Speaker 07:
So, this is... Are you challenging the denominator?

[00:10:54] Speaker 07:
Yes, we are.

[00:10:55] Speaker 07:
I would love to move on to the denominator.

[00:10:58] Speaker 07:
The denominator issue in this case... We'll give you time.

[00:11:01] Speaker 07:
Thank you.

[00:11:03] Speaker 07:
The denominator issue in this case is that we have a 150 megawatt unit divided into 350 megawatt specific turbines.

[00:11:12] Speaker 07:
The way the system was designed, it's to have two in operation all the time.

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They have to provide a minimum of 7 megawatts at all times.

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And to keep the third as an operational spare, or if the excursions get particularly high.

[00:11:28] Speaker 07:
The initial decision's position on that was that we hadn't shown that we couldn't be running that third turbine and generating income from that, so why should we be passing it on?

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And the way she decided to deal with that was by inflating the denominator to 150 from 105.

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And that greatly reduced our cost.

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The arbitrary and capricious piece of this, I mean, I can talk about why she's wrong on the merits.

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And the evidence about the inflation of the denominator, we addressed very strongly through the evidence, particularly of Mr. Koshel, Mr. Vaughan, Mr. Merchant.

[00:12:05] Speaker 07:
All of them addressed this.

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I'm happy to provide the J citations for you.

[00:12:08] Speaker 07:
We cover them in our briefs.

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But those are the three that I'd ask you to particularly pay attention to.

[00:12:12] Speaker 07:
You just could not.

[00:12:15] Speaker 07:
try to sell energy intermittently from those resources and hope to provide a reliable

[00:12:24] Speaker 07:
firm schedule three regulation service.

[00:12:28] Speaker 07:
It just couldn't be done.

[00:12:29] Speaker 07:
She reached a different conclusion, but we have a separate problem with FERC's orders.

[00:12:34] Speaker 07:
FERC's opinion only summarily affirmed this outcome from the initial decision.

[00:12:41] Speaker 07:
And then when we said, hey, come on, we've raised this on our briefs on exceptions, we've raised on rehearing this question of the denominator, we get nothing in the rehearing order.

[00:12:50] Speaker 07:
Do a word search in the rehearing order.

[00:12:51] Speaker 07:
Use the word denominator one time in the decision.

[00:12:54] Speaker 07:
And that is in a generalized description of what it held in the case below.

[00:12:59] Speaker 04:
Just help me understand, you proposed 105 megawatt denominated.

[00:13:05] Speaker 04:
And help me understand how you arrived at that number again.

[00:13:10] Speaker 07:
That represents the maximum capacity of the two turbines, plus some fluff because of the way that, that sounds terrible, I didn't mean to say it doesn't really matter, but because of the way CPS2 is measured, you're allowed to have a

[00:13:27] Speaker 07:
you're allowed to have a deviation from the total amount that's required, and that extra five represents the deviation from what the maximum capacity was, those things to provide.

[00:13:36] Speaker 07:
And that's actually another thing that FERC adjusted, and that was our conclusions with regard to how much we needed in order to meet CPS2.

[00:13:45] Speaker 04:
I hate to skip back to the numerator, but in your brief you talk about how basically those two turbines would

[00:13:53] Speaker 04:
would operate from a set point of 27 megawatts.

[00:13:57] Speaker 04:
That's regulation down, correct?

[00:13:59] Speaker 04:
For regulation down.

[00:14:03] Speaker 04:
So that's 27 total for the two or 27 each?

[00:14:07] Speaker 07:
27 for each of them.

[00:14:09] Speaker 07:
No, no, no.

[00:14:10] Speaker 07:
I'm sorry.

[00:14:10] Speaker 07:
27 for them combined.

[00:14:12] Speaker 07:
They together needed to provide 27 megawatts.

[00:14:15] Speaker 04:
OK.

[00:14:16] Speaker 04:
So maybe I'm not understanding this correctly.

[00:14:18] Speaker 04:
So how, if that's the case,

[00:14:22] Speaker 04:
How did that number factor into, if at all, the numerator to get to 19?

[00:14:29] Speaker 07:
All right, because 27 to 20 is seven, and they just went one further than that.

[00:14:35] Speaker 07:
And that seven is the, you can't, unless you want to cold start the generation facility, it has to be operating its absolute operational minimum.

[00:14:43] Speaker 07:
And for these units, that meant they had to be always outputting seven megawatts all the time.

[00:14:49] Speaker 07:
had for chosen to ever address the crediting issue which they never address that was a principal part of the credit mechanism was what do you do with this with the seven megawatts in our answer was well we credit them not going to make them pay for that.

[00:15:01] Speaker 07:
In fact that's the credit mechanism gets to a real real problem at the at the heart of the whole regulation down piece which is that

[00:15:11] Speaker 07:
Burke's worry about the numerator is that we're somehow going to be unjustly enriched by putting electricity on the system, making money off of that, and then charging for it because we're using it to maintain a set point.

[00:15:24] Speaker 07:
But we had a crediting mechanism that expressly gave, to the extent there was any income at all derived from putting energy in the system,

[00:15:30] Speaker 07:
It was expressly credited against the Schedule III amounts because that was it.

[00:15:35] Speaker 07:
The only thing that the General Station existed to do was provide Schedule III service.

[00:15:39] Speaker 07:
So if any money came in from any other place, then you knew you took that off the Schedule III rate.

[00:15:44] Speaker 07:
Burke does not talk about crediting at all.

[00:15:46] Speaker 07:
Burke's brief at 34 concedes they didn't talk about crediting at all.

[00:15:50] Speaker 07:
The initial decision didn't talk about crediting at all because it denied fuel costs.

[00:15:53] Speaker 07:
It found no reason to discuss ways of crediting fuel costs.

[00:15:56] Speaker 07:
So there's no discussion about the credit issue in first orders.

[00:16:00] Speaker 07:
And the initial decision itself says, we don't find a reason to address it, because we've thrown out so many other things.

[00:16:05] Speaker 07:
And the way that we opposed it in our reply read was to say, surely it can't be the case that you get to be excused completely ignoring and arguing about crediting, because it's tied to an argument about fuel costs, which you summarily denied, and let one summary denial roll into another summary denial, so you just decide you don't need to discuss these things.

[00:16:23] Speaker 07:
And in fact, the mechanics of the accrediting mechanism present a whole different set of issues from the reason why I'm raising it here, which is to the extent Burt was worried that there was ever going to be an unjust enrichment from providing

[00:16:39] Speaker 07:
the set point, then they didn't have to worry about that because it was a credit mechanism would have given all that money back.

[00:16:45] Speaker 07:
And that's what when you talk about the fact that FERC has tried to put this into the large integrated multi-state utility energy box or the way it's going to do it's going to do regulation down, that's because they've got

[00:16:56] Speaker 07:
There are 15 other generating stations that are 1,800 megawatts that are operating at their sweet spot in terms of generating electricity.

[00:17:04] Speaker 07:
And when they need to provide regulation down, they just turn it down a little bit.

[00:17:09] Speaker 07:
That's not an option for us here because we aren't selling electricity on the market.

[00:17:12] Speaker 07:
We just have to maintain the set point.

[00:17:14] Speaker 07:
It's either that or pay $15 a megawatt for a third-party provider.

[00:17:17] Speaker 06:
Why don't we hear from FERC and we'll give you time on rebuttal?

[00:17:20] Speaker 07:
Unless there's... We never got to talk about refunds.

[00:17:23] Speaker 06:
Okay, you said you wanted to.

[00:17:24] Speaker 06:
I'll give you a couple minutes now to talk about refunds.

[00:17:27] Speaker 07:
Thank you.

[00:17:27] Speaker 06:
And I'm terribly sorry about this.

[00:17:29] Speaker 07:
You identified that, so... Well, briefly.

[00:17:36] Speaker 07:
The imposition of refunds in this case causes Northwestern to outright lose money for providing a mandatory service that FERC requires it to provide.

[00:17:46] Speaker 07:
As Judge Wilkins remembered from the LPC remand case, because it was covered in detail there, and from the two orders in remand, both of which are now coming up to you again soon, there are two basic classes of cases as far as refund liability is concerned.

[00:18:00] Speaker 07:
Cost allocation and rate design cases, and in those cases it's first general policy not to award refunds, and overcharge or overcollection cases, in which it is first policy in general to order refunds.

[00:18:11] Speaker 07:
The actual words of the statute are permissive.

[00:18:13] Speaker 07:
It says may.

[00:18:13] Speaker 07:
That's the whole point of Towns of Concord.

[00:18:15] Speaker 07:
So the critical question is, did FERC or did FERC not explain the equity, explain how it was addressing the equities in this particular situation?

[00:18:25] Speaker 07:
Given the amount of time I have left, I can just say this much.

[00:18:28] Speaker 07:
This case is clearly a cost allocation or rate design case.

[00:18:31] Speaker 07:
It's both.

[00:18:32] Speaker 07:
This case is not an overcharge or overcollection case.

[00:18:34] Speaker 07:
And if you were to redefine overcharge or overcollections the way FERC has chosen to do so here, where it's anything over the rate ultimately approved by FERC, then that would mean that FERC would always be awarding refunds.

[00:18:44] Speaker 07:
So it's clearly overinclusive.

[00:18:47] Speaker 07:
Since we have the benefit of the intervener's presence here, I guess the best way to deal with the equities of the situation is just ask them this question.

[00:18:55] Speaker 07:
Why is it fair for you to get regulation down service for free?

[00:18:59] Speaker 07:
Why is it fair for you to pay 4.4% or rate that you cost 35% of the cost?

[00:19:03] Speaker 07:
Why is it fair for you to receive a rate which is half of what we would be able to get from the best possible offer we ever got in 2007 and tell us that we have to bear the cost for subsidizing that service to you?

[00:19:14] Speaker 07:
And with that, thank you.

[00:19:17] Speaker 07:
Thank you.

[00:19:25] Speaker 01:
Good morning.

[00:19:25] Speaker 01:
May it please the court, Holly Kafer for the commission.

[00:19:28] Speaker 01:
Let me start by saying that what the commission's orders do here is ensure that the customers don't pay for more service than they need, more service than they require.

[00:19:38] Speaker 01:
They're only paying for what they're getting.

[00:19:40] Speaker 01:
That is the fundamental theory, to use Petitioner's Council's term,

[00:19:44] Speaker 01:
of Burke's case.

[00:19:46] Speaker 01:
Cost causation, you pay for what you get.

[00:19:51] Speaker 06:
To turn to the issues, I think maybe we should... What about the 205-206 issue?

[00:19:55] Speaker 06:
Can you tell me what your response to that is?

[00:19:58] Speaker 01:
I have a few, Your Honor, but the first one, perhaps, to set you at ease is that the Commission made the 206 finding here.

[00:20:05] Speaker 01:
At JA-237, it found that the inclusion of regulation down, and that's the only part of the case implicated by this issue at all, the inclusion of regulation down is not just and reasonable.

[00:20:17] Speaker 01:
It is not consistent with the Commission's precedent and...

[00:20:21] Speaker 01:
Northwestern simply has not shown that they can't recover those costs elsewhere.

[00:20:26] Speaker 01:
So to the extent there's any concern at all about the 205-206 issue, that should really do away with it.

[00:20:32] Speaker 01:
That said, looking at what was their prior rate, their prior rate had been approved as part of a settlement for a few years before

[00:20:42] Speaker 01:
They made this proposal, and as the court held in Wisconsin Public Power v. Burke, 493 of 239 at 259, none of the parties, the court nor the commission, can rely on an uncontested settlement, and that is what it was.

[00:21:02] Speaker 01:
as precedent.

[00:21:03] Speaker 01:
So not only did the commission not rule on the level of service in those prior cases, but it was an uncontested settlement, and it can't be held against anyone in particular.

[00:21:13] Speaker 01:
That said, factually looking at this,

[00:21:17] Speaker 01:
What Northwestern proposed here, they claim it's novel.

[00:21:21] Speaker 01:
It is novel.

[00:21:22] Speaker 01:
They built a generating facility for one particular purpose.

[00:21:27] Speaker 01:
It hasn't turned out to their liking, but they set an entirely new rate based on a cost of service.

[00:21:32] Speaker 01:
They were previously collecting based on contracts that did not involve any kind of cost of service analysis, did not involve a numerator, period.

[00:21:42] Speaker 01:
So, the commission was reasonable to proceed with this under 205, and Northwestern, throughout the hearing, put on evidence in support of, it essentially had accepted the burden for a period of time, where it put on evidence, it did studies, you know, which the initial decisions simply found were not persuasive on this point, to show that 60 megawatts is just much, much more than what is needed to provide service to the Schedule III customers.

[00:22:08] Speaker 01:
Perhaps they need it for other purposes.

[00:22:10] Speaker 01:
They have real tail customers.

[00:22:11] Speaker 01:
And fundamentally, the point is that they can use this station for other purposes.

[00:22:17] Speaker 01:
They are making energy sales at

[00:22:22] Speaker 01:
In their rehearing request at JA-912 to 913, they cite some very helpful numbers, which is that in 2011, they made $6.1 million worth of energy sales from this plant.

[00:22:36] Speaker 01:
Now, Petitioner's Council says, well, that's all fine because we propose to credit it back.

[00:22:41] Speaker 01:
But how is it just unreasonable to force their Schedule III customers to pay those costs up front?

[00:22:46] Speaker 01:
they try to brush that off as 20% of their revenue requirement.

[00:22:50] Speaker 01:
Again, those numbers are in JA 912 to 913.

[00:22:54] Speaker 01:
But 20% of that revenue requirement is what the Schedule III customer shouldn't be paying because they're not benefiting from that service.

[00:23:01] Speaker 01:
They're not causing those costs.

[00:23:03] Speaker 01:
Northwestern is selling that energy and getting its return through that mechanism, which is exactly what it should be doing under the Commission's precedent.

[00:23:14] Speaker 04:
But what about the argument that

[00:23:16] Speaker 04:
The customers that were paying 35% or that are responsible for 35% of that cost are only paying 4.4% now, I think under the new rate.

[00:23:29] Speaker 01:
That argument presumes Northwestern's proposal, which is that 60 megawatts is needed.

[00:23:37] Speaker 01:
60 megawatts of regulation service is needed for Schedule III customers, the commission found directly to the contrary.

[00:23:43] Speaker 01:
So I mean, I think we can address that sort of step by step by going through how the commission reduced the numbers, starting with regulation down, which is, I think, petition counsel described accurately as they have to maintain a certain amount of generation.

[00:23:59] Speaker 01:
They know they have to maintain a certain amount of generation, which is why they are able to make those sales, which they have done.

[00:24:08] Speaker 01:
So the Commission has previously held, long before this case, going back to Order 888,

[00:24:14] Speaker 01:
that any type of generator can't recover the costs of that regulation down service because it's not going to the benefit of the Schedule III customers and because they have the opportunity to earn revenue from those sales as they are.

[00:24:34] Speaker 01:
What the commission did here was say,

[00:24:36] Speaker 01:
We understand Northwestern has done something different here.

[00:24:39] Speaker 01:
So Allegheny and Kentucky utilities, the cases that the commission discusses, are not directly controlling.

[00:24:46] Speaker 01:
That's where we've really firmly excluded regulation down before.

[00:24:51] Speaker 01:
Here, if you can come back to us and show evidence that those costs are just simply unrecoverable, then please do so.

[00:25:01] Speaker 01:
The thing that's perhaps most concerning is that in the very first hearing order in this case, October of 2010, three months before the plant went into service, the commission said, Northwestern, you have not explained why you propose to depart from precedent on that very issue, regulation down.

[00:25:24] Speaker 01:
And that was more than six years ago now.

[00:25:28] Speaker 01:
more than seven years ago now, three months before the plant went into service, and they still have not taken any action to mitigate what they say are their losses.

[00:25:43] Speaker 01:
More on the topic of regulation down, because it is the biggest reduction, I do want to point out that really the commission did thoroughly address all of their arguments, and I think that their

[00:25:55] Speaker 01:
concession that there is value in that service to Northwestern's customers, not its Schedule III customers, but to its other customers, should really just kind of close that issue entirely.

[00:26:10] Speaker 01:
I think perhaps it would be best to go directly to the issue of refunds.

[00:26:17] Speaker 01:
Judge Randolph, I wanted to start with your question about how exactly the commission is calculating refunds here, first by saying that there's no dispute about

[00:26:27] Speaker 01:
how the refunds should be calculated.

[00:26:29] Speaker 01:
There's a dispute about whether they should be granted at all.

[00:26:32] Speaker 01:
Sure, that's fine.

[00:26:34] Speaker 01:
But the way that the commission has always calculated refunds, unless there is some kind of intervening dispute in an overcharged case, is that the utility has to refund the difference between its proposed rate, which it was allowed to charge because it was put in effect, subject to refund, during the pendency of the case,

[00:26:54] Speaker 01:
and the rate that was ultimately found to be just and reasonable.

[00:26:57] Speaker 03:
So all that the commission is doing by imposing refunds here is... Well, I thought it was... See, that's where I'm not clear.

[00:27:05] Speaker 03:
Because I thought once, in a 205, once the revised rate was held to be unjust and reasonable, then the previous rate would be the measure, the baseline for the refund.

[00:27:19] Speaker 03:
Isn't that the way it works?

[00:27:21] Speaker 01:
No, Your Honor.

[00:27:22] Speaker 01:
I think maybe you're thinking of the instance where a rate could be rejected in its entirety, right?

[00:27:30] Speaker 01:
Which isn't what the Commission did here.

[00:27:32] Speaker 01:
The Commission said, we see your rate for X number, we reduce it to Y. That should have been the other way.

[00:27:39] Speaker 01:
So the commission has simply just reduced the total number that they're collecting, which is why this is an overcharge case and not a cost allocation or a rate design case.

[00:27:49] Speaker 03:
The commission in its order relied not only on Section 205, but also on Section 206.

[00:27:57] Speaker 03:
They didn't vote it anyway.

[00:28:00] Speaker 01:
I don't think so, Your Honor, except to the extent, as we were discussing earlier, that the Commission did make an alternative 206 finding on the regulation down costs.

[00:28:14] Speaker 01:
The refunds are imposed solely under 205.

[00:28:18] Speaker 01:
It's just a very standard case, and I would point to the case that we cited in our brief.

[00:28:23] Speaker 01:
at page 53, Westar Energy versus FERC, 568 F3rd, 985 at 989, as providing just a very simple guide for the commission, for the court's analysis here.

[00:28:36] Speaker 01:
A rate was filed.

[00:28:37] Speaker 01:
It resulted in overcharges until the commission corrected it by putting in place a just and reasonable rate, and the commission refunded the difference.

[00:28:47] Speaker 01:
What the court held there, your honor, is that what really matters is that the utility had notice

[00:28:53] Speaker 01:
that of the possibility of refunds and as the Commission held here of course Northwestern had notice of the possibility of refunds.

[00:29:02] Speaker 04:
They had notice of the possibility of refunds but that they have noticed that you would completely change the I guess the methodology of calculating the rate.

[00:29:15] Speaker 01:
Your Honor, Northwestern does not allege that we change their methodology.

[00:29:19] Speaker 01:
They allege that we reduced the amount they're collecting

[00:29:23] Speaker 01:
I have not seen that in their pleadings.

[00:29:25] Speaker 04:
So you think that this isn't a change of methodology and so this takes it outside the NRG power cage?

[00:29:35] Speaker 01:
Absolutely.

[00:29:35] Speaker 01:
There's multiple reasons, going back to where we started, for why we are well outside NRG.

[00:29:41] Speaker 01:
The first being that the Commission made the 206 finding here.

[00:29:45] Speaker 01:
And it's adequately supported by the Commission's analysis showing that inclusion of regulation down would be unjust and unreasonable.

[00:29:52] Speaker 01:
It would put costs on Schedule III customers that they do not cause that Northwestern has not recovered elsewhere, JA-237.

[00:29:59] Speaker 01:
The second reason is that

[00:30:05] Speaker 01:
the commission that Northwestern had the burden in the first place, of course, to justify its 205 filing.

[00:30:12] Speaker 01:
So you have two bases to go on there with regard to the 205-206 question.

[00:30:18] Speaker 01:
If you have questions about how I'm arriving there, I'd be happy to answer them.

[00:30:25] Speaker 01:
On the question of whether the commission changed the rate design, again, I hear Northwestern to argue that this is a cost allocation and rate design case for purposes of refunds because they prefer for the commission to follow the traditional approach it has in those cases of denying refunds.

[00:30:44] Speaker 01:
Although I do have to add that the commission does not always deny refunds in those cases.

[00:30:49] Speaker 01:
It is simply a policy that sets forth the guidelines of how the commission analyzes a particular case

[00:30:55] Speaker 01:
I don't see Northwestern as arguing that we've changed their rate design, they're upset that we've increased their denominator, that we've reduced their numerator, and that affects their overall recovery of their revenue requirement.

[00:31:12] Speaker 01:
Which takes us back to where I started with the commission's theory here.

[00:31:17] Speaker 01:
It is not about whether Northwestern can recover the entirety of its gate station revenue requirement.

[00:31:24] Speaker 01:
Much of that revenue requirement is being allocated to retail customers in any event without the commission.

[00:31:29] Speaker 01:
Of course, we have no say over that.

[00:31:31] Speaker 01:
The question is, what are the costs that are needed to serve the Schedule III regulation service customers?

[00:31:37] Speaker 01:
Northwestern simply attempted to put too much of the cost of this facility on those customers.

[00:31:43] Speaker 01:
It has not shown that it cannot recover those costs elsewhere, and it still has the opportunity to do so.

[00:31:49] Speaker 01:
Perhaps I can just end by pointing to the places in which they've conceded or recognized that they have those opportunities.

[00:31:58] Speaker 01:
For regulation down, they've acknowledged that they have the opportunity to file for

[00:32:02] Speaker 01:
opportunity costs under schedule 10.

[00:32:04] Speaker 01:
You can find that at JA 210 in the opinion paragraph 30.

[00:32:09] Speaker 01:
for fuel costs.

[00:32:10] Speaker 01:
They stated their intent to evaluate the idea of revising schedule four so that they could recover those costs.

[00:32:16] Speaker 01:
That's at JA 842, and the commission noted it in the re-hearing order at JA 244.

[00:32:22] Speaker 01:
Energy sales.

[00:32:23] Speaker 01:
Again, we've already discussed that they are making significant energy sales, 20 percent of their revenue requirement from this station.

[00:32:31] Speaker 01:
Customers for schedule three should not be paying those costs

[00:32:35] Speaker 01:
At the end from from the beginning With just having to wait to have them credited back to them.

[00:32:42] Speaker 01:
Okay.

[00:32:42] Speaker 01:
That's all thank you

[00:32:53] Speaker 02:
May it please the court, Christina Gomez, arguing today on behalf of the intervenors, Montana Large Customer Group and Central Montana Electric Power Cooperative.

[00:33:01] Speaker 02:
I'm going to try to be ambitious and get to four quick points in the time I've got today.

[00:33:05] Speaker 02:
The first being that any shortfall in the recovery of costs from the gate station is really a result of Northwestern's own actions and failing to seek those costs through the appropriate tariffs.

[00:33:19] Speaker 02:
Second,

[00:33:20] Speaker 02:
that Northwestern's proposed rate here was contrary to FERC precedent, and nearly 10 times higher than comparable Schedule III rates that have been approved by the Commission.

[00:33:31] Speaker 02:
Third, that the refund order is consistent with FERC precedent, including in the Entergy case, which involves similar Schedule III issues and a similar refund.

[00:33:40] Speaker 02:
And the fourth will be to answer some of the questions that were launched directly at the interveners.

[00:33:45] Speaker 05:
Yes, why is it fair?

[00:33:47] Speaker 02:
That's that was the question with a lot of tag alongs because and that relates to the first point I have here because there are other options that have been pointed out throughout this proceeding.

[00:33:57] Speaker 02:
There are other avenues to recover these costs.

[00:34:00] Speaker 02:
I'll start by saying back even before this first case was filed long before the facility was approved by the Montana Public Service Commission.

[00:34:08] Speaker 02:
We told Northwestern this was in the 2008 2009 time frame.

[00:34:13] Speaker 02:
You are

[00:34:14] Speaker 02:
are not applying precedent here.

[00:34:17] Speaker 02:
You're miscalculating the costs that are going to be attributed to Schedule III customers, and you've got several other options to recover the costs from these stations.

[00:34:28] Speaker 02:
Excuse me, from this station.

[00:34:29] Speaker 02:
That was at Joint Appendix, page 362 was the first reference to that.

[00:34:35] Speaker 02:
In terms of the regulation down piece of that, Northwestern admitted in these proceedings that the energy that it uses to

[00:34:44] Speaker 02:
to stay at that set point is absorbed into its system.

[00:34:48] Speaker 02:
It's used by its retail customers.

[00:34:50] Speaker 02:
That's what the ALJ ultimately looks at in saying, you haven't showed why you should be treated differently from the vertical providers here, because you've vaguely stated that this energy is absorbed into your system.

[00:35:03] Speaker 02:
You haven't shown that you're not going to be able to sell it.

[00:35:06] Speaker 02:
And then throughout this process.

[00:35:07] Speaker 06:
The ALJ said that, you're saying?

[00:35:08] Speaker 02:
Yes.

[00:35:10] Speaker 02:
That was in the ALJ's decision at

[00:35:20] Speaker 02:
Excuse me.

[00:35:22] Speaker 02:
That is right around page 135 of the appendix.

[00:35:28] Speaker 02:
OK.

[00:35:32] Speaker 02:
That the ALJ said, here's what the burdens are.

[00:35:36] Speaker 02:
I mean, here's what you need to do to establish that you should be treated differently and hasn't.

[00:35:40] Speaker 02:
There also are several other schedules that have come up, schedule four, schedule 10, as the park council indicated.

[00:35:45] Speaker 02:
Northwestern has still, after years, never attempted

[00:35:50] Speaker 02:
to bring those parties into this proceeding or file a separate rate to try to recover those costs through, like I said, the appropriate channels.

[00:36:00] Speaker 02:
I know I'm short on time here, but I would like to quickly go to the issue of the refunds.

[00:36:06] Speaker 02:
The question of how that applies here.

[00:36:09] Speaker 02:
I think the statute may help with answering the questions that you had, Judge Randolph.

[00:36:14] Speaker 02:
And 16 USC section 824 D

[00:36:18] Speaker 02:
Right toward the end of that section it says that the commission, after determining if a rate is just and unreasonable and if it needs to, excuse me, is unjust and unreasonable and needs to adjust it, it may by further order require such public utility to refund with interest

[00:36:37] Speaker 02:
To the persons in whose behalf such amounts were paid, such portion of such increased rates or charges as by its decisions shall be found not justified."

[00:36:47] Speaker 02:
So that's where you get to.

[00:36:48] Speaker 02:
You don't go back to the prior rate, you go to the difference between.

[00:36:51] Speaker 02:
Okay.

[00:36:54] Speaker 02:
So the point I wanted to make here in referencing the Entragy case, this was cited at page 31 of our brief,

[00:37:01] Speaker 02:
First, did the exact same thing in that case.

[00:37:04] Speaker 02:
It adopted the rates subject to refund.

[00:37:07] Speaker 02:
It looked at the Schedule III issues, including the regulation down issue, decided that was not recoverable, and then it issued refunds.

[00:37:15] Speaker 02:
The refunds also are consistent with the Federal Power Act's policies of protecting ratepayers.

[00:37:20] Speaker 02:
Here we are the rate payers who paid more than $30 million more than the just and reasonable rate that was determined to apply to Schedule 3.

[00:37:28] Speaker 02:
It's not an allocation because there are no other customers other than Schedule 3 who are in this case.

[00:37:34] Speaker 02:
The state rate payers couldn't be because FERC doesn't have jurisdiction.

[00:37:38] Speaker 02:
The Schedule 4 and Schedule 10 customers, they're not in this proceeding.

[00:37:42] Speaker 02:
It's not the same customers.

[00:37:44] Speaker 02:
So there was no way an allocation could have even taken place.

[00:37:48] Speaker 02:
We ask the court to affirm.

[00:37:52] Speaker 06:
We'll give you a few minutes for rebuttal.

[00:37:55] Speaker 07:
Thank you, Your Honor.

[00:37:55] Speaker 07:
I appreciate your indulgence.

[00:37:57] Speaker 07:
It's the first time.

[00:37:58] Speaker 07:
First of all, cost causation is not about you pay for what you get.

[00:38:00] Speaker 07:
It's about you pay for what you cause.

[00:38:02] Speaker 07:
And here, the cause is the need to provide regulation services to the tune of 60 megawatts.

[00:38:08] Speaker 07:
Burke makes some interesting arguments.

[00:38:10] Speaker 07:
Burke Council makes some interesting arguments about credits here.

[00:38:13] Speaker 07:
And the new theme is that the damage here is that somehow customers should be required to pay for them upfront.

[00:38:18] Speaker 07:
That's the new harm.

[00:38:20] Speaker 07:
The first problem with that argument is I don't see it anywhere in Burke's orders, which don't talk about crediting at all, and Burke's Creek admits that at page 34.

[00:38:26] Speaker 07:
So she's just bringing a policy argument to your attention the first time.

[00:38:29] Speaker 07:
Second of all, it's a terrible policy argument.

[00:38:31] Speaker 07:
What matters is whether or not they're going to be ending up paying for something.

[00:38:34] Speaker 07:
And if we're crediting them the entire value of anything that bleeds onto the system for maintaining regulation down service at the set point, then they're not harmed.

[00:38:42] Speaker 07:
So, why does it matter whether or not we're reducing their rate upfront or pretending that we sold them something at a different time?

[00:38:50] Speaker 07:
The point is, they're not paying for regulation down service to the extent that any energy goes onto the system.

[00:38:55] Speaker 07:
So, they're not harmed, and we are harmed if you tell us we just can't recover for providing that energy.

[00:39:01] Speaker 06:
Well, one of their themes is that you can recover the costs elsewhere.

[00:39:03] Speaker 06:
Can you respond to that?

[00:39:04] Speaker 07:
That is where I'm next going.

[00:39:06] Speaker 07:
I just want to say this last thing about credits.

[00:39:08] Speaker 07:
Since Golden Spread in particular, the commission's preferred method of dealing with any unexpected costs or costs that cannot, where there's no firm determinants, you didn't, you can't, you have no way of previously calculating what it's going to be, is to do it through credits.

[00:39:21] Speaker 07:
That's what Golden Spread says.

[00:39:22] Speaker 07:
We've said so many times in this case, this is why we're doing, this is why we're dealing with crediting.

[00:39:26] Speaker 07:
But there's no mention of crediting in Burke's orders, period.

[00:39:30] Speaker 07:
Look for it.

[00:39:31] Speaker 07:
It's not there, and Burke concedes that it's not discussed.

[00:39:34] Speaker 07:
As for the alternative methods, this is tiresome.

[00:39:36] Speaker 07:
We spent the entire trial arguing every possible other way to get this from Schedule 2 through Schedule 10, Black Star, and every other potential way to try to call this something that it is not.

[00:39:49] Speaker 07:
always and has only ever been and only ever will be regulation service.

[00:39:53] Speaker 07:
That is the only thing it is.

[00:39:55] Speaker 07:
We face substantial liability if we start trying to double count capacity for other purposes.

[00:39:59] Speaker 07:
That is the Mr. Merchant's testimony in particular goes into this particular problem.

[00:40:04] Speaker 07:
We cannot call something schedule four capacity if we're using it for schedule three purposes.

[00:40:08] Speaker 07:
And these arguments are faithless and I will just direct you to this one place to dispose of them entirely.

[00:40:17] Speaker 07:
After telling us, go seek help under schedule four, go seek help under schedule 10 as potential other alternatives, you go a few paragraphs later, and whether denying our ability to recover fuel costs, which directly impacts both regulation up and regulation down, because after all, what's your number one variable cost of your generating station?

[00:40:34] Speaker 07:
Fuel costs, for which we get nothing.

[00:40:38] Speaker 07:
They tell us this about schedule 10.

[00:40:40] Speaker 07:
Don't try to go recover this into schedule 10.

[00:40:42] Speaker 07:
That will be a quote difficult proposition because it would quote be internally inconsistent with Northwestern's contradictory claim that it built the gate station exclusively to provide regulation services for its retail and schedule three customers.

[00:40:53] Speaker 07:
So there, they will absolutely use it as a baseball bat to smash us in the head if we decide that we're going to go try to recover it or something else.

[00:40:59] Speaker 07:
So this whack-a-mole game, go search here, go search here, forgets the one basic thing.

[00:41:05] Speaker 07:
This is only a Schedule III service.

[00:41:07] Speaker 07:
It has only ever been a Schedule III service.

[00:41:09] Speaker 07:
It will only ever be a Schedule III service.

[00:41:11] Speaker 07:
And if any other income comes from any other place, it will be credited by a reduction in the Schedule III service.

[00:41:16] Speaker 07:
There is no harm in that.

[00:41:17] Speaker 04:
Do you agree that there was no change in rate design or rate methodology here within the meaning of NRG power?

[00:41:27] Speaker 07:
Public Service Commission of New York does not speak in terms of rate design.

[00:41:30] Speaker 07:
It speaks in terms of rate components, and there are multiple rate components to a rate design.

[00:41:35] Speaker 07:
The question is whether or not, under Public Service Commission of New York, is did you change this rate component or was it a continuation of the status quo?

[00:41:42] Speaker 07:
That's the language of Public Service Commission of New York, an older case,

[00:41:45] Speaker 07:
before Western Resources, before city of, I forgot the name, city of, start with the W, Judge Slaterow, Judge Slaterow, depending on when he was here.

[00:41:56] Speaker 07:
What we are saying is the 60 megawatt rate determinant, the 60 megawatt allocator here represents and has only ever represented one thing.

[00:42:05] Speaker 07:
How much regulation service do you need?

[00:42:09] Speaker 07:
That has never changed until this order, where FERC decided all of a sudden that you don't need 60 megawatts of regulation service, you only need 19, because we decided that you don't need to get regulation down service anymore.

[00:42:21] Speaker 07:
Regulation down service was an integral part of what they were getting out of the 60 megawatts in the past.

[00:42:25] Speaker 07:
And erasing it, why?

[00:42:26] Speaker 07:
Because we built the generating station, which they expect us to operate like some sort of full base load plant instead of the special facility that it is.

[00:42:33] Speaker 07:
That makes no sense.

[00:42:35] Speaker 07:
And finally, it's just this question of when to fall.

[00:42:37] Speaker 07:
The intervenors have a chart on page eight of their brief which reports to tell you, oh, these are the comparison.

[00:42:45] Speaker 06:
What's wrong with that chart?

[00:42:47] Speaker 07:
That chart talks about the cost of delivering regulation reserves inside the territory of an

[00:42:53] Speaker 07:
Integrate vertically integrated utility all of those are vertically integrated utilities.

[00:42:57] Speaker 07:
They all have generation fleets They are all operating their their their generation stations for other purposes namely primarily to provide energy It is very easy for them to just ratchet down if demand goes down if they're operating from operating that base load plant Not so with us.

[00:43:11] Speaker 07:
The other reason why that is a fundamentally defective approach is this

[00:43:16] Speaker 07:
It's not just what you can provide in your own area.

[00:43:18] Speaker 07:
We had put out RFPs.

[00:43:19] Speaker 07:
We did it in 2007.

[00:43:21] Speaker 07:
We had to do it again when the station broke in 2012.

[00:43:23] Speaker 07:
We know what the market price for delivering regulation to our balancing area is, because you will find this out in the, the full citation is in the briefs, but the 2007 Northwestern order, the order on our RFP.

[00:43:37] Speaker 07:
Look at paragraph seven.

[00:43:38] Speaker 07:
What does it say?

[00:43:39] Speaker 07:
The rate that they were willing to, that we were willing to, that the lowest rate we could get was a rate of $8 for 50 megawatts, scaling up to 14 megawatts, but $14 for anything above that, plus $5 to deliver it.

[00:43:55] Speaker 07:
And because that rate was so high, they decided to cap it at 15.

[00:43:58] Speaker 07:
This is compared to the 128 rate that we produced here.

[00:44:01] Speaker 07:
And again, in 2012, when our system broke and we needed to get the replacement, we went out and we did another solicitation.

[00:44:07] Speaker 07:
What did we get?

[00:44:09] Speaker 07:
$9 for megawatt hour plus transmission, again capped at $15 for $15 a megawatt.

[00:44:15] Speaker 07:
That is far lower than the 128 that we offered, and it is way, way, way off the sense that they're allowing us to have as our ultimate adjusted rate here.

[00:44:26] Speaker 06:
Okay.

[00:44:27] Speaker 06:
Thank you very much.

[00:44:28] Speaker 06:
The case is submitted.