[00:00:00] Speaker 03:
Case number 20-1388, California Public Utilities Commission petitioner versus Federal Energy Regulatory Commission.

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Ms.

[00:00:08] Speaker 03:
Mori for the petitioner, Ms.

[00:00:09] Speaker 03:
Rylander for the respondent.

[00:00:12] Speaker 00:
Ms.

[00:00:12] Speaker 00:
Mori, I'm also glad to see you.

[00:00:14] Speaker 00:
We've been trying all morning to find you, so that's okay.

[00:00:19] Speaker 00:
Please proceed.

[00:00:20] Speaker 03:
I apologize.

[00:00:21] Speaker 00:
Please proceed.

[00:00:22] Speaker 03:
I've been watching, so I don't know what happened, but thank you.

[00:00:24] Speaker 03:
Good morning.

[00:00:25] Speaker 03:
And may it please the court.

[00:00:28] Speaker 03:
I'm Candice Mori on behalf of petitioners.

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The California Public Utilities Commission asks the court today to remand the commission's order.

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The commission arbitrarily and capriciously approved a new filed rate formula that can overpay resources for backstop capacity.

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without any safeguards to protect consumers or even other sellers in the market from windfall profits.

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It did so with no evidentiary basis without addressing the compelling concerns and contrary evidence that parties raised and based on nothing more than conclusory reasoning.

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To further explain the gravity of the commission's error and why the law requires remand, I'd like to present three arguments this morning.

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First, why preventing windfall profits is important to California ratepayers whose interests the commission failed to consider.

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Second, that this court's recent decision, Delaware Division of the Public Advocate versus FERC compels the same outcome here, remand.

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And third, that remand is necessary to clear up this key question.

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What costs, if any, above our resources going forward costs should be guaranteed in the voluntary CPM capacity market, given that the ISO maintains mandatory backstop procurement power through its reliability must run tariff?

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Now, first, this case matters because the commission has failed to fulfill its core statutory duty to protect consumers.

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The words consumer, rate payer, do not even appear in its order.

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The ISO pointed out to the commission that capacity markets are tightening in California.

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Parties submitted evidence that CPM, the capacity procurement mechanism at issue here, that those CPM solicitations have become structurally uncompetitive

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and that CPM sellers have market power.

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And that was before a prolonged extreme heat event in California caused reliability problems in the summer of 2020.

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In California, we have a history of sellers exerting market power to gain excessive compensation and harm rate payers.

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And the new rate makes this even easier.

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It streamlines the process to get commission approval to make offers above the competitive soft offer cap and guarantees them a 20% adder whether they need it or not.

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The stage is set.

[00:03:02] Speaker 01:
Just a basic question about the structure of this and why it matters, which is

[00:03:09] Speaker 01:
I mean, usually a tariff price, it's just the price that the utility will charge.

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And if the consumer wants power, they have to pay that price and that's it.

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This case seems a little unusual.

[00:03:24] Speaker 01:
This is just about bidding options, right?

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And the above cap rate

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On the one hand, it seems a little bit strange, but on the other hand, it only becomes relevant if that's the price for clearing the market and if lower bids are not accepted.

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And it seems like the history

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under this program is, if I understand it, there's never been an above cap rate that's been the market clearing price.

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So if someone can make a bid at cost plus 500% and no one ever buys at that price, what are we arguing?

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Why does that matter?

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Well, the context here is important, as you know.

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In California, the primary market for procuring resource adequacy to make sure that we have enough capacity to meet our energy needs is through bilateral contracting.

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We have a bilateral resource adequacy as our first stop, you'd say, for buying capacity.

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And then in addition, the California ISO has two different

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options to procure backstop capacity.

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The first one is this capacity procurement mechanism.

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And so if there is a deficiency in the resource adequacy showings or an unexpected event, it can go to this market, the CPM solicitation to buy that capacity.

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And the other one is a mandatory reliability must run program.

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So if resources are looking to mothball or shut down, then that's where they go to make sure they're getting enough

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cost recovery to stay in operations.

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And so you're getting back to your question and CPM solicitations in 2015 the ISO proposed changing this market from a fixed administrative price so every resource would have been paid the same.

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one price.

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And it went to a competitive bid process.

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And now this is pay as bid.

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So there's not a market clearing price.

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Each resource that bids in, if it's needed, it gets the bid it submitted.

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And an important part of that switch

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which was part of a broad settlement that all parties agreed to, was that there needed to be a market mitigation measure there.

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And that market mitigation measure is that soft offer cap price.

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And so there's a formula that says, this is the price that you get to bid up to with no justification of your costs.

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But what we're talking about today is bids above that soft offer cap price, where resources that are the highest costs need some more money.

[00:06:21] Speaker 01:
Yeah, I understand that and I understand they get the bid price, but that's only if the ISO accepts that bid, right?

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That's correct, but this is a filed rate is the other important aspect of this.

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So this is a cost based showing that the resources make in order to be able to bid above that soft offer price.

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And it's important because whether it's been used much before in the past, it's really not a good predictor of the future here because the capacity markets are tightening in California.

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And when sellers have market power, it is not just unreasonable to pay them more than the costs they need to incur to pay, to provide that capacity service.

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And now the second point I want to make is that the court here is compelled to reach the same outcome, which is remand regarding this automatic 20% adder that it's giving resources, as in the recent decision authored by Judge Henderson, the Delaware Division of the Public Advocate,

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And the case is so strikingly similar here to this one in the ways that the commission failed to engage in reason decision-making.

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And before making that analogy, I'll just give you a quick recap here.

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Here, the ISO did not provide and the commission did not rely on any data or evidence showing that the CPM, the capacity procurement resources need or will use this automatic 20% adder that's given on top

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of their demonstrated going forward costs.

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They did not show that those resources will use or even need that adder for maintenance and upgrades.

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And in the ISO's energy markets, another key point is these resources retain all of the energy markets that they earn.

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And those energy bids, they're allowed to recover long-term maintenance and upgrade costs.

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The Department of Market Monitoring, which is the independent market monitor,

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asked the ISO for this assessment and never provided it.

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And the commission never responded to this issue.

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It didn't say anything in response to arguments that resources are already earning enough money through market revenues in this competitive solicitation.

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And that it's just windfall profits to give them this extra 20% booster.

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The commission simply concluded

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that the inclusion of a 20% adder on top of demonstrated going forward costs is consistent with commission precedent on CPM compensation.

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And now if this all sounds really familiar, this failure to engage in reasoned decision-making, it should, because it was the same flaws, the commission, the same failures of the commission in reasoned decision-making.

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in the Delaware Division of the Public Advocates versus Burke case.

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And now, before I conclude, I want to make one final point today.

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The commission has never answered this looming and critical question.

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which is just fundamental to this competitive solicitation.

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And again, this is a voluntary backstop capacity market.

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And it's never said, well, what costs, if any, should these resources be guaranteed to recover in addition to keeping their market revenues and in addition to a capacity payment that covers their actual and demonstrated going forward costs?

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This is critical in 2020 right now because of recent reforms that the ISO has made to better distinguish this voluntary and competitive backstop market from the ongoing mandatory reliability must run program.

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And it's not even clear that the ISO itself agrees what additional fixed costs this capacity price should pay for.

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And this clarity is critical because California's new rule does not follow the guidelines and directives that the commission has given in the New York ISO in two orders where it addressed this very same issue about payments in a voluntary backstop capacity market.

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And now to look back at what guidance the commission has given on CPM compensation in California,

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We wind back through its 2015 CPM order to the 2011 CPM order.

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In that order, the commission rejected a proposal the ISO submitted.

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We don't think that compels any particular outcome here because again, California's resource adequacy program, which provides most of our capacity and the ISO's market rules have evolved significantly since 2011.

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But in that order, the commission expressly identified long-term maintenance and other improvements such as environmental upgrades as the type of money it wanted to make sure CPM resources could recover.

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And now I just want to leave the court at JA 21 here before I go.

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In its own transmittal letter and answer, the ISO itself said that it is not just unreasonable to pay capacity procurement mechanism resources

[00:11:52] Speaker 03:
for their actual long-term costs and upgrades.

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It says the reliability must run mechanism is much better suited than this voluntary backstop market to address the recovery of long-term maintenance and upgrade costs that may be needed.

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And in its own words, the ISO said these kinds of costs could be millions and millions of dollars.

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And it asked if they should even be accommodated under the CPM framework.

[00:12:19] Speaker 03:
Now, I'm not sure how it can be unreasonable to pay a resource for long-term maintenance costs it actually incurs, but then reasonable to pay them for these same kinds of costs only so long as they are unknown, approximate, and not necessarily incurred.

[00:12:36] Speaker 03:
And the ISO never explained that.

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And so it is critical to make sure.

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And one other thing is the ISO also identified that there are no provisions to prevent resources from going back and forth

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between this market rate that's supposed to be competitive and the filed rate that they're going to get approval from FERCON with a 20% adder.

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And this clarity is needed and remit is needed for the commission to make sure that this new rule is passed in California is consistent with its policies and other ISOs.

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Now, if there are no other questions, then I will reserve the remainder of my time for a rebuttal.

[00:13:16] Speaker 03:
All right.

[00:13:17] Speaker 00:
We'll hear then from Ms.

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Rylander.

[00:13:23] Speaker 04:
Good morning.

[00:13:23] Speaker 04:
May it please the court Elizabeth Rylander for the commission.

[00:13:27] Speaker 04:
What's required of the commission in response to a Federal Power Act section 205 rate application like this one, is that it use its technical understanding and policy judgment to evaluate whether that rate's just and reasonable.

[00:13:41] Speaker 04:
California Commission's challenge here is to that policy judgment, which has been developed over many years of evaluating proposals for the California ISO as to how best to procure capacity in its region and how best to balance the various mechanisms for obtaining that capacity.

[00:14:02] Speaker 04:
As Ms.

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Mori has noted, the capacity markets and the energy markets are not the same.

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And the compensation mechanism here applies just to what is necessary to entice resources to be available to generate energy if necessary.

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It's completely separate from the compensation that arises from providing that energy.

[00:14:27] Speaker 04:
So the capacity payment has to be sufficient to bring generators into the market no matter what happens after that.

[00:14:35] Speaker 02:
Excuse me, the energy market

[00:14:39] Speaker 02:
you're referring to, then is the the consumer's payment of of monthly electric bill?

[00:14:50] Speaker 04:
Your honor, I said this could be a retail.

[00:14:55] Speaker 04:
That would be a retail level.

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That would be a retail level bill that is not subject to the commission's jurisdiction.

[00:15:03] Speaker 04:
What I mean is, yeah, OK.

[00:15:06] Speaker 02:
So then

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Once the capacity is brought online through these incentive payments, basically, then the owner of the capacity generates and keeps the revenues from the first sale of the energy, as well as whatever it's gotten from, for bringing the capacity online.

[00:15:31] Speaker 02:
Yes, your honor.

[00:15:32] Speaker 02:
Okay, thank you.

[00:15:36] Speaker 01:
So just I had the same question.

[00:15:42] Speaker 01:
This capacity is a kind of option contract, right?

[00:15:50] Speaker 03:
Yes, I think that's a fair observation.

[00:15:52] Speaker 01:
Is it fair?

[00:15:53] Speaker 01:
Am I thinking about things in the right way to think of these payments we're talking about

[00:16:03] Speaker 01:
just the price of buying the option as opposed to the strike price, correct?

[00:16:12] Speaker 04:
Yes, your honor.

[00:16:15] Speaker 04:
And this court has considered a number of cases in a number of regions in previous years of California and elsewhere concerning capacity markets, how they work, and what their function is.

[00:16:27] Speaker 01:
And just one other nuts and bolts question before you get into the

[00:16:33] Speaker 01:
guts of your argument, which is with that in mind, what is the conceptual difference between going forward costs, which you generally think could be compensated as part of the option price, and all other costs which

[00:16:57] Speaker 01:
we were talking about the cost, the underlying cost of providing the service, you would think the provider should recover all of its costs.

[00:17:07] Speaker 01:
What's the difference?

[00:17:08] Speaker 01:
What distinguishes going forward costs in this context?

[00:17:14] Speaker 04:
Going forward costs are a narrower set of costs than are a narrower set of costs than full fixed costs.

[00:17:22] Speaker 04:
And in this case,

[00:17:24] Speaker 04:
I believe there can be more than one definition of going forward costs, but here it's just narrow categories.

[00:17:32] Speaker 01:
Yeah, I get that.

[00:17:33] Speaker 01:
I have in my notes, it's fixed operating and maintenance costs, ad valorem taxes and insurance insurance.

[00:17:43] Speaker 01:
I understand the point that that's a proper subset.

[00:17:48] Speaker 01:
I don't understand what the

[00:17:52] Speaker 01:
economic or practical significance is between those costs and other costs that aren't included in this option price.

[00:18:06] Speaker 04:
I would characterize it as short-term costs versus long-term costs.

[00:18:12] Speaker 04:
And the commission's orders also draw this distinction in a couple of places, I believe in 2011 and 2015.

[00:18:22] Speaker 04:
What the Commission found is necessary in this case is to provide an incentive not just for capacity providers to enter the market to provide capacity, but also if there is a resource that is maybe not very economic and that is at risk of retirement, there needs to be some incentive to remain in the market.

[00:18:46] Speaker 04:
There you get to longer-term costs such as maintenance, long-term maintenance and capital improvements, which are referenced in the orders.

[00:19:03] Speaker 01:
Okay.

[00:19:03] Speaker 01:
So then can I ask you, so the 20% adder, which is a structural feature of this,

[00:19:17] Speaker 01:
What is that designed to do?

[00:19:22] Speaker 01:
I could think of three possible reasons for having an adder.

[00:19:29] Speaker 01:
One is to account for the fact that there are costs that aren't going forward costs.

[00:19:41] Speaker 01:
One is to account for the fact that you want

[00:19:46] Speaker 01:
a reasonable rate of return above and beyond costs.

[00:19:52] Speaker 01:
And the third, which I think is what's going on here, but I want to make sure, is to account for the fact that if you just pay average costs, if what you're trying to do is compensate going forward costs and you just pay an average,

[00:20:12] Speaker 01:
That won't be adequate for high cost producers on the right-hand side of the bell curve.

[00:20:20] Speaker 01:
And the 20% is designed to account for that.

[00:20:24] Speaker 04:
Yes, Your Honor.

[00:20:26] Speaker 04:
Paragraph 36 of the order on review discusses this somewhat in explaining that the 20% adder is intended to provide for sufficient recovery of fixed costs, which is the broader category Your Honor was asking about earlier.

[00:20:42] Speaker 04:
plus a return on capital to facilitate incremental upgrades and improvements by resources, which, as I mentioned earlier, would encourage them or provide them an opportunity to remain available and in the California markets longer if they choose to.

[00:20:56] Speaker 01:
Sorry, I'm just talking about, for now, 20% adder in the soft offer cap.

[00:21:07] Speaker 04:
Oh, I'm sorry, Your Honor.

[00:21:09] Speaker 01:
And I understood that one to be primarily about the last thing I mentioned, which is your objective is to compensate for going forward cost and you need a number that will do that for high cost producers.

[00:21:29] Speaker 04:
Yes, I agree with you.

[00:21:31] Speaker 04:
Sorry, go ahead.

[00:21:33] Speaker 04:
Okay.

[00:21:35] Speaker 04:
The price, the going forward costs reflected in the soft offer cap calculation are those of a reference unit, not a specific unit.

[00:21:45] Speaker 04:
and there will be some specific units whose total bid is less than the soft offer cap, whose going forward costs are higher than those of the reference unit, there will be some with costs that are lower.

[00:21:59] Speaker 04:
So the 20% provides a cushion to make sure that they're all compensated.

[00:22:02] Speaker 01:
So if that's right, why isn't CPUC's criticism of FERC's reasoning

[00:22:13] Speaker 01:
spot on, which is the only discernible reasoning in the order is, well, we have a 20% adder there, so we can have a 20% adder here.

[00:22:28] Speaker 01:
But the 20% adder in the above cap rate, I mean, if the logic for the 20% adder in the default cap is,

[00:22:42] Speaker 01:
we need to accommodate high-cost producers who are on the right-hand side of that bell curve, then if you start with such a high-cost producer and then instead of giving him average plus 20, you give him actual cost, I mean, that would seem to obviate the need for another 20% on top of that.

[00:23:10] Speaker 04:
No, your honor.

[00:23:11] Speaker 04:
It does not.

[00:23:12] Speaker 04:
It does not obviate the need for additional revenues, because again, the above cap compensation is based just on going forward costs, not on full fixed costs.

[00:23:22] Speaker 04:
There are the commission has previously evaluated

[00:23:27] Speaker 04:
the question of paying only going forward costs as discussed on pages 32 and 33 of our briefs as to findings in other regional systems.

[00:23:38] Speaker 04:
And here specifically in the 2018 order on paragraph 44, where the commission noted that a resource at risk of retirement, which is the type you tend to see in the capacity procurement mechanism, is likely to need more than the compensation available bilaterally.

[00:23:56] Speaker 04:
and what is available bilaterally because that's a competitive function is going to be somewhat lower than what is available in the capacity procurement mechanism.

[00:24:13] Speaker 01:
So it's designed to capture the difference between going forward costs and other costs

[00:24:25] Speaker 04:
Yes, your honor.

[00:24:26] Speaker 04:
It's what the commission is trying to do here is to identify a rate that is within the zone of reasonableness.

[00:24:34] Speaker 01:
And it just seems like I mean, what do you do?

[00:24:40] Speaker 01:
What about an average cost producer?

[00:24:47] Speaker 01:
Who can't say that.

[00:24:53] Speaker 01:
can't say, well, I need more to account for the fact that my going forward costs are high.

[00:25:02] Speaker 01:
Or even a low cost producer, are they allowed to go above cap on the theory not that they're going forward costs are higher, but that they need to be compensated for other costs that aren't going forward costs?

[00:25:24] Speaker 04:
A resource that's bidding above the offer cap would have to submit a cost justification filing to the commission.

[00:25:30] Speaker 04:
And as we've been over already, first that offer would have to be accepted and there has never been an above cap offer accepted.

[00:25:37] Speaker 04:
And there's never been such a justification made to the commission.

[00:25:41] Speaker 04:
So to answer your question, I think a lower price generator could try to do that.

[00:25:49] Speaker 04:
First, but there are two, the two huge obstacles would be having its bid accepted and then having the commission find that the bid is justified and that the ISO could pay it.

[00:26:00] Speaker 04:
Getting back for a moment to the need to- Excuse me.

[00:26:04] Speaker 04:
Yes, Your Honor.

[00:26:04] Speaker 02:
An above cap offer accepted.

[00:26:08] Speaker 04:
Yes, so when they- Above the soft cap.

[00:26:12] Speaker 04:
Yes, above the soft cap.

[00:26:15] Speaker 04:
There has never been, to my knowledge, since the soft offer cap was implemented in 2015, a bid higher than the soft offer cap accepted for use in the California ISO markets or a cost justification filing made to the commission.

[00:26:34] Speaker 02:
So this rate is submitted but not accepted?

[00:26:38] Speaker 04:
I don't know, Your Honor.

[00:26:41] Speaker 02:
OK, so most of what we're talking about relates to

[00:26:47] Speaker 02:
bids that are above cap, none of which have ever been accepted, but might be in the future.

[00:26:52] Speaker 04:
Correct.

[00:26:55] Speaker 04:
So this is all very theoretical.

[00:26:57] Speaker 02:
But the 20% adder, if I understand it right, below cap bidders don't submit their costs, right?

[00:27:05] Speaker 02:
So the adders intended for them to account to the variability in costs that you described, variability from the reference source.

[00:27:16] Speaker 04:
Yes.

[00:27:16] Speaker 02:
Um, but above cap do submit their costs.

[00:27:22] Speaker 02:
Yes.

[00:27:22] Speaker 02:
So the justification from the below cost context doesn't seem to carry over.

[00:27:30] Speaker 02:
What's the need for an adder once you've gotten actual costs demonstrated?

[00:27:35] Speaker 02:
Um, once again, your honor, I'm going to say it because the costs that are demonstrated are less than the full fixed costs.

[00:27:44] Speaker 02:
Right.

[00:27:45] Speaker 02:
Yes, so.

[00:27:47] Speaker 04:
And there's been a great.

[00:27:49] Speaker 02:
Why not?

[00:27:50] Speaker 02:
Why is it reasonable to do that rather than ask for a showing of the full fixed costs at the same time as the going forward costs are submitted?

[00:28:03] Speaker 04:
There's nothing in the record to suggest whether that's reasonable or not, because that is not the proposal made to the commission.

[00:28:09] Speaker 02:
That's fair enough, but I don't see anything in the record or in the decision, I should say, that justifies the 20% adder other than carrying it over from this other context for below cost, below cap offers.

[00:28:27] Speaker 04:
There are a couple of guideposts in the commission's past decisions and also reflected in the record here.

[00:28:34] Speaker 04:
There is agreement among market participants that the current rate for above-cap resources is too high.

[00:28:41] Speaker 04:
That's noted in the order at paragraph 12 and also at paragraphs 35 and 36.

[00:28:51] Speaker 04:
What's too high?

[00:28:54] Speaker 04:
I should say the previous rate that was in place from 2015 until this order.

[00:29:02] Speaker 04:
The ISO wanted to replace that rate because market participants felt that it was too high.

[00:29:08] Speaker 04:
The commission did not make a finding as to whether that rate had become unjust and unreasonable, but accepted the party's interest in changing it.

[00:29:17] Speaker 02:
So those are purchasers, I gather.

[00:29:19] Speaker 02:
They're complaining about the rate.

[00:29:21] Speaker 04:
Um, there were purchasers and state entities complaining about the rate.

[00:29:26] Speaker 04:
Yes.

[00:29:27] Speaker 04:
And on the other hand, that was because Calpine says it's too low.

[00:29:30] Speaker 02:
Wait a minute.

[00:29:31] Speaker 02:
That was the rate for, for what?

[00:29:35] Speaker 02:
Above cap?

[00:29:36] Speaker 04:
Yes, that was the rate for above cap.

[00:29:38] Speaker 04:
It was calculated using a different mechanism.

[00:29:41] Speaker 04:
That was calculated using full fixed costs plus a return of and on capital that was previously set at 12.25%.

[00:29:52] Speaker 02:
So they thought it was too high for rates for bids above the cap, none of which has ever been accepted.

[00:29:59] Speaker 04:
Correct.

[00:30:01] Speaker 00:
May I ask you about paragraph five in the FERC dissent by now Chairman Glick?

[00:30:16] Speaker 00:
That last sentence about, well, he says first the 20% adder is particularly troubling because the CPM resources retain all market

[00:30:26] Speaker 00:
revenues earned and so forth.

[00:30:28] Speaker 00:
Then he says, especially given the evidence of market power in the CPM process, the commission ought to provide some reason to believe that the 20% adder will be anything other than a windfall for high cost generators before finding it just and reasonable.

[00:30:46] Speaker 00:
What about this evidence of market power in the CPM process?

[00:30:54] Speaker 04:
Your honor, the commission in paragraph 41 of its order limited the scope of this case just to the rate proposal, and it shows not to take up the issues of how the capacity procurement mechanism as a whole was working.

[00:31:11] Speaker 04:
The ISO will have to revisit this particular rate starting as soon as next year.

[00:31:23] Speaker 02:
I would mention, though, that the petition here, the 2020 has never been used, will be re-examined next year in the ordinary course.

[00:31:35] Speaker 04:
The California ISO tariff requires that every time the California Energy Commission releases a new study of generator costs, the California ISO in its stakeholder process must review

[00:31:51] Speaker 04:
the soft offer cap, and it's working.

[00:31:54] Speaker 04:
And if the California ISO wishes to make changes, then it has to submit those to the commission.

[00:32:01] Speaker 04:
The tariff provision is cited in the commission's order and footnote, I believe it's footnote nine, 43A.4.1.1.1, and it is appended to the back of the petitioner's brief.

[00:32:22] Speaker 02:
But where is that in the order in the J.A.

[00:32:25] Speaker 04:
joint appendix?

[00:32:34] Speaker 04:
Page 255.

[00:32:35] Speaker 02:
Give me a moment here.

[00:32:39] Speaker 02:
I have it.

[00:32:44] Speaker 00:
What footnote?

[00:32:57] Speaker 04:
Also, paragraph five, Your Honor, explains that the ISO's tariff requires it to conduct a stakeholder process to revisit the soft offer cap at least every four years.

[00:33:09] Speaker 04:
And that, which is seen in the tariff provision, that is tied to the release of regular California Energy Commission reports.

[00:33:17] Speaker 02:
So is there some reason to think that the question of market power will be investigated at that point?

[00:33:25] Speaker 02:
It hasn't been in the past, I guess.

[00:33:28] Speaker 04:
I can't say, Your Honor.

[00:33:34] Speaker 00:
Well, I think Judge Ginsburg is asking the same thing I asked originally.

[00:33:38] Speaker 00:
In other words, the dissent says, you haven't considered the market power of the CPM regime.

[00:33:47] Speaker 00:
And you pointed to the majority or the order from FERP saying, we're not going to do that now.

[00:33:57] Speaker 00:
I mean, they don't explain why they aren't, they're just not going to do it now.

[00:34:02] Speaker 00:
And then Judge Ginsburg, I think you answered him saying, they may never, they may never do it.

[00:34:14] Speaker 00:
Am I right?

[00:34:16] Speaker 04:
I can't speculate on what will happen in a future commission proceeding that hasn't begun at this point, Your Honor.

[00:34:23] Speaker 04:
I would certainly expect that if there are market power problems, they will be brought to the commission's attention, either via complaint or in future capacity procurement mechanism rate cases.

[00:34:37] Speaker 04:
This is not a filing that deals with the overall structure of the capacity procurement mechanism or the way it works.

[00:34:45] Speaker 04:
or how the California ISO uses it.

[00:34:48] Speaker 04:
It's limited to the very narrow issue of compensation for a small set of resources.

[00:34:54] Speaker 04:
And once again, it's never, you know, for the hypothetical, so far, hypothetical situation in which such payments are necessary.

[00:35:05] Speaker 01:
But if the justification, you're right.

[00:35:10] Speaker 01:
What's before FERC is a tariff amendment limited to above cap offers.

[00:35:18] Speaker 01:
But if FERC's justification is, well, this seems okay because the formulas appears analogous to what happens for below cap offers.

[00:35:35] Speaker 01:
which seem not a helpful fact for you, that if FERC has not examined at all, what happens the reasonableness of the below cap offers?

[00:35:50] Speaker 04:
Your honor, I think we got away from this issue a few minutes ago, and I would like to to re-explain that the commission was not merely looking at

[00:36:02] Speaker 04:
the level of below cut compensation and saying, well, that worked in 2015, that'll probably work now.

[00:36:08] Speaker 04:
It does have other precedent in other cases concerning this and other ISOs in which it's found that going forward costs alone, which is the pinpoint rate that California commission would like to substitute here are too low.

[00:36:22] Speaker 04:
That's in our brief at 32 to 33 and also described in the 2018 order.

[00:36:28] Speaker 04:
And there's also evidence of the record that the current cap rate for above cap resources, which is full fixed costs plus a return of it on capital is too high.

[00:36:41] Speaker 04:
That's mentioned in the order of paragraphs 12 and 35 to 36.

[00:36:46] Speaker 04:
And even Commissioner Glick said that, you know, that this rate is, you know, is at least a step in the right direction.

[00:36:53] Speaker 04:
It is possible it is.

[00:36:59] Speaker 04:
I'm sorry I misspoke.

[00:37:02] Speaker 04:
What the California Commission, which never mentioned windfall profits, I believe until its reply brief, had to say, had to, would like us to do is to substitute a pinpoint rate that the commission knows is not, the commission knows is not sufficient to compensate expensive resources for something that

[00:37:25] Speaker 04:
appears to the Commission to at least be in the range of just and reasonable and which will remain under the Commission's oversight in the future.

[00:37:32] Speaker 02:
How do they know that it's insufficient if they have no experience with actual bidding on it?

[00:37:43] Speaker 04:
What the Commission has found in the past, Your Honor, is that going forward costs with which it does have experience alone are insufficient.

[00:37:58] Speaker 02:
Well, the going forward cost, which is demonstrated in 2020 proposal has to be shown, right?

[00:38:04] Speaker 04:
I'm sorry.

[00:38:05] Speaker 02:
Can you repeat that, please?

[00:38:07] Speaker 02:
Under the 2020 order, the going forward fixed costs are actually shown.

[00:38:14] Speaker 02:
They're demonstrated before the, or at some point to prove what the actual number is.

[00:38:22] Speaker 04:
Yes, for a below cap resource.

[00:38:25] Speaker 04:
The going forward costs of the reference rate or the reference unit are demonstrated.

[00:38:29] Speaker 04:
And for an above cap resource, the going forward costs of the specific unit are demonstrated.

[00:38:34] Speaker 02:
Right.

[00:38:35] Speaker 02:
So they get their going forward costs and they get fixed operating and maintenance expenses and taxes, right?

[00:38:43] Speaker 02:
Taxes, insurance and so on.

[00:38:44] Speaker 00:
Yes.

[00:38:45] Speaker 02:
Then they get the adder.

[00:38:46] Speaker 04:
Yes.

[00:38:47] Speaker 00:
And they have market revenues.

[00:38:52] Speaker 04:
Yes, but we must presume, Judge Henderson, we cannot assume anything about market revenues because it is not necessarily the case that a unit whose capacity bid is acceptable and that is available in the capacity market will ever be called upon to provide energy.

[00:39:11] Speaker 04:
Two recent cases concerning just this situation that we did not cite in our brief are Duke Energy v. FERC, 892 F3rd, 416.

[00:39:22] Speaker 04:
and Old Dominion VFIRC, 892 F3, 1223.

[00:39:26] Speaker 04:
Those both concerned capacity resources in a different system that lost money because while they were paid to be available, they were prepared and they purchased fuel in order to run, very expensive fuel in order to run, and then were not called upon to run.

[00:39:43] Speaker 04:
So market revenues, while market revenues are more complicated

[00:39:51] Speaker 04:
that it is a more complicated concept than just simply assuming some positive number, which I think is what the California Commission is doing here.

[00:39:59] Speaker 04:
We really can't consider them.

[00:40:01] Speaker 02:
Seems that, therefore, this segregation that you have between the capacity market and the energy market seems to say if the end result of the two is a windfall profit, that's really not our business.

[00:40:22] Speaker 02:
of our business.

[00:40:23] Speaker 02:
That doesn't make the rate unreasonable.

[00:40:30] Speaker 04:
I do not expect that FERC, whose mission is to ensure just and reasonable rates, would ever countenance windfall profits, your honor.

[00:40:40] Speaker 02:
And that's how will one know, given the 20% added without any demonstration of the other beyond the forward going forward costs.

[00:40:51] Speaker 04:
We will have real-world data if this ever occurs.

[00:40:55] Speaker 04:
And if it does, the Commission has tools at its disposal to change the rate in the form of Federal Power Act Section 206 or to further investigate the rate or otherwise to make changes.

[00:41:07] Speaker 04:
What we don't have is any showing that there will definitely be windfall profits or anything of that nature.

[00:41:16] Speaker 02:
And in the capacity market, do you regard market power as essentially irrelevant?

[00:41:24] Speaker 02:
Because when this capacity is called upon, it's an unusual and urgent situation in which demand is

[00:41:32] Speaker 02:
is the price of the offer is very high.

[00:41:38] Speaker 02:
The market clearing price, let's say, is very high because of the basically urgent circumstances.

[00:41:46] Speaker 02:
And therefore, whatever it takes is reasonable.

[00:41:55] Speaker 04:
I think that is reading more into the commission's order than is there, Your Honor.

[00:41:59] Speaker 04:
But what is, again, the vast bulk of the capacity procurement mechanism is bilateral and is competitive and is intended to find some sort of clearing price may not be the right term, but is intended to find a competitive price for capacity.

[00:42:21] Speaker 02:
Right.

[00:42:22] Speaker 02:
And I think we'll find out more in rebuttal, but it seems to me

[00:42:26] Speaker 02:
the California Commission's complaint is analogous to saying where there is so-called price gouging because of the urgency of the matter, the result will be higher than just in reasonable rates.

[00:42:45] Speaker 04:
I would say that is their concern, Your Honor, yes.

[00:42:48] Speaker 02:
And of course, there will only be actual transactions when there is this great urgency and very high rates for bringing capacity online or keeping it.

[00:42:59] Speaker 04:
I presume so, Your Honor, yes.

[00:43:01] Speaker 02:
All right.

[00:43:02] Speaker 02:
Thank you.

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

[00:43:04] Speaker 00:
Judge Casas, do you have any more questions?

[00:43:07] Speaker 04:
I think very much.

[00:43:08] Speaker 00:
All right.

[00:43:09] Speaker 00:
Ms.

[00:43:09] Speaker 00:
Moye, why don't you take two minutes and also answer any questions?

[00:43:16] Speaker 03:
Thank you, Your Honor.

[00:43:17] Speaker 03:
Now I have to correct several things that Ms.

[00:43:20] Speaker 03:
Rylender said about this tariff that are simply wrong.

[00:43:24] Speaker 03:
First, she said that going forward costs alone that the Commission has found those to be not sufficient payments in a voluntary backstop capacity market.

[00:43:35] Speaker 03:
Now that is contrary to the Commission's orders that it issued in the New York ISO.

[00:43:40] Speaker 03:
addressing a reliability must run backstop program where it said that that is enough.

[00:43:45] Speaker 03:
That's the minimum that needs to be paid.

[00:43:48] Speaker 03:
And that's because as Judge Katz said and hit the nail right on the point, paying the actual going forward cost of the resource

[00:43:57] Speaker 03:
obviates the need for additional revenues.

[00:44:00] Speaker 03:
And the commission just repeatedly flips the burden of proof in this case.

[00:44:04] Speaker 03:
The burden of proof is not on the commission to demonstrate that market revenues are not sufficient.

[00:44:10] Speaker 03:
The burden is on the commission to demonstrate that the adder is just unreasonable and not going to result in rainfall profits.

[00:44:17] Speaker 03:
Has no data, no evidence, no analysis whatsoever of how market revenues supplement the CPM

[00:44:25] Speaker 03:
earnings and the Department of Market Monitoring, Pacific Gas and Electric and the CPC all put in evidence showing the market revenues are enough and asked the commission and the ISO to do an assessment.

[00:44:39] Speaker 03:
And it has never done that.

[00:44:40] Speaker 03:
It's exactly like the case, the Delaware Division of the Public Advocate.

[00:44:44] Speaker 03:
The second thing she said incorrectly is that risk of retirement resources are the types of capacity you're likely to see in this CPN market.

[00:44:55] Speaker 03:
Now that is incorrect risk of retirement designations are no longer available in this backstop market that was approved in 2011 the ISO asked to add a risk of retirement designation and in.

[00:45:11] Speaker 03:
Just last year, the commission approved a comprehensive set of reforms the ISO has been pursuing to move the risk of retirement designation into its mandatory reliability must run backstop program.

[00:45:24] Speaker 03:
And that's where the ISO says itself, resources can and should go to get recovery of additional costs above their fixed costs if they need them to stay in service.

[00:45:34] Speaker 03:
And then, you know, finally I just want to point out.

[00:45:38] Speaker 03:
She also suggested that the commission could correct a rate or deny a rate if in a section 205 filing it turns out to show that it's unjust and unreasonable that it's too high.

[00:45:51] Speaker 03:
And I don't want to put words into my future opponents' mouths.

[00:45:56] Speaker 03:
But I am very certain that if the CPUC showed up in one of these proceedings and said, no, you can't give them this 20% adder, the rate is too high, this resource doesn't need it, that would be deemed a collateral attack on the commission's order here.

[00:46:12] Speaker 03:
Because it's approving the automatic inclusion

[00:46:15] Speaker 03:
of the adder, whether the resource needs it or not.

[00:46:18] Speaker 03:
There's no demonstration required.

[00:46:20] Speaker 03:
The resource doesn't even need to claim that it will use the money for anything other than windfall profits, which, by the way, can harm other sellers who are competing in these markets.

[00:46:32] Speaker 03:
And now, Judge Henderson, you asked me to answer a question.

[00:46:34] Speaker 03:
I want to make sure I address that.

[00:46:40] Speaker 00:
If you can repeat.

[00:46:41] Speaker 00:
Oh, no, no, I just said answer any questions we have.

[00:46:44] Speaker 00:
I don't have any.

[00:46:46] Speaker 03:
Okay, well then I just want to also make one point in closing.

[00:46:50] Speaker 02:
Hold on a second.

[00:46:51] Speaker 02:
So you're saying if the FERC initiated a proceeding to investigate or correct or reject these filed rates as being unreasonably high, that would be barred as a collateral attack

[00:47:10] Speaker 03:
Now, Your Honor, what I'm saying is in its brief, the commission has pointed to this process where to go above this soft offer cap, a resource has to make a section 205 filing with the commission.

[00:47:24] Speaker 03:
It shows what its actual going forward costs are.

[00:47:27] Speaker 03:
And that's where the commission gives that approval for the filed rate.

[00:47:31] Speaker 03:
And Ms.

[00:47:32] Speaker 03:
Rylender has suggested in her answer today that the commission could

[00:47:36] Speaker 03:
correct that rate there if it looks like that's going to be too high for a resource.

[00:47:41] Speaker 03:
And what I am saying is that's incorrect because the commission's order here guarantees the extra 20% automatically.

[00:47:49] Speaker 03:
And so if the CPSC tried to oppose that, it could be deemed a collateral attack.

[00:47:54] Speaker 02:
Oh, if you tried to oppose it.

[00:47:56] Speaker 02:
I see.

[00:47:57] Speaker 03:
Okay.

[00:47:57] Speaker 03:
Right.

[00:47:57] Speaker 03:
And then always after the fact, you know, if, if, if things go haywire.

[00:48:02] Speaker 03:
Sorry.

[00:48:03] Speaker 01:
Let me just make sure I got that.

[00:48:05] Speaker 01:
You're saying that in the later, the later proceeding,

[00:48:09] Speaker 01:
would adjudicate the question of what the actual going forward costs were, it could not relitigate the question of whatever that is, you get that plus 20% more.

[00:48:27] Speaker 03:
That would certainly be an argument parties would make.

[00:48:29] Speaker 03:
And it's significant because- Excuse me, would they be invoking the files rate doctrine?

[00:48:36] Speaker 02:
Is that what would happen?

[00:48:38] Speaker 03:
I think it would be a collateral attack because here the commission is approving a new method and it's part of a comprehensive set of reforms.

[00:48:46] Speaker 03:
And the intention was to streamline and simplify this process.

[00:48:50] Speaker 03:
So while resources may have never actually gotten authority to use an above cap price before, the whole intention of this is to make it a shorter form.

[00:49:00] Speaker 03:
It's a much, it's only four categories of costs instead of around 20.

[00:49:04] Speaker 03:
and they get that automatic 20% adder.

[00:49:07] Speaker 03:
It's not the same as fully litigating what the cost of service is for the resource.

[00:49:13] Speaker 03:
That's the change the commission is making to the above cap rate.

[00:49:17] Speaker 03:
And it's making that change because resources can always get their full cost of service by going through the California ISO's mandatory capacity backstop program.

[00:49:29] Speaker 03:
That's the reliability must run program.

[00:49:31] Speaker 03:
if they are needed to stay in operation for reliability.

[00:49:35] Speaker 02:
That's not a choice that the resource owner can make.

[00:49:37] Speaker 02:
That's a choice that the ISO makes.

[00:49:41] Speaker 02:
No, the resource owner can make that choice and the ISO... How can the resource say, it's mandatory, you must buy my capacity?

[00:49:53] Speaker 03:
If the resource is saying that it's not making enough money from the market revenues,

[00:49:58] Speaker 03:
and that it's actually going to have to shut down or mothball, it goes to the ISO and it says, you know, we're planning to de-issue.

[00:50:08] Speaker 03:
And then the ISO, if that resource is needed for reliability, it will evaluate what long-term costs, upgrades, cost of service is needed by that resource to keep it in service.

[00:50:21] Speaker 03:
But here, this capacity procurement mechanism is a short-term market.

[00:50:26] Speaker 03:
The ISO itself pointed out, these are usually one to two month designations.

[00:50:31] Speaker 03:
Many of them are for partial units.

[00:50:33] Speaker 03:
And the ISO itself, I really invite you to look at JA21.

[00:50:36] Speaker 03:
The ISO itself says, this is not the program to provide long-term costs for environmental and other upgrades.

[00:50:45] Speaker 03:
It says that should be done in the reliability must run.

[00:50:49] Speaker 03:
program.

[00:50:50] Speaker 03:
And so again, the commission here has said, well, there's no, there's no evidence that the 20% will overcompensate, but that's not the burden.

[00:51:00] Speaker 03:
The commission's order has to be supported by substantial evidence.

[00:51:05] Speaker 03:
In this case, it is not supported by any evidence at all.

[00:51:09] Speaker 03:
It's not even close to a scintilla.

[00:51:10] Speaker 03:
It's zero.

[00:51:12] Speaker 03:
The only basis for its decision

[00:51:14] Speaker 03:
is that, well, we approve this 20% adder for the soft offer cap itself in connection with proxy resource.

[00:51:22] Speaker 03:
So we'll approve it here.

[00:51:24] Speaker 03:
And just one other thing to point out, the ISO revisits this price every so often.

[00:51:31] Speaker 03:
In the stakeholder process that was just finished, the parties demonstrated that that soft offer cap price is too high, that the CPM solicitations have become structurally uncompetitive, and parties asked the ISO to lower it.

[00:51:49] Speaker 03:
But it didn't do that.

[00:51:51] Speaker 03:
In the Section 205, finally, it only recommended changing the above soft offer cap.

[00:51:57] Speaker 03:
So if we're going to get that soft offer cap change, we have to file a Section 206 complaint.

[00:52:03] Speaker 02:
But that's not part of your concern in the current proceeding, right?

[00:52:08] Speaker 02:
In this court, you haven't challenged that.

[00:52:11] Speaker 03:
That is not before the court because it would have to come through a section 206 complaint.

[00:52:16] Speaker 03:
But those very same concerns, the very same evidence showing that that soft offer cap formula itself with the 20% adder has become overcompensatory, that is leading to unjust and unreasonable rates, and that there's market power being exerted in California today.

[00:52:33] Speaker 03:
Those same arguments compel the commission to do more than it has done here.

[00:52:39] Speaker 03:
It is not balancing the interests of consumers against the needs of sellers, and it is required to do.

[00:52:47] Speaker 03:
It hasn't considered consumers at all.

[00:52:50] Speaker 03:
Only now, Jeremy Glick has done that in his dissent, and he reaches the right outcome here.

[00:52:57] Speaker 03:
All right.

[00:52:57] Speaker 03:
Are there any more questions?

[00:53:00] Speaker 03:
All right.

[00:53:01] Speaker 03:
Thank you.