[00:00:00] Speaker 01: Case number 21-1214 et al. [00:00:03] Speaker 01: District Court Petitioner versus Federal Energy Regulatory Commission. [00:00:07] Speaker 01: Mr. Hughes for the petitioners, Mr. Flynn for the intervener for petitioner PJM Interconnection LLC, Mr. Estes for the respondents, Mr. Mays for the interveners in support of the respondent. [00:00:23] Speaker 08: Good morning. [00:00:27] Speaker 02: Good morning, Your Honor. [00:00:29] Speaker 02: May it please the court, Paul Hughes, on behalf of the petitioners. [00:00:34] Speaker 02: The PJM capacity market is critical to ensuring that in times of emergency, sufficient power is available. [00:00:43] Speaker 02: The February 2021 winter storm in Texas illustrates the power emergencies may be catastrophic, and the 2014 polar vortex event gave rise to the market structure at issue here. [00:00:58] Speaker 02: This case addresses how capacity suppliers may bid into the PJM capacity market. [00:01:04] Speaker 02: And we submit that FERC erred in three distinct respects. [00:01:08] Speaker 02: First, FERC earlier correctly said that capacity suppliers could account for the lost opportunity of bonus payments. [00:01:17] Speaker 02: FERC's reversal is unwarranted and unreasoned. [00:01:20] Speaker 02: Second, in providing for unit-specific offers, [00:01:24] Speaker 02: FERC disallowed significant risks that capacity suppliers undertake because of the capacity commitments. [00:01:30] Speaker 02: This is arbitrary and capricious. [00:01:33] Speaker 02: Third, FERC is wrong to claim that the capacity sellers lack Section 205 rights. [00:01:38] Speaker 02: As a textual matter, Section 205 clearly encompasses capacity offers. [00:01:43] Speaker 02: In the report squarely held in Atlantic City, the participants in the PJM market cannot qualify as a concession of Section 205 rights. [00:01:52] Speaker 02: I'd like to take those in order. [00:01:54] Speaker 02: But of course, I'd be happy to begin anywhere the court may like. [00:01:58] Speaker 04: Do you dispute that the March 2021 determination that the default offer cap was too high? [00:02:05] Speaker 02: No, Your Honor, I don't think we dispute the earliest determination that there was a miscalibration of the anticipated emergency hours. [00:02:16] Speaker 02: And so I think there was an understanding at the outset when the structure was put in place, this court recognized advanced energy, that there would need to be likely recalibration of the system. [00:02:27] Speaker 02: And I don't think anyone disputes that. [00:02:29] Speaker 02: I will say many of FERC's arguments go to disputes about how the 2016 capacity performance structure operates and challenges to that. [00:02:40] Speaker 02: And to many of those, I'm sure we'll go through several of them, we don't disagree that FERC has [00:02:45] Speaker 02: objections to the 2016 capacity performance. [00:02:48] Speaker 02: That's not the basis of our claim. [00:02:50] Speaker 02: The basis of our claim is the new tariff that was implemented in 2021. [00:02:54] Speaker 02: We think for these very discreet but very important reasons, Balesburg's obligations under the Administrative Procedure Act. [00:03:01] Speaker 02: So we don't object to the notion that there was a 206 finding a complaint, a finding of unjust unreasonableness. [00:03:08] Speaker 02: What we're concerned with is the replacement tariff that was implemented in core defects that are in that replacement tariff. [00:03:16] Speaker 02: So turning to that first core defect is Burke's abandonment of opportunity cost arising from foregone bonuses was just clear error. [00:03:27] Speaker 02: So this performance capacity structure, which still exists in relevant part, creates penalties and bonuses. [00:03:34] Speaker 02: That's if you have a capacity commitment and you don't perform, there's a penalty. [00:03:39] Speaker 02: If you have a capacity commitment, you overperform, you have a bonus. [00:03:42] Speaker 02: Or if you don't have a capacity commitment, you have a bonus. [00:03:45] Speaker 02: What FERC said in 2016 is that this system of penalties and bonuses creates opportunity costs, and the competitive market at FERC accounts for that risk and that opportunity cost. [00:03:58] Speaker 02: That was that core decision. [00:04:00] Speaker 02: In this report, Advanced Energy specifically looked at that and recognized that. [00:04:04] Speaker 03: So you'd say you do not want to attack the 2015 [00:04:17] Speaker 03: tariffs, but only what was done in 2021. [00:04:23] Speaker 03: But in so arguing, this court does not have to accept, does it? [00:04:33] Speaker 03: The proposition that first explanation for what it has done now in 2021 [00:04:45] Speaker 03: draws on the experience it had as to what happened under 2015, where a number of its assumptions, a number of the party's statements proved not to be demonstrated as was anticipated. [00:05:07] Speaker 03: And you start out here by saying, you don't deny that some adjustment or recalibration was needed. [00:05:17] Speaker 03: And so FERC came up with a recalibration. [00:05:21] Speaker 03: You don't like it. [00:05:23] Speaker 03: And you say why FERC should have done something else. [00:05:27] Speaker 03: But that's not really the issue, is it? [00:05:30] Speaker 03: The question is whether or not it adequately explained [00:05:37] Speaker 03: what it did and why. [00:05:40] Speaker 03: And the fact that you don't agree with the conclusion or even its interpretation of its experience is basically not relevant, is it? [00:05:55] Speaker 02: Well, respectfully, I disagree with the conclusion you draw, Your Honor. [00:05:57] Speaker 02: I think I agree with much of what you said as to her changing from 2016 and [00:06:03] Speaker 02: and finding an unjustness and unreasonableness of 2016 and then it had flexibility in some respects to craft a new system. [00:06:10] Speaker 02: I think that is true so far as it goes. [00:06:13] Speaker 02: But in adopting that new tariff, it had to still comply with the APA. [00:06:18] Speaker 02: And there are very specific concrete ways in which it didn't do so. [00:06:22] Speaker 03: So what I'm getting at is the argument to the contrary is that it did so, but you disagree with its explanation. [00:06:34] Speaker 03: And I don't see the APA or the FBA requiring that you necessarily agree. [00:06:42] Speaker 03: And so that's why I think some of the statements in your brief are a little misleading. [00:06:48] Speaker 03: I mean, it's fine if you don't agree. [00:06:50] Speaker 03: if you give us reasons, but that's different from saying FERC never responded, never addressed the alternatives, when clearly, when you read its order and order on rehearing, it did. [00:07:07] Speaker 03: Isn't your burden to tell us why those explanations are insufficient? [00:07:16] Speaker 02: Yes, your honor, absolutely. [00:07:18] Speaker 02: And so let me try to do that with a little bit more precision, because I think there are two in particular to focus on. [00:07:23] Speaker 02: The first is Burke earlier said that a competitive offer can account for opportunity costs. [00:07:31] Speaker 02: They've now denied the ability to account for opportunity costs, but they've never explained why opportunity cost isn't part of a legitimate offer. [00:07:39] Speaker 03: Well, come back and say something a little to the contrary, don't they? [00:07:43] Speaker 03: That's what I'm getting at is you want a different system. [00:07:49] Speaker 03: And FERC says, well, in the system we want, here's why we did certain things. [00:07:55] Speaker 03: So I just want to be clear as to why the opportunity costs that it allowed under the 2015 system allowed for these offers to simply be too high. [00:08:12] Speaker 02: And so this is, I think, the key thing to disentangle, Your Honor, is they've made the conclusion that the opportunity cost is too high. [00:08:21] Speaker 02: That is a different issue from what we're addressing. [00:08:24] Speaker 02: What we're addressing is, if there is opportunity cost, and FERC doesn't deny there's opportunity cost, can you account for the existence of that opportunity cost? [00:08:33] Speaker 02: That's sort of a question one is, do you have the right to even claim the opportunity [00:08:38] Speaker 02: Question two is, how do you calculate the opportunity costs? [00:08:41] Speaker 03: So when Burke says, that's what I just need to understand in your argument. [00:08:46] Speaker 03: Are you disputing that the record shows that you are three years out able to accurately, within reason, identify these costs? [00:09:00] Speaker 03: Or is it really just speculation? [00:09:02] Speaker 03: I mean, so much could happen in three years. [00:09:05] Speaker 02: I think you can. [00:09:07] Speaker 02: but legitimately identify them and FERC itself recognizes that. [00:09:11] Speaker 02: At paragraph 71 of its order in September of 2021, that's in Appendix 1092, it recognizes that sellers will have the ability to estimate this and that there will be a variation of ranges. [00:09:27] Speaker 02: So that's point one. [00:09:28] Speaker 02: FERC recognizes these are things that can be subject to estimation. [00:09:31] Speaker 02: The second point is FERC has retained the very penalty and bonus structure at the heart here, which includes these estimates. [00:09:39] Speaker 02: So FERC has not walked away from the notion of having that there is risk and opportunity costs in the system that exist inherent to those penalties and bonuses. [00:09:49] Speaker 02: If FERC wants to say that we're going to scrap the entire system of capacity performance, perhaps, Your Honor, then you say there wouldn't be opportunity costs in the system, but they've not done that and they kept those estimates. [00:10:02] Speaker 02: I don't think it's appropriate to say that you have estimates for one part of the tariff, but then you don't allow estimates when it comes to actually providing capacity suppliers compensation or the ability to recover that in a market-based offer. [00:10:17] Speaker 03: When do you know what it is? [00:10:18] Speaker 03: And FERC says, [00:10:20] Speaker 03: You know, we are unpersuaded by what was presented to us that these costs can be, other than speculative, three years out. [00:10:29] Speaker 02: Well, Burke expressly, at paragraph 71, does not say these are not calculable. [00:10:33] Speaker 02: Burke says that these are things that... Well, I think if it does, Your Honor, it would contradict itself at 71 because it says the party suppliers can provide estimates and that there can be determinations that are made in this regard. [00:10:48] Speaker 02: And the existence of there being a ability to estimate is inherent in the fact that there still is the bonuses and the penalty structure, because that's also based on an estimate. [00:11:00] Speaker 02: And so given that the bonus and penalty structure was inherently based on estimate still exists, I don't think they can say that we can't calculate it for this point. [00:11:10] Speaker 02: And the third part is just the capacity markets themselves inherently reflect [00:11:15] Speaker 02: Predictions now they're educated predictions about what future markets generally three years in advance are going to look like and that's why when. [00:11:24] Speaker 02: Burke engages in the sort of rate making, it recognizes that what it predicts may have to change and that there has to be some iteration or, as we said at the outset, recalibration. [00:11:34] Speaker 02: So that's why we don't think it's a surprise that the values that were earlier picked need to be recalibrated. [00:11:39] Speaker 02: We're not disputing Burke's view that, again, to Judge Child's question opening argument, we don't dispute that recalibration was needed and that there has to be a dynamic conversation about setting these rates. [00:11:53] Speaker 02: The point is, if FERC maintains the structure that it's maintained, such that there are penalties and bonuses, there are real costs that are imposed on capacity suppliers. [00:12:03] Speaker 02: And in 2016, FERC said a competitive offer includes compensation for those legitimate costs. [00:12:12] Speaker 02: Burke has never said that is wrong. [00:12:14] Speaker 02: They've now said it's harder to calculate. [00:12:16] Speaker 02: And again, I think Burke's best argument is at page 62 to 63 of their brief, where they point to paragraph 24 of the rehearing petition for the point where they say the opportunity cost was set too high. [00:12:30] Speaker 02: But when you look at the rationale, the reason for that, Burke explains it at paragraph 25 of the rehearing decision. [00:12:37] Speaker 02: That's a joint appendix 1243. [00:12:40] Speaker 02: Straddling over to 44, what FERC says is, quote, the formula used to calculate opportunity costs established in the capacity performance order is no longer just and reasonable because it incorporated an excessive expected PAI, that's excessive expected emergency hours. [00:12:58] Speaker 02: This is a justification to fix how it calculates opportunity costs. [00:13:03] Speaker 02: It's not a justification to say that even though there's opportunity costs in the system, capacity suppliers can't factor that opportunity cost into their offers when FERC previously said they could. [00:13:15] Speaker 02: They just haven't given a reason explanation for that very poor, narrow issue. [00:13:21] Speaker 02: And it would be irrational, I think, if they were to say, yes, these costs exist, but capacity suppliers can't account for them in making a competitive offer. [00:13:30] Speaker 04: We're essentially talking about rates, though, right? [00:13:33] Speaker 02: Yes, Your Honor. [00:13:34] Speaker 04: But has that ever been used consistently in the case law? [00:13:39] Speaker 02: Sorry, Your Honor. [00:13:40] Speaker 04: The term rate. [00:13:41] Speaker 04: Is it even used consistently? [00:13:43] Speaker 02: Well, and Your Honor, you addressing the Section 205 argument about the meeting. [00:13:48] Speaker 02: So I think that the core is that the out, well, Burke certainly agrees that the outcome of the capacity auction is a rate. [00:13:57] Speaker 02: And we think that a bid into that which could set that outcome is certainly a rate demanded. [00:14:02] Speaker 02: I don't think Burke has a particularly powerful textual argument to say that a bid that they recognize could set the clearing rate, could be the marginal price, is anything other than a bid demanded, or a rate demanded. [00:14:15] Speaker 02: And I think Burke's key argument, actually in the Section 205 argument, is what they suggest is a capacity supplier isn't actually demanding a specific bid, that they're demanding the clearing price. [00:14:28] Speaker 02: But that argument can't be right, because if a capacity supplier's bid is more than what the clearing price ultimately is, then they just won't sell into that auction. [00:14:37] Speaker 02: They'll have demanded a rate more than where the auction closed, and they simply won't sell. [00:14:43] Speaker 02: They'll have demanded a rate. [00:14:45] Speaker 02: They won't have gotten it, so they won't have sold. [00:14:47] Speaker 02: So I don't think it works for FERC to be able to say that we're somehow just demanding the clearing price when that may [00:14:57] Speaker 02: turn out to be incorrect. [00:14:59] Speaker 02: Perk's other argument that I don't think is really a textual one, it's just sort of a pragmatic argument, is that these are inputs into the rates. [00:15:07] Speaker 02: But I think Perk itself has been inconsistent with that point. [00:15:11] Speaker 02: If you look at this where it's an excellent decision, I think it's important is the remand decision that was issued [00:15:18] Speaker 02: by Burke after this court's Exelon decision. [00:15:21] Speaker 02: And Burke talks about that at paragraph 121 of its rehearing decision. [00:15:27] Speaker 02: That's at the Joint Appendix, page 1294. [00:15:30] Speaker 02: And in that remand decision, what FERC recognizes is, although there's a complex procedure, but that capacity suppliers, they can essentially tag onto the Ice of New England's Section 205 filing. [00:15:44] Speaker 02: But what's critical is FERC recognizes that if there is a capacity or retirement delisted in the Ice of New England system, that is [00:15:54] Speaker 02: also an input into the auction, Burke recognizes that there are Section 205 rights, and that the capacity supplier's retirement delist bid will be accepted if the supplier demonstrates that it's just and reasonable. [00:16:09] Speaker 02: And now Burke's response to that is ISO New England has a different tariff structure than PJF. [00:16:16] Speaker 02: And that's true. [00:16:17] Speaker 02: But the question is, what's the meaning of Section 205 of the core term, Your Honor asked, of race demanded? [00:16:24] Speaker 02: And if they recognize that an input into the option for purposes of ISO New England is qualifies within the meaning of rate, of a rate demanded, I don't think they can turn around here and say the input, the capacity bid, the capacity offer into this auction is not rate demanded. [00:16:43] Speaker 02: It is actually in accords with what FERC has done in other cases. [00:16:49] Speaker 02: So on the section tool. [00:16:50] Speaker 04: Can a capacity offer be considered a rate? [00:16:53] Speaker 02: Yes, Your Honor, I think it is the right demand. [00:16:56] Speaker 04: Some of those are deemed confidential, right? [00:17:01] Speaker 02: It is, Your Honor. [00:17:02] Speaker 02: And to be sure, there's a default under Section 205 for rates to be made public, but that is not inherently the case. [00:17:13] Speaker 02: What both 205C and 205D have as a preface to those provisions providing public notice of rates is [00:17:23] Speaker 02: unless or to the extent that FERC regulations and orders direct, I have the precise language, but it gives FERC some flexibility. [00:17:32] Speaker 02: And I presume in a circumstance where FERC thinks that offers should be kept confidential, they would exercise their statutory authority to have some narrow exemptions to the publicity or the publication requirements, which I understand or I think they are doing in ISO New England with respect to retirement dealers, [00:17:50] Speaker 04: Now, Ferg did consider your alternatives, but then they ultimately decided that it would not have changed the conclusion about the offer cap. [00:18:00] Speaker 02: Sorry, back to the first. [00:18:04] Speaker 02: It's true that they dislike the alternatives that we have given, but I'll say I think the more fundamental point, and Ferg tries to suggest that their selection that they chose is [00:18:15] Speaker 02: permissible under the APA because they think our alternative option would have led to different policy outcomes they dislike. [00:18:26] Speaker 02: I'll say even if you grant all of that, that's not a basis to find that what they did do is compliant with the APA. [00:18:32] Speaker 02: And that's our fundamental point is that disallowing opportunity costs is not compliant with the APA because there's no reason to back away from that and it's just irrational. [00:18:41] Speaker 02: And let me just touch for a half moment on the second argument in our brief. [00:18:45] Speaker 02: which is there's this whole category of risks that capacity suppliers face bidding into the market, in addition to the opportunity costs that FERC has just fully disallowed. [00:18:56] Speaker 08: You didn't argue about opportunity costs in that portion of your brief, correct? [00:19:00] Speaker 02: No, please, sorry. [00:19:04] Speaker 08: I'm trying to make sure I have things straight in my head. [00:19:06] Speaker 08: So maybe if I say, you can tell me if I'm wrong. [00:19:08] Speaker 08: So the costs you're talking about here are distinct from the opportunity costs. [00:19:13] Speaker 02: So what we're talking about, and this is under Roman 2 of our briefs, this is a distinct set of risks that capacity suppliers face. [00:19:24] Speaker 02: And these are things like risks of system-wide plant outage that would forbid a supplier or a generator from forming. [00:19:34] Speaker 02: What FERC's key argument is to say is, well, you can't factor that into a capacity bid, because they've basically premedically sealed what they call on the one hand, capacity risk, and on the other hand, energy market revenue risk. [00:19:47] Speaker 02: And they say you can only look at the risk for capacity that is capacity as capacity for this, and we're going to disallow anything that goes into the energy markets. [00:19:57] Speaker 02: But that structure, that argument, I think, falls apart. [00:20:00] Speaker 02: It's just arbitrary and capricious [00:20:03] Speaker 02: variety of reasons, but the most straightforward one is what is in fact the formula for the offer cap that's at issue here. [00:20:13] Speaker 02: So the market seller offer cap, this is in the tariff of section 6.4A, it appears at Joint Appendix page 620. [00:20:21] Speaker 02: The formula is avoidable cost rate minus projected PJM market revenue. [00:20:29] Speaker 02: What our argument is, is there are a series of risks that necessarily go into what the projected PJM market revenues. [00:20:38] Speaker 02: PERC is only allowing consideration of the first half of that formula, the ACE of the avoidable cost rate, but they're not recognizing that part, the very definition, the formula used for the market seller offer cap also requires a projection of market revenue. [00:20:55] Speaker 02: And there is a risk that a plant may be out of service and not producing any PJAM market revenue. [00:21:03] Speaker 02: And that should be accounted for as just a fundamental matter as to when you're calculating what the expected energy market revenue is. [00:21:15] Speaker 08: And for... How does this argument differ from ones that were raised in the challenge to the 2015 order by, among others, Exelon? [00:21:24] Speaker 08: This is so important, Your Honor. [00:21:25] Speaker 08: And rejected by FERC then. [00:21:26] Speaker 02: Yeah, this argument wasn't. [00:21:27] Speaker 02: So it is true. [00:21:28] Speaker 02: And this is one of FERC, and especially the Independent Market Monitor's argument, saying this feature of the tariff design is consistent from the 2015-2016 order to today. [00:21:38] Speaker 02: But that part of the market design simply was not challenged. [00:21:42] Speaker 02: I mean, FERC tells us that at their brief at page 49, quote, no party challenged that holding on review. [00:21:49] Speaker 02: So when this court in advanced energy considered the earlier tariff, there wasn't a challenge to that. [00:21:54] Speaker 08: But the same argument could have been made back then, but it wasn't made. [00:21:58] Speaker 02: And there was a very practical reason, your honor, why it wasn't made is because of the fall offer cap as a practical matter. [00:22:04] Speaker 08: It wasn't putting maybe a practical matter, but it seems like y'all had the opportunity to challenge it in 2015 and made a decision not to. [00:22:13] Speaker 08: This is something that has existed since. [00:22:16] Speaker 08: the 2015 order, and it wasn't challenged then, and isn't it too late to challenge it now? [00:22:21] Speaker 08: And the only exchange is we're not so happy with a different part of the program. [00:22:26] Speaker 02: So both the legal response and the practical response to that, as a legal matter, there's no sort of a stop bowl or bar to that. [00:22:35] Speaker 02: This is a wholly new tariff, and there's an aspect of it that we've shown under this argument that violates the APA for being arbitrary and capricious. [00:22:42] Speaker 02: It's not a defense to an argument that it's arbitrary and capricious that the agency has been doing it for some time. [00:22:47] Speaker 02: I mean, if they had statute of limitations argument or something like that, or a collateral stop argument, those would be arguments. [00:22:54] Speaker 02: But they've not raised or lodged any arguments. [00:22:58] Speaker 02: So just an argument that they've previously been doing something that we think we've demonstrated is substantially arbitrary and capricious isn't a defense to it not being arbitrary and capricious. [00:23:07] Speaker 02: It just wasn't raised and litigated. [00:23:09] Speaker 02: And again, there's a good reason for that. [00:23:11] Speaker 02: As FERC recognizes under the pre-existing system, most capacity suppliers use it to fall offer cap, and there wasn't this push into unit-specific review. [00:23:21] Speaker 02: Now FERC has made much of the fact that this new market design is designed to essentially push virtually every capacity supplier into the much more onerous unit-specific review, where their offer has to go before the independent market monitor, and all of these things then get factored in an individualized base [00:23:39] Speaker 02: It's that market design change that has made this aspect of the tariff now really, really important. [00:23:46] Speaker 02: And so the fact that this aspect is really important is now why there's a spotlight on this and it being arbitrary and capricious is an argument that's being raised. [00:23:54] Speaker 08: But again- So if Exelon, if I at least read Exelon's challenge as having raised this point before the commission with respect to the 2015 order and the commission addressing it and rejecting it. [00:24:07] Speaker 08: And don't you need to show some basis on which something more than what could have been argued then, but it wasn't worth the time because you got what you liked on the default offer cap, FERC's going to be just flip-flopping from one order to the next. [00:24:25] Speaker 08: And that's generally frowned upon. [00:24:28] Speaker 08: So you need just some reason why they were wrong in their analysis in 2015, so wrong that they should change their position now. [00:24:35] Speaker 02: Well, two things about that, Your Honor. [00:24:37] Speaker 02: First, Exelon is not the only petitioner here, and I don't think any Exelon-specific argument will apply to the other six petitioners in the case. [00:24:44] Speaker 08: But second... Well, everyone else chose to let Fert know. [00:24:47] Speaker 08: They gave no signal they were unhappy, and we're living with it for quite some time. [00:24:51] Speaker 02: But Your Honor, I don't think the fact that an agency has previously rendered a decision back in 2016 that wasn't reviewed by this court or any other court, [00:24:59] Speaker 02: therefore blesses it in some way. [00:25:02] Speaker 08: That order was definitely reviewed and upheld by our court and people weren't even serious enough about the argument to raise it on appeal. [00:25:09] Speaker 02: Yes, Your Honor, but the fact that that aspect wasn't challenged, FERC might be able to say that we've already decided this as a matter of FERC precedent, this is something that we've looked at and we can adopt the reasoning for [00:25:22] Speaker 02: team here. [00:25:23] Speaker 02: Our principle argument, to be clear, as to this part, as Roman too, is not some failure of reasoning in FERC, our principle argument is it's a substantively arbitrary and capricious. [00:25:35] Speaker 02: But this is not a result that can be countenance because these are in fact real legitimate costs. [00:25:41] Speaker 02: FERC has never given an argument as to why they're not legitimate costs. [00:25:44] Speaker 02: They've just said they're not [00:25:45] Speaker 02: costs that belong in the capacity supplier ledger because they go to energy market revenues. [00:25:51] Speaker 02: And our point is that sealing off these two things doesn't work based on the formula. [00:25:56] Speaker 02: So our point is that they just can't reach, as a substantive matter, this result. [00:26:01] Speaker 02: So again, even if the court thinks that there is something procedurally appropriate about FERC adopting what it previously did, I don't think that answers the substantive challenge of being arbitrary and capricious. [00:26:12] Speaker 02: You know, a FERC decision that isn't challenged doesn't, I think, become immune to later challenges when they re-adopt that same aspect of the tariff. [00:26:20] Speaker 02: And frankly, I think that sort of holding would be quite dangerous to say that a party, every time they think FERC has done anything in a tariff, has to bring to this court every conceivable challenge they have, or else, you know, 10 years, 20 years down the road, when that aspect of the tariff gets reincorporated or reenacted and actually becomes important, unlike before, that it's been immune from challenge, [00:26:42] Speaker 02: I don't think there's a legal basis for that. [00:26:45] Speaker 02: And I think it's sort of framework that would set up. [00:26:47] Speaker 08: But we do an ordinary civil litigation all the time. [00:26:50] Speaker 02: Well, for issues that are in fact, again, if FERC had a collateral estoppel style argument, they could suggest that. [00:27:01] Speaker 08: They could have been brought but weren't. [00:27:03] Speaker 02: Right, but I don't think that residue decoder or collateral estoppel type argument has been advanced or developed in the agency review proceedings. [00:27:09] Speaker 08: You sounded like it was the most incomprehensible thing ever, but we do it all the time. [00:27:14] Speaker 08: That's my only point. [00:27:18] Speaker 02: I take the point, Your Honor, but just given the complexity of FERC cases as they exist, I think if the court were to set a rule where the first time FERC does something, you must immediately challenge, even if it doesn't immediately affect your rights. [00:27:30] Speaker 08: Well, no, you did challenge and you lost and didn't seek further review. [00:27:34] Speaker 08: It's less different than... [00:27:37] Speaker 02: It wasn't any challenge it didn't seek review when it wasn't an issue that had immense practical importance. [00:27:43] Speaker 02: And again, I just don't think that the fact of a priority violation, I just don't think blesses this moving forward. [00:27:50] Speaker 02: I might finish on the section 205 issues for a moment, or be happy to go anywhere else that might have questions. [00:27:56] Speaker 02: So Judge Charlton had drawn us to the section 205. [00:28:00] Speaker 02: As I said, I think the two issues are, is it within the scope of the text? [00:28:04] Speaker 02: And for reasons we discussed, I think the answer [00:28:07] Speaker 02: Clearly, yes. [00:28:08] Speaker 02: If it is, then I think the only second question is, has there been some action here that has removed the capacity suppliers Section 205 rights? [00:28:19] Speaker 02: And I think this court's decision in Atlantic City is really quite impactful on that. [00:28:24] Speaker 02: Because what Atlantic City says is, first, Section 205 creates statutory rights. [00:28:30] Speaker 02: And second, Burke lacks any power [00:28:35] Speaker 02: force a public utility to cede those statutory rights. [00:28:38] Speaker 02: And I think the claim for ceding 205 rights in Atlantic City would be even stronger than that here, because there it was to participate in the PJM market. [00:28:48] Speaker 02: The precise tariff says you'll have to give up your 205 rights. [00:28:51] Speaker 02: That's an express condition. [00:28:53] Speaker 02: And transmission operators voluntarily participated. [00:28:57] Speaker 02: And this court said, no, still, that's not the kind of voluntary [00:29:03] Speaker 02: waiver of these rights by contract under the Mobile Sierra Doctrine is the only circumstance that they would recognize where there could be a session of the 205. [00:29:12] Speaker 02: I think that what Atlantic City establishes quite squarely is that participation in the PJM market does not, that act does not see public utilities section 205. [00:29:23] Speaker 04: And I think that is- We need to address Atlantic City if we accept Burke's sexual argument. [00:29:30] Speaker 02: If you accept Burke's textual argument that we're just totally outside, then that's right, Your Honor. [00:29:35] Speaker 02: But I frankly don't think Burke's textual argument has much weight to it. [00:29:39] Speaker 02: And I think that this is plainly a rate demanded under just the plain text of that term. [00:29:46] Speaker 02: It's also, I think, consistent with what Burke has done in Exelon. [00:29:49] Speaker 02: But I think as a textual matter, this does qualify as a rate demanded. [00:29:54] Speaker 02: But I agree, Your Honor, if you reject that at the outset, then the second issue would fall back. [00:30:00] Speaker 08: And your best authority that this constitutes a rate under 205 is, you got the statutory argument, what's your best case? [00:30:10] Speaker 02: Your honor, I'm not sure I have a particular case that has squarely addressed this. [00:30:14] Speaker 02: I think there's a lot of language in Exelon. [00:30:17] Speaker 02: It didn't, of course, it remanded without getting to a straight holding, but I think there's a lot of language in Exelon by when- Kinda cuts both ways, actually. [00:30:25] Speaker 02: I would like to think it cuts more towards us, but I'd start though with, [00:30:30] Speaker 02: I really think this is a matter of plain text of the statute. [00:30:34] Speaker 02: And nobody disagrees that the clearing price of the capacity is the rate received. [00:30:42] Speaker 02: And so if that's the rate received, the rates that capacity sellers demand in the auction is the rate demanded. [00:30:51] Speaker 02: And so again, it's not just the term rate, but it's also the disjunctive between received or demanded. [00:30:57] Speaker 02: And so I don't think a construction of Section 205 that limits it to the auction, which is the rate received, would do justice to the full statutory tax, which also includes the rate demanded. [00:31:10] Speaker 02: And again, I think the scenario where you imagine a capacity seller who has a high rate and they don't clear, so they don't sell, [00:31:19] Speaker 02: That is a rate demanded. [00:31:20] Speaker 02: They didn't receive it because they didn't clear, but that still qualifies as a rate demanded within the meaning of the text. [00:31:27] Speaker 02: And the fact that the text has both rate received and rate demanded, I think inherently contemplates that there will be rates demanded that are not in fact paid or received. [00:31:37] Speaker 02: And that is squarely the context where you have [00:31:41] Speaker 02: a bid into an auction that doesn't clear, that is a rate demanded that you didn't receive. [00:31:47] Speaker 02: So I think actually we are squarely there and there hasn't been concession of these rights. [00:31:54] Speaker 02: And I think the harm here to suppliers is significant because otherwise this [00:32:02] Speaker 02: affects a very substantial shift of authority from capacity suppliers to be able to select within the zone of unjust, or the zone of just and reasonable rates where it's a price capacity offer to the independent market monitor and PJM in a way that is quite inconsistent with the section 205 rate. [00:32:25] Speaker 02: And you'll see this in a whole host of, I think, day-to-day interactions because this will come up in [00:32:31] Speaker 02: one of these offers that now go unit-specific review. [00:32:35] Speaker 02: So there are, you know, you can imagine a whole host, these are sort of mundane, everyday things, but now are going to be transformed pretty profoundly. [00:32:42] Speaker 02: So a generator who has many units will have various system costs, you know, one near and dear to my heart, perhaps avoidable expenses for legal services. [00:32:52] Speaker 02: And the question is, how do you allocate that among several different units that a generator might have? [00:32:57] Speaker 02: There can be different- [00:32:59] Speaker 03: Well, while you want to talk about a statutory only focusing on 205, there's a statutory scheme here. [00:33:10] Speaker 03: And you want us to ignore that aspect in interpreting section 205. [00:33:21] Speaker 03: I mean, when you make an offer, I don't see where that establishes [00:33:28] Speaker 03: a rate. [00:33:31] Speaker 03: Rather, you're just asking for the market clearing rate. [00:33:34] Speaker 03: That's all FERC said in explaining why that argument didn't hold up. [00:33:42] Speaker 02: Your Honor, I don't think our argument on this score is a lack of explanation. [00:33:46] Speaker 02: It's that FERC's. [00:33:48] Speaker 03: I know that. [00:33:49] Speaker 03: I understand that clearly. [00:33:51] Speaker 03: But you're interpreting the statute, section 205, in a way that [00:33:58] Speaker 03: FERC points out is basically inconsistent with other provisions of the Federal Power Act as to who's in charge of rates, et cetera, who reviews them, et cetera. [00:34:10] Speaker 03: And it's not the offeror. [00:34:14] Speaker 03: So that's all I was getting at. [00:34:16] Speaker 02: Well, with respect, Your Honor, I do think I disagree with that, because section 2 of 5 doesn't make sense. [00:34:21] Speaker 03: Well, we shouldn't look at the whole statute, much less defer to FERC's reasonable interpretation of it. [00:34:28] Speaker 02: Well, Your Honor, if there's a particular statutory provision that I could address, I'd be happy to. [00:34:33] Speaker 03: I don't think there is an inconsistency with other aspects of- Well, I think some of the questions we've asked have already identified inconsistencies. [00:34:45] Speaker 03: Oh, no need to pursue it further. [00:34:48] Speaker 02: Justice, Your Honor, I think what Burke's argument is that we're at odds with how they understand [00:34:55] Speaker 02: market mitigation principles, but we fundamentally disagree with that because ultimately the structure- That is not their explanation. [00:35:04] Speaker 03: So that's what I'm getting at. [00:35:06] Speaker 03: There's a whole statutory scheme here about how rates are made, how they're reviewed, all those sorts of things. [00:35:16] Speaker 03: And I realize you want to, on behalf of your clients, want a different scheme, but that's a different issue as to whether or not [00:35:24] Speaker 03: Oh, what FERC has said here is inconsistent with the language of 205. [00:35:31] Speaker 02: But with respect, I think the whole statutory scheme sets a scenario where the public utility can select the rate and then it's FERC's determination to decide whether that public utility has met its burden to show that that rate is just and reasonable. [00:35:49] Speaker 02: And we completely agree with the whole notion that FERC has the obligation [00:35:53] Speaker 02: to determine whether that rate is just and reasonable. [00:35:58] Speaker 02: I think what the court may be suggesting is my friends at FERC suggest there's inconsistency with our position and what this court held in public citizen and the nature of using the RTO tariffs as part of that market mitigation. [00:36:13] Speaker 02: And let me answer that correctly if I can because I think that might help. [00:36:16] Speaker 02: What the court and public citizen was addressing is how do we set up a structure where when FERC does not review individual rates, FERC can still make sure that it is adhering to its obligation to ensure that the rates in a market-based system are just and reasonable. [00:36:33] Speaker 02: And what the court's opinion in public citizens says, well, there's a structure for doing that, which includes complying with the tariff structure and also having ongoing monitoring by FERC of the market system. [00:36:45] Speaker 02: What that is addressing is the problem of how do you set up rules ex ante that ensure, you know, high confidence that you'll have just and reasonable rates without FERC reviewing those rates. [00:36:57] Speaker 02: And when there is a capacity bid that is done pursuant to that, then public citizens, the score decision of public citizens say FERC has generally satisfied its obligations to ensure just and reasonable rates. [00:37:09] Speaker 02: What we're proposing though is when there is a disagreement between the PJM and the public utility, then that specific rate goes directly to FERC. [00:37:19] Speaker 02: PERC is ultimately in the role of decision-maker to determine whether or not that rate is a just and reasonable rate. [00:37:26] Speaker 02: You don't have that situation then of trying to set up the system ex-nancy for how you ensure just and reasonable rates that PERC isn't looking at. [00:37:33] Speaker 02: PERC would in fact be looking at that specific rate proposed by the utility with any views from PJM or the independent market monitor. [00:37:41] Speaker 02: It would make that determination. [00:37:43] Speaker 08: It makes a determination whether that [00:37:45] Speaker 08: price is consistent with the tariff. [00:37:49] Speaker 08: But as Judge Rogers was explaining, the rate under our current system is this sort of open market tariff. [00:37:57] Speaker 08: It is a process rather than a number. [00:38:01] Speaker 08: And so when Burke reviews those types of claims that you're talking about, they're just, they say we're looking for compliance with the tariff. [00:38:10] Speaker 02: But here's, I think the critical question is, you know, the tariff is not just [00:38:15] Speaker 02: just one big mathematical formula. [00:38:17] Speaker 02: There is numerous kinds of discretionary decisions that get made into the inputs for that. [00:38:24] Speaker 02: So the one example that my clients have supplied is when they have to do certain maintenance, a state of rewind, whether or not they're going to use new copper or used copper is a determination they might have to make. [00:38:36] Speaker 02: And they might want to use new copper, but the independent market monitor might say your bid should be priced on the basis of used copper. [00:38:42] Speaker 02: Tariff doesn't control this. [00:38:44] Speaker 02: It's not, you know, a yes or a no. [00:38:46] Speaker 02: It's a question. [00:38:46] Speaker 02: It's a judgment question. [00:38:47] Speaker 02: His question is, what's the range of reasonable? [00:38:50] Speaker 02: Where does this fall within reasonable? [00:38:52] Speaker 02: The core part of the section 205 rate is if the supplier has a 205 rate, if its judgment is reasonable, is within just and reasonable-ness, it can select that for deciding the inputs into the tariff. [00:39:06] Speaker 02: If though Burke is correct, [00:39:08] Speaker 02: then the independent market monitor can change that, and if PJM agrees, then the independent market monitor's views override the supplier's, even if the supplier's view was just and reasonable. [00:39:23] Speaker 02: The independent market monitor doesn't have to find that it was unjust and unreasonable, nor would the independent market monitor have a statutory authority to find unjust and unreasonable. [00:39:31] Speaker 02: That's the point, is taking away that clear discretion from the inputs that go into the tariff. [00:39:36] Speaker 02: The structure that Burke has established under this petition for review of, say, compliance with the tariff, what that tariff sets up is when you have these discretionary determinations, is it new copper, is it used copper, that selection is made by PJM, or the Independent Market Monitor, not by the public utility. [00:39:52] Speaker 02: And so that's, I think, where the rubber really meets the road and why the key flexibility for the generators is [00:40:00] Speaker 02: important and it just isn't some abstract concern. [00:40:03] Speaker 02: But it's completely consistent with ensuring that there's market mitigation and FERC review of just reasonableness, because to the extent that the tariff-based approach where PJM disagrees, then it goes directly to FERC. [00:40:18] Speaker 02: And FERC is not using ex ante [00:40:21] Speaker 02: you know, rules where it's kind of guessing wide as to whether or not that rate is going to be just and reasonable. [00:40:26] Speaker 02: It's looking at the specific proposal and it can make an up or down. [00:40:29] Speaker 08: And comparing it to the tariff. [00:40:31] Speaker 08: Sorry? [00:40:31] Speaker 08: And comparing it to the tariff. [00:40:33] Speaker 02: the tariff is going to be very important. [00:40:34] Speaker 02: Yes, Your Honor. [00:40:35] Speaker 02: I mean, if the argument is that we're going to do something that's completely inconsistent with the tariff, I don't think parks are going to take terribly long in saying that's unjust and unreasonable. [00:40:44] Speaker 02: But what we're focused on is not, you know, is this outside the tariff or inside the tariff? [00:40:48] Speaker 02: This is, you know, how have you allocated these cost factors? [00:40:52] Speaker 08: I think we understand. [00:40:54] Speaker 08: Unless my colleagues have more questions, because we've kept you up an awfully long time. [00:40:59] Speaker 08: You have more questions? [00:41:02] Speaker 07: Okay, thank you. [00:41:06] Speaker 07: Mr. Flynn for PGM. [00:41:20] Speaker 06: Can you please record Paul Flynn for PGM Interconnection. [00:41:24] Speaker 06: So PJM's concern about first order is that what do we care about? [00:41:28] Speaker 06: We want to make sure that there is no exercise in market power, but where there is a real legitimate cost the supplier has. [00:41:36] Speaker 06: We want to make sure they have a reasonable opportunity to include that in their capacity, so that we are not deterring folks who would be submitting offers the same way they would submit them if there was a competitive market and they had no market value, to say, no, you can't do that. [00:41:53] Speaker 06: And we think that that's what happened below. [00:41:54] Speaker 06: The firm overshot. [00:41:57] Speaker 06: It went dramatically away from the capacity performance construct and its practical effects in a way that overshoots. [00:42:03] Speaker 06: And what we're hoping is that you will send it back to them and say, Ferg, you overshot in a way that you didn't adequately explain. [00:42:09] Speaker 06: Go take another look at this. [00:42:10] Speaker 06: Because some of this stuff needs to be recovered, whether it's in the default or in the year specific. [00:42:16] Speaker 06: Because the end result of what Ferg did was that you could out of it. [00:42:20] Speaker 06: That's where we're at right now. [00:42:21] Speaker 06: So specifically, how did Ferg get it wrong below on this issue of opportunity cost and these other things? [00:42:32] Speaker 08: Opportunity costs and the default offer cap issue. [00:42:35] Speaker 08: And then, I'm sorry, I didn't hear what your other one was. [00:42:37] Speaker 08: Is it the sort of, in my mind, I'm calling this sort of the energy market costs. [00:42:41] Speaker 06: I'm sorry, were you finished? [00:42:45] Speaker 08: Oh, no, I'm just trying to make sure. [00:42:46] Speaker 06: The opportunity costs and the other rates. [00:42:50] Speaker 06: On the opportunity costs, the fundamental problem is they sort of threw the baby out with the bathwater because the real problem [00:42:57] Speaker 06: was the difficulty, the fact that we haven't had the number of performance assessment hours or intervals that we're expecting. [00:43:05] Speaker 06: And so based on that, Burke found that the existing rule was not just unreasonable. [00:43:13] Speaker 06: But Burke went well beyond, there's a problem with the performance assessment hours to say, no, we're throwing out the entire approach. [00:43:21] Speaker 06: of having any possibility of including the opportunity cost of avoiding these, of not getting these bonus payments that past performance still provides. [00:43:32] Speaker 06: But you can't include those in the offering under no circumstance. [00:43:35] Speaker 06: So they just went too far and they never really came to grips with the fact that they went too far. [00:43:40] Speaker 06: They came up with this idea, well, that's energy, I mean, excuse me, 15 years, but they never really explained why [00:43:49] Speaker 08: you have to go so far throughout the entire program, allowing these opportunity costs, as opposed to... I thought that they said that the producers here are so grossly overshot that they were exercising market power. [00:44:08] Speaker 08: And that seems, no one seems to challenge that. [00:44:12] Speaker 08: And that, I'm just talking about the bonus... [00:44:15] Speaker 08: that cost right here. [00:44:17] Speaker 06: The reason it grossly overshot was because we were assuming 30 hours a year and there were almost no hours. [00:44:26] Speaker 08: Well exactly and so if it's an almost no almost zero number and the other proposal was simply to increase penalties but still not address the problems with a reliable computation of what this opportunity cost is [00:44:46] Speaker 08: especially given that over time it was looking like it was approaching zero and no one was given any more reliable method for computing that, then why isn't it within FERC's discretion to say, you gave us some, it was completely broken. [00:45:03] Speaker 08: Your backup, your plan B here is no better. [00:45:05] Speaker 08: It leaves the same problem in place that we still can't [00:45:08] Speaker 08: measure with any reliability, opportunity cost in a way that will ensure no one's exercising market power. [00:45:14] Speaker 08: And so instead we're going to shift to this unit specific approach. [00:45:18] Speaker 08: Why is that not within FERC's discussion? [00:45:21] Speaker 08: Well, and I'm sure they'll explain it better than I am, but that's my shorthand of it. [00:45:25] Speaker 06: For one thing, you could still have performances that still exist in the tariff and they still may occur. [00:45:34] Speaker 06: And when they do, then some people will pay penalties. [00:45:37] Speaker 06: And some people will get bonus. [00:45:39] Speaker 06: And so that is a real thing that still exists in the chair. [00:45:42] Speaker 08: It is difficult. [00:45:43] Speaker 08: When was the last time bonuses were paid according to this record? [00:45:52] Speaker 08: I'm not sure they were on this record. [00:45:54] Speaker 08: That's right. [00:45:55] Speaker 08: Right. [00:45:55] Speaker 08: That's, that seems part of the problem. [00:45:57] Speaker 08: Cause I, you know, it seems like they haven't been charging a lot of penalties either. [00:46:01] Speaker 08: So. [00:46:04] Speaker 08: So that seems to confirm their point. [00:46:06] Speaker 08: There's really no way to measure this. [00:46:08] Speaker 08: So we're going to go. [00:46:09] Speaker 08: And we had such a problem of market power exercise with this approach that we're switching to unit specific, at which point then you have, I know a separate argument about the problem with, as you perceive it with what they did under unit specific costs analysis. [00:46:24] Speaker 06: Right. [00:46:24] Speaker 06: And on that point, on the issue of these other risks, their answers were, oh, that's energy. [00:46:30] Speaker 06: B, we resolved it in the capacity performance orders, and C. I'm sorry, I didn't hear the rest. [00:46:36] Speaker 08: I apologize, I didn't hear the rest of your sentence. [00:46:37] Speaker 08: So that's energy marketing. [00:46:39] Speaker 06: The first rationale for not allowing additional risk was number one, oh, that's an energy risk. [00:46:46] Speaker 06: Number two, we ought to resolve that in the capacity performance order. [00:46:50] Speaker 06: And number three, you're asking for the sun, the moon, and the stars to put in anything you want. [00:46:55] Speaker 06: And so what I would say is on the energy risk, [00:46:58] Speaker 06: From PJM's perspective, what's going on here is that when you submit, and this is our concern, when you commit capacity to our region to help us out to keep the lights on on the worst day of the year, we want to be sure that if you have additional costs that you're going to incur from taking on that capacity commitment, then you should be allowed to include those in your offer. [00:47:24] Speaker 06: And that would be a cost-based offer. [00:47:27] Speaker 06: And so where you take on a capacity commitment and you now have an obligation to enter into the energy market every day, which you do not have otherwise, that is an additional cost related to taking on a capacity commitment. [00:47:44] Speaker 06: When the price you're permitted for capacity is determined as the difference between all your costs and an estimate of what you'll get in the energy market, then at that point, [00:47:57] Speaker 06: What you will get in the energy market is directly pertaining to whether what you got in the capacity market is reasonable and can you include, can you reflect some level of uncertainty in that when you are submitting your offer into the capacity market. [00:48:16] Speaker 06: So from our perspective, these do relate to capacity. [00:48:19] Speaker 06: They do affect [00:48:20] Speaker 06: whether, let's suppose a competitive seller with no market power, that's the type of thing they would think about in deciding whether or not to submit an offer into this capacity market and whether they can submit an offer that will clear it. [00:48:31] Speaker 08: I thought, as I read Ferck's order, [00:48:35] Speaker 08: they said is, we'll let you include opportunity costs as long as they are, and again, I don't have their exact words at the tip of my tongue, but sort of verifiable and objectively, you show that they're sort of computable in a rigorous way or verifiable way, again, to avoid market power concerns. [00:48:54] Speaker 08: And the problem is that a lot of these other costs haven't been shown by the suppliers to be [00:49:02] Speaker 08: computable in any concrete way, at which point then, and we're only talking about risks anyhow, we're not talking about certainties, risks that are sort of aesthetic and I know aesthetics are too amorphous to actually compute in a concrete verifiable way, both creates again the same kind of market power concerns they had the different buffer cap and [00:49:28] Speaker 08: it risks shifting 100% of this risk to consumers. [00:49:32] Speaker 08: So it's sort of two things as I read it. [00:49:34] Speaker 06: Well, from P. John's perspective, we would only support it if it is something that can be documented and quantified. [00:49:41] Speaker 06: And it is probably the case that under the tariff that results in these orders, you don't get these types of opportunity costs at all. [00:49:50] Speaker 06: The only thing that the tariff allows as a quote unquote opportunity cost is if you have the opportunity [00:49:57] Speaker 06: to make a sale in New York, for example, you can include what you could have got if you had made the sale in New York as part of the price that you can submit into our capacity market. [00:50:08] Speaker 06: That's the only opportunity cost. [00:50:11] Speaker 06: So it isn't a, it's not permissible to include any other opportunity costs in the tariff. [00:50:17] Speaker 06: So to the extent FERC suggested that in order, that would have been incorrect. [00:50:23] Speaker 06: Probably my formulation to be clear of how I read it. [00:50:27] Speaker 06: Well, and they are a little unclear on exactly what you can recover in the component of the unit specific. [00:50:38] Speaker 06: Because the unit specific says here are all these categories. [00:50:41] Speaker 06: We'll lay them out in the tariff. [00:50:42] Speaker 06: These are the different categories. [00:50:43] Speaker 06: And one of them is capacity performance quantifiable risk. [00:50:47] Speaker 06: And what it says in the tariff is it's the risk that you will not perform. [00:50:53] Speaker 06: under capacity performance. [00:50:56] Speaker 06: And Burke, in its characterization of that, particularly in the hearing order, kind of suggests more than that, which is a little bit concerning because that's not what the tariff says. [00:51:08] Speaker 06: And we'd hate to say, oh, but you said over here that you could include a little more than that. [00:51:14] Speaker 06: And they would say, well, no, I'm sorry. [00:51:16] Speaker 06: The tariff just says, you've got to tie it down to not perform. [00:51:19] Speaker 06: So we see that as a bit of a problem as well, where clearly you could do that because the opportunity cost that was permitted in the prior default rate, which included the opportunity cost of, oh, if I'm not in the capacity market, I can get bonus payments. [00:51:40] Speaker 06: So if I am in the capacity market, I'm giving up bonus payments. [00:51:44] Speaker 06: It was closely related to this idea [00:51:47] Speaker 06: of penalties as well. [00:51:49] Speaker 06: And so there are multiple considerations that go into and offer under the capacity performance construct, not limited to the specific issue of whether your research will perform. [00:52:01] Speaker 06: And right now, at least the way the tariffs were, that's all you get as a result of these orders. [00:52:07] Speaker 06: And our concern is that's not enough. [00:52:10] Speaker 06: And that's what we're trying to convey. [00:52:12] Speaker 08: Okay. [00:52:12] Speaker 08: My colleagues have any questions? [00:52:13] Speaker 08: Nope. [00:52:15] Speaker 08: Okay. [00:52:15] Speaker 08: Thank you very much. [00:52:17] Speaker 08: Yes, please refer. [00:52:28] Speaker 05: Afternoon, Your Honor. [00:52:30] Speaker 05: Good afternoon. [00:52:32] Speaker 05: I'm Matt Estis here on behalf of the Federal Energy Regulatory Commission. [00:52:37] Speaker 05: I want to start with the Section 205 filing rights issue. [00:52:44] Speaker 05: I was a little confused [00:52:48] Speaker 05: It sounded at first like he was claiming that offer cap provisions and tariffs, which substitute the offer cap and the tariff for an offer, violate Section 205 rights. [00:53:08] Speaker 05: I don't think that could be the case. [00:53:11] Speaker 05: It can't possibly violate your Section 205 rights to have to comply with the tariff. [00:53:19] Speaker 05: pursuant to which you're making your sale. [00:53:22] Speaker 05: He then backed away from that by saying, no, it didn't really apply to that. [00:53:26] Speaker 05: It only applied here because somehow the commission has given the market monitor the ability to set the offer cap. [00:53:37] Speaker 05: But that's not correct. [00:53:39] Speaker 05: The tariff gives the suppliers [00:53:45] Speaker 05: the ability in the first place to propose an offer cap based on the formula. [00:53:51] Speaker 05: The market monitor simply reviews that offer to see if it complies with the tariff. [00:53:57] Speaker 05: And ultimately, if the supplier disagrees with what the market monitor determines, it can go to the commission and ask the commission to decide what cap complies with the tariff. [00:54:13] Speaker 05: It doesn't have to prove that the market monitor's wrong. [00:54:18] Speaker 05: The commission specifically said that was not correct. [00:54:23] Speaker 05: To the extent that Mr. Hughes is complaining that the tariff is not specific enough, that has nothing to do with their filing rights. [00:54:34] Speaker 05: They may or may not have some claim that the tariff should be made more specific. [00:54:38] Speaker 05: But that's a different issue. [00:54:39] Speaker 05: They've not raised that on appeal. [00:54:41] Speaker 05: They didn't raise that below. [00:54:45] Speaker 08: Can I ask a fact question? [00:54:47] Speaker 08: If the market monitor looks at a proposal and rejects it, does the market monitor do any kind of written decision or explanation and the same for if it's reviewed by PJM? [00:54:59] Speaker 08: And then do either of those get looked at by the commission if they take it to the commission? [00:55:04] Speaker 05: I believe they do. [00:55:07] Speaker 05: Mike, you're going to hear an argument from the market monitor's counsel. [00:55:11] Speaker 05: You might want to confirm that. [00:55:14] Speaker 05: But it's also, I just want to push back a little bit. [00:55:17] Speaker 05: The market monitor can't reject a supplier's proposal. [00:55:22] Speaker 05: It just says it disagrees. [00:55:25] Speaker 05: The parties are supposed to try to reach an agreement. [00:55:28] Speaker 05: If they don't, then the supplier goes to PJM and asks it to make its own independent determination. [00:55:35] Speaker 05: And if it disagrees with that, then it comes to the commission to ask it. [00:55:40] Speaker 05: And the just and reasonable standard doesn't fit in there at all, you correctly pointed out. [00:55:45] Speaker 05: The question is whether the offer complies with the tariff. [00:55:52] Speaker 05: The arguments on the commission's finding that it offers not a rate, that was an alternate grounds provided by the commission. [00:56:05] Speaker 05: for its decision. [00:56:07] Speaker 05: There are no precedents one way or the other in that issue. [00:56:10] Speaker 08: I thought public citizen was close. [00:56:14] Speaker 05: Well, it didn't say that an offer was or was not a section two of five rate. [00:56:27] Speaker 08: Can you address the exclusion of risks [00:56:35] Speaker 08: energy market risks under the unit-specific cost rate? [00:56:40] Speaker 05: Yes. [00:56:40] Speaker 05: Well, the first thing to point out is the commission did not issue a new tariff with that respect. [00:56:50] Speaker 05: Those risks have never been included in the formula since 2006. [00:56:54] Speaker 05: And the type of risks they're talking about, the risk that you will underperform your estimated revenues, have always been there. [00:57:05] Speaker 05: All the commission did in this case was say, we're going to use the existing tariff. [00:57:11] Speaker 05: So I think there is a collateral estoppel argument. [00:57:17] Speaker 05: The commission did not say that in its orders. [00:57:20] Speaker 05: What it did say is, we've already rejected that argument. [00:57:24] Speaker 05: And it also pointed out that the suppliers never provided any other reason that things have changed now [00:57:34] Speaker 05: that would lead to a different result. [00:57:38] Speaker 05: And I also think that it's incorrect to say that the way the formula works precludes them from recovering their costs. [00:57:52] Speaker 05: It's important to remember that suppliers in a competitive market [00:58:00] Speaker 05: are not entitled to guarantee the recovery of their costs. [00:58:05] Speaker 05: The petitioners acknowledge that principle at page 40 of their brief. [00:58:11] Speaker 05: They're only entitled to the opportunity to recover their costs. [00:58:15] Speaker 05: And the formula specifically gives them that opportunity. [00:58:19] Speaker 05: The capacity calculation is intended to allow them to recover all of their costs [00:58:29] Speaker 05: that they would incur, be expected to incur in the capacity market. [00:58:35] Speaker 05: And then you subtract out the projected energy revenues. [00:58:40] Speaker 05: Well, that means on its terms, if the supplier meets its projections, it's recovering all its costs. [00:58:49] Speaker 05: Yes, there's a risk that it might not meet those projections. [00:58:53] Speaker 05: There's also an opportunity to over-recover its costs if it meets its projections. [00:58:59] Speaker 05: The important point is, it is given the opportunity. [00:59:03] Speaker 05: It's costs. [00:59:04] Speaker 05: That's what everybody agrees they're entitled to. [00:59:09] Speaker 05: And that's the way this tariff has worked since 2006. [00:59:13] Speaker 05: I did want to briefly mention, going back to the Section 205 issue, Mr. Hughes's contention that an offer clearly [00:59:29] Speaker 05: is a rate demanded. [00:59:31] Speaker 05: What the offer says is, I will charge x, which is the offer, anything more than that that comes out of the capacity market. [00:59:43] Speaker 05: So it's really, I will charge, let's say, $10 or more. [00:59:48] Speaker 05: Under the standards for rates that have been established by this court, [00:59:56] Speaker 05: In order for a rate to satisfy the requirements of Section 205, it has to do one of two things. [01:00:04] Speaker 05: It either has to specify in the rate the specific price, or it has to set forth a formula pursuant to which you can look at the formula and determine what the rate's going to be. [01:00:21] Speaker 05: An offer doesn't satisfy either of those [01:00:24] Speaker 05: requirements. [01:00:25] Speaker 05: So I don't think it's clear that an offer constitutes a rate demanded. [01:00:32] Speaker 05: Moving to the opportunity costs issue. [01:00:38] Speaker 05: I was quite surprised to hear Mr. Hughes referred to paragraph 71 of the unit specific order as representing a holding that the commission agreed that it was possible [01:00:51] Speaker 05: to come up with an appropriate estimate of what the emergency hours would be because, in fact, the commission said the exact opposite. [01:01:00] Speaker 05: It said it is difficult to come up with an estimate that is appropriate for general use. [01:01:08] Speaker 05: So as you correctly pointed out, Your Honor, that was an important part of the commission's decision that it didn't think the formula could be used because it didn't think [01:01:21] Speaker 05: it was possible to come up with the inputs that go into the formula. [01:01:26] Speaker 05: And that's especially important because the experience showed that there had been no penalties paid, which meant that there's no bonuses paid, which meant that, in fact, there were no opportunity costs incurred by any supplier. [01:01:43] Speaker 08: I didn't first say that suppliers can consider that can include in their calculation the risk of [01:01:51] Speaker 08: non-compliance and facing penalties. [01:01:54] Speaker 05: Yes, absolutely. [01:01:55] Speaker 08: Well, and the bonuses are just paid out of the penalties. [01:01:57] Speaker 08: So I don't understand how you can compute one without necessarily being able to compute. [01:02:02] Speaker 05: Well, you can compute the penalty. [01:02:03] Speaker 05: That's not the problem. [01:02:04] Speaker 05: The question is... No, but the risk of the penalty. [01:02:07] Speaker 08: I mean, they're not including the amount of the penalty. [01:02:09] Speaker 08: They're including the risk of incurring a penalty and what that cost might be. [01:02:14] Speaker 08: doesn't always charge penalties and that is allowed to be in there and it seems to me that that's really it's just the other side of the coin from the bonuses because the bonuses come from the penalties. [01:02:23] Speaker 08: I don't know how one can be calculable and the other can't. [01:02:26] Speaker 05: Well what the commission said in that same paragraph 71 if it's in its specific order is that while it's it's too difficult to calculate a generally applicable risk that [01:02:41] Speaker 05: For purposes of calculating the risk that goes in the formula that an individual supplier can have its own supportable evaluation of the risk. [01:02:55] Speaker 05: The problem is determining what should apply generally. [01:03:06] Speaker 07: Do you have any other questions? [01:03:09] Speaker 07: No. [01:03:10] Speaker 07: Want to wrap up? [01:03:11] Speaker 07: Thank you, Your Honor. [01:03:19] Speaker 08: Thank you very much. [01:03:20] Speaker 08: Mr. Mays from the Market Monitoring. [01:03:23] Speaker 08: Would you be able to explain to me a little bit about how this process works when someone submits a proposal to the Market Monitor and the Market Monitor thinks it's inconsistent with the tier of what kind of explanation happens and if you know what kind of explanation happens before 8 a.m.? [01:03:38] Speaker 00: Sure. [01:03:38] Speaker 00: I'd be happy to talk about the process. [01:03:40] Speaker 00: So we have staff that talk to the various participants about their offer. [01:03:46] Speaker 00: They provide us information about their costs, very confidential information that we review. [01:03:52] Speaker 00: We look at the rules for how you calculate an offer cap. [01:03:57] Speaker 00: And we also provide the piece of the equation, the net revenues. [01:04:03] Speaker 00: We come up with a level of an offer that we show them what we think the level is that would be a competitive offer. [01:04:10] Speaker 00: They come up with their offer. [01:04:12] Speaker 00: We go back and forth discussing it. [01:04:16] Speaker 00: Usually, almost always, we come to an agreement. [01:04:20] Speaker 00: Sometimes we don't. [01:04:21] Speaker 00: Sometimes the participant wants to offer at a level higher than what we think is competitive and appropriate. [01:04:28] Speaker 00: One thing that the process requires is for them to provide that level, and they're committed to their level, even though it's higher than what we think is a competitive offer. [01:04:36] Speaker 00: They tell us what that does is [01:04:39] Speaker 00: It allows us to evaluate the impact. [01:04:41] Speaker 00: If they go forward with that offer into the market, we can look and see what the likelihood is that it would raise market power and consider whether we would need to go to FERC about that. [01:04:53] Speaker 00: And the other piece of the process is then if there remains a dispute, it would go to PJM. [01:05:00] Speaker 00: PJM's role is to review compliance. [01:05:02] Speaker 00: So they're really looking just at the tariff and whether or not the proposed offer complies with the tariff. [01:05:09] Speaker 00: And they may decide that it does comply with the tariff, even though we disagree with it. [01:05:14] Speaker 00: And if that happened, the participant is permitted to offer at the level that it committed to. [01:05:20] Speaker 00: And it's responsible for that offer, including whether that offer constitutes an attempt to exercise market power. [01:05:28] Speaker 00: We would evaluate the likely harm from allowing it off the market. [01:05:33] Speaker 00: And if we determined that it was needed and necessary, we would take the matter to the commission in a complaint. [01:05:39] Speaker 00: or other action, but typically it would be a complaint. [01:05:43] Speaker 00: And we would bear the burden of proof to show that the offer was unjust and unreasonable, that it was not competitive, and that it constituted an attempt to exercise market power, and we would have to litigate any issue we had with compliance. [01:05:56] Speaker 08: And do you issue some sort of written decision explaining your rationale? [01:06:01] Speaker 00: We explain our rationale in conversation. [01:06:04] Speaker 00: I don't know if there's a formal process where we issue a letter [01:06:08] Speaker 00: detailing every dispute, but it certainly comes up, and we would provide that information if a participant asked. [01:06:14] Speaker 08: How does PJM know the, if they take it to PJM, how does PJM know the basis for your decision? [01:06:19] Speaker 00: We communicate as part of that process, we're required to notify PJM of the level that we come up with, and the level that the participant comes up with, and we have robust discussions with PJM about that. [01:06:33] Speaker 08: Are you aware whether PJM issues any kind of written decision? [01:06:37] Speaker 00: I think [01:06:38] Speaker 00: I'm not aware of what the content would be, but they tell the participant whether they find the offer compliant or not. [01:06:45] Speaker 00: So the participant knows whether it can go forward with that offer in the auction. [01:06:52] Speaker 00: This all occurs in the days, maybe the 190, about 100 days before the auction with the idea that we will ex ante give information about the nature of the offer before the auction. [01:07:07] Speaker 00: So it's to provide more certainty and confidence in the individual auction results. [01:07:18] Speaker 08: My colleagues, any questions? [01:07:22] Speaker 08: Yeah. [01:07:22] Speaker 08: Okay. [01:07:22] Speaker 08: You can wrap up if you like. [01:07:24] Speaker 00: Can I proceed with my statement? [01:07:26] Speaker 08: I'll give you about 30 seconds. [01:07:29] Speaker 00: Okay. [01:07:29] Speaker 00: Wrap up. [01:07:30] Speaker 00: So, you know, the purpose of the market model we've talked about is to protect competition in PGA markets. [01:07:35] Speaker 00: We bring issues to the attention of those who can act to address them. [01:07:39] Speaker 00: We don't make those decisions. [01:07:42] Speaker 00: To get to some of the issues that we are confronting in this case, one is the nature of the net ACR offer. [01:07:50] Speaker 00: And we've discussed that that offer has been in place since the beginning of the PGM market from 2006. [01:07:58] Speaker 00: That market, it has always accounted for some risk. [01:08:02] Speaker 00: For one thing, there's a 10% adder on top of all the costs that go into ACR. [01:08:07] Speaker 00: There is room to account for risk in that. [01:08:10] Speaker 00: And then there are the cost components. [01:08:12] Speaker 00: The purpose of the market is to provide capacity when needed. [01:08:15] Speaker 00: That's what the capacity product is. [01:08:17] Speaker 00: And the cost that we're looking at are the cost to provide capacity when needed. [01:08:21] Speaker 00: And when the participant is determining whether to spend money, part of that money is spent to address the risk that it will not be able to provide the capacity when needed. [01:08:30] Speaker 00: For example, [01:08:31] Speaker 00: There's an important mission called project investment. [01:08:35] Speaker 00: And so if a unit were concerned that it would not be able to deliver capacity when needed, it would spend more money to try to make its unit better and more capable. [01:08:44] Speaker 00: And so that cost of investment would factor into the offer. [01:08:48] Speaker 00: So the risk for accounting for a cost [01:08:51] Speaker 00: We're also accounted in the provision that we've talked about specifically, the capacity performance quantifiable risk provision. [01:08:58] Speaker 00: And that provision is very reasonably limited to costs that are quantifiable and reasonably supported. [01:09:04] Speaker 00: So we don't think much of the arguments about risk and the awarded cost offer. [01:09:10] Speaker 08: OK, great. [01:09:11] Speaker 08: Thank you very much. [01:09:13] Speaker 08: Mr. Hughes, we'll give you three minutes. [01:09:20] Speaker 02: Thank you, Your Honor. [01:09:21] Speaker 02: I'd just like to start briefly with the Section 205 issue. [01:09:25] Speaker 02: And the argument that we have to comply with the tariff we submit is just too simplistic. [01:09:30] Speaker 02: I don't think there's a disagreement about complying with the tariff. [01:09:33] Speaker 02: The issue is, these are far more complex calculations that require judgment. [01:09:40] Speaker 02: I gave the example earlier of new copper, used copper. [01:09:43] Speaker 02: Let me offer a different example that comes from Ferg's Behearing Order, paragraph 57, [01:09:48] Speaker 02: to an appendix page 1259 where Burke says, quote, there may be more than one just and reasonable expected PAI value. [01:09:57] Speaker 02: That's the expected emergency hours. [01:10:00] Speaker 02: Burke recognizes that inputs into the tariff, there can be more than one just and reasonable value. [01:10:05] Speaker 02: That's the whole point of rate making. [01:10:07] Speaker 02: There just isn't one value. [01:10:09] Speaker 02: The question here comes down to not complying with the tariff, but when there are multiple reasonable options, how is that selected? [01:10:17] Speaker 02: And the way that this structure is set up is the supplier makes a proposal. [01:10:23] Speaker 02: The IMM disagrees. [01:10:24] Speaker 02: It makes its alternative proposal. [01:10:26] Speaker 02: Then it goes to PJM. [01:10:27] Speaker 02: If PJM rejects the supplier's proposal, then the independent market proposal becomes the rate. [01:10:35] Speaker 02: Now, you can petition, as the courts mentioned, to FERC to have FERC see if there's compliance with the tariff. [01:10:41] Speaker 02: But I think it's going to be very difficult for a supplier to show there's not been compliance with the tariff. [01:10:45] Speaker 02: if the rate that's selected is somehow within the tariff. [01:10:48] Speaker 02: But the problem is you've shifted who gets to select the just and reasonable rate from the supplier, who if we're right about section 205 should have that right, to the independent market monitor in PJM, we don't think should have that. [01:11:01] Speaker 02: That's the core issue. [01:11:03] Speaker 02: The other practical problem is on a petition, we don't know what the petition to FERC is. [01:11:07] Speaker 02: If it's a rule 207 petition, this may be something that is completely discretionary at FERC and may not even be something that FERC [01:11:15] Speaker 02: has to respond to. [01:11:17] Speaker 02: Briefly on rates, I think the court appreciates the argument there about separating energy and capacity just doesn't hold up. [01:11:26] Speaker 02: We think on opportunity costs, Burke has identified in paragraph 71 that it can calculate risk penalties. [01:11:33] Speaker 02: The same should be true. [01:11:36] Speaker 08: OK. [01:11:36] Speaker 08: Colleagues, have any further questions? [01:11:39] Speaker 08: No, thank you. [01:11:40] Speaker 08: OK. [01:11:40] Speaker 08: Thank you very much. [01:11:41] Speaker 08: The case is submitted.