[00:00:00] Speaker 01:
Case number 20-1289 et al.

[00:00:03] Speaker 01:
TransCanada Power Marketing Limited Petitioner versus Federal Energy Regulatory Commission.

[00:00:08] Speaker 01:
Mr. Sundbett for the petitioner.

[00:00:10] Speaker 01:
Mr. Kennedy for the respondent.

[00:00:12] Speaker 03:
Good morning, Council.

[00:00:14] Speaker 03:
Mr. Sundbett, when you're ready, please proceed.

[00:00:16] Speaker 01:
Good morning.

[00:00:17] Speaker 01:
Thank you.

[00:00:18] Speaker 01:
May it please the court, Mark Sundbett, Council for Petitioner TransCanada.

[00:00:23] Speaker 01:
We'd like to start with a couple themes that relate back to the last time this case was before this court.

[00:00:31] Speaker 01:
In that decision in 2015, the court noted, quote, FERC made no effort to define the relevant markets or determine the participants market power.

[00:00:43] Speaker 01:
We're back, and one of the reasons we're back is that FERC still has not made any meaningful effort to define the markets or test

[00:00:52] Speaker 01:
participants market power within those defined markets.

[00:00:57] Speaker 01:
Having failed to define a market adequately, FERC can't make a determination regarding the existence or exercise of market power in any meaningful or judicially sustainable fashion.

[00:01:11] Speaker 01:
First, the geographic scope of the market has not been identified or even addressed by the commission on remand.

[00:01:19] Speaker 01:
there was no showing or analysis concerning what the appropriate geographic market would be.

[00:01:25] Speaker 01:
The system operator for various purposes breaks itself down into many different units.

[00:01:34] Speaker 01:
For instance, their dispatch zones, their reliability zones, their load zones.

[00:01:40] Speaker 01:
There can be as many as 19 different fractured pieces of the system operator

[00:01:47] Speaker 01:
But the commission never addresses what the proper size of the geographic market is.

[00:01:53] Speaker 01:
Nonetheless, the record clearly shows that geography was an important limiting characteristic for terms of the products.

[00:02:02] Speaker 01:
You will see, for instance, in both the testimony that accompanied the initial filing and the bid material.

[00:02:11] Speaker 03:
Can I ask you something about this issue, which is

[00:02:15] Speaker 03:
The question market definition the way that it was presented in the rehearing papers and also in your opening brief was pretty bound up in your argument that the commission aired by not applying the market based rate regime correctly.

[00:02:31] Speaker 03:
And I just understood that the commission doesn't even address the market definition argument in its response brief, and we can ask the commission why.

[00:02:39] Speaker 03:
But I had understood your argument about market definition, including the geographic scope of the market, to be bound up in your argument that the commission erred in its application of the market-based rate regime, as opposed to a freestanding argument that there's a problem with market definition.

[00:02:58] Speaker 01:
Your honor, we

[00:02:59] Speaker 01:
don't intend for that to be the interpretation at all.

[00:03:04] Speaker 01:
There are a variety of standard guidelines for determining, as you know, whether there's market power.

[00:03:16] Speaker 01:
And different agencies have different yardsticks, I'm sorry, different tests and ways of dealing with determining market power.

[00:03:26] Speaker 01:
And we're not saying that

[00:03:28] Speaker 01:
In this instance, clearly there was a, let's call it prefabricated template that was available for use that the commission decided for whatever reason it was not going to use.

[00:03:39] Speaker 01:
We contend that it was error not to use that prefabricated method, but regardless of whether they did use it or not, there is in addition

[00:03:51] Speaker 01:
the substantive error of if you're not going to use the existing rules, then you have to come up with some way of determining what the relevant market is.

[00:04:01] Speaker 01:
And they haven't.

[00:04:02] Speaker 01:
They've presumed that the geographic market is apparently, although they haven't even explicitly said this, the entirety of the system operator's footprint, even though the system operator repeatedly has determined that it's, especially in periods of high stress, which is what

[00:04:21] Speaker 01:
this program is intended to address.

[00:04:24] Speaker 01:
There's not free flowing communication of electrons from Northern Maine to Southwestern Connecticut.

[00:04:32] Speaker 01:
There are many bottlenecks.

[00:04:34] Speaker 01:
And we've seen that in many cases before this court and in the materials that were actually submitted by the system operator, which recognized the importance of, for instance, the North South and East West zones, if you will,

[00:04:51] Speaker 01:
and where assets were located within those.

[00:04:56] Speaker 01:
It would be amazing that having been sensitive to the locational needs in order to achieve the goals of enhanced reliability, if the commission then said, it's all one big market, one big happy market, we don't care.

[00:05:16] Speaker 01:
Obviously the system operator

[00:05:18] Speaker 01:
cared very much.

[00:05:19] Speaker 01:
And so when we get to, for instance, the quantification of the size of the market and when the commission says, oh, well, it's not, we're not going to test the market at 1.95 million megawatts.

[00:05:31] Speaker 01:
We'll test it at 2.25 million megawatts.

[00:05:35] Speaker 01:
The commission's just expanding the market and thereby diminishing any result of market power that might be determined

[00:05:45] Speaker 01:
regardless of geographic limitations or the important product market limitations.

[00:05:51] Speaker 00:
But the commission gave a pretty extensive explanation as to why market power was not a serious issue in this case.

[00:05:59] Speaker 00:
I mean, you really are wanting them to go to form and what they are saying is this was a special circumstance.

[00:06:06] Speaker 00:
We used

[00:06:07] Speaker 00:
the bidding, the auction process to address a special one-time circumstance, and they're entitled to do that if they justify it.

[00:06:15] Speaker 00:
You really want them to go to a particularized form.

[00:06:18] Speaker 00:
They didn't, and they acknowledged they didn't.

[00:06:20] Speaker 00:
You can't characterize it by reference to pre-existing forms.

[00:06:25] Speaker 00:
They use the auction approach here and they explained why market power was not an issue.

[00:06:30] Speaker 00:
I don't know what more they're supposed to do.

[00:06:32] Speaker 00:
What's your quibble with their explanation?

[00:06:34] Speaker 00:
It's pretty extensive.

[00:06:35] Speaker 00:
What's your quibble with their explanation as to why market power is not an issue?

[00:06:40] Speaker 01:
Your honor, there is an extensive volume of verbiage, but just like the decision involving the Environmental Defense Fund BFIRC that was issued by this court in June of this year, a lengthy order is not to be confused with rigorous analysis.

[00:06:57] Speaker 00:
No, no, no.

[00:06:59] Speaker 00:
You're avoiding my question.

[00:07:00] Speaker 00:
I'm asking, what's wrong with the explanation?

[00:07:03] Speaker 00:
They have given an explanation, long or short, they've given it.

[00:07:07] Speaker 00:
They have explained, they looked at two different approaches on the cost and they explained why they were adopting the approach they did.

[00:07:15] Speaker 00:
And they explained why market power is not an issue.

[00:07:18] Speaker 00:
And they explained that, no, they're not using what would appear to be routine to you because this was a special circumstance.

[00:07:25] Speaker 00:
There's nothing in the law that prohibits that.

[00:07:28] Speaker 01:
Your honor, first of all, they did not claim this was an experimental program.

[00:07:32] Speaker 01:
Second.

[00:07:33] Speaker 00:
Not experiment.

[00:07:34] Speaker 00:
You're putting words in my mouth.

[00:07:35] Speaker 00:
OK, I apologize.

[00:07:36] Speaker 00:
They didn't say experimental.

[00:07:37] Speaker 00:
They said they devised this approach, this auction approach, to address this situation.

[00:07:45] Speaker 00:
It's just like your argument on retroactive rate making.

[00:07:48] Speaker 00:
It doesn't make any sense in light of what they're doing.

[00:07:51] Speaker 00:
It's just not a viable argument.

[00:07:54] Speaker 00:
It misses the point.

[00:07:55] Speaker 00:
They had a single problem here they were trying to address, but I still would like to know why, what the particular mistakes are in your view with respect to their answer to there's no market power issue here.

[00:08:11] Speaker 01:
Your honor, the market monitors report details the absence of specific information that was requested.

[00:08:22] Speaker 01:
FERC could have and has the authority to request the information necessary to compute costs and the claim is in their justifications.

[00:08:32] Speaker 01:
Oh, well, we already determined costs.

[00:08:35] Speaker 01:
We did a

[00:08:36] Speaker 01:
proxy determination of costs, and that allows us to draw the intercept between demand and supply and match that to the actual bids.

[00:08:45] Speaker 01:
Well, if you're using made up quote cost unquote data, then sure, you can probably get there.

[00:08:53] Speaker 01:
But if you add a 25% adder without any quantification, any justification for the quantification,

[00:09:01] Speaker 01:
If you put your thumb on the scale for all the other costs, including presuming when there's a bid, it should be justified as either the higher of cost base, which there are no actual costs for many of the elements, as you can see in, for instance, pages A4 and A5 of the IMM's report filed on January 23rd, then

[00:09:26] Speaker 01:
There's no substantial evidence behind this.

[00:09:29] Speaker 01:
This is all conjecture.

[00:09:31] Speaker 01:
The commission could have, without any materially greater effort, obtained the cost data from the 18 participants, rather than allowing half of them to basically say, no, we're not even going to give it to you.

[00:09:47] Speaker 01:
If this was really cost justified, you would think that the merchants would have every incentive

[00:09:53] Speaker 01:
to provide that information to the market monitor and say, look, we invested quite a bit in making sure that this service was available.

[00:10:03] Speaker 01:
They didn't, the market monitor got stiff armed as you'll see in its report on a lot of the data.

[00:10:09] Speaker 01:
And so the market monitor tried to come up with some kind of proxy, but in light of the fact that the service was represented to be a cost-based service from the outset,

[00:10:22] Speaker 01:
in 2013, according to the testimony of the ISO and its own filings, it's passing strange that the commission and the market monitor and the system operator did not require the production of accurate cost information.

[00:10:42] Speaker 03:
May I ask my colleagues if they have additional questions for you, Mr. Sundback?

[00:10:47] Speaker 03:
I don't.

[00:10:48] Speaker 00:
No.

[00:10:48] Speaker 00:
I don't.

[00:10:49] Speaker 03:
Thank you, Mr. Sunbeck.

[00:10:50] Speaker 03:
We'll give you a little time for rebuttal.

[00:10:52] Speaker 03:
Thank you very much.

[00:10:53] Speaker 03:
We'll hear from the commission now.

[00:10:54] Speaker 03:
Mr. Kennedy.

[00:10:57] Speaker 02:
Morning, Your Honors.

[00:10:58] Speaker 02:
Robert Kennedy on behalf of the commission.

[00:11:01] Speaker 02:
Petitioners' argument had two basic tent poles.

[00:11:04] Speaker 02:
One, the commission erred in defining the market, that it should have been broken down further.

[00:11:10] Speaker 02:
And two, that the commission erred in failing to, I guess, press the bidders for actual cost information above and beyond what they supplied to the market monitor.

[00:11:21] Speaker 02:
Neither of those issues were raised in TransCanada's request for rehearing, and they've been waived.

[00:11:27] Speaker 02:
The request for re-hearing is at page 211 of the joint appendix.

[00:11:32] Speaker 02:
It was concise and precise.

[00:11:35] Speaker 02:
It alleged that the commission erred by, that the Federal Power Act precluded the commission from using a market paradigm to evaluate the results of this auction.

[00:11:46] Speaker 02:
And it said the commission had failed to point to substantial evidence that supported

[00:11:52] Speaker 02:
the use of a 25% ban to judge competitive bids.

[00:11:58] Speaker 02:
And within that was sort of a sub-argument that the market monitor erred in failing to look at the weighted cost of capital information and verify it that was provided by the bidders.

[00:12:13] Speaker 02:
With respect to that last minor point,

[00:12:16] Speaker 02:
That is one input in a multi-input formula that the market monitor used to evaluate one of the risk elements in his bid construction.

[00:12:26] Speaker 02:
And the commission explained why that was wrong in paragraph 27 of the rehearing order.

[00:12:32] Speaker 02:
sort of getting back to where petitioners started, why we're here, this court's remand.

[00:12:37] Speaker 02:
And it asks the commission to better explain why it believed the rates resulting from this program were just and reasonable.

[00:12:42] Speaker 03:
Can I just add, before you just go there, on market definition, in the rehearing petition of JA 221,

[00:12:51] Speaker 03:
The rehearing petition does say, second, the commission failed to make an ex ante finding of the absence of market power, or even describe what it believes to be the dimensions and parameters of the relevant markets when approving the program under a market paradigm.

[00:13:05] Speaker 02:
Well, I think, again, as you pointed out, that was that was part and parcel of their argument that the commission's market based rate probe, all the elements of the commission's market based rate program had followed here in order for the commission to use market principles to judge the.

[00:13:23] Speaker 02:
the reasonableness of the resulting bids.

[00:13:25] Speaker 03:
Is that how you understood it and understood the commission to understand it?

[00:13:28] Speaker 03:
Is that that was part and parcel of this argument about that?

[00:13:32] Speaker 02:
It is how I took it and it's clearly how the commission took it because as Judge Edwards observed, I mean these are pretty comprehensive orders and the commission made a determined effort to respond to the remand.

[00:13:43] Speaker 02:
with respect to you know why the commission came out the way it did why I thought these rates were just and reasonable you know the commission went into more detail on the benefit side that this is an undisputed risk to the New England region for blackouts if if the system isn't sort of if

[00:14:03] Speaker 02:
If there isn't back oil backup available to the natural gas generators in New England, it could cost rate payers up to billions of dollars in lost revenue in the region if the blackouts were to occur.

[00:14:15] Speaker 02:
Now, obviously the commission didn't say, well, we got a billion dollars on the benefit side, anything goes.

[00:14:21] Speaker 02:
It took a hard look at the resulting costs of the program, which are $75 million.

[00:14:26] Speaker 02:
It compared them to a competitive benchmark.

[00:14:29] Speaker 02:
It looked at whether there were aspects of the design of the program that could reasonably be assumed to curb the exercise of market power.

[00:14:38] Speaker 02:
And then again, it looked at the expert analysis provided by the internal market monitor.

[00:14:43] Speaker 02:
With respect to the first, comparing it to a competitive benchmark, the commission said, OK, what would have happened if we used a uniform clearing price auction, where under bidding theory,

[00:14:55] Speaker 02:
participants are encouraged or incentivized to bid as close as possible to their costs to ensure that they clear.

[00:15:02] Speaker 02:
Everyone gets the same price.

[00:15:05] Speaker 02:
It gets the price of the marginal, the marginal unit.

[00:15:08] Speaker 02:
And when the commission did that, it found that had that market construct been used for the winter reliability program, the cost would have been 88 million, 13 million more than what resulted here.

[00:15:18] Speaker 02:
So that was one data point that the commission looked at in assuring itself that these rates were just and reasonable.

[00:15:24] Speaker 02:
Then it looked sort of at theory.

[00:15:26] Speaker 02:
It accepted the market monitor's view that there are structural market power issues here.

[00:15:33] Speaker 02:
And the commission defined the relevant question as whether is there evidence that it had been exercised.

[00:15:39] Speaker 02:
And it first looked at the design of the program and found there are a few elements that would tend to curb any exercise of market power.

[00:15:47] Speaker 02:
One is that there was a lot of uncertainty on the demand side.

[00:15:52] Speaker 02:
The program rules said the market monitor was looking to obtain up to 2.4 million megawatt hours per month.

[00:16:03] Speaker 02:
And it could come in less than that, as it did.

[00:16:06] Speaker 02:
And as it showed in the program rules and in the first auction, the system operator showed itself to be a price-sensitive buyer.

[00:16:17] Speaker 02:
that the costs the first time around were too much versus what they got.

[00:16:20] Speaker 02:
So they went back for more.

[00:16:21] Speaker 02:
The commission found that would tend to send people to bid a bit closer to their costs.

[00:16:27] Speaker 02:
So to ensure that their bid is actually selected.

[00:16:30] Speaker 02:
The commission also noted that under the program rules, the system operator wasn't just selected.

[00:16:37] Speaker 03:
Can I ask you one question about that point, which there's on the 25% adder, because it bears on the 25% adder.

[00:16:45] Speaker 03:
There's two points that are being made in the commission's order and in the briefing that seem at least somewhat intention on the surface in my mind, but you tell me what's wrong with this.

[00:16:55] Speaker 03:
So for example, on page 45 of your brief, you explain why the commission was right in finding it unlikely that the participants knew they had market power.

[00:17:07] Speaker 03:
And in other words, that the market's functioning competitively.

[00:17:11] Speaker 03:
And the fourth point made is that the winter reliability program was an entirely new product market, which has the capacity to make it function more competitively in terms of the bidding I take it.

[00:17:22] Speaker 03:
And then on page 58 in explaining the 25% adder, which sort of goes in the opposite direction because the adder boosts the price

[00:17:36] Speaker 03:
The point is made that the Winter Reliability Program was a novel market with many unknowns.

[00:17:40] Speaker 03:
And so it seems like the same point that the Winter Reliability Program was a new product market, both keeps the prices in the competitive range, but also justifies a 25% adder.

[00:17:54] Speaker 02:
Well, I think obviously the commission is talking about two different things, but to answer your question, yes, I mean, the commission thought that market participants, because this was a brand new market, wouldn't be aware that they had market power.

[00:18:07] Speaker 02:
And so as a result,

[00:18:09] Speaker 02:
they would tend not to exercise it.

[00:18:11] Speaker 02:
What the commission is doing with the 25% adder, I mean, the question is the commission has to, and the market monitor as well, set a price and create a presumption above what price should we deem a bid to reflect some exercise of market power.

[00:18:26] Speaker 02:
And sort of the options were

[00:18:30] Speaker 02:
the marginal cost-based bid identified by the market monitor or something else in all parties, the market monitor, the system operator, and the commission agreed that

[00:18:43] Speaker 02:
some accommodation needed to be made for these additional factors.

[00:18:48] Speaker 02:
The fact that parties, yes, it's a brand new market, so they would be unlikely to exercise market power, but they also don't really know how to value these bids because it's never happened before.

[00:19:00] Speaker 02:
So we don't want to penalize and characterize

[00:19:05] Speaker 02:
conduct that is innocent and is competitive simply because it falls within a band of the market monitors.

[00:19:16] Speaker 02:
you know, price.

[00:19:17] Speaker 02:
So that's kind of why the commission used the analysis in both places.

[00:19:24] Speaker 02:
That it is new, so people will be unlikely to know that they had market power and know how to wield it.

[00:19:30] Speaker 02:
But they're also preparing these bids for the first time.

[00:19:33] Speaker 02:
And there may be, you know, we need to account for that and allow some bandwidth above the market monitor's view of the competitive cost-based bid

[00:19:44] Speaker 02:
before we create our presumption of an exercise of market power, which again, as we noted in our brief, is kind of consistent with the way the system operator does it in its tariff with its other established markets.

[00:19:55] Speaker 02:
The internal market model will create a reference bid.

[00:19:59] Speaker 02:
And when it's reviewing an actual bid, there's a bandwidth.

[00:20:03] Speaker 02:
If it's sometimes $25 or 50% over the bid, if it falls within that range, it will not be deemed inappropriate.

[00:20:11] Speaker 02:
And that's kind of the

[00:20:12] Speaker 02:
same process that the internal market monitor went through here in the commission adopted.

[00:20:18] Speaker 03:
So am I right?

[00:20:19] Speaker 03:
I'm not saying this is necessarily wrong, but am I right in understanding that the commission thought that the novelty of the market both had the effect of keeping bids within a competitive range, which is IE suppressing them, but also had the effect of raising the bids to build in some kind of risk premium.

[00:20:40] Speaker 03:
And that's why you can justify the adder.

[00:20:42] Speaker 02:
Well, I think if I could put it this way, yes, it has the effect of limiting the exercise of market power because it's new, but also there's uncertainty around what a competitive bid is because of the novelty.

[00:20:55] Speaker 02:
So we need to account for that in some manner in the analysis.

[00:21:00] Speaker 02:
And that's sort of why the issue comes up two places.

[00:21:04] Speaker 00:
The assumption being they haven't been enough and we want to make sure they're getting what is reasonable.

[00:21:10] Speaker 00:
That's the answer.

[00:21:12] Speaker 02:
No, the assumption is that they, you know, is a bid, I mean, they're getting what they bid.

[00:21:21] Speaker 02:
You know, the adder doesn't give them any costs or anything like that.

[00:21:24] Speaker 02:
But it's there as a mark for the commission to say anything above this, we're gonna presume to be the result of market power.

[00:21:33] Speaker 02:
And anything below, we're gonna deem it to be competitive.

[00:21:37] Speaker 02:
So it's for that purpose.

[00:21:40] Speaker 02:
My time's expired if there's other questions.

[00:21:45] Speaker 03:
I don't think we have any further questions for you, Mr. Kennedy.

[00:21:47] Speaker 03:
Thank you.

[00:21:48] Speaker 03:
Thank you, Your Honors.

[00:21:49] Speaker 03:
Mr. Sonbeck will give you two minutes for your rebuttal.

[00:21:52] Speaker 01:
Thank you, Your Honor.

[00:21:54] Speaker 01:
Several points.

[00:21:55] Speaker 01:
First, the reference by counsel to the two tests applied by FERC, the uniform clearing price analysis, the first one he referenced is premised on the cost study of sorts.

[00:22:08] Speaker 01:
So if the costs presumed in the study were erroneous, then the uniform clearing price analysis can't be presumed to be valid.

[00:22:19] Speaker 01:
The second test that the commission used, according to him, was based on the inflated 2.25 million megawatt hour market, which once again disregards any limits on geography or product markets.

[00:22:38] Speaker 01:
reference to price uncertainty and price sensitivity that the ISO had.

[00:22:43] Speaker 01:
First of all, the winter reliability program was disproportionately approved by generators seven to one and opposed by end users in the markets committee by seven to one.

[00:22:57] Speaker 01:
So there was a price sensitivity, but the sensitivity on the part of the generators was to a higher price.

[00:23:05] Speaker 01:
And that's why it was approved.

[00:23:07] Speaker 01:
So yes, there was price sensitivity.

[00:23:09] Speaker 01:
There was also urgency, as you'll recall, in the August 26 filing.

[00:23:13] Speaker 01:
No, I'm sorry.

[00:23:15] Speaker 01:
August 9 filing, the ISO tells the FERC, we haven't got enough.

[00:23:19] Speaker 01:
We need to hurry up.

[00:23:20] Speaker 01:
This is really a little short of a crisis.

[00:23:24] Speaker 01:
So that undercut the notion that there was price sensitivity depressing the price.

[00:23:33] Speaker 01:
Council referenced the standard the Commission used, which was we presume anything over this is clearly the exercise of market power.

[00:23:41] Speaker 01:
Well, regardless of whether that's appropriate, that subsumes a potential for the exercise of market power below that.

[00:23:50] Speaker 01:
It's just not as obvious.

[00:23:51] Speaker 01:
We disagree with the characterization offered by Council that the Commission made that second step, which was to say, oh, and it's obvious that

[00:24:02] Speaker 01:
prices below this threshold don't represent the exercise of market power.

[00:24:08] Speaker 01:
In fact, the ISO as well as the market monitor in the January 2017 filing acknowledged that the overcharges could be as much as $6.6 million.

[00:24:20] Speaker 01:
Finally, oh, I'm sorry.

[00:24:22] Speaker 01:
If you have one final point, you can make it quickly.

[00:24:25] Speaker 01:
The 25% adder, in addition to being unjustified to start with, was taken whole cloth by the FERC and applied to a much higher reference price.

[00:24:35] Speaker 01:
Recall the market monitor applied it to a $15 price, which yielded a $3 nominal increase

[00:24:43] Speaker 01:
the FERC gave no consideration to whether that was still an appropriate nominal increase as opposed to this conceptual percentage increase.

[00:24:53] Speaker 01:
Thank you for your attention and questions, your honor.

[00:24:56] Speaker 03:
Thank you, counsel.

[00:24:57] Speaker 03:
Thank you to both counsel.

[00:24:58] Speaker 03:
We'll take this case under submission.