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Case number 16-1285, A&R storage company petitioner versus federal energy

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Good morning, ladies and gentlemen.

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Two things before we start.

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First of all, Judge Henderson unfortunately can't be with us this morning.

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She will listen to the tapes of this morning's arguments and she will participate in the decisions.

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Second, as you know, this matter has material that's been filed under seal, and some of the parties may want to discuss that material in the argument.

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We have received consent from all of the parties, including the interveners, to address that in open court, and therefore we will not be closing this argument.

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Counsel.

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Thank you, Your Honor.

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Good morning, Mark Sundback for NR Storage.

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I'd like to reserve three minutes for rebuttal.

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This case presents a textbook example of a failure to engage in reasoned decision-making.

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The results are evident in paragraphs 215 through 220 of opinion 538.

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There are conclusory allegations contained in those passages that are simply inconsistent

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with the body of the order that made repeated specific findings based on a voluminous record that constitute a basis of substantial evidence.

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So, for instance, in paragraph 219, the commission expresses concern about what it characterizes as the sheer number of facilities that would either have to acquire 284 authorization or release capacity in order to police a potential exercise of market power.

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In that paragraph, it also asserts that a substantial number of intrastate providers would all need to enter the interstate market with available capacity.

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Those assertions are simply inconsistent with many passages.

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There's certainly a lot of tension between what FERC says when they're defining the product market and when they're addressing good alternatives.

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and what they say at the end when they're addressing whether market power will be constrained.

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But can't we consider that issue as really a question of degree?

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How good are the alternatives?

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And FERC is saying they're okay, but not perfect.

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And when they end up with a situation where, if I understand the calculations, the intrastate component of the other suppliers is way over 50% of the relevant market.

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Can't they say that's concerning?

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Well, you don't have to take ANR's word for it.

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You have only to take the Commission's word for it.

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Paragraph 184, quote,

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Interstate providers themselves were good alternatives, end quote.

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The commission criticized the interveners for presuming that they couldn't be good alternatives.

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Good, but not perfect.

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I mean, surely an intrastate provider would be not as good an alternative as an interstate, right?

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I'm not sure we'd agree with that, Your Honor.

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Well, you have to get the certificate.

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You have to put yourself in a wholly separate regulatory scheme.

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It takes time.

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No, Your Honor, I disagree with that for several reasons.

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Intrastate capacity, the Commission itself found, is a good substitute.

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even if an intrastate pipeline wants to provide interstate service under the commission's regulations, intrastate pipelines can provide interstate service to interstate pipelines or LDCs served by those interstate pipelines.

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without further authorization.

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Part 284-122A of the commission's regs says, if you're an intrastate pipeline, you're already authorized to do that.

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So the bogeyman of having to convert is a fallacious one.

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Additionally, we have many examples in the cases cited in the briefs where capacity that was in intrastate commerce is either leased to an interstate pipeline

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or assets are sold to an interstate pipeline that already has a blanket certificate.

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There are many different ways that these facilities, this capacity is readily usable without further authorization.

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The record is replete with examples of entities that have NGA Section 3 authorization already to import and export gas from Michigan to Ontario, and that in itself undercuts or

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affects the market for A&R storage.

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I'm sorry, I thought all parties briefed this as if an intrastate provider needs to get a 284 certificate in order to enter the interstate market, and there's just dispute about how long that takes and how burdensome it is.

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And you all said, well, it can happen within a year, so it's no big deal.

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Your Honor, the 284 authorizations can either be pursuant to a specific application by the applicant, or to the extent an entity is an intrastate pipeline, the 284 authorization already exists in the Commission's regulations.

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So there's no need for conversion.

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You can convert, and we demonstrated that conversion can happen readily within a year, but there's no need to convert in order to impact pricing and demand for interstate service.

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While you're there, I looked for and didn't find, and I may just have overlooked, but what is the intra-state

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storage companies, how do they set their pricing?

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Is that market-based or cost-based or something else?

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That's a good question.

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It's both.

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Both.

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Some intrastate entities have cost-based rates.

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Some have effectively market-based rates.

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For instance, there's certain storage capacity provided intrastate in Michigan, which it's our understanding has market-based rate authorization.

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When you say that the intrastate providers don't need to convert in order to have an impact, is that because you're now saying that they can enter the interstate market without any further authorization from FERC, or is it because of your argument on the demand side that even if they stay in the intrastate market,

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consumers can buy from them rather than from the interstate providers?

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Both, your honor.

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Okay.

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Part 284, 122A.

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Okay.

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The allegation, the conclusory assertions in paragraphs 215 through 220 also ignore, for instance, the availability of

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currently deactivated interstate storage, which can be reactivated.

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The Wabash and Columbiana fields were referenced in the record.

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The Commission simply ignored those with regard to A&R Storage's argument that entry is easy.

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And our storage sponsored extensive testimony from the only reservoir engineer in this case that there are over 2,000 potential usable containers of depleted storage, gas storage fields just in Michigan alone with an aggregate capacity substantially in excess of 2,000 BCF.

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The commission never got to that.

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Instead, it dismissively said without any citation in the record,

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Well, it's unlikely that that's going to cause NR Storage to no longer be the largest storage provider.

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In fact, if the Commission had simply looked at the rebuttal evidence, which it itself concluded was erroneously ignored by the initial decision,

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It would have seen that ANR storage is neither the largest storage provider by working gas capacity or daily deliverability.

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ANR storage ranks number three on daily deliverability.

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The commission ignored the fact that in one single order, in the blue water order,

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which involves a storage capacity previously intrastate in Michigan, so it was in the Central Great Lakes market, the commission authorized for market-based rates more daily deliverability than is impacted or requested for all four of the ANR storage fields here at issue.

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So in Bluewater, they authorized market-based rates

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for over 826 MMCF a day of daily deliverability, 110% of what A&R Storage is asking for.

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So this shimmer of A&R Storage is the largest is A, incorrect.

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the Commission recognized that the initial decision committed error by not recognizing the... The Commission recalculated the shares and on working gas, ANR came out at 16.1 or 2 percent and they were the market leader.

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And if you assume, let's assume for the sake of argument that we reject your claims with regard to rehearing and that those two points would drive up ANR share a little bit more.

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I think it goes from something like 16 percent to 20 percent.

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Those are their findings, and I don't think you challenged any of them as unsupported.

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Your Honor, we contended that they were contrary to the record.

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And in any event, the commission has authorized market-based rates in instances of market shares of over 20 percent, like the Petal case.

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Do you have any cases where they have authorized market rates at a level where the applicant is the market leader?

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In Petal, the third Petal case, which is 2003, Petal had a market share of 20.6% for daily deliverability.

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It was affiliated with El Paso Energy, which is a significant

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participant in the natural gas market, and while it didn't acknowledge that it was the largest entity in the market, I would think that it was.

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Similarly, in One Oak, the 2000 case,

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One oak had almost 22% share of daily deliverability in the market, and that likely made it the largest participant.

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It had five storage fields and was leasing to an interstate pipeline another storage field.

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So there are other instances with market shares in excess of what A&R had where the commission has nonetheless authorized market-based rates.

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What does DTA share?

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DTE's share is between 14.8 on working gas and daily deliverability is 16.57.

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DTE, just during the time that lapsed between the initial filing of the application for market-based rates and the actual hearing of this case, added 4,500 or 5,000 of working gas capacity just during that period of time.

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Did you argue before the Commission that it should approve ANR's application because ANR's application is essentially indistinguishable from DTE and DTE's application was approved?

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Yes, Your Honor, we did.

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In the rehearing petition?

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Yes, that is correct.

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Did you do it in the main proceeding?

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There's a testimony from Mr. A&R witness Sullivan, and I don't remember the joint appendix number, but I think it was at pages 19 and 20 of his rebuttal testimony, where he also discusses DTE and MISCON, which is an affiliate.

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So this was present in the case, even in the evidentiary.

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That seems to me a pretty strong argument for you, and I'm just puzzled why it has so little development before the ALJ, who mentions MISCON in passing, but just only as another data point on share.

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And as far as I can tell, the Commission doesn't mention it at all.

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and the first time it really comes up is on rehearing.

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Well, the record also shows that Mishcon was directly competing to take customers from A&R storage.

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The record shows that.

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Well, that raises a question in my mind.

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Tell me if this is correct as a matter of economics.

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If you only have one market-based pricing entity within the relevant geographic market, all the rest are cost-based,

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And it's only one, in this case DTE, putting aside the intros.

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Wouldn't it be true that the market-based company would have to either equal or undercut the cost-based suppliers or storage companies?

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Because otherwise it has no business.

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All other things being equal, that's certainly true, Your Honor.

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But the dynamic changes, if you have more than one,

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market-based company in the mix, does it not?

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It depends on the market metrics and the profile of the market, I believe, Your Honor, not as an economist, but sort of a common sense regulatory lawyer, to the extent that actually even everybody is entitled to charge market-based rates.

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If the market is workably competitive,

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then that you're getting the results of a competitive market.

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And in fact, the commission found in Blue Water that a subset of the Central Great Lakes market was highly competitive.

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And similarly, in the Orbit case, which contains a subset of the Central Great Lakes market, the commission stated that it was a competitive market.

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So DTE is charging market rates in this market.

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I think I saw some other participants were.

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Yes, for instance, Blue Water, which is located pretty close to A&R in Michigan, was authorized to charge market-based rates once again for about more than half of the working gas capacity of A&R's storages.

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fields at issue and more than the daily deliverability of ANR storage fields at issue.

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WPS, cited in our briefs, is also an example of market-based rates and I believe LE8, the L-E-E-8 case, also involved market-based rates in the market.

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And it's not a surprise, given the fact that, for instance, the Ohio storage capacity is undersubscribed.

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So there's available capacity out there.

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So market-based rates in an environment like that work very well.

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Ontario has also market-based rates for some of its providers.

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Just going back to intrastate providers for a minute, assuming you're correct,

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that they either don't need or can easily get authorization as a matter of FERC law to come into the interstate market.

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What do you do with the argument that I think FERC hints at, but the interveners really press, which is

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There may be a lot of other legal or economic constraints under state law, perhaps under Canadian law.

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So even if you can easily get the FERC certificate, you might be barred by Michigan law, you might be barred by your own contracts.

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A lot of that capacity might be unavailable for other reasons.

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We only have to look at the real world to see how fallacious that argument is, Your Honor.

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For instance, in the East Ohio cases, we see that unsubscribed capacity held by the local distribution company is offered to interstate service in part because of the concerns that the local distribution company will face at

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when its rates are reviewed by the state regulatory commission.

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Mr. Sullivan points out that because of the obligation to furnish service at the lowest reasonable cost, local distribution companies have a powerful incentive to release their capacity and see if there's a home for it in the interstate market.

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Another good example of that is the central Oklahoma case where that took place.

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Similarly, the one oak case, as we mentioned before,

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involved one oak leasing capacity to Natural Gas Pipeline Company of America, the Sayer Field, to redeploy that, presumably to earn more revenues.

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There are a legion of examples where intrastate, formerly intrastate facilities are moved over into the interstate column, and a large part of that is because the economic incentives to redeploy idled capacity or try to capture higher value.

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If I could loop back to an earlier question, and I'm sorry for the disjointed nature of the answer, you had suggested, if memory serves, that intrastate capacity simply by being intrastate was inferior to interstate capacity.

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As a substitute in the interstate market.

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And we'd like to point out that a lot of intrastate capacity is closer to load to the consumer than interstate capacity.

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And our storages facilities are a perfect example.

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They're in the middle of a field in the middle of Michigan.

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They're not sitting right under Detroit.

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In contrast, local distribution facilities like those, for instance, of Dominion or East Ohio are right under the municipalities that they serve.

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So in that sense, they're more flexible.

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They're right there.

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There's a lower transportation cost to bring that gas to the market.

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That's a competitive advantage that the intrastates have that interstates often don't.

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thing I noticed in the record, which no one makes much of, is that

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In, I think, 2011, the commission conducted an investigation of your client's rates and found them to be super competitive, something like 130%, 150% return on equity.

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Wouldn't that be pretty compelling, pretty direct evidence of market power that could inform the Commission's concern?

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No, Your Honor.

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As we've seen, for instance, in the Exxon Mobil case and the Mobil Pegasus case, this Court, as well as the Commission, has determined that using

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The yardstick of a particular entity's cost as a measure of whether there's market power exercise or not is not a reliable measure.

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An entity may be largely depreciated.

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and therefore the marginal cost supplier might experience costs substantially in excess of a particular... Well, maybe in the abstract, but FERC pressed that case and extracted a settlement which resulted in your client having to charge substantially lower rates.

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So they thought in that proceeding that the rates were super competitive.

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In that case, why was the market, a subset of the Central Great Lakes market, found to be highly competitive by the Commission in the Blue Water case?

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Blue Waters in the same state, in the same market, had more daily deliverability than A&R Storage.

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The Commission said, fine, market-based rates for you.

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It gave market-based rates for WPS, also in the same market.

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They're irreconcilable to conclude that there's apparently a monopolist at large in that market, but nonetheless it's highly competitive and an entity that actually has a greater market share than ANR storage should be able to go out and, if that represents monopoly power, exercise it.

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It's logically, it's illogical from our perspective.

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Thank you, Counselor.

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Thank you.

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Good morning, Your Honors.

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Luna Perry for the Commission.

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I would like to begin with the last point first.

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I would like to point out that although he keeps repeating that there have been other people, other entities in the Central Great Lakes market that have received market-based rates, I want to point out that the inquiry that we're engaging in here is not whether the Central Great Lakes market is workably competitive.

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This court has affirmed the fact that what the commission looks at is not whether the market as a whole is workably competitive.

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but whether or not this particular applicant is in a position to exercise market power in that market.

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And I would point out to you that Orbitgas and Bluewater and WPSESI were all very small entities.

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Orbit had 3.3% working gas, 10.45% deliverability.

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Bluewater had 2.... Fair enough, but DTE has 14 and a half versus ANR's 16.

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And FERC approved market rates for DTE.

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And I don't... It was some time ago, but I don't think the shares were materially different when FERC approved DTE's application.

[00:24:10] Speaker 00:
A couple points about that, Your Honor.

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In the first place, it cannot be a reason to grant A&R market-based rates when it has market power.

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that somebody else in the market has previously been given market-based rate authority, as they say in their brief.

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But if there's no sustainable distinction between ANR's position in this market and DTE's position in the identical market, I mean, the core obligation of reasoned decision-making is to treat like cases in the same way.

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Yes, and let me explain that their DTE energy was not similarly situated to A&R storage.

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A&R storage aggregated with the Trans-Canada affiliates.

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At the time, it was granted market-based rate authority.

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For one thing you have to bear in mind as we discuss in our brief and is in the order is DTE Energy is composed of two affiliates that are intrastate facilities and they operate at cost-based state regulated rates with regard to the local distribution services they provide.

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So the market-based rate authority that they were granted is for

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essentially incremental sales that are made in the interstate market.

[00:25:34] Speaker 02:
None of this is in the commission's order on rehearing.

[00:25:42] Speaker 00:
No, Your Honor, the commission's order on rehearing doesn't discuss this expressly, but... Even though the petition, the rehearing petition did.

[00:25:53] Speaker 00:
Yes, Your Honor, but at the time, and also, well, the orders do, Your Honor, talk about the fact that DTE Energy, it's in the discussion of all the individual competitive alternatives, and the Commission, the initial decision and the Commission talked about the fact that DTE Energy

[00:26:13] Speaker 00:
operates at a considerable amount of its capacity as it costs state-regulated cost-based rates.

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And so when it received market-based rate authority, it was pursuant to its service under Section 311 of the Natural Gas Policy Act, which allows interstate facilities to make some interstate transactions.

[00:26:33] Speaker 03:
I'm sorry, let me just make sure I understand it.

[00:26:35] Speaker 03:
You're saying that

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While DTE at 14.5% might look a lot like ANR at 16% at first glance, they are different because much of that 14.5% is in an intrastate market, and when FERC granted market authority to DTE, it was only for a narrow subset of the 14.5%.

[00:27:03] Speaker 00:
Yes, Your Honor, that's correct.

[00:27:05] Speaker 00:
And you can see that, and that is in the orders, the discussion of DTE energy and in the discussion of... Where is that in the main FERC order?

[00:27:15] Speaker 03:
I didn't see anything on this point about inconsistency as between A&R and DTE.

[00:27:22] Speaker 00:
The DTE discussion in the initial decision is at Joint Appendix 151.

[00:27:30] Speaker 00:
It's all paragraph 493, but that goes on for many pages.

[00:27:38] Speaker 02:
The commissions... While you're giving us citations, would you also tell us where in your brief the argument that you just made about DTE appears in your brief?

[00:27:50] Speaker 00:
At pages 40 to 42, Your Honor, is where we discuss the composition of the individual competitive alternatives, and that includes a discussion of DTE energy.

[00:28:00] Speaker 02:
DTE energy was... I thought it was on pages 28 to 29.

[00:28:05] Speaker 02:
Am I wrong about that?

[00:28:06] Speaker 02:
That you discuss...

[00:28:07] Speaker 00:
There's the arguments about the previous market-based rates to Michigan consolidated and to Washington 10, but what I'm talking about now is the discussion of the composition of DTE energy.

[00:28:25] Speaker 03:
All I see on DTE is you categorize DTE as one of the many competitors that has some interstate, intrastate capacity in the course of making your argument that there was a lot of intrastate capacity which heightens your concern about this market.

[00:28:49] Speaker 00:
Right, Your Honor, but that is exactly the point, is that they are largely composed of intrastate.

[00:28:57] Speaker 03:
That seems like a pretty oblique way of dealing with the pretty

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obvious argument that this is a market structure in which there are two leading competitors whose shares seem to be virtually identical.

[00:29:15] Speaker 03:
All the dynamics about intrastate versus interstate and how much capacity there is under the ground in Detroit, Michigan or whatever, it's all the same.

[00:29:27] Speaker 03:
It's the same market.

[00:29:29] Speaker 03:
And one of the two leading competitors approaches you for permission to charge market rates and you grant it.

[00:29:38] Speaker 03:
And then the other one approaches you and you deny it without any obvious explanation of why you're treating these companies differently.

[00:29:48] Speaker 00:
Well, Your Honor, it is absolutely part of the record that DTE Gas, it's Michigan Consolidated,

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subsidiary had 79,970 million cubic feet that were committed to interstate storage.

[00:30:05] Speaker 00:
That is in the record.

[00:30:06] Speaker 00:
That's in our brief.

[00:30:08] Speaker 00:
And that's all I'm talking about is the fact that they are not an interstate entity in the manner of A&R and the TransCanada affiliates.

[00:30:16] Speaker 00:
That's absolutely in the record.

[00:30:18] Speaker 00:
And at the time, additionally, at the time, as we pointed out in our brief, at the time that the market-based rates were granted to DTE Energy for that incremental federal service, that ANR storage and the TransCanada affiliates were charging cost-based rates.

[00:30:37] Speaker 00:
And in the case of the New York, Pennsylvania market, for example, the commission has found that entities operating at commission-regulated cost-based rates can

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control the ability of smaller entities to exercise market power.

[00:30:51] Speaker 03:
That rationale was not in the agency decision.

[00:30:56] Speaker 00:
That rationale certainly is in the agency decision, Your Honor.

[00:31:06] Speaker 03:
It's okay.

[00:31:07] Speaker 03:
The competitors are otherwise identically situated.

[00:31:13] Speaker 03:
But it's okay to treat one differently based on who files first for market-based authority.

[00:31:21] Speaker 00:
I mean, that's in your brief.

[00:31:23] Speaker 03:
That's in the red brief, but I don't think it's in the commission's order.

[00:31:27] Speaker 00:
It is certainly in the commission's order.

[00:31:29] Speaker 00:
If you look at paragraph 215 of opinion 538 at the joint appendix 261, there is certainly a discussion there of the Wyckoff case, which is a case where there was a 16% market share.

[00:31:45] Speaker 00:
And the commission found that the 16% market share, although it might ordinarily present market

[00:31:50] Speaker 00:
power concerns was not a concern because there was an incumbent in the market that had 42% of the market share that was operating at commission-regulated cost-based rates.

[00:32:03] Speaker 03:
That's a fair distinction of Wyckoff.

[00:32:05] Speaker 03:
I'm not sure it directly answers the concern about DTE.

[00:32:12] Speaker 00:
The point is, Your Honor, not that DTE got there first.

[00:32:17] Speaker 00:
It's not that ANR storage couldn't have market-based rates if it could show that it did not have the ability to exercise market power.

[00:32:26] Speaker 00:
It's not that there was some limited access to market-based rates that DTE Energy somehow took up.

[00:32:34] Speaker 00:
Everybody in the market could have market-based rates if they individually could show they are not in a position to exercise market power.

[00:32:42] Speaker 02:
All this seems so reminiscent of equal protection cases.

[00:32:47] Speaker 02:
It occurred to me, if you take a case where

[00:32:52] Speaker 02:
There's a higher age requirement, a drinking age requirement for males than there is for females, which is a famous Supreme Court case.

[00:33:03] Speaker 02:
The remedy for that, there are two remedies.

[00:33:07] Speaker 02:
One is to lower the male's drinking age, and the other is to raise the female's drinking age, so they'd be equal.

[00:33:16] Speaker 02:
And as I read your brief, it was that kind of thinking that went into your argument that says, well, you know, it may be that DTE is similarly situated in charging market-based rates, but the remedy for that would be to reopen and vacate

[00:33:35] Speaker 02:
the orders that allowed them to charge the market-based rate.

[00:33:41] Speaker 02:
But how do you choose between the two?

[00:33:46] Speaker 02:
I mean, the other remedy for it is to grant ANR's request for them to charge market-based rates.

[00:33:53] Speaker 00:
But, Your Honor, the point is that that's... It's a long question.

[00:33:56] Speaker 00:
No, no, I understand.

[00:33:57] Speaker 00:
I understand your question.

[00:33:59] Speaker 00:
The point is that the second part, that second remedy, is not possible here.

[00:34:04] Speaker 00:
because awarding A&R storage market-based rates when it has not demonstrated that it cannot exercise market power would be an unjust and unreasonable rate.

[00:34:15] Speaker 00:
The commission does not have statutory authority to grant the second, which is why even in petitioners brief at page 31 and in their rehearing request at 29, they make a reference to the fact that you would have to go and re-ovacate other people's market-based rate authority, not

[00:34:33] Speaker 00:
And they didn't ask for that remedy here.

[00:34:36] Speaker 03:
So I understand the argument that they're not similarly situated because you're only talking about a narrow sliver of their capacity, but just assume hypothetically they are.

[00:34:49] Speaker 03:
Um, Judge Randolph raises the question about leveling up or leveling down.

[00:34:56] Speaker 03:
The Supreme Court in those equal protection cases said that the disfavored party has standing to raise the claim about differential treatment, even though in theory,

[00:35:06] Speaker 03:
the regulator could treat everyone less favorably.

[00:35:09] Speaker 03:
And DTE seems like they're in that position and they didn't go to the commission and say we're being unfairly disadvantaged so you should therefore take away, I'm sorry, ANR didn't go to the commission and say we're being disadvantaged and therefore you should take away DTE's advantage.

[00:35:32] Speaker 03:
They went to the commission and said, look, you've granted this for an identically situated competitor on the hypothetical, and you have an obligation to treat like cases similarly, so grant it for us.

[00:35:47] Speaker 03:
So they sought a level up remedy, not a level down remedy, and they're generally allowed to do that.

[00:35:53] Speaker 00:
They could seek the remedy, Your Honor, but the point being that unless they established that they lacked market power, which they failed to do in this case, the commission is not at liberty to grant them market-based rates.

[00:36:06] Speaker 00:
The commission under the statute is required to regulate the rates unless it can be determined that the rates will be just and reasonable because that individual applicant is not able to exercise market power.

[00:36:20] Speaker 00:
So the Commission didn't have the option of granting market-based rates in the absence of showing that A&R storage could not exercise market power.

[00:36:33] Speaker 03:
On the intrastate point,

[00:36:39] Speaker 03:
There does seem to be a fair amount of tension at best, internal inconsistency at worst, between the way the agency treated the question of market definition and the question of good alternatives from the question of whether other competitors can constrain market power.

[00:37:05] Speaker 03:
I mean, in order to put competitors into a relevant product market, the agency quite correctly cited the basic antitrust standard, which is the competitor needs to be not just a

[00:37:24] Speaker 03:
a somewhat good substitute, but a reasonable substitute, one that will actually have a practical effect on the options available in the market.

[00:37:35] Speaker 03:
And likewise, when you addressed good alternatives, your own standard for that is that the alternative has to be available quickly enough, at a price low enough, and a quality high enough

[00:37:51] Speaker 03:
buyers regarded as a good option.

[00:37:55] Speaker 03:
And once you say all that, it seems a little bit difficult to turn on a dime and say, oh, yes, but even though we've said all that and even though they're in the market, we don't think that their presence will constrain.

[00:38:12] Speaker 00:
Your Honor, what the Commission found was that as to any individual intrastate competitor or alternative, that each individual intrastate competitor should be included in the market because on an individual basis it could be regarded as a good alternative.

[00:38:31] Speaker 00:
Because there is the possibility that committed intrastate storage can be released into the market.

[00:38:37] Speaker 00:
And that is the big concern with the interstate storage, by the way, Your Honor, is the fact that so much of this, as the Commission found and the initial decision found, was committed to local distribution service.

[00:38:49] Speaker 00:
And there's a serious issue about how much of that could be released into the interstate market, because it is already committed to local distribution service.

[00:38:58] Speaker 03:
And the... Is that, so let me ask you about that.

[00:39:03] Speaker 03:
Is that the same as what you call the capacity release issue?

[00:39:07] Speaker 00:
Well, it is a question about whether you can release that capacity because you are obligated to serve that retail load with certain amounts of your capacity, and that prevents you from being able to release that to somebody else.

[00:39:21] Speaker 03:
The argument, as I understand it, is there's all this intrastate capacity

[00:39:27] Speaker 03:
And you don't seem to really dispute very much the proposition that as a matter of FERC law, it's fairly easy to get authorization to shift from intrastate to interstate.

[00:39:42] Speaker 03:
But there are all these other state law constraints or Canadian law constraints or whatever.

[00:39:49] Speaker 00:
It's state law constraints, but it's also just the fact that so many of these entities are local distribution companies, and they have retail load, and the retail load comes first.

[00:40:00] Speaker 00:
And they can only release or sell in the interstate market what they don't need to serve their retail load.

[00:40:07] Speaker 00:
And that was the concern about, because all of the capacity of all of these entities was being counted in the market.

[00:40:13] Speaker 03:
I understand the point conceptually, but it's very hard to tease out of the FERC opinion.

[00:40:21] Speaker 03:
They make all the conceptual points about why intrastate is

[00:40:30] Speaker 03:
a reasonable substitute and a good alternative.

[00:40:34] Speaker 03:
And then they apply that and go through each of the 19 companies and reverse company after company on exclusion because they didn't have the certificate.

[00:40:45] Speaker 03:
And then they just recalculate the share and come up with 16%.

[00:40:49] Speaker 03:
And then just kind of ipsa dicks it.

[00:40:51] Speaker 03:
They say, oh, but we have a concern.

[00:40:53] Speaker 03:
We have a concern about all of these good alternatives that we've chosen to put into the market.

[00:40:58] Speaker 00:
No, Your Honor.

[00:40:59] Speaker 00:
What the Commission said was in paragraph 219 of opinion 538, which is 262 of the Joint Appendix, it acknowledged that each one of the interstate facilities that was at issue was included in the product market because it's theoretically a good substitute.

[00:41:20] Speaker 00:
But a significant number of them would have to get certification and or release capacity

[00:41:28] Speaker 00:
in order to prevent an exercise of market power.

[00:41:31] Speaker 00:
And when you look at, for example, opinion 538 of paragraph 162, joint appendix 244, the commissioner is explaining with regard to good alternatives, available alternatives are those that are unsubscribed or reasonably expected to become available.

[00:41:51] Speaker 00:
And the question is, in the aggregate, what quantity of good alternatives could reasonably be expected to become available, given that so much of the service of these particular entities was committed to retail load?

[00:42:08] Speaker 03:
So one more question along the same lines, which is, as I understand it,

[00:42:16] Speaker 03:
The reasoning in the commission's order and what you just said is a concern that not all of the people that you, not all of the intrastate providers that you put in the relevant market would shift over into the interstate market.

[00:42:36] Speaker 03:
And that is your answer to the point about supply-side substitutability.

[00:42:45] Speaker 03:
You made a wholly separate point when you decided to put them in the market about demand substitutability.

[00:42:53] Speaker 03:
And as I understand it, the point is that

[00:42:56] Speaker 03:
even if they stay in the intrastate market and never come over in the interstate market, they will constrain market power because from the perspective of the buyers, right, gas is gas.

[00:43:09] Speaker 03:
They can just buy from intrastate providers.

[00:43:13] Speaker 03:
And I didn't see any explanation of why that point won't constrain market power.

[00:43:25] Speaker 00:
Well, what the Commission said about that, Your Honor, in rehearing order at paragraph 37, Joint Appendix 289, is that... There's one sentence that says the demand effect by itself isn't enough.

[00:43:41] Speaker 03:
Holy conclusory with a site to the FERC opinion that doesn't really support that proposition.

[00:43:48] Speaker 00:
What the sentence actually says, Your Honor, is that A&R storage failed to show that the demand effect alone would be sufficient to check market power.

[00:43:58] Speaker 03:
And they have ten pages in the blue brief which look somewhat plausible.

[00:44:06] Speaker 03:
Then I assume they made that case equally forcefully before the commission.

[00:44:12] Speaker 03:
And there's just no answer to it that I can tell, that I can stop.

[00:44:19] Speaker 00:
Well, what the commission said, if you look at paragraph 108 of order, opinion 538 at 221, about the demand, the commission's example.

[00:44:31] Speaker 00:
I'm sorry, I'm talking too fast.

[00:44:33] Speaker 00:
Opinion 538, paragraph 108, at 221, if you join appendix.

[00:44:39] Speaker 00:
Okay.

[00:44:40] Speaker 00:
What the commissioner is talking about the demand effect and their example of how the demand effect works is if you have a local distribution company that needs storage service and it can turn to its own storage service as opposed to using A&R storage as service, then you should consider that to reduce overall demand.

[00:45:00] Speaker 00:
But the point being that A&R storage is an interstate facility.

[00:45:03] Speaker 00:
It has 12 customers that use interstate storage and

[00:45:09] Speaker 00:
The issue is whether, what the commission found was is that simply the fact that the existence of intrastate storage may at some point and at some times be useful to customers of ANR storage doesn't answer the question about a sufficient supply of interstate storage, which they need for at least some transactions.

[00:45:31] Speaker 00:
And so you have to show both the demand and supply effect on the interstate market.

[00:45:42] Speaker 03:
Do you want to ask you about the 2011 investigation, which just as a non-expert seemed to me something that would be a significant arrow in your quiver, but you didn't choose to make much of it.

[00:46:00] Speaker 03:
So am I wrong to think that that could have been pretty good evidence in your favor?

[00:46:10] Speaker 00:
Well, Your Honor, it certainly does suggest that A&R Storage was able to charge super competitive rates to its customers and was able to do that for a considerable period of time.

[00:46:24] Speaker 00:
But the commission didn't rely on that as being evidence of market power.

[00:46:30] Speaker 00:
And they did the straightforward analysis from the policy statement in the order 678.

[00:46:35] Speaker 03:
So I guess we can't then, I guess.

[00:46:39] Speaker 00:
Well, the commission did not rely on that, as evidence of market power, Your Honor.

[00:46:47] Speaker 00:
If there are no further questions.

[00:46:48] Speaker 03:
Thank you, Counselor.

[00:46:52] Speaker 01:
We'll give you a couple minutes.

[00:46:55] Speaker 01:
Thank you, Your Honor.

[00:46:56] Speaker 01:
In no particular order, what we heard just now in part is a remarkable effort, inconsistent with the Chenery standard, to try to, in essence, apply bondo to 538 and make it more presentable.

[00:47:16] Speaker 01:
To start, over – with regard to cost-based rates, the reply brief of ANR demonstrates that over half of central Great Lakes Markets charge the cost-based rates.

[00:47:28] Speaker 01:
So to the extent that we're looking at the New York and Pennsylvania market cases where the commission pointed to at least 42 percent of the rates being based on a cost basis, there's not a cognizable distinction there.

[00:47:45] Speaker 01:
The council for the commission wanted to argue that there is a very narrow slice of DTE capacity subject to market-based rates.

[00:47:59] Speaker 01:
In this case, ANR storage's capacity for which it's seeking market-based rates represents approximately 3.6 of working gas,

[00:48:09] Speaker 01:
according to the total market calculated by the Commission, and 2% of daily deliverability.

[00:48:16] Speaker 01:
Where do we get that?

[00:48:17] Speaker 01:
That sounds a bit new to me.

[00:48:19] Speaker 01:
The application itself says that we're seeking market-based rate authority for four fields, Cold Springs, Excelsior, they're listed there, and they have a total of 750 a day of daily deliverability.

[00:48:35] Speaker 03:
Right, but the case was litigated before FERC on the assumption that your client has these four fields and FERC sifted through all the evidence and came up with the 16% number.

[00:48:48] Speaker 01:
And that represents an attribution of affiliates

[00:48:51] Speaker 01:
capacity which are charged at cost-based rates.

[00:48:56] Speaker 01:
What we just heard from the solicitor was an attempt to distinguish DTE because DTE only saw the subset of its capacity.

[00:49:04] Speaker 03:
You're saying it might be fair to

[00:49:06] Speaker 03:
It might be fair to treat ANR as encompassing all of TransCanada when calculating the shares, but that doesn't change the fact that it's just ANR, the ANR part of TransCanada is 3% rather than 16.

[00:49:23] Speaker 01:
The particular fields for which market-based rate authority, and once again, if I understood the solicitor's argument,

[00:49:30] Speaker 01:
we shouldn't presume that all DTE capacity is charged at market-based rates because some is charged at cost-based rates.

[00:49:38] Speaker 01:
That's true on both sides, so it's an apples and oranges comparison to take the 16 percent market share that's attributed in opinion 538 to all of the ANRS affiliates and compare that to two or three percent for DTE.

[00:49:54] Speaker 01:
Sauce for the goose is sauce for the gander.

[00:49:57] Speaker 03:
Very well, thank you.

[00:49:59] Speaker 03:
But that does take us seemingly way beyond anything that's in either the Commission's order or the briefs.

[00:50:09] Speaker 01:
Fair enough.

[00:50:11] Speaker 01:
The Solicitor also hasn't explained why the Commission repeatedly and other decisions included intrastate capacity, storage capacity, in its definition of the market.

[00:50:25] Speaker 01:
The Commission, for instance, in orbit, in the orbit case.

[00:50:29] Speaker 03:
There are, there seem to be at least a handful and maybe many cases where they treat intrastate capacity as part of an interstate market.

[00:50:40] Speaker 03:
But are any of those cases, do any of those cases discuss the particular feature of this market which concern FERC, which is that it's not just intrastate

[00:50:58] Speaker 03:
capacity on the margin.

[00:51:00] Speaker 03:
It's more than 50% of what we're talking about with a lot of different intrastate providers, so that even if it's a slightly less good substitute, this could be a problem in the aggregate.

[00:51:16] Speaker 03:
Is that issue addressed in any of these cases?

[00:51:18] Speaker 01:
That's a great question, Your Honor.

[00:51:20] Speaker 01:
In Orbit, the commission, which involves a market that substantially overlaps the Central Great Lakes market, includes, if memory serves, Indiana, Illinois, maybe downstream Ohio, as well as a part of Kentucky, which in fairness is not part of the Central Great Lakes market.

[00:51:40] Speaker 01:
The intrastate facilities were included in the market power study.

[00:51:43] Speaker 01:
The Commission said that that represented a proper assessment of market of good alternatives consistent with the Commission's criteria.

[00:51:55] Speaker 01:
So it endorsed explicitly the inclusion of intrastate facilities in a market that overlapped the Central Great Lakes market.

[00:52:05] Speaker 01:
Once again, back to Blue Water, the commission issued market-based rate authorization of Blue Water.

[00:52:12] Speaker 01:
There was not, and in fact, Blue Water exemplified the transition from intrastate to interstate.

[00:52:19] Speaker 01:
The commission never said in that order, oh, we're concerned because after we've done this, we're going to have to worry about whether there are other intrastate storage capacity providers who will need to convert.

[00:52:32] Speaker 01:
There's not a hint of that in that order.

[00:52:35] Speaker 01:
Finally, the commission attempts to avoid the issue with regard to DTE by saying that it can't authorize what it characterizes as a not just unreasonable outcome under the NGA, but the Conway case that it cites in its brief

[00:52:56] Speaker 01:
stands for the proposition that the commission in setting just and reasonable rates must take into account competitive impacts.

[00:53:04] Speaker 01:
That was a price squeeze case, but once again, that principle should apply here because ANRS is disadvantaged relative to other competitors in the market.

[00:53:16] Speaker 01:
If this court is inclined to reverse or remand the case, we ask that so long as DTE has market-based rate authority and is, like ANRS, a market incumbent, not a new entrant, like ANRS, has comparable market shares to ANRS, is located in the same state as ANRS.

[00:53:39] Speaker 01:
I think we get the point.

[00:53:40] Speaker 01:
Yeah.

[00:53:40] Speaker 01:
Thank you.