[00:00:00] Speaker 00:
Case number 18-1018 at L, North Carolina Utilities Commission, the Petitioner v. Federal Energy Record Commission.

[00:00:09] Speaker 00:
Ms.

[00:00:09] Speaker 00:
Mazura, the Petitioner, Mr. Madinat-Namara for Interveneer EFPSC, Ms.

[00:00:15] Speaker 00:
Pacella, the Respondent, and Mr. Suarez for Interveneer Transfer.

[00:01:01] Speaker 02:
Good morning.

[00:01:02] Speaker 02:
May it please the Court.

[00:01:03] Speaker 02:
I'm Kathleen Mazur of the firm of Duncan and Allen, arguing today on behalf of the North Carolina Utilities Commission.

[00:01:09] Speaker 02:
That's the state agency charged under Chapter 62 of the North Carolina Code to protect the interests of North Carolina ratepayers before federal agencies and the courts to ensure adequate, reliable, and economical utility service to all citizens and residents of North Carolina.

[00:01:24] Speaker 04:
How do we know that this case is going to affect any North Carolina ratepayers?

[00:01:31] Speaker 02:
Let's consider the Atlantic Sunrise project.

[00:01:33] Speaker 02:
That project is mostly contracted by producers and marketers.

[00:01:37] Speaker 02:
FERC did not require that any shippers be end users when it certificated that proceeding, when it goes facilities.

[00:01:45] Speaker 02:
However, it did find that marketers and producers would use the capacity under that

[00:01:52] Speaker 02:
project to deliver gas to the Mid-Atlantic and Southeastern markets.

[00:01:55] Speaker 02:
That's in the joint appendix at 296.

[00:01:58] Speaker 02:
Given the gas flows from Pennsylvania to Mississippi on that project, and there were facilities constructed in North Carolina with that project, Transco actually marketed the project as

[00:02:16] Speaker 02:
having primary and secondary rights within the contract path.

[00:02:21] Speaker 02:
And that path goes from Pennsylvania to Mississippi.

[00:02:24] Speaker 02:
North Carolina is squarely in the market where the marketers and producers who have signed up for that capacity will be delivering the gas.

[00:02:38] Speaker 04:
It's in the market, but I guess that still doesn't answer the question as far as

[00:02:46] Speaker 04:
How do we know that gas will be delivered in North Carolina to North Carolina ratepayers without making some assumptions?

[00:02:57] Speaker 02:
Well, in the Kansas Corporation Commission v. Ferg case, it wasn't that you had to demonstrate a certainty, rather a substantial probability.

[00:03:06] Speaker 02:
And here, given that the gas will be delivered within

[00:03:11] Speaker 02:
the southeast and mid-Atlantic markets.

[00:03:14] Speaker 02:
Those are the facts that FERC relied on in issuing the certificates.

[00:03:19] Speaker 02:
We believe that the substantial probability task has been met.

[00:03:26] Speaker 04:
Do you believe that the special solicitude granted in Massachusetts VEPA is necessary for you to establish standing?

[00:03:38] Speaker 02:
No.

[00:03:39] Speaker 02:
We believe that we have met the rule on factors.

[00:03:42] Speaker 04:
Based on substantial probability.

[00:03:45] Speaker 02:
But substantial probability.

[00:03:47] Speaker 02:
Also, unlike in the Kansas Corporation Commission here, Kansas Corporation Commission opinion

[00:03:54] Speaker 02:
Here, there is more than a mere possibility of collateral estoppel effect.

[00:03:58] Speaker 02:
As demonstrated by page three of the addendum to the North Carolina Utilities Commission reply brief, Transco is already claiming in other proceedings that the North Carolina Utility Commission is collaterally a stock from raising the arguments it's making here when challenging new projects that Transco is proposing to construct.

[00:04:23] Speaker 04:
What about redressability?

[00:04:26] Speaker 04:
Why is, even if we were to assume that there's injury here and assume that you were to prevail on the merits as far as your argument about the improper recourse rate, how is that redressable of the injury?

[00:04:49] Speaker 02:
Well, FERC obviously has significant discretion in how it chooses to fulfill its obligations under the Natural Gas Act.

[00:04:56] Speaker 02:
However, below, the state commissions requested that FERC hold an evidentiary hearing in order to explore whether or not the recourse rates provided the necessary check on the exercise of market power by the pipeline at the time they were entering into the negotiated rates.

[00:05:13] Speaker 02:
Unfortunately, FERC exercised its discretion and chose not to do so.

[00:05:19] Speaker 02:
However, FERC has in other proceedings held or performed VCF analysis in other Section 7 proceedings without holding an evidentiary hearing.

[00:05:32] Speaker 02:
But here, FERC decided to, it directed that the issue be addressed in Transco's next rate case.

[00:05:38] Speaker 02:
Those negotiated rate agreements are not at issue in that case.

[00:05:42] Speaker 02:
Therefore, the remedy that FERC directed below simply is illusory.

[00:05:49] Speaker 02:
We believe that this court has, since FERC claims that in the orders below, they satisfied the negotiated rate policy and the necessary check on the potential market power was provided here.

[00:06:01] Speaker 02:
That's at page 20 of FERC's brief.

[00:06:05] Speaker 02:
We believe that this court has the authority to remand and require that FERC actually apply its policies and determine whether or not that appropriate title.

[00:06:15] Speaker 07:
Why do we think that if that happened,

[00:06:18] Speaker 07:
that the rate paid would be any different.

[00:06:20] Speaker 07:
I mean, everyone here is here under a negotiated rate, right?

[00:06:24] Speaker 00:
Correct.

[00:06:25] Speaker 07:
And it was a negotiated rate that was entered into before FERC set the recourse rate, right?

[00:06:34] Speaker 00:
Correct.

[00:06:35] Speaker 07:
So we would have to think that if you were to prevail here, that some, what, go back to new negotiations that would end up with a new negotiated rate?

[00:06:45] Speaker 02:
That is one possibility.

[00:06:48] Speaker 02:
Unfortunately, FERC never actually looked at the negotiated rates.

[00:06:54] Speaker 02:
It simply assumed that the market power was checked.

[00:06:57] Speaker 07:
Unfortunately, that's... What I'm interested in is whether the end result would be any different.

[00:07:03] Speaker 07:
Would there be different negotiated rates if there were a different recourse rate set?

[00:07:11] Speaker 07:
And what's the evidence for that?

[00:07:12] Speaker 02:
Well, recourse rate, FERC's policy is that the recourse rate must be available at the time the negotiated rates were entered into.

[00:07:23] Speaker 07:
And they had a recourse rate at the time.

[00:07:27] Speaker 02:
Well, they had a recourse rate.

[00:07:28] Speaker 07:
So they had a policy as to what the recourse rate would be.

[00:07:31] Speaker 02:
And FERC blindly applied one policy, its policy of using the most recent stated rate, which is a policy which

[00:07:40] Speaker 02:
helps administrative expediency, but it allowed that policy to trump its more fundamental obligation of protecting against market power.

[00:07:49] Speaker 07:
What I'm getting at is, did that change the negotiated rate in any way?

[00:07:52] Speaker 02:
Well, FERC relied on those negotiated rates and assumed that they were free of the exercise of market power.

[00:08:00] Speaker 02:
when it relied upon those negotiated rates to issue the certificates for billions of dollars of new facilities.

[00:08:07] Speaker 02:
Unfortunately, as the Missouri Public Service Commission case guides us, before FERC can rely on existing contracts between a pipeline and its customers to show that rates are reasonable, FERC must first

[00:08:21] Speaker 02:
determine upon the basis of substantial evidence that the pipeline lacks significant market power.

[00:08:27] Speaker 07:
Let me ask you, maybe you can educate me about how these contracts go.

[00:08:31] Speaker 07:
I understand it.

[00:08:32] Speaker 07:
These rates were negotiated in 2014 and 2015.

[00:08:37] Speaker 07:
Correct.

[00:08:37] Speaker 07:
Right.

[00:08:38] Speaker 07:
And at that time, FERC had not yet set a recourse rate, right?

[00:08:43] Speaker 02:
The pipeline proposed a recourse rate, though they're all set forth in Appendix P of each of the applications.

[00:08:49] Speaker 07:
Right.

[00:08:49] Speaker 07:
Okay.

[00:08:50] Speaker 07:
So at the time, there's a proposed recourse rate, but not a set recourse rate.

[00:08:55] Speaker 07:
Correct.

[00:08:55] Speaker 07:
When parties enter into negotiations in those circumstances, do they say,

[00:09:02] Speaker 07:
If FERC comes up with a different recourse rate than the proposed one, we're back at the table and we're going to negotiate all over again.

[00:09:09] Speaker 07:
Is that part of the negotiation?

[00:09:11] Speaker 02:
It could be.

[00:09:12] Speaker 07:
Was it here?

[00:09:13] Speaker 02:
I do not know.

[00:09:14] Speaker 07:
No one has said that, so why?

[00:09:16] Speaker 04:
Did the shippers make a counter-proposal?

[00:09:21] Speaker 02:
We are not party to those negotiations.

[00:09:24] Speaker 08:
Isn't it the case that the policy of FERC as the last recourse rate is the recourse rate?

[00:09:29] Speaker 02:
actually its policy is that the last stated return, no matter how old, it has two policies.

[00:09:37] Speaker 08:
I understand.

[00:09:37] Speaker 08:
So when Judge Griffith is asking what was the likely recourse rate at the time of the negotiation, it was the one dictated by the policy.

[00:09:47] Speaker 08:
Now, I understand you think that's wrong, but the people who are negotiating

[00:09:51] Speaker 08:
would have nothing other than a high recourse rate because that was the rate assumed at the time.

[00:09:57] Speaker 02:
That is one of FERC's policies.

[00:09:59] Speaker 02:
The problem is FERC did not apply its alternative rates policy statement, which requires that the recourse rate not be stale or outmoded.

[00:10:07] Speaker 08:
I'm sorry.

[00:10:07] Speaker 08:
I'm sorry.

[00:10:08] Speaker 08:
I think you're thinking that I'm asking a question that's going to hurt you, and I'm also asking a question.

[00:10:14] Speaker 08:
I think I'm asking a question that was intended to help your argument.

[00:10:18] Speaker 08:
The question is, was there a recourse rate, a likely recourse rate, at the time of the negotiation?

[00:10:25] Speaker 08:
And wouldn't all parties have expected, unless you were able to persuade FERC later otherwise, that the recourse rate at that time was the last recourse rate, which was a high one?

[00:10:37] Speaker 02:
It was actually, it's the last stated

[00:10:41] Speaker 02:
return figure.

[00:10:42] Speaker 02:
The return figure is the largest element of the cost of service that results in the recourse fee.

[00:10:47] Speaker 02:
I understand.

[00:10:48] Speaker 08:
That's the one that you think is wrong.

[00:10:50] Speaker 02:
And we think it's inconsistent with our policy.

[00:10:52] Speaker 08:
But that's the one that was, at the time, unless you were to succeed later in this proceeding, that would be the one that would be the

[00:10:59] Speaker 08:
rate of return.

[00:11:00] Speaker 02:
But FERC's policy requires that that recourse rate not be stale or outmoded and refuse to apply that policy.

[00:11:09] Speaker 08:
I don't think you're understanding my question, but let me ask you another question.

[00:11:12] Speaker 08:
In your opening brief, you asked for vacatur.

[00:11:15] Speaker 08:
Yes.

[00:11:15] Speaker 08:
In your reply brief, you asked for remand.

[00:11:18] Speaker 08:
Have you lost your nerve in between those two or what's the deal?

[00:11:23] Speaker 02:
Your Honor, we would be happy with either.

[00:11:26] Speaker 02:
We do believe that FERC should be required to apply both of its policies, and that the policy of the last stated rate, which... Is there a reason for asking for remand rather than vacatur in the reply brief?

[00:11:41] Speaker 08:
I mean, are you concerned about disruption and that sort of thing, or some of the... Imprecision, Your Honor.

[00:11:46] Speaker 02:
My apologies.

[00:11:47] Speaker 02:
Imprecision.

[00:11:47] Speaker 08:
Oh, it's only imprecision.

[00:11:48] Speaker 02:
My apologies.

[00:11:50] Speaker 07:
So if we rule for you,

[00:11:53] Speaker 07:
What happens next to change the rate that consumers would ultimately pay?

[00:11:58] Speaker 07:
Just walk me through that.

[00:12:00] Speaker 02:
Well that would be up to FERC and FERC certainly has a lot of deference in deciding how it would determine whether or not the

[00:12:09] Speaker 02:
recourse rates were free of the exercise of market power.

[00:12:13] Speaker 02:
But also, this is something that comes up a lot.

[00:12:16] Speaker 02:
We have already challenged this in other cases as well.

[00:12:19] Speaker 07:
Okay, so let's imagine FERC, and the next step, FERC accepts your recourse rate, your argument.

[00:12:25] Speaker 07:
What happens then?

[00:12:26] Speaker 07:
Do the parties actually renegotiate?

[00:12:30] Speaker 02:
I'm unaware of that having occurred up to this point.

[00:12:34] Speaker 02:
I think that would be new ground for FERC to figure out how it would fix its error.

[00:12:41] Speaker 08:
Okay, thank you.

[00:12:42] Speaker 08:
We'll hear from New York.

[00:12:59] Speaker 05:
Good morning, Your Honors.

[00:12:59] Speaker 05:
May it please the Court, Lucas McNamara on behalf of the New York State Public Service Commission.

[00:13:03] Speaker 08:
Mr. McNamara, I, in reading your brief, I read a somewhat different explanation of redressability than is provided by North Carolina.

[00:13:11] Speaker 08:
Do you want to explain what your explanation is?

[00:13:14] Speaker 05:
Sure.

[00:13:14] Speaker 05:
So we believe that in granting the certificate with the conditions, FERC has altered our ability to meaningfully challenge the negotiated agreements with the negotiated rates.

[00:13:25] Speaker 05:
And we believe that's how we establish traceability and redressability.

[00:13:28] Speaker 08:
So as I understood, the redressability point is if we assume for purposes of standing that you are correct on the merits.

[00:13:38] Speaker 08:
If you're correct on the merits, then we vacate the certificate of convenience and necessity, and the pipeline cannot go forward unless something else happens.

[00:13:50] Speaker 08:
And the rate cannot go forward because the agreements provide that the rate doesn't go forward until there is a certificate of convenience and necessity.

[00:14:04] Speaker 08:
And FERC has the authority under Section 7 to set conditions.

[00:14:08] Speaker 08:
And if you are right, the appropriate condition is, here's the new recourse rate, go negotiate another deal.

[00:14:17] Speaker 05:
We think that's right.

[00:14:18] Speaker 05:
It may take another step.

[00:14:21] Speaker 08:
OK, but this would make it redressable.

[00:14:22] Speaker 08:
If you are right on the merits, we have the power.

[00:14:27] Speaker 08:
You may not win.

[00:14:28] Speaker 08:
But if you did win, we have the power to vacate the current agreement with respect to rates.

[00:14:34] Speaker 08:
and direct FERC or on remand, let FERC make its own decision to set a new recourse rate and a new negotiation.

[00:14:43] Speaker 08:
Is that right?

[00:14:44] Speaker 05:
Yes.

[00:14:45] Speaker 05:
And I would point to FERC's August 16 determination.

[00:14:49] Speaker 05:
Well, first of all, I would point out that before this court, FERC is saying that the proper time to challenge the negotiated agreements and negotiated rates is when there's another question.

[00:14:58] Speaker 08:
I think we should discuss that also.

[00:15:00] Speaker 08:
But right now, we're on the standing question.

[00:15:05] Speaker 08:
And with respect to the questions that Judge Griffith was asking your co-counsel, how is it that

[00:15:13] Speaker 08:
Why isn't it the fact that since they just negotiated a rate, that's the end of it.

[00:15:17] Speaker 08:
They didn't pick the recourse rate.

[00:15:20] Speaker 08:
And so it's tough luck.

[00:15:22] Speaker 08:
But since they didn't pick the recourse rate and they negotiated a rate, that should be the end of the matter.

[00:15:27] Speaker 08:
What was your answer to that?

[00:15:28] Speaker 05:
The answer to that is that they knew what the recourse rate would be because FERC has said that it would consistently apply its policy.

[00:15:35] Speaker 05:
So the shippers would have known that in such a circumstance that it would

[00:15:39] Speaker 05:
consistently apply its policy despite the fact that doing so in these circumstances where it would draw on a 15-year-old data would be irrational and arbitrary.

[00:15:49] Speaker 08:
And it would not constrain the monopoly power, the market power, which is the whole point of the policy of FERC, right?

[00:15:55] Speaker 05:
Yes.

[00:15:56] Speaker 05:
FERC's recourse rate policy establishes this as the fact they say that their recourse rate policy needs to retain integrity to properly serve as a check on market power.

[00:16:07] Speaker 05:
not relying on anything that FERC hasn't said on this issue.

[00:16:09] Speaker 08:
Now would you answer Judge Wilkins' questions to your co-counsel about why New York consumers will be affected by this, or at least there's a substantial probability?

[00:16:18] Speaker 05:
Sure.

[00:16:19] Speaker 05:
So we focused on injury impact in terms of the Atlantic Sunrise project, and the quick answer on this is Transco's promotional materials support our contention.

[00:16:29] Speaker 05:
The promotional materials in the record at 282

[00:16:32] Speaker 05:
advertise the Atlantic Sunrise project as providing access to the New York City markets.

[00:16:37] Speaker 05:
In our initial brief to this court, we submitted an affidavit from Cynthia McCarran explaining how shippers are able to access the New York City market.

[00:16:46] Speaker 05:
The New York City market is the largest market on the Transco pipeline.

[00:16:49] Speaker 05:
We believe that we have established more than a

[00:16:52] Speaker 05:
the substantial probability necessary for injury, in fact, particularly given, again, that transpose position, you know, a Williams position in terms of how they were advertising this pipeline is that the reason you want to subscribe to this pipeline is it will allow you access to the New York City market.

[00:17:09] Speaker 04:
Was that in your opening brief or in your reply brief?

[00:17:14] Speaker 05:
The evidentiary materials are in the administrative record.

[00:17:19] Speaker 05:
I don't know whether we cited the promotional materials, but the reason that we – if we did not cite the promotional materials in our opening brief, we did so in rebuttal when FERC suggested that the only way that the

[00:17:35] Speaker 05:
that the only thing that mattered was the primary pathway outlined in the contracts.

[00:17:40] Speaker 05:
And we submitted an affidavit explaining why that is not, in fact, the case in outlining how secondary rights work, secondary pathways, and pointed to the fact that the transcode agreed with that argument, essentially.

[00:17:54] Speaker 05:
At the time where they were not involved in advocacy, they took the position that the New York City market was why you would want to subscribe to the Atlantic Sunrise Project expansion.

[00:18:06] Speaker 04:
If we were to get to the merits, why would you be able to prevail under the arbitrary capricious standard where I don't think that there's any dispute in the record that the most recent data available was used, right, as far as an actual pre-tax rate of return?

[00:18:37] Speaker 04:
Sure.

[00:18:38] Speaker 04:
So I mean, FERC can't invent data, can't get blood out of a stone.

[00:18:45] Speaker 04:
So what was arbitrary and capricious about what they did?

[00:18:49] Speaker 05:
OK, so a couple of points quickly.

[00:18:50] Speaker 05:
I'm just going to start with the end of your question.

[00:18:52] Speaker 05:
FERC could have done anything that was rational to figure out a proper cost of service calculation.

[00:18:58] Speaker 05:
So we don't necessarily need to recommend something specifically or dictate that there's only one course that could have held an evidentiary hearing.

[00:19:06] Speaker 05:
And I'm sorry, I'm forgetting the beginning of your question now.

[00:19:10] Speaker 05:
But you do have to show that this was irrational.

[00:19:14] Speaker 05:
Yes.

[00:19:14] Speaker 05:
Yes, we do.

[00:19:15] Speaker 05:
So it's irrational because it violates FERC's own policies.

[00:19:18] Speaker 05:
And the two policies that it most directly violates is that FERC has a policy and practice of rejecting stale and outmoded data as inappropriate for establishing cost of service.

[00:19:28] Speaker 05:
That's the Cranberry Pipeline FERC case that we cited in our brief.

[00:19:32] Speaker 05:
This court in Farmers Union v. FERC has noted that cost of service data from a previous case is our products of a bygone era.

[00:19:44] Speaker 05:
I believe that's the quote.

[00:19:48] Speaker 05:
a principle that this court has recognized, but more importantly, it's a principle that FERC has recognized.

[00:19:53] Speaker 05:
So classically arbitrary administrative action is adopting a policy and then contravening that policy without explanation.

[00:20:00] Speaker 05:
So there is no explanation that FERC simply never engaged.

[00:20:04] Speaker 07:
How long does the process get slowed down if they do that?

[00:20:07] Speaker 07:
I mean, your argument is that

[00:20:09] Speaker 07:
We have this data.

[00:20:11] Speaker 07:
Let's press ahead.

[00:20:12] Speaker 07:
If we stop to have an evidentiary hearing, the thing gets delayed by a significant amount of time.

[00:20:17] Speaker 07:
How do you respond to that?

[00:20:18] Speaker 05:
Sure.

[00:20:18] Speaker 05:
Well, I'm not sure I can answer for FERC on that, but we certainly believe that if these needed to be expedited, that New York would participate in that expedited proceeding.

[00:20:27] Speaker 05:
There's questions about would it have to be the full-blown

[00:20:29] Speaker 05:
We're not talking necessarily about a full-blown section four proceeding here.

[00:20:35] Speaker 05:
So again, in some ways that we recognize that that's a question that's within FERC's purview in terms of it coming up with a rational solution.

[00:20:44] Speaker 05:
But the problem with their current solution is that that explanation is tantamount to saying we do not have a consumer protection obligation to protect consumers from market power in section seven proceedings.

[00:20:56] Speaker 05:
And that is inconsistent with the precedent from this court, from the United States Supreme Court.

[00:21:01] Speaker 05:
I would look to the Missouri Public Service Commission and the FERC in 2003 for setting forth principles that establish that cost is relevant in terms of the consumer protection obligation in Section 7 proceedings.

[00:21:14] Speaker 05:
So it's no answer to focus on the need for plentiful supply and administrative convenience if your argument is, and because of that statutory obligation that we have, we're not going to fulfill it.

[00:21:27] Speaker 05:
That's patently irrational.

[00:21:31] Speaker 08:
I interrupted you when you were, we'll give you some more time.

[00:21:34] Speaker 08:
I interrupted you when you were going to explain why FERC's suggestion of the section four proceedings

[00:21:42] Speaker 08:
I'm not particularly interested in the

[00:21:44] Speaker 08:
August 31-1, because I understand that that, well, when you just asked, that one would not apply to you, help you at all, right?

[00:21:50] Speaker 08:
That only would apply to the next Section 7 case.

[00:21:53] Speaker 05:
I was referring to the August 16 determination.

[00:21:56] Speaker 05:
Yeah, OK.

[00:21:56] Speaker 08:
That's the one I wanted to ask about.

[00:21:57] Speaker 08:
Yes.

[00:21:58] Speaker 08:
So what's wrong with that?

[00:21:59] Speaker 05:
OK, so what's interesting about that is it supports our point.

[00:22:02] Speaker 05:
TransCov submitted it and said FERC has consistently said, wait for the negotiated agreement submission process.

[00:22:07] Speaker 05:
That's when it's appropriate to do that.

[00:22:09] Speaker 05:
But when FERC was accepting the agreements for the Atlantic Sunrise Project,

[00:22:13] Speaker 05:
A close reading shows that it did not, in fact, say that this was the appropriate time.

[00:22:17] Speaker 05:
At paragraph 16, FERC explained that, essentially, that it was too late to provide such consideration.

[00:22:27] Speaker 05:
So paragraph 16, it says that Transco has relied.

[00:22:30] Speaker 08:
What joint appendix page, or what page?

[00:22:33] Speaker 05:
So that was submitted, I'm sorry, that was submitted pursuant to rule 28J by Transco.

[00:22:41] Speaker 08:
Are you talking about the Atlantic Sunrise Order or the August 16th order?

[00:22:47] Speaker 05:
The August 16th decision.

[00:22:49] Speaker 08:
Okay, so that says, at paragraph 10, the proper form for a protest at a negotiated rate is at the time the pipeline files a relevant contract or tariff records containing the essential details of the agreement.

[00:23:02] Speaker 05:
And that would be fine, or at least would support that point that FERC is making if it then treated that as though it was the case.

[00:23:11] Speaker 05:
But if you read paragraph 16, what it says is that Transco relied on its granting of the certificate and that therefore it is quote, reluctant to upset, end quote, that reliance.

[00:23:21] Speaker 05:
So if FERC is saying that it is reluctant to upset Transco's reliance based on the decision of the certificate.

[00:23:29] Speaker 08:
Well maybe they're just wrong and you're going to get an appeal of that one.

[00:23:32] Speaker 08:
Why isn't that the appeal rather than this one?

[00:23:36] Speaker 05:
That's certainly a possibility, but at this point FERC is taking the position that there is some sort of tacit approval at the certificate stage that is meaningfully changing our rights in terms of our ability to challenge the negotiated rates.

[00:23:49] Speaker 05:
And that explains why FERC is saying this is way too, when the agreements are submitted, they're saying this is way too late.

[00:23:55] Speaker 05:
We've encouraged billions of dollars in investment.

[00:23:58] Speaker 05:
We can't seriously consider this issue anymore.

[00:24:00] Speaker 05:
And there's some, you know,

[00:24:03] Speaker 05:
that would in some ways fit with FERC's practice of promoting pipeline companies to come into Section 7 proceedings having fully subscribed their pipeline.

[00:24:13] Speaker 05:
So they're encouraging that policy, but then they're saying, but we're not passing on whether those agreements are valid in any way.

[00:24:23] Speaker 05:
And so we have reason, I think there's reasons to believe that FERC is actually making determinations in the certificate proceeding, at least on a preliminary basis about the negotiated agreements.

[00:24:32] Speaker 05:
And if that's the case, and our ability to challenge those negotiated agreements is harmed at the certificate stage, then we are injured, and that injury is redressable by FERC's determination to establish an initial recourse rate that was arbitrarily relied on 15-year-old data.

[00:24:50] Speaker 05:
FERC does not say,

[00:24:52] Speaker 05:
15-year-old data is okay to rely on because that is simply not a sentence that infers determination, and simply saying we have consistently applied this policy is also not a rational explanation, because there's always a question before you apply the policy of whether it is rational in the circumstances to use the policy, and that is the issue in this case.

[00:25:16] Speaker 05:
Thank you, Your Honors.

[00:25:26] Speaker 03:
Good morning, Your Honors.

[00:25:27] Speaker 03:
Beth Pacella for FERC and with me at council table with Andy Swirrs, who represents TransGo.

[00:25:34] Speaker 03:
Let me just, I'm going to start with standing, of course, but I just want to point out one thing.

[00:25:38] Speaker 03:
As the court recognizes, negotiated rates were not approved here.

[00:25:42] Speaker 03:
The commission did not rely on the existence of nonexistent negotiated rates when it made its certificate determinations.

[00:25:48] Speaker 03:
It relied on the existence of precedent agreements, which are wholly different.

[00:25:52] Speaker 03:
The commission does not know what the rate is in the

[00:25:56] Speaker 03:
at the time that that is disclosed at the negotiated rate time, which is in Atlantic Sunrise was responded to by the Commission in this order that we were just talking about this August 16th.

[00:26:08] Speaker 08:
I'm not sure the meaning of this.

[00:26:09] Speaker 08:
Are you saying that the appropriate time is this August?

[00:26:15] Speaker 03:
Absolutely, Your Honor.

[00:26:16] Speaker 08:
So FERC's position is it will, it's okay to wait

[00:26:22] Speaker 08:
to approve negotiated rates after the certificate is already done, after the pipeline is already ready to flow?

[00:26:30] Speaker 03:
Because that rate can be changed.

[00:26:34] Speaker 08:
Yes, the rate can be changed, but opposing counsel's point is he thought that FERC wanted to make sure that

[00:26:42] Speaker 08:
pipeline could have a reasonable economic decision in building the pipeline.

[00:26:48] Speaker 08:
And if the rate changes, it's no longer necessarily a reasonable economic decision.

[00:26:52] Speaker 08:
So doesn't everybody benefit by doing it at the time of the Section 7 proceeding?

[00:27:01] Speaker 03:
No, Your Honor, but for sure, what would happen here, and again, what's before the court is this specific circumstance here, and I'm kind of on the merits now, and that's, I'm happy to talk about that.

[00:27:13] Speaker 08:
I don't want to be on the merits.

[00:27:14] Speaker 08:
I mean, first question is, are we appealing in the right place?

[00:27:17] Speaker 03:
It is not an appeal in the correct place, because really, it turns out, based on their reply brief, not on their opening brief, where they really only talked about the recourse rate, and now they're talking more about the negotiated rate, and they've kind of shifted their argument.

[00:27:30] Speaker 03:
But if they're concerned... I don't think, to be clear, I don't think that's fair.

[00:27:34] Speaker 08:
I think the theory of FERC is that the recourse rate affects the negotiated rate.

[00:27:40] Speaker 08:
Is that not true?

[00:27:42] Speaker 03:
That the recourse rate affects... The resulting negotiated rate.

[00:27:47] Speaker 03:
For sure, when the parties enter into these contracts, they know, and that's why

[00:27:52] Speaker 08:
They know what the recourse rate is?

[00:27:54] Speaker 03:
They don't know what the recourse rate is, but they know the commission's general policy.

[00:27:57] Speaker 08:
That's right.

[00:27:57] Speaker 08:
So they should assume that the policy is going to continue.

[00:28:00] Speaker 08:
Sure.

[00:28:00] Speaker 08:
And negotiate in the shadow of that recourse rate.

[00:28:03] Speaker 08:
Of course.

[00:28:03] Speaker 08:
And that's the theory, which that is what

[00:28:07] Speaker 08:
protects against the market power of the pipeline in a situation where the pipeline has market power, which I take it is this case.

[00:28:14] Speaker 03:
And in this specific circumstance here, which is all that I'm defending today, the orders here, the three sets of orders I'm challenged here, the commission pointed out why it's appropriate to apply its general policy is because there is a section four proceeding that had to be filed

[00:28:32] Speaker 03:
by August 31st, 2018.

[00:28:36] Speaker 03:
So while the parties would be agreeing, the shippers would be agreeing to negotiate.

[00:28:42] Speaker 08:
That's not the negotiate rate filing, that's the August.

[00:28:47] Speaker 03:
No, that's the section four general rate filing.

[00:28:49] Speaker 08:
And that rate would not apply to these people.

[00:28:51] Speaker 08:
If they didn't take the theory, because it only goes to the next section.

[00:28:55] Speaker 03:
And when they're making their determination whether to negotiate with Transco or to take the recourse rate, that is something that they knew.

[00:29:04] Speaker 08:
So they knew they had to.

[00:29:07] Speaker 08:
If a Section 7 proceeding happens before that, this August 31st general rate proceeding only applies to the next pipeline construction.

[00:29:16] Speaker 08:
It doesn't apply to this one, does it?

[00:29:18] Speaker 03:
It doesn't because they chose, in that factual circumstance, to take the negotiated rate.

[00:29:23] Speaker 03:
But they could have taken the recourse rate.

[00:29:25] Speaker 08:
They could have taken an unknown future recourse rate?

[00:29:28] Speaker 03:
Is that what you're saying?

[00:29:29] Speaker 03:
Sure.

[00:29:29] Speaker 03:
That happens all the time.

[00:29:30] Speaker 03:
And in the circumstance where they know.

[00:29:33] Speaker 08:
I just want to be sure I understand the facts.

[00:29:35] Speaker 08:
So they don't take the recourse rates that's there, which is the only one they actually know.

[00:29:41] Speaker 08:
They know what the policy was before.

[00:29:43] Speaker 08:
They don't know what the new one will be.

[00:29:46] Speaker 08:
But you're saying if a new one is provided in the Section 4 rate case, that one, they can now pick that one up?

[00:29:55] Speaker 03:
Not now, but at the time.

[00:29:56] Speaker 03:
That's what I'm saying.

[00:29:57] Speaker 03:
You're on the commission's basis for why it was approved.

[00:30:00] Speaker 08:
Lisa, I don't know the FERC stuff quite as well as you do, so you'll have to help me with this.

[00:30:05] Speaker 08:
Sure.

[00:30:06] Speaker 08:
They could have said, we will take the recourse rate.

[00:30:10] Speaker 03:
Right.

[00:30:11] Speaker 08:
They won't know what it is.

[00:30:12] Speaker 03:
Right.

[00:30:13] Speaker 08:
And if in August it's set lower than the one that is under your policy, they would get that one for the future of this pipeline.

[00:30:24] Speaker 03:
Exactly.

[00:30:25] Speaker 08:
And they would have, notwithstanding the fact that other people would have already filled up the entire pipeline,

[00:30:32] Speaker 08:
produce, they would still be able to get?

[00:30:35] Speaker 03:
No, because when they decide whether to do a precedent agreement with Transco, the shippers have a choice.

[00:30:42] Speaker 03:
At that time, we are going to take the recourse rate that's set in the Section 7 proceeding and in this circumstance will be subject to change in the Section 4 proceeding happening shortly thereafter.

[00:30:53] Speaker 03:
Or we can take a negotiated rate.

[00:30:54] Speaker 03:
They had that full choice then.

[00:30:56] Speaker 03:
Transco didn't have any ability to say to them, no, you have to take a negotiated rate.

[00:31:00] Speaker 03:
That's the basis of the Commission's policy.

[00:31:02] Speaker 08:
Isn't the idea that you know what the – in order for the recourse rate to be leveraged against the market power of the pipeline, don't you have to know what the recourse rate is?

[00:31:14] Speaker 03:
No, Your Honor, you have to know that the recourse rate will apply and that it can then be, even if in Section 7 it is not a just and reasonable rate, it's only a public interest rate, that that can then, you can either go through Section 5 or here, through a Section 5 complaint.

[00:31:33] Speaker 08:
Of course, Section 5 puts the burden the other way.

[00:31:35] Speaker 03:
Right, and so that's why in this circumstance here, Your Honor, Section 4 was already going to happen for sure.

[00:31:42] Speaker 03:
100% chance that by August 31, a Section 4 rate proceeding, general rate proceeding, would happen where the discounted cash flow analysis would occur and a just and reasonable recourse rate would be determined that if you didn't, if you chose not to take a negotiated rate, you would get that rate for the term of your

[00:32:03] Speaker 03:
for your 20 years or 25 years, whatever you contract.

[00:32:05] Speaker 07:
Let me ask you the question I asked your friend.

[00:32:08] Speaker 07:
If we ruled against you, if we thought that somehow it was inappropriate to use this recourse rate, what would happen next?

[00:32:19] Speaker 03:
What would happen next is nothing regarding the negotiated rate because in this proceeding, because that's already happening in the negotiated rate proceeding.

[00:32:27] Speaker 07:
So there were three negotiated rate proceedings after... Does PERC lack the authority to go back and say you need to negotiate new rates in light of the proper recourse rate?

[00:32:42] Speaker 07:
Why isn't that what would happen next?

[00:32:44] Speaker 03:
Because the negotiated rate proceeding is just a separate proceeding, people certainly, and the Atlantic Sunrise negotiated rate proceedings is still ongoing, and it's not rehearing, and so that's a different circumstance.

[00:32:55] Speaker 03:
We don't know what will happen in the end regarding that.

[00:32:59] Speaker 03:
North Carolina, New York,

[00:33:01] Speaker 03:
commissions did not intervene or protest the Dalton expansion or Virginia Southside.

[00:33:07] Speaker 07:
I think you see what I'm getting at is the redressability issue.

[00:33:10] Speaker 07:
If your opponents prevail, you argued that nothing would change, right?

[00:33:15] Speaker 07:
They have the negotiated rates.

[00:33:17] Speaker 07:
That's a done deal.

[00:33:18] Speaker 07:
And I guess I don't understand that.

[00:33:20] Speaker 07:
I don't understand why it is that the negotiated rates are a done deal and can't be adjusted in light of a new recourse rate.

[00:33:29] Speaker 03:
because the order here, because the commission didn't approve the negotiated rates in this proceeding.

[00:33:34] Speaker 03:
And what the court has jurisdiction over here is the recourse rate, not the negotiated rate.

[00:33:40] Speaker 03:
And as Judge Garland, I believe, was saying,

[00:33:44] Speaker 03:
if there can be an appeal of the negotiated rate proceeding in Atlantic Sunrise, not regarding Dalton expansion in Virginia Southside, because the state commissions didn't intervene or protest those negotiated rates.

[00:33:56] Speaker 04:
So in their briefs, the petitioners or the intervener for petitioners cite Morgan Stanley, the Supreme Court case for this proposition that FERC has the authority to set aside the contrary.

[00:34:13] Speaker 04:
And in that case, the court said, you know, where there's unfair dealing at the contract formation stage, then you can set aside the contract.

[00:34:22] Speaker 04:
So why isn't that fundamentally, what's that issue here?

[00:34:27] Speaker 04:
We assume that they were to prevail on the merits of showing that the recourse rate was improper.

[00:34:42] Speaker 03:
I guess I'm not fully understanding your question.

[00:34:44] Speaker 03:
Again, there's separate negotiated proceedings.

[00:34:46] Speaker 04:
For redressability, you're saying that, well, the only thing before us is the recourse rate.

[00:34:51] Speaker 04:
And so even if we set it aside, nothing happens with respect to the negotiated rates.

[00:34:59] Speaker 04:
And I guess I'm questioning the premise of that.

[00:35:03] Speaker 04:
They're questioning the premise of it by citing Morgan's statement.

[00:35:06] Speaker 03:
Because while the Commission theoretically in these separate proceedings could set aside, the Commission could, I guess, initiate a Section 5 proceeding, a NGA Section 5 proceeding to

[00:35:19] Speaker 03:
look at those contracts again, the state commissions could file a Section 5 complaint with the commission asking it to relook at those contracts.

[00:35:28] Speaker 03:
That could happen.

[00:35:30] Speaker 03:
But again, that's not part of this proceeding here.

[00:35:32] Speaker 08:
This proceeding.

[00:35:33] Speaker 08:
I'm stuck a little bit on the same.

[00:35:35] Speaker 08:
So the precedent agreements say negotiations, negotiated rates

[00:35:41] Speaker 08:
don't go forward until the certificate of convenience necessity is issued by FERC, correct?

[00:35:48] Speaker 08:
That's what was represented in the briefs.

[00:35:51] Speaker 03:
I just know that they couldn't be in effect until none of the negotiated rates, and certainly in the negotiated rate proceedings, none of the rates are in effect until the projects are in service.

[00:36:02] Speaker 03:
So the projects would have to be in service.

[00:36:04] Speaker 08:
And they can't be in service without Section 7, they can't go forward without a certificate, correct?

[00:36:09] Speaker 08:
Okay, so if we vacated the certificate, they couldn't go forward, right?

[00:36:15] Speaker 08:
That's true.

[00:36:16] Speaker 08:
And under E, the Commission has the power to attach to the issuance of the certificate and the exercise of the rights granted such reasonable terms and conditions as a public convenience and necessity may require, right?

[00:36:30] Speaker 08:
Right.

[00:36:30] Speaker 08:
So that could include setting a new recourse rate

[00:36:35] Speaker 08:
and requiring a new negotiation based on the new recourse rate.

[00:36:38] Speaker 03:
For sure the Commission could set a new recourse rate, absolutely.

[00:36:42] Speaker 08:
And at the very least then they could take the recourse rate or it could also as a condition require a new negotiation or a new decision.

[00:36:52] Speaker 03:
I don't know whether they could do that, Your Honor, and I'm hearing that you're not

[00:36:58] Speaker 03:
perhaps buying redressability.

[00:37:01] Speaker 03:
So perhaps can I spend a minute on injury, because... If you have nothing more to say on redressability.

[00:37:06] Speaker 03:
Well, I mean, I don't know what else to say other than I see these as two separate proceedings.

[00:37:11] Speaker 03:
I think that that's something that would be in the Commission's discretion to do.

[00:37:15] Speaker 03:
The Commission doesn't have to do it.

[00:37:16] Speaker 03:
I don't think it would make it more likely that the Commission would do that, because there are these separate proceedings.

[00:37:22] Speaker 04:
Is the Commission arguing collateral estoppel, as was represented by your friends on the other side?

[00:37:27] Speaker 04:
No, we're not.

[00:37:29] Speaker 04:
So you're saying that in these other proceedings, the petitioners

[00:37:36] Speaker 04:
could challenge the recourse rate, and then if they were to prevail, then they could use that to argue for a renegotiation or vacatur of the negotiated rate.

[00:37:55] Speaker 03:
Absolutely.

[00:37:55] Speaker 03:
The Commission's policy and what has occurred in the Atlantic Sunrise Negotiated Rate Proceding is that

[00:38:00] Speaker 03:
parties can raise anything that they want to in order to challenge the negotiated rate in the negotiated rate proceeding and that's occurred.

[00:38:07] Speaker 03:
These state commissions did in the Atlantic Sunrise case argue the same arguments that it made in this proceeding and the commission has addressed those and they're again now pending on rehearing.

[00:38:20] Speaker 03:
Actually the North Carolina Commission

[00:38:24] Speaker 03:
protested the Atlantic Sunrise Proceeding, the New York Commission intervened but didn't actually file a protest.

[00:38:30] Speaker 03:
But now they both have sought rehearing from the commission.

[00:38:33] Speaker 08:
So... One more law question.

[00:38:35] Speaker 08:
On these Section 4 proceedings, if a lower rate is determined, are there refunds available?

[00:38:41] Speaker 03:
Absolutely, and the commission has ordered, made them subject to refund.

[00:38:45] Speaker 03:
So if I could just spend a minute on injury, no injury in fact, and the point there is that each and every one of the bases on which the state commissions argue that they have standing here, that they have been injured, is based on the speculation regarding the future actions of third parties.

[00:39:04] Speaker 03:
And this court has time and again

[00:39:06] Speaker 03:
including in Kansas Corporation Commission, determine that that is not sufficient.

[00:39:11] Speaker 03:
And that is all they're relying on here.

[00:39:13] Speaker 03:
There is no basis to believe that there's a substantial probability that the gas will flow.

[00:39:19] Speaker 08:
Which is the problem that you think is speculative?

[00:39:23] Speaker 08:
Which step is speculative?

[00:39:24] Speaker 03:
So, for example, with the New York Commission, they argue

[00:39:34] Speaker 03:
that it would require three steps to occur, the secondary market.

[00:39:40] Speaker 03:
And of course, in FERC's opening brief, in our brief, we acknowledge that there's the secondary market possibility.

[00:39:46] Speaker 03:
But it's just simply a possibility.

[00:39:47] Speaker 03:
I guess there would have to be capacity available for that.

[00:39:51] Speaker 08:
And the question is whether there's substantial probability or whether it's pure speculation.

[00:39:55] Speaker 08:
Why is it that Transco would be advertising in the attached advertisement to the reply brief

[00:40:04] Speaker 08:
Why Transco Firm Service?

[00:40:06] Speaker 08:
One of the reasons, additional secondary rights in Zone 6.

[00:40:10] Speaker 01:
Sure.

[00:40:11] Speaker 08:
And at the end, secondary rights within Zone 6 that provide access to the New York market.

[00:40:17] Speaker 08:
Sure.

[00:40:18] Speaker 08:
That sounds like they are suggesting to the shippers that this is a good deal because you get access to the New York market.

[00:40:25] Speaker 08:
Right.

[00:40:26] Speaker 08:
Now this is just purely speculative.

[00:40:28] Speaker 08:
They wouldn't be doing that.

[00:40:29] Speaker 08:
So that doesn't strike me as speculative.

[00:40:33] Speaker 03:
Well, so what it requires, first of all, that was in the open season materials.

[00:40:36] Speaker 03:
It was in the what?

[00:40:37] Speaker 03:
In the open season materials for the Atlantic Sunrise Project.

[00:40:40] Speaker 03:
They were letting them know all the possible things that could occur.

[00:40:45] Speaker 03:
And then when they made the application to be filed, they said the increased demand that we have is in the mid-Atlantic and the southeast.

[00:40:52] Speaker 03:
It's not in the New York.

[00:40:53] Speaker 08:
New York's not considered the mid-Atlantic?

[00:40:55] Speaker 03:
No, New York is the Northeast.

[00:40:58] Speaker 07:
They said specifically it's not in New York?

[00:41:01] Speaker 03:
No, they say in the Mid-Atlantic and Southeast there's no indication on this record that there's any increased demand.

[00:41:10] Speaker 03:
And the Commission made a determination that this is in the

[00:41:13] Speaker 03:
the capacity is needed for growing demand in the mid-Atlantic and southeast.

[00:41:19] Speaker 03:
It doesn't say my next part, which is not in New York, but not in the northeast.

[00:41:23] Speaker 04:
North Carolina isn't in the mid-Atlantic or the southeast?

[00:41:26] Speaker 03:
North Carolina is.

[00:41:27] Speaker 03:
North Carolina is, Your Honor.

[00:41:29] Speaker 03:
That's right.

[00:41:30] Speaker 03:
But for example, what the secondary market thing would require is that the shippers, that's assuming that shippers will put their capacity into the secondary market.

[00:41:42] Speaker 03:
It assumes that

[00:41:43] Speaker 03:
other shippers will take that capacity and finally that other shippers will take that capacity and use it to ship to New York or to North Carolina.

[00:41:53] Speaker 08:
But the affidavit explains the reason is that gas can be sold for higher prices in a major consumer area like New York City.

[00:42:02] Speaker 08:
And that's the reason, as compared to Pennsylvania, for example, where the price of gas is relatively low.

[00:42:08] Speaker 03:
Well, that makes it possible.

[00:42:11] Speaker 03:
I will concede that it's possible, but it is not substantially likely.

[00:42:15] Speaker 08:
I don't understand that.

[00:42:16] Speaker 08:
We've said that where economics suggests the way in which prices will go, that's sufficient for our cases.

[00:42:24] Speaker 08:
And this is an obvious piece of economics supported by an expert affidavit.

[00:42:29] Speaker 08:
So I don't understand why

[00:42:31] Speaker 08:
It seems obvious that if they're going to pay more in New York than they're going to pay in Pennsylvania, shippers will be happy to use the secondary market.

[00:42:40] Speaker 03:
That's, again, theoretically possible.

[00:42:42] Speaker 03:
But my understanding is that that's not sufficient under this court's precedent.

[00:42:47] Speaker 08:
So are cases that say we will follow economic analysis we should reverse?

[00:42:55] Speaker 08:
We've said with respect to standing,

[00:42:57] Speaker 08:
that if you come up with an argument that fits the laws of economics, that that's sufficient for standing.

[00:43:05] Speaker 08:
So we shouldn't be following that here?

[00:43:08] Speaker 03:
Well, I think that what it is is it's just, for example, in Kansas Corporation Commission, where this court said that there's no standing with the alleged harm

[00:43:19] Speaker 03:
rests upon hypothetical chain of events, none of which is certain to occur.

[00:43:23] Speaker 03:
Sounds to me quite stronger than the substantial probability test set by the Supreme Court.

[00:43:30] Speaker 03:
No, but that's a pretty high standard, and what they presented in my mind doesn't rise to that.

[00:43:37] Speaker 03:
But again,

[00:43:38] Speaker 03:
I just want to emphasize again that the necessary check on the potential market power was provided here because the shippers knew when they chose to take service under negotiated rates instead of under the

[00:43:55] Speaker 03:
instead of under the recourse rates that would be set in this proceeding, that they could opt to take service under the recourse rates, which would initially be set in the Section 7 proceeding, and would then be subject to Section 4 just and reasonable review in Transco's August 2018 General Section 4 rate proceeding.

[00:44:12] Speaker 03:
So this is not a circumstance where

[00:44:15] Speaker 03:
shippers were saying, oh my goodness, we will have to, we'll be stuck with that terrible, theoretically terrible recourse rate.

[00:44:24] Speaker 03:
We're going to have a section four proceeding available that will absolutely occur

[00:44:29] Speaker 03:
shortly thereafter and we can take that recourse rate instead of we'll know we'll have a just and reasonable rate.

[00:44:34] Speaker 08:
So that makes this case somewhat different than another case.

[00:44:38] Speaker 08:
Absolutely.

[00:44:38] Speaker 08:
And the reason for the August proceeding coming up because of some settlement?

[00:44:42] Speaker 03:
They had a settlement and so yeah, it was publicly noticed that they were required, that transcript was required to do a general session.

[00:44:49] Speaker 08:
So you're not saying that that has to always be the case?

[00:44:52] Speaker 08:
Absolutely not.

[00:44:52] Speaker 08:
You're just saying that we can resolve this case that way?

[00:44:55] Speaker 03:
Exactly, Your Honor.

[00:44:59] Speaker 03:
There is nothing further.

[00:45:01] Speaker 03:
Thank you.

[00:45:37] Speaker 06:
May it please the court?

[00:45:38] Speaker 06:
My name is Andrew Swirz.

[00:45:40] Speaker 06:
I'm arguing here for Transco.

[00:45:43] Speaker 06:
I think I want to cut through what I think is some confusion here.

[00:45:47] Speaker 06:
When FERC precedent says that there needs to be a recourse rate available, that's exactly what FERC means.

[00:45:55] Speaker 06:
What checks the market power of market participants on a pipeline like Transco is the availability of a recourse rate when a negotiate when pipelines

[00:46:06] Speaker 06:
when pipeline shippers negotiate their rates.

[00:46:12] Speaker 07:
That can't be right.

[00:46:13] Speaker 07:
The recourse rate has to be rational.

[00:46:17] Speaker 07:
It can't just be anything.

[00:46:20] Speaker 07:
The argument here is that this was irrational.

[00:46:22] Speaker 07:
It was old.

[00:46:22] Speaker 07:
It was stale.

[00:46:23] Speaker 06:
It meant nothing.

[00:46:27] Speaker 06:
The shippers on any pipeline, but particularly Transco, are very sophisticated.

[00:46:32] Speaker 06:
They're going to be calculating, when they engage in a negotiation for rates, they are going to be calculating what the rate is, what they believe the proper rate is today, tomorrow.

[00:46:43] Speaker 06:
These are 20 years.

[00:46:44] Speaker 07:
Without regard to the recourse rate, is that where you're headed with that?

[00:46:47] Speaker 06:
Well, the reason why the recourse rate, the availability of the recourse rate checks market power is because

[00:46:55] Speaker 06:
the shippers know when they enter into that negotiation, it's not negotiate or else.

[00:47:01] Speaker 06:
They do not have to take whatever the result of that negotiation provides.

[00:47:08] Speaker 06:
What FERC is required to do is to provide a recourse rate for substantially similar service.

[00:47:16] Speaker 06:
And that was done here.

[00:47:17] Speaker 06:
And as long as

[00:47:19] Speaker 07:
I think that's the argument that that wasn't done here, that the recourse rate that was chosen had no relationship to current market conditions, and so it was toothless.

[00:47:30] Speaker 06:
Well, but at the negotiation stage, the recourse rate is always an estimate.

[00:47:34] Speaker 06:
And in Section 7, we know from CACCO and its progeny that... But I think the argument here is that this was a particularly bad estimate.

[00:47:42] Speaker 06:
But what I'm saying is it's the assurance that the shipper has that there will be a recourse rate set by FERC that checks the market power, because that means that the negotiation is not a stick-up.

[00:47:57] Speaker 07:
But I guess what I'm getting at is what if you have an assurance that FERC will set a recourse rate, but it's an irrational recourse rate?

[00:48:04] Speaker 07:
How does that work?

[00:48:09] Speaker 07:
And I know your argument is that this was not an irrational recourse rate.

[00:48:13] Speaker 07:
Yeah.

[00:48:13] Speaker 07:
Your argument that it is.

[00:48:16] Speaker 06:
Well, at the time of the negotiation, as Ferp council discussed, there is no set recourse rate.

[00:48:23] Speaker 06:
It's an estimate.

[00:48:24] Speaker 06:
They're provided with an estimate of the recourse rate.

[00:48:26] Speaker 06:
Your client proposed a rate.

[00:48:29] Speaker 06:
We proposed based on an estimate.

[00:48:31] Speaker 06:
Now, at the time that these negotiations are going on, we don't know the final cost of this project.

[00:48:36] Speaker 06:
It's before the project is even built.

[00:48:39] Speaker 06:
So there's a lot of rough cut justice in these negotiated rates.

[00:48:46] Speaker 04:
And there's... Help me understand how the negotiation takes place, because maybe that's part of the disconnect here.

[00:48:54] Speaker 04:
So when it's set in the record that Transco proposed a rate, there's some sort of an estimated

[00:49:04] Speaker 04:
rate that's based on this pre-tax rate of return.

[00:49:13] Speaker 04:
Correct.

[00:49:15] Speaker 04:
But that recourse rate is not necessarily accepted by any of the shippers.

[00:49:23] Speaker 04:
That specific rate that your client proposed.

[00:49:27] Speaker 06:
Right.

[00:49:28] Speaker 06:
I mean, FERC could have entirely rejected the recourse rate in the certificate order.

[00:49:33] Speaker 06:
But the parties will, the shippers who negotiated rates will still have negotiated their rates.

[00:49:39] Speaker 06:
These shippers engage in negotiated rate, rate negotiations because what they're looking for is long-term certainty.

[00:49:46] Speaker 06:
Over the 20 to 25 year term of a contract, that recourse rate is going to go up and down depending on what section four cases are filed, what section five cases are filed.

[00:49:55] Speaker 08:
So you're saying it doesn't make any difference what the recourse rate was at the time?

[00:50:00] Speaker 06:
What I'm saying is that

[00:50:02] Speaker 06:
FERC fulfilled its obligation under its own policy to check market power by assuring that there was a recourse rate available to be taken.

[00:50:12] Speaker 08:
But they accepted for purposes of the Section 7 proceeding a 2002 recourse rate, right?

[00:50:19] Speaker 06:
Well, the recourse rate is not entirely.

[00:50:21] Speaker 06:
It's a 2002 pre-tax return.

[00:50:24] Speaker 06:
There's other elements in the recourse rate there.

[00:50:27] Speaker 08:
I'm going to use that just as a shorthand because that's what we're talking about.

[00:50:30] Speaker 08:
They accepted that, right?

[00:50:32] Speaker 08:
They said that was okay because we have a policy and even if it's old, it's the most reasonable.

[00:50:38] Speaker 06:
They did accept that and the reason is because it would be an understatement to say that setting rates of return and pre-tax returns at FERC is a contentious process.

[00:50:52] Speaker 06:
This is among the most contentious of rate issues.

[00:50:55] Speaker 08:
So 2002,

[00:50:58] Speaker 08:
I don't know what recourse rates were, but interest rates were enormously higher than they are today.

[00:51:04] Speaker 08:
10-year bond rates were enormously higher than they are today.

[00:51:07] Speaker 08:
And imagine that this recourse rate, this rate had not been reset since the days of Jimmy Carter when the rate was probably enormously higher than the very low rates are today.

[00:51:19] Speaker 08:
You would say that's still okay, still rational, just because it provides for a quicker, more convenient proceeding?

[00:51:31] Speaker 08:
Imagine it was set at 2 million percent

[00:51:35] Speaker 08:
That would still be okay because there was something.

[00:51:38] Speaker 08:
There must be some rate at which it's not rational, don't you think?

[00:51:44] Speaker 08:
I suppose there could be, but... And as to which it provides no control over market power.

[00:51:52] Speaker 08:
Isn't the whole theory that FERC is employing here a policy that you have to have a recourse rate in order to constrain market power?

[00:52:00] Speaker 06:
The salient point is, let's say that they use a 2 million percent pre-tax rate of return.

[00:52:09] Speaker 06:
The shippers don't have to take that.

[00:52:11] Speaker 08:
But then they're stuck with the negotiation with a pipeline that has market power.

[00:52:18] Speaker 08:
And the whole theory was that the recourse rates are supposed to constrain it.

[00:52:23] Speaker 08:
If you set a recourse rate that is out of this world and therefore can't constrain it, then you are resting completely on the market power of the pipeline, which FERC said it shouldn't do.

[00:52:36] Speaker 06:
Well, we don't concede in this proceeding that Transco has market power.

[00:52:41] Speaker 08:
You're smiling, but that's certainly what FERC assumes.

[00:52:45] Speaker 08:
Otherwise, you would need a recourse rate.

[00:52:47] Speaker 08:
And I don't remember an argument in FERC's order that we don't have to worry about the recourse rate because Transco doesn't have market power.

[00:52:58] Speaker 06:
FERC did not rest its order on that particular issue, but what FERC did say is that the availability of the recourse rate checks the market power, and FERC said it again in the order that we filed under Rule 28J.

[00:53:10] Speaker 08:
And it would be rational to say that regardless of what the recourse rate is in your view.

[00:53:14] Speaker 08:
In which case, what's the point of having a recourse rate?

[00:53:22] Speaker 06:
If there is an unreasonable recourse rate and shippers decide not to, they can't negotiate anything better, I find it's speculative to believe that the pipeline would persist in those negotiations if, you know, at 2 million percent, but nonetheless.

[00:53:36] Speaker 04:
It seems to me that, help me understand the way that this works.

[00:53:43] Speaker 04:
It seems to me that what you're saying is that

[00:53:45] Speaker 04:
At the time that Transco sits down with the shippers to start this negotiation process, they say, we believe or we propose that a recourse rate would be, let's say, 15%.

[00:54:00] Speaker 04:
The shippers may or may not agree with that.

[00:54:07] Speaker 04:
It doesn't really matter whether they agree with it because

[00:54:13] Speaker 04:
the recourse rate isn't really set unilaterally by transco, it's set by FERC.

[00:54:20] Speaker 04:
That's correct, Your Honor.

[00:54:21] Speaker 04:
And so you're saying that when you sit down and negotiate at this beginning to set this kind of precedent rate, you might propose that it's 15%.

[00:54:32] Speaker 04:
The shippers might think that it's 10%.

[00:54:35] Speaker 04:
But it doesn't matter if the two sides can negotiate something

[00:54:40] Speaker 04:
that they agree on, especially with long-term, and interest rates might go up and down, markets might go up and down, and they agree at 8%, then everybody's happy.

[00:54:53] Speaker 06:
Absolutely.

[00:54:54] Speaker 06:
I mean, if Transco proposes an utterly absurd rate, no shippers are going to agree to take service under it, and the facilities won't get built.

[00:55:01] Speaker 06:
So what's going on here is that the shippers are trying to negotiate long-term certainty.

[00:55:10] Speaker 06:
You know, on one of these projects, I believe it was nine shippers came in and negotiated rates.

[00:55:15] Speaker 06:
You know, they're projecting what is in their economic interest over, I think those were 20-year, 15-year contracts with a five-year renewable clause.

[00:55:24] Speaker 06:
So they're projecting over a long period of time.

[00:55:26] Speaker 06:
Over that period of time, Transco may come in for multiple Section 4 rate cases.

[00:55:31] Speaker 06:
That recourse rate is going to go up and down based on current economic conditions.

[00:55:35] Speaker 06:
I can tell you today that if we set a pre-tax return today, it's not going to be the same, well, like it's an evidentiary issue about the DCF that New York submitted, but it's not going to be the same as what they submitted.

[00:55:48] Speaker 07:
Are you saying the recourse rate for the Section 7 doesn't really matter because it can get fixed later?

[00:55:53] Speaker 07:
Is that the point?

[00:55:54] Speaker 06:
I'm not saying it doesn't.

[00:55:56] Speaker 06:
I'm saying what matters is not the absolute level of the recourse rate, it's the assurance that the

[00:56:01] Speaker 06:
the shippers have when they enter into negotiations.

[00:56:04] Speaker 06:
Not necessarily in the Section 7 proceeding, but in the Section 4 proceedings that you're saying?

[00:56:08] Speaker 06:
I'm saying in a Section 7 context, when new facilities are being built, so there's a certificate process ongoing, shippers are negotiating and the pipeline needs those shippers because if there's no need, if the

[00:56:23] Speaker 06:
If the pipeline can't demonstrate that there's shippers willing to take service on its pipeline, then the pipeline won't get built.

[00:56:30] Speaker 06:
So there is a limit on the 2 million percent

[00:56:34] Speaker 06:
recourse rate, because nobody's going to take service at that rate.

[00:56:38] Speaker 06:
The shippers themselves are very sophisticated.

[00:56:41] Speaker 06:
These are not small players.

[00:56:45] Speaker 06:
They project what Transco's rates are.

[00:56:47] Speaker 06:
If they thought that the 15.34% that Transco was using here pursuant to FERC precedent, they could negotiate for something less.

[00:56:57] Speaker 08:
This is all said as if you had no market power.

[00:57:01] Speaker 08:
And it would be fine if that were the case.

[00:57:03] Speaker 08:
But FERC is saying in their policy agreements that that can't be the way in which this is done with a shipper who has market power.

[00:57:13] Speaker 08:
Now, I appreciate your saying that you don't know whether you have market power or not.

[00:57:16] Speaker 08:
But for purposes of this, we have to assume that you do, because FERC certainly is not resting its orders on an absence of market power.

[00:57:23] Speaker 08:
So in the absence of market power, of course somebody can negotiate between long-term contracts and short-term contracts.

[00:57:29] Speaker 08:
And of course, they get bound by whichever choice they make.

[00:57:33] Speaker 08:
The first theory is, which has substantial support in economics, that if the buyer or the seller has market power,

[00:57:47] Speaker 08:
then this is not a free choice by the buyer.

[00:57:53] Speaker 08:
That's why they have constraint.

[00:57:55] Speaker 08:
So all the things you keep saying, you have to explain to us why it's still okay given market power, not it's still okay because it was a completely free choice.

[00:58:13] Speaker 08:
If a shipper can't negotiate a rate due to market power and must take the recourse rate because for some reason it absolutely needs to have service on this proposed project, that it will... No, it's the other way around, that because they don't have in front of them a recourse rate that's a reasonable deal, they have to take the market power negotiated rate, the rate that you're able to extract because you have market power.

[00:58:40] Speaker 08:
It's not evil or not evil.

[00:58:42] Speaker 08:
This is just economics.

[00:58:47] Speaker 06:
I mean, I would say that they're not forced to negotiate.

[00:58:50] Speaker 06:
And if they feel like they're getting a raw deal in the negotiation, they can take the recourse rate.

[00:58:58] Speaker 06:
And when FERC sets that rate, if they don't like what FERC sets, they can challenge it under Section 5.

[00:59:03] Speaker 06:
Right now, in this particular case, there is an ongoing Section 4 case in which the recourse rate is at issue.

[00:59:09] Speaker 06:
They can participate there.

[00:59:13] Speaker 06:
This is the Section 4 case that Transco was required to file by August 31st.

[00:59:18] Speaker 04:
Yes.

[00:59:20] Speaker 04:
So at the time of the negotiation, let's say that Transco says, we believe that you should pay us

[00:59:36] Speaker 04:
at least 15 cents per unit for the use of our pipeline.

[00:59:50] Speaker 04:
And we think that that's fair because we think that the recourse rate that FERC would set would also be 15 cents per unit.

[01:00:03] Speaker 04:
Just, you know, we think that that's a fair offer.

[01:00:12] Speaker 04:
And they take that.

[01:00:15] Speaker 04:
The shippers take that.

[01:00:17] Speaker 04:
Okay.

[01:00:17] Speaker 04:
And then the recourse rate is set at 12 cents per unit at the section seven stage.

[01:00:28] Speaker 04:
Okay.

[01:00:29] Speaker 04:
What happens there?

[01:00:32] Speaker 04:
the shippers stuck or can the shippers say, well, our rate is not just reasonable that we negotiated and we'd like to have the recourse rate now since it's 12 cents rather than 15 cents.

[01:00:52] Speaker 06:
If they negotiate a rate, they enter into a contract for a period of years.

[01:00:58] Speaker 06:
I think in these cases, it range from 15 to 25.

[01:01:01] Speaker 06:
And that is the rate they pay.

[01:01:02] Speaker 06:
And the reason why they're doing it, Your Honor, is because they believe it's in their long-term economic interest to do that.

[01:01:09] Speaker 06:
Because the Section 4 rate that is set could be higher or lower in 2018.

[01:01:17] Speaker 06:
Transco could file another rate case in 2020.

[01:01:20] Speaker 06:
Economic conditions could be completely different.

[01:01:22] Speaker 06:
The rate could shoot up.

[01:01:24] Speaker 06:
But another shipper who is not under a negotiated contract could file a Section 5 proceeding.

[01:01:31] Speaker 06:
challenging transpose recourse rates and the rates could change again.

[01:01:35] Speaker 06:
These shippers, they're not going to enter into a negotiated rate that they don't believe is in their long-term interest.

[01:01:46] Speaker 06:
They just won't ship.

[01:01:49] Speaker 04:
And that's why you believe that there's no redressability here?

[01:01:54] Speaker 06:
We believe that there's no redressability here because

[01:01:58] Speaker 06:
They've negotiated their long-term rates.

[01:02:02] Speaker 06:
And this gets to what Judge Griffith was pressing on earlier.

[01:02:06] Speaker 06:
If you were to remand this back to FERC, presumably what you'd be telling FERC to do is to set a rate of return.

[01:02:20] Speaker 06:
So what would have to happen?

[01:02:22] Speaker 06:
is that FERC would need to engage in all of its processes, all of the contentiousness that is involved in setting a rate of return.

[01:02:31] Speaker 06:
But your opponent suggested that could be done on an expedited basis.

[01:02:38] Speaker 06:
I'm sure that's his opinion.

[01:02:40] Speaker 06:
I don't believe that can be done on an expedited basis.

[01:02:43] Speaker 06:
FERC has a DCF policy that turns into a battle of experts.

[01:02:47] Speaker 06:
In order to set a pre-tax return, you have to set the rate of return, which uses a discounted cash flow analysis.

[01:02:54] Speaker 06:
FERC has just issued a recent case several weeks ago questioning whether that will be the only analysis involved or whether other models need to be used going forward.

[01:03:03] Speaker 06:
That's in the electric field, could be applied to the gas field.

[01:03:07] Speaker 06:
People always fight over bond ratings.

[01:03:10] Speaker 06:
The proxy group, FERC has certain exceptions for removal of people from the proxy group.

[01:03:15] Speaker 06:
That is always a battle.

[01:03:17] Speaker 06:
There's a case right now, EMRA main case, that was filed in 2011.

[01:03:24] Speaker 06:
The sole issue is the rate of return.

[01:03:25] Speaker 06:
And it is still ongoing.

[01:03:27] Speaker 06:
It's been before this court.

[01:03:28] Speaker 06:
It's now back at FERC.

[01:03:29] Speaker 06:
And proceedings are scheduled through 2019.

[01:03:33] Speaker 06:
So if you remain in this case, what you're saying

[01:03:36] Speaker 06:
is you need to set a rate at the Section 7 stage.

[01:03:42] Speaker 06:
That tells pipelines like my client that there's going to be a lot of delay because we can't rely on what we're negotiating with our shippers.

[01:03:53] Speaker 06:
There's no question this infrastructure was needed.

[01:03:56] Speaker 06:
Nobody's challenged the need for these projects.

[01:03:59] Speaker 06:
And what Catco says is that FERC can consider the rate and FERC can also consider the need and other non-cost factors.

[01:04:07] Speaker 06:
And what FERC is saying is these facilities are needed.

[01:04:11] Speaker 06:
There's a market in Florida and Alabama for this gas.

[01:04:17] Speaker 06:
And that's why Atlantic Sunrise is being built.

[01:04:20] Speaker 06:
And in order to put that into service to serve the public interest, we're going to

[01:04:26] Speaker 06:
We're going to have some rough cut justice because the Section 7 rate is an estimate.

[01:04:30] Speaker 06:
It's not just the rate of return factor, the pre-tax return that's an estimate in the Section 7 rate.

[01:04:40] Speaker 06:
It's all of the costs.

[01:04:42] Speaker 06:
So when a shipper is negotiating at that stage, they're negotiating based on what Transco thinks the project will cost.

[01:04:50] Speaker 06:
If there's a cost overrun,

[01:04:53] Speaker 06:
And it's not covered in the rate they negotiated.

[01:04:55] Speaker 06:
Transco eats that, even though it may be factored into the recourse rate later.

[01:05:00] Speaker 06:
So that is the process that I believe Catco recognizes.

[01:05:05] Speaker 06:
And that is what I understand Burke to be arguing here, is that what checks the market power is the availability of the recourse rate.

[01:05:18] Speaker 08:
Can I ask you, I'm reading from the 1996 policy.

[01:05:26] Speaker 08:
It says, the commission is particularly concerned about maintaining the integrity of the recourse service.

[01:05:32] Speaker 08:
In order to be successful, recourse service must remain a viable alternative to negotiated service.

[01:05:38] Speaker 08:
Otherwise, if the recourse service remains stagnant in time, the recourse service will become outmoded and will cease to be a viable alternative to negotiated service.

[01:05:49] Speaker 08:
Since the purpose of the recourse service is to act as a check against pipeline market power, such a result is impermissible.

[01:05:56] Speaker 08:
So how is that consistent with allowing a 15-year-old recourse rate to be the only check on market power?

[01:06:06] Speaker 06:
I think, Your Honor, what they're saying there is that the recourse service, it's the service.

[01:06:13] Speaker 06:
So if I'm a shipper and I'm contracting to ship from A to B,

[01:06:16] Speaker 06:
I can negotiate a rate for that.

[01:06:18] Speaker 06:
If there's no service available at a recourse rate that can get me from A to B, there's no comparable service.

[01:06:27] Speaker 06:
And then I have the gun to my head that your honor is concerned about.

[01:06:34] Speaker 08:
So what you're saying is recourse service is not the same thing as recourse rate?

[01:06:37] Speaker 06:
I don't believe that that should be read to include the actual rate for the service.

[01:06:43] Speaker 06:
It is the service itself.

[01:06:46] Speaker 06:
If I'm negotiating a rate from A to B, there must be comparable service at a recourse rate from A to B. Otherwise, I must take the negotiated rate.

[01:06:56] Speaker 08:
And then I'll go up to three paragraphs where it says, thus, the recourse rate mitigates market power.

[01:07:04] Speaker 08:
It's the availability of the rate.

[01:07:06] Speaker 08:
The fact that FERB will set a rate.

[01:07:09] Speaker 08:
They say it's the rate that mitigates the market power, not the availability of the service.

[01:07:15] Speaker 08:
It could be at any rate.

[01:07:17] Speaker 08:
It's the availability of a service at a recourse rate.

[01:07:20] Speaker 08:
Right.

[01:07:21] Speaker 08:
So is it not talking about the problem that will occur if it gets outmoded?

[01:07:28] Speaker 08:
If the rate becomes outmoded because it doesn't reflect the actual economic conditions.

[01:07:36] Speaker 08:
This would seem to me a lot different case.

[01:07:37] Speaker 08:
It was a five-year-old rate, maybe even a 10-year-old rate, but we're talking about such different economic conditions in the country now than they were in 2002.

[01:07:51] Speaker 06:
But we have no showing that those conditions, whatever they may be, would lead to a different pre-tax return.

[01:07:57] Speaker 06:
That gets to a different issue.

[01:08:00] Speaker 08:
Well, they have two different pieces, agreed not sufficient to establish it, but the only question, one is their cash flow analysis, and the other filed other cases around this time.

[01:08:15] Speaker 08:
They only need enough to show why they need a hearing, not enough to prove their case.

[01:08:22] Speaker 06:
True, but the discounted cash flow analysis that they submitted, they called it a preliminary discounted cash flow analysis.

[01:08:29] Speaker 06:
That's not the same as a, what comes out of there is an after-tax rate of return.

[01:08:34] Speaker 06:
That is only one element of the pre-tax return calculation.

[01:08:39] Speaker 06:
There are other factors that can interact with.

[01:08:42] Speaker 08:
I understand, but that's not what FERC said in its order.

[01:08:45] Speaker 08:
FERC just said we have a policy and we're going to stick with it.

[01:08:48] Speaker 08:
They didn't say anything wrong, there was anything wrong with the evidence presented.

[01:08:52] Speaker 08:
They just said we have a policy and we're going to stick with it.

[01:08:55] Speaker 06:
Well, because FERC knows that nobody is paying this recourse rate because everybody has entered into negotiated rate contracts, and they know that the recourse rate will be set in this case or on these expansions in the proceeding that was required to be filed on August 31, 2018.

[01:09:14] Speaker 08:
That proceeding has been filed, and they know that... What rate did you suggest in that proceeding?

[01:09:21] Speaker 08:
There's a variety of rates.

[01:09:23] Speaker 08:
I'm the number one that's being drawn into question in this case.

[01:09:26] Speaker 08:
What pre-tax rate did you suggest?

[01:09:30] Speaker 06:
I'm not sure what the overall pre-tax.

[01:09:32] Speaker 08:
Higher or lower than the 15-year-old one?

[01:09:46] Speaker 06:
Your Honor, I could get that for you, but I'm not sure it's standing here today.

[01:09:50] Speaker 06:
I can tell you that the rate of return on equity is 16.4%.

[01:09:54] Speaker 06:
Is 16.04%, which is higher than that.

[01:09:57] Speaker 06:
Not 04, 40.

[01:09:59] Speaker 06:
I'm just reading from the fur quarter.

[01:10:01] Speaker 06:
Oh.

[01:10:03] Speaker 06:
Perhaps my memory is transposing those two numbers.

[01:10:05] Speaker 06:
But nonetheless, it's higher than the rate of return.

[01:10:10] Speaker 06:
So if we're comparing apples to apples and not apples to oranges, which they recognize they're doing,

[01:10:15] Speaker 06:
If we're comparing apples to apples, today's conditions give you an even higher rate of return than what they're trying to use as evidence to argue this point.

[01:10:24] Speaker 08:
Well, even there, Transco would like to make more money than it had made in the past.

[01:10:27] Speaker 08:
This wasn't a resolution by FERC that you're correct.

[01:10:30] Speaker 06:
Sure, and nor do we have any assurance that their calculation is correct.

[01:10:34] Speaker 06:
That's why I say that these calculations become real battles at FERC.

[01:10:39] Speaker 06:
because everybody brings in their experts.

[01:10:42] Speaker 06:
You know, people have incentives to try to come out with different things, and FERC has to sort through all that, and it's an extremely time-consuming process.

[01:10:53] Speaker 06:
Well, I understand my red light is on.

[01:10:56] Speaker 06:
Twenty-two minutes.

[01:10:57] Speaker 06:
Yes, unfortunately.

[01:10:58] Speaker 06:
I did want to speak to the additional evidence that was provided on reply by New York,

[01:11:04] Speaker 06:
about the open season brochure.

[01:11:14] Speaker 06:
The way this works is transco shippers are contracting for service, for example, on Atlantic Sunrise.

[01:11:22] Speaker 06:
They're contracting from Pennsylvania all the way down to Alabama and Florida.

[01:11:30] Speaker 06:
They're paying a reservation rate for that entire length of service.

[01:11:36] Speaker 06:
They wouldn't be doing that if they didn't think their primary market was in Florida and Alabama.

[01:11:44] Speaker 06:
And I might add that one of the reasons they're doing that is because they're trying to access the world LNG market, which has extremely high prices.

[01:11:51] Speaker 08:
None of that is in the record.

[01:11:52] Speaker 06:
None of that's in the record.

[01:11:55] Speaker 06:
They submitted it on reply.

[01:11:56] Speaker 06:
We didn't really have an opportunity to address

[01:11:59] Speaker 06:
to address it, and the statements are the bare statements of an individual who works at the New York Public Service Commission, so there's not a whole lot of substance supporting them.

[01:12:12] Speaker 06:
But if... No disrespect intended.

[01:12:16] Speaker 06:
No, no disrespect.

[01:12:17] Speaker 06:
I mean, we're all pressing our points here.

[01:12:19] Speaker 06:
So if, as fur counsel has said,

[01:12:24] Speaker 06:
A shipper, let's say it's Anadarko, is one of the shippers on the Atlantic Sunrise project.

[01:12:32] Speaker 06:
If they wanted, if for some reason they needed to sell gas in New York City, I can't tell you that they can't do it, but what I can tell you is if that gas is sold in New York City from one of the Atlantic Sunrise shippers, the people in Atlantic City are paying the market price.

[01:12:52] Speaker 06:
They are not paying

[01:12:54] Speaker 06:
some Atlantic Sunrise price that necessarily includes the Atlantic Sunrise transportation rate.

[01:13:02] Speaker 06:
They are paying whatever the market in New York dictates.

[01:13:06] Speaker 06:
And there are other pipelines going into New York City.

[01:13:08] Speaker 06:
Transco's not the only one.

[01:13:09] Speaker 06:
And I might add that Transco has another branch of its pipeline that goes into New York.

[01:13:18] Speaker 06:
That's the Lighty Line.

[01:13:19] Speaker 06:
The rate for service on the Lighty Line is different.

[01:13:22] Speaker 08:
So a shipper... What again was the reason for advertising that you can sell in New York?

[01:13:28] Speaker 06:
It was simply to state that there's flexibility, and I believe FERC Order 637 requires some of this flexibility.

[01:13:36] Speaker 06:
So you can segment your service, and you can use what's called secondary rights to get into other places.

[01:13:47] Speaker 06:
I mean, anybody can ship gas anywhere.

[01:13:50] Speaker 06:
But there must be something attractive about it, or you wouldn't be advertising.

[01:13:54] Speaker 06:
Well, it's the ability to flex into New York if you need to.

[01:14:04] Speaker 06:
What it doesn't say is that you get any discount on your Atlantic Sunrise reservation charge if you do that.

[01:14:11] Speaker 06:
If you do that, you're still paying the entire Atlantic Sunrise charge.

[01:14:15] Speaker 06:
So your costs will be higher.

[01:14:16] Speaker 08:
So in a free market, costs will be part of the supply curve.

[01:14:24] Speaker 08:
You will face a demand curve.

[01:14:26] Speaker 08:
It's not just the market price.

[01:14:27] Speaker 08:
The market price is determined by the

[01:14:30] Speaker 08:
crossing of the supply and the demand curves.

[01:14:32] Speaker 08:
So it's going to increase the price in New York.

[01:14:35] Speaker 06:
Well, that assumes they can even get that gas into New York on days where there are peak days where there's a lot of competition for the price.

[01:14:44] Speaker 06:
And what I would say there is that on a peak day in New York, you're not going to get secondary service in New York City.

[01:14:50] Speaker 08:
But shouldn't there have been a footnote to the advertisement saying, ignore

[01:14:56] Speaker 08:
the man behind the screen.

[01:14:57] Speaker 08:
This is actually not true.

[01:14:58] Speaker 06:
I think transgo shippers understand exactly what that means.

[01:15:02] Speaker 06:
Okay.

[01:15:02] Speaker 06:
All right.

[01:15:02] Speaker 06:
Further questions?

[01:15:03] Speaker 06:
Thank you.

[01:15:05] Speaker 06:
Thank you, Your Honor.

[01:15:14] Speaker 08:
Is there any time left?

[01:15:16] Speaker 08:
Okay, so in the absence of time, I only have one question, which I'd like both of you to answer, which is what about this argument that the shippers knew, made by, for counsel that in this particular case, not necessarily in all cases, but in this particular case, they knew that they would have this August proceeding coming up and that they could opt to take whatever

[01:15:43] Speaker 08:
recourse rate is then set in what you would regard as a fair proceeding.

[01:15:47] Speaker 02:
Your Honor, as you noted, the first negotiated rate policy statement, alternative rates policy statement, requires that the rate be available at the time that the negotiations are being entered into.

[01:16:03] Speaker 02:
The arguments that the level doesn't matter makes it difficult to

[01:16:08] Speaker 02:
assume that there is a lack of market power.

[01:16:12] Speaker 02:
And the fact that parties chose to enter into these agreements can't be relied upon, as you explained in your Missouri Public Service Commission case, that FERC must first determine upon the basis of substantial evidence that the pipeline lacks significant market power before they can rely on those agreements.

[01:16:37] Speaker 02:
So may I please just address the speculative nature of statements?

[01:16:42] Speaker 02:
There were a couple of statements made about the record.

[01:16:44] Speaker 02:
I'd just like to provide a couple of sites to the record.

[01:16:49] Speaker 02:
Judge Wilkinson asked what the most recent financial data was.

[01:16:53] Speaker 02:
Actually, if you look at joint appendix at 53, the most recent financial data was provided by the state agencies.

[01:17:00] Speaker 02:
FERC Council also stated that the precedent agreements were not before it.

[01:17:05] Speaker 02:
In fact, if you look at Joint Appendix at 13, 164, and 229, the precedent agreements were provided to FERC.

[01:17:13] Speaker 02:
They were provided under SEAL, but FERC certainly had those precedent agreements before it at the time it was making the determinations here.

[01:17:21] Speaker 02:
And as to the speculation, I'd like to bring the Court's attention to Joint Appendix at 296, where

[01:17:30] Speaker 02:
In the order below, FERC stated, as we have previously stated, a project driven primarily by marketers and producers does not render it speculative.

[01:17:39] Speaker 02:
Marketers or producers who subscribe to firm capacity on the proposed project on a long-term basis presumably have made a positive assessment of the potential of selling gas to end users in a given market

[01:17:49] Speaker 02:
and have made a business decision to subscribe capacity on the basis of that assessment.

[01:17:54] Speaker 02:
Here, Transco designed its project to meet the growing demand for natural gas in the mid-Atlantic and southeastern markets.

[01:18:00] Speaker 02:
That's North Carolina, and that's affirmed by the next Paragraph 30 as well.

[01:18:04] Speaker 02:
I thank you for your attention.

[01:18:14] Speaker 08:
Judge Garland, if I understand your question, you're asking about the upcoming rate case or the... Yes, and the particular argument made by FERC counsel that we don't have to decide everything here about the future.

[01:18:25] Speaker 08:
We only have to decide that in this case, somewhat idiosyncratic because the Section 4 proceeding was coming up, and that New York consumers would get the benefit in the sense of refunds if

[01:18:40] Speaker 08:
lower rate would have been decided so when this particular deal was negotiated it was negotiated in the shadow of a maybe at that moment too high rate but one which you had some prospect would

[01:18:58] Speaker 08:
not you, but the shippers that would go down in section four and that they would get the benefit through a refund.

[01:19:06] Speaker 08:
Sure.

[01:19:06] Speaker 08:
And that controlled the market power here, and it's under those understandings that they pick and negotiate.

[01:19:12] Speaker 05:
Sure.

[01:19:14] Speaker 05:
Whatever the reasoning of what you just said, whether it's logical in some sort of abstract sense, it certainly doesn't comply with the statutory obligation to protect consumers from market power in Section 7 proceedings.

[01:19:28] Speaker 05:
So I think that's what you just said fits with what I just said, and I don't think that's allowed under the Natural Gas Act.

[01:19:33] Speaker 08:
Why aren't they protected if the normal rule

[01:19:37] Speaker 08:
which there's not a challenge to, which is we use the old rate.

[01:19:42] Speaker 08:
Your challenge is particularly about this really, really old rate.

[01:19:46] Speaker 08:
You're not challenging the whole policy of, am I right?

[01:19:50] Speaker 05:
No, not in every circumstances.

[01:19:53] Speaker 05:
There may be circumstances where it's appropriate and rational to apply policy.

[01:19:55] Speaker 08:
So her argument is that in this case, it was appropriate even so to not change it immediately in the section seven proceeding,

[01:20:06] Speaker 08:
but to know it was coming in the next proceeding and in those circumstances they knew that they were negotiating in the shadow of what would be a decent

[01:20:18] Speaker 05:
cost of service recourse rate.

[01:20:21] Speaker 05:
So I think the answer is that the rate proceeding could take years.

[01:20:26] Speaker 05:
They would be subject to those inflated recourse rates with no certainty.

[01:20:31] Speaker 05:
And then I think that related to that is how that fact is going to affect sophisticated negotiations between parties and that it's likely to dissuade them that if they know that FERC is going to use an irrationally high

[01:20:44] Speaker 05:
initial recourse rate adopt one in a Section 7 proceeding, that that's going to affect the negotiations and it's going to allow TransCo to exercise the market power that the Natural Gas Act presumes.

[01:20:56] Speaker 08:
So I take, and to take I think one or both of my colleagues' questions, if we were to, what would we do here?

[01:21:04] Speaker 08:
That is, what would FERC do if you had your way?

[01:21:09] Speaker 05:
So FERC has options, and they've certainly used it as a sort that we suggested in evidentiary proceeding at one point, but we're trying to recognize that FERC can take rational action to pursue its consumer protection obligation in terms of market power.

[01:21:22] Speaker 05:
So we don't want to dictate that, but we think there are mechanisms, including an evidentiary proceeding, that's an option.

[01:21:28] Speaker 05:
But I think you're honing in on redressability and traceability again.

[01:21:33] Speaker 05:
And I believe that when FERC was up here that it said that it had the discretion and certificate proceedings to redo the recourse rate and vacate the negotiated agreements.

[01:21:44] Speaker 05:
And if that's what FERC has said, I mean, traceability and regressibility are done.

[01:21:47] Speaker 05:
If they had that discretion and they did not exercise it in our favor, then we are certainly harmed.

[01:21:52] Speaker 08:
What would you, if you had your way on the merits, what would they do?

[01:21:57] Speaker 08:
They would set a new recourse rate and the shippers could

[01:22:03] Speaker 08:
We then have to renegotiate the deal.

[01:22:07] Speaker 05:
Yes.

[01:22:08] Speaker 05:
No longer in the situation where the pipeline power or the market power that the Natural Gas Act presumes could be acting.

[01:22:17] Speaker 05:
Because in those circumstances, FERC would be satisfying its policy that recourse rates need to remain integrity and not become outmoded.

[01:22:26] Speaker 05:
And when those situations exist, that is how FERC has

[01:22:29] Speaker 05:
That is the policy that allows FERC to accept negotiated rates with a presumption that they were not the result of the exercise of market power.

[01:22:38] Speaker 08:
And how would this new recourse rate proceeding take less time than the Section 401 that's already begun?

[01:22:44] Speaker 05:
So, I mean, again, I would in some ways leave that to FERC's rational exercise of its discretion, how it goes about doing this.

[01:22:51] Speaker 05:
FERC certainly has shown flexibility in other instances.

[01:22:54] Speaker 05:
And the more fundamental answer is administrative convenience is never an answer for why you do not have to fulfill your statutory duty.

[01:23:02] Speaker 05:
So there are trade-offs in many areas, but the trade-offs cannot be we have these statutory duties to allow for abundant supply and we have to protect consumers from market power.

[01:23:14] Speaker 05:
And for reasons of administrative convenience, we're only going to fulfill one of those duties.

[01:23:19] Speaker 05:
We're not going to do the consumer production against market power.

[01:23:22] Speaker 05:
So I'm asking how you do both of those statutory

[01:23:24] Speaker 05:
I think the answer is hustle.

[01:23:29] Speaker 08:
Yes, but how do you do that in a shorter amount of time than happens in the section four?

[01:23:36] Speaker 05:
I mean, I think a paper hearing

[01:23:39] Speaker 05:
I just think that there's certainly a lot of flexibility that FERC would have to, in terms of its exercising its discretion to come up with some compromise.

[01:23:48] Speaker 05:
Again, you can compromise between the need to bring these projects into service due to the fact of FERC's other obligations, but you can't, it has to be, it has some rational

[01:24:03] Speaker 05:
explanation for how it's also fulfilling its consumer protection obligation in terms of protecting them against market power without offering a solution.

[01:24:10] Speaker 05:
But I am arguing that the Natural Gas Act demands one.

[01:24:15] Speaker 05:
The President of the Supreme Court in this court demands one in terms of specifically saying that Section 7 is a proceeding where you do need to protect against market power.

[01:24:23] Speaker 05:
So the answer is we won't do that now.

[01:24:26] Speaker 05:
We'll do it later in the General Four rate case is not a legally permissible answer.

[01:24:31] Speaker 04:
Your retressability argument seems to me to be counterfactual.

[01:24:37] Speaker 04:
So in 2014, there's a negotiation between Transco and Shippers.

[01:24:45] Speaker 04:
And let's suppose Transco says, we believe that you should pay us 15 cents per unit for the right to use our pipeline.

[01:25:01] Speaker 04:
and we'll give you that price over 20 years.

[01:25:07] Speaker 04:
And we think it's fair because the recourse rate that FERC would set today, if there were a section seven proceeding, would be 15 cents based on what our discount rate of return would be, et cetera, et cetera.

[01:25:29] Speaker 04:
The shippers could say, that's hogwash.

[01:25:33] Speaker 04:
We think that FERC would set the recourse rate at 10 cents.

[01:25:39] Speaker 04:
And we think that your 15 cents number is ridiculous.

[01:25:47] Speaker 04:
We're not going to accept that as a negotiated rate.

[01:25:52] Speaker 04:
And we'll take our chances and just

[01:25:57] Speaker 04:
um, except whatever the recourse rate is that FERC sets, but they didn't do that here.

[01:26:06] Speaker 04:
They agreed to a negotiated rate and now that it's been agreed to, even if at this stage we were to say that that recourse rate that had been proposed by Transco was, you know, not just unreasonable.

[01:26:27] Speaker 04:
It doesn't change the fact that at the time, I mean, the shippers didn't know that FERC was going to accept that rate or not.

[01:26:38] Speaker 04:
They could have taken their chances.

[01:26:40] Speaker 04:
They didn't want to take their chances.

[01:26:42] Speaker 04:
They were satisfied with what the outcome of their negotiations were.

[01:26:49] Speaker 04:
Why is it that even if we find that the recourse rate that was proposed in the negotiations was too high, and that FERC shouldn't have approved it, that that means that we go back and unscramble this egg?

[01:27:08] Speaker 05:
So the answer to that is that at the time of the negotiations, all of these sophisticated parties would have known about FERC's policy.

[01:27:15] Speaker 05:
What FERC is advertising repeatedly and emphasizing is that it consistently applies its policy.

[01:27:20] Speaker 05:
It believes that's a defense, that it consistently applies its policy.

[01:27:23] Speaker 05:
But of course, that led shippers to know when they were negotiating this race that they were extremely unlikely to be able to get FERC to move off that position.

[01:27:32] Speaker 05:
And so I believe that's the answer to that question.

[01:27:34] Speaker 04:
So they knew in 2014 that

[01:27:37] Speaker 04:
When Transco proposes 15 cents, based on my hypothetical, based on the policy that FERC would buy that lock, stock, and barrel,

[01:27:50] Speaker 04:
How would they know that?

[01:27:51] Speaker 05:
Because FERC has projected that it will consistently apply this policy.

[01:27:56] Speaker 05:
And so you're a sophisticated shipper sitting there thinking about that issue.

[01:28:02] Speaker 05:
And the question is whether you will pay.

[01:28:04] Speaker 05:
So assume in an irrational degree in terms of that rate of return, the shippers will pay up until that in terms of their negotiated rate to avoid being subjected to that irrationally high rate of initial recourse rate.

[01:28:23] Speaker 00:
All right.

[01:28:25] Speaker 08:
Okay, we'll take another submission.

[01:28:28] Speaker 08:
Thank you.