[00:00:00] Speaker 08:
State's number 20-1343 et al.

[00:00:03] Speaker 08:
Constellation Mystic Power LLC, Mr. Turner, versus Federal Energy Regulatory Commission.

[00:00:12] Speaker 02:
Good morning, counsel.

[00:00:13] Speaker 02:
Mr. Fitzgerald, please proceed when you're ready.

[00:00:16] Speaker 04:
Thank you, your honor.

[00:00:19] Speaker 04:
May it please the court, Matt Fitzgerald, on behalf of Constellation Mystic.

[00:00:24] Speaker 04:
This FERC appeal is about two LNG fire generators in Boston Harbor.

[00:00:30] Speaker 04:
And in a cold winter, these generators could save New England from rolling blackouts.

[00:00:36] Speaker 04:
So Mystic entered into an agreement with ISO New England that the ratepayers, under cost of service principles, would compensate Mystic for two winters.

[00:00:46] Speaker 04:
FERC reviewed and quite properly approved most of this agreement.

[00:00:50] Speaker 04:
But in three finite areas, FERC arbitrarily and capriciously cut down Mystic's recovery.

[00:00:57] Speaker 04:
And those areas are rate base, capital structure, and one element of the fuel supply cost.

[00:01:05] Speaker 04:
Now, on rate base, the right answer is very clear.

[00:01:09] Speaker 04:
10 years ago, on the open market, Mystic paid $925 million for these units, eight and nine.

[00:01:20] Speaker 04:
That number was computed by an independent auditor using generally accepted accounting principles at a time when there was no incentive whatsoever to inflate it and years before this particular dispute ever arose.

[00:01:35] Speaker 04:
So quite literally, Mystic is asking for its quote, cost of service.

[00:01:40] Speaker 04:
One component of that being the cost that it actually paid to provide the generators that are going to provide the public service.

[00:01:49] Speaker 04:
Now, instead FERC took an arbitrary turn on this.

[00:01:53] Speaker 04:
It looked back 15 years to a transaction in which these generators were transferred in lieu of foreclosure in exchange for forgiveness of about $550 million worth of debt.

[00:02:05] Speaker 04:
And it pulled that transaction forward, essentially saying, this is the cap from which all further depreciation, all further transactions must be below.

[00:02:15] Speaker 04:
And there was no good reason for doing that.

[00:02:19] Speaker 02:
Can I just ask a question?

[00:02:20] Speaker 02:
When you say that was arbitrary, I understand your argument to be not that was arbitrary in the sense that it wasn't in keeping with what the commission has done before because it is in keeping with what the commission has done before in terms of the approach that's used.

[00:02:38] Speaker 02:
Your argument is that it's arbitrary to apply that approach to this situation because of the particularities

[00:02:45] Speaker 02:
of the circumstances attending Mystic's conversion from merchant to cost of service.

[00:02:51] Speaker 04:
That is one of the arguments, yes, Your Honor, but it is important to note that doing the test in exactly this way is unprecedented in some sense, and that is there is no example, FERC has given no example, of looking back to an early merchant-to-merchant transaction like this and using that going forward in this way.

[00:03:10] Speaker 04:
So in addition to what you said, we contend that it is unprecedented to do it this way, not that this is sort of how it's always been done.

[00:03:18] Speaker 07:
Now, in the original cost test, when the utilities are... Mr. Fitzgerald, what about the fact that one of the things that FERC argues is that it needs to have a consistent test.

[00:03:28] Speaker 07:
So even though facilities may go back and forth between cost of service and merchant, it's best to have a consistent test.

[00:03:39] Speaker 04:
Your Honor, a consistent test can be a reasonable thing, but a consistent test when the facts don't support that at all is arbitrary.

[00:03:48] Speaker 04:
I mean, it would be consistent to, say, flip a coin in every case too, but it still can be arbitrary even if it is uniform.

[00:03:56] Speaker 04:
And so what's so different here is

[00:03:59] Speaker 04:
What they're trying to do is apply cost of service as if these units had been cost of service their entire lives.

[00:04:07] Speaker 04:
But this transaction, in particular the 550 million transfer in lieu of foreclosure, just wouldn't make any sense if those units had been cost of service at that time.

[00:04:18] Speaker 07:
But it's cost of service now.

[00:04:20] Speaker 07:
And I think FERC's view as well, if it's cost of service now, we treat it this way.

[00:04:25] Speaker 04:
Well, that's certainly their view, Your Honor.

[00:04:28] Speaker 04:
But why is that unreasonable?

[00:04:31] Speaker 04:
It's unreasonable because it's losing all touch with the purposes of the test that they're attempting to apply.

[00:04:40] Speaker 04:
So the original cost test exists because cost of service utilities would have incentive to inflate their prices intentionally to pay more than anything was worth in order to get that money plus a return on it back out of rate payers.

[00:04:53] Speaker 04:
But no one's even said that that that could possibly be.

[00:04:57] Speaker 04:
It's not that the price is not inflated here.

[00:05:00] Speaker 04:
It's that there's not even any incentive to inflate that price here.

[00:05:03] Speaker 04:
It's the price that we actually paid, which has been confirmed by generally accepted accounting principles and an independent auditor.

[00:05:11] Speaker 04:
And so

[00:05:12] Speaker 04:
by saying, well, really it should be hundreds of millions of dollars lower because of this transaction many years ago where you weren't the buyer.

[00:05:22] Speaker 04:
It just doesn't really make sense in a way that the original cost test would if it had been cost of service its whole life.

[00:05:28] Speaker 07:
So I mean, assume I agree with you that this does create a kind of unfairness to Mystic.

[00:05:32] Speaker 07:
I understand, I take your argument about that, but it seems to me that what the commission, I mean, the commission's view as well, you know, may create unfairness in some situations, but it's still better that we have a settled rule, right?

[00:05:46] Speaker 07:
We're not gonna go on a case-by-case basis depending on whether the particular circumstances serve the purpose of the test.

[00:05:51] Speaker 07:
This is the test we're going to use.

[00:05:54] Speaker 04:
Well, Your Honor, this is a very, so first of all, this is a very unique situation that we are in.

[00:06:00] Speaker 04:
This is the first time ever that we're aware of that there has been a generator like us retained for fuel security.

[00:06:08] Speaker 04:
We're uniquely positioned in many ways in Boston Harbor, relying on shiploads of LNG.

[00:06:14] Speaker 04:
And so for us to say,

[00:06:17] Speaker 04:
This is different than the original cost test applied to the lifelong 40 year cost of service life.

[00:06:24] Speaker 04:
It is vastly different and it's a tremendous cut down and without any real justification for it on these facts.

[00:06:31] Speaker 04:
That is what we paid.

[00:06:32] Speaker 04:
There was no incentive to inflate that and it's worth keeping in mind.

[00:06:38] Speaker 04:
I mean, FERC may say, we want to check, you know, we want to test.

[00:06:41] Speaker 04:
We want to test the price that you paid.

[00:06:43] Speaker 04:
We're groping for a test here.

[00:06:45] Speaker 04:
But keep in mind, if they were to compare our purchase price to the original depreciation line, our purchase price is lower.

[00:06:53] Speaker 04:
So in other words, the facility is built for just under a billion dollars.

[00:06:57] Speaker 04:
If you ran that depreciation over 40 years and included the capital additions and expenditures, you know, improvements along the way, that line would be higher than the $925 million that we paid.

[00:07:08] Speaker 04:
And so there really isn't any way to slice this that the ratepayers would be overpaying in some sense by setting the rate base at the price that we paid.

[00:07:22] Speaker 02:
There would be situations unlike this one

[00:07:27] Speaker 02:
in which applying the original cost test would still arguably lead to some disparity between the explanation for the test, this incentive point that you've made, and the actual facts on the ground.

[00:07:45] Speaker 02:
It's not only this circumstance that gives rise to that possibility that there's an application of the test in circumstances in which the incentive justification isn't exactly borne out.

[00:07:56] Speaker 02:
So what's the rule?

[00:07:59] Speaker 02:
What's your rule for this?

[00:08:02] Speaker 02:
In other words, I don't take you to be arguing that the original cost test is itself arbitrary and should never be applied.

[00:08:08] Speaker 04:
Right.

[00:08:08] Speaker 02:
So what's your rule for when it's arbitrary to apply?

[00:08:13] Speaker 04:
So I think, and our facts are even better than this rule, but the key fact I think is that we were a merchant buyer

[00:08:19] Speaker 04:
buying a merchant facility for use as a merchant.

[00:08:24] Speaker 04:
And under those circumstances, what we paid, what the market value of it was, just had nothing to do with what we could ever get from rate payers later.

[00:08:34] Speaker 04:
And so under those circumstances, pulling forward all of the old past transactions is just particularly nonsensical.

[00:08:42] Speaker 02:
And so you're saying if it's a purchase that was made at a time when the buyer's a merchant buyer and had no idea in its mind that there would be a shift to cost of service.

[00:08:52] Speaker 02:
That's a circumstance in which you can't apply the original cost methodology.

[00:08:56] Speaker 04:
Yes.

[00:08:56] Speaker 04:
And of course, our facts are a little better than that.

[00:08:58] Speaker 04:
But I think that's the core of it.

[00:09:00] Speaker 04:
And that does make sense because a merchant buyer

[00:09:04] Speaker 04:
Buying a facility operating as a merchant isn't going to envision switching it to cost of service I mean the way that the way in situations like that that cost of service eventually comes up is The merchant is basically going out of business that the enterprise is a failure and then what happens is another entity ISO New England that we don't control comes along and says we need you for two more years and so

[00:09:28] Speaker 04:
It's hard to envision any merchant buyer saying, let's consider the possibility that this will totally fail, and then after that the possibility that some entity we don't control will say, we need you for two more years, and how they would price that entity if they did that, you know, it's sort of impossible to envision

[00:09:46] Speaker 04:
a merchant buyer sort of thoroughly taking this into account.

[00:09:51] Speaker 04:
I mean, particularly before this case, because I don't think even if we had envisioned the cost of service, switching the cost of service many years later, that we would have known FERC was going to apply the test the way that it has here.

[00:10:03] Speaker 02:
So that approaches it from your perspective as on the purchaser end.

[00:10:08] Speaker 02:
Then on the rate payer end of it, there's a prong of it that asks that it seems to me is at issue here and is at issue with the original

[00:10:16] Speaker 02:
cost methodology, which asks, what's it fair to pass on to the rate payers?

[00:10:21] Speaker 02:
And as I understand it, there is a doctrine under which the original cost test wouldn't apply if it can be shown that something beyond the depreciated cost actually is a benefit to the rate payers.

[00:10:33] Speaker 02:
And why doesn't that account for it?

[00:10:35] Speaker 02:
So the cost test, you could be right that it doesn't always work in every situation, but there's already something built into the test that allows for situations in which something else should be used.

[00:10:44] Speaker 04:
Yes, Your Honor, and that exception doesn't fit here for the same reason that the test in general doesn't fit here.

[00:10:51] Speaker 04:
My understanding of that test is if you can show that paying a premium over the value was itself like a direct benefit to rate payers, then perhaps you can recover from them the premium.

[00:11:03] Speaker 04:
But those terms don't even really make sense here.

[00:11:05] Speaker 04:
We didn't pay any premium over value.

[00:11:08] Speaker 04:
We paid what it was worth on the market at $925 million.

[00:11:14] Speaker 04:
To compare that to the far lower number and say well, that's a premium that benefits the ratepayers I mean this was done six years before That sort of issue was ever considered and so that's why there's no argument for that particular wouldn't that also be the case in other situations too in which the original cost test is applied that there could have been some transaction along the way and under by operation of the test you only take in account the lowest cost one that Was at some point in the past

[00:11:44] Speaker 04:
Well, no, Your Honor, because so the vast majority of the time when this test is applied, it's to generation that has always been cost of service.

[00:11:53] Speaker 04:
And so all they're really doing in that situation is comparing the immediate purchase price to the immediate sort of existing value

[00:12:01] Speaker 04:
that the current cost of service utility is getting.

[00:12:04] Speaker 04:
And here what I'm saying is these old transactions, including the 925 one, were merchant to merchant.

[00:12:10] Speaker 04:
So the old merchant wasn't getting anything that was cost of service.

[00:12:13] Speaker 02:
But is it not the case that even if it's been done under cost of service for a long time, and this just made me by my ignorance of the industry, but even if it's cost of service all the time, there still could have been transactions along the way.

[00:12:24] Speaker 02:
There still could have been purchase and sales.

[00:12:27] Speaker 04:
Yes, exactly.

[00:12:28] Speaker 04:
And those are all done with a close eye on what the cost of service valuation is.

[00:12:32] Speaker 04:
Now, sometimes they may be a little bit higher.

[00:12:34] Speaker 04:
A company might say, well, it's worth us to pay a little bit more.

[00:12:37] Speaker 04:
It's more efficient for us for some reason.

[00:12:38] Speaker 04:
And they may try to prove that that's to benefit the ratepayers, which makes perfect sense when they're a cost of service utility.

[00:12:44] Speaker 04:
They are recovering from the ratepayers.

[00:12:46] Speaker 04:
They may try to get that benefit back.

[00:12:48] Speaker 04:
Or they may pay a little bit less and move that depreciation line down.

[00:12:51] Speaker 04:
But there is no example of something hundreds of millions of dollars off the way that this is.

[00:12:57] Speaker 04:
And the only way that that comes about is these merchants, this long history of merchant operation and the many transactions along that way that don't make any sense to go back and apply the original cost test with neither party having any sort of incentive about the value that way.

[00:13:14] Speaker 04:
Now the two other issues, the capital structure and the fuel cost from Everett.

[00:13:22] Speaker 04:
Capital structure is the issue that FERC has just issued an order about two days ago.

[00:13:28] Speaker 04:
But the key to that is it doesn't seem that FERC is changing the core thing that we are objecting to about that order.

[00:13:37] Speaker 04:
And that is the failure to use our immediate parent ex-GEMS equity structure of 67%.

[00:13:44] Speaker 04:
So everybody agrees that in a situation like this, you generally would use the immediate, the closest parents' equity structure.

[00:13:52] Speaker 04:
Here, XGen has its own credit rating, actually does the finances for Mystic, and so it would seem to make the most sense.

[00:13:59] Speaker 02:
Can I ask you on this, because I think, and we'll ask Commission Council about this too, at least I have some questions about what are we supposed to be doing with this issue now, because if the

[00:14:11] Speaker 02:
Equity, if the capital structure that was in place and that you're challenging is no longer the one that's going to be used, which is that's I think everybody agrees the point, then is it not the case then that the commission now needs to figure out what the right capital structure is?

[00:14:27] Speaker 02:
And at least there's at least some possibility it could end up being the very one that you think is the right one, which is Exchequer.

[00:14:32] Speaker 04:
Yes, and the problem with all of that is it's not clear to us that they are backing off.

[00:14:38] Speaker 04:
In other words, FERC could easily say in the future, we've already decided we're not using Xgen.

[00:14:43] Speaker 04:
We're not going back to that.

[00:14:45] Speaker 04:
We can't use Exelon Corp anymore, so the question now is what to use.

[00:14:49] Speaker 04:
But it's not clear to me that they're going to give us another shot at arguing we should use the immediate parent.

[00:14:54] Speaker 04:
I mean, their order just isn't that clear on that.

[00:14:57] Speaker 02:
Suppose they tell us that they will.

[00:14:59] Speaker 04:
If they tell us that they will, then the idea that it's moot would be much stronger.

[00:15:06] Speaker 02:
But I think still, there is this... So in other words, your argument for urging us to reach out to do it is contingent on their saying, we already made a decision that it's not going to be Xgen, that continues, we're never going to look at Xgen.

[00:15:21] Speaker 04:
It's not entirely dependent on that.

[00:15:24] Speaker 04:
I think that if they really were going to reconsider it that way, then it would be a stronger argument for mootness.

[00:15:32] Speaker 04:
But I think the way that we fear they're setting it up is it's a two-step analysis.

[00:15:37] Speaker 04:
They're not going back to step one.

[00:15:39] Speaker 04:
So in other words, if they decide never to go back and

[00:15:42] Speaker 04:
And and reconsider using X gen itself.

[00:15:45] Speaker 04:
They could say we've already decided that and we're not going back.

[00:15:47] Speaker 04:
And if they say that then in that case, the right time to appeal it would be now.

[00:15:52] Speaker 02:
So then for us in order for us to reach it, it seems to me and to resolve it.

[00:15:56] Speaker 02:
Our rationale would have to be.

[00:15:59] Speaker 02:
The only conceivable rate that would be non-arbitrary, the only conceivable structure that would be non-arbitrary would be the Xgen one.

[00:16:08] Speaker 02:
Anything else would be arbitrary, and therefore we can just cut everything off and agree with you, which is apparently what you want, which is the Xgen structure.

[00:16:16] Speaker 04:
Yes, Your Honor, but I think the path to that is an easier one than you might be envisioning, because all agree that the general presumption is to use the immediate parent.

[00:16:24] Speaker 04:
And so FERC made this finding, the immediate parent is anomalous, and we're not going to use it.

[00:16:29] Speaker 04:
And that's what we're saying is wrong.

[00:16:31] Speaker 04:
So if you agree with us on that, then yes, that's the impact as you envision it.

[00:16:36] Speaker 07:
We could also agree that, I mean, could we also agree that that's wrong, but then still remand to FERC to determine an appropriate rate, including potentially the immediate parent's rate?

[00:16:45] Speaker 04:
And that would be very helpful, of course, on that.

[00:16:49] Speaker 07:
I had a question about me to do.

[00:16:52] Speaker 07:
I did forget jurisdiction to issue.

[00:16:54] Speaker 07:
It's May 2nd order.

[00:16:57] Speaker 04:
In this case, given that the record is this court should have jurisdiction of it.

[00:17:03] Speaker 07:
I think that's 25 Alan.

[00:17:05] Speaker 04:
So I think the way to look at it that FERC would have jurisdiction would be to take this assumption that this is a follow-on, that they're not going back to what this court is considering, that it's of course open to this court and proper for this court to consider that issue, and that on the assumption

[00:17:21] Speaker 04:
that they're not going back, they can go on and proceed, though it may be voided by what this court did.

[00:17:26] Speaker 04:
If they're really reconsidering it, then there could very well be a problem with that.

[00:17:31] Speaker 04:
Yes, I think this court should have jurisdiction of that issue, and I think there are ways that the court can ask for it back.

[00:17:37] Speaker 07:
Is our jurisdiction exclusive now that the record has been sent to us and this case is before us?

[00:17:43] Speaker 04:
I think that it is.

[00:17:44] Speaker 02:
Did anybody object to folks issuing the order on that basis?

[00:17:49] Speaker 04:
I'm not aware of that, Your Honor, and I think that they were operating on the assumption that that is what needs to be figured out if this court were to affirm and that FERC isn't reconsidering in that way that would be more likely to run into the jurisdictional problem.

[00:18:03] Speaker 04:
I'd like to save some time, but just briefly on the last issue.

[00:18:07] Speaker 04:
The last issue is the fuel supply charge from Everett.

[00:18:11] Speaker 04:
And what we're asking for is to recover from Everett in the fuel supply charge, money that's credited to the purchase of Everett.

[00:18:21] Speaker 04:
That's no different than any other owner of Everett would charge in a fuel charge.

[00:18:26] Speaker 04:
So to borrow Ferck's analogy, if we view Everett as a gas station, whoever owns the gas station is going to sell gas at a price that allows them to pay the mortgage on the gas station.

[00:18:37] Speaker 04:
And that's all that we're asking for here, just a two year amortization of that.

[00:18:42] Speaker 04:
So I'd like to save the rest of my time.

[00:18:44] Speaker 04:
Thank you.

[00:18:45] Speaker 02:
Thank you, Mr. Fitzgerald.

[00:18:50] Speaker 02:
Mr. Coyle will hook from the commission now.

[00:18:53] Speaker 03:
Good morning, Your Honors.

[00:18:55] Speaker 03:
Robert Kennedy on behalf of the commission.

[00:18:57] Speaker 02:
Oh, I'm sorry.

[00:18:58] Speaker 02:
Sorry, Mr. Kennedy.

[00:18:59] Speaker 02:
I got the order wrong.

[00:19:01] Speaker 02:
I apologize.

[00:19:02] Speaker 02:
I didn't hear you, so I wasn't offended.

[00:19:06] Speaker 03:
Now, in this case, the commission, I'll start with Ray Bass.

[00:19:10] Speaker 03:
unless the court has any particular place they want me to start.

[00:19:13] Speaker 03:
But in this case, the commission applied its long-standing original cost rule when calculating Mystic's rate base.

[00:19:20] Speaker 03:
Now Mystic is correct.

[00:19:21] Speaker 03:
The rule sort of grew out of concerns arising from transactions between entities that were operating in a cost-based rate regime.

[00:19:29] Speaker 03:
But the remedy adopted, objectively valuing facilities,

[00:19:34] Speaker 03:
through the depreciated original cost applies in all circumstances where facilities come into a cost-based rate regime.

[00:19:42] Speaker 03:
And that's because it really reflects kind of the fundamental balance underlying cost-based rates.

[00:19:47] Speaker 03:
On the utility side of the equation, cost-based rate allows them to recover their cost plus a guaranteed return.

[00:19:55] Speaker 03:
But in order to provide some protection to the consumers, in this case the now captive consumers, who don't really, you know, they don't have a seat at the table when these facilities are being bought and sold previously,

[00:20:06] Speaker 03:
The original cost rule applies an objective measure to value those facilities, and it's the original cost of construction plus capital expenditures minus depreciation.

[00:20:17] Speaker 03:
And certainly if entities want to purchase these facilities at a price above the depreciated original cost because their view of the future value based on the cash flows they think they can generate from these facilities, they're welcome to do so, but the original cost test makes sure that captive rate payers aren't going to be the guarantor

[00:20:35] Speaker 03:
of their business bet, essentially.

[00:20:39] Speaker 03:
Now, Mystic's fundamental contention is that, you know, they operated under a market-based regime previously, and therefore the test shouldn't be applied, but as the Commission found, I mean, now we're talking about what do we do now with cost-based rates and captive rate payers, and the Commission found that we need

[00:20:56] Speaker 03:
a uniform rule.

[00:20:58] Speaker 03:
If you had a different accounting standard based on looking back on whether sales are made pursuant to or when you're operating in market-based rates or cost-based rates, you would have two different results.

[00:21:10] Speaker 03:
The same facility would have a different rate impact depending upon the tariff under which the operator sold power into the market.

[00:21:20] Speaker 03:
And the commission found that that wasn't appropriate.

[00:21:23] Speaker 03:
Now, the argument seems to be that, you know, these prior transactions at below the depreciated original cost would never have happened in a cost-based rate regime.

[00:21:35] Speaker 03:
But as the commission pointed out in these orders, there's numerous instances where the commission has had to address how to handle negative acquisition adjustments, which is what they call the delta between the depreciated cost and the sale price when it's below.

[00:21:48] Speaker 03:
And I think the fallback that you see in the reply as well, nothing this bad has ever happened.

[00:21:54] Speaker 03:
And certainly I can't point you to a case that involves these specific facts, but I will note in the NEPCO case, which is discussed in our brief for just general cost of service rate making principles, the first issue addressed in that case, and that was issued in the, I believe the late 80s, so where everyone for the most part is operating at cost-based rates,

[00:22:17] Speaker 03:
The question was, a project had been undertaken, ran into construction delays, the market turned, so they had to cancel it, even though they were operating under a cost-based rate regime.

[00:22:28] Speaker 03:
And the question was, how should the cost be allocated?

[00:22:31] Speaker 03:
So the fact that there is cost-based rate tariffs doesn't insulate these sales from swings in the market.

[00:22:40] Speaker 03:
There could be transactions like we talked about.

[00:22:43] Speaker 07:
Mr. Kennedy, if you could just explain to me,

[00:22:47] Speaker 07:
You know, I understand the preference for having a rule, you know, using the cost-based test kind of across the board, but in setting the base rate, why shouldn't the commission take into account maybe unusual circumstances like the ones we have here?

[00:23:04] Speaker 07:
What's, you know, what's the reason to have kind of a very rigid rule in this context?

[00:23:10] Speaker 03:
Again, I think it goes back to kind of the point that we're going to guarantee your cost and return, but we need some protection from for rate payers.

[00:23:20] Speaker 03:
So we're not going to get into, you know, the reasonableness of fair market valuations.

[00:23:26] Speaker 03:
And I mean, you see that in

[00:23:27] Speaker 03:
In this case, the record is hotly disputed among the party, and the commission didn't have to make any resolution here about whether that $925 million which was allocated to Missigake 9 is really a reasonable price.

[00:23:39] Speaker 03:
So the original cost test just provides an objective measure just to take that all off the table, and it's been around for years.

[00:23:49] Speaker 03:
the statements here today in their briefs that, well, we never would have thought about this.

[00:23:54] Speaker 03:
But it has been on the books for a long time.

[00:23:56] Speaker 03:
And Mystic 8 and 9 were under a cost of service regime for a certain portion of their lives.

[00:24:02] Speaker 03:
So we would certainly say there was fair notice that this is the way the rate base.

[00:24:08] Speaker 02:
So there might have been some notice at least from, and you could argue it's bolstered by the fact that there was a cost of service period there.

[00:24:15] Speaker 02:
But do you take issue with the notion that

[00:24:19] Speaker 02:
The incentive the underlying incentive basis that's been proffered for the original cost test to the effect that it prevents a situation in which there's a transaction that comes along that's inflated in order to precisely for the purpose of passing along that inflated amount to the ratepayers and thereby garnering an edge.

[00:24:40] Speaker 02:
for the purchaser, that that dynamic doesn't exist in the circumstances in this case.

[00:24:44] Speaker 03:
Yes, when it's emergent, buying it, yes, without the cost base, the captive consumers to fall back on.

[00:24:54] Speaker 03:
Yes, that precise incentive is not there.

[00:24:56] Speaker 03:
But I think there is a similar point, though, that, again, the original cost test prevents rate payers from being caught holding the bag when someone

[00:25:08] Speaker 03:
Places a market value on a facility that turns out not to be true I mean, you know in this case the bet was we can make 925 million plus back from these facilities and you know a couple years later they're having to close them down and and essentially the original cost as allocates that risk to the You know to the purchasers rather than to the repair rather than the captive repair.

[00:25:30] Speaker 03:
I'll just note it my time.

[00:25:33] Speaker 02:
Yeah I'm keeping rough track.

[00:25:36] Speaker 02:
What's that?

[00:25:37] Speaker 07:
The time isn't showing.

[00:25:38] Speaker 02:
Yeah, the timer isn't showing.

[00:25:39] Speaker 08:
The timer is working, but the connection with the lightning has been lost.

[00:25:45] Speaker 08:
I can use a beep to let you know when an attorney enters their rebuttal time, or has two minutes left, and two beeps when they reach zero.

[00:25:53] Speaker 02:
Sure.

[00:25:54] Speaker 02:
That sounds good.

[00:25:54] Speaker 02:
Did everybody catch that?

[00:25:56] Speaker 02:
One beep when you've entered into rebuttal time, two beeps when the time has expired.

[00:26:03] Speaker 03:
OK.

[00:26:03] Speaker 03:
Where are we now, roughly?

[00:26:05] Speaker 08:
Eight minutes and 53 seconds.

[00:26:08] Speaker 03:
I apologize.

[00:26:10] Speaker 03:
It's our mistake.

[00:26:13] Speaker 03:
So with respect to, I guess unless there's anything else, I'll move on to capital structure.

[00:26:20] Speaker 03:
With respect to capital structure, I guess maybe I'll start with the where are we now.

[00:26:27] Speaker 03:
I take your point about jurisdiction.

[00:26:29] Speaker 03:
It certainly was not something that was raised, and I'm just thinking it through now.

[00:26:37] Speaker 03:
It's not so much.

[00:26:38] Speaker 03:
So, so as we view 825 L, I think it is that, you know, the commission loses jurisdiction once it files a certified record, which it did.

[00:26:46] Speaker 03:
And, and I think that the case law to the extent it exists indicates that that prevents the commission from reconsidering its position here.

[00:26:53] Speaker 03:
There's really a changed circumstance.

[00:26:55] Speaker 03:
The parties wanted to, the commission's not

[00:26:58] Speaker 03:
considering based on the record that existed then, what the capital structure is.

[00:27:02] Speaker 03:
It's a changed circumstance and kind of an amendment to the agreement.

[00:27:06] Speaker 03:
So I'm not certain 825L would apply, but.

[00:27:10] Speaker 07:
I think 825L envisions that FERC will file something with this court if it wants to reconsider an issue.

[00:27:18] Speaker 07:
And I'm not sure that FERC has done that in this case.

[00:27:20] Speaker 03:
No, certainly it hasn't with respect to this.

[00:27:24] Speaker 03:
But I think what I'm trying to say,

[00:27:27] Speaker 03:
You know, proceedings go on.

[00:27:29] Speaker 03:
Once issues are brought before the court, there's often agency proceedings.

[00:27:32] Speaker 03:
And I think the commission and the case law sort of draws the line between things that are before the court that are being reconsidered.

[00:27:39] Speaker 03:
That's barred.

[00:27:40] Speaker 03:
But to the extent there's distinct issues that are before the agency, they can continue to act on those.

[00:27:47] Speaker 03:
But yes, there was no motion for, I think it's usually just a voluntary remand to ask for it back in this case.

[00:27:54] Speaker 07:
Does first, may second order render the capital structure issue moot?

[00:28:01] Speaker 03:
Certainly there's rightness concerns.

[00:28:03] Speaker 03:
I mean, I think it definitively rules that Exelon's capital structure will not be used, which is the result of the orders before the court.

[00:28:13] Speaker 03:
The proposal was to use Exgen's, or whatever its new name is now.

[00:28:17] Speaker 03:
And the commission's ruling was that we have questions about that.

[00:28:22] Speaker 03:
That hasn't been shown to be just and reasonable, so it set the matter for hearing.

[00:28:26] Speaker 03:
Now, certainly, it's a possibility the commission could say,

[00:28:31] Speaker 03:
for the reasons we said before, X-Gen is not a good, it's anomalous.

[00:28:37] Speaker 03:
It could ultimately come back with a capital structure that's different or maybe similar to Exelon's, not exactly Exelon's, but I think the point is it's uncertain at this point how the commission will rule.

[00:28:52] Speaker 02:
But do you understand the commission to have irrevocably foreclosed

[00:28:58] Speaker 02:
using X gen, right?

[00:29:00] Speaker 03:
I don't take that this order to say that.

[00:29:05] Speaker 03:
I think it's sort of like what happened in the start of this case where X gen was proposed initially.

[00:29:10] Speaker 03:
The issue wasn't found to have been just and reasonable on its face, so the matter was set for hearing.

[00:29:15] Speaker 02:
So if we get past the jurisdictional question, then

[00:29:17] Speaker 02:
Is it still possible that the ultimate result that Mystic wants is, in fact, the result that will come about?

[00:29:26] Speaker 03:
Yes, that's my understanding of the May 2nd order, that it's setting the entire matter for hearing.

[00:29:32] Speaker 03:
And I'm certainly sure Mystic will argue that XGen is appropriate.

[00:29:39] Speaker 03:
But again, I mean, you know.

[00:29:41] Speaker 07:
And you think that argument is open to them?

[00:29:43] Speaker 03:
I do, I do.

[00:29:45] Speaker 03:
But again, obviously the possibility is the commission will say that we, no factors have changed with respect to the anomalousness of ExGen.

[00:29:56] Speaker 03:
But that's my understanding of the order, setting the entire thing for hearing and the parties can make their arguments as to whatever they think the appropriate would be.

[00:30:04] Speaker 02:
Would the commission need to identify some alternate rate that exists?

[00:30:09] Speaker 02:
Could it just pick a rate?

[00:30:11] Speaker 02:
A ratio.

[00:30:12] Speaker 02:
I'm sorry, I keep using rate, but I think ultimately we're talking about a ratio here.

[00:30:16] Speaker 03:
In some circumstances, it does just create a hypothetical capital structure.

[00:30:20] Speaker 03:
It's usually with new entrants into the market where they don't have a parent to draw from.

[00:30:27] Speaker 02:
Because the point is the model capital structure that was seized upon now can't be the one.

[00:30:31] Speaker 02:
Correct.

[00:30:32] Speaker 02:
So it's got to be something else.

[00:30:34] Speaker 02:
Yes.

[00:30:34] Speaker 02:
And the default would be that it would be the immediate parent.

[00:30:37] Speaker 03:
Yes, provided that would provide just and reasonable results.

[00:30:42] Speaker 03:
And in the orders before the court now, the commission ultimately determined that.

[00:30:47] Speaker 02:
So even then, on what's going to be reconsidered, it would still be that the default would be the immediate parent.

[00:30:55] Speaker 02:
It's still the case that the commission could determine that that's anomalous and therefore won't be applied.

[00:31:00] Speaker 02:
And then there'll be a search for some alternate.

[00:31:02] Speaker 02:
It can't be the model that's already been used, so it could be one that is just calculated and applied, or it could be a different model.

[00:31:09] Speaker 02:
Correct.

[00:31:10] Speaker 02:
Correct.

[00:31:10] Speaker 03:
Am I understanding the scenario right?

[00:31:14] Speaker 03:
Yes, the baseline rule is you're a parent unless it provides unjust and unreasonable results.

[00:31:20] Speaker 03:
If that is the case, then there's a search for a suitable substitute.

[00:31:26] Speaker 03:
And I think this order, what this order does clearly say is that Exelon can't be used.

[00:31:33] Speaker 03:
Whether a hypothetical calculus structure with a similar ratio is used is certainly possible.

[00:31:40] Speaker 07:
It does seem the commission should consider maybe a motion for voluntary remand in this case.

[00:31:46] Speaker 07:
So we don't set a precedent for deciding issues by the commission in circumstances where a case is already within our jurisdiction.

[00:31:57] Speaker 03:
With respect to the, unless the court has questions about the substance of the capital structure ruling here, with respect to the Everett acquisition cost, I think the timeline is important here.

[00:32:13] Speaker 03:
March 23rd, 2018,

[00:32:16] Speaker 03:
Exelon submits, I'm sorry, Mystic submits its retirement bids into the market announcing that it's going to retire when its current capacity obligations expire in May 2022.

[00:32:29] Speaker 03:
A week later, they announced that, so after they announced the retirement, they're going to acquire Everett.

[00:32:35] Speaker 03:
So there was no, and I think it's on dispute, but there's no expectation that they would recover the acquisition costs

[00:32:44] Speaker 03:
through sales to Mystic after May 2002.

[00:32:49] Speaker 03:
So then the Mystic agreement comes out of the blue.

[00:32:52] Speaker 03:
We have captive rate payers and the commission applied causation principles to it and determined that certainly the captive customers are not the cause of this purchase.

[00:33:02] Speaker 03:
And the reply in the reply brief is that, well, they benefit from it.

[00:33:08] Speaker 03:
Certainly they do benefit from the fuel purchases from Mystic.

[00:33:11] Speaker 03:
That's why they're being allocated 91% of Everett's costs.

[00:33:17] Speaker 03:
and they are being obligated to, or the capital improvements made to provide service during the term of the agreement are allowed to be flowed through.

[00:33:27] Speaker 03:
But as to the acquisition itself, there's no benefit to the rate payers whether the name at the top of the corporate structure forever is NG as it was previous, right before the retirement announcement, or it's excellent.

[00:33:40] Speaker 03:
So that's really the core of the Commission's determination with respect to that issue.

[00:33:46] Speaker 02:
And unless there are any further questions.

[00:33:49] Speaker 02:
Let me make sure we don't have further questions.

[00:33:52] Speaker 02:
Thank you, Council.

[00:33:53] Speaker 02:
Now, I think if I've got the order right, we'll hear from Mr. Cora.

[00:33:57] Speaker 02:
I'll interview you in support of the Commission.

[00:34:00] Speaker 02:
And since we don't have a timer up there for you, you have four minutes, as you know.

[00:34:04] Speaker 05:
The whole four minutes, Your Honor, I'll speak as quickly as I can.

[00:34:10] Speaker 05:
all these Irishmen, Fitzgeralds, Kennedys, and Coils.

[00:34:13] Speaker 05:
Anyway, let me try and make this brief, Your Honor.

[00:34:18] Speaker 05:
My clients were the people who actually litigated the great base issue before the commission.

[00:34:26] Speaker 05:
Mystic argues in its main brief, pages 18 to 34, that it paid $925 million from Mystic 8 and 9.

[00:34:34] Speaker 05:
That is a characterization.

[00:34:36] Speaker 05:
It's more informative to say that Exelon attributed a value of $925 million to its acquisition, and that attribution reflects a number of upward adjustments in at least three successive asset valuations between 2011 and 2013 that are attributable to expected future market earnings, acquisition premium, and anticipated tax benefits and accelerated depreciation.

[00:35:03] Speaker 05:
For record context, I would invite the court's attention in particular to the joint appendix under the sealed volume of the appendix, pages 2096 through 2111, which is my redirect of our witness, Bora Steffen, which steps through those various adjustments.

[00:35:24] Speaker 05:
Why is that important?

[00:35:25] Speaker 05:
Well, it's important because there's another principle at issue here in addition to the rationale for the original cost rule.

[00:35:34] Speaker 05:
Which, by the way, the application is not unprecedented.

[00:35:38] Speaker 05:
FERC applied the original cost rule to the transition of a merchant unit to cost of service status in the Pacific Corp case in 2008.

[00:35:47] Speaker 05:
124 FERC, paragraph 61046, paragraph 28.

[00:35:55] Speaker 05:
But the real rationale here goes back, and I invite the court's attention to Judge Silberman's decision in Northern Border Pipeline 129, Fed 3rd, 1315, where Judge Silberman says, you know, the concept of original cost accounting is a bedrock principle of FERC's uniform system of accounts.

[00:36:17] Speaker 05:
Why do we do it?

[00:36:18] Speaker 05:
Well, one reason why we do it is the one that the court has explored in colloquies with other counsel.

[00:36:25] Speaker 05:
And I'm not going to revisit that rationale for you, but there's another one at play, which is, excuse me, the Supreme Court's holding in Hope Natural Gaps.

[00:36:38] Speaker 05:
which says that whatever you're going to base fair value on, you cannot base fair value for rate making purposes on projected earnings, on what the facility would be expected to earn under the rates that are being set in this proceeding.

[00:37:03] Speaker 05:
And that is 320 U.S.

[00:37:06] Speaker 05:
at page 601.

[00:37:09] Speaker 05:
Court said, the heart of the matter is that rates cannot be made to depend on fair value when the value of the going enterprise depends on earnings under whatever rates may be anticipated.

[00:37:19] Speaker 05:
That is the fundamental problem that you have here, ascribing the utmost of good faith to all the participants in all the various purchase and sale transactions.

[00:37:29] Speaker 05:
Those valuations are based on capitalized projections of future earnings.

[00:37:35] Speaker 05:
The Supreme Court has held that that is not an appropriate basis for setting cost of service rates.

[00:37:41] Speaker 05:
If you go back to the case that Judge Silverman relied on in Northern Border Pipeline, excuse me, the United Gas Pipeline decision,

[00:37:50] Speaker 05:
25 Federal Power Commission, we're going way back here, 1961, 25 FPC 35 at pages 64 to 65.

[00:38:02] Speaker 05:
The commission there adopted the same rationale that they applied on their July 17th, re-hearing order in this case.

[00:38:11] Speaker 05:
If I could just finish this point.

[00:38:15] Speaker 05:
That is to say, investors can pay whatever they want.

[00:38:19] Speaker 05:
for a utility facility, a generator.

[00:38:23] Speaker 05:
And that's on them.

[00:38:25] Speaker 05:
They can use whatever considerations they want to set a price.

[00:38:30] Speaker 05:
That's United Gas Pipeline.

[00:38:32] Speaker 05:
It's paragraph 110 of the commission's rehearing order from July 17, 2020 in this case.

[00:38:39] Speaker 05:
But those projections turned out not to be correct.

[00:38:45] Speaker 05:
If they had turned out to be correct, we wouldn't be dealing with the question of cost of service rates.

[00:38:50] Speaker 05:
Therefore, they're not a reliable basis for setting the cost of service rate.

[00:38:55] Speaker 05:
And that is, as I say, a position that extends all the way back to the Supreme Court's decision in Hope Natural Gas in 1943.

[00:39:05] Speaker 05:
None of this is new law.

[00:39:08] Speaker 05:
Thank you.

[00:39:09] Speaker 02:
Thank you, Mr. Coyle.

[00:39:11] Speaker 02:
Mr. Fitzgerald, you asked for three minutes.

[00:39:12] Speaker 02:
We'll give you your three minutes for rebuttal.

[00:39:16] Speaker 04:
Thank you, your honor.

[00:39:19] Speaker 04:
So

[00:39:21] Speaker 04:
There's really one point on rate base that cuts through a lot of what has been said about who should bear the supposed risk of us paying $925 million and the idea of uniformity and the right test, and that is to keep in mind

[00:39:38] Speaker 04:
that the $925 million is below the original depreciation line if you set aside the transactions.

[00:39:46] Speaker 04:
Transactions which had nothing to do with cost of service, no incentive to inflate or be lower or to have any relation to cost of service whatsoever.

[00:39:55] Speaker 04:
So it isn't that we paid some exorbitant price, it turned out poorly and

[00:40:02] Speaker 04:
And now here we are to claim the exorbitant price.

[00:40:05] Speaker 04:
It's below the original depreciation line.

[00:40:07] Speaker 04:
The real problem is taking into account these prior transactions that had nothing to do with cost of service and the distressed asset, 550 million.

[00:40:18] Speaker 04:
Now, to keep in mind, what FERC has said is that the transfer in lieu of foreclosure, the value of the debt forgiven is the 550 million valuation.

[00:40:32] Speaker 04:
And so even that on its face is not necessarily a sensical way to value something.

[00:40:38] Speaker 04:
I mean, if a bank forecloses on a house for the value of the debt, the house may be worth more than that.

[00:40:45] Speaker 04:
I mean, their theory is premised on the idea that this facility was built for a billion dollars and one year later it was worth barely $550 million.

[00:40:54] Speaker 04:
And our point is, and they're saying they're trying to attribute that whole thing like in a cost of service world.

[00:41:01] Speaker 04:
But our point is in a cost of service world, something like that doesn't happen.

[00:41:05] Speaker 04:
Cost of service utilities are able to get their costs of construction.

[00:41:09] Speaker 04:
So construction delays, market variations up and down.

[00:41:13] Speaker 04:
don't tend to bankrupt projects like that.

[00:41:17] Speaker 04:
In fact, cost of service generators and utilities can get their cost of construction ahead of time if they ask for it.

[00:41:24] Speaker 04:
So it's really this long history that has nothing to do with cost of service.

[00:41:30] Speaker 04:
We ultimately paid on the merchant market this 925 million, attributed to it by an independent accounting firm as part of a larger transaction.

[00:41:40] Speaker 04:
at a time when there was no reason to inflate, no incentive for that to be any bigger than the actual value.

[00:41:47] Speaker 04:
And that's the proper value that should be used in rate base.

[00:41:56] Speaker 04:
On the

[00:41:58] Speaker 04:
fuel supply, just briefly.

[00:42:00] Speaker 04:
I know there's another argument coming and connected in this case that's going to have a lot more to say about Everett, but I would just say this is not FERC regulating Everett and its own right.

[00:42:15] Speaker 04:
What FERC is doing is regulating Mystic's fuel supply.

[00:42:19] Speaker 04:
Any cost of service utility is going to have these elements.

[00:42:23] Speaker 04:
One of them is fuel supply.

[00:42:25] Speaker 04:
May I finish?

[00:42:26] Speaker 04:
One of them is fuel supply.

[00:42:29] Speaker 04:
And in evaluating fuel supply, it's proper to include all of the normal aspects of that, including who bought the facility.

[00:42:36] Speaker 04:
Thank you, Your Honor.

[00:42:38] Speaker 02:
Thank you, Mr. Fitzgerald.

[00:42:41] Speaker 02:
We'll now shift to part two of the argument, the state petitioner's issues, and we'll hear from Mr. Schwartz when everybody's settled.

[00:43:09] Speaker 02:
So we see the timer on the screens.

[00:43:13] Speaker 02:
Is it going to be at the podium, too, or is that?

[00:43:16] Speaker 08:
No, but they've got it.

[00:43:16] Speaker 02:
They've got it.

[00:43:17] Speaker 02:
Good.

[00:43:18] Speaker 02:
All right.

[00:43:18] Speaker 02:
Thank you.

[00:44:32] Speaker 02:
Morning, Mr. Schwartz, and you'll see their timer on the screen instead of at the podium.

[00:44:36] Speaker 01:
Thank you, your honor.

[00:44:39] Speaker 01:
May it please the court, I'm Jeffrey Schwartz for the state petitioners, and I'd like to reserve five minutes for rebuttal.

[00:44:46] Speaker 01:
As you've heard, Mystic buys fuel from what is now an unregulated corporate affiliate, the Everett Gas Terminal.

[00:44:53] Speaker 01:
We're here today because FERC allowed Mystic to recover from its captive electric rate payers an extra $75 million to subsidize Everett and its sales of fuel to third parties.

[00:45:08] Speaker 01:
FERC assigned Mystic and its rate payers 91% of Everett's costs when Mystic is physically incapable of using more than about 35% of Everett's capacity.

[00:45:21] Speaker 01:
And at the same time,

[00:45:23] Speaker 01:
FERC allocated no cost to an entire category of other use.

[00:45:28] Speaker 01:
Everett's sales of vapor regasified ONG to third parties.

[00:45:34] Speaker 01:
FERC then compounded its error by relieving Mystic of the obligation to credit the revenues from those sales and to refund certain charges if Everett stays in business selling gas to other customers when the Mystic agreement ends.

[00:45:51] Speaker 01:
FERC's decisions were contrary to its precedent and were not supported by substantial evidence or reasoned decision making.

[00:45:58] Speaker 01:
In fact, when it came to Everett, FERC consistently said one thing and did another.

[00:46:04] Speaker 01:
Let's begin with cost allocation.

[00:46:06] Speaker 01:
FERC said that Mystic's customers should pay only for the Everett costs attributable to certain Mystic, but that promise was empty.

[00:46:16] Speaker 01:
The evidence was undisputed that Everett was not planned to serve Mystic.

[00:46:20] Speaker 01:
It was built 30 years earlier.

[00:46:23] Speaker 01:
Everett is not reserved for Mystic's use.

[00:46:26] Speaker 01:
Only a tiny portion of the Everett facilities serve Mystic exclusively.

[00:46:30] Speaker 01:
Those are the pipes connecting the fuel facility to the generators.

[00:46:34] Speaker 01:
And the rest of Everett's facilities are either common facilities that serve all customers, like the storage tanks.

[00:46:43] Speaker 01:
Facilities that serve Mystic and some other customers

[00:46:46] Speaker 01:
like the high-pressure vaporization systems, or systems that serve only other customers, like the low-pressure vapor systems, the pipeline interconnection, and the liquid delivery systems.

[00:47:00] Speaker 01:
And FERC did not tally up and exclude the costs of the facilities that Mystic can't use.

[00:47:07] Speaker 01:
Instead, it out-treated all Everett costs as common costs

[00:47:11] Speaker 01:
and allocated them based on the ratio of historic liquid sales and historic vapor sales.

[00:47:17] Speaker 02:
It didn't allocate the liquid part, right?

[00:47:19] Speaker 02:
It at least discounted the 9% that is liquid.

[00:47:26] Speaker 01:
That's true.

[00:47:26] Speaker 01:
So the 9% is the volume of

[00:47:30] Speaker 01:
gas that was sent out in liquid form as compared to the total amount of gas sent out.

[00:47:38] Speaker 01:
So FERC applied that ratio, the 91-9% split to all of Everett's costs and held Mystic and its captive electric great payers responsible for the entire remaining 91%.

[00:47:50] Speaker 01:
And FERC failed to answer two objections to that allocation.

[00:47:57] Speaker 01:
First, the record showed that Mystic would use much less gas during the contract term than it had burned historically.

[00:48:05] Speaker 01:
So the historic 91%, 9% split was unlikely to be a good predictor of the usage of the effort facility during the contract term.

[00:48:16] Speaker 01:
And FERC never responded to that point at all.

[00:48:19] Speaker 01:
Second, FERC allocated no cost to third-party vapor sales.

[00:48:25] Speaker 01:
And that was despite FERC's own acknowledgement that New England ratepayers, and this is a quote from J 1323, New England ratepayers and third-party customers should share Everett's costs as a matter of fairness and cost causation.

[00:48:40] Speaker 01:
So on rehearing, FERC tried to rationalize that decision.

[00:48:45] Speaker 01:
It said that actually it's okay

[00:48:47] Speaker 01:
to assign all of the vapor functionalized cost to Mystic because Mystic benefits from the third party sales.

[00:48:55] Speaker 01:
According to Ferg, Mystic benefits from those sales because the sales help Everett manage the inventory in its tank.

[00:49:04] Speaker 01:
But that argument was contradicted

[00:49:06] Speaker 01:
by FERC's own findings elsewhere, that some third-party sales complicate tank management and impose additional tank management costs, some of which Mystic repairs will bear.

[00:49:20] Speaker 01:
So the benefit assertion is unfounded.

[00:49:23] Speaker 01:
But more fundamentally, FERC gave no reason to treat Mystic as the only beneficiary of Everett's tank management.

[00:49:33] Speaker 01:
The tanks hold all of the gas,

[00:49:35] Speaker 01:
for any of Everett's sales, whether as liquid or vapor, whether to Mystic or to third parties.

[00:49:40] Speaker 01:
So all customers benefit from the tank management.

[00:49:45] Speaker 02:
Including Mystic.

[00:49:46] Speaker 01:
Including Mystic.

[00:49:47] Speaker 01:
But that doesn't, you know, when the benefits are diffused, this course precedent holds that it's not just unreasonable and it's arbitrary and capricious to target all of the costs to just one of the many beneficiaries.

[00:50:02] Speaker 01:
And contrary to this course precedent, FERC made no effort

[00:50:05] Speaker 01:
to ensure that the tank management benefits supposedly accruing to Mystic were roughly commensurate with the fixed cost burdens being shifted to it.

[00:50:17] Speaker 01:
The court doesn't have any questions further about the cost allocation.

[00:50:21] Speaker 01:
I do have a question.

[00:50:22] Speaker 07:
I was wondering if you could respond to some of the arguments made by ISO New England and its intervener brief about this issue.

[00:50:30] Speaker 07:
I'm not sure if I entirely understand this, but they say that FERC was very concerned with maintaining an incentive for Everett to continue in business.

[00:50:40] Speaker 07:
And that's why they allocated 100% of the vaporized costs to Mystic.

[00:50:49] Speaker 01:
So I believe that the incentive, the ISO was concerned, of course, that it would ever continue in business as it's the sole fuel supply for Mystic.

[00:51:05] Speaker 01:
But I think the incentive issue goes to a different point.

[00:51:08] Speaker 01:
As you know, Everett sells gas not only to Mystic, but to two interstate pipelines to a local distribution company.

[00:51:18] Speaker 01:
And those sales to third parties provide fuel security benefits that help the entire region.

[00:51:28] Speaker 01:
They provide fuel security benefits, both in terms of providing non-pipeline gas, for lack of a better term.

[00:51:38] Speaker 01:
to electric generators throughout New England.

[00:51:41] Speaker 01:
But they also provide gas for use in heating, which will reduce congestion on the pipelines.

[00:51:49] Speaker 01:
And third, injections into the pipeline

[00:51:52] Speaker 01:
at Mystic and Everett, which is kind of the terminus of the general flow into New England, supports the pipeline pressures and supports the operation of the pipeline and improves the pipeline's ability to deliver gas throughout the region.

[00:52:09] Speaker 01:
So there are all of these benefits that accrue, none of which are captured just by looking at

[00:52:20] Speaker 01:
the gas that Mystic buys from the facility.

[00:52:26] Speaker 01:
Now, I'd like to make one further point about that, Your Honor.

[00:52:31] Speaker 01:
The evidence in this case is clear that Mystic relies on Everett, but there is very sparse evidence, if any, in the record about the extent, if any, to which Everett relies on Mystic.

[00:52:47] Speaker 01:
There was some testimony that if Mystic retired, that is, if Mystic made zero contribution to Everett's costs, that could jeopardize Everett.

[00:52:59] Speaker 01:
Not that it would, but it could.

[00:53:01] Speaker 01:
But there is no evidence in the case at all.

[00:53:05] Speaker 01:
that a 39% contribution by Mystic to Everett's fixed costs would be insufficient to keep Everett in business, let alone any evidence that a 91% contribution is required to keep Everett in business.

[00:53:20] Speaker 01:
That just isn't in the record anywhere, and FERC certainly purported to make no such

[00:53:25] Speaker 01:
findings.

[00:53:26] Speaker 01:
FERC's sole justification for the cost allocation was the historic ratio of vapor sales and liquid sales ignoring that an entire category of vapor sales are made to other customers.

[00:53:39] Speaker 02:
Thank you.

[00:53:40] Speaker 02:
And why, in terms of Everett staying in business, what's the relevance of that to this proceeding other than insofar as Everett needs to stay in business in order to make sure that Mystic is able to fulfill

[00:53:54] Speaker 02:
It's the interest that the commission has in Mystic, vis-a-vis the ratepayers.

[00:53:59] Speaker 01:
I agree with you, Your Honor.

[00:54:02] Speaker 01:
The right way to look at this is what percentage of Everett's capacity is Mystic capable of using?

[00:54:10] Speaker 01:
And the state petitioners use that percentage, which is Mystic's maximum possible use of Everett's capacity.

[00:54:20] Speaker 01:
So that's an unrealistically high percentage to begin with.

[00:54:24] Speaker 01:
We use that percentage as representing a fair contribution from Mystic and its captive rate payers to Everett.

[00:54:33] Speaker 01:
And bear in mind the context for this, Your Honor.

[00:54:36] Speaker 01:
Everett is not a regulated cost of service facility.

[00:54:40] Speaker 01:
Congress deregulated first sales of natural gas, wanting those sales to be governed by the market.

[00:54:49] Speaker 01:
So the question in this case is how far can FERC push its Federal Power Act authority by virtue of Mystic's involvement here to remove Everett costs from the market and shield Everett from market risk.

[00:55:07] Speaker 01:
Let's move on and say a couple of words about revenue crediting.

[00:55:11] Speaker 01:
The two important points to understand about revenue crediting

[00:55:14] Speaker 01:
is one, that FERC didn't justify taking the revenue credits away, but second and more important, that restoring them would not fix FERC's orders.

[00:55:27] Speaker 01:
The underlying and fatal error is the cost allocation, which created problems that the credits can't solve.

[00:55:35] Speaker 01:
In a market, sellers need to make sales to cover their fixed costs, and of course they keep all their revenue, and that creates strong incentives to sell.

[00:55:45] Speaker 01:
But FERC's cost allocation here obliterated that incentive to sell vapor to third parties.

[00:55:51] Speaker 02:
Does it work in the opposite direction, though?

[00:55:53] Speaker 02:
I mean, at your point, I take it as that adding revenue crediting won't fix the problem with cost allocation.

[00:56:00] Speaker 02:
But if you fix the problem with cost allocation, then you don't need revenue crediting.

[00:56:04] Speaker 01:
That's correct, Your Honor.

[00:56:05] Speaker 01:
OK.

[00:56:06] Speaker 01:
That's absolutely right.

[00:56:08] Speaker 01:
And in fact, that's what we talked for.

[00:56:10] Speaker 01:
We talked for the best way to incentivize Everett to make sales is to allocate an appropriate percentage of Everett's cost to Mystic, 39%, in which case Everett would need to make sales to third parties in order to cover its remaining costs and it would keep all of that revenue.

[00:56:32] Speaker 01:
Finally, let me turn to the Clawback issue.

[00:56:37] Speaker 01:
FERC failed to justify carving out Everett's costs from the clawback that the agency required.

[00:56:44] Speaker 01:
FERC said that it lacks jurisdiction to clawback Everett, Mystic's charges for Everett's costs, but jurisdiction is not a one-way street.

[00:56:55] Speaker 01:
If FERC can let Mystic pass through Everett's costs, it can require refunds of unjust and unreasonable amounts.

[00:57:05] Speaker 01:
And in this case, well,

[00:57:07] Speaker 01:
actually in this case and in all reliability must run agreements, FERC says in general when capital is invested, the normal rate making approach is you amortize that investment over the life of the facility.

[00:57:25] Speaker 01:
In these reliability agreements, because of the prospect that the facility will retire,

[00:57:30] Speaker 01:
allows an exception to accelerate the recovery of those capital expenditures entirely within the two-year term of the agreement.

[00:57:39] Speaker 01:
But that's just unreasonable only if there is an attendant commitment to refund

[00:57:47] Speaker 01:
the undepreciated portion of those costs if the facility does not retire, if it returns to merchant operations when the cost of service agreement ends.

[00:57:57] Speaker 01:
And that is necessary as a matter of fairness to the rate payers because they should not be subsidizing post-agreement merchant operations.

[00:58:07] Speaker 01:
That concept applies whether or not

[00:58:10] Speaker 01:
the charges that Mystic collects are for improvements to the Mystic generators, or whether they are for improvements to the Everett fuel facility.

[00:58:22] Speaker 01:
In neither case should Mystic's repairs during the two-year agreement be responsible for paying all of their allocated costs for facilities that will remain in service on a merchant basis, selling gas to other customers for the next 25 years.

[00:58:44] Speaker 01:
I'd like to reserve the remaining time, please.

[00:58:47] Speaker 02:
Thank you, Mr. Schwartz.

[00:58:48] Speaker 02:
We'll give you that rebuttal time.

[00:58:49] Speaker 02:
We'll hear from Commission Council now, Ms.

[00:58:55] Speaker 02:
Banta.

[00:59:10] Speaker 06:
Good morning.

[00:59:10] Speaker 06:
Carol Bantit for the Commission.

[00:59:12] Speaker 06:
And I would like to start with a brief explanation of Mystic's relationship to its fuel supplier.

[00:59:20] Speaker 06:
And I want to point specifically to a couple places in the record, and these are cited in the order in our brief in a way that I'll explain, but first I want to go to the description.

[00:59:31] Speaker 06:
At JA, this is in volume three, JA 1021 and 22, really 324,

[00:59:40] Speaker 06:
as well as 1033 and 1034.

[00:59:46] Speaker 06:
And this is a Mystic witness explaining that the Everett terminal, the way its operation doesn't simply supply Mystic.

[00:59:57] Speaker 06:
It revolves around Mystic's need and the way it has to juggle that with the amount of gas that can have in its storage tanks and these

[01:00:07] Speaker 06:
tankers or natural gas ships that have to be scheduled well in advance that have a capacity that nearly fills the storage tanks so that it's a back and forth juggling of making sure there's enough gas in the tanks for Mystic, and that's especially true under this fuel security agreement,

[01:00:26] Speaker 06:
while also making sure that the tanks are empty enough when a ship arrives to take that shipment.

[01:00:33] Speaker 06:
And so there's this description here about what this witness called a tricky balancing act and the integrated operation.

[01:00:40] Speaker 06:
And the point being here that the way Mystic or the way Everett operates its terminal, including the way it makes third party sales,

[01:00:50] Speaker 06:
revolves around making sure it's there to serve Mystic's need, both by being able to have the tanks empty enough to get gas when the gas arrives on the ship, but to have the tanks full enough when Mystic needs to draw on it to supply power, because, and again, especially during the fuel security agreement.

[01:01:07] Speaker 06:
Now, the commission cited the Mystic brief that had summarized this exact testimony, actually uses the same language of the Tricky Balancing Act,

[01:01:23] Speaker 06:
Let me get that site for you.

[01:01:24] Speaker 06:
But we cited also in our brief through the part of the order that had discussed that with respect to tank management costs.

[01:01:32] Speaker 06:
But the commission cited to the pages in Mystic's brief that discussed this testimony specifically with regard to the allocation of costs.

[01:01:41] Speaker 06:
And that is in volume four.

[01:01:45] Speaker 06:
at 1581 when the Commission said that it is reasonable to allocate the fixed effort costs as part of the fuel supply charge that Mystic is incurring.

[01:02:01] Speaker 06:
And it says

[01:02:02] Speaker 06:
Liquid gas is exclusively used to serve third parties, and I can talk about the evidence for that as well.

[01:02:09] Speaker 06:
Everett's sales of vapor gas primarily benefit Mystic, and the Commission says, yes, vapor sales are made to third parties, but those third party sales benefit Mystic by helping to manage Everett's tank.

[01:02:21] Speaker 06:
And then footnote 148 cites

[01:02:23] Speaker 06:
Mystics brief that discusses exactly the testimony I was just describing.

[01:02:28] Speaker 06:
So when the Commission says that even sales to third parties benefit Mystic, it does support that with the record and it is supported in the record.

[01:02:37] Speaker 02:
But doesn't everybody get the benefit?

[01:02:39] Speaker 02:
That's what I don't understand is why is it being treated as if Mystic is the only beneficiary and therefore it's fair?

[01:02:47] Speaker 06:
Because Mystic is the primary beneficiary because it is managing its operation around Mystic's needs with these incidental other sales to third parties.

[01:03:06] Speaker 06:
The operation is integrated with how Mystic needs it and making sure that the tank is, that the gas is there when Mystic needs it and that the next ship that comes in can be loaded into those tanks because Mystic needs it.

[01:03:19] Speaker 07:
And another, another... Does that, does that explain though why 100% of those costs go to Mystic?

[01:03:26] Speaker 07:
I mean, even if Mystic is, if Everett is revolving its business around Mystic, and Mystic is the, you said the primary beneficiary, it's still not the only beneficiary.

[01:03:38] Speaker 06:
It is, it is the primary, yes, it is maybe not exclusively a beneficiary, except that those sales are made also for its benefit, but I would also point to another part of the record, the commission

[01:03:51] Speaker 06:
in choosing among the different proposals that different parties have made, chose the trial staff's proposal, which did the 91 and the 9.

[01:04:00] Speaker 06:
And trial staff, as they described in their brief, which I think we did cite and that was cited in the order as well,

[01:04:07] Speaker 06:
looked at historical usage data, not just the capacity of what's there at the Everett Terminal that could in theory be used, but how is it actually being used, and that's where I would point also to Staff Exhibit 0006, and this is at Volume 2, JA 648 and 649.

[01:04:27] Speaker 06:
This is what Ms.

[01:04:28] Speaker 06:
McComb's testimony for staff, which is what the staff brief is based on, and her testimony is at around 956 and 957 in that same volume.

[01:04:37] Speaker 06:
But if you look at the chart on J648, and this is why Ms.

[01:04:41] Speaker 06:
McComb said in her proposal that

[01:04:47] Speaker 06:
we can exclude the average of 9% that's going to liquid.

[01:04:50] Speaker 06:
That's coming from the chart on the left side of JA648.

[01:04:55] Speaker 06:
And this is historical send out from the Everett terminal from 2003 to 2017.

[01:05:02] Speaker 06:
Now in the center, we see deliveries in vapor form.

[01:05:04] Speaker 06:
That's vapor sales, whether to Mystic or anyone else.

[01:05:08] Speaker 06:
And you can see the sharp decline in those numbers after 2012.

[01:05:12] Speaker 06:
So, I mean, the Everett is not operating at the same send out with its capacity that it was in, say, 2006.

[01:05:20] Speaker 06:
That's just one thing we can notice from this chart.

[01:05:22] Speaker 06:
But she was looking at the numbers, except for a brief spike in the mid-2010s, the liquid that has gone out has averaged 9%.

[01:05:32] Speaker 06:
And she also has testimony, in Ms.

[01:05:35] Speaker 06:
McCombs' testimony and in the trial brief that the commission relied on in adopting their proposal,

[01:05:41] Speaker 06:
that liquid deliveries are not used to manage the tank.

[01:05:44] Speaker 06:
That's why the commission agreed.

[01:05:46] Speaker 07:
But that's not what we're concerned with.

[01:05:47] Speaker 07:
We're concerned about the 91% and why all of that is being allocated to Mystic, right?

[01:05:52] Speaker 06:
Right.

[01:05:53] Speaker 06:
Well, because we back out the liquid, which doesn't play any role in the integrated operation that I started with that Mystic's witness had described.

[01:06:00] Speaker 06:
Right.

[01:06:00] Speaker 06:
But so nobody's worried about that, really, I think.

[01:06:02] Speaker 06:
Right.

[01:06:03] Speaker 06:
And so the commission said, when we look at the way Mystic operates,

[01:06:08] Speaker 06:
and the historical usage data of who's using it now, that Mystic is the primary customer and the primary beneficiary, and when it sells to others, it's doing so to empty the tank to the level it needs to get another shipment.

[01:06:22] Speaker 07:
When you say primary, I mean, primary could mean that Mystic takes, you know, nothing close to approaching 100%, but just more than any other entity, right?

[01:06:37] Speaker 06:
I think the system operator put in testimony, but I don't know if the commission cited it.

[01:06:43] Speaker 06:
The system operator put in testimony that it's two-thirds, that it's at or above two-thirds because we're averaging about the 56 million going back to that chart where it used to be 173 million.

[01:06:57] Speaker 06:
I think it's a million BTUs.

[01:07:00] Speaker 06:
I might be wrong about the unit.

[01:07:02] Speaker 06:
But it's down to 56 million at that point in the years leading up to this agreement.

[01:07:07] Speaker 06:
Mystic is the primary customer.

[01:07:10] Speaker 06:
And under this agreement, it especially is the primary customer because it has to have the gas be there.

[01:07:18] Speaker 06:
That's the whole reason for the fuel security agreement and the penalties that Mystic would encourage.

[01:07:23] Speaker 02:
But even if it's two-thirds, and I don't recall much of this being discussed in the commission orders that we're reviewing, as opposed to the explanation that you're elaborating on now.

[01:07:33] Speaker 02:
But even if it's two-thirds, if we're just doing rough math and we use the two-thirds figure, that's not 100.

[01:07:41] Speaker 02:
It still seems like there's got to be some explanation for why of the 91% that's vapor, once you discount the 9% that's liquid, why the 91% is being entirely allocated and ultimately paid for by Mystics ratepayers.

[01:07:55] Speaker 06:
Right.

[01:07:55] Speaker 02:
And I don't see that in the commission's order.

[01:07:58] Speaker 06:
Well, and that's where I come back to the, it's the second July re-hearing order at J1580 and 1581.

[01:08:06] Speaker 06:
It's based on everything else that

[01:08:08] Speaker 06:
that I've explained, the commission citing Mystic in particular with the description of how the Everett terminal operates for Mystic's benefit made the finding that Mystic is the primary beneficiary and that the third party sales benefit Mystic.

[01:08:24] Speaker 06:
And it cites the Illinois Commerce Commission roughly commensurate standard.

[01:08:29] Speaker 06:
And this court has some similar cases where even when it's not 100%,

[01:08:36] Speaker 06:
the primary, that it can be allocated.

[01:08:39] Speaker 07:
Doesn't FERC have to do something more to kind of match up costs and benefits?

[01:08:45] Speaker 07:
I mean, all it says here is these benefits are not trivial.

[01:08:48] Speaker 07:
Okay, maybe it's more than two thirds, but less than 100%.

[01:08:52] Speaker 06:
Well, this court has never required exacting precision, of course.

[01:08:58] Speaker 06:
But this seems very rough.

[01:09:01] Speaker 06:
Well it does say to the mystic again the mystic witness explained in much more detail than I have here.

[01:09:06] Speaker 06:
Why it is that even the facilities that don't send gas to mystic but send it to third parties are used for the benefit of mystic's operation.

[01:09:16] Speaker 06:
And again the trial staff as they explain their

[01:09:22] Speaker 06:
proposal that the commission adopted.

[01:09:24] Speaker 06:
It was the only one that was based on historic usage data rather than the percentage of particular facilities that it was based on how this is actually being used.

[01:09:33] Speaker 02:
Did the sales to Mystic benefit the third parties in the same way that the sales to third parties benefit Mystic?

[01:09:41] Speaker 06:
I don't know that we have any evidence.

[01:09:42] Speaker 06:
Why wouldn't they?

[01:09:46] Speaker 06:
Given that the sales to third parties are made to manage the tank as Mystic needs it, I don't know that they have any benefit that they wouldn't.

[01:09:54] Speaker 02:
Well, it just seems like the tank management.

[01:09:56] Speaker 02:
I mean, part of the problem is I don't see an explanation otherwise.

[01:09:58] Speaker 02:
So maybe there is an explanation otherwise.

[01:10:00] Speaker 02:
But just as a matter of rough understanding, it seems like the tank management, yeah, it definitely benefits Mystic.

[01:10:07] Speaker 02:
But it seems like the benefit would run in the other direction too.

[01:10:10] Speaker 02:
And then at that point, just because it does benefit Mystic, does it

[01:10:15] Speaker 02:
is it appropriate to allocate the entire cost to Mystic's rate payers when, at least as I would conceptualize it, the third parties are benefiting also when Mystic gets the tank management benefits.

[01:10:30] Speaker 02:
So.

[01:10:31] Speaker 06:
And I think there are cases from this court as well as the Seventh Circuit that don't demand a one for one and that the majority might be enough for the hundred.

[01:10:41] Speaker 06:
And we submit that in this case,

[01:10:44] Speaker 06:
that it is because of the way it is managed.

[01:10:47] Speaker 06:
I do want to add, although it's not really an issue here, just so it's clear, when we talk about the revenue crediting and the third party sales, we're only talking about forward sales, which are beyond three months, to the extent that Everett makes spot sales or shorter term sales for purposes of emptying the tank or whatever.

[01:11:09] Speaker 06:
There was no dispute in any of this, and the commission did clarify in the final order.

[01:11:14] Speaker 06:
that those revenues are credited 100% back to Mystic.

[01:11:19] Speaker 06:
Those are not retained by Everett.

[01:11:22] Speaker 06:
So there is revenue from sales to third parties coming back to Mystic, just not the particular forward sales that initially there had been an effort to put in an incentive, and that's what the commission decided not to do.

[01:11:38] Speaker 06:
So it's not that no other parties are paying any money back to Mystic for this.

[01:11:44] Speaker 06:
Just as a matter of making sure the record is clear on that.

[01:11:47] Speaker 06:
But that was not an issue.

[01:11:48] Speaker 06:
There was no argument.

[01:11:49] Speaker 06:
No one was disputing those sales here.

[01:11:52] Speaker 06:
But that is what the commission based

[01:11:56] Speaker 06:
based the 91% on, was the primary benefit.

[01:12:01] Speaker 06:
But I wanted to make sure that we may not have explained fully previously this symbiotic relationship between the two, which, like I said, the commission did cite it.

[01:12:14] Speaker 06:
We just didn't flesh it out as much as we could have previously.

[01:12:19] Speaker 06:
But that is what the commission was looking at.

[01:12:23] Speaker 06:
Taking also together with the fact that, as Mr. Kennedy discussed, Mystic didn't get all the costs of Everett that it wanted here.

[01:12:35] Speaker 06:
It didn't get to collect on the acquisition costs.

[01:12:40] Speaker 06:
This part is about the fixed operating costs.

[01:12:44] Speaker 06:
And so the commission did go with the 91% because with the proposals before it, the trial staff was the one that backed out the one category of sales that we can categorically say does not benefit Mystic or Mystic's ratepayers, and that's the liquid sales.

[01:12:59] Speaker 06:
And so based on the historic usage data that the Commission chose that, it didn't have to be the only reasonable way of doing it, but the Commission thought it was the best one.

[01:13:10] Speaker 06:
And as long as it's within a zone of reasonableness, the Commission wasn't arbitrary in choosing that.

[01:13:20] Speaker 06:
I also want to pick up on a point from earlier about

[01:13:26] Speaker 06:
whether Everett stays in business.

[01:13:27] Speaker 06:
The commission didn't focus on any of this on whether Everett stays in business beyond the end of the RMR agreement.

[01:13:34] Speaker 06:
That's not what any of this was about because Everett is not jurisdictional.

[01:13:38] Speaker 06:
The commission doesn't have a stake in that because as it found with the revenue crediting and the clawback, Everett is not in the commission's jurisdiction.

[01:13:49] Speaker 06:
Its role in this case is

[01:13:50] Speaker 06:
solely as the fuel supplier with the fuel supply charge that Mystic is collecting under the fuel security agreement.

[01:14:02] Speaker 06:
And so when the commission found in some aspects like the clawback that it might be intruding on Everett's operation by finding an incentive for Everett or in some way regulating

[01:14:18] Speaker 06:
or directing its focus at what Everett might do, that was beyond the commission's jurisdiction and that was the commission's reason for pulling back.

[01:14:28] Speaker 02:
It seems like there's a disconnect between saying on one hand that Mystic's costs that are attributable to Everett can be taken into account not withstanding the commission's lack of jurisdiction over Everett for purposes of fuel support costs, fuel supply costs.

[01:14:46] Speaker 02:
But then the jurisdictional problem prevents that same kind of dynamic from operating with respect to the clawback.

[01:14:55] Speaker 02:
I don't understand.

[01:14:58] Speaker 02:
It seems like they stand or fall together.

[01:14:59] Speaker 02:
Because in both situations, it's not that the commission's doing something directly with respect to Everett.

[01:15:05] Speaker 02:
It's that the commission's doing something with respect to Mystic that takes into account the consequences of Everett for Mystic.

[01:15:11] Speaker 06:
except with the clawback, it would be concerning Everett because this is in a scenario, the commission does have a stake in whether Mystic retires at the end of this agreement or not and requires a clawback because you don't get to go into this kind of agreement and collect your capital expenditures and things like that under this kind of agreement that's premised on its retirement and then decide to go back into the regulated market with the advantage of keeping those things.

[01:15:41] Speaker 06:
Any of the costs that are flowing to Everett are only costs that it's paying its fuel supplier, which as the commission pointed out, if they were connected to a pipeline and they could buy from any fuel supplier on the market, they would be paying these kinds of costs, but they wouldn't be broken out in a cost of service analysis.

[01:16:00] Speaker 06:
It would be a black box charge.

[01:16:02] Speaker 06:
from a third-party supplier.

[01:16:04] Speaker 06:
The only reason the Commission got so into the weeds on efforts costs here is because of, well, the fact that it's the only fuel supplier, it's the only thing Mystics hooked up to, and it's an affiliate, and the Commission said that requires extra scrutiny.

[01:16:17] Speaker 06:
So it did cause some confusion when the Commission is analyzing costs of service for an entity that it doesn't regulate, but it's only doing that to determine whether the fuel supply charge is reasonable.

[01:16:30] Speaker 06:
But it's not, so any of those kinds of costs would be built into what any fuel supplier would be charging Mystic if there could be another fuel supplier.

[01:16:40] Speaker 06:
It wouldn't have been examined in this way because it would just be some third party.

[01:16:44] Speaker 06:
And at the end of the Mystic agreement, if Mystic doesn't retire, it has a clawback for things it's gotten like capital expenditures.

[01:16:52] Speaker 06:
But it doesn't get to get back the fuel costs it paid to whatever fuel supplier it had at the time.

[01:16:59] Speaker 06:
I think that's how the commission looked at it.

[01:17:02] Speaker 06:
We're not going after the fuel supplier, whether it was, you know, X company or, in this case, Everett, because they were just recovering their costs of providing the service for that two-year period that they were the fuel supplier.

[01:17:19] Speaker 06:
And that's how the commission looked at it with Everett's jurisdiction, or Everett's business and what happens with this business going forward not being within the commission's jurisdiction.

[01:17:33] Speaker 06:
If there are no further questions.

[01:17:35] Speaker 02:
OK.

[01:17:36] Speaker 02:
Thank you.

[01:17:36] Speaker 02:
Thank you, Ms.

[01:17:37] Speaker 02:
Banta.

[01:17:38] Speaker 02:
I think we have the rebuttal time for Mr. Schwartz.

[01:17:42] Speaker 02:
It's about six minutes.

[01:17:48] Speaker 01:
Thank you, Your Honor.

[01:17:50] Speaker 01:
You asked the question of whether sales to Mystic benefit third parties.

[01:17:57] Speaker 01:
The answer is they do, or they can.

[01:18:01] Speaker 01:
If Everett has engaged in a forward sale to third parties three months forward, they need to make sure that they have fuel in the tank for that.

[01:18:14] Speaker 01:
If they need to receive a new shipment of gas and they need to make room in the tank for that, one of the mechanisms available to it is for Mystic to self-schedule the generation.

[01:18:27] Speaker 01:
That is to take the gas, burn it, run the generation regardless of the electricity market price in order to make room in the tank.

[01:18:35] Speaker 01:
So at least some sales to Mystic do benefit third parties.

[01:18:42] Speaker 01:
Council for the Commission referred to evidence in the records submitted by a system operator witness about the historic percentages of gas sent out to Mystic versus third parties.

[01:19:00] Speaker 01:
I'd like to just contextualize that a little bit.

[01:19:04] Speaker 01:
The 67%

[01:19:07] Speaker 01:
is associated with a five-year window from 2012 to 2017.

[01:19:13] Speaker 01:
Prior to that, before 2012, Mystic's percentage of the gas was 40%.

[01:19:20] Speaker 01:
So it varies pretty significantly with time.

[01:19:24] Speaker 01:
And of course, the 67% window ends in 2017.

[01:19:28] Speaker 01:
So what has happened since then, from 2018 when Exelon acquired Everett until 2022 when this contract starts,

[01:19:40] Speaker 01:
Everett is in the market entirely.

[01:19:42] Speaker 01:
There's no cost of service recovery through Mystic.

[01:19:47] Speaker 01:
So Everett is out there trying to make whatever sales it possibly can make.

[01:19:55] Speaker 01:
I guess another point about the 40%, 67% numbers.

[01:20:03] Speaker 01:
There's evidence in the record I alluded to earlier, and I'd like to direct the court's attention.

[01:20:09] Speaker 01:
I have to be a little careful because the specifics are protected, and unfortunately we didn't include this in the sealed portion of the joint appendix.

[01:20:23] Speaker 01:
But I'd like to direct the court's attention to Mystic's initial post-hearing brief to the commission.

[01:20:30] Speaker 01:
It's a privileged document.

[01:20:32] Speaker 01:
It's record number 279, and the relevant passage is at page 117.

[01:20:37] Speaker 01:
And in that brief, Mystic tells the commission how it expects Mystic's gas use to change going forward once it has acquired

[01:20:49] Speaker 01:
the facility compared to the prior use when it was unaffiliated.

[01:20:54] Speaker 01:
Long story short, Mystic plans to use a lot less gas going forward than it used historically.

[01:21:03] Speaker 01:
And part of the reason why it used so much gas historically was that the prior fuel arrangements with the prior supplier

[01:21:12] Speaker 01:
included a must take requirement and provided Mystic a discount off the market price.

[01:21:19] Speaker 01:
So when we look at the percentage of the volumes of gas sent to Mystic versus third parties, the percentage that third parties actually took from Mystic

[01:21:34] Speaker 01:
kind of understates their contribution to the revenue because they're presumably paying the higher market price compared to Mystic's discounted price.

[01:21:42] Speaker 02:
In addition, there's- The third parties took from Mystic or from Everett?

[01:21:46] Speaker 01:
I'm sorry, from Everett.

[01:21:47] Speaker 02:
From Everett, okay.

[01:21:48] Speaker 01:
Yes.

[01:21:49] Speaker 01:
In addition, there's evidence in the record that many of the third party sales are option contracts.

[01:21:57] Speaker 01:
So there's option value to the third parties.

[01:22:00] Speaker 01:
They can call on guests from Everett when they need it.

[01:22:04] Speaker 01:
But they don't need to, and usually option contracts provide a payment for the option value independent of the payment for the gas when it's taken.

[01:22:12] Speaker 01:
So there's an additional revenue source from third parties as an additional benefit.

[01:22:18] Speaker 01:
that third parties derived from Everett that's not captured in the data about how much gas is going to Mystic versus going to third parties.

[01:22:27] Speaker 01:
And of course, the commission itself relied on none of this in its order.

[01:22:32] Speaker 01:
The commission itself just looked at 91%, 9%, and didn't really trouble itself with the details.

[01:22:41] Speaker 01:
One other point about that, Your Honor,

[01:22:44] Speaker 01:
You know, Mystic and Everett, the affiliated company, may well have looked at this as being all about Mystic, but that is in some ways a self-fulfilling prophecy.

[01:22:56] Speaker 01:
If you look at it that way and allocate all the costs to Mystic, then Everett has no need to make sales and no incentive to make sales to third parties.

[01:23:06] Speaker 01:
That's not what Congress envisioned when it took facilities like Everett out of the market and deregulated them.

[01:23:19] Speaker 01:
Finally, a note about the clawback.

[01:23:23] Speaker 01:
The issue with respect to the clawback is whether it is just and reasonable for Mystics rate payers in the two years of the agreement to pay 91% or some smaller percent of improvements made to Everett, even if Everett goes on selling in the market for 20 years to other people

[01:23:47] Speaker 01:
after the mystic agreement ends.

[01:23:49] Speaker 01:
Submit that that's not just unreasonable, Your Honor.

[01:23:54] Speaker 02:
Make sure my colleagues don't have questions for you.

[01:23:55] Speaker 02:
Thank you, counsel.

[01:23:58] Speaker 02:
Thank you to all counsel.

[01:23:59] Speaker 02:
We'll take this case under submission.