[00:00:01] Speaker 05:
Case number 16-1433, San Diego Gas and Electric Company Petitioner versus Federal Energy Regulatory

[00:00:48] Speaker 00:
Thank you, Your Honors.

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May it please the court, Kevin King for the petitioner, San Diego Gas and Electric.

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Your Honors, two straightforward steps resolve the merits of this case.

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First, as FERC found at pages eight to nine of the appendix, the South Orange County project meets the criteria for the abandonment incentive, the nexus and reliability tests, which is to say that the project, if built, would enhance the reliability of the electric grid in Southern California,

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and that the abandonment incentive that we've sought here is tailored to the permitting risks and environmental risks faced by the project.

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Second, because the project meets those criteria, it is entitled to the benefit prescribed by the abandonment incentive, which is recovery of 100 percent of the prudently incurred costs of the transmission facility.

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So the agency had no discretion whatsoever, even if

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there was no nexus?

[00:01:49] Speaker 00:
No, Your Honor, I wouldn't say that.

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The agency found here that there's a sufficient nexus between, on the one hand, the abandonment incentive that we've requested, and on the other hand, the environmental permitting, citing risks faced by the project.

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But that's my point.

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As I understand your two steps, then the agency has no discretion, regardless of its view of the nature of the purported nexus.

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That's right.

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There are two steps.

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There's the reliability step, which it's undisputed was met here, that this project is going to make the electric grid a more reliable, less subject to blackouts in Southern California.

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And having done that, then the agency asked the question, and this is in 18 CFR 35.35 D1 Romanet 6, which you can find in page A4 of our statutory and regulatory appendix.

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It asked the question, is the requested incentive, here the abandonment incentive,

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tailored to the risks and challenges faced by the applicant in developing the project.

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And FERC answered that question in the affirmative.

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It said, yes, this project faces real substantial risks that it might have to be abandoned for reasons that are totally outside of San Diego Gas and Electric's control.

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At least in the orders, and I think it is clearer in the order to dying reconsideration, FERC says, sort of seems to do kind of a two-tiered nexus analysis.

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And it says, yes, there is an uncertainty.

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There's facing uncertainty.

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But under the regulation, there's also this reference to tailoring the incentives to demonstrable risk or challenges faced by this applicant.

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And it seems that that's where FERC is saying, you know, the tailoring, the general type of risk is there's a risk of regulatory uncertainty check.

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But that doesn't exhaust the nexus analysis, at least as FERC is doing it in this case.

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And what's your response to that?

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Sure.

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So I think that does get right to the heart of the case, Your Honor.

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And our response would be that the regulations set out a two-part test reliability and a project-level nexus test.

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The nexus test does not look, as FERC's brief would have it, at each individual component of a project's costs.

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Instead, it looks at the risks and challenges faced by the applicant in developing

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the project.

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If you look, for example... All right, if you set aside the... I understand your argument about the project is the unit, and the argument is that if there are risks faced by the project, the project as a whole is subject to the incentive.

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If the risks... If there aren't the covered risks, it's not.

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If we were to rule against you on that, and to read the language that the total package of incentives has to be tailored to address the demonstrable risks or challenges faced by the applicant,

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in undertaking the project and were to read that as giving some leeway for this kind of treatment.

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Other than the argument, I understand, and I'm not saying I don't agree, but just to analytically clarify, other than the argument about the project being the only unit that FERC can look to and grant any incentive, what would be your argument?

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Why they couldn't have read the, and didn't read the regulation that way here?

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We hope you agree with us on the project, but even if you don't on that point, there are several other reasons why FERC is bound by its regulations and cannot do what it did here.

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And let me walk through those one at a time.

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To start with, the regulations expressly give utilities two procedural options to seek incentive rate treatment.

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The first is an ahead-of-time declaratory order petition of the kind that we filed here.

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We're going to seek incentive eligibility in advance.

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The second, and again you'll find this in 3535D, is an after the fact section 205 rate filing where the utility comes in and it requests incentive treatment after a product has been abandoned for reasons outside its control.

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And so the regulations expressly envision that a utility can come in after a project has been abandoned, after all of its costs have been expended, and nevertheless get this 100 percent abandonment incentive.

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Not 90 percent, as FERC says in its brief or any other proportion, but 100 percent.

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Where does that 90 percent figure come from?

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The 90% is, and this is sort of... Because they took the amount that you, the 50% of what you had already expended and then compared that against the projected entire cost of the project.

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Is that the idea?

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I'll let my colleague for FERC do the math, but yes, that's my understanding of where FERC got that number from, and of course it wouldn't be 90 percent if, for example, we had to abandon the project tomorrow or next week, and it'd be a much higher, I'm sorry, much lower percent.

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Totally hypothetical, because that assumes that there will be no abandonment, in which case it doesn't matter whether you get 50 percent or 100 percent or whatever, you're going to recover

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the cost of the project through a rate proceeding, right?

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That's right, Your Honor, yes.

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So Mr. King, you argue that FERC's reading effectively eliminates the Section 205 only route, but as I read the regulation, the two procedural avenues are available for the whole list of seven plus other incentives, and

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So really, the question is, why isn't the availability of rate-making-only requests for incentives still material, viable, worthwhile, and not rendered a nullity, given, for example, that you might only seek accelerated depreciation in rate-making, but maybe for this kind of abandonment incentive, it makes more sense to, in fact, it might be required to seek it

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in a declaratory order.

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Well, I'd say a few things in response to that, Judge Pillard.

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First off, as you say, the two-tier structure, the reliability and nexus tests and the Section 205 option and the declaratory option, all those apply to the entire list of incentives, which means all of the incentives, the seven plus,

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may be acquired through either of those two procedural routes.

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There's nothing in the regulation whatsoever that says, okay, if you're going to seek the abandonment incentive, you've really got to take the first route.

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I agree, that's what FERC was trying to say in its orders here, but that's inconsistent with the regulation.

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And that's the Christopher case from the Supreme Court.

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It says an agency is bound by its regulations.

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Here, its regulations say when you meet the reliability and nexus tests, you get 100 percent.

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Instead, they're trying to give us 90%, as they say in their brief.

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That just won't wash.

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So I guess that's one response.

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Another response is that here we're talking about a sort of a fact-specific nexus test.

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That's what FERC argues in its brief.

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But that's not at all what FERC did in its orders.

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If you look at pages 19 to 20 of our reply brief, there's a series of bullets where we quote from FERC's opening order and its rehearing order.

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And you'll see in those bullets in 19 to 20

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a series of statements that say, from FERC, 100 percent recovery is not available, categorically.

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prior to the date of a project-specific order.

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We are only going to allow 50 percent recovery prior to the date of that order.

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That requirement is nowhere in FERC's regulations.

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Indeed, it's flatly inconsistent with the 205 option I've described.

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It's flatly inconsistent with the project-level understanding of how the NEXUS test works.

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It's flatly inconsistent with FERC's own precedent, as we develop in our brief.

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So let me just go back to this earlier point, so I'm clear what your position is.

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Your point is once the criteria in terms of reliability and nexus are met, you get your client is entitled to the 100%.

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And you're saying the nexus test is limited by

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I need to be clear about this, the precise words in the regulation, even though the discussion of the regulation says the Commission is not setting out specific factors.

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It's going to look at this on a case-by-case basis.

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And I know your argument about that's completely contrary to what the statute was talking about and what FERC did in responding to Section 219, but I just want to be clear about that.

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That's why I wanted to be certain that you see FERC has no discretion

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after it makes the first two findings.

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I appreciate the question because I think it actually will help clarify exactly what we're arguing here.

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We're not arguing that FERC has no discretion.

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Indeed, FERC has significant discretion in applying the nexus test, but it has to apply that test in a manner that's consistent with what the regulations say.

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and consistent with what FERC has said about it in the past.

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So, for example, it's not just the regulation, but if you look at Order 679A, Paragraph 21, you'll see there FERC on rehearing of Order 679 was expounding on, well, what does this NETSIS test mean?

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What is the structure that we're going to apply on this case-by-case basis?

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And what it says is, and I quote,

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The NEXUS test evaluates, quote, how the requested incentives address the risks and challenges faced by the project.

[00:11:35] Speaker 03:
Okay, so here FERC says, your client acknowledged that it was going forth with this project without any, I don't know if these were a guarantee, but assurance that it was going to qualify for the 100 percent.

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That's right.

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We did say we didn't have any assurance, but the context for that statement is important.

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We didn't have assurance that we'd be able to recover the cost through our rates because we didn't have any assurance that, for example, the California Public Utility Commission would give us the certificate of public necessity and convenience.

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We'd need to build it.

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So we weren't talking about the abandonment incentive when we made that assurance.

[00:12:18] Speaker 03:
Is that after your project was included in the state plan?

[00:12:24] Speaker 00:
It was after that we were included in the California Independent System Operator Plan, which is a different body than the State Public Utility Commission.

[00:12:33] Speaker 03:
Right.

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But I mean, the state, in effect, had acknowledged that this was a plan that would come within the whole purpose of the statutory revision.

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I'm not sure I agree with that.

[00:12:48] Speaker 01:
The California independent system operator has said this is the type of plan we need to improve the electric grid in Southern California, but the state... But doesn't that, that triggers the reliability related, makes you eligible under the reliability related factor, but it doesn't remove potential abandonment risk.

[00:13:06] Speaker 00:
That's absolutely right.

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The abandonment risk was still very significant.

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What about now?

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Because I understand that California has made the approval, but there's still some local and quite vehemently opposed localities that need to be cleared.

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What's the status right now of the risk?

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So I'll start with what's in the record, and then if the court allows, I'll go outside the record just to give you facts that bear on what's going on right now.

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So to start with what's in the record, there are a series of permits that are necessary for this project to go forward.

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Some come from the state of California, from the Public Utilities Commission.

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Others come, for example, from the city of San Juan Capistrano, where the project is located, or under the National Environmental Protection Act, I hope I'm getting that right, because part of the project crosses the Marine Corps base at Camp Pendleton.

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So now I'm going to go outside the record.

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That's what we said in advance, and the briefs do show that we got the permit from the State Utility Commission.

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The City of San Juan Capistrano, where this project is located, where we're going to improve the substation, they have sued the Public Utility Commission in federal court challenging the grant of our permit.

[00:14:16] Speaker 03:
So let me ask you, Justice Counsel, sorry to interrupt, but how can we rely on any of this if it's not part of the record that was before the agency?

[00:14:24] Speaker 00:
You could look at this only if you were thinking about standing or something other than the merits of the case.

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Right.

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You can look outside the record for standing.

[00:14:31] Speaker 03:
I think our standing here is... But I didn't think that was the nature of Judge Pillers.

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Question.

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Is this within the city limits of San Juan Capistrano?

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I believe it is, although I'd have to check with my client.

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I'd be happy to file a 28-J letter on it.

[00:14:45] Speaker 02:
Because that's a kind of quaint little city right on the Pacific Ocean, right?

[00:14:52] Speaker 02:
I didn't think there was any room for a transmission facility there.

[00:14:57] Speaker 00:
I think you'll find if you look at the case that I mentioned is now in the Ninth Circuit, number 17-56693, and you'll see that there are arguments to that effect in the briefing in that case, Your Honor.

[00:15:08] Speaker 03:
What I'm trying to focus on here is that in any project there are risks as to whether you will get the necessary permits and authorizations that you need.

[00:15:21] Speaker 03:
So can it be that any project

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that is included in the state plan is going to be eligible for the abandonment recovery.

[00:15:34] Speaker 00:
The answer to that question is yes, Your Honor, because the plan is not the state's plan.

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The plan is not the plan of the entities giving out the permits.

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The plan is of a different entity, the independent system operator.

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And I would say here, FERC made a finding.

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It pages 89 of the appendix that this particular project stands apart from other projects because it faces special and substantial, I think is the word FERC used, permitting risks.

[00:16:00] Speaker 02:
Mr. King, before you sit down, there's one thing that

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It sort of puzzles me.

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Maybe I should save this question for the Commission, but I'll pose it to you.

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The Commission asks for our deference in interpreting its regulation.

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And I've looked through the regulation, and I don't find any ambiguity that they're interpreting.

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I'm looking at the regulation now.

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that the incentive-based rate allows recovery of 100% of prudently incurred costs of transmission, et cetera, et cetera.

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If the facilities are canceled or abandoned due to factors beyond the control of the public utility, what ambiguities for interpreting there?

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I think that there's none in our view.

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The regulation is unambiguous.

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When you meet the two tests, as FERC found that we do here, you get 100 percent recovery, not 90 percent or 78.4 percent.

[00:17:10] Speaker 01:
Just following up on the question I had about the permitting.

[00:17:18] Speaker 01:
One of the questions I have is, were you happily to get that final approval, do a NEPA analysis and have the city of San Juan Capistrano give you the go ahead, the case would become moot, would it not, because this is about risk of abandonment

[00:17:43] Speaker 01:
based on factors beyond San Diego gas and electrics control, and if those kinds of hurdles that the regulation speaks to fall away, then you're not going to need it anyway.

[00:17:57] Speaker 00:
That's right.

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The case could become moot at some juncture, but that's, I would submit, way off in the future because here we are, we're in a fight in federal court in California over whether our permit is valid and whether there's going to be an injunction to stop us from building the project.

[00:18:11] Speaker 00:
But years down the road, there's the NEPA process, so it's going to be a long time.

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This is a gigantic project, a $300 million investment.

[00:18:18] Speaker 00:
So if there ever were a day where this case could become moot, it's way off in the future.

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But really what this case is about goes to Judge Randolph's question, which is an agency is bound by its legislative rule.

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Right.

[00:18:29] Speaker 01:
We understand that.

[00:18:30] Speaker 01:
You've briefed that really quite well.

[00:18:33] Speaker 01:
The other question I have is about remedy.

[00:18:36] Speaker 01:
If you prevail,

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What's the scope and implications of that as you see it?

[00:18:41] Speaker 01:
Every other transmission investor that has been only given order eligibility for this abandonment incentive from the date of their declaratory order forward, all would be subject to the same treatment.

[00:18:59] Speaker 00:
I think if there are cases still in the pipeline and that haven't reached a final non-appealable judgment, this Court's interpretation of the regulation would apply in those cases.

[00:19:08] Speaker 00:
So, for example, in the cases involving our interveners, Pacific Cast and Electric, Southern California Edison, they have cases that are at the rehearing stage before FERC right now.

[00:19:16] Speaker 00:
If this Court were to agree with our interpretation, we hope it will, it would apply in those cases.

[00:19:22] Speaker 00:
But if they're cases from three years ago, no, it wouldn't apply in those cases.

[00:19:25] Speaker 01:
What if we thought that FERC could interpret the regulation the way it says it has, but that it hadn't been sufficiently clear in giving you notice of that fact, then the remedy might be more nuanced or not?

[00:19:46] Speaker 00:
I think if FERC hasn't, if FERC has departed here from what it did for a decade and all those prior orders that we cite, the remedy would be vacatur and remand.

[00:19:56] Speaker 00:
And that's the TMA.

[00:19:57] Speaker 00:
For you.

[00:19:58] Speaker 00:
I'm sorry?

[00:19:58] Speaker 00:
For you.

[00:19:58] Speaker 00:
For us.

[00:19:59] Speaker 00:
Yes, for us.

[00:19:59] Speaker 00:
That's right.

[00:20:00] Speaker 01:
But not of the rule or?

[00:20:02] Speaker 00:
I don't know as a rule for other cases.

[00:20:04] Speaker 00:
No, I'm not so sure, right?

[00:20:05] Speaker 00:
It would depend in the other cases how much notice that the other parties had.

[00:20:09] Speaker 00:
And this is, again, just assuming, arguing that you don't agree with our interpretation of the rule.

[00:20:13] Speaker 01:
Right.

[00:20:13] Speaker 01:
You're more generalistic.

[00:20:15] Speaker 00:
Right.

[00:20:15] Speaker 00:
So it would be an us-only type remedy.

[00:20:17] Speaker 00:
Yes.

[00:20:19] Speaker 03:
All right.

[00:20:19] Speaker 03:
Why don't we hear from the commission?

[00:20:34] Speaker 05:
Good morning.

[00:20:35] Speaker 05:
I'm Carol Banta for the Commission.

[00:20:37] Speaker 05:
Before I sit down, I do want to get to the question about the 205 proceedings that Judge Pillard was asking, but I think I'll start with talking about the regulation.

[00:20:45] Speaker 05:
And I'm looking at the full version that's at pages A8 and A9 of the addendum to FERC's brief, the unedited original GPO, I guess, version.

[00:20:59] Speaker 05:
To be clear, before we get to the 100% language in D6,

[00:21:04] Speaker 05:
D6 is the list of all the different incentives that are available under D. But we begin with the main body of D.

[00:21:14] Speaker 05:
that says the commission will authorize any incentive-based rate treatment as discussed provided that the proposed incentive-based rate treatment is just and reasonable and not under the discriminatory preferential standard 205 206 and it goes on to say that the burden is on the applicant to explain how and to demonstrate how it fits and to demonstrate those risks and challenges and then it says

[00:21:37] Speaker 05:
that the applicant must demonstrate that the total package of incentives is tailored to address the particular risks of challenges and that the resulting rates are just and reasonable.

[00:21:48] Speaker 05:
And I'd also go back to, if you look up at section C of 35.35, again, all rates under this have to be just and reasonable.

[00:21:57] Speaker 05:
That's also in the statute, section 219D, which is on A6 of the addendum.

[00:22:02] Speaker 02:
And just another overarching principle that's in both 219A and 3535A is that the purpose is... And adjusting reasonable rate according to the regulation allows for 100% recovery of prudently invested or spent funds in a project that was abandoned through no fault of the utility.

[00:22:28] Speaker 05:
from the time the incentive is granted is how... No, it doesn't say that.

[00:22:33] Speaker 02:
Where does it say that from the time of the order?

[00:22:36] Speaker 05:
Well, it says from the very beginning that no incentive from paragraph one

[00:22:47] Speaker 05:
The rule doesn't grant any incentives to any public utility.

[00:22:50] Speaker 05:
It will allow them when justified, but you do have to come in.

[00:22:53] Speaker 05:
You have to ask.

[00:22:53] Speaker 05:
You have to come in.

[00:22:54] Speaker 05:
And so, but I would also point the Commission, or point to the Court, to paragraphs, I believe, 21 to 26, but particularly 26 in Order 679, where the Commission is talking about the entire reason for these incentives and that not every incentive will be available for every new investment.

[00:23:13] Speaker 05:
And it goes back to what I was saying in 219 and 3535, that the purpose of the incentives is to benefit consumers.

[00:23:20] Speaker 05:
And in paragraph 26 of order 679, the commission talked about how we believe these incentives.

[00:23:27] Speaker 02:
I would suppose that when a, like San Diego or any other company makes an investment decision, they're doing it on the basis of the prospect

[00:23:42] Speaker 02:
of earning a profit, right?

[00:23:47] Speaker 02:
I mean, why else do it?

[00:23:49] Speaker 02:
So the incentive is recovering 100 percent of the cost of the project.

[00:23:57] Speaker 02:
That's the incentive.

[00:23:58] Speaker 02:
And that is derived not from an order of fur, it's derived from the regulation.

[00:24:03] Speaker 02:
And it's also derived

[00:24:04] Speaker 02:
from the general rate practice that if you prudently invest a billion dollars, that's going to be part of your rate base if the thing is up and running.

[00:24:18] Speaker 05:
And the Commission's policy has, for a long time, been, if it doesn't get up and running, the cost recovery for that is 50-50, which is another thing that the Commission decided, balancing the interests of investors and consumers.

[00:24:30] Speaker 02:
Where's the 50-50 in this regulation?

[00:24:32] Speaker 02:
Well, no, it's the existing.

[00:24:33] Speaker 02:
Well, show me the 50-50 in this regulation.

[00:24:36] Speaker 05:
It still exists.

[00:24:37] Speaker 02:
Well, we have a regulation, because there is a statute that required you to promulgate.

[00:24:43] Speaker 05:
Well, for incentives, but 50-50 was never an incentive.

[00:24:47] Speaker 05:
It's basic abandoned plant cost recovery that still exists.

[00:24:50] Speaker 05:
I would... So, Ms.

[00:24:52] Speaker 01:
Banja, in the order, you were pointing us to the order's language, and it seems like a lot of the... I mean, the entire rationale for the limitation imposed here is that an incentive

[00:25:10] Speaker 01:
is only functional as an incentive if it precedes the incentivized conduct or if it's assured before the incentivized conduct.

[00:25:22] Speaker 01:
It seems like as you've articulated the logic of that limitation, it's actually quite categorical.

[00:25:27] Speaker 01:
In other words, an investment that's made before an order securing

[00:25:31] Speaker 01:
the abandonment incentive is inexorably not going to be subject to recovery.

[00:25:37] Speaker 01:
And I know in your brief you go on and you say, well, there could be circumstances in which it would be.

[00:25:44] Speaker 01:
Can you tell us more about that?

[00:25:46] Speaker 01:
Because it's hard to see, given just the logic of the position about you don't know until you know, so you got to come ask.

[00:25:56] Speaker 01:
And when we tell you the answer, then you're going to be incentivized.

[00:26:00] Speaker 05:
And I'll give you a couple of examples, but I do want to point out that in this case in particular, the commission was particularly focused on the facts before it and mentioned, I think, four or five different times in the hearing order that this is a case where it was four years.

[00:26:17] Speaker 05:
So it's not one of those cases where it's maybe 60 days and they're asking for the date when they filed or they're asking for some other date.

[00:26:24] Speaker 05:
The commission left the door open to consider

[00:26:26] Speaker 05:
that in appropriate cases.

[00:26:28] Speaker 01:
But when you say case by case, you have to have in mind a category of reasoning that would make a difference in a different case.

[00:26:36] Speaker 01:
And so I'm actually trying to probe that.

[00:26:39] Speaker 01:
What is a good example of a case in which somebody exercises only the Section 205 rate-making procedural opportunity to request an abandonment incentive, and it would be granted?

[00:26:52] Speaker 05:
I'll give you two that the petitioners have cited many times, although not for that.

[00:26:58] Speaker 05:
Neat West and Alete, those two cases that they cited, A-L-L-E-T-E.

[00:27:03] Speaker 05:
To be clear, and I know this has been confusing, the 205, and Judge Pillard, you hit on this exactly with

[00:27:09] Speaker 05:
the overarching comments in order 679 going to all the different kinds of incentives, the construction work in progress, various other costs that you can get during the course of construction, things like that.

[00:27:22] Speaker 05:
So the commission said you can do a declaratory order or you can do a 205.

[00:27:25] Speaker 01:
Construction work in progress, could you even do that by 205 or would you have to do that by declaratory order?

[00:27:31] Speaker 01:
Construction work in progress.

[00:27:33] Speaker 05:
Well, it's the opposite.

[00:27:34] Speaker 05:
You wouldn't get much from doing declaratory because you don't get to put in your rates until you do 205.

[00:27:40] Speaker 05:
So the examples I cited, the Neat West and Elite, I'll give you the details on those cases, both of them, they were not petitions for declaratory orders.

[00:27:48] Speaker 05:
They were both Section 205 filings, and this is not the 205 filing at the end when something has been abandoned.

[00:27:53] Speaker 05:
This is the 205 filing to implement incentives.

[00:27:57] Speaker 05:
In the Neat West Next Era case, that was a Section 205 that in addition to asking for the abandonment incentive, if that happened, at that point it hadn't been abandoned.

[00:28:08] Speaker 05:
They were asking for it going forward.

[00:28:09] Speaker 05:
They filed their 205 filing two and a half months after they got approved in their regional plan.

[00:28:17] Speaker 05:
They asked for abandonment.

[00:28:18] Speaker 05:
They asked for pre-commercial expenses.

[00:28:20] Speaker 05:
They asked for a hypothetical capital structure.

[00:28:22] Speaker 05:
They asked for a return on equity and a regional transmission organization adder.

[00:28:28] Speaker 05:
The commission actually denied the return on equity because it was disputed by rate payers.

[00:28:32] Speaker 05:
So it didn't even get all the incentives it asked for.

[00:28:35] Speaker 05:
But it did get the other four.

[00:28:38] Speaker 05:
In ALIT, I think they filed fairly soon after their approval in the regional plan.

[00:28:44] Speaker 05:
They asked for abandonment.

[00:28:46] Speaker 05:
and construction work in progress.

[00:28:49] Speaker 01:
So I guess my question is, how in need does the commission contend with the rationale that it imposed on San Diego Gas and Electric and distinguish its grant of the abandonment incentive in that circumstance from its partial denial of it to San Diego Gas and Electric?

[00:29:11] Speaker 05:
And I think, first of all, it didn't

[00:29:15] Speaker 05:
It didn't address the merits of it because nobody protested the abandonment.

[00:29:19] Speaker 05:
Nobody raised that issue.

[00:29:21] Speaker 05:
There was no record there what costs were before or after.

[00:29:24] Speaker 05:
There was just no discussion of that.

[00:29:26] Speaker 05:
Neat West put the language in their request that they get.

[00:29:30] Speaker 05:
uh... the two-and-a-half months again they filed very soon after they met the reliability nexus of signing this agreement with the regional i forget who it was uh... they signed very soon but there's not nothing uh... at least mention in the order about what costs they're talking about what they had already spent by that point no repair contested that whereas i think the state disputed

[00:29:58] Speaker 05:
one of the other incentives and the Commission gave it and then a variety of parties disputed the return on equity which the Commission discussed at length.

[00:30:04] Speaker 01:
So is the Commission's position that where nobody protests that it doesn't have to apply that limitation that is in its view based on a policy of inherent to the nature of an incentive that it should only become available after it's been sought in a declaratory order?

[00:30:25] Speaker 05:
The dividing line rationale?

[00:30:29] Speaker 05:
I think not.

[00:30:29] Speaker 05:
I mean, the Commission answered a similar challenge in the PJM 2 case, but until these orders, I think the Commission hadn't really grappled with exactly how the rationale for incentives and the general policy rationale should be.

[00:30:43] Speaker 05:
And I think it has been consistent afterward.

[00:30:47] Speaker 05:
But in many of the early cases, they were declaratory orders that were filed.

[00:30:52] Speaker 05:
filed very soon in the process when there weren't a lot of costs and no one was disputing whatever those costs might have been.

[00:30:58] Speaker 02:
Is there a prerequisite to filing a section 205 that one of two things has occurred, that the project has formally been abandoned or that it's up and running?

[00:31:14] Speaker 02:
No, no, because as I said... So you can file a 205 halfway through construction?

[00:31:21] Speaker 05:
at any point, and the commission did in footnote, oh, I'm looking at the wrong thing.

[00:31:28] Speaker 05:
In these orders, there's a footnote and a rehearing order at

[00:31:35] Speaker 05:
J-22 and J-23, where the commission says that these kinds of incentive orders can still be useful later in the process.

[00:31:43] Speaker 05:
But the cases I cited, the elite and Neat West were 205 filings made early in the process.

[00:31:49] Speaker 05:
They wanted to be able to put construction work in progress.

[00:31:52] Speaker 05:
And in Neat West's case, things like hypothetical capital structure.

[00:31:56] Speaker 05:
Because going back to the other, the larger list of incentives.

[00:32:00] Speaker 02:
You know, Justice Douglas once said, in an opinion, that footnotes don't really count.

[00:32:08] Speaker 02:
And he said it in the footnote, by the way.

[00:32:10] Speaker 05:
I do remember that.

[00:32:11] Speaker 05:
Well, this wasn't so much of ruling as just dealing with one particular argument.

[00:32:19] Speaker 05:
It may not be clear here because this isn't a 205 case, but there is discussion of it in 679.

[00:32:26] Speaker 05:
And again, I point to cases where they've done it.

[00:32:27] Speaker 05:
They came in with only a 205.

[00:32:30] Speaker 05:
It's early on.

[00:32:31] Speaker 05:
Construction work in progress, for example, is an incentive that you can start collecting money now while you're still building.

[00:32:39] Speaker 05:
You don't have to wait till the end, the traditional 205, at the end where it's useful and you capitalize everything and deal with that.

[00:32:47] Speaker 03:
All right, so Council for Petitioner.

[00:32:49] Speaker 03:
mentioned 679A.

[00:32:52] Speaker 03:
And how do you distinguish the language there?

[00:32:58] Speaker 03:
For example, in paragraph 23, the commission reaffirms that the most compelling case for incentives are new projects that present special risks.

[00:33:09] Speaker 03:
So the commission finds this is a special risk project.

[00:33:13] Speaker 03:
So it doesn't say anything that you have to have an order at some point before you qualify.

[00:33:19] Speaker 05:
Well, it says throughout that you do, but I would add about that nothing is granted until and the Commission said we'll make it as easy as possible.

[00:33:29] Speaker 05:
You can do a declaratory order if you don't want to do a 205.

[00:33:32] Speaker 05:
I would add that that language in paragraph 23 was actually eliminated several years later in a 2012

[00:33:39] Speaker 05:
It's not an issue here, so I think it didn't get cited, but there was a 2012 rulemaking that eliminated the routine and non-routine distinction.

[00:33:47] Speaker 05:
You see something about non—it actually extended incentives to investments that might have been considered routine.

[00:33:54] Speaker 03:
So that actually is obscene.

[00:33:56] Speaker 03:
So it broadened it.

[00:33:56] Speaker 03:
It didn't narrow it.

[00:33:58] Speaker 03:
So that certainly is reinforcing petitioners' arguments.

[00:34:02] Speaker 05:
Well, no, if you flip to the next page, paragraph 25 continues on to the next page.

[00:34:08] Speaker 05:
And it talks particularly about incentives are not provided in circumstances where they do not materially affect investment decisions.

[00:34:19] Speaker 05:
And I would point to something that the commission cited in both the declaratory order and the rehearing order.

[00:34:25] Speaker 02:
Let's just deal with that.

[00:34:28] Speaker 02:
I think that maybe the, at least in my mind, one of the ways of looking at this is that if you don't get 100% recovery after an abandonment and you're thinking about making your investment decision, that's a disincentive to invest if you don't get 100%.

[00:34:49] Speaker 05:
Or it's an incentive to ask for it as early as possible.

[00:34:54] Speaker 05:
So to get a determination.

[00:34:58] Speaker 02:
You can ask for it very, very early, and you're still not going to recover 100%.

[00:35:03] Speaker 05:
We don't know that.

[00:35:04] Speaker 02:
Well, how can you meet the reliability and nexus test without at least preliminary drawings and work and analysis and so on and so forth?

[00:35:18] Speaker 02:
You can't possibly do it.

[00:35:19] Speaker 02:
And that's very expensive stuff, right?

[00:35:23] Speaker 05:
It can be, but I would point to and I would point to language in 679B, which was re-hearing of 679A.

[00:35:35] Speaker 05:
Paragraph 115, I'm sorry, not B, it's Paragraph 115 of Order 679A.

[00:35:40] Speaker 05:
That actually says... Which paragraph now?

[00:35:45] Speaker 05:
115.

[00:35:46] Speaker 05:
It's in the section on construction work in progress, but it also draws in the abandoned plant issue.

[00:35:53] Speaker 05:
115?

[00:35:54] Speaker 05:
115, yes.

[00:35:56] Speaker 05:
And it says, we clarify that, okay, the first sentence is not it.

[00:36:00] Speaker 05:
The second, these are rate treatments which may be needed and requested in advance of a project being approved through a regional planning process or receiving any necessary siting approvals.

[00:36:10] Speaker 05:
So the commission's trying.

[00:36:12] Speaker 05:
115, it's on, well I don't know what version of 679A you have, what page that would be, but.

[00:36:18] Speaker 05:
On the FERC version, I've got it at page 82.

[00:36:22] Speaker 05:
Which sentence are you reading?

[00:36:25] Speaker 05:
It's the second sentence.

[00:36:26] Speaker 05:
It's after the footnote 186.

[00:36:30] Speaker 05:
More importantly, these are rape treatments.

[00:36:34] Speaker 03:
678A.

[00:36:37] Speaker 05:
If I said B again, I'm sorry.

[00:36:40] Speaker 01:
I have a slightly separate...

[00:36:44] Speaker 01:
question.

[00:36:47] Speaker 01:
You're brief and to some extent I think the orders here characterize this period of recovery issue as an application of the nexus requirement.

[00:36:55] Speaker 01:
Is that your position that it is an application of the nexus requirement?

[00:36:59] Speaker 05:
Yes.

[00:37:00] Speaker 05:
Could I expand on this a little bit because I wanted to get to this

[00:37:05] Speaker 05:
before, and the Commission, in discussing the nexus in the rehearing order as well in the declaratory order, specifically cited language from a 1992 policy statement it put out on incentive rate making.

[00:37:18] Speaker 05:
This is how the Commission has looked at incentives for decades.

[00:37:21] Speaker 03:
And it's 140… But then Congress comes along in 2005, all right, and directs the

[00:37:30] Speaker 03:
in section 219 that what's been going on hasn't worked effectively.

[00:37:35] Speaker 01:
Right.

[00:37:36] Speaker 01:
I'm sorry, you were saying in the reconsideration order, what were you saying?

[00:37:39] Speaker 01:
These fit together, actually.

[00:37:41] Speaker 05:
Oh, it's cited in the rehearing order at paragraph 4, footnote 6.

[00:37:46] Speaker 05:
But I can pull these two questions together.

[00:37:49] Speaker 05:
In that 1992 rate-making,

[00:37:54] Speaker 05:
or policy statement, the Commission said, incentive rate-making must be prospective.

[00:37:58] Speaker 05:
Here's what's important.

[00:37:59] Speaker 05:
Incentive regulation is not designed to reward past efficient cost-saving behavior.

[00:38:04] Speaker 05:
To do so would violate the objective of benefiting customers, because this is always a balance between the investors recovering their money and the ratepayers having to pay it.

[00:38:13] Speaker 05:
And that's what the Commission was talking about in paragraph 26 of order 679.

[00:38:17] Speaker 05:
But to go to your question about Congress,

[00:38:19] Speaker 05:
Section 219, which is at page A6 in the Addendum to FERC's brief.

[00:38:25] Speaker 05:
Part A.

[00:38:28] Speaker 05:
The commission shall establish by rule rate treatments for transmission for the purpose of benefiting consumers.

[00:38:37] Speaker 05:
219 is about benefiting consumers.

[00:38:40] Speaker 05:
The commission echoes that in section 35.35 and says it's about benefiting consumers.

[00:38:45] Speaker 05:
So the commission is saying we have thought for years that giving money to investors for past decisions does not incentivize behavior going forward.

[00:38:56] Speaker 05:
So to benefit consumers,

[00:38:58] Speaker 05:
You have to, and this is language 679, materially affect those decisions.

[00:39:03] Speaker 01:
But you've done that in NEAT.

[00:39:05] Speaker 01:
You've done that in Republic transmission.

[00:39:07] Speaker 01:
I mean, there are other cases where that putative lack of benefit to consumers was just, the commission appears to have just blown by it.

[00:39:16] Speaker 01:
And I'd be particularly interested in hearing about the cases since the orders in this case.

[00:39:22] Speaker 01:
where the period of recovery issue was not addressed as part of the NEXUS analysis.

[00:39:28] Speaker 01:
I mean, in Republic transmission, the commission appears to have just gone back to treating the period of recovery issue as a policy inquiry and doesn't really even have language linking it to the NEXUS requirement.

[00:39:40] Speaker 01:
I'm just wondering how you reconcile the commission's treatment in those cases with the treatment here.

[00:39:45] Speaker 05:
Well, and I think that's where, in the orders here, in the rehearing order, and I think it's... I'm focusing less on the rehearing order than on what's happened since then in other cases.

[00:39:58] Speaker 05:
Yes, they're applying a general policy rationale, and I think they may or may not have used, I think they used that word.

[00:40:05] Speaker 05:
They're following the general policy rationale that was elucidated in this case, and I would say, particularly in the rehearing order,

[00:40:13] Speaker 05:
Maybe paragraph 16 and 22 are the places that best try to draw the idea of the nexus under the regulation.

[00:40:21] Speaker 05:
with our theory of how incentives work and when they benefit consumers.

[00:40:27] Speaker 05:
Now, again, all of those, the subsequent cases, except Republic, which nobody's thought were hearing, if I'm remembering the right ones, those are pending on re-hearing, and if someone wants to raise an issue about why they should be an exception to that policy, the commission will consider it.

[00:40:42] Speaker 05:
Nothing is ironclad when it's a policy, but it's a case-by-case, just and reasonable determination.

[00:40:49] Speaker 05:
Exceptions can be made.

[00:40:51] Speaker 02:
Does that mean case by case?

[00:40:53] Speaker 02:
Every case is case by case.

[00:40:55] Speaker 02:
What are the principles that are governing whether the Commission in its wisdom or discretion is going to award 50% versus 100%.

[00:41:04] Speaker 02:
What are those principles?

[00:41:06] Speaker 05:
Well, and it's about awarding the 100%, because the 50% is the default that you get, regardless of what's happening here.

[00:41:14] Speaker 05:
It's not an incentive, it's just cost recovery.

[00:41:16] Speaker 05:
But the commission looks at the project, it looks at the risks involved, and I'll give you an example of that in a minute.

[00:41:22] Speaker 05:
But depending on the incentives, it could also be risks particular to the developer, like hypothetical capital structure.

[00:41:28] Speaker 05:
Not every utility is going to qualify for that, because the Commission intended it to be for consortiums, multi-developers, or competitive developers who aren't incumbent utilities.

[00:41:39] Speaker 05:
You have to show that it fits your situation.

[00:41:41] Speaker 05:
Now, the facts the Commission had to go on here is...

[00:41:46] Speaker 05:
If you could make the, first of all, you come in as early as you can.

[00:41:50] Speaker 05:
Well, pre-operational costs is pretty much every, I mean, all of the incentives are pre-operational because they're construction and such.

[00:41:59] Speaker 05:
But I lost my, oh, I was.

[00:42:01] Speaker 02:
Doesn't the regulations say that?

[00:42:03] Speaker 02:
Which?

[00:42:04] Speaker 02:
Say which?

[00:42:07] Speaker 02:
Yeah, recovery incentive-based rate treatment should mean

[00:42:15] Speaker 05:
Pre-commercial I think that Does include some I don't know exactly how that one's applied.

[00:42:26] Speaker 05:
It has to do It has to do with creating a regulatory asset and then you get into some rate accounting that

[00:42:34] Speaker 05:
But I think you can... Let me ask you... Go ahead, you can finish answering... One other thing I would point out in the subsequent orders, in the PG&E order, although it is pending on re-hearing, I would point out that they requested abandonment incentive for eight projects, and the commission actually denied it as to five based on specific considerations of the particular risks and really how risky those projects were.

[00:42:58] Speaker 05:
So that's another way that it comes, the case by case... Does that mean it wasn't prudently incurred?

[00:43:02] Speaker 05:
Oh, no, they hadn't been incurred.

[00:43:03] Speaker 05:
These were earlier.

[00:43:05] Speaker 05:
It's not about prudently incurred.

[00:43:08] Speaker 05:
It's that the particular risks they faced just weren't that I remember there's a there's a word moderate risk was in one of the paragraphs, but it's all in that order where they granted three and denied five based on the specific

[00:43:20] Speaker 05:
risks and challenges that had been shown.

[00:43:23] Speaker 05:
I'm sorry, Judge Miller.

[00:43:25] Speaker 01:
I have a pair of questions.

[00:43:26] Speaker 01:
One is, you know, we typically afford our deference to an agency's interpretation of its own regulations, but we are attentive to whether

[00:43:35] Speaker 01:
the regulated party had notice that the rule might be so interpreted and I wonder if you could help point us to where San Diego Gas and Electric would have notice of this particular aspect of the Nexus test in advance of these orders in this case.

[00:43:59] Speaker 05:
Well, again, I always go back to the Commission saying that nobody is entitled to an incentive

[00:44:07] Speaker 05:
until you come to us in one of these various procedural avenues that we're giving you to specifically.

[00:44:13] Speaker 01:
I mean, the regulatory materials supporting this rule talk a lot about things like you actually have to show that the reasons the project's abandoned are beyond your control.

[00:44:27] Speaker 01:
You have to show that this is something about reliability or lowering costs to consumers.

[00:44:33] Speaker 01:
The things that are focused on

[00:44:35] Speaker 01:
And indeed, one thing I'd be interested in your views on, paragraph 28 talks about the incentives being designed to reduce the risks of new investment by providing assurance of recovery of abandoned plant costs.

[00:44:51] Speaker 01:
And then it says, although this qualifies as a, quote, incentive under section 219, it is perhaps more appropriately characterized as a reduction of a regulatory barrier, the potential lack of recovery of costs to infrastructure development.

[00:45:05] Speaker 01:
So in a way, it's saying it's not so much that we necessarily see this functioning strictly as an incentive, but removing something that has been an obstacle in the past, which seems, again, maybe

[00:45:22] Speaker 01:
You know, if you're San Diego Gas and Electric, to muddy the waters on whether this crisp incentive-based reasoning that you then adopt in the order is the kind of reasoning that they would have reasonably anticipated.

[00:45:34] Speaker 05:
Well, and I think I look again at paragraph 26 of 679, which says,

[00:45:43] Speaker 05:
each incentive will be applied in a manner that is rationally tailored to the risks and challenges.

[00:45:47] Speaker 05:
And then it says not every incentive will be available for every new investment.

[00:45:52] Speaker 01:
It's just at a very high level of generality.

[00:45:54] Speaker 01:
Everything you're pointing to just doesn't get in close to this

[00:46:00] Speaker 01:
Let me ask you a follow-up question, which is the flip side of what I asked your opponents.

[00:46:07] Speaker 01:
Were we to disagree with you, or were we to find that there was a problem here, what do you think the appropriate remedy would be?

[00:46:20] Speaker 05:
Since it's a case by case determination, I guess the commission would have to look again at this particular case or maybe it given that it really.

[00:46:33] Speaker 05:
explained a policy rationale that isn't new, that is drawn on older things.

[00:46:37] Speaker 05:
I don't know exactly what the commission would have to do with that.

[00:46:41] Speaker 05:
But all of 679 was couched in this is going to be case by case, and you have to come ask for it.

[00:46:46] Speaker 05:
We're making it as easy as possible.

[00:46:48] Speaker 05:
We're going to be easier than we used to be because we have these new incentives.

[00:46:54] Speaker 05:
And they largely have been.

[00:46:55] Speaker 05:
And I don't think we have any example of a case where someone waited four years.

[00:47:00] Speaker 05:
So maybe there's a case where the commission has to decide.

[00:47:04] Speaker 01:
Well, you have examples where someone waited to the rate making, but they did the rate making early in the project.

[00:47:10] Speaker 01:
Is that what you're saying?

[00:47:10] Speaker 01:
Well, you were saying NEET was just a 205 filing.

[00:47:13] Speaker 01:
But they also need the order refers to a subsequent 205 proceeding.

[00:47:18] Speaker 01:
So I'm a little bit confused, frankly, about the process.

[00:47:20] Speaker 01:
Right.

[00:47:21] Speaker 05:
I think you still do a 205 at the end when the project is complete, or a 205 at the end if the project is abandoned.

[00:47:30] Speaker 05:
But you can do, under Order 679, you can do a single issue or these incentive rate-making things where you can start collecting construction work in progress, you can start the

[00:47:45] Speaker 05:
having the regulatory asset for the pre-commercial expenses.

[00:47:48] Speaker 05:
The commission talks about how this can give you increased cash flow, lower interest rates, rate stability.

[00:47:56] Speaker 05:
One of the cases talked about not having rate shock on the consumers when they get to the end of the project and suddenly put the whole thing in the rates at once.

[00:48:03] Speaker 05:
There are a lot of reasons.

[00:48:05] Speaker 05:
to put it into the rates as you go.

[00:48:09] Speaker 05:
And I would like actually another example of someone who waited for different reasons.

[00:48:13] Speaker 05:
It's the one case I can think of where someone waited too late.

[00:48:17] Speaker 05:
We cited it.

[00:48:19] Speaker 05:
In Commonwealth Edison, a party came in.

[00:48:22] Speaker 05:
It did get some incentives for some projects, but the key part that we cited, it came in with two projects it had already completed.

[00:48:30] Speaker 05:
and said, well, you know, can we have those incentives now for the projects we already completed?

[00:48:34] Speaker 05:
And the commission said, well, that's not an incentive.

[00:48:37] Speaker 05:
No, you can't.

[00:48:37] Speaker 05:
Not the abandonment incentive.

[00:48:39] Speaker 05:
No, what's that?

[00:48:40] Speaker 05:
I'm sorry.

[00:48:41] Speaker 01:
Not the abandonment incentive, but different.

[00:48:42] Speaker 05:
No, they had been completed and they wanted to take advantage of the increased return on equity and some other incentives.

[00:48:47] Speaker 05:
So the commission said from the start, Congress wants us to create more incentive rate treatments to benefit consumers.

[00:48:58] Speaker 05:
Here are a bunch of them.

[00:49:00] Speaker 05:
Some of them will work for you, some won't.

[00:49:01] Speaker 05:
As I cited in cases, some parties just seek abandonment.

[00:49:04] Speaker 05:
Some seek abandonment and construction work in progress.

[00:49:09] Speaker 05:
Some want the whole thing.

[00:49:11] Speaker 05:
They want the hypothetical capital structure and the return on equity, and they want all of it.

[00:49:15] Speaker 01:
I do get the impression that this bundle of incentives, I mean, not everybody gets the ROE.

[00:49:22] Speaker 01:
Not everybody gets accelerated depreciation.

[00:49:25] Speaker 01:
Not everybody asks.

[00:49:26] Speaker 01:
Exactly.

[00:49:27] Speaker 01:
It's a little confusing to think about how any of them operate as an incentive, per se, if often

[00:49:37] Speaker 01:
they are having accelerated depreciation, for example, which is maybe just I choose that because it's one of the easier ones to understand.

[00:49:44] Speaker 01:
One could, after the project is up and built and supplying power and rates are being charged, one could seek accelerated depreciation going forward, no?

[00:49:56] Speaker 01:
Would that not be granted?

[00:49:59] Speaker 05:
I mean, they'd have to show

[00:50:02] Speaker 05:
It has to be influencing some decision.

[00:50:04] Speaker 05:
That's the idea of the incentive.

[00:50:07] Speaker 05:
And the reason that they're not all at the outset, like maybe you want the abandonment one, is that maybe you don't care about construction.

[00:50:13] Speaker 05:
Now I'm thinking it's construction while in progress.

[00:50:16] Speaker 05:
We call it QUIP, but you know, acronyms.

[00:50:20] Speaker 05:
You don't need equipment until you start construction.

[00:50:23] Speaker 05:
So you have more of a time frame that you could consider whether you're applying for that.

[00:50:27] Speaker 05:
Some apply for it upfront because they know they're going to want it.

[00:50:29] Speaker 05:
Some of them.

[00:50:31] Speaker 05:
But but as the commission said here, yes, San Diego waited four years and we don't have another case like that.

[00:50:36] Speaker 05:
But at the point when they came in,

[00:50:39] Speaker 05:
the real heavy spending, the 350 and 400 million dollars, was still prospective.

[00:50:45] Speaker 05:
So they got the abandonment incentive for the decision to go forward with 400 million dollars worth of risk.

[00:50:51] Speaker 01:
So when are some of these other ones requested?

[00:50:55] Speaker 01:
Like if I'm constructing some transmission infrastructure and I want accelerated depreciation treatment, when is that sought typically?

[00:51:09] Speaker 05:
The commission left it to the utility.

[00:51:12] Speaker 01:
When does it functionally, when does it make sense?

[00:51:15] Speaker 05:
It certainly makes sense before construction.

[00:51:18] Speaker 05:
As a practical matter, in the cases that I've looked at, they tend to come in pretty soon after getting the approval in the regional plan.

[00:51:27] Speaker 05:
And they'll do a whole package.

[00:51:28] Speaker 05:
They'll do hypothetical capital structure then and ROE.

[00:51:33] Speaker 05:
And the commission said you don't even have to do them all at once.

[00:51:35] Speaker 05:
We encourage you to do them all at once because we do consider them as a package.

[00:51:39] Speaker 01:
Well, and they seem like several of them are overlapping.

[00:51:41] Speaker 05:
Yeah, abandonment and ROE can play off each other.

[00:51:45] Speaker 05:
You don't get the higher ROE for how risky your project was.

[00:51:51] Speaker 05:
We suggested that you may not get the higher ROE in that case if you also got the abandonment.

[00:51:55] Speaker 05:
But I'm just looking at some cases.

[00:51:57] Speaker 05:
PJM II, they had abandonment ROE equipped.

[00:52:01] Speaker 05:
The DCR case, which was a declaratory order, they came in pretty early.

[00:52:06] Speaker 05:
They wanted abandonment, pre-commercial expenses, hypothetical capital structure, and the RTO adder.

[00:52:13] Speaker 01:
And you said this is typically early before construction.

[00:52:18] Speaker 01:
In these cases, it has to come to the table and say, look, we want a package.

[00:52:22] Speaker 01:
These are the kinds of things we think we're eligible for.

[00:52:24] Speaker 01:
And that's that is formally a rate making.

[00:52:29] Speaker 01:
It is even though there's no power being supplied.

[00:52:32] Speaker 01:
There's a rate.

[00:52:34] Speaker 05:
That's exactly the point of this.

[00:52:36] Speaker 05:
How does that work?

[00:52:37] Speaker 05:
It's exactly what 679 is about.

[00:52:39] Speaker 05:
It used to be that you got a lot of these costs when you met the so-called used and useful test.

[00:52:47] Speaker 05:
When it's done and it's ready to go.

[00:52:50] Speaker 05:
And because Congress wants us to give incentives for the investment, we're letting you take some of these sooner.

[00:52:58] Speaker 05:
If you come in and show that it's having a motivating effect, that it influences the decision that you're making.

[00:53:08] Speaker 05:
We left it to the discretion of companies, but I don't think it's odd that most of them come in pretty early.

[00:53:13] Speaker 01:
So it's kind of a workout.

[00:53:14] Speaker 01:
I mean, people come in, it's like you're doing a deal with them.

[00:53:17] Speaker 01:
And they're saying, look, we'd like to do this.

[00:53:21] Speaker 01:
The market is a bit tough right now getting investment.

[00:53:24] Speaker 01:
Can you help us out with a hypothetical capital structure?

[00:53:28] Speaker 05:
Treatment and y'all sit at a table and figure that one out or I don't think that's how I know they file something they make a case on the record for what their risks are and the various interested parties their state regulators their ratepayers come in and say You know or they don't come in because they're fine with it or they come in and say wait a minute

[00:53:49] Speaker 05:
No, and it isn't always about the costs.

[00:53:52] Speaker 05:
I can give you an example.

[00:53:54] Speaker 05:
One of the cases, my notes are all confused, either the Edison, I think it's the Edison 3 case.

[00:54:00] Speaker 05:
One of the cases that the petitioners said, oh no, people did complain about the abandonment incentive.

[00:54:06] Speaker 05:
Well, they didn't complain about what they said, I think it was Edison 3.

[00:54:12] Speaker 05:
at the declaratory order stage, the ratepayers came in and said, no, wait, if this thing gets abandoned, it's going to be their own fault.

[00:54:20] Speaker 05:
So it was actually that they didn't think that.

[00:54:22] Speaker 02:
Do you know whether when a company enters into or starts planning, they obviously have to have debt financing for the project?

[00:54:36] Speaker 02:
And do you know whether the bank or the other lenders require

[00:54:42] Speaker 02:
and early appearance before the Commission to make sure that the nexus and reliability tests are satisfied and may have nothing to do with the 100%, 50% time of order or anything else.

[00:54:56] Speaker 02:
It may be just a financing requirement.

[00:54:58] Speaker 02:
Do you know whether that's true?

[00:54:59] Speaker 02:
I don't know.

[00:55:00] Speaker 05:
I have, I mean, it does appear in the case.

[00:55:03] Speaker 02:
And there's nothing in the regulation that deals with that, with financing, right?

[00:55:08] Speaker 05:
Well, no, the reason the commission created this declaratory order procedure was to give you upfront certainty to help with financing early on.

[00:55:17] Speaker 05:
And I did quote that language from 679B that said, maybe you can even come in before you meet the standards.

[00:55:24] Speaker 05:
I'll give you an example of someone who did.

[00:55:26] Speaker 02:
Well, I think your time is right.

[00:55:28] Speaker 02:
You're way over.

[00:55:29] Speaker 05:
OK.

[00:55:29] Speaker 03:
Anything, though, that is key that you need to make a point of here?

[00:55:35] Speaker 05:
Well, yes, I just wanted to close by focusing on that the Commission is

[00:55:43] Speaker 05:
having to make a just and reasonable rates determination based on what benefits consumers and it says that incentives that incentivize you going forward benefit consumers that are worth making the rate payers share the cost with investors or take them on.

[00:55:56] Speaker 01:
If someone gets the abandonment incentive and then during the inquiry into just and reasonableness is it ever is there authority on the part of the commission to pair that away or pair it back because it's not considered to be

[00:56:12] Speaker 01:
just and reasonable.

[00:56:14] Speaker 01:
Or if something's met the nexus requirement, it's not going to be found not just unreasonable?

[00:56:18] Speaker 05:
If the commission finds it's incentivized, it's going to give that.

[00:56:21] Speaker 05:
And the question of whether the costs were a good idea is the prudently incurred.

[00:56:26] Speaker 01:
Right.

[00:56:26] Speaker 01:
But I'm asking about the general sort of—to the extent that consumer interests are looked at at all with respect to the abandonment incentive, is it in the application of the three-part test in this regulation, or is there a later time when that is revisited?

[00:56:44] Speaker 05:
Well, I think it's certainly every just and reasonable determination would consider the rate payers.

[00:56:51] Speaker 05:
So it will be involved in the prudently incurred.

[00:56:53] Speaker 05:
But I think it does principally come in here where we're saying, does granting this incentive-based rate treatment benefit consumers in this instance?

[00:57:01] Speaker 05:
So it is the upfront determination, I think.

[00:57:05] Speaker 03:
OK.

[00:57:06] Speaker 05:
Thank you.

[00:57:07] Speaker 05:
Thank you.

[00:57:19] Speaker 00:
If I could, five points I'd like to get to quickly, but Judge Piller, let me start with that last point about whether incentive eligibility would be revisited at a sort of a post-abandonment 205 filing.

[00:57:29] Speaker 00:
The answer is no.

[00:57:31] Speaker 00:
That's in paragraph 77 to 78 of order 679, which explained that the commission's not going to revisit the eligibility, the application of the reliability, and that's the test of that juncture.

[00:57:43] Speaker 00:
FERC's Council adverted to its policies from 1992 or its longstanding policies.

[00:57:48] Speaker 00:
The policies that count here are the ones set forth in its legislative rule.

[00:57:52] Speaker 00:
Order 679 in the incentive regulations, which state that when a project such as ours meets the reliability indexes test, it gets the prescribed 100% benefit, not 90%, as FERC says in its brief.

[00:58:04] Speaker 00:
Council said, well, you know, you haven't spent most of your money yet.

[00:58:06] Speaker 00:
You haven't built this project.

[00:58:08] Speaker 00:
You're going to get a recovery for that.

[00:58:10] Speaker 00:
But that's not what the regulation says.

[00:58:12] Speaker 00:
And it's a really important principle, not just in this case, but in all of this court's administrative law cases, that if an agency wants to change position after a presidential administration or anything else like that, it has to go through notice and comment rulemaking to do so.

[00:58:26] Speaker 00:
And until it does, it's bound by its legislative rule.

[00:58:30] Speaker 00:
I would point out also that paragraph one of order 679 says, this final rule is designed to promote investment and transmission infrastructure development.

[00:58:40] Speaker 03:
Could I just go back to your former point?

[00:58:41] Speaker 03:
The commission says we've had this general policy and we've defined incentive as a forward-looking determination.

[00:58:54] Speaker 03:
There's nothing new, as it were, in 679 except you may be eligible for this 100% abandonment incentive.

[00:59:07] Speaker 00:
I think actually there's more that's new than that, Your Honor.

[00:59:09] Speaker 00:
If you look at Paragraph 24 of Order 679, it says, we recognize that our past policies, including, among other things, the 1992 policy statement the Council of Burditt to.

[00:59:19] Speaker 03:
You think that's Paragraph 24 of the original order?

[00:59:23] Speaker 00:
Of 679, yes, the original order.

[00:59:25] Speaker 00:
It says, we need to go past and change and modify and update our policies, because that's what Congress told us to do in Section 319 of the Federal Power Act.

[00:59:33] Speaker 00:
And because transmission investment was declining under the old regime, the regime that Council referred to, it had fallen, I think, remarkably down below 1975 levels, notwithstanding that demand on the grid had doubled since that time.

[00:59:48] Speaker 00:
So there was a need to change and do new things and to be more expansive in giving incentives.

[00:59:53] Speaker 00:
That's what Order 679 did.

[00:59:54] Speaker 03:
So why wouldn't your client have come to FERC earlier?

[00:59:59] Speaker 00:
We came to FERC using the options that they gave us in Order 679, the declaratory order option.

[01:00:06] Speaker 03:
It's a matter of, just so I'm clear, it's a matter of notice.

[01:00:11] Speaker 03:
In other words, if they'd said nothing happens before we issue the order.

[01:00:17] Speaker 03:
You would have been in there immediately.

[01:00:19] Speaker 03:
That's absolutely right.

[01:00:20] Speaker 00:
But they had not said that anywhere.

[01:00:24] Speaker 00:
You know, what they said in their rule is you have the option.

[01:00:26] Speaker 00:
You can come in ahead of time on a declaratory petition or after the fact on a 205.

[01:00:31] Speaker 00:
If their legislative rule had said you've got to come in right away and you're not going to get 100 percent until after we say the word, we would have come in right away.

[01:00:39] Speaker 00:
But that's not what their regulations say.

[01:00:41] Speaker 01:
The argument that it affects your cost of capital would seem to also be an argument that if it really were affecting your cost of capital, you would have come in earlier.

[01:00:49] Speaker 01:
I mean, presumably you have been lax with respect to obtaining lower cost capital during those four years and therefore impose that cost on rate payers by not going in earlier and getting qualified for the abandonment incentive that would therefore have entitled you to lower cost of capital.

[01:01:09] Speaker 00:
Well, I guess, Your Honor, I'd submit we came in very early.

[01:01:12] Speaker 00:
This project has not, construction had not started in 2015 when we came in.

[01:01:17] Speaker 00:
As counsel mentioned, the overwhelming bulk of our costs were out in the future.

[01:01:21] Speaker 01:
That's more their position.

[01:01:22] Speaker 01:
They say, you've got most of your costs.

[01:01:23] Speaker 01:
What are you squawking about?

[01:01:24] Speaker 01:
You know, if it's so early, then no harm, no foul.

[01:01:29] Speaker 00:
They say, oh, you got 90%.

[01:01:31] Speaker 00:
That's pretty good for you.

[01:01:32] Speaker 00:
But the reg says 100%.

[01:01:33] Speaker 01:
No, I understand.

[01:01:34] Speaker 00:
And we did come in, I think, pretty early here.

[01:01:38] Speaker 00:
But the other point is we...

[01:01:40] Speaker 00:
started development on this project in 2008, right?

[01:01:44] Speaker 00:
The incentive regulations went into effect in 2006.

[01:01:46] Speaker 00:
If you look at paragraph 11 of David Guyer's declaration attached to our appearing brief, you'll see we were aware of the abandonment incentive when we started on this project in 08.

[01:01:56] Speaker 00:
We were relying on its availability, and we knew that we met the criteria.

[01:01:59] Speaker 00:
And lo and behold, we were right.

[01:02:01] Speaker 00:
We do meet the criteria, which means that we get the benefit.

[01:02:04] Speaker 00:
So I think, you know, we were relying, our investors were relying on our eligibility here.

[01:02:10] Speaker 00:
So I think that's one key point.

[01:02:14] Speaker 00:
I just want to double back on this 1992 policy statement that Council referred to.

[01:02:18] Speaker 00:
If you look at paragraph 53 of Order 679, it says expressly, and I want to quote here because this is important,

[01:02:27] Speaker 00:
that we will not require compliance with the 1992 transmission policy statement as a precondition for approval of incentives.

[01:02:34] Speaker 00:
But more fundamentally than that, counsel's argument misperceives the source of the incentives, which flow not from a project-specific order, but from the incentive regulations themselves.

[01:02:44] Speaker 00:
Order 679, paragraph 1 says, this final rule promotes infrastructure development, provides incentives for infrastructure development.

[01:02:52] Speaker 00:
Section 219 of the Federal Power Act says that, yes, it's true.

[01:02:57] Speaker 00:
The rules are going to benefit customers, as my friend said, but they're going to benefit customers by promoting infrastructure development.

[01:03:03] Speaker 00:
And when you understand incentives to operate in that way, as Judge Randolph said, as flowing from the rule, the regs, and not from a project-specific order, it makes perfect sense to say that everything operated prospectively.

[01:03:16] Speaker 03:
There are a lot of laws on the books where your client might benefit from those laws, but you have no assurance of that, for example, until you get an IRS letter or something.

[01:03:32] Speaker 03:
So the fact that you relied on the notion that there was this rule

[01:03:40] Speaker 03:
That isn't enough, is it, in this context?

[01:03:43] Speaker 03:
Because you still had to get the commission to decide that this was the type of project.

[01:03:49] Speaker 03:
So you say it decided it was the type of project, end of discussion.

[01:03:55] Speaker 03:
And then the commission comes back and you say this is the inappropriate part as I understand it.

[01:04:01] Speaker 03:
One, no notice.

[01:04:02] Speaker 03:
Two, it goes back to this pre-

[01:04:05] Speaker 03:
Order 679 policy that it can't pull back in when it says specifically it's not going to require But that's that's my argument in a nutshell.

[01:04:15] Speaker 00:
Yes, your honor.

[01:04:16] Speaker 03:
That's that's precisely it and I close council mentions if Mr. Geier had said In very plain language we placed no reliance on the fact that we might

[01:04:33] Speaker 03:
come to FERC somewhere down the road and seek an order.

[01:04:39] Speaker 03:
But we certainly hope we would be successful in obtaining that order.

[01:04:45] Speaker 03:
Is it your position FERC still would have no basis for saying we're only going to approve this for expenses incurred going forward?

[01:04:57] Speaker 00:
Yes, that's still our position because that's how the regulation works.

[01:05:00] Speaker 00:
It says that if you meet the criteria in here, FERC said at 8 to 9 that we do meet the criteria, you get this particular benefit.

[01:05:07] Speaker 00:
They can change that rule through rulemaking if that's what they want to do, but they haven't done so.

[01:05:11] Speaker 00:
And as to Meet West, Council said that nothing in the order there said that or remarked on the timing of recovery or anything.

[01:05:19] Speaker 00:
That's just simply false.

[01:05:20] Speaker 00:
I want to point the Court to the language 154 of FERC at paragraphs 61009, paragraphs 13 and 26.

[01:05:28] Speaker 00:
It says that the utility requested, quote, recovery of 100% of prudently incurred costs, including costs related to the projects that have been incurred prior to the date of filing.

[01:05:40] Speaker 01:
I'm sorry.

[01:05:43] Speaker 00:
We quote this at the bottom of page 26 of our reply brief.

[01:05:49] Speaker 00:
So FERC had said before it issues the orders in this case, many, many times, but most specifically in Meet West, that when you meet the criteria, you get 100% of your costs, including those before the date of the order.

[01:06:02] Speaker 01:
Your view that that same logic does not apply to the other incentive programs, the sort of relatively categorical idea that you qualify, you get it.

[01:06:17] Speaker 00:
Yeah, I think you qualify, you get it, but the you qualify is going to differ for each incentive.

[01:06:21] Speaker 00:
And so rate of equity return or QIP or these other incentives that we've talked about, you might not qualify for some of those under the circumstances.

[01:06:29] Speaker 01:
The qualifications in all of them are very high-level, general.

[01:06:34] Speaker 01:
which seems to imply that there's some qualitative judgment, there's some discretion on the part of FERC to say, you know, hypothetical capital structure, that's kind of a big project.

[01:06:48] Speaker 01:
you know, grant that, make it up, say you're the kind of entity that's gonna benefit from that.

[01:06:54] Speaker 01:
And yes, it's an incentive, and yes, it's written in the rule, but nobody is actually incentivized by it unless and until they get some kind of confirmation from FERC that they are gonna have that brass ring.

[01:07:09] Speaker 01:
And why wouldn't we assume that all of these have sort of a parallel operation like that?

[01:07:15] Speaker 01:
You have to check in and get the okay.

[01:07:18] Speaker 00:
Well, I think there are two responses to that.

[01:07:20] Speaker 00:
The first is that there's a difference between hypothetical capital structure and the abandonment incentive, which is for the abandonment incentive, the rate of recovery, the benefits you get is defined right in the rule, right?

[01:07:30] Speaker 00:
100%, right?

[01:07:32] Speaker 00:
For rate of equity or hypothetical capital structure, it's more sort of amenable to a case-by-case decision of the structure of the benefit.

[01:07:43] Speaker 00:
But the other point is that

[01:07:46] Speaker 00:
On the front end, FERC has tremendous discretion in deciding, does this benefit, is it tailored to the risks and challenges faced in developing this project?

[01:07:54] Speaker 00:
There's a lot of discretion there.

[01:07:55] Speaker 00:
I'll acknowledge that.

[01:07:57] Speaker 00:
But once they've made the decision that an incentive is tailored to the risks of the project, as they made clear, you get the prescribed benefit.

[01:08:05] Speaker 00:
So we're not trying to take any discretion away from the agency.

[01:08:08] Speaker 01:
So what if, it's not your position that they could have

[01:08:13] Speaker 01:
come up with this policy that they're now claiming was sort of instinct in the rule all along.

[01:08:20] Speaker 01:
You're not saying, yeah, they could have come up with it, but they just didn't do it clearly enough before we came along.

[01:08:26] Speaker 01:
Your position is that the regulation is

[01:08:33] Speaker 01:
contradicts the policy they now claim to have.

[01:08:36] Speaker 00:
We make both of those arguments.

[01:08:38] Speaker 00:
You do make both of those arguments.

[01:08:39] Speaker 00:
The latter is the one we really rely on, is what they're trying to do here contradicts the reg, but at a minimum, even if you disagree with us on that, what they're saying here contradicts what they did in over three dozen cases for a decade, and that's at pages 25 to 26 of our reply brief, which maybe, I guess, brings it home, your question about the remedy.

[01:08:57] Speaker 01:
It seems like it's a very different remedy depending on which ground one might rule on.

[01:09:00] Speaker 00:
Yeah, right.

[01:09:01] Speaker 00:
Exactly.

[01:09:01] Speaker 00:
But I think in either case, we get what FERC, at a minimum, has been doing for, in over 36 cases, over a decade here, which is 100 percent recovery of all of our costs.

[01:09:10] Speaker 00:
We think the rules require that, but at a minimum, their precedent requires it.

[01:09:14] Speaker 00:
And they departed with that explanation here from their past practice.

[01:09:17] Speaker 03:
All right.

[01:09:18] Speaker 03:
Thank you.

[01:09:18] Speaker 03:
We'll take the case under advisement.

[01:09:26] Speaker ?:
In this case it was 17-21.