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Case number 19-1224 et al.

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Belmont Municipal Light Department et al.

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Petitioners versus Federal Energy Regulatory Commission.

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Mr. Coyle for the petitioner, New England Consumer Owned Systems.

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Mr. Aslin for the state petitioners.

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Ms.

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Roberts for the petitioners, Sierra Club and Union of Concerned Scientists.

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Mr. Kennedy for the respondent, Burke.

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Mr. Hughes for the respondent, intervenors, New England Owner Generators Association et al.

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All right.

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Mr. Coyle, we'll hear from you.

[00:00:33] Speaker 02:
Good morning, your honors.

[00:00:34] Speaker 02:
May it please the court, I'm John Coyle from Duncan and Allen LLP on behalf of petitioners Belmont, municipal light department at all, call ourselves the New England Consumer Owned Systems here and Energy New England LLC.

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I've reserved four minutes time for rebuttal with my

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Co-petitioners council would like to invite the court to direct questions on rebuttal anywhere they like.

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But unless you specify, you wanna hear an answer from Ms.

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Roberts or Mr. Aslan, I'll be the default rebuttal council.

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The order on review in this case is based not on substantial evidence or reason decision-making, but on speculation and sloganeering.

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There are four fatal flaws in this order.

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It is unsupported by substantial evidence or reason decision-making.

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There is no calibration of the incentive provided by the $82.49 per megawatt hour forward price or the $8.25 per megawatt hour real-time adder for so-called inventory and energy.

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no calibration of that incentive to need, and the rate itself is neither cost-based nor market-based, therefore has no inherent guarantee of justice or reasonableness.

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The third, the decision unreasonably, it is unreasonable to accept payments, to accept ISO New England's proposal for payments,

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resources that will not respond to the incentive.

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These are resources that naturally inventory energy and indeed have no choice.

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Coal fired power plants, nuclear plants or certain hydroelectric plants that

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inevitably store fuel or other energy sources and will not increase their ability to do that in response to the incentive provided by the rate in the Inventory Energy Program.

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Why is it unreasonable to provide compensation for the value provided by energy stability?

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And those resources are, on the one hand, they're at a major disadvantage because they're more expensive.

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On the other hand, they provide this distinct benefit, which is the energy is there, it's stored and it can be used in a pinch.

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So if you compensate for that value, you would tend to make those resources

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better able to compete and you might save the marginal ones from going under.

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And we know that New England has this major energy problem caused in part by a lot of these older kinds of technologies going under.

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It's an interesting hypothesis, Your Honor.

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Unfortunately, there's no evidence in the record or no analysis in the record to support it.

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The point of the rate that's been established in this case is to elicit additional supplies of energy during the winter months.

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There's no evidence to support the calibration or there's no evidence to support just the basic reasoning that I gave you, which is let's compensate for elements of value so that people contributing to security

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appropriately get compensated and won't have to fold when they shouldn't.

[00:04:32] Speaker 02:
There was no evidence adduced to relate the payment to the value of that allegedly stored energy, number one.

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Number two, as your honor knows.

[00:04:45] Speaker 07:
Yeah, I understand.

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But that's an argument really for the whole thing.

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That's not to stick to the coal producers.

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There was also, your honor, a prior determination by the commission not to pay these kinds of resources because they're not in a position to respond to the incentive.

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Now FERC tried to get around that in its decision in this case.

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I'm referring by the way to prior decisions in ISO New England, Inc.

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152 FERC

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paragraph 61190 at paragraph 47 and the order denying rehearing in that case 154 FERC paragraph 61133 at paragraph 13.

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The basis for the commission's denial in that instance is there is no supplemental response from these resources in response to the supplemental payment.

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FERC attempted to get around that in its decision here by rebranding the product, okay, as inventoried energy rather than under the prior decision, it was winter reliability.

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In substance, it was inventoried oil, but the,

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the use of a semantic dodge to, in essence, rebrand the product so that more people could get paid doesn't constitute reason decision-making.

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Didn't he also, Mr. Cole, have another plan happening to address the potential retirements?

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And I understand Judge Katz is sort of saying, well, we want to make sure these people are happy because

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they might drop out or they might retire.

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But I'd understood there was some other way to prevent that.

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Sorry, Your Honor, I didn't mean to step on your question.

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Yeah, there are, that's kind of my, the fourth problem with the order is there is a forward capacity market in New England.

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And PERC did not evaluate the impact of its acceptance of the Inventory Energy Program

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here on the operation of other markets.

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In particular, the forward capacity market is intended to incentivize the orderly retirement of uneconomic units and their replacement by newer and more efficient generation and by propping up units that have become uneconomic with this additional compensation.

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The Inventory to Energy Program dampens the price signal that the forward capacity market is intended to send.

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There is also a pay for performance program, which is intended to incentivize generators to maintain fuel on site when they have a capacity supply obligation under the market rules so that they can produce energy on call.

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And again,

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Our view was that this Inventory Energy Program interferes with price signals sent by the other market mechanism, the pay for performance mechanism, and FERC didn't evaluate it.

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It simply said, oh, they're complimentary because they both incent the same thing.

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It's not true.

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They actually worked to some extent across purposes because the Inventory Energy Program payment

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to some extent, offsets the incentive that the penalty structure and pay for performance is intended to create.

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Did that cover your question, Your Honor?

[00:08:30] Speaker 04:
I believe so.

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I think I was more focused on the cost of service plan and the extent to which that addressed the problem that it seemed as though Judge Katzis was focusing on.

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And that again is a different flaw in the order that relies on

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ISO New England's January 2018 operational fuel security analysis is having created some sense of exigency about bringing in more energy supply.

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But by the time FERC had allowed the Inventory Energy Program to become effective, FERC had also accepted a cost service agreement that would keep 1500 megawatts of liquefied natural gas-fired

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combined cycle capacity and service domestic eight and nine units.

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And so to the extent that the, I think what your honor is referring to is that specifically, which is not addressed really at all in the commission's reliance on the operational fuel security analysis, but also a generic rule change accepted along with

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the Mystic 8 and 9 agreement that allowed the ISO New England to retain retiring units on a cost of service basis if they were needed for fuel security.

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You're referring to one or two of those.

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Yes, yes.

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I think the latter, but yes.

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Okay.

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Yeah.

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Yeah.

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So there were many other paths that were already in place.

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And again, there's no analysis of whether

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the incremental payment associated with the Inventory Energy Program is necessary or sufficient or how much additional supply do we need?

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How much is this additional payment likely to elicit?

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Really no analysis of how this incremental payment is likely to influence the retirement decisions of existing generators because there was ample evidence on this record that the

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the incremental payment would amount best case to approximately 50 cents a kilowatt month, which is within the play of forward capacity auction prices.

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And for a two-year interval was unlikely to influence any retirement decision.

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And indeed, NEPCA, New England Power Generators Association, the intervener you'll be hearing from a little later,

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had a great metaphor for it.

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He said it's like two people working on a road crew where one's filling the pothole and the other guy's taking the fill out of the pothole.

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At the end of the day, you still have a pothole.

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This is, again, the sort of the analytical deficiencies of the proposed program.

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There was no exigency behind this program either.

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The only exigency that's actually involved is ISO New England's unilateral commitment undertaken in another case really to put before the commission a more market-based means of securing winter, supplemental winter fuel than its previous essentially either cost-based or auction-based procurement.

[00:12:06] Speaker 02:
of additional oil supplies.

[00:12:09] Speaker 04:
Can you speak?

[00:12:10] Speaker 04:
Oh, sorry.

[00:12:11] Speaker 04:
Judge, go ahead.

[00:12:13] Speaker 07:
Are you saying no exigency because you don't think that the macro problem is real?

[00:12:24] Speaker 07:
No.

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Or no exigency because you think that

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the pay for performance program addresses the misaligned incentives problem and what's the other one?

[00:12:43] Speaker 07:
The cost of service program addresses the issue I was addressing, which is suppliers that might be marginally beneficial taking into account the security value are gonna fold.

[00:13:00] Speaker 02:
If your honor will indulge me, I'd like to unpack your question a little bit.

[00:13:05] Speaker 02:
Sure.

[00:13:05] Speaker 02:
On a macro level, sure, there is a problem.

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And I think for then Commissioner Glick, now Chairman Glick, discussed that pretty compellingly in his dissent.

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While you need to address the problem, you don't address the problem by creating a system where

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for all the evidence shows, the customers would be better off if you burned the money to generate electricity.

[00:13:32] Speaker 07:
Well, but you may cut the agency a little bit more slack to the extent you think that there is a real problem.

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Everyone seems to think if you get to the point of rolling blackouts, those costs are gonna dwarf any cost we're talking about here.

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We're only talking about two years.

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They were bumping up against the bidding deadlines for the 23 futures.

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Why shouldn't we cut them a little bit of slack if we think, you know, they're in the right ballpark, but they didn't calibrate it perfectly.

[00:14:15] Speaker 02:
Well, if I could finish unpacking your first question.

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All right, that's fine.

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But I have answers to all those.

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Go ahead.

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The commission relies and NEPCA helps them rely on the notion that there is some urgency to coming up with a resolution to the problem that justifies bypassing principles of sound market design, right?

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Because we know ISO New England admitted in their response to FERC administrative staff's deficiency letter, that's record item 71,

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that there were a lot of analyses they didn't do.

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ISO New England didn't do.

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They didn't identify the amount of inventory energy needed to maintain system reliability.

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That's JA 515.

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They didn't quantify the benefits expected from the Inventory Energy Program.

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They didn't evaluate the cost impacts of including opportunity costs and energy market offers.

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And they didn't evaluate whether or not the IEP would have ensured reliability under past winters.

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They didn't evaluate whether or not the IEP was actually capable of producing generator entitlements.

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That's why I say you have an order here that is largely based on speculation and sloganeering.

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not on the kind of analysis that would support the hypotheses that are being advanced as, in essence, rank speculation here.

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There's no evidence to support those hypotheses at this point in the case.

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There should have been, if you wanted to support this program as just and reasonable under Section 205 of the Federal Fabric Act, there should have been evidence.

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There is very little, if any, an administratively determined price, a single price,

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is, as Chairman Blake said, not a market of any kind.

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It is simply an incentive bonus and spread around to resources that really are not in a position to respond to.

[00:16:31] Speaker 06:
Judge Katz, does that answer your question?

[00:16:33] Speaker 06:
Yes.

[00:16:34] Speaker 06:
Thank you.

[00:16:36] Speaker 06:
Over your time, I just want to see if Judge Katz and Judge Jackson have any other questions for this petition.

[00:16:45] Speaker 04:
No, I'm all set.

[00:16:46] Speaker 04:
Thank you.

[00:16:47] Speaker 06:
Thank you.

[00:16:47] Speaker 06:
All right.

[00:16:48] Speaker 06:
We'll give you some time on rebuttal.

[00:16:51] Speaker 06:
Let's hear from counsel for, I believe it's the state petitioners.

[00:16:59] Speaker 09:
Thank you, your honor.

[00:17:00] Speaker 09:
May it please the court, Christopher Aslin on behalf of the state petitioners.

[00:17:04] Speaker 09:
I think there's three points I'd like to make briefly for the court to focus the attention here.

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And they relate to the two primary justifications that work.

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gave for approval of the IEP program.

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And the first point is that this so-called misaligned incentive problem that Judge Katz has referred to earlier really only applies to natural gas and oil resources.

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it does not apply to other resources such as nuclear, coal, biomass, and hydroelectric resources.

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And therefore, it is not a reasonable justification for inclusion of those other resources in this program, the payment of money.

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The second point is that with regard to those other resources, nuclear, coal, hydroelectric, and biomass, the justification was that this program may in some way help deter retirement of some of those resources.

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However, as Attorney Coyle pointed out, there simply was no record evidence to support that notion other than anecdotal theory that, well, if you give them more money, they might do better.

[00:18:07] Speaker 09:
But we don't have analysis to show how much money is enough.

[00:18:12] Speaker 09:
And in fact, the record has contrary evidence that the commission did not respond to.

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And then the third point is that without these justifications being supported in the record,

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You're left with a program that saddles consumers with up to five times the cost of prior winter reliability programs, which is clearly excessive.

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It's serving the same basic role as these prior programs, but charging a significant more greater amount of money to consumers.

[00:18:42] Speaker 09:
So I'm happy to unpack any of those.

[00:18:43] Speaker 09:
I'll start with the misaligned incentives piece.

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The ISO England relies on this problem, this line incentive problem, based on a discussion paper that's part of the record.

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That paper, discussion paper, clearly, and it appears in the joint appendix at page 731.

[00:19:03] Speaker 09:
That discussion paper clearly focuses in on

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resources, natural gas primarily, but also oil resources that have production uncertainty, which the discussion paper discusses as meaning that they typically don't achieve awards in the day ahead market.

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In other words, they know that they're likely to have the fuel they need and be able to produce that energy at the time it's needed.

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That does not apply to nuclear biomass, coal, or hydroelectric resources typically.

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And indeed some, as a discussion paper points out, some highly efficient natural gas resources are also in the day ahead market, and this line doesn't really apply to them either.

[00:19:48] Speaker 09:
Without that problem relating to the resources that Iceland England is trying to include in this program, you're simply, as Commissioner Klick pointed out, you're simply putting money in for no particular benefit to customers.

[00:20:03] Speaker 09:
That's the first point.

[00:20:04] Speaker 09:
The second point.

[00:20:05] Speaker 04:
Can I, Mr. Assel, before you leave that point, I always try to think about things relative to our role, burden, oversight under the statutes,

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and what FERC's responsibility was when evaluating this IEP.

[00:20:23] Speaker 04:
So the defect that you've now identified to the extent that the plan was not tailored adequately to address misaligned incentives because it applied to these entities to whom that is not an issue.

[00:20:40] Speaker 04:
What is the nature of that problem?

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Is it that there wasn't

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evidence?

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Is it arbitrariness?

[00:20:47] Speaker 04:
Is that where we are?

[00:20:48] Speaker 04:
Are you suggesting that it's a just it's a sort of a substantive problem?

[00:20:53] Speaker 04:
You understand my question.

[00:20:54] Speaker 04:
I'm sorry.

[00:20:54] Speaker 04:
I do.

[00:20:55] Speaker 04:
Yes, as it could have been.

[00:20:58] Speaker 09:
OK, that's clear.

[00:20:59] Speaker 09:
Yeah, I believe that the fundamental problem is it goes to the just and reasonable.

[00:21:03] Speaker 09:
Because what in effect, if you are paying resources for no particular benefit to customers, that is definitionally an excessive rate and therefore not just and reasonable.

[00:21:14] Speaker 09:
There's also an arbitrary factor here in the sense that I believe Mr. Coyle already pointed out, the FERC has previously made a determination that those resources, nuclear coal, et cetera, should not be part of winter reliability programs for that same reason, because they are not incentivized to procure additional fuel resources or supply agreements.

[00:21:40] Speaker 09:
They already do that as a matter of course, under the market system that they operate in today.

[00:21:44] Speaker 04:
And so, but they did acknowledge that change so to the extent that they changed position isn't there information in the record that indicates that for recognize that they had previously held a different view on this.

[00:21:57] Speaker 09:
They did, Your Honor, but they didn't provide a reasoned explanation for the change in course, other than to say that this will help the misaligned incentives problem.

[00:22:07] Speaker 09:
However, as I pointed out, that misaligned incentive problem is not relevant to these additional resources.

[00:22:12] Speaker 09:
Paying nuclear more money will not change the misaligned incentive, because they're not subject to a misaligned incentive problem to begin with.

[00:22:21] Speaker 09:
And so, to the extent that they acknowledge their change, of course, they didn't provide a reason decision for that change and then with arguments and arbitration.

[00:22:31] Speaker 09:
And then we have the bigger problem on the retirement side of the equation, which is that there simply isn't substantial evidence to show that we will achieve any of the benefits that are

[00:22:42] Speaker 09:
The potential that, you know, have been raised by assuming was a possibility where we might deter the retirement of some resource that provides these secure energy benefits.

[00:22:54] Speaker 09:
We don't have that evidence in the record, and there was evidence you have a history.

[00:23:02] Speaker 07:
these other plants getting forced out of the market, right?

[00:23:07] Speaker 07:
Because they will lose the competitive bids with the natural gas plants, right?

[00:23:14] Speaker 07:
Which can supply energy more cheaply.

[00:23:18] Speaker 07:
That's right.

[00:23:19] Speaker 07:
That is a problem.

[00:23:20] Speaker 07:
But they provide this distinct benefit which the market doesn't seem to value, which is the security.

[00:23:30] Speaker 09:
I would agree with that, your honor, but this program the IP program doesn't adequately address that problem in a targeted way.

[00:23:37] Speaker 09:
And there's two flaws.

[00:23:38] Speaker 09:
One, it doesn't set a price that's aimed at

[00:23:43] Speaker 09:
addressing that problem.

[00:23:44] Speaker 09:
And the price that it does set, there's no evidence that it would actually deter any returnments.

[00:23:49] Speaker 09:
And in fact, there was evidence in the record from an analyst for the Massachusetts Attorney General, Benjamin Griffiths, that he did an analysis to show that the amount of revenue that would come to these resources is so small in the context of the energy capacity resources revenues that they obtain.

[00:24:09] Speaker 09:
that it's unlikely to have any effect on the retirement decision, particularly when this is only a two-year program and you have large swings in energy and capacity prices from year to year that dwarf this change in revenue that you might get from this program.

[00:24:25] Speaker 09:
That evidence is in the protest of the Massachusetts general and it appears in the joint appendix at pages 190 to 208.

[00:24:35] Speaker 09:
It wasn't addressed by the commission either.

[00:24:37] Speaker 04:
And isn't the retirement history that Judge Katz is referring to before these other mitigating measures as well.

[00:24:45] Speaker 04:
I keep coming back to that because I'm trying to understand whether and to what extent FERC took into account

[00:24:53] Speaker 04:
that there were already other sort of intervening measures dealing with the retirement problem put into place.

[00:25:00] Speaker 09:
I would agree, Your Honor, that the Pay for Performance program went into effect 2019.

[00:25:05] Speaker 09:
It's just playing out now.

[00:25:07] Speaker 09:
We're starting to see what role plays.

[00:25:09] Speaker 09:
But beyond some nominal lip service in the commission's order, say, we don't think that there's a problem here.

[00:25:16] Speaker 09:
They didn't provide any real analysis or explanation of how these

[00:25:20] Speaker 09:
programs would interact.

[00:25:21] Speaker 09:
And the same goes for the cost of service tariff that was approved that allows the ISO to retain resources that may retire under the market system if they're needed for reliability.

[00:25:33] Speaker 09:
That wasn't clearly addressed by the commissioner.

[00:25:36] Speaker 06:
On your argument is that, you know, the rate is just, you know, has to be just and reasonable when the cost here is excessive.

[00:25:45] Speaker 06:
It seems that FERC

[00:25:47] Speaker 06:
FERC's response is basically, look, there are benefits to this that you can't quantify because reliability of the grid is an important benefit that can be recognized and you can't necessarily quantify that.

[00:26:08] Speaker 06:
And then secondly, if there are situations where there are blackouts or

[00:26:17] Speaker 06:
power losses that that couldn't cost businesses, you know, in the billions of dollars and they there's information in the record about that.

[00:26:27] Speaker 06:
And then thirdly, they talk about the differences in wholesale prices, I think, from a really, you know, bad winter in 2013 or 2012, I think it is versus

[00:26:42] Speaker 06:
wholesale prices in 2016 were thereabouts, and there being a billion dollar difference in the wholesale prices where you had the kind of bad winter and the potential reliability problems.

[00:27:02] Speaker 06:
And so putting all those things together seems to be arguing, yeah, $300 million is a

[00:27:12] Speaker 06:
We understand that's a big price tag, but when you look at everything in context, it's money well spent given all of these different things.

[00:27:25] Speaker 06:
What's wrong with that art?

[00:27:27] Speaker 09:
Well, I think there are two problems with the IEP.

[00:27:29] Speaker 09:
One, there's no doubt that there's this large risk factor out there.

[00:27:33] Speaker 09:
It's undefined to some extent, but it exists.

[00:27:37] Speaker 09:
The first problem is that this program, the IEP, we have no analysis to show that it will address that problem effectively.

[00:27:45] Speaker 09:
In effect, we think it won't address that problem effectively.

[00:27:48] Speaker 09:
The second issue is the cost.

[00:27:50] Speaker 09:
As I mentioned earlier,

[00:27:52] Speaker 09:
We've had, or ISO England has had winter reliability programs in place over a number of years in the past decade at significantly lower costs.

[00:28:02] Speaker 09:
And so we have a problem for Burke here to say, what's the justification for paying upwards to $150 million of consumer money for a program where the prior winter reliability programs came in around $30 million a year?

[00:28:17] Speaker 09:
That's a huge change without any analysis to suggest that we are actually going to receive substantially more benefit, either in reliability or eliminating high price spikes in the markets.

[00:28:29] Speaker 09:
We just don't have any analysis in this record to show that that is a justified expense.

[00:28:34] Speaker 09:
And therefore, we argue that it's excessive and that there's a lack of substantial evidence.

[00:28:38] Speaker 06:
What evidence do you point to in the record

[00:28:42] Speaker 06:
that the reliability problems that FERC is concerned about in those two winters coming up beginning, I guess, winter of 2024, that there won't be any reliability problems during those two winters?

[00:28:57] Speaker 09:
Well, we can't say that there won't be reliability.

[00:29:00] Speaker 09:
And that is a problem that exists.

[00:29:02] Speaker 09:
However, it's Iceland, England as the proponent and FERC as the judicator or the regulator to determine whether this particular program addresses those needs appropriately.

[00:29:12] Speaker 09:
If we just say, well, there's a big problem coming, let's throw as much money as possible at it and hope for the best.

[00:29:18] Speaker 09:
That's essentially where we are in this case.

[00:29:20] Speaker 06:
But it seems to me that what you're arguing is that everything that we have is really sufficient, or we don't need to spend all this money on this particular program.

[00:29:34] Speaker 06:
But you're saying that without pointing me to any evidence that

[00:29:41] Speaker 06:
the status quo was working?

[00:29:44] Speaker 09:
Sure.

[00:29:44] Speaker 09:
So the alternative here, Your Honor, would be to reintroduce a program like the former winter reliability programs, which were significantly cheaper.

[00:29:53] Speaker 09:
And though every winter is different, they met the need and they did incentivize resources to retain additional fuel sources for the winter periods.

[00:30:05] Speaker 09:
We haven't seen any evidence

[00:30:07] Speaker 09:
that that would not be sufficient going forward.

[00:30:10] Speaker 09:
There's just the operational fuel security assessment was done in 2018, I believe.

[00:30:16] Speaker 09:
It says under these certain assumptions, we see that there's going to be a problem.

[00:30:21] Speaker 09:
But those assumptions are just assumptions.

[00:30:24] Speaker 09:
And that is really the only evidence in the record here that there will be a problem.

[00:30:29] Speaker 09:
I think we can all agree that there are these concerns, but we don't know the extent of those concerns.

[00:30:35] Speaker 09:
And therefore, we can't say that this program will adequately address them.

[00:30:40] Speaker 06:
All right.

[00:30:41] Speaker 06:
I think in the interest of time, unless there's further questions from Judge Katz and Judge Jackson, we'll move on.

[00:30:48] Speaker 08:
Thank you.

[00:30:48] Speaker 06:
Roberts.

[00:30:52] Speaker 01:
Thank you.

[00:30:52] Speaker 01:
May it please the court, Casey Roberts on behalf of environmental petitioners.

[00:30:56] Speaker 01:
The Inventory to Energy program could cost consumers more than $300 million over two years.

[00:31:01] Speaker 01:
So it's fair to ask that FERC rely upon substantial evidence of an urgent reliability problem before approving the admittedly substandard design of this program on grounds that there wasn't time to do a more thorough job.

[00:31:16] Speaker 01:
But the order on review fails to establish a near-term reliability problem not already addressed by ISO New England's existing rules.

[00:31:25] Speaker 01:
In a single sentence of its order, FERC passingly mentions the operational fuel security analysis and the findings in its 2018 order as justification for the program.

[00:31:36] Speaker 01:
FERC and NEPCA make a lot of this single sentence in their briefs.

[00:31:41] Speaker 01:
In doing so, draw from parts of the analysis

[00:31:44] Speaker 01:
that FERC never mentioned in either the July 2018 order or the one under review here.

[00:31:49] Speaker 01:
I think it's particularly important listening to some of the questions earlier to distinguish between what FERC has now said in its brief to bolster the order below and what was actually in that order below, which is very, very little on the existence of an urgent problem.

[00:32:05] Speaker 01:
So the findings in that 2018 order were specific to the risks posed by the retirement of the Mystic Unit.

[00:32:12] Speaker 01:
And that makes sense because that was the question before the Commission at the time.

[00:32:17] Speaker 01:
And then following that 2018 order, the Commission approved a program to allow ISO New England to prevent the retirement of units as needed to ensure winter energy adequacy.

[00:32:27] Speaker 01:
Those are the cost of service agreements.

[00:32:29] Speaker 01:
And the ISO has used that authority to delay the retirement of the mystic units for several years at significant cost to consumers.

[00:32:37] Speaker 01:
Notably, ISO New England recently decided that those units were no longer necessary for fuel security in the winter of 2024-25, which would have belied the breathless takes otherwise that there's an imminent fuel security problem.

[00:32:53] Speaker 01:
In the order below, there's just a single order on review here.

[00:32:55] Speaker 01:
The commission never adequately explained why that authority that it gave ISO New England to prevent the retirement of units needed for fuel security is inadequate to address.

[00:33:05] Speaker 01:
any imminent risk is touched upon very, very briefly in paragraph 117 of the commission's order.

[00:33:12] Speaker 01:
And the commission then simply refers back to this misaligned incentives theory, which as Mr. Aslan explained, doesn't really connect to the retirement concern, which is mostly about generators who kind of don't suffer from the so-called misaligned incentives problem.

[00:33:31] Speaker 01:
And I'll note that in the December 2020 order, the commission concluded

[00:33:34] Speaker 01:
But the concerns it had expressed back in 2018 had actually been resolved by this retirement prevention cost of service program.

[00:33:43] Speaker 01:
And that's when the order in which FERC terminated the section 206 proceeding.

[00:33:48] Speaker 01:
And ISA New England itself described the IEP, the Inventory to Energy Program, as being aimed at precisely the same problems identified by the commission in the 2018 proceeding.

[00:34:01] Speaker 01:
So essentially what we have here is FERC allowing ISO England to sort of double dip on the findings in that 2018 proceeding, not only implement the cost of service provisions, but also implement another interim program without explaining why there's still some urgent problem that hasn't been addressed.

[00:34:19] Speaker 01:
So the second error in FERC's order that I want to discuss is the Commission's complete failure to respond to environmental petitioners' arguments that the program is unduly discriminatory.

[00:34:28] Speaker 01:
We argued the program discriminates by providing compensation to an arbitrary subset of resources that alleviate the region's dependency on just-in-time delivery of gas from the region's pipeline system.

[00:34:41] Speaker 01:
And as an example, we submitted evidence produced by IAS New England showing how offshore wind production reduces the drawdown on fuel supplies in the region during cold snaps.

[00:34:50] Speaker 01:
But FERC responded only to a strawman version of our argument

[00:34:54] Speaker 01:
arguing why wind and solar resources aren't similarly situated in their ability to provide inventoried energy.

[00:35:00] Speaker 01:
That wasn't our argument below.

[00:35:02] Speaker 01:
I can go into it if there's questions, but essentially FERC did not meet its obligation to respond to legitimate objections.

[00:35:09] Speaker 04:
Can you just summarize, so what is your discrimination argument?

[00:35:13] Speaker 01:
Yeah, so our discrimination argument is that in defining this inventoried energy product as the solution to the broader alleged problem,

[00:35:23] Speaker 01:
of winter energy adequacy in the region.

[00:35:24] Speaker 01:
FERC has created a product that only certain kinds of resources can be eligible for.

[00:35:30] Speaker 01:
So the problem is too many resources relying on just-in-time deliveries from the pipeline system.

[00:35:36] Speaker 01:
Therefore, they're not able to generate electricity when it's needed, when there's also demand on that pipeline system for building uses, heating, that sort of thing.

[00:35:45] Speaker 01:
So renewable energy that alleviates the drawdown on the region's fuel supplies and that can generate notwithstanding reliance

[00:35:53] Speaker 01:
on that pipeline system, those resources are similarly situated to resources that can inventory fuel in terms of their ability to help address the core problem.

[00:36:04] Speaker 04:
But it sort of seems to me like it's in the nature of a definition to that you have a particular problem that you're trying to address.

[00:36:13] Speaker 04:
And it seems you say it's broad, but it is these kinds of resources

[00:36:19] Speaker 04:
that are not going to be able to produce when called upon because the incentives are wrong.

[00:36:25] Speaker 04:
And by its definition, that doesn't apply to the kinds of resources that you're talking about because they're able to produce regardless.

[00:36:33] Speaker 04:
I don't know how that's necessarily discriminatory.

[00:36:36] Speaker 04:
It's that the problem doesn't encompass the groups that you're talking about.

[00:36:40] Speaker 04:
So of course the solution isn't addressed to them.

[00:36:44] Speaker 01:
I hear what you're saying, except when the solution is money that incentives are being paid to these other generators to help those generators fix a particular deficiency that they have in their ability to generate electricity and then similar benefits are not available to other resource types.

[00:36:59] Speaker 01:
It's not an efficient or just a reasonable way of getting at the problem.

[00:37:04] Speaker 01:
I mean, FERC has actually acknowledged this sort of undue discrimination framework in some of its orders on the prior winter reliability programs, which Mr. Coyle was explaining earlier.

[00:37:14] Speaker 01:
and did require ISA New England in coming back with a revised winter reliability program to address whether it could be done in a way that was more fuel neutral, was sort of the term they used at the time.

[00:37:25] Speaker 01:
And if it couldn't be done in a more fuel neutral way to explain why.

[00:37:29] Speaker 01:
So Judge Jackson, your questions I think are valid and they're ones that FERC should have considered, but they didn't even address our undue discrimination argument.

[00:37:38] Speaker 01:
They pretended it was this much simpler

[00:37:41] Speaker 01:
argument about whether wind and solar could provide an inventory to energy, which is a rather simple answer, but that was not our questions.

[00:37:48] Speaker 01:
We would like for it to be considering this in the first instance, as it should on the ABA.

[00:37:56] Speaker 06:
All right.

[00:37:57] Speaker 06:
Any other questions, Judge Katz, Judge Jackson?

[00:38:00] Speaker 06:
No, thank you.

[00:38:02] Speaker 06:
All right.

[00:38:02] Speaker 06:
We'll hear from Mr. Kennedy for responding first.

[00:38:07] Speaker 03:
Good morning your honors Robert Kennedy on behalf of the Commission before touching on the specific points raised by petitioners.

[00:38:15] Speaker 03:
In their objections to the program I think it's important to step back sort of a judge Katz's didn't and set the context here, which is important.

[00:38:22] Speaker 03:
In this case, the commission was presented with forecasts indicating that from the system operating in New England, indicating that if there isn't a course correction, there's significant risk of energy shortfalls on the coldest days of the year.

[00:38:37] Speaker 03:
And as we just saw this winter in Texas, that can have tremendous public welfare impacts.

[00:38:42] Speaker 03:
The commission was presented with a stopgap to your program to try and address that kind of tied the market over until this flaw in the market that doesn't value fuel reliability can be permanently resolved.

[00:38:58] Speaker 03:
And it does it by compensating all resources who are able to provide the product that the system operator is looking for.

[00:39:05] Speaker 03:
Inventory to energy.

[00:39:06] Speaker 03:
All units who are able to respond to the system operator's request to run on the coldest days of the year.

[00:39:12] Speaker 03:
And you know, the commission acknowledges, ISA New England acknowledged when it made this proposal that it's certainly not perfect.

[00:39:21] Speaker 07:
Can I ask you, assume I think the problem is real.

[00:39:25] Speaker 07:
and that this would be a reasonable but though not perfect response in the absence of anything else.

[00:39:38] Speaker 07:
But why do you need this program on a semi-emergency basis where you have pay for performance, which addresses misaligned incentives,

[00:39:55] Speaker 07:
And if a penalty on pay for performance is too low to realign the incentives, the obvious solution would seem to be just raise the penalty.

[00:40:09] Speaker 07:
And then you have cost of service to address the distinct problem of

[00:40:17] Speaker 07:
the high cost, high secure providers who might otherwise go out of business.

[00:40:24] Speaker 07:
Why do you need this on top of those two?

[00:40:27] Speaker 03:
So with respect to cost of service, if you go back to the Mystic Water, which is essentially incorporated in this order in paragraph 55, the commission made its ultimate finding that not only does the region need these costs of service agreements, but there also needs to be a, it needs to better,

[00:40:45] Speaker 03:
improve its market design to better address the regional fuel security revisions.

[00:40:50] Speaker 03:
And it made that finding because in this response to some of the arguments we heard today, the misaligned incentive problem is at the heart of this, that natural gas generators, which on any given day, on normal days, are roughly 45, 50% of the region's generation needs.

[00:41:09] Speaker 03:
They don't have the financial incentive to enter into firm

[00:41:12] Speaker 03:
firm fuel delivery agreements, because as explained in the brief, as explained in the material submitted by the system operator, that has an upfront cost, and the end result is it brings down the price of energy.

[00:41:26] Speaker 03:
And if you do all the probability analyses and the math, it's not worth it most of the time for the generators to do that.

[00:41:33] Speaker 03:
So just having these costs of service agreements wouldn't address that situation at all.

[00:41:39] Speaker 03:
And second, these costs of service agreements, just to give you some context here, they're massively expensive.

[00:41:45] Speaker 03:
I mean, we talked about the Mystic agreement.

[00:41:48] Speaker 03:
That's, I believe, in the neighborhood of 400 million for one unit, two years, one generating station in one area of the region.

[00:41:56] Speaker 03:
The commission has always viewed these as sort of a tool of last resort.

[00:42:01] Speaker 03:
So the Inventory Energy Program is

[00:42:03] Speaker 03:
is a interim tool, so you don't have to resort to that too much.

[00:42:06] Speaker 03:
In fact, if you go back and look at these courts' opinions in Connecticut Department of Public Utility and some of the other ones from the late 2000 timeframes, we have a capacity market in New England because there were so many cost of service agreements that were being used.

[00:42:21] Speaker 03:
with these generators who are retiring that the stakeholders had to come up with a different solution.

[00:42:26] Speaker 03:
So that never want that.

[00:42:28] Speaker 04:
Kennedy, I don't I'm struggling to understand why your response is actually responsive to Judge Katz's because he pointed out two different programs.

[00:42:38] Speaker 03:
Correct.

[00:42:39] Speaker 04:
And so and to the extent that misaligned incentives is the problem, I'm wondering why entities that don't have that problem are being compensated in this way.

[00:42:51] Speaker 04:
and why the program that is directed, the other interim pay for performance or whatnot, why that is not sufficient to deal with your misaligned incentives problems.

[00:43:05] Speaker 03:
I was responding to the second half of Judge Katz's question to take your two points, which should address his as well.

[00:43:11] Speaker 03:
The eligibility question, why are we including these resources who in the normal course of business have fuel on site during the coldest days of the year?

[00:43:21] Speaker 03:
And what the system operator has done here, it has identified a market flaw that the market does not value this reliability attribute that they bring to the table.

[00:43:32] Speaker 04:
What does that mean?

[00:43:33] Speaker 04:
I admit I'm not an economics expert.

[00:43:36] Speaker 04:
Sure.

[00:43:37] Speaker 04:
The system does not value them, meaning they're not being paid enough to keep the fuel on site?

[00:43:46] Speaker 03:
Correct.

[00:43:47] Speaker 03:
No, they do keep the fuel on site.

[00:43:49] Speaker 03:
All right.

[00:43:50] Speaker 04:
But the cost that we already have before your program, right?

[00:43:54] Speaker 03:
Correct.

[00:43:54] Speaker 04:
They keep the fuel on site.

[00:43:55] Speaker 04:
And isn't that the objective?

[00:43:56] Speaker 04:
We want them to keep the fuel on site.

[00:43:58] Speaker 03:
Correct.

[00:43:59] Speaker 03:
The problem is the revenues they derive from ISO New England's other markets, energy markets, capacity markets, ancillary services are insufficient to cover their costs.

[00:44:10] Speaker 03:
So they're going away.

[00:44:12] Speaker 03:
And just to signal why that's so important, and I believe this is in the fuel security analysis, there's an example in a typical day, in typical month in New England, there was a cold snap and I believe it was

[00:44:23] Speaker 03:
went over the end of December, 2017 to early 2018.

[00:44:27] Speaker 03:
I believe coal was like 0.3% all of December until that one week when it was about 24% of the megawatts produced.

[00:44:38] Speaker 04:
Right, but can I ask you a question?

[00:44:39] Speaker 04:
Are they going away based on evidence that you have looked at after the implementation of the cost

[00:44:49] Speaker 04:
for performance after the implementation of the other interim measures that were supposed to keep them from going away.

[00:44:56] Speaker 04:
Do we have evidence related to that?

[00:44:58] Speaker 03:
That the retirement studies have been updated since paper performance?

[00:45:02] Speaker 04:
Yes.

[00:45:03] Speaker 03:
I'm not sure.

[00:45:04] Speaker 03:
I'm not sure when the projections date from.

[00:45:07] Speaker 03:
I know ISO New England

[00:45:11] Speaker 03:
put forward those numbers in the fuel security agreement and in this, in this filing which post date the beginning of paper performance and if you kind of look at the, I'm sorry, just, just pay for performance apply to the coal and nuclear suppliers I thought it was.

[00:45:27] Speaker 03:
I believe it's everyone who has a capacity supply obligation.

[00:45:31] Speaker 03:
Now, they're not duplicative.

[00:45:33] Speaker 03:
Pay for performance either pays you or penalizes you for not providing energy during scarcity conditions.

[00:45:41] Speaker 03:
The inventory energy program compensates you for having this reliability attribute, being able to answer the- I understand, but pay for performance should tend to help

[00:45:53] Speaker 07:
make the coal producers more viable because it's easy for them to make a capacity commitment and satisfy it.

[00:46:03] Speaker 03:
Well, if you look at the discussion paper put forward by the ISO

[00:46:12] Speaker 03:
and this is around JA 749 through 751, it explains why the incentives, and it goes through various scarcity analyses, probability analyses, and explains why the incentives created by the paper performance problem haven't solved the- That's directed to misaligned incentives, which applies to the natural gas people.

[00:46:36] Speaker 04:
What I'm trying to understand, dovetailing with Judge Katz's question,

[00:46:40] Speaker 04:
is to the extent that pay for performance does apply to biogas and those stored fuel capacity entities, and they get it, why doesn't that help to solve the problem of their going under?

[00:46:54] Speaker 03:
Well, I think because the main pay performance largely is a stick.

[00:46:58] Speaker 03:
If you take on a commitment and you can't meet it, you get penalized.

[00:47:02] Speaker 08:
They can't meet it.

[00:47:03] Speaker 03:
They can't meet it.

[00:47:04] Speaker 03:
Right, but already the revenues that they're getting, this is a capacity, pay performance interacts with the capacity market.

[00:47:11] Speaker 03:
The revenues they're getting from that market and the energy market are insufficient to cover their costs and keep them going.

[00:47:17] Speaker 04:
At least that- They don't get more for- Going forward.

[00:47:19] Speaker 04:
I thought there was also a benefit if you can meet it under pay for performance.

[00:47:22] Speaker 03:
Well, there's a baseline, you've got a baseline capacity payment.

[00:47:25] Speaker 03:
And as my understanding of pay for performance, if there's a scarcity condition,

[00:47:30] Speaker 03:
I'm not sure that the number of times that comes up per year, but if you can, if you overproduce, yes, you can get some benefit.

[00:47:39] Speaker 03:
But I believe what the system operator says here is looking at the baseline, which includes pay-per-performance, that the market still doesn't value these resources enough to cover their costs and have them there in the future when we need to call upon them.

[00:47:58] Speaker 04:
What's your response to Mr.

[00:48:00] Speaker 04:
oil's point that even if that's true, even if we have some nebulous understanding of the market undervaluing these resources, there doesn't seem to be any analysis of how much more they need in order to prevent them from retirement of the extent of the problem concerning their

[00:48:23] Speaker 04:
undervalue, there's like, I didn't see anything and I think many of your opponents in their briefs pointed out this vacuum of analysis that would actually substantiate these contentions.

[00:48:40] Speaker 04:
What do you say about that?

[00:48:41] Speaker 03:
Am I missing it?

[00:48:44] Speaker 03:
So the system operator explained just to respond to a point that's inherent in your question and that Council for New Hampshire raised that the point is not that this is going to give them a revenue stream that's enough to cover the shortfall that currently exists that will take them out of the risk for retirement.

[00:48:59] Speaker 03:
The point is this will allow them to lower their bids into the capacity market and obtain a

[00:49:05] Speaker 03:
a capacity commitment for future years and get the revenue stream through that.

[00:49:12] Speaker 03:
Yes, there is no analysis of here's the 5,000 megawatts that are at risk for retirement, here's how much they need.

[00:49:20] Speaker 03:
No, that is not in the record.

[00:49:22] Speaker 03:
What we have is a system operator identifying these resources, being at risk and providing a proposal based on sound economic theory

[00:49:31] Speaker 03:
and in their judgment will incent these resources to stay in the market and delay the retirements for two years until the region can come together and deal with a long-term proposal.

[00:49:44] Speaker 03:
And part of the reason that, you know, they didn't go through that exercise and the commission found this reasonable is because, you know, this has been going on for a decade trying to come up with a solution to this problem.

[00:49:56] Speaker 03:
There's a myriad of factors as to why it is a problem and why it's so difficult.

[00:49:59] Speaker 04:
I don't know if the longevity helps you or hurts you.

[00:50:04] Speaker 04:
If it's been going on for a decade, there should be some data about it, right?

[00:50:08] Speaker 04:
I mean, there should be some.

[00:50:09] Speaker 03:
Well, there is data, Your Honor.

[00:50:11] Speaker 03:
If you look through the fuel security agreement, the retirement study, I think, was first done back in 2000.

[00:50:18] Speaker 03:
2012, 2014, there was 8,100 megawatts at risk for retirement.

[00:50:23] Speaker 03:
And now we're down to 5,000.

[00:50:24] Speaker 03:
And the entire region is just 30,000.

[00:50:27] Speaker 03:
So that's a significant clip.

[00:50:29] Speaker 03:
So the forecasts have been coming true, unfortunately.

[00:50:32] Speaker 03:
And what changed here is in 2018, ISO New England went through this detailed analysis and found, hey, you know what?

[00:50:39] Speaker 03:
These things are really important.

[00:50:41] Speaker 03:
We need them.

[00:50:42] Speaker 03:
uh on the coldest days of the year and we and right now the market's in flux and we don't have a ready available replacement um so we need to recognize the value they provide for the market and develop a way to keep them online.

[00:50:54] Speaker 03:
Why there was no detailed study before then is you know the IO explained it would take some time um and you know this program needed to be simple enough for generators to understand and in place before they made the

[00:51:11] Speaker 03:
from doing the math right four years in advance from when it happens.

[00:51:16] Speaker 03:
So that's part of the explanation is why there's not a full-blown study.

[00:51:20] Speaker 03:
But it's based on a reasonable economic principles put forward by the system operator upon which the commission relied.

[00:51:29] Speaker 03:
Now, there's some suggestion in the brief, oh, well, the capacity prices are coming down.

[00:51:33] Speaker 03:
That means this whole thing's a sham.

[00:51:35] Speaker 03:
Obviously, that's a benefit to consumers.

[00:51:38] Speaker 03:
But as the system operator explains, in ISO New England, they use a downward sloping demand curve.

[00:51:44] Speaker 03:
So as the price comes down, there's actually more capacity awards.

[00:51:48] Speaker 03:
And in the system operator's opinion, who runs these markets, that's an indication that fewer retirements will occur.

[00:51:55] Speaker 04:
Can I ask you, Mr. Kennedy, to first give deference to the system operators in their analysis?

[00:52:01] Speaker 04:
Is there some kind of a thing that happens

[00:52:04] Speaker 04:
in FERC's own review of things that they sort of just defer to what the system operator wants.

[00:52:12] Speaker 03:
No, I mean, so I think as the commission said in this order, you know, it held the system operator to an interim program doesn't mean they don't need to support it with substantial evidence.

[00:52:21] Speaker 03:
But these are they these are the people running the markets.

[00:52:25] Speaker 03:
They are putting forward sworn testimony.

[00:52:26] Speaker 03:
Some of the forward rate and the determination as to what that should be to incent enough resources to participate was prepared by an outside consultant.

[00:52:37] Speaker 03:
So definitely there is some expertise there.

[00:52:40] Speaker 04:
And wasn't there a point that was not give blind deference to this wasn't there a point at which the system operator updated the data updated the information I think I think Miss Roberts talked about it that they.

[00:52:53] Speaker 04:
actually said that we don't need as much because they're not retiring as fast in the wake of these other programs.

[00:53:00] Speaker 03:
Maybe I had that wrong, but I'm not quite certain what Ms.

[00:53:06] Speaker 03:
Roberts was referring to.

[00:53:07] Speaker 03:
I'm not saying it doesn't exist, but I'm not certain what she's referring to.

[00:53:10] Speaker 04:
Maybe I just threw her under the bus.

[00:53:12] Speaker 04:
Maybe she wasn't even talking about that.

[00:53:14] Speaker 03:
Again, this has been going on a while.

[00:53:18] Speaker 03:
It's still going on, so there's a lot of orders that are inside and outside the record.

[00:53:21] Speaker 03:
I would just say to my first

[00:53:24] Speaker 03:
The response is obviously the issue before the commission is what's in the record at that time when it's facing this.

[00:53:30] Speaker 03:
The commission in the mystic orders had found that the processes methodologies used by the system operator were reasonable there, and, and I think you'll see some discussion in there.

[00:53:45] Speaker 03:
Some of the environmental groups had indicated that things had changed a bit there and the system operator responded indicating that may be the case but also we use some very conservative assumptions that kind of undercut the fuel security that underplayed the fuel security risk so the commission found that on balance it was a reasonable analysis I mean I will say.

[00:54:05] Speaker 03:
kind of to both your questions about whether the commission just blindly relies on the system operator.

[00:54:10] Speaker 03:
The answer is no.

[00:54:11] Speaker 03:
You see that by the fact that the commission recently rejected ISO New England's proposed long-term proposal here because it didn't think that it was reasonably calculated to address the risk.

[00:54:24] Speaker 03:
Whether the commission still views the fuel security, whether it still holds the water, it did when the commission was looking at this back then.

[00:54:32] Speaker 03:
I think if you look at that, and I think it's a December 2020 order, rejecting the ISO's long-term proposal, the commission does rely on it, and that's part of the problem.

[00:54:42] Speaker 03:
The long-term proposal by ISO New England didn't really address some of the risks laid out in the field security analysis.

[00:54:53] Speaker 03:
I see I'm in the red.

[00:54:55] Speaker 03:
Unless there's any questions from the panel, I'll defer to our interveners.

[00:55:01] Speaker 06:
All right, Judge Kansas, Judge Jackson.

[00:55:04] Speaker 03:
All set.

[00:55:05] Speaker 06:
All right, we'll hear from Mr. Hughes.

[00:55:10] Speaker 05:
Thank you, Your Honor, and may it please the court, Paul Hughes for the New England Power Generators Association.

[00:55:17] Speaker 05:
I'd like to begin by focusing on three broad principles and then responding to several of the issues that have come up today.

[00:55:25] Speaker 05:
The first is, of course, there can be no serious dispute that absent action New England faces severe risk of cold weather induced blackouts.

[00:55:34] Speaker 05:
Second, FERC's approval of an interim program must be evaluated against the backdrop of this exigency.

[00:55:41] Speaker 05:
The question here is not whether ISO New England's program is a perfect one.

[00:55:45] Speaker 05:
is whether FERC acted in arbitrary and capricious fashion in determining that is it just at least one reasonable and just proposal.

[00:55:54] Speaker 05:
The need for a simple solution in a short period of time appropriately bears on that analysis.

[00:55:59] Speaker 04:
Can you define the exigency, Mr. Hughes?

[00:56:01] Speaker 04:
What exactly are you saying was the exigent circumstance?

[00:56:06] Speaker 05:
Here, Your Honor, the extreme circumstance was the extensive analysis that ISO New England took in 2018.

[00:56:12] Speaker 05:
They issued a report in January of 2018 and then in July of 2018 FERC identified the severe cold weather induced blackout risk and directed ISO New England to take a response.

[00:56:26] Speaker 05:
ISO New England from that time in less than eight months

[00:56:29] Speaker 05:
put forth this proposal as an interim proposal only for two years.

[00:56:34] Speaker 05:
They had to act in that period of time because what ISO New England said in this proposal was critical in part was the forward-looking component of this.

[00:56:44] Speaker 05:
So it could send signals to resources not to retire.

[00:56:48] Speaker 05:
And your honor, to make those retirement delist bids, the record is clear that those had to be made for the winters of 2023 to 24 by March of 2019.

[00:56:58] Speaker 05:
So from January when this report was issued to July of 2018, they had until March of 2019 to put in place a solution that would affect retirement determinations for the winter of 2324.

[00:57:10] Speaker 04:
What is the evidence that it actually is affecting or will affect and to what degree it affects retirement determinations.

[00:57:21] Speaker 05:
Thank you, Your Honor.

[00:57:22] Speaker 05:
engaged in relatively extensive analysis that this would have an effect on these signals.

[00:57:28] Speaker 05:
So for example, at records page 520 to 521, at paragraphs 95 to 96 of the decision, what for reasons is that providing these sorts of incentives create a pressure in the direction not for these resources not to retire.

[00:57:45] Speaker 05:
And this was against the backdrop, as been discussed, of 5,000 megawatts of fuel secure resources

[00:57:52] Speaker 05:
at the risk of retirement.

[00:57:54] Speaker 05:
Now, I note the court's point earlier that there could be more calculation as to tethering these, but the issue is for this interim proposal, is this sufficient for an agency to take interim exigent action?

[00:58:07] Speaker 05:
We think the answer there is yes.

[00:58:09] Speaker 05:
We recognize that as ISO New England is working towards a permanent long-term solution, that the standards that the court may impose may well differ.

[00:58:20] Speaker 05:
given the nature of the program.

[00:58:22] Speaker 05:
But for this program to have a solution in place for 2023 to 2025, we think FERC was well within its authority to adopt this as a particular solution.

[00:58:33] Speaker 05:
And let me add, I think it also bears noting, and this goes to Mr. Cuell's point about the pothole filling and the pothole unfilling, this program is already underway because the two capacity auctions for the summer or the winters that are at issue have already been run in February of 2020 and February of 2021.

[00:58:49] Speaker 05:
So the notion that

[00:58:51] Speaker 05:
the retirement decisions based on the inventory to energy program have already in fact been made.

[00:58:57] Speaker 05:
And as ISO New England points out in its brief at 11 to 12, of course, part of the nature of this program may well be to suppress the pricing in the forward capacity options.

[00:59:07] Speaker 05:
Although it's quite complex and there are many factors, of course, that go into it.

[00:59:11] Speaker 05:
ISO New England does not say that the program is the sole basis.

[00:59:15] Speaker 05:
As a matter of fact, the forward capacity pricing

[00:59:18] Speaker 05:
has decreased.

[00:59:19] Speaker 05:
So that has occurred following the nature of this program.

[00:59:24] Speaker 05:
And so from the intervenors.

[00:59:26] Speaker 04:
What impact, if any, is the other mitigating plans that were put into place to address the retirement exigency that you say exists?

[00:59:39] Speaker 05:
Thank you, your honor, we can talk both about the cost of service and pay for performance so on the cost of service plans first about the mystic cost of service in particular.

[00:59:47] Speaker 05:
As I understand the mystics are still retiring in 2024 so won't provide the fuel security for the winter of 24 to 25 that's an issue here.

[00:59:57] Speaker 05:
But for the December 2018 for order that has a broader cost of service there are a few different responses to that your honor, the first is that paragraph 117 of first decision, it recognizes that as well as the paper performance and finds nonetheless that it's not a sufficient action.

[01:00:14] Speaker 05:
And I think there are a few reasons for that.

[01:00:16] Speaker 05:
As Mr. Kennedy explained, the cost of service mechanism in the December 2018 order is highly disfavored.

[01:00:24] Speaker 05:
It is an out-of-market solution entirely, and is one that is of last resort.

[01:00:28] Speaker 05:
And I think it's notable that petitioners here tried to criticize the 2020.

[01:00:33] Speaker 04:
Mr. Cruz, I've been asking you whether it's a good thing, disfavored or not.

[01:00:38] Speaker 04:
I'm asking whether it works.

[01:00:39] Speaker 04:
What's the evidence that

[01:00:42] Speaker 04:
you know, there was still a need for IEP even after you had these other programs.

[01:00:50] Speaker 05:
Your honor, I think that's found in ISO New England's study that underlies this.

[01:00:55] Speaker 05:
And that's the discussion that's at pages 138 to 100.

[01:00:59] Speaker 05:
Oh, I'm sorry, your honor.

[01:01:02] Speaker 05:
It's an appendix pages 351 to 352.

[01:01:05] Speaker 05:
That's the ISO New England's filing that provides more details as to why against the baseline programs, there was additional need for the incentives to be created for fuel secure resources

[01:01:17] Speaker 05:
to remain online, not retire.

[01:01:19] Speaker 05:
That's the retirement incentive.

[01:01:21] Speaker 05:
And then the real time incentives for other generators to ensure fuel secure resources.

[01:01:27] Speaker 05:
And one small point there, your honor, I think it's notable that the dissenting commissioner below and petitioners sees on the notion that they suggest one third or so of generators or resources might inventory energy in the status quo or absent of the program.

[01:01:43] Speaker 05:
But that suggests on its face that

[01:01:46] Speaker 05:
two thirds of those who would be responding to the program would not be inventorying energy in the status quo.

[01:01:51] Speaker 05:
I think that's rather compelling evidence that there will be a change in behavior that results from this program in a way that's quite important.

[01:02:00] Speaker 05:
And further to the notion that generators might engage in this activity, as I said at the outset, this is about also sending forward signals and for the auctions that have already occurred.

[01:02:10] Speaker 05:
I think that's relatively difficult to unwind at this point.

[01:02:14] Speaker 05:
But finally,

[01:02:15] Speaker 05:
to the point that the court has previously discussed, what the whole program turns on is the premise that inventoried energy provides a social good, that there is a utility that's based in it.

[01:02:26] Speaker 05:
And at the status quo prior to the program, there was insufficient levels of inventoried energy to meet winter demand needs.

[01:02:34] Speaker 05:
It was reasonable for FERC to say, we need to create a market and provide a compensation basis, both on a forward basis and a spot basis to ensure that if we don't have enough of this good,

[01:02:44] Speaker 05:
compensating for it to ensure that we get to socially useful levels of this.

[01:02:49] Speaker 05:
And in many ways, this is just like the way the capacity markets operate generally, is when one thinks about the capacity markets, of course, there are going to be generators out there who are going to be able to provide capacity, even in the absence of a forward capacity market.

[01:03:03] Speaker 05:
But the reason that we have those capacity markets is because we recognize there has to be sufficient capacity and a guarantee of that sufficient capacity in the future for when it's needed.

[01:03:12] Speaker 05:
That's the same.

[01:03:14] Speaker 04:
Can I ask you if we if we disagree with you, and we think that this matter needs to be handed to the agency.

[01:03:21] Speaker 04:
No one really has talked about with or without they get or something that you raised.

[01:03:27] Speaker 04:
in terms of the intertwined, the options are already happening, touches on that.

[01:03:32] Speaker 04:
So is it your view that if it were to be remanded, it would have to be without Baker because it would be disruption?

[01:03:39] Speaker 04:
My thought was that, you know, if there were a remand, it would be fine because this is about, you know, 2023, 2024.

[01:03:50] Speaker 04:
We haven't really

[01:03:52] Speaker 04:
done this yet, but explain to me what your point or what your view would be on with or without vacater.

[01:03:59] Speaker 05:
Thank you, Your Honor, and of course we think that the petition should be not denied, but answering the Court's question, if the Court were inclined to grant any petition, we absolutely think it should be without vacater.

[01:04:08] Speaker 05:
because of the fact that, again, we are midway through the process here.

[01:04:14] Speaker 05:
The auctions have already been run.

[01:04:15] Speaker 05:
The delist bids have already occurred.

[01:04:17] Speaker 05:
We are years past that now for the delivery of the energy in the winters of 23 to 24 and 24 to 25.

[01:04:25] Speaker 05:
And so if, again, we disagree with this, but if the court were of the view that needed more explanation for the result it reached, a remand without vacant would be absolutely critical not to disrupt the system because all of the generators have been into this market on the basis of the inventory energy program's existence.

[01:04:43] Speaker 05:
Those are already terminations that have long since been made in markets that have since been constructed as a result.

[01:04:49] Speaker 05:
So again,

[01:04:50] Speaker 05:
We think that the petition should be denied.

[01:04:53] Speaker 05:
But barring that, any remand certainly should be without vacancy.

[01:05:00] Speaker 05:
Thank you.

[01:05:05] Speaker 05:
I'm happy to answer any other questions.

[01:05:07] Speaker 06:
Judge Katz, Judge Jackson.

[01:05:10] Speaker 06:
All right.

[01:05:12] Speaker 06:
We'll hear from counsel and rebuttal.

[01:05:16] Speaker 06:
We'll give you your four minutes.

[01:05:19] Speaker 02:
Thank you for your generosity, your honor.

[01:05:21] Speaker 02:
I appreciate it.

[01:05:23] Speaker 02:
There's a lot to unpack in that discussion.

[01:05:25] Speaker 02:
Let me go back to Judge Jackson's question about Baker first.

[01:05:31] Speaker 02:
Excuse me.

[01:05:33] Speaker 02:
I don't believe that forward capacity auction 15, which covers 24 through 25, has been run as yet.

[01:05:46] Speaker 02:
The bids for the FCA 14, which covers the 2023 to 2024 were submitted in alternative, an IEP in effect and a no IEP in effect.

[01:06:01] Speaker 02:
So that's relatively easy to sort.

[01:06:05] Speaker 02:
The more basic question that you have to confront when deciding on bank order is whether the flaws in the underlying order are something that the agency can cure.

[01:06:16] Speaker 02:
And here, there is not a sufficient record or sufficient reasoning behind the record for the reasons we've detailed at length in our briefs and our arguments to enable the FERC to salvage this order.

[01:06:30] Speaker 02:
So absolutely, if you decide, you have to remand with Baker.

[01:06:36] Speaker 04:
And so is that because there's not sufficient evidence in your view to support what FERC determined?

[01:06:45] Speaker 04:
Why can't they cure it with more of a reasoned or rational explanation?

[01:06:52] Speaker 02:
The analysis, and I'm doing this loosely a little bit, your honor, but as I understand the courts, I believe it's the allied signal decision.

[01:07:02] Speaker 02:
You have criteria that guide the decision whether or not to grant vacatur.

[01:07:08] Speaker 02:
And typically, the way the court applies those criteria are

[01:07:12] Speaker 02:
Is the deficiency in the order something that the agency is likely to be able to cure on remand with, for example, better explanation than they supply, but it's plausible that the agency reached the right result?

[01:07:27] Speaker 02:
Right.

[01:07:28] Speaker 02:
Our position here is that the record before the agency does not furnish a sufficient basis for just fixing this order with an explanation, right?

[01:07:41] Speaker 02:
that the analytical defects are so egregious in this order that you have to vacate and tell the agency to start over again.

[01:07:49] Speaker 02:
Now, that's not an emergency.

[01:07:52] Speaker 02:
It takes literally five months to put a winter reliability program in place.

[01:07:57] Speaker 02:
So if there is a crisis, the way that worked for the previous eight or 10 years,

[01:08:08] Speaker 02:
can be made to work again.

[01:08:09] Speaker 02:
It's not like the lights are gonna go off or people are gonna suffer rolling blackouts.

[01:08:14] Speaker 02:
There are means to deal with this.

[01:08:18] Speaker 02:
Also on the question, the impact on ongoing forward capacity auctions, as I said, one I believe that has occurred had alternative bids to the extent I'm wrong about forward capacity auction 15, that auction occurred with full knowledge and notice that this case was on appeal.

[01:08:38] Speaker 02:
So bidders in that auction were able to factor that risk into their bids.

[01:08:43] Speaker 02:
There is no basis for remand without Baker in this case.

[01:08:48] Speaker 02:
I wanted also to go back and revisit the question of misaligned incentives generally and touch on a quick response to Judge Wilkins' observation that you can't put a price on reliability.

[01:09:07] Speaker 02:
In the crudest terms, the misaligned incentive slogan argues that the value of service to the customer is an appropriate basis for setting utility rates.

[01:09:20] Speaker 02:
FERC itself has held in Western Systems Power Pool, cited in our brief, 55 FERC, paragraph 61099 at page 61316, that value of service pricing to the customer

[01:09:37] Speaker 02:
is an attribute of monopoly price.

[01:09:40] Speaker 02:
You think about what the value of lost load is.

[01:09:44] Speaker 02:
It's tens of thousands of dollars per megawatt hour.

[01:09:48] Speaker 02:
If that is your ultimate limit on pricing, you are not producing just and reasonable rates.

[01:09:54] Speaker 02:
And yet, that is the end state of the misaligned incentives argument.

[01:10:00] Speaker 02:
There is no limiting principle on that argument.

[01:10:04] Speaker 02:
And for that reason, it is not a sound basis for setting a utility rate.

[01:10:10] Speaker 02:
And it certainly doesn't justify quintupling the cost to consumers of ensuring that the lights stay on in the wintertime, which is what this order does.

[01:10:23] Speaker 02:
All right.

[01:10:23] Speaker 02:
I'm about to run out of time, so I'll thank the court and ask for a remand with vacant.

[01:10:27] Speaker 06:
Thank you.

[01:10:29] Speaker 06:
All right.

[01:10:30] Speaker 06:
Thank you.

[01:10:31] Speaker 06:
We have the argument we will take the matter under advice.