[00:00:01] Speaker 02: Case number 15-1323 at L, El Paso Natural Gas Company, LLC, petitioner, versus Federal Energy Regulatory Commission. [00:00:10] Speaker 02: Mr. Nelson, the petitioner, El Paso Natural Gas Co., Ms. [00:00:14] Speaker 02: Teixella and Ms. [00:00:15] Speaker 02: Perry for Spondit FERC, and Mr. Bress for petitioner, Southern California Gas Company at L. Thank you. [00:00:23] Speaker 05: May it please the court. [00:00:24] Speaker 05: My name is Howard Nelson, and I represent one of the petitioners in this case, El Paso Natural Gas Company. [00:00:30] Speaker 05: We have challenged three rulings and he orders a review and I will address each one in turn. [00:00:35] Speaker 05: With respect to capital structure. [00:00:37] Speaker 05: El Paso's total capitalization exceeds the amounts of assets in its regulated rate base. [00:00:44] Speaker 05: It is not disputed, though, that El Paso does not earn a return on the non-rate base assets that are associated with this excess capitalization. [00:00:52] Speaker 05: The issue in this case is whether inclusion of some of that excess capitalization in El Paso's capital structure that is used to calculate a return on its investment in rate base distorts that capital structure. [00:01:05] Speaker 05: It is our position that the commission's requirement that El Paso remove two of those non-rate-based assets, a loan and undistributed subsidiary earnings, solely from the equity component of El Paso's capital structure, violates a line of cases that has its genesis in a 1971 Fifth Circuit opinion also in an El Paso proceeding, where the court held that it is only if the source of funding of a non-rate-based asset [00:01:35] Speaker 05: can be distinctly identified and surely isolated, or in the words of future commission cases, traced to equity, that it is appropriate to remove a non-rate-based asset from equity. [00:01:46] Speaker 07: Can I ask you a question, just a framing question, which is the way you've described it is it's in conflict with precedence. [00:01:53] Speaker 07: Just assume hypothetically for the minute that there is no precedent. [00:01:58] Speaker 07: Is it wrong? [00:01:59] Speaker 07: to exclude these assets from equity in an effort to as accurately as possible capture the debt equity ratio? [00:02:10] Speaker 05: Well, the capitalization should as closely as possible represent the equity underlying rate base. [00:02:17] Speaker 05: But the existence of these non-rate-based assets does not distort the capital structure. [00:02:22] Speaker 05: There is no reason to believe that just simply including those assets and capitalization distorts capital structure. [00:02:31] Speaker 05: The decision is based on the common sense rationale that [00:02:35] Speaker 05: If the source of funding for the non-rate-based asset is not traced to equity, then total capitalization should not affect capital structure. [00:02:45] Speaker 05: It's only if the source of funding of the non-rate-based asset changes the debt-equity mix underlying rate base that the capital structure is distorted. [00:02:55] Speaker 02: Right. [00:02:56] Speaker 05: So that's the basis of the holding in El Paso, but without that holding, that logic still applies. [00:03:06] Speaker 05: In this case, FERC concedes that logic. [00:03:09] Speaker 05: It says it has to show there's a change in the mix. [00:03:13] Speaker 05: It concedes that it has to attribute an asset to equity to remove that asset to equity because it wouldn't change the capital structure. [00:03:20] Speaker 05: In fact, in the hearing order in 517A, the commission allowed $50 million of that loan balance to be removed from debt because it was traced to a debt issuance. [00:03:33] Speaker 05: So putting aside the commission's arbitrary distinction between attributing an asset to equity, which it concedes it must do, and tracing the equity, tracing the asset to equity, which it claims it doesn't have to do, the commission hasn't done either. [00:03:48] Speaker 05: It's undisputed. [00:03:49] Speaker 05: that both the loan balance and the subsidiary earnings were generated from revenues derived from operations. [00:03:57] Speaker 05: Once derived, they become commingled into El Paso's finances and the words of the Fifth Circuit become part of the corporate hodgepodge. [00:04:08] Speaker 05: So what is the commission's rationale then? [00:04:10] Speaker 05: It says, okay, if because those two non-money based assets are not devoted to, [00:04:17] Speaker 05: or available for investment in rate base, they must be removed. [00:04:23] Speaker 05: Well, that standard has no bearing. [00:04:27] Speaker 05: Whether that is so has no bearing on whether or not the capital structure is distorted. [00:04:32] Speaker 05: It may relate to whether the assets should be in rate base and they're not in rate base. [00:04:37] Speaker 05: So it also proves too much. [00:04:39] Speaker 05: that there are a number of assets typically in a pipeline balance sheet as well as El Paso's balance sheet that are not in rate base. [00:04:48] Speaker 05: and are not available for investment in rate-based, the obvious example is the subsidiary itself, which is an asset on El Paso's balance sheet. [00:04:58] Speaker 05: And the commission has not stated that that has to come out of equity. [00:05:01] Speaker 05: They concede that in a number of cases, they found that it doesn't have to come out of equity because it wasn't traced to equity, not whether it's available for investment in rate-based or not. [00:05:17] Speaker 05: Commission relies heavily on the district gas case, a first circuit opinion. [00:05:24] Speaker 05: But that case was decided on very narrow grounds. [00:05:30] Speaker 05: In that case, the ALJ did find that a $6.5 million loan should be removed from equity because it was not available for investment and rate base. [00:05:41] Speaker 05: The commission affirmed that decision, the ALJ's decision, without discussion. [00:05:46] Speaker 05: But by the time it got to the first circuit, [00:05:49] Speaker 05: The parties had agreed that the issue to be decided by that court was whether or not the loan was available for investment in rate base, which in turn depended on whether the parent or the pipeline subsidiary controlled whether the loan would be repaid. [00:06:05] Speaker 05: And the court said the parent controlled that and it affirmed the commission. [00:06:09] Speaker 05: But in that case, the court was given the standard by the parties. [00:06:13] Speaker 05: It was told what it had to decide. [00:06:14] Speaker 05: It didn't comment on that rationale. [00:06:17] Speaker 05: And it also didn't address the requirement in the El Paso Fifth Circuit case that to remove an asset from equity, it had to be distinctly identified and surely isolated to equity. [00:06:32] Speaker 05: The commission's rationale or its interpretation of digital gas is also inconsistent with its arguments in this case. [00:06:41] Speaker 05: At page 33 of its brief, it cites district gas for the proposition that since the loan was derived by revenues which cannot be traced or attributed to either debt or equity, it should be removed from equity. [00:06:56] Speaker 05: Yet in this case, the commission concedes you have to trace a non-rate-based asset to equity. [00:07:03] Speaker 05: And it must concede that because that's what El Paso requires and that's what a rational standard requires. [00:07:08] Speaker 05: The commission's subsequent cases after district S also don't apply that rationale. [00:07:15] Speaker 05: There are a number of commission cases. [00:07:18] Speaker 05: in which the commission has refused to remove a non-rate-based asset, including specifically loans from equity because they were not traced to equity. [00:07:29] Speaker 05: The Mountain of Fuel case, the commission expressly stated they denied a request to remove a loan balance from equity because there was no evidence in the record to show that it was traced to equity. [00:07:41] Speaker 05: In the Transco line of cases, which is the Opinion 414 line of cases, the commission also refused to remove a loan from equity. [00:07:48] Speaker 05: And in that case, it was because of a new policy that was announced in that case concerning capital structure where the commission decided that it was no longer going to look behind the reason that a parent established a particular capital structure for its pipeline subsidiary as long as the resulting equity ratio was within a reasonable range. [00:08:11] Speaker 05: And I would suggest to you that if it would have been okay for El Paso's parent in this case to intentionally create a 60% equity ratio by either refusing equity or retiring debt, under Transco that would have been reasonable because a 60% equity ratio is within an acceptable range. [00:08:31] Speaker 05: The commission made that finding. [00:08:34] Speaker 05: If that loan balance results from an accumulation in a cash management program that was approved by FERC, somehow that's not appropriate. [00:08:42] Speaker 07: So can I ask you, it's not on the loan but on the unrealized subsidiary earnings. [00:08:47] Speaker 07: So the commission at paragraph 97 of the Joint Appendix J 44 to 45 says the following. [00:08:57] Speaker 07: Instead, as our accounting reflects, the undistributed subsidiary earnings represent unrealized equity in the subsidiary generated from pipeline operations. [00:09:03] Speaker 07: When that equity is in fact appropriated by the parent, it will be recognized in an account as retained earnings or equity. [00:09:10] Speaker 07: So it's tying the unrealized subsidiary earnings to equity as distinguished from debt. [00:09:17] Speaker 07: Because I understand your point that there needs to be some basis for deciding [00:09:25] Speaker 07: assign it to equity as opposed to debt. [00:09:27] Speaker 07: Otherwise, you could apply the same debt equity ratio that exists already. [00:09:31] Speaker 07: So you have to have some basis for it. [00:09:33] Speaker 07: But isn't that a basis? [00:09:34] Speaker 05: Well, no, Your Honor. [00:09:35] Speaker 05: I mean, let me use this as an example. [00:09:37] Speaker 05: The commission's policy as it's expressed in the United case, which is involving undistributed subsidiary earnings, is that if it's undistributed, it's not available for investment. [00:09:47] Speaker 05: If it's distributed, then it should be included in equity. [00:09:51] Speaker 05: But if it's distributed, it just goes from one equity account to another equity account. [00:09:57] Speaker 05: And so it doesn't matter where it is, the issue is how it's sourced because that's what determines whether capital structure is distorted. [00:10:06] Speaker 05: And I would point out another inconsistency between the two issues here. [00:10:10] Speaker 05: The commission states that with respect to the loan, that once revenues are earned, [00:10:20] Speaker 05: from operations that that's not attributable to debt or equity. [00:10:26] Speaker 05: But it should be removed because now the pipeline at its discretion disposed of those revenues as it wants. [00:10:34] Speaker 05: Yet we get the subsidiary earnings, once it moves from undistributed to distributed, they have that cash. [00:10:40] Speaker 05: They can distribute it at its discretion. [00:10:42] Speaker 05: The pipeline, in fact, the pipeline could provide it to its parent. [00:10:47] Speaker 05: So whether it's available for investment in equity, it doesn't matter. [00:10:50] Speaker 05: It's also available to distribute. [00:10:53] Speaker 05: Either case, it's not used for jurisdictional purposes and it's not in rate base. [00:10:58] Speaker 05: And either case, it doesn't distort capital structure. [00:11:01] Speaker 05: I would turn to Article 11.2b. [00:11:02] Speaker 05: It's actually at four and a half minutes. [00:11:06] Speaker 05: Article 11.2b of the 1986 settlement prohibits El Paso from recovering in its future rates [00:11:13] Speaker 05: the cost of unsubscribed or discounted capacity that existed on the system at that time from a discrete set of shippers at that time. [00:11:21] Speaker 05: When El Paso filed its 2011 rate case, the issue the commission was presented with was whether El Paso's current rates, the rates filed in that rate case, included a shift in the cost of discounted 1995 capacity when the capacity was much larger than it was in 1995. [00:11:40] Speaker 05: The principal problem with the commission's resolution of that issue is having remanded the cost shift issue to another hearing because it needed evidence to resolve it. [00:11:50] Speaker 05: The commission then rejected the evidence that El Paso supplied at the hearing and made a finding without the evidence that it said it needed. [00:11:58] Speaker 05: So the commission's examination of 11.2 first started with a presumption that was designed to determine whether or not there was discounted 1995 capacity. [00:12:09] Speaker 05: The commission found that the capacity of the system in 1995 was approximately 4,000 MMCF. [00:12:15] Speaker 05: So the commission said, if El Paso can show that its current contracts, that it had current contracts priced at the Article 11.2A rate or higher, Article 11.2A rate or higher, which was the maximum rate in 1995, for the full 4,000 MMCF, it would presume there was no discounted 1995 capacity. [00:12:35] Speaker 05: So we get to this case in 2011. [00:12:38] Speaker 05: In opinion 528, the commission finds that El Paso did not meet the presumption. [00:12:43] Speaker 05: But it said, well, a record's not sufficient to determine whether or not there's a shift in the cost of that 1995 capacity. [00:12:50] Speaker 05: If it doesn't meet the presumption, that means there's 1995 discounted capacity. [00:12:53] Speaker 05: So the commission said, El Paso, at the hearing, you can show compliance with Article 11.2B if you show that the total amount of discounted revenues ensure that there's no cost shift. [00:13:04] Speaker 05: Then in the order under review, after the hearing, the commission affirmed the ALJ's striking of El Paso's cost and revenue evidence, her rejection of the second cost and revenue evidence, and adopted the ALJ's finding that because the total amount of discounted capacity [00:13:22] Speaker 05: was greater than the post-95 capacity, there must be some discounted 1995 capacity and therefore there must be a cost shift. [00:13:31] Speaker 05: Essentially, the decision says because you didn't meet the presumption, this existing discounted capacity, 95 capacity, there must be a cost shift. [00:13:41] Speaker 05: If that were the case, why have a hearing? [00:13:44] Speaker 05: If the evidence that El Paso submitted to show that the revenues exceed the cost of 1995 capacity was inappropriate, because in the commission's view you can't separate 95 costs from post-95 costs, then what did the commission mean by the evidence that El Paso must show? [00:14:00] Speaker 05: What evidence could it have shown? [00:14:04] Speaker 05: that a failure to meet a presumption, that presumption does not indicate a cost shift is because the presumption measures discounts by comparing El Paso's current contractual rates to the Article 11.2A rate which was the maximum rate based on a rough measure of 95 costs. [00:14:25] Speaker 05: But the issue in this case is whether there's a cost shift of that discounted 95 capacity in El Paso's current rates. [00:14:34] Speaker 05: And the current rates, the cost of El Paso's 95 capacity and El Paso's current rates in the 2001 rate case is much lower because the system has depreciated over the last 16 years. [00:14:46] Speaker 05: I'd like to give you an example. [00:14:48] Speaker 05: Suppose that the cost of El Paso's capacity in 1995 was 100 million dollars and there was therefore a unit rate of a dollar. [00:14:57] Speaker 05: Now we get to the 2011 rate case. [00:15:00] Speaker 05: And El Paso has a contract priced at 90 cents. [00:15:05] Speaker 05: That 90 cents compared to the 11.2A rate in 95 of a dollar is discounted by a dime. [00:15:12] Speaker 05: But now assume that because of depreciation, the cost of the 95 system, which is the facilities that make up that system, is now $50 million. [00:15:20] Speaker 05: And therefore, there's a 50-cent unit rate. [00:15:24] Speaker 05: Well, while the 90-cent contract is discounted compared to the 11.2A rate, it's more than sufficient to cover the cost of that 50-cent contract. [00:15:34] Speaker 05: And therefore, there is no cost shift. [00:15:37] Speaker 05: I see there's 10 seconds left. [00:15:38] Speaker 05: Anybody have any questions? [00:15:40] Speaker 07: We'll give you some time for a little. [00:15:43] Speaker 07: Thank you. [00:15:43] Speaker 07: Thanks. [00:15:54] Speaker 00: Good morning, Your Honors. [00:15:55] Speaker 00: Beth Masella for the Commission. [00:15:56] Speaker 00: I'll start with Bill 11 to be issued because that's where we ended up. [00:16:01] Speaker 00: It seems that El Paso was arguing that there was no evidence shown regarding there being an actual cost shift, but that's not true. [00:16:10] Speaker 00: If you look at in the trial staff analysis, it was specifically shown that it wasn't just that, [00:16:23] Speaker 00: What that analysis showed was that El Paso used lower than presumption billing determinants to set its compliance filing rates due to discount adjustments for unsubscribed capacity. [00:16:33] Speaker 00: And it further showed that using lower than presumption billing determinant levels increased maximum rate article 11 to B shipper rates. [00:16:42] Speaker 00: So it wasn't just that there were these billing determinant issues, but that it actually increased the rates. [00:16:46] Speaker 00: So it was shown that there was an improper shift. [00:16:48] Speaker 04: What's the site for that? [00:16:52] Speaker 00: Opinion 528B, JA520, paragraph 50, and also in the trial staff initial brief at JA1048, and in also JA1041 to 42, and JA1126 to 27 is where all of that evidence is. [00:17:11] Speaker 00: And it showed that the rates would shift, and again, if you look at the initial order on remand, JA1086 to 87, paragraphs 113 and 115. [00:17:21] Speaker 00: and 528B, 520 to 21, paragraph 40, and paragraph 50, 52, and 528A, JA455, paragraph 380. [00:17:33] Speaker 00: The same thing was true for the rape protective shippers analysis. [00:17:39] Speaker 00: In that case, it did talk about the fact that according to El Paso's data, it discounted more than one million decathurns per day of capacity. [00:17:49] Speaker 00: Its total discounted capacity was one and a half million decathurns per day. [00:17:53] Speaker 00: And the claimed capacity, post-1995 capacity, was only half a million decathurns. [00:18:00] Speaker 00: So it showed that it discounted capacity of more than a thousand hectares per day. [00:18:05] Speaker 00: It also showed that the rate proposal allocated, again this is the key point, [00:18:10] Speaker 00: The rate proposal allocated these discounts to all shippers that pay out-passes maximum rates including 11 to be shippers and that's how you know that there's an improper cost shift. [00:18:19] Speaker 00: And the sites for that are in the orders are 528B, JA 514, paragraph 40, JA 520, paragraph 50, 528A, paragraph 380, JA 455 to 56. [00:18:32] Speaker 00: In the initial order on remand, JA 1086 to 87, paragraphs 114 to 115. [00:18:41] Speaker 00: The other issue that El Paso talked about regarding 11.2b was the depreciation claim and that 11.2a rates and that was only the rate protected shippers used for their analysis 11.2a rates so it wouldn't apply to the trial staff analysis as well regarding the rate protected shipper analysis. [00:19:05] Speaker 00: What the commission explained about that is that JA [00:19:08] Speaker 00: The commission said there, while El Paso wants a comparison between the cost of 95 capacity in its current rates and those embedded in the 112A rates, El Paso has failed to provide adequate information to permit a computation of the cost of 95 capacity in its current rates. [00:19:28] Speaker 00: Because El Paso operates an integrated system, its capacity, its cost of service, and its associated costs and revenues are based on both 95 and post-95 capacity. [00:19:37] Speaker 00: So it wasn't that it couldn't be done on the information that El Paso provided in the record here regarding its own rates. [00:19:46] Speaker 00: I'll turn to capital structure now if there are no 112B questions. [00:19:52] Speaker 00: Thank you. [00:19:54] Speaker 00: Let me start off on what El Paso did and that's start off with distortion, the distortion question. [00:20:01] Speaker 00: Regarding the loan, [00:20:06] Speaker 00: The commission found that there was a distortion here because El Paso made a long-term return of capital through the loan to its shareholding parent, which offset the amount of capital its parent has at risk in the pipeline, which is the basis on which the parent earns a return. [00:20:26] Speaker 00: 517A, JA 150 to 52, paragraphs 43 and 46, 517JA 48, paragraph 106, and 528B, JA 536, paragraph 79. [00:20:39] Speaker 00: The commission explained elsewhere that absent the adjustment, the equity figure isn't representative of the amount that El Paso, the parent has in stake in El Paso. [00:20:48] Speaker 00: So it doesn't represent the risks. [00:20:50] Speaker 00: And that was the commission's point there. [00:20:54] Speaker 00: I can talk about if you have any questions about why the loan and the undistributed subsidy earnings were taken out of capital structure at all, or I could just skip right to why it was taken out of equity. [00:21:08] Speaker 04: I'm going for equity. [00:21:10] Speaker 00: Yeah. [00:21:10] Speaker 00: Of course. [00:21:11] Speaker 00: That's what I thought. [00:21:11] Speaker 00: I didn't want to skip that in case you had questions. [00:21:14] Speaker 00: So why it's out of equity. [00:21:17] Speaker 00: So the loan first, the commission explains. [00:21:30] Speaker 00: Commission explains, first of all, that it's required by long-standing precedent. [00:21:35] Speaker 00: In Southern California Edison, Indiana, Michigan, the equity accounting rule, and Arcla Gas, it was all taken out of equity, the loan was all taken out of equity. [00:21:45] Speaker 00: But on top of that, the commission exp- oh, I'm sorry, that's- [00:21:48] Speaker 00: undistributed city area earnings. [00:21:49] Speaker 00: So I'm on that already and I'll stay there, the undistributed city area earnings. [00:21:53] Speaker 00: All of those cases are those. [00:21:55] Speaker 00: And the second reason is that it's accounted for in FERC account 216.1, which is a proprietary capital equity account. [00:22:03] Speaker 00: So these funds are surely distinctly identified and surely isolated in FERC account 216.1, which is an equity account. [00:22:13] Speaker 07: Where's, and that's where, is that, where is that in the joint appendix? [00:22:17] Speaker 00: In the orders. [00:22:18] Speaker 00: Yes, that's 528B, JA535 paragraph 78, 517JA39 paragraph 86, and JA44 paragraph 96. [00:22:32] Speaker 00: The equity in 517JA143 paragraph 27, note 39, and 527JA27 paragraph 61, the commission explains that the inequity counting rule [00:22:44] Speaker 00: It explains that undistributed earnings are booked to account 216, which is the stockholders' equity account under the commission's uniform system. [00:22:52] Speaker 00: So that's why it's out of, why it's deducted out of equity. [00:22:56] Speaker 00: Also, the commission explained why the undistributed subsidiary earnings are not debt. [00:23:02] Speaker 00: The commission explained that taking on additional debt wouldn't be anticipated to result in subsidiary earnings as any funds obtained as proceeds would be offset by an equal liability. [00:23:12] Speaker 00: And El Paso also failed to show that undistributed subsidiary earnings rose from a debt issuance at all. [00:23:20] Speaker 00: So that's why it's out of, that's why that's out of equity. [00:23:24] Speaker 00: The loan is out of equity because the funds, [00:23:39] Speaker 00: The funds originated from internally generated funds, which El Paso agrees with. [00:23:44] Speaker 00: And El Paso had no debt or preferred stock issuances in the relevant timeframe. [00:23:48] Speaker 00: And that's the relevant holding from Distragas. [00:23:51] Speaker 00: In Distragas, where the facts mirror what happened here, there was a loan to a parent company that was excluded from equity because of those exact reasons. [00:24:01] Speaker 00: In Southern Natural as well, the commission did the same thing. [00:24:06] Speaker 00: The commission explained that once earned [00:24:08] Speaker 00: These internally generated funds were equity available to the pipeline to dispose of at its discretion. [00:24:15] Speaker 00: So they had these funds, they chose to give it to the parent and [00:24:21] Speaker 00: that was their choice, but it doesn't make it not equity just because they gave it to them. [00:24:25] Speaker 04: Did a portion of the loan though get attributed to debt? [00:24:28] Speaker 04: I'm sorry? [00:24:29] Speaker 04: Did some portion of the loan get attributed to debt? [00:24:31] Speaker 00: Yes. [00:24:32] Speaker 00: And why is that? [00:24:33] Speaker 00: That was because El Paso did show a 2007 debt issuance of $50,000, $50 million, excuse me, and the commission [00:24:43] Speaker 00: gave them the benefit of the doubt that there was something to hang the hat on to say that it was debt. [00:24:48] Speaker 00: So they're not sure that that's what it was, but there was something, some basis to attribute it to debt. [00:24:55] Speaker 00: Not to trace it to debt, but to attribute it to debt. [00:24:57] Speaker 00: And so the commission took the, it was $615 million and it went down to $565 million because of that debt insurance. [00:25:06] Speaker 06: Are you distinguishing between attribution and tracing because you don't believe that the burden is on the commission to trace? [00:25:16] Speaker 00: No, I think it's because these types of items are not generally given based on debt or equity issuances. [00:25:25] Speaker 00: So it would be futile to try to trace them generally to debt. [00:25:31] Speaker 00: You're not going to take out, as the commission explained, you're not going to take out a loan [00:25:35] Speaker 00: You're not going to issue debt to give your parent a loan. [00:25:38] Speaker 00: Why would someone do that? [00:25:39] Speaker 00: And with the undistributed subsidiary earnings, those are earnings. [00:25:43] Speaker 00: They're not going to be traced to an issue of debt or equity issuance. [00:25:47] Speaker 00: So it's just futile to do so. [00:25:49] Speaker 00: But you do have to attribute it. [00:25:50] Speaker 00: There has to be some basis to attribute it to equity or debt in order to take it out of that side. [00:26:00] Speaker 00: I want to mention that, [00:26:01] Speaker 00: El Paso continues to argue that in the transfer proceedings there was a loan during the test period, the rate test period, that had not been paid back by the parent. [00:26:15] Speaker 00: And that's just not true. [00:26:16] Speaker 00: The commission explained that. [00:26:17] Speaker 00: The commission even said in its orders, [00:26:19] Speaker 00: El Paso keeps saying that the loan wasn't paid back, but the loan was paid back. [00:26:22] Speaker 00: So a transcode does not involve a loan to a parent. [00:26:25] Speaker 00: And the commission explains that at 517A at JA 175 paragraph 111 and 528B at JA 533 to 34 paragraph 76. [00:26:35] Speaker 00: I can talk about, the final thing would be mountain fuel. [00:26:40] Speaker 07: Can I just ask you on the... Sure. [00:26:41] Speaker 07: Just on the parent loan again. [00:26:43] Speaker 07: So it sounds like you're saying, [00:26:46] Speaker 07: that just as a general matter, you wouldn't expect El Paso to issue debt to give the parent a loan. [00:26:51] Speaker 07: That's right. [00:26:52] Speaker 07: But then with the 50 million, that is what happened. [00:26:56] Speaker 00: didn't find that for sure that that was, it just said there is a basis on which to attribute it. [00:27:04] Speaker 00: There was an unaccounted for I guess. [00:27:06] Speaker 00: I don't really, I'm sorry, I don't really understand more about that because the record doesn't explain more about that. [00:27:11] Speaker 00: But they said, hey, we have this $50 million debt issuance in 2007. [00:27:16] Speaker 00: you can attribute it to that. [00:27:18] Speaker 00: And the commission erred on the side of giving them, because again, the commission doesn't just want to take things out of equity if it's not appropriate to take things out of equity. [00:27:25] Speaker 00: So it did have something to... [00:27:29] Speaker 00: to I guess trace it to but tracing didn't mean we know that this debt financed that, you know, paid for that loan. [00:27:36] Speaker 04: Did that instrument say the purpose of the loan was so that the subsidiary could contribute it, could loan it to the parent? [00:27:43] Speaker 00: My understanding is no and let me see if I can find that. [00:27:46] Speaker 00: My understanding is when El Paso presented it to the commission it wasn't like we know for sure that this is what the $50 million towards the loan. [00:27:54] Speaker 00: We just have this $50 million debt issuance and again the commission [00:27:57] Speaker 00: on the side and I'm sorry I don't, it would take me some time. [00:28:01] Speaker 00: I could find the site for that and explain that. [00:28:06] Speaker 00: Let me see if I can do that quickly. [00:28:08] Speaker 00: All right. [00:28:09] Speaker 00: But it is in there and I don't think that El Paso would disagree with that. [00:28:14] Speaker 00: Maybe they will. [00:28:16] Speaker 00: And then I can always send the court the sign there. [00:28:20] Speaker 00: If there's no further question. [00:28:23] Speaker 00: Thank you very much. [00:28:26] Speaker 07: We'll give you two minutes for rebuttal. [00:28:31] Speaker 04: Can I just ask about that? [00:28:32] Speaker 04: Did the debt instrument by which money was loaned to El Paso say, we're going to take this money and send it to the parent? [00:28:40] Speaker 04: No. [00:28:42] Speaker 04: Because no one would loan under those circumstances. [00:28:44] Speaker 05: It was just a question of tracing. [00:28:47] Speaker 04: Well, but I don't understand the tracing. [00:28:49] Speaker 04: If the people who are loaning the money don't understand that it's being transferred somewhere else, [00:28:56] Speaker 04: then they think it's in El Paso not being sent up to a parent. [00:29:00] Speaker 05: Right. [00:29:00] Speaker 05: Well, our position is that these revenues, the loan balance can't be traced at all. [00:29:07] Speaker 05: But the commission said, our position in the case was that the loan balance, the revenues that generated that loan balance can't be traced at all. [00:29:17] Speaker 05: because it's co-mingled in El Paso's finances. [00:29:21] Speaker 05: But the commission, in its initial order, said, you know, I'm going to take it out of equity. [00:29:26] Speaker 04: It seems like they did you a favor they didn't have to do you. [00:29:28] Speaker 04: That's what I'm wondering about this. [00:29:31] Speaker 05: Well, we would say that the entire thing should not have been taken out of equity. [00:29:34] Speaker 04: I know you would say that, but I think you get a benefit here. [00:29:36] Speaker 04: You shouldn't be second-guessing because it seems like the right answer was not to do that. [00:29:41] Speaker 05: I agree. [00:29:42] Speaker 05: If you buy their logic, which I think is flawed, [00:29:46] Speaker 05: And that's why the loan balance, that's why the debt came out. [00:29:49] Speaker 05: We don't agree with that logic, but if that was their logic, we said in the alternative, if you're going to apply that logic, you got to at least take out the $50 million from debt. [00:29:58] Speaker 05: So let me respond to a few things Council stated. [00:30:01] Speaker 05: You know, she says that, you know, that what they did is they didn't trace the equity, but they attributed to equity because it affected the risk of the companies. [00:30:09] Speaker 05: Well, and it lowered, you know, it offsets the parents' stake in the business. [00:30:15] Speaker 05: Well, El Paso's parents' risks are not an issue in this case. [00:30:19] Speaker 05: Whatever their risks are, it doesn't affect whether the capital structure is distorted or not, which is the issue. [00:30:26] Speaker 05: With respect to subsidiary earnings, again, you know, she's cited to where, [00:30:31] Speaker 05: it shows that it's in an equity account. [00:30:33] Speaker 05: I would refer you to paragraph 61, J, 27, 28, and paragraphs 97, paragraphs 44 to 45, where it shows it just moves from one equity account to another equity account. [00:30:45] Speaker 05: So the commission's distinction of whether it's available or not available really has no bearing here. [00:30:54] Speaker 05: With respect to the Transco case, counsel says that [00:30:58] Speaker 05: There was evidence that the loan was repaid. [00:31:01] Speaker 05: There was a mention, an allegation of whether it was repaid. [00:31:04] Speaker 05: The commission didn't resolve that issue. [00:31:06] Speaker 05: And that wasn't the reason why it didn't remove, why it refused to remove it from equity. [00:31:11] Speaker 05: The reason was we're not going to look behind the reasons why a parent established a capital, a particular equity ratio as long as it's within an acceptable range. [00:31:22] Speaker 05: It could have been as a result of a loan. [00:31:24] Speaker 05: It could have been without a loan. [00:31:26] Speaker 05: If the excess cash just sat there in retained earnings, the commission wouldn't remove it. [00:31:33] Speaker 05: And I refer you to the Iroquois case where they rejected an argument that Iroquois had $64 million in excess cash that it didn't distribute. [00:31:43] Speaker 05: If it distributed, the capital structure would have been lower. [00:31:45] Speaker 05: The commission said, well, based on transco, which we just decided, we're not going to look at that anymore. [00:31:53] Speaker 05: With respect to 11.2b, council refers to, again, the two positions of the staff and the rate protector shippers that the ALJ and the commission relied on. [00:32:05] Speaker 05: The shipper position, which is the one I mentioned before, is just simply that there's existing discounting capacity. [00:32:12] Speaker 05: Again, the amount of total discounts exceed the amount of [00:32:16] Speaker 05: post-95 capacity and therefore this discounted 90-95 capacity. [00:32:21] Speaker 05: It doesn't address 95 costs at all. [00:32:24] Speaker 05: It doesn't address where there's a shift in the cost of 95 capacity. [00:32:28] Speaker 05: Same thing with staff's analysis. [00:32:30] Speaker 05: Staff, she says, [00:32:32] Speaker 05: that the billing determinants in the case were lower than the presumption billing determinants. [00:32:37] Speaker 05: Well, the presumption billing determinants are a measure of the maximum rates under the 11.2B, which is reflective of the cost of the 95 capacity. [00:32:49] Speaker 05: So stats analysis is basically saying, look, we got some billing determinants here, there's a discount adjustment, and there's some shift of cost through the discount adjustment. [00:32:59] Speaker 05: But there's never any analysis of whether that shift relates to the cost of 1995 capacity in El Paso's current rates. [00:33:11] Speaker 07: Thank you. [00:33:11] Speaker 07: Thank you, Council. [00:33:13] Speaker 07: Thank you, Council. [00:33:13] Speaker 07: We'll move to the second part of the case. [00:34:04] Speaker 03: The Commission's cost allocation decision was erroneous in three respects. [00:34:14] Speaker 03: I'd like to start this morning on the first and what I think is the most fundamental respect. [00:34:19] Speaker 03: The Commission recognized recently in the fuel case [00:34:23] Speaker 03: that unless you can reasonably determine the distance of hall, there's no way to set a distance-based rate that is just and reasonable. [00:34:32] Speaker 03: That principle should have been dispositive in this case. [00:34:35] Speaker 03: Because of the articulated and integrated nature of this pipeline and the predominant use of displacement, no one disputes that it's impossible to know how far distance is actually flowing between a particular receipt point and a particular delivery point. [00:34:52] Speaker 03: and the ALJ held in this instance, it's untenable to set rates based on actual distance. [00:34:58] Speaker 03: So what El Paso did instead is it sought to use contract path-based distances as a proxy for cost causation. [00:35:05] Speaker 03: But that just added an additional layer of irrationality. [00:35:09] Speaker 03: The problem is that contract paths are simply a tool that El Paso uses to make sure that in the aggregate it's got sufficient capacity to serve all of the firm contracts on the system. [00:35:22] Speaker 03: It wasn't developed as a cost causation tool and it's not a proxy for the fixed costs on the system that are actually used. [00:35:29] Speaker 03: to reach any particular destination point. [00:35:31] Speaker 03: Now FERC offers three defenses of the uses of contract paths, and I'd like to address them in turn. [00:35:37] Speaker 07: Can I just ask you a conceptual question, which is you don't take issue with the basic understanding that seems to be underlying everybody's presentation of this, that just as a general matter, distance can relate to cost. [00:35:51] Speaker 03: Absolutely not, Your Honor. [00:35:52] Speaker 03: And the reason distance can relate to cost is, you know, if you have a straight line system, for example, I think as we've explained in our brief, [00:36:00] Speaker 03: If your gas flows further along that straight line system, you're responsible for more of the fixed costs of the pipes that are built and have to be constructed along the course of that system. [00:36:10] Speaker 03: And that's really all we're talking about here. [00:36:12] Speaker 03: The problem with the contract paths, and again, FERC offers three defenses of them. [00:36:17] Speaker 03: The first defense they offer is that they approximate the actual costs. [00:36:22] Speaker 03: The problem with that is that the record cuts precisely in the other direction. [00:36:27] Speaker 03: First of all, one thing we know is that 20% of contract paths are literally impossible paths. [00:36:33] Speaker 03: Gas can't flow over those paths because those paths have segments in them called contraflow segments where gas actually flows in the opposite direction. [00:36:42] Speaker 03: Secondly, we know that even in addition to these impossible paths, as a practical matter, gas doesn't flow along many contract paths because of the use of displacement. [00:36:52] Speaker 03: As a result, the expert for El Paso, Mark Westoff, acknowledged on page 742 and 743 of the JA that the most that he could say is that at times of peak usage, contract pads more nearly replicate actual gas flows. [00:37:12] Speaker 03: Not that they replicate, not that they're reasonable proxies, but that they come closer to it. [00:37:17] Speaker 03: And specifically, he put out a couple of data points. [00:37:20] Speaker 03: Closer than what? [00:37:21] Speaker 03: closer than they do otherwise. [00:37:24] Speaker 04: That's all we know. [00:37:25] Speaker 03: Yes, that's all they're saying is that at peak times, contract paths come closer to approximating actual paths than they do at non-peak times, which tells us precisely nothing. [00:37:35] Speaker 03: Now he did have a couple of data points. [00:37:38] Speaker 03: So one of the data points he set out is that [00:37:41] Speaker 03: The most that he could say is that the crossovers, the north-south crossovers on this pipeline system, when they're at peak, contract paths replicate actual paths 60 to 70 percent of the time. [00:37:54] Speaker 03: But then he said as to the southern mainline, it's a whole lot less clear and it becomes a lot more confusing because of the use of displacement. [00:38:02] Speaker 03: So what we know is that, [00:38:04] Speaker 03: even at the best of times it is not a reasonable proxy and for much of the pipeline they can't even say that much. [00:38:11] Speaker 03: Now FERC doesn't actually spend much time arguing before this court that there is a reasonable approximation. [00:38:18] Speaker 03: What it spends most of its time arguing is that in some other respect it's a proxy for cost causation and what they say specifically [00:38:26] Speaker 03: is that contract paths reflect the shipper's right to capacity along the specified path. [00:38:34] Speaker 03: But that's highly misleading. [00:38:36] Speaker 03: The only right that a shipper has is the right that's given by its firm contract. [00:38:40] Speaker 03: And that right is to nominate for receipt a particular quantity of gas at the receipt point and to take out that same quantity of gas from the delivery point. [00:38:51] Speaker 03: But the shipper has no right whatsoever to ship along a particular contract path. [00:38:56] Speaker 03: never has an enforceable right to do that. [00:38:58] Speaker 03: The paths weren't created for that purpose. [00:39:01] Speaker 03: They weren't created for purposes of cost causation whatsoever. [00:39:05] Speaker 03: As a result, there's no correlation then between a contract path, which doesn't describe how gas actually flows, and any articulable basis for allocating cost causation. [00:39:20] Speaker 03: The third basis that they argue is more of a throwaway, I think, which is they point out that different contract paths can be worth different amounts of money in the secondary market. [00:39:30] Speaker 03: Now, that's true, but it's irrelevant for this purpose. [00:39:33] Speaker 03: The reason that a contract path may be worth more in the secondary market than another contract path is that it may have segments along it that are in higher demand, choke points and things of that sort. [00:39:46] Speaker 03: It has nothing to do necessarily with how long the path is. [00:39:50] Speaker 03: And there's no evidence in this record, by the way, about what the different values of the contract paths that are at issue here are, much less anything in the record that would say that the differences in value in the secondary market correlate to the differences in the zone rates that El Paso has established. [00:40:09] Speaker 03: So that clearly isn't the basis. [00:40:13] Speaker 07: Burke offers nothing else. [00:40:14] Speaker 07: Can I ask this question? [00:40:16] Speaker 07: Even if it's true that sometimes the contract paths don't approximate the real world, sometimes some contract paths do. [00:40:30] Speaker 07: And so even what you pointed out was that you could have a 20% figure where it can't be used in that way, but then that would leave 80% where it can't. [00:40:39] Speaker 03: 80% where it physically can, but not that no one has said that 80% of the time it actually does. [00:40:46] Speaker 03: And the reason, Your Honor, is this. [00:40:47] Speaker 03: Let's take another simple example. [00:40:50] Speaker 03: Not this case. [00:40:50] Speaker 03: But suppose you have a straight line going from here to here. [00:40:54] Speaker 03: You've got a production area in the middle and a production area at the beginning. [00:40:59] Speaker 03: Gas can physically flow all the way. [00:41:02] Speaker 03: But gas may actually, it may make no sense for gas to flow all the way to the left-hand side here, because it may be flowing from the middle, because it's a lot more efficient to just enter the gas in the middle and go to the left. [00:41:14] Speaker 03: So for that reason, even when you physically can send gas along a particular contract path, the fact is that you may never ever do so. [00:41:23] Speaker 03: And that's why, again, getting back to the only evidence we've got is their expert, Mark Westoff. [00:41:28] Speaker 03: And again, the most he would say is along two particular crossovers. [00:41:32] Speaker 03: 60 to 70 percent compliance at peak times. [00:41:35] Speaker 03: And for the rest of the system, he offered nothing. [00:41:37] Speaker 03: At the very least, substantial evidence, Your Honor, would require some more data that would give the court and give us reasonable assurance that this is a decent proxy and there just isn't anything. [00:41:49] Speaker 03: And by the way, 60 to 70 percent of the time is pretty poor to let's start there. [00:41:53] Speaker 03: Because after all, what they've calculated at the end of this process is a very small difference in mileage between California and Arizona. [00:42:02] Speaker 03: Now, if they're wrong 30 to 40 percent of the time, there's just no reasonable assurance that that difference in mileage is even correct. [00:42:11] Speaker 03: And by the way, that points out another problem, another flaw in FERC's decision here, which is even if you assumed, which we of course don't, that contract pads work, at the very best they're an awfully rough proxy. [00:42:25] Speaker 03: And yet, FERC disallowed El Paso in this case from equilibrating California and Arizona, which after all had a very small mileage difference between the two. [00:42:37] Speaker 03: Again, a rough proxy at best. [00:42:40] Speaker 03: And there were very real countervailing costs, fixed costs, that argued that deliveries to Arizona are more expensive. [00:42:47] Speaker 03: Those really very real fixed costs are discussed at pages 696 and 750 of the JA. [00:42:53] Speaker 03: 696 tells us that in Arizona, a full 2,000 miles out of the 4,900 miles in the Arizona system are these small diameter laterals. [00:43:06] Speaker 03: You go to page 750 and what another of their experts, Mr. Westoff, explains is that these small diameter laterals carry only one-fifth the gas of the large pipelines and yet they cost half as much to build. [00:43:21] Speaker 03: It doesn't take a whole lot of math to understand, therefore, that the unit fixed costs of the small diameter laterals are much higher. [00:43:29] Speaker 03: And that's 40 percent of the Arizona system. [00:43:32] Speaker 03: This data was all in the record, and all that El Paso did, and of course El Paso is allowed to establish whatever rates it wants in their zone of reasonableness, is said, look, we've got these very real offsetting costs. [00:43:43] Speaker 03: We have a very small mileage difference here. [00:43:46] Speaker 03: And it makes sense to treat them all as a single zone for rate purposes. [00:43:50] Speaker 03: Now, FERC refused to allow them to do so, but not for any reason that was rational. [00:43:54] Speaker 03: Now, first, FERC said, well, you don't have any empirical data to support that. [00:43:59] Speaker 03: There's a couple of problems with this. [00:44:00] Speaker 03: First of all, once you've accepted that zone-based pricing can be just and reasonable, you're in a world where you've already accepted averaging of longer and shorter distances within a particular zone. [00:44:12] Speaker 03: For example, Arizona is a large zone. [00:44:14] Speaker 03: They don't require that it be split up in five pieces. [00:44:17] Speaker 03: Here we're just talking about the California zone is literally the border of California and Arizona. [00:44:22] Speaker 03: The pipes are really in Arizona, just one of the border. [00:44:25] Speaker 03: All El Paso said is small difference in miles. [00:44:28] Speaker 03: We've got offsetting costs, it makes sense. [00:44:30] Speaker 03: That's actually more empirical evidence than anyone introduced in this proceeding to justify use of state boundaries to begin with. [00:44:38] Speaker 03: So it's utterly irrational in a world where no one put in any evidence to justify why you'd use state boundaries. [00:44:45] Speaker 03: Actual evidence was introduced as to why to put California and Arizona together and FERC said no. [00:44:51] Speaker 03: Makes no sense. [00:44:52] Speaker 03: Now, Ferck said, well, equilibration is inconsistent with the contract path methodology. [00:44:57] Speaker 03: Of course, it's not. [00:44:58] Speaker 03: Contract path methodology tells you how to try to estimate distances. [00:45:02] Speaker 03: It doesn't tell you what zones should look like, how big they should be, and what their boundaries should be. [00:45:07] Speaker 03: So that made no sense whatsoever. [00:45:10] Speaker 03: And as I've noted, to the extent that any empirical evidence was necessary, it was produced here. [00:45:17] Speaker 03: If there are no further questions, I would save the rest of my time for a bottle. [00:45:21] Speaker 07: Sure. [00:45:21] Speaker 03: Thank you. [00:45:22] Speaker 03: Thank you. [00:45:29] Speaker 01: May it please the court, Lona Perry for the Commission. [00:45:33] Speaker 01: The Commission approved El Paso's proposal to use contract PAS to allocate costs of the fixed installed capacity on the pipeline [00:45:44] Speaker 01: because they provided a reasonable proxy for the relative cost of service to each of the zones. [00:45:52] Speaker 01: And the commission found that that was true because cost allocation for purposes of fixed cost has to do with service at peak. [00:46:01] Speaker 01: And the reason why the contract paths made sense is because the contract paths were created for the purpose of assuring that at peak, [00:46:12] Speaker 01: El Paso could serve all of the fixed shippers on the system. [00:46:17] Speaker 01: And therefore, the commission found that using the contract pass as a mechanism for measuring the distance through the system required by the shippers in a zone was appropriate because that was for the purpose of accommodating peak capacity. [00:46:34] Speaker 01: And the thing that you need to bear in mind when you're considering this issue is if you consider the map that's at page 740 of your joint appendix, the major operational limitation that exists on the El Paso system is the limited capacity of the crossovers that are on the west end of the system. [00:46:57] Speaker 01: 70% of the contract volumes are being delivered to Arizona and California [00:47:03] Speaker 01: But the crossover laterals between the north and south systems have very limited capacity. [00:47:10] Speaker 01: And the commission's point was, and it discussed this about the route, the famous NS1 route all the way around the horn the other way to Arizona and to California. [00:47:22] Speaker 01: The point being that once these north-south laterals fill up, the rest of the service to those places has to go [00:47:32] Speaker 01: the other way, around the horn. [00:47:35] Speaker 01: And therefore, when you're talking about peak, when you're talking about the need to make deliveries at peak, you need to take into account all of the costs of that system, not just what you might get in a direct line on an average or typical day. [00:47:49] Speaker 01: And the testimony that Mr. Russ was just referring to, the Westhoff testimony at JA 742, [00:47:58] Speaker 01: If you look at it you will see there that he is referring to what happens when those north-south laterals at the west end of the system are at capacity. [00:48:09] Speaker 01: The rest of his conversation with Ms. [00:48:12] Speaker 01: Albert that he refers to is not in on that page of the Joint Appendix. [00:48:17] Speaker 01: But what the discussion was about was he was saying you don't have to get to capacity on the main line before you start getting close to contract paths, before the contract paths start approximating the service. [00:48:32] Speaker 01: You just have to get at capacity on these west end laterals and then they start to look more like the contract paths and therefore the commission found that there was substantial evidence to support the proposition that when you're considering the need for installed capacity at peak that it was reasonable to consider the contract paths because those take into account [00:48:54] Speaker 01: all of the facilities that are needed to support those shippers, not just the ones on a typical day, but also the ones when they have to use the more circuitous route to make deliveries. [00:49:06] Speaker 07: So one way to look at it I think is that the contract path methodology is better than some alternatives because it does take into account paths at peak capacity for the reasons that you say. [00:49:18] Speaker 07: And then I guess the response would be, but it still has to be a reasonable proxy. [00:49:22] Speaker 07: even if it's advantageous in one respect, it still has to be a reasonable proxy. [00:49:26] Speaker 07: And with respect to whether it's a reasonable proxy, what's your response to the point that we know that the contract path methodology includes paths that in the real world don't ever in fact exist? [00:49:41] Speaker 01: Well, Your Honor, I would point out that [00:49:45] Speaker 01: The contrapass, they exist in the pathing because there are four segments of this oval that are bidirectional. [00:49:58] Speaker 01: And it's not that they are physically impossible paths in the sense that the gas couldn't flow that way, but they are, there are on parts of those laterals [00:50:09] Speaker 01: there are predominant flows and therefore they treat those as contraflows because it's contrary to the predominant flow. [00:50:17] Speaker 01: It is actually a physical path. [00:50:19] Speaker 07: Right. [00:50:19] Speaker 07: No, I get it. [00:50:20] Speaker 07: I get that it actually exists. [00:50:20] Speaker 01: And the commission considered, the commission recognized that the presence of these contraflows complicated the analysis, the mileage analysis, but the commission looked at their treatment, El Paso's treatment of those contraflow segments which was to count them as zero miles. [00:50:38] Speaker 01: and decided that that was a reasonable way to deal with the presence of the contraplate segments. [00:50:45] Speaker 01: I mean, there's no issue that that was a complicating factor to the mileage analysis, but the commission decided that that was appropriate because they consume less forward haul capacity, obviously, because the deliveries would be made by displacement there, than do the forward haul parts of the system. [00:51:04] Speaker 01: And they decided that in taking into account [00:51:07] Speaker 01: that the fact that the contraflows exist, that that was a reasonable method of dealing with that. [00:51:12] Speaker 07: To zero them out. [00:51:13] Speaker 01: Yes, to zero them out of the mileage. [00:51:16] Speaker 01: And so the commission found that with that treatment of the contraflows that it was the contract path methodology was a reasonable proxy for the relative cost of serving each of the five state zones. [00:51:32] Speaker 07: And now, can you speak to equilibrium? [00:51:35] Speaker 07: Is that even a word outside of this context, actually? [00:51:38] Speaker 07: I don't even know. [00:51:38] Speaker 07: I've never heard of it. [00:51:39] Speaker 01: Not that I'm aware of, Your Honor. [00:51:41] Speaker 01: Yes. [00:51:42] Speaker 01: Equilibration or equilibration, I don't know. [00:51:45] Speaker 01: I'm not sure what the exact pronunciation would be. [00:51:50] Speaker 01: The commission's decision on equilibration was basically based on the fact that the El Paso had gone to a great deal of effort to have this detailed decatherm mileage study that definitely showed a difference in mileage between California and Arizona. [00:52:06] Speaker 01: And then they proposed to change that methodology with respect to the western three zones and to just average them out based on this alleged cost of Arizona laterals. [00:52:22] Speaker 01: There were a number of points about the Arizona laterals. [00:52:25] Speaker 01: First of all, the commission found that there was no empirical evidence whatsoever of the cost of the Arizona laterals. [00:52:33] Speaker 01: And Mr. Derryberry testified that there had been no quantification at all. [00:52:38] Speaker 01: They didn't keep track of the cost of the Arizona laterals. [00:52:42] Speaker 01: And so there was no, there was no, [00:52:46] Speaker 01: of the cost to offset the calculation of the mileage differences between two zones and there was no reason to think, just that there was no reason to decide that that should be an offsetting factor. [00:53:00] Speaker 01: And then the commission also found that even if you took into account just the idea that the argument that the per unit cost in Arizona was higher than it was in California because of the existence of these laterals, [00:53:15] Speaker 01: the Commission found that that consideration, even though not quantified, was offset by other factors, which included the fact that there are discounted rates in California, and it also included the integrated operation of the pipeline itself. [00:53:32] Speaker 01: As the Commission said at [00:53:35] Speaker 01: Well, they're discussing this in the context of equilibration at 528 paragraph 274, which is in the joint appendix of 106. [00:53:43] Speaker 01: And also at 528 paragraph 247, joint appendix 97, the commission discusses the fact that on an integrated system, you are assuming that all the customers benefit from the entire, all of the facilities of the entire system. [00:53:57] Speaker 01: And so the commission [00:53:59] Speaker 01: view was that undercuts the argument that any particular zone is having a higher per unit cost of delivery than any other zone because the facilities are for the benefit of the entire system. [00:54:13] Speaker 01: And so with those things, the Commission found that equilibration [00:54:21] Speaker 01: that the equilibration of the zones as set out in the dacotherm mileage study was not just unreasonable. [00:54:28] Speaker 01: And the commission also noted that at hearing that El Paso never made a case [00:54:35] Speaker 01: for the proposition that it's deca-thermal mileage study without the subsequent step of equilibration would result in unjust and unreasonable rates. [00:54:44] Speaker 01: And the commission found that equilibration was in fact unjust and unreasonable but the contract path methodology was reasonable. [00:54:56] Speaker 01: If there are any further questions? [00:54:59] Speaker 07: Thank you. [00:54:59] Speaker 07: Thank you. [00:55:02] Speaker 07: Mr. Ress, do you have, how much time did Mr. Ress have in her vote? [00:55:06] Speaker 07: Okay. [00:55:07] Speaker 03: There you go. [00:55:08] Speaker 03: Thank you. [00:55:09] Speaker 03: In order for contract paths to be a reasonable proxy for cost causation, whether it's through distance or some other method, you still need empirical proof that they are. [00:55:21] Speaker 03: Council discussed, you know, the fact that you have to use these crossovers when the system is at peak. [00:55:26] Speaker 03: I agree with that, of course, but it doesn't get them where they need to go. [00:55:30] Speaker 03: I'll use their example to show why. [00:55:32] Speaker 03: It doesn't make a whole lot of sense. [00:55:34] Speaker 03: So NS1, everybody's familiar with that at this point. [00:55:37] Speaker 03: It's the very long roundabout route. [00:55:39] Speaker 03: We're not saying that at peak it is never used. [00:55:42] Speaker 03: There's evidence that at peak it might be used seldomly if ever, but it might. [00:55:47] Speaker 03: The problem is this. [00:55:50] Speaker 03: The methodology they used has it taking up a full 20% of the gas shipments in terms of dekatherm miles going from the San Juan basin all the way to California. [00:56:05] Speaker 03: Now that changes, as we've described in our brief, that changes the overall mileage computations hugely. [00:56:11] Speaker 03: It increases the mileage from that receipt to that delivery point by 130 miles. [00:56:17] Speaker 03: If they're wrong on that, if it only is true 50 percent of the time, in other words, if it's a 10 percent rather than a 20 percent measure is the correct measure, suddenly California has fewer miles to get to it than Arizona does. [00:56:33] Speaker 03: And there's no evidence in the record from which the court can conclude that the contract path mileage basis is right in that instance or is wrong in that instance in terms of coming in at 20%. [00:56:45] Speaker 03: We believe it's wrong, but the whole point is there's no evidence that it's correct. [00:56:49] Speaker 03: So given that contract paths have not been shown to be accurate, those kind of assumptions can make a huge difference in the mileages that come out the other end of the calculation and therefore the rates that we have to pay. [00:57:01] Speaker 03: The mere fact that they use contract path methodology as an aggregate to make sure that as a whole the system doesn't sell more capacity than they can take on doesn't tell you that the relativities within the system work. [00:57:13] Speaker 03: There's absolutely nothing in the record that actually shows how they came up with their contract path-based design, who got what paths, et cetera. [00:57:22] Speaker 03: There's nothing to show it. [00:57:24] Speaker 03: And all we know is that each path is as short as the distance of each path was computed to be as short as that path could be. [00:57:31] Speaker 03: We have no proof that the average distance is anywhere as short as they could be. [00:57:35] Speaker 03: Number two, contrapads. [00:57:38] Speaker 03: There's no question that they're impossible in the sense that gas never flows that way. [00:57:42] Speaker 03: That's JA609 and 833. [00:57:45] Speaker 03: Zeroing them out doesn't cure the problem because the problem is it's actually a false path. [00:57:50] Speaker 03: The whole path's wrong. [00:57:51] Speaker 03: So zeroing out one segment of it, you're still going along a path that in real life gas doesn't travel. [00:57:57] Speaker 03: As far as the equilibration, the fact that they spent a great deal of time computing the overall mileage really tells us nothing, because that doesn't tell us what shape zones are right, what size zones are right, or where their boundaries should be. [00:58:12] Speaker 03: It just tells us what the overall miles are. [00:58:15] Speaker 03: Secondly, the cost for Arizona laterals. [00:58:19] Speaker 03: What we know is that they're real costs. [00:58:21] Speaker 03: Yes, we don't know exactly how much they were, but they didn't know exactly how much the additional cost of small laterals were in the Tennessee gas case either. [00:58:29] Speaker 03: If I may just finish up with this last point, Your Honor, as to the offsetting factors that FERC discussed, the integrated nature of the pipeline [00:58:38] Speaker 03: actually counts in favor of equilibration, not arguing against the equilibration. [00:58:44] Speaker 03: And to the extent they're trying to argue that the laterals that are in Arizona are used by other parts of the system, the evidence in this case, and again this is at page 696, is that those 2,000 miles of laterals are used only for Arizona deliveries. [00:59:01] Speaker 03: So they're not integrated with anything else whatsoever. [00:59:06] Speaker 03: The discounts to California again don't matter because what we're looking at here is the maximum rates that El Paso is allowed to charge. [00:59:13] Speaker 03: Whether in real life under certain market conditions it provides discounts have nothing to do with the question that this court is looking at, which is whether they've sent the maximum rates at a lawful level. [00:59:25] Speaker 07: Thank you. [00:59:26] Speaker 03: Thank you very much. [00:59:26] Speaker 07: Thank you, counsel. [00:59:27] Speaker 03: The case is submitted.