[00:00:00] Speaker 09:
Base number, 22 dash 10, 96, excellent energy and LP, and as well as the L. C. petitioners versus federal energy regulatory commission.

[00:00:11] Speaker 09:
Mr. Segal for the petitioners, Mr. Glover for the respondent, Mr. Mays for the intervener.

[00:00:35] Speaker 07:
You may proceed.

[00:00:36] Speaker 02:
Good morning, Your Honor, and may it please the court.

[00:00:38] Speaker 02:
Peter Siegel for the petitioners.

[00:00:40] Speaker 02:
The lecture is reserved for three minutes for rebuttal.

[00:00:43] Speaker 02:
The orders on review are arbitrary and capricious on both grounds of the briefing addresses.

[00:00:48] Speaker 02:
Starting with the remedy issue, there are three reasons for vacator here.

[00:00:53] Speaker 02:
First, at JA 251 to 253,

[00:00:57] Speaker 02:
the Commission committed legal error in concluding that as a matter of law, it lacked discretion to award any remedy other than the one that would be appropriate for a 206 violation itself.

[00:01:10] Speaker 02:
What my clients are asking for isn't a remedy for a Section 206 violation, it's a remedy for a filed rape violation.

[00:01:16] Speaker 02:
And if you look at page 47 of the commission's brief, they say, well, the reason we looked at section 206 and attempted to do the section 206 calculation is that this is a section 206 case with no unique or novel aspects.

[00:01:29] Speaker 02:
But the file rate violation here is a quintessentially unique and novel aspect that broadened the commission's discretion to look beyond just the comparison of two rates and obviated the necessity to calculate what would have been charged under the pre-2017 rate.

[00:01:46] Speaker 02:
So, after finding that you couldn't calculate what would have been charged under under 2017 rate finding that we disagree with and explain why in a moment.

[00:01:55] Speaker 02:
The commission had certainly at least the entitlement and the discretion to, and in our view, the obligation to, look beyond that and attempt to find another remedy.

[00:02:06] Speaker 02:
But it didn't look beyond that.

[00:02:08] Speaker 02:
It just said, okay, we can't do the section 206 violation.

[00:02:10] Speaker 02:
Our hands are tied.

[00:02:12] Speaker 02:
This is a file grade violation and we can't remedy it.

[00:02:15] Speaker 02:
And that was erroneous as a matter of... Second, even assuming the commission could look only to the pre-2017 rate for the remedy,

[00:02:23] Speaker 02:
It acted arbitrarily and capriciously in concluding that it couldn't calculate the amounts that should have been paid under the pre-2017 rate.

[00:02:30] Speaker 02:
And there are three reasons for that.

[00:02:33] Speaker 02:
The first one is that the commission asked PJM, not the independent market monitor, whether the software could be updated.

[00:02:41] Speaker 02:
But under PJM's FERC approved tariff, it's the responsibility of the market monitor, not of PJM, to make those calculations and maintain that software.

[00:02:50] Speaker 02:
But the fact that PJM couldn't do it is really beside the point.

[00:02:53] Speaker 02:
The fact that PJM claims it couldn't do it is beside the point.

[00:02:55] Speaker 02:
The question is whether the independent market monitor could have done it.

[00:02:58] Speaker 02:
And Perth didn't even ask.

[00:03:00] Speaker 04:
Before you even get to that, don't you have an issue about the rate being the default because of the timing issue?

[00:03:09] Speaker 02:
I'm sorry, around being the default because of the timing issue?

[00:03:11] Speaker 04:
Yeah, like in other words, the rate gets

[00:03:15] Speaker 04:
stated because the preliminary or minimum rate, it ends up being the rate because it was not approved by FERC timely.

[00:03:24] Speaker 02:
So we certainly, it's understood that there was an egregious file rate violation here and that file rate violation arises because PJM, without any approval from the commission in advance, charges a rate that is not the same as the rate.

[00:03:38] Speaker 02:
And the commission won't dispute that when they stand up and the IMM won't dispute that when they stand

[00:03:43] Speaker 02:
there was a violation in this case.

[00:03:45] Speaker 02:
There was no entitlement for PJ and to go ahead and charge the unapproved interim rate when it didn't have first approval to go ahead and do stuff.

[00:03:55] Speaker 01:
Can you explain the white towns of concord doesn't govern this?

[00:03:58] Speaker 01:
Like they have discretion not to order a refund.

[00:04:01] Speaker 01:
And I'm trying to understand your argument that you're saying that they didn't understand.

[00:04:07] Speaker 02:
Uh, your iron.

[00:04:08] Speaker 02:
The 1st argument we made in the brief was that town of concord doesn't govern here and we will readily agree with her that there is discretion to fashion a remedy in the context of a filed rape violation, including no remedy if they choose to do that.

[00:04:23] Speaker 02:
So, on some facts.

[00:04:25] Speaker 02:
But the commission has discretion not to provide that's what towns of Concord stands for towns.

[00:04:30] Speaker 02:
Concord was the case that involved an accidental passed on overcharge of $30,000 over 15 years and the regulated entity essentially got a bill.

[00:04:41] Speaker 02:
Asked it on to rate payers and didn't.

[00:04:44] Speaker 02:
according to the case, didn't really even look at the bill.

[00:04:46] Speaker 02:
They just sort of passed it on, and it turned out that at some point when they were passing those bills on, the components of the bill changed.

[00:04:53] Speaker 02:
Something was added that they weren't allowed to pass on.

[00:04:57] Speaker 01:
But similar to Townsend Concord, you could only prevail if they are required to give refunds.

[00:05:02] Speaker 01:
I don't see that.

[00:05:03] Speaker 02:
No, Your Honor, even if you assume that there's discretion not to provide a refund in general, our argument is that the bases of the commission invoked for declining to provide a refund here are arbitrary and capricious.

[00:05:16] Speaker 02:
And the first of those bases is the one that I've been discussing, which is that... So an abuse of discretion.

[00:05:21] Speaker 01:
They have discretion to decide what the refunds are, and you're saying they abuse their discretion?

[00:05:27] Speaker 02:
They acted arbitrarily and capriciously in invoking improper grounds and irrational grounds for declining.

[00:05:34] Speaker 02:
And the 1st of those is the air of law that they looked only at the possible section 206 remedy calculation and didn't look at other possibilities, such as refunding all amounts paid.

[00:05:45] Speaker 01:
Well, they looked at that because that's what you propose, right?

[00:05:48] Speaker 01:
So, but they chose something different.

[00:05:51] Speaker 02:
No, we did propose that your honor, but what they said was.

[00:05:55] Speaker 02:
The remedy has to be either this section 206 remedy or no remedy at all.

[00:06:00] Speaker 02:
And we can't calculate the section 206 remedy, so we can't provide anything.

[00:06:05] Speaker 01:
So they were at liberty to reject your calculation, but you're saying that they erred by not stating that they were doing so.

[00:06:14] Speaker 02:
Well, if I did no reason, other than an apparent belief, if you look at Jay, they say the appropriate, the appropriate remedial calculation has to measure the difference between the pre 2017 rate and the unapproved.

[00:06:28] Speaker 02:
I'm paraphrasing from Jay to 53.

[00:06:31] Speaker 01:
I'm looking at it.

[00:06:31] Speaker 01:
Which paragraph are you?

[00:06:38] Speaker 02:
So that's paragraph 18.

[00:06:41] Speaker 02:
We continue to find that the appropriate refund calculation would have required a comparison of the proposed 2017 forfeiture rule with the pre-2017 FDR.

[00:06:50] Speaker 01:
But they said that's the appropriate refund calculation.

[00:06:53] Speaker 01:
Isn't that them saying that they think it would be appropriate that it must be done this way, which is different from we have no choice but to do it this way?

[00:07:01] Speaker 02:
They offer no reasoning other than, and if you look at page 407 of their brief, what they say is the reason for that is that this is an ordinary Section 206 case with no unique ass.

[00:07:14] Speaker 02:
But it's undisputed, this isn't an ordinary section 206 case.

[00:07:17] Speaker 02:
This is a section 206 case with a filed rate violation on top of it.

[00:07:21] Speaker 02:
As Judge Shouts was mentioning, under an ordinary section 206 case, what they would have done would have been to continue charging the pre-2017 rate until the new, just and reasonable rate was approved.

[00:07:37] Speaker 02:
And then the commission

[00:07:38] Speaker 02:
Would have looked at the difference between the new, just and reasonable rate and the pre 2017 rate, and it would have had discretion.

[00:07:46] Speaker 02:
You know, there are a lot of DC circuit cases about the discretion that it has in the context section 206 provide refund.

[00:07:52] Speaker 02:
It cannot provide a reason on work has a lot of policies about when it does so, and when it doesn't do so.

[00:07:56] Speaker 02:
But in this case, what for concluded was we can't do that calculation because essentially there was a filed rate violation.

[00:08:04] Speaker 02:
We don't know what would have been paid if PJM had followed the law and continued to charge the pre-2017 rate.

[00:08:11] Speaker 02:
That's a mystery.

[00:08:12] Speaker 02:
And the reason it's a mystery is because they violated file rate doctrine and didn't do what section 206 required them to do, which was to continue to charge that rate.

[00:08:19] Speaker 01:
So my understanding your argument to be that they would have had discretion to say that the correct calculation is the one that finds the difference between the pre-2017 rate and the 2017 rate, et cetera.

[00:08:34] Speaker 01:
But because they did not state, we're exercising our discretion to do that, and did not explicitly state, and we're rejecting the just refund everything approach that you proposed that they aired.

[00:08:46] Speaker 01:
It's really a matter of the way they phrased it, is my understanding of what you're saying.

[00:08:52] Speaker 02:
No, Your Honor, I disagree with that.

[00:08:54] Speaker 01:
But you're saying that they would have had discretion to do that, but you're just saying they didn't exercise their discretion because of the way they phrased it in paragraph 18?

[00:09:01] Speaker 02:
No.

[00:09:02] Speaker 02:
They didn't ultimately do that, right?

[00:09:04] Speaker 02:
They would have had discretion to provide a remedy based on that.

[00:09:07] Speaker 02:
But what they found was we can't provide a remedy based on that first calculation.

[00:09:11] Speaker 02:
That's our option A. And we can't do it because we don't know what would have been charged under pre-2017.

[00:09:16] Speaker 01:
They're not saying we can't.

[00:09:17] Speaker 01:
They're saying the appropriate calculation is this comparison of proposed 2017 with pre-2017.

[00:09:23] Speaker 01:
They're saying that it's the appropriate way.

[00:09:26] Speaker 01:
And since we can't do it, we're not going to

[00:09:29] Speaker 01:
provide a refund.

[00:09:30] Speaker 01:
But you're saying that because of the way they phrase this, because they use the word required, they didn't recognize they had discretion.

[00:09:37] Speaker 02:
Well, and they provide no reason to the extent you want to look at the phrase the appropriate refund calculation.

[00:09:43] Speaker 02:
I think your point is maybe they were exercising discretion because they say the appropriate refund calculation would have been missed.

[00:09:50] Speaker 02:
The question is why.

[00:09:51] Speaker 02:
It's utterly arbitrary that they determine that that's the only appropriate refund calculation.

[00:09:56] Speaker 02:
Under Section 309 of the Federal Power Act,

[00:09:58] Speaker 02:
They have broad remedial discretion to remedy violations of this core doctrine.

[00:10:03] Speaker 01:
But again, they have discretion to reject your proposal, and you're just saying they didn't explicitly say, and we reject that?

[00:10:11] Speaker 02:
No, they didn't provide any reason for determining that the appropriate refund calculation is this measure instead of a different measure.

[00:10:18] Speaker 02:
We propose other measures as well.

[00:10:20] Speaker 02:
And under APA review, they can't simply say, those don't work.

[00:10:24] Speaker 02:
They have to say why those don't work.

[00:10:27] Speaker 01:
Can I ask you a different question?

[00:10:28] Speaker 01:
Can you explain the leverage point of having a little trouble understanding what that issue is and why the response was allegedly inadequate?

[00:10:38] Speaker 02:
Sure.

[00:10:38] Speaker 02:
So this goes to the 2021 rate.

[00:10:40] Speaker 02:
And I do have other points that I'd like to return to if I'm permits on the remedial issue.

[00:10:46] Speaker 02:
But on the leverage issue, and on the 2021 rate, we have two points.

[00:10:51] Speaker 02:
We have the portfolio issue and the leverage issue.

[00:10:54] Speaker 02:
And the basic idea of the leverage issue is that if you don't stand to make more money from supposed FTR manipulation, then you would lose in the process of engaging in virtual trades to manipulate the FTRs.

[00:11:15] Speaker 01:
Why is that leverage leverage?

[00:11:18] Speaker 01:
I'm thinking you're taking on debt to buy securities.

[00:11:21] Speaker 02:
The idea is you've got more weight on in order to make money for your FDRs.

[00:11:29] Speaker 02:
You have to have more weight on your FDR position than on your virtual trade position.

[00:11:34] Speaker 02:
And if you have more on your virtual trade position,

[00:11:36] Speaker 02:
You're not going to sacrifice the virtual trade position to make money in the FDR position.

[00:11:41] Speaker 02:
It's the same concept as, you know, in a chess match, you might sacrifice a pawn to save your queen.

[00:11:47] Speaker 02:
You're not going to sacrifice the queen to save your pawn.

[00:11:49] Speaker 02:
And the idea is,

[00:11:52] Speaker 02:
In the context, and really, the 1st thing I would say is.

[00:11:55] Speaker 02:
In the orders on review, if you can't parse what the leverage position is, and why they rejected it, that's the reason for vacator and reversal.

[00:12:03] Speaker 02:
The commission is required to explain justification for its action.

[00:12:07] Speaker 02:
And if sitting here today, we can't determine justification for its action.

[00:12:11] Speaker 02:
Then that's the ground for vacator.

[00:12:13] Speaker 02:
Of course, the.

[00:12:16] Speaker 02:
The leverage issue, as we point out in the brief.

[00:12:20] Speaker 02:
it is impossible to determine why they rejected it because they repeatedly conflated it with the portfolio argument which is a different argument from the leverage argument and it seems that they rejected the portfolio argument irrationally on the ground that they had already rejected the leverage argument and then when we talk about the leverage argument they just go back to the grounds on which they rejected the portfolio.

[00:12:40] Speaker 01:
Are you saying then that if there isn't leverage then there isn't market manipulation because in order to

[00:12:49] Speaker 01:
of course, the whole purpose of manipulation is to make a profit from it.

[00:12:53] Speaker 01:
So are you, is this sort of by definition what the manipulation would be that the FTR, that you have more weight in FTR so that when you change your virtual portfolio, you're making a profit on the FTR?

[00:13:09] Speaker 01:
I'm trying to understand, because they say, is it necessary?

[00:13:11] Speaker 01:
And I'm trying to understand, like, is it necessary that for there to be leverage in order for there to be money?

[00:13:16] Speaker 02:
So, short answer, yes, and I actually think if you'll indulge me, it's easier to explain through the portfolio concept, which is very similar concept and I'll explain how they're slightly different.

[00:13:27] Speaker 02:
But they're the same general, they're related.

[00:13:32] Speaker 02:
So, the portfolio idea is that if you stand to make money on an, you know.

[00:13:39] Speaker 02:
A $5 FTR, say, going in 1 direction, right?

[00:13:42] Speaker 02:
But you have a $100 FTR going in the other direction and then your virtual trades.

[00:13:49] Speaker 02:
They would be promising and helpful for the $5 FTR going in the 1st direction.

[00:13:56] Speaker 02:
But they would lead you to lose money on the $100 FTR going in the other direction.

[00:14:03] Speaker 02:
I should make clear this is a gross oversimplification, but.

[00:14:07] Speaker 02:
The commission said, well, you might have an incentive still to manipulate for the benefit of that.

[00:14:13] Speaker 02:
So we don't even have to look at whether, in fact, you would be losing a hundred dollars on some other portfolio.

[00:14:21] Speaker 02:
And we said, that doesn't make any sense.

[00:14:23] Speaker 02:
Nobody would engage in that in that conduct as our manipulation.

[00:14:27] Speaker 02:
You might want to make virtual trades.

[00:14:29] Speaker 02:
It would have that effect, but you'd be making them for another reason.

[00:14:31] Speaker 02:
For instance, you think you're going to make a profit on the virtual trades.

[00:14:34] Speaker 02:
You're not doing it to manipulate FDRs because you're going to lose $95.

[00:14:39] Speaker 02:
And you know that in advance.

[00:14:41] Speaker 02:
And so what the Commission and the IMM both said is, well, we don't want this to depend on whether you're going to make a profit.

[00:14:48] Speaker 02:
But our point isn't look at it from after the fact, and if you don't make a profit, then you get off scot-free.

[00:14:54] Speaker 02:
It's that nobody would engage in the conduct as FDR manipulation in the first place, because they know, I'm going to lose money on my FDRs if I do that.

[00:15:03] Speaker 02:
So it's not FDR manipulation.

[00:15:06] Speaker 02:
Are there further questions on that?

[00:15:07] Speaker 01:
How does that explain leverage?

[00:15:10] Speaker 02:
And so the leverage concept, I apologize for not returning to the leverage concept, but the basic idea of this portfolio concept is that the trades are going to cause you to lose more money on your FDRs than you would overall than you would gain on the single FDR that you supposedly manipulated.

[00:15:28] Speaker 02:
So you would never manipulate that FDR.

[00:15:30] Speaker 02:
The leverage concept is,

[00:15:32] Speaker 02:
you're going to lose more money on these virtual trades than you would stand to gain on the supposed FDR manipulation.

[00:15:40] Speaker 02:
So you're not going to engage in that conduct because again, you know in advance that if you don't stand to gain more from the FDRs, then you're going to lose with respect to your virtual position.

[00:15:51] Speaker 02:
You're just not going to do it.

[00:15:52] Speaker 02:
It's not profitable.

[00:15:54] Speaker 02:
And you know in advance that it's not profitable.

[00:15:56] Speaker 02:
So you're not going to engage in supposed manipulation that's a money losing proposition from the outset.

[00:16:02] Speaker 02:
And there's been no, as you said, there's no response from FERC on the virtual position.

[00:16:09] Speaker 01:
So was your proposal that before there could be a forfeiture, they have to calculate the leverage basically to make sure that they would have profited from this?

[00:16:20] Speaker 02:
Yes.

[00:16:21] Speaker 02:
They have to take it out of leverage positions.

[00:16:24] Speaker 02:
And in the portfolio argument, that they have to look at the entire portfolio.

[00:16:28] Speaker 02:
They can't zero in.

[00:16:31] Speaker 02:
Just the at issue, they have to look at whether you would have stood to make money.

[00:16:35] Speaker 01:
That's the portfolio when I'm talking about leverage.

[00:16:38] Speaker 01:
So, where you was, what was your proposal on what they should do about the leverage?

[00:16:47] Speaker 02:
I don't know that it got more granular than essentially take account of leverage.

[00:16:53] Speaker 02:
Look at whether a particular market participant actually stands to gain more from the FDR than they would lose in manipulating the FDR.

[00:17:04] Speaker 02:
And if they don't, then it can be FDR manipulation.

[00:17:13] Speaker 01:
So the idea is it's necessary to manipulation because they're not making money otherwise.

[00:17:20] Speaker 01:
So there would be no incentive to do this as a manipulation.

[00:17:25] Speaker 01:
Right, exactly.

[00:17:26] Speaker 01:
So your point would be that it is necessary.

[00:17:30] Speaker 01:
Leverage is a necessary component of manipulation in this context.

[00:17:33] Speaker 01:
Yes, exactly.

[00:17:35] Speaker 01:
And so when the commission said it is not necessary,

[00:17:39] Speaker 01:
That was arbitrary.

[00:17:42] Speaker 02:
Yeah, we disagree with that and I would love to disagree with their reasoning for that, except as we sit here, we have no idea what it was.

[00:17:48] Speaker 04:
What's your remedy for them not sufficiently explaining to remand for the explanation?

[00:17:55] Speaker 02:
So on the virtual issue, I think only a remand would be appropriate.

[00:18:01] Speaker 02:
The record just doesn't demonstrate what the commission's rationale was.

[00:18:07] Speaker 02:
Uh, on the portfolio issue, on the leverage issue, I think remand is appropriate.

[00:18:16] Speaker 01:
I remand without vacator.

[00:18:19] Speaker 02:
Oh, no, I'm sorry.

[00:18:22] Speaker 02:
We have no basis for concluding why they reached the decision they did.

[00:18:27] Speaker 02:
I think vacator is appropriate in those circumstances.

[00:18:29] Speaker 02:
In addition to.

[00:18:32] Speaker 01:
Will it create confusion in the market if we vacate?

[00:18:35] Speaker 01:
If we could remand and say, explain yourself better and not vacate, but would it create confusion in the market if we were to vacate?

[00:18:48] Speaker 02:
So, I want to address that.

[00:18:49] Speaker 02:
I would first say the remand without vacator approach is usually adopted when there's some reason to think that the agency would reach the same result on a remand.

[00:19:01] Speaker 02:
And again, here we have nothing from the agency about why they reached the result and more explanation.

[00:19:08] Speaker 02:
Well, we certainly need more explanation, but also there's no reason to think that if the commission were actually put to providing that explanation, it would reach the same result.

[00:19:17] Speaker 02:
Because in our view, as we discussed, it doesn't make sense.

[00:19:20] Speaker 02:
And it's the same in the context of the portfolio issue, except that there they've actually provided their rationale and it doesn't make sense.

[00:19:32] Speaker 02:
The rationale is essentially you might do this because you'd like to have five dollars in your left pocket even if it's going to cost you a hundred dollars out of your right pocket.

[00:19:40] Speaker 02:
And that's, you know, they said, you'll manipulate one after even if you're going to lose money overall, that doesn't make any sense.

[00:19:46] Speaker 02:
There's no reason to think that if they were required to come up with an explanation that didn't make sense, they would reach the same result and then argue.

[00:19:52] Speaker 02:
They couldn't possibly reach the same result.

[00:19:54] Speaker 02:
That's a vacator issue.

[00:19:55] Speaker 02:
And I think both of them are vacator and remand issues.

[00:19:58] Speaker 02:
at really at worst in the context of the portfolio approach, I think it would be appropriate to reverse entirely.

[00:20:06] Speaker 05:
But didn't the commission explain the complexity involved in ordering refunds beyond the points you were making and therefore didn't have to reach those points?

[00:20:22] Speaker 07:
I don't think so, Your Honor.

[00:20:23] Speaker 02:
Everything that they said was in the context of kind of bolstering their initial conclusion that they wouldn't provide refunds under the Section 206 calculation.

[00:20:35] Speaker 05:
No, they said, look, they balanced and they addressed your issues on remand.

[00:20:42] Speaker 05:
And they didn't find, after they modified their original order in some respects,

[00:20:48] Speaker 05:
that your arguments should prevail over the balance that the agency had thought should control here.

[00:21:02] Speaker 02:
Well, so that's their bottom line conclusion, but it embeds the best of errors that we've discussed in the brief.

[00:21:11] Speaker 02:
For instance, it rests on the conclusion that PJM can't calculate the refund amounts because it's failed to maintain the software to do so.

[00:21:20] Speaker 02:
But failing to maintain the software is an independent filed rate violation.

[00:21:24] Speaker 02:
The question isn't whether PJM can refund the amounts.

[00:21:27] Speaker 02:
but instead whether the, I'm sorry, can perform the calculation, but instead whether the IMM, which the tariff requires to be the one that performs the calculation, can do it.

[00:21:38] Speaker 08:
Yes, but the issue is if the necessary data for the calculation no longer exists

[00:21:59] Speaker 05:
That's a different issue.

[00:22:03] Speaker 05:
It's not that somebody else can recreate.

[00:22:17] Speaker 02:
So here, I think that question goes to this variance idea, which is that PJM said that even if we had properly maintained the software,

[00:22:29] Speaker 02:
the file rate doctrine required us to do, you still couldn't provide a remedy here because nobody knows what market participants would have done.

[00:22:38] Speaker 05:
Yes, the market participants changed, the markets changed.

[00:22:44] Speaker 05:
I mean, we don't have a static situation here that a number of your arguments are prefaced on.

[00:22:52] Speaker 05:
And your recreation argument.

[00:22:55] Speaker 05:
Um, it seems to me the commission could probably say, um, you know, balancing what's at stake here.

[00:23:03] Speaker 05:
Um, we exercise our discretion not to order remedies.

[00:23:12] Speaker 02:
Well, those are magic words that they can say at the end of an irrational analysis.

[00:23:17] Speaker 05:
Yes, but they can do that at the conclusion of an analysis that is different than yours.

[00:23:24] Speaker 05:
In other words, they don't have to accept your approach willy-nilly.

[00:23:29] Speaker 05:
They can explain why they're not going that way and come out with a conclusion that differs.

[00:23:40] Speaker 02:
Yes, I agree with that, but I would say that in every step of that analysis, they in fact made errors that made the bottom line.

[00:23:48] Speaker 05:
Well, you're saying that a file rate violation is different than the normal 206 violation.

[00:23:57] Speaker 05:
Well, why is it different?

[00:23:59] Speaker 05:
I mean, it's different in the sense in some instances, it's a more egregious violation, all right, as opposed to an error in calculation.

[00:24:12] Speaker 05:
But that doesn't make the 206 proceeding inapplicable, which seems to be the premise of your arguments here.

[00:24:22] Speaker 02:
Well, actually, your honor, in 1, very real sense section 2, 0, 6 is applicable, which is that in the context of the section 2, 0, 6 replacement rate proceeding, the authority to provide a remedy arises under section 2, 0, 6, which very precisely sets out essentially a math problem that the commission can decide to do or not do subject to its discretion.

[00:24:44] Speaker 05:
It's not a bad problem.

[00:24:46] Speaker 05:
That's the whole point, isn't it?

[00:24:49] Speaker 05:
That Congress understood these were difficult balancing situations.

[00:24:54] Speaker 05:
And it's not just adding up one column of figures versus adding up another column of figures.

[00:25:00] Speaker 05:
These are expert judgments.

[00:25:01] Speaker 05:
And Congress has delegated that expertise to these expert commissioners.

[00:25:10] Speaker 05:
Not that it's a mathematical calculation that

[00:25:13] Speaker 05:
sort of anybody could do.

[00:25:17] Speaker 02:
Well, Your Honor, I agree with you in the context of section 309 and remedy and file rate violation.

[00:25:22] Speaker 02:
In the context of section 206, it is a simple math problem.

[00:25:25] Speaker 02:
And the problem here is that what the commission did was it tried to do the section 206 math problem, found it was unable to do it precisely because PJM had made a file rate violation and made one of the variables for that math problem more difficult.

[00:25:41] Speaker 05:
That is not what the commission said.

[00:25:45] Speaker 02:
The principle basis for the commission's conclusion was the declaration of Brian Chmielinski from PJM who said, we don't keep the software.

[00:25:53] Speaker 02:
We have maintained the software to calculate what the charges would have been under the filed rate.

[00:25:58] Speaker 02:
And even if we had, you can't know what market participants would have done if we had adhered to the file rate doctrine.

[00:26:05] Speaker 02:
and charge the file rate, there was market participants' reliance on our violation of law.

[00:26:10] Speaker 02:
Obviously, I'm paraphrasing that, but that's the substance of what he said.

[00:26:13] Speaker 02:
We didn't follow the file rate doctrine.

[00:26:15] Speaker 02:
We didn't charge the file rate, and you can't know what anybody would have done if we had, but you can't provide a remedy.

[00:26:21] Speaker 02:
And the commission bought that reasoning without any recognition that that makes the file rate doctrine, which according to the Supreme Court's decision in Maislin, is utterly central

[00:26:32] Speaker 02:
to regulatory regimes that require adjusting reasonable rates.

[00:26:35] Speaker 05:
And the commission has reaffirmed that time and time again, but it doesn't necessarily mean that a violation of the file rate doctrine obligates it to order refunds.

[00:26:49] Speaker 05:
And that's the point, it seems to me, you don't want to acknowledge in our cases, and indeed, Supreme Court acknowledged that discretion lies with the commission.

[00:26:59] Speaker 02:
I will readily acknowledge that it's specialized with the commission.

[00:27:03] Speaker 05:
That's 10.

[00:27:04] Speaker 05:
You really don't.

[00:27:05] Speaker 05:
You're saying that 206 is mathematical.

[00:27:10] Speaker 05:
And that's the end of it, basically.

[00:27:12] Speaker 05:
And there's discretion.

[00:27:14] Speaker 05:
But it's very confined because this is a file rate doctrine.

[00:27:18] Speaker 05:
And I understand your argument.

[00:27:20] Speaker 05:
And the commission could have adopted it.

[00:27:24] Speaker 05:
But it did not.

[00:27:25] Speaker 05:
And it explained in the language of our

[00:27:29] Speaker 05:
Opinions, the path of the commission can be determined and reasonably understood.

[00:27:44] Speaker 02:
As I've stood here today, I've actually been arguing that it was the Commission that viewed its discretion as unduly constrained by Section 206, when in fact the Commission's remedial discretion was broader than just the 206 remedy.

[00:28:02] Speaker 02:
What the Commission should have done was look to other possible remedies in recognition of the fact that the final rape doctrine is utterly central to this regulatory issue.

[00:28:15] Speaker 02:
And so, instead of just looking to the section 206 remedy and finding, well, the file rate violation makes it impossible for us to provide this to 6 remedy air go.

[00:28:25] Speaker 02:
We can't do anything.

[00:28:26] Speaker 01:
So, if I may, I'm looking at what the commission did right now, paragraph 16.

[00:28:32] Speaker 01:
And.

[00:28:33] Speaker 01:
I think it's important to note that the Commission directed PJM to include information on, quote, the method by which PJM would calculate refunds and surcharges based on the prior rate on file.

[00:28:45] Speaker 01:
So that was the task that they assigned.

[00:28:48] Speaker 01:
They wanted

[00:28:49] Speaker 01:
the refunds to be based on the prior rate on file, which is within their discretion to determine that that's the appropriate refund.

[00:28:55] Speaker 01:
And then it says XO energy posits that PJM should refund all FTR forfeitures dating back January 19th, 2017.

[00:29:03] Speaker 01:
So clearly they considered your proposal.

[00:29:06] Speaker 01:
And their answer to that is they disagree.

[00:29:09] Speaker 01:
They want to do it based on the prior rate.

[00:29:11] Speaker 01:
They're entitled to do that.

[00:29:13] Speaker 01:
They have discretion.

[00:29:14] Speaker 02:
So your honor, if they had said only that under the APA,

[00:29:18] Speaker 02:
That would be around for vacator and remit.

[00:29:21] Speaker 02:
We don't want to do it.

[00:29:22] Speaker 02:
It's not a valid exercise of agency discretion.

[00:29:25] Speaker 05:
That is not what they said, counsel.

[00:29:28] Speaker 05:
I mean, we'll do respect.

[00:29:29] Speaker 05:
You may disagree with its reasoning.

[00:29:32] Speaker 05:
But what Judge Pan just quoted from the rehearing order is not what the commission said.

[00:29:41] Speaker 02:
So, right, and that was going to be the second part of my answer.

[00:29:43] Speaker 02:
They, in fact, did not say only that.

[00:29:45] Speaker 02:
What they said was, in the context of just essentially what calculation can we do?

[00:29:51] Speaker 02:
What are we empowered to look at as a possible remedy?

[00:29:53] Speaker 02:
Right?

[00:29:54] Speaker 02:
They said in the context of rejecting our argument that they should just refund everything.

[00:29:59] Speaker 01:
But before your argument, they'd already decided they wanted it calculated based on the prior rate on file.

[00:30:04] Speaker 01:
That was the instruction in the prior order.

[00:30:08] Speaker 01:
So, and then they concluded that and then you said that you, why don't you just give us all the right?

[00:30:13] Speaker 01:
And then they said, we disagree.

[00:30:15] Speaker 01:
And they said, it should be based on the prior rate on file.

[00:30:18] Speaker 01:
And then they said, that's the appropriate calculation.

[00:30:21] Speaker 02:
Right?

[00:30:22] Speaker 02:
Because they're entitled to do that because the pre 2017 rate was the effective rate in our view.

[00:30:28] Speaker 02:
And I recognize.

[00:30:31] Speaker 01:
That's not what they chose to do.

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

[00:30:34] Speaker 02:
Our view is that that response was a non-sector.

[00:30:36] Speaker 02:
That response, if this were straightforward to the state's proceeding.

[00:30:39] Speaker 02:
I think we understand your view.

[00:30:41] Speaker 01:
Thank you.

[00:30:42] Speaker 04:
Thank you.

[00:30:42] Speaker 01:
Thank you.

[00:31:04] Speaker 07:
You may please the court.

[00:31:06] Speaker 03:
I'm Matthew and I represent the federal energy regulatory commission.

[00:31:09] Speaker 03:
I realize this is factually and legally complicated.

[00:31:13] Speaker 03:
So I want to start with a couple of points on the remedy.

[00:31:15] Speaker 03:
I think we'll clarify.

[00:31:17] Speaker 03:
First of all, I think my friend on the other side made an important concession that we do have discretion even in filed rate cases.

[00:31:23] Speaker 03:
That was clear from towns and comfort was clear from a few of the other cases we cited as well.

[00:31:27] Speaker 03:
The key span ravens with this reversed us and said there was a file rape violation.

[00:31:31] Speaker 03:
Go back and decide if you want to remedy that in consolidated Edison in 2003.

[00:31:36] Speaker 03:
We cited both of these.

[00:31:37] Speaker 03:
You did the same.

[00:31:38] Speaker 03:
You reversed us.

[00:31:38] Speaker 03:
So there was a violation.

[00:31:40] Speaker 03:
We came back in 2007.

[00:31:41] Speaker 03:
So we've decided not to remedy that.

[00:31:44] Speaker 03:
You said we do balance the.

[00:31:45] Speaker 03:
So that's an important concession because.

[00:31:47] Speaker 03:
They are tied to the arguments they made on rehearing.

[00:31:50] Speaker 03:
Their principal argument on rehearing was that we lacked discretion, but stepping back to or stepping into how we exercise our own.

[00:31:57] Speaker 03:
And I just, I want to note one more case on the file rate recently in 2018, an unpublished decision in.

[00:32:03] Speaker 03:
Amarin Services Co.

[00:32:05] Speaker 03:
v. Spirk, that's number 131138, at 739 Fed Appendix 646.

[00:32:14] Speaker 03:
The court again was confronted with a file rape violation that we found equitably there was no remedy.

[00:32:21] Speaker 03:
And among the factors that were considered there was reliance was the time, expense, and difficulty with developing software.

[00:32:26] Speaker 03:
It was a different

[00:32:27] Speaker 03:
Regional transmission organization called mice over mid continent.

[00:32:30] Speaker 03:
They hadn't kept up their software.

[00:32:32] Speaker 03:
We said that was an issue.

[00:32:33] Speaker 03:
So I think that case looks a lot of the same things, but.

[00:32:37] Speaker 03:
There's a little bit of confusion here on the remedy.

[00:32:39] Speaker 03:
My friend keeps saying we constrained ourselves to section 206.

[00:32:43] Speaker 03:
That's not true, actually.

[00:32:44] Speaker 03:
The normal remedy in a, if I can step back and look at towns of Concord, it's more about what I would call classic file rate case where you were charging a cost-based rate, you weren't supposed to include the spent fuel cost, but you did.

[00:32:56] Speaker 03:
And so you were supposed to charge X, but actually you charged X plus $36,000.

[00:33:02] Speaker 03:
The remedy in a filed rate case is the remedy between what you charged and what the rate on file was.

[00:33:07] Speaker 03:
And that's why, Judge Pan, I think it was paragraph 16 at J.A.

[00:33:11] Speaker 03:
251, and then we're hearing where you went to.

[00:33:13] Speaker 03:
We were in those paragraphs that are heading there as the pre-2017 rate was the rate on file, right?

[00:33:18] Speaker 03:
They had made arguments both on appeal and below that there was no forfeiture rate because that rate was found unlawful.

[00:33:25] Speaker 03:
That's where the 206 provision comes in 206 structurally, only declare at step 1, our rate is unjust and unreasonable.

[00:33:32] Speaker 03:
We have to go forward to that step 2 process.

[00:33:35] Speaker 03:
We cited era energy for discussing the 2017 case for discussing why there's actually 2 cases from the servant that more clearly state 1 of them we cited, but not for this proposition.

[00:33:46] Speaker 03:
It's the recent NISO transmission owners versus Burke.

[00:33:50] Speaker 03:
45F4248, we cited it for a different proposition, but at page 253 there, the court notes that after the step one provision, quote, until FERC sets a new rate in a 206 proceeding, customers continue to pay the challenge rate.

[00:34:05] Speaker 03:
So that's why it remained the rate on filing you were supposed to continue paying.

[00:34:09] Speaker 03:
Now, if we were going to remedy this as a 206 violation, my friend did point out that 206 has some provisions.

[00:34:15] Speaker 03:
One of them is there's a 15-month limit on refunds.

[00:34:18] Speaker 03:
When you refund a 206 violation, what you do is you say you were charging an unlawful rate.

[00:34:24] Speaker 03:
You keep charging that unlawful rate, and when we figure out what the lawful rate is, you refund the difference between the lawful rate and the unlawful.

[00:34:31] Speaker 03:
So if the refund calculation for sort of a 206, if they kept charging the pre-2017 rate and never commit the file rate violation, we would still have discretion on whether we wanted to refund.

[00:34:42] Speaker 03:
We'd be limited in a number of months, but the refund calculation would actually be running the new rule that we approved in the compliance order.

[00:34:49] Speaker 03:
What are the refunds?

[00:34:50] Speaker 03:
What were the forfeitures under that versus the pre-2017?

[00:34:54] Speaker 03:
And that's not what we were doing here.

[00:34:56] Speaker 03:
Here, we were looking at the rate on file, which is the pre-2017 rule versus what you charged.

[00:35:01] Speaker 03:
That's how you remedy a file of rate violation.

[00:35:04] Speaker 03:
That's what we were trying to do.

[00:35:06] Speaker 03:
We looked at factors, we asked PJ to provide us information, and we considered what we think are appropriate factors.

[00:35:12] Speaker 03:
There are factors that this court in Amarin has looked at.

[00:35:14] Speaker 03:
I would note towns of Concord noted the difficulty and the time and expense involved in trying to reconstruct the rates at issue there.

[00:35:21] Speaker 03:
So I think each of these factors

[00:35:23] Speaker 03:
been applied by the commission and accepted by this court in various cases on those.

[00:35:28] Speaker 03:
So I think that's the key point I would make there.

[00:35:31] Speaker 03:
I would also cite the 2014 Louisiana Public Service Commission we cited in our brief.

[00:35:35] Speaker 03:
It also went through and included I think every one of these sectors.

[00:35:38] Speaker 01:
Could you address the leverage issue?

[00:35:40] Speaker 03:
Yeah, I'll take a quick print.

[00:35:46] Speaker 03:
So

[00:35:49] Speaker 03:
I didn't really think about this way till I read their reply brief at 12 and then again at 14, they described both leverage and portfolio involving the intent to manipulate and needing to have the intent to manipulate.

[00:36:01] Speaker 03:
And so if you look at the compliance order at paragraph 44, which is J.A.

[00:36:06] Speaker 03:
204,

[00:36:08] Speaker 03:
We said there that we had previously rejected arguments about center or intent to manipulate in the twenty seventeen or no one saw rehearing of that.

[00:36:17] Speaker 03:
And so, you know, as we were narrowing the proceeding, right?

[00:36:19] Speaker 03:
It starts with a twenty fourteen proceeding where they're adding these up to congestion trends and we narrow it in twenty seventeen and said.

[00:36:25] Speaker 03:
You need to catch less hedging activity.

[00:36:28] Speaker 03:
You need to sort of narrow this rule.

[00:36:29] Speaker 03:
Here's what you need to do in that order.

[00:36:31] Speaker 03:
We rejected center or intent.

[00:36:33] Speaker 03:
And so in so far as they're arguing, it's a necessary component of the final rule because you can't capture intent or center without that, which I think is how they framed it in their reply brief.

[00:36:43] Speaker 03:
We rejected that in 2017, and in 2021, we said that that was an inappropriate collateral or an inappropriate rehearing request or collateral attack of the earlier order.

[00:36:54] Speaker 03:
And I guess this goes to some of the market monitor's points, but on the sort of inappropriate rehearing or collateral attack, again, I would cite to a very recent opinion of the court.

[00:37:03] Speaker 03:
It's another Louisiana Public Service Commission case.

[00:37:05] Speaker 03:
There's a lot of them, but this is the 2022 case number

[00:37:08] Speaker 03:
20-1315.

[00:37:09] Speaker 03:
It's unpublished.

[00:37:11] Speaker 03:
It's from last year.

[00:37:12] Speaker 03:
It's 2022 Westlaw 801353.

[00:37:15] Speaker 03:
There, Louisiana had a series of these cases about specific remedy.

[00:37:20] Speaker 03:
We had decided, I think it was in the year 2015, that they weren't going to get certain types of refunds.

[00:37:25] Speaker 03:
They didn't seek rehearing of that.

[00:37:27] Speaker 03:
At the end of the case, they then sought to challenge those refunds.

[00:37:30] Speaker 03:
We said that's a collateral attack on our earlier order.

[00:37:33] Speaker 03:
You needed to seek rehearing.

[00:37:34] Speaker 03:
They responded, well, that earlier order wouldn't have been final, so we couldn't have gone to the Court of Appeals.

[00:37:39] Speaker 03:
And this court said FERC was within its discretion to treat its proceedings that way, and it analogized to your own law of the case precedent.

[00:37:46] Speaker 03:
But even though Louisiana was claiming it wasn't final and they couldn't have got to the D.C.

[00:37:49] Speaker 03:
Circuit in 2015, our rule was we needed to challenge that honorary hearing, and we later treated it as... Sorry, Your Honor.

[00:37:57] Speaker 01:
So, can I ask...

[00:38:00] Speaker 01:
I know that you're framing this as the enter, but my understanding of their argument and I'd appreciate your guidance on this.

[00:38:11] Speaker 01:
You have my depth a little bit.

[00:38:13] Speaker 01:
Their argument I think is that there's no manipulation unless there is leverage because otherwise it's just a series of transactions that happens to have a certain effect.

[00:38:23] Speaker 01:
But unless they're profiting, that's not manipulation.

[00:38:27] Speaker 03:
So that's part of the structure of this.

[00:38:29] Speaker 03:
This is an ex ante rule that is designed to catch when virtual transactions are having an impact that raises the value of your financial transmission rights being cross product manipulation.

[00:38:39] Speaker 03:
Again, parties argue throughout that you need to show a profit or you need to show sort of intent or other things.

[00:38:46] Speaker 01:
But I'm saying is profit different from.

[00:38:49] Speaker 03:
Well, yes, to an extent, but one of the things, and again, I don't mean to get too technical, your honor, but you have to understand that these are paid out and they're based on different things.

[00:38:57] Speaker 03:
So an FTR is going to be on a path from point A to point B. If there's congestion places along that path, you're going to get paid for those congestion charges.

[00:39:06] Speaker 03:
One of the things we criticized PJM about and asked them to revise from the original rule was these INCs and

[00:39:14] Speaker 03:
I think it's incremental bids and detrimental.

[00:39:16] Speaker 03:
I'm forgetting the term, but the two initial types of virtual transactions or you virtually offered to buy or sell at one specific place.

[00:39:23] Speaker 03:
You're going to make money on that based on what the dollar value and sort of whether you're selling the day ahead and buying it in the real time.

[00:39:31] Speaker 03:
If you sold for higher in the day ahead than you bought for the real time, you made money.

[00:39:35] Speaker 03:
one of the problems with the original rule and it had this worst case scenarios thing was you could make a bid very far away from your FTR or your financial right and it would still like increase and we had this was a problem with the one cent test it would still increase the FTR in some way and so you'd forfeit and we said that that's too tangential and so this idea of leverage or profiting the problem is you don't know whether you're going to make money you're speculating on think what you think the price tomorrow versus today is at this one location

[00:40:03] Speaker 03:
and that's going to have an effect on your FTR but you don't know what your profit is going to be based on what happens as to that location not what happens everywhere along the path of the FTR and so you're sort of bidding and speculating in two different markets and what we're concerned with is

[00:40:21] Speaker 03:
These virtual transactions can create congestion.

[00:40:25] Speaker 03:
Congestion is then paid by the transmission rate payers and that congestion you shouldn't be benefiting when you created that congestion with your FTR because then you're using your virtual transactions and you are benefiting from it.

[00:40:35] Speaker 03:
Again, you might be making a really big bet on

[00:40:38] Speaker 03:
what the price is going to be like in Richmond tomorrow for power.

[00:40:42] Speaker 03:
But your FTR may run from DC to Baltimore, but that Richard purchase because they have to model this entire grid with where all of the power is moving, et cetera.

[00:40:50] Speaker 03:
That Richard purchase is going to affect where they're modeling the grid and where the power is moving.

[00:40:55] Speaker 01:
So what is the difference between?

[00:40:57] Speaker 01:
So the premise of this is if you manipulate things in your virtual portfolio that affects the price of the FTR.

[00:41:08] Speaker 01:
You would only forfeit if you're profiting on the FDR.

[00:41:12] Speaker 01:
So what's the difference between leverage and just a violation where you're profiting on the FDR?

[00:41:18] Speaker 03:
So I think that there's two points.

[00:41:20] Speaker 03:
One is the manipulation is that your virtual transactions, which is one market you can profit or lose in those, are benefiting your other set of transactions.

[00:41:32] Speaker 03:
was technically under inclusive and how we don't go after intent.

[00:41:36] Speaker 03:
If you had a situation where you engage in a bunch of virtual transactions to raise the value of your FTR, you were meaning to cross product manipulate and you raised the value of your FTR because you created congestion between DC and Baltimore.

[00:41:48] Speaker 03:
Again, I'm simplifying like there's going to transition something.

[00:41:51] Speaker 03:
And so, congestion ended up being $100, or FDR's value was going to be $100, you've got $100 for congestion.

[00:41:57] Speaker 03:
But over, and it's, again, it's the day ahead market for tomorrow.

[00:42:00] Speaker 03:
Overnight, an act of God knocks out the main transmission line there, such that there's massive real-time congestion between D.C.

[00:42:07] Speaker 03:
and Baltimore.

[00:42:08] Speaker 03:
There's a whole nother case about this.

[00:42:09] Speaker 03:
PGM has a $2,000 limit, so the congestion price can't go above that, but it causes the congestion price to go to $2,000.

[00:42:16] Speaker 03:
you don't have to forfeit your FTR profits because the last provision of the forfeiture rule is you only forfeit when the day ahead market had greater convergence or greater congestion than the real-time market.

[00:42:26] Speaker 03:
And that's because the idea of virtual trading is that it will provide not just liquidity but efficiency and that the day ahead market will look more like the real-time market because of virtual trading.

[00:42:36] Speaker 03:
And so in that case, you intended to manipulate, you did manipulate, you got money off of your FTR, but because there was market convergence, you didn't get penalized.

[00:42:45] Speaker 03:
Now, I believe it was Exxon or someone earlier on in the 2017 procedure, there's a lot of orders and a lot of descriptions, argued that, well, wait, sometimes you can increase convergence and you're still manipulating.

[00:42:59] Speaker 03:
And it was one of the reasons we added the rule to what are called counterflow FTRs.

[00:43:03] Speaker 03:
Again, I apologize for getting really technical.

[00:43:06] Speaker 03:
What we said, we're still only going to make you forfeit your profit.

[00:43:10] Speaker 03:
when at the end result was greater congestion in the day ahead than in the real-time market.

[00:43:15] Speaker 03:
Again, because the virtual transactions that created that congestion in the day ahead market, someone's paying that congestion, like that's actually impacting the system.

[00:43:23] Speaker 03:
And that's where when we talk about portfolios, we're worried about your full portfolio of virtual transactions, because we're worried about how you actually caused or didn't cause congestion.

[00:43:33] Speaker 01:
Sorry, I know I went very- But so then if your virtual portfolio, you lose money on

[00:43:38] Speaker 01:
and you gain money in your FTR, why isn't that an appropriate comparison to make?

[00:43:44] Speaker 01:
Which I take it as the leverage point.

[00:43:46] Speaker 03:
Again, the point being, we don't want virtual transactions.

[00:43:49] Speaker 03:
People know that you're buying this at different times.

[00:43:52] Speaker 03:
You know that you have an FTR here.

[00:43:53] Speaker 03:
We don't want you engaging in virtual transactions.

[00:43:56] Speaker 03:
For example, speculating really wildly that, gee, we really think the price enrichment is going to go wild and we'll make a lot of money.

[00:44:02] Speaker 03:
But if we don't, we have this backup DC to Baltimore FTR that will also be held to buy this.

[00:44:07] Speaker 03:
So in the event, if we speculate correctly, the FTR doesn't make us money, but we make a bunch of money in the virtual transactions.

[00:44:13] Speaker 03:
But if we speculate incorrectly, the FTR is going to make us money.

[00:44:16] Speaker 03:
You've still engaged in a virtual transaction that is going to raise the value of your FTR and that's going to cause congestion, right?

[00:44:24] Speaker 03:
So we're not looking at gene.

[00:44:26] Speaker 03:
Should you be kind of speculating wildly?

[00:44:27] Speaker 03:
It's are you engaging?

[00:44:29] Speaker 03:
And again, if we're only up to congestion transactions, which is the type added to be a little easier to see because those have a start and end point.

[00:44:36] Speaker 03:
And so it's a little easier to see where those are going to have an impact.

[00:44:39] Speaker 03:
But because virtual bids can be at a location that impacts your FTR path, but it's not the entirety of your FTR path, or it could be where the constraint is somewhere else on that path, the constraint being the congestion, it may not be the whole path, it may just be a limited piece of the path.

[00:44:54] Speaker 03:
We didn't think for an ex ante rule, right?

[00:44:57] Speaker 03:
We wanted an ex ante rule.

[00:44:58] Speaker 03:
Some regional transmission organizations kind of after the fact police this.

[00:45:03] Speaker 03:
But we found it acceptable for PJM in 2001 and since to have an ex ante rule that tells you when your virtual transactions will be considered cross product manipulation because they are impacting the value of your FTRs.

[00:45:17] Speaker 03:
You're only going to forfeit when you profit because we don't think you should forfeit when you didn't profit on the FTR.

[00:45:21] Speaker 03:
Again, that's a lot of narrowing.

[00:45:23] Speaker 03:
And if I can make one point about hedging, FTRs were designed as a hedge for load serving entities like, I think, Exelon or Constellation in Maryland or Dominion in Virginia that serve customers, right?

[00:45:38] Speaker 03:
They have to purchase what's called firm transmission because they don't want to be curtailed when they're buying power.

[00:45:43] Speaker 03:
And so when they purchase this firm transmission, they're given

[00:45:48] Speaker 03:
these things auction revenue right anyways they can convert these into firm transmission rights the idea being that if you're a virginia customer like i am and there's congestion getting the power to virginia dominion isn't going to keep changing the price on me and charging me for that they're going to hold an ftr that will allow them to get that congestion money back so the ftrs are designed for those entities to hedge um and that's the kind of legitimate hedging that we're concerned with

[00:46:14] Speaker 04:
leveraging in the 2017 order there was a statement about leveraging may play a part in the cross-product manipulation but it's not a necessary condition so what do you take that position now so I think sorry

[00:46:30] Speaker 03:
Yeah, your position that goes to the structural point that this is an ex ante rule, right?

[00:46:35] Speaker 03:
And so in my example, you know, you leveraging that you plan to make a lot of money on this, you know, FTR by making these small bets in the virtual transactions or making specific bets that you're intent again, like it may play a part that you have, you know, use your virtual transactions to make money.

[00:46:52] Speaker 03:
We didn't think that when we're establishing an ex-ante rule that will just let you know when you engage in this conduct, you will forfeit.

[00:46:59] Speaker 03:
We didn't think it was necessary to consider that.

[00:47:01] Speaker 03:
We thought you could have a just and reasonable bright line.

[00:47:05] Speaker 04:
What can a non-leverage transaction be manipulated?

[00:47:11] Speaker 03:
Again, I think the problem is that the way that the FCR is paying is different than the way that the individual virtual transaction is paying.

[00:47:23] Speaker 03:
And so you could be making a very large virtual transaction, expecting the price to be exactly the same today and tomorrow so that it'll net you nothing.

[00:47:31] Speaker 03:
But you want it to raise the value of your FTR.

[00:47:34] Speaker 03:
If you want your FTR to go up $100, you bet $1,000 over here, but your intent was to win on the FTR because you think that $1,000 here is not, you think there's going to be no congestion, no nothing.

[00:47:45] Speaker 03:
So you're betting that assuming that tomorrow the price will be the same, right?

[00:47:48] Speaker 03:
If you were intending to manipulate your FTR, you've made this bet with the intent to manipulate your FTR.

[00:47:53] Speaker 03:
But it turns out that in the virtual market, something happened that caused your bet to be a losing one.

[00:47:58] Speaker 03:
And so you made $100 on the FTR like you intended to.

[00:48:02] Speaker 03:
Actually, rather than paying a tap, selling for $1,000 today and buying for $1,000 tomorrow, something happened in that location such that the price was different and you lost money.

[00:48:12] Speaker 03:
You intended to make money on your FTR by betting on your virtual transaction, but you didn't.

[00:48:18] Speaker 03:
And again, that's because the FTR can make money

[00:48:23] Speaker 03:
The FDR can make money from the entirety of its path.

[00:48:30] Speaker 03:
like congestion on different points along its path.

[00:48:32] Speaker 03:
The virtual in terms of the increment and decrement is a specific location.

[00:48:37] Speaker 03:
And that's one of the actual narrowing provisions in the final rule is that we didn't want to look at the entire FTR path.

[00:48:44] Speaker 03:
We wanted to look at where your virtual transaction caused, like which constraint.

[00:48:48] Speaker 03:
There could be multiple congestion points on an FTR path.

[00:48:50] Speaker 03:
And if the one that led to their increase in value was not the one your virtual transaction had any impact on, you don't need to forfeit.

[00:48:57] Speaker 03:
Under the old rule, you actually would have forfeited.

[00:49:00] Speaker 04:
I think Judge Rogers might have had a question.

[00:49:03] Speaker 03:
Oh, sorry, Judge Rogers.

[00:49:04] Speaker 08:
No, no, I thought the explanation was helpful.

[00:49:10] Speaker 01:
I just want to note, I think that your opposing counsel made the point that if we can't understand what you did, then we should vacate because you haven't explained it adequately, haven't addressed it meaningfully.

[00:49:25] Speaker 01:
And through all this argument, I'm starting to

[00:49:29] Speaker 01:
understand, but it seems that as an initial matter, like you are obligated to address their concerns meaningfully.

[00:49:37] Speaker 01:
And if we're having so much trouble understanding what you did, why isn't this a remand so that you can explain it?

[00:49:43] Speaker 03:
So, I think part of that goes to again, the structure of this proceeding.

[00:49:48] Speaker 03:
Things like the intent point early on in the proceeding in the 2017, or we address a lot of these arguments and in 2021, or we address some more.

[00:49:56] Speaker 03:
And, you know, by the time we got to the 2022 or the compliance order, right?

[00:50:00] Speaker 03:
We were directing them to make specific changes.

[00:50:03] Speaker 03:
And this is actually exactly what I was going to point to.

[00:50:06] Speaker 03:
In the 2021 order at paragraph 70, which is JA 113, we rejected a leverage argument from another party.

[00:50:13] Speaker 03:
I'm not going to try to pronounce their name because it's long and complicated.

[00:50:17] Speaker 03:
Noting that we don't require PJM to exempt from forfeiture an effective FTR holder's positions where its virtual transaction position exposure is greater than its FTR exposure,

[00:50:28] Speaker 03:
we're not persuaded that these proposals are, at this time, necessary elements of adjusted reasonable replacement rates.

[00:50:36] Speaker 03:
So we had earlier on said these are not necessary for adjusted reasonable rate.

[00:50:39] Speaker 03:
The ultimate question we're trying to answer, and I think when you challenge our rate, you know, again, I understand Judge Payne you're making kind of an APA failure to explain challenge compared to an unjust and unreasonable rate challenge, but we had earlier on said

[00:50:52] Speaker 03:
You know, we don't think that's necessary for an X anti rule that is going to try to catch cross product manipulation.

[00:51:00] Speaker 03:
We just didn't think those were necessary provisions.

[00:51:01] Speaker 03:
We said it then they came back and kept saying, you can't be just unreasonable without these.

[00:51:06] Speaker 03:
And we again reiterated that and as to kind of the explanation.

[00:51:10] Speaker 03:
My friend hit today that he hit in his reply brief and in his opening brief that in the rehearing order, we discussed portfolio leverage and portfolio FC arguments together.

[00:51:22] Speaker 03:
If you look at the rehearing order, and I apologize, I didn't include the whole thing in the JA, but it's available, it's in the record.

[00:51:28] Speaker 03:
In their second and third statements of error, which we included statements of error, it's their sumerits arguments.

[00:51:35] Speaker 03:
If you look at the re-hearing order, they switch between leverage and portfolio in the same paragraph, paragraph after paragraph.

[00:51:41] Speaker 03:
I think it's pages, I want to say 10 to 13 of the re-hearing order.

[00:51:44] Speaker 03:
But anyways, the point is they were addressing them both together in those challenges.

[00:51:48] Speaker 03:
We addressed them both in that paragraph, but there are earlier paragraphs addressing these various points.

[00:51:54] Speaker 01:
It seems that every time you address it, you say the same thing.

[00:51:57] Speaker 01:
We acknowledge that leverage may play a part in a cross-product manipulation, but it is not a necessary condition.

[00:52:03] Speaker 01:
And if that's not clear, it's not clear in every single order in which you said that.

[00:52:10] Speaker 03:
Yeah, I guess, you know, I don't have a number of, like the 20, I gave the 2021 order citation, the next paragraph.

[00:52:18] Speaker 01:
I'm looking at that.

[00:52:19] Speaker 03:
We were just a test for profitability.

[00:52:22] Speaker 03:
You know, I think I would have to go back and look at those and see what, you know, were we citing arguments, the market monitor made, et cetera.

[00:52:31] Speaker 03:
you know our ultimate question in 2017 was is this just and reasonable and we were looking at a few factors in 2021 we narrowed that saying i think a just and reasonable rate needs to have certain provisions but doesn't need to have these others um and and so you know we didn't think catching sienna we didn't think catching kind of the profitability between the two um markets were necessary to an ultimately just and reasonable i think it boils down to whether this sentence meaningfully addresses it

[00:53:00] Speaker 01:
That it may play a part, but it's not a necessary condition.

[00:53:04] Speaker 04:
That's what I went to.

[00:53:05] Speaker 01:
Exactly.

[00:53:06] Speaker 01:
If that's not clear, then you haven't addressed it.

[00:53:09] Speaker 05:
Could you say the question is where the commission has referred to its previous decisions isn't that the corporation by reference that has acknowledged.

[00:53:21] Speaker 05:
And here it's too late to seek re-hearing of 2017 and 2021.

[00:53:30] Speaker 05:
In any event, we can discuss that later.

[00:53:35] Speaker 03:
In those, I have one other site in my notes that's just in the 2017 order of paragraph 80.

[00:53:42] Speaker 03:
Which I know is J 38.

[00:53:44] Speaker 03:
We have rejected another parties.

[00:53:47] Speaker 03:
It was the.

[00:53:48] Speaker 03:
I don't know what the acronym stands for, but he's argument for leverage and the footnote there.

[00:53:54] Speaker 03:
Anyway, so the 2017 order does have some discussion of this.

[00:54:00] Speaker 03:
I appreciate your question again.

[00:54:02] Speaker 03:
That sense specifically, I think, is capturing the idea.

[00:54:05] Speaker 03:
If you don't think that we explained early on, that's all.

[00:54:08] Speaker 03:
But the idea that a just and reasonable rate doesn't need this component, it's an ex ante sort of forward looking point.

[00:54:15] Speaker 03:
If the court has no questions, I realize I'm very far over.

[00:54:18] Speaker 03:
I appreciate your time.

[00:54:19] Speaker 01:
Thank you.

[00:54:20] Speaker 01:
Thank you.

[00:54:34] Speaker 07:
May I please support?

[00:54:35] Speaker 00:
Yes.

[00:54:35] Speaker 00:
My name is Jeff Mays.

[00:54:37] Speaker 00:
I'm counsel for the Independent Monitor for PJM.

[00:54:41] Speaker 00:
A core flaw in Exxon Energy's case is that it has appealed wrong orders.

[00:54:45] Speaker 00:
The 2022 order and the 2022 re-hearing order.

[00:54:50] Speaker 00:
The 2022 orders on appeal address a single component of the FTO or forfeiture rules, the impact test.

[00:54:57] Speaker 00:
The impact test is the only issue within the scope of the 2022 order.

[00:55:03] Speaker 00:
Yet, EXO does not appeal the impact test.

[00:55:06] Speaker 00:
Instead, the appeal addresses findings on other issues addressed in the 2021 order that is not on appeal and in the 2017 order.

[00:55:16] Speaker 00:
EXO does not support its claim that an appeal of the 2022 order is proper.

[00:55:21] Speaker 00:
EXO Energy cites cases that are not about work and RTO market rules.

[00:55:25] Speaker 00:
None of them are on point.

[00:55:27] Speaker 00:
The 2021 order is not abstract.

[00:55:30] Speaker 00:
It defines the scope of the compliance

[00:55:33] Speaker 00:
EXO Energy's arguments are all directed at the 2021 order.

[00:55:38] Speaker 00:
And FERC Council earlier noted a decision in the unpublished, and we would say on a public service commission versus FERC, where this court found that the PSC's failure to appeal an earlier order was not final.

[00:55:59] Speaker 00:
So, um, at this time, I'd like to make myself a bit of a question.

[00:56:02] Speaker 00:
Sorry, go ahead.

[00:56:07] Speaker 05:
Please proceed.

[00:56:09] Speaker 04:
Okay.

[00:56:10] Speaker 04:
Um, two questions.

[00:56:11] Speaker 04:
One is just your position on the remedy issue.

[00:56:14] Speaker 04:
And then also with respect to whether there's a violation rate, we didn't take a position on the remedy issue.

[00:56:20] Speaker 00:
Um, our concern really is to protect your forfeiture role.

[00:56:25] Speaker 00:
We think that is a very important role for the efficiency of the markets and protecting against manipulation.

[00:56:30] Speaker 00:
We think such a role always needs to be in effect as long as we have virtual trading in the markets.

[00:56:35] Speaker 00:
Having that role is necessary in order to have virtual trading in the markets and arguably even to have the two-stage day ahead real-time market construct that we have.

[00:56:45] Speaker 05:
Let me ask you, counsel, I read your brief.

[00:56:49] Speaker 05:
I didn't see that Burke adopted that position of forfeiture.

[00:56:54] Speaker 05:
Am I incorrect?

[00:56:59] Speaker 05:
Not that you don't state a forfeiture rule that this court has long recognized, that final rules cannot be collateral attacked after the time for petitioning for review has expired.

[00:57:15] Speaker 05:
But I did pick up on that argument at any point, and I didn't hear it this morning either.

[00:57:23] Speaker 00:
Yes, in the 2017 order, these issues, the issues in this case were raised by Exile Energy and perhaps were also raised by others.

[00:57:35] Speaker 00:
And a decision was made, a final decision that those elements, those components are not necessary for adjusting reasonable FDL forfeiture.

[00:57:43] Speaker 05:
Right.

[00:57:44] Speaker 05:
But why would Bert not have picked up on this argument?

[00:57:50] Speaker 05:
I just wasn't clear about that, because your brief was so definitive on this matter.

[00:58:00] Speaker 00:
Right.

[00:58:00] Speaker 00:
I don't know why Bert didn't argue that as far as we did.

[00:58:04] Speaker 00:
But I would point to the 2017 order and the 2021 order.

[00:58:10] Speaker 00:
And the first compliance round, Bert

[00:58:12] Speaker 00:
basically states in its order that the arguments being raised by EXO here, that they're not properly part of the compliance proceeding.

[00:58:19] Speaker 00:
And so I think that is, it's not in the current briefing stage, but in that 2021 order, I think Brooke is saying essentially the same thing that we're arguing.

[00:58:29] Speaker 00:
Thank you.

[00:58:33] Speaker 04:
Thank you.

[00:58:33] Speaker 04:
Anything further?

[00:58:35] Speaker 04:
No.

[00:58:35] Speaker 04:
Okay.

[00:58:36] Speaker 04:
Thank you.

[00:58:52] Speaker 02:
I'd like to begin by taking a crack at the question that Judge Rogers just asked.

[00:58:56] Speaker 02:
I think the answer as to why the Commission didn't adopt the IMM's argument is that this is not a collateral attack on a final rule.

[00:59:04] Speaker 02:
The rule was approved

[00:59:06] Speaker 02:
Only in the order that is now on review, there were aspects of the rule that were passed of other proposals, I should say that were passed upon in earlier orders, but we had no obligation and the commission did not say in this brief that we had any obligation to seek rehearing those orders in order to preserve our arguments.

[00:59:25] Speaker 02:
as to the final rule, which is now properly on review in this court.

[00:59:30] Speaker 05:
Would you agree though that this court, given that FERC has referred to these actions it took previously in 2017 and 2021, that this court has traditionally looked for the explanation provided by the agency

[00:59:54] Speaker 05:
and a reference is sufficient.

[00:59:59] Speaker 05:
In other words, when the agency has decided one, two, three, it doesn't in the fourth situation also have to redesign one, two, three.

[01:00:10] Speaker 05:
It can simply refer to the orders on one, two, three.

[01:00:16] Speaker 05:
And to the extent that the court is concerned about an accurate explanation,

[01:00:23] Speaker 05:
The court looks to the orders one, two, three.

[01:00:33] Speaker 02:
with that principle at all.

[01:00:35] Speaker 02:
The issue here is that if you look back, what you're essentially getting is zero plus zero plus zero plus zero equals zero.

[01:00:42] Speaker 05:
No, I understand that that is your position, but that is not the agency's view of what it previously said.

[01:00:49] Speaker 05:
So your position in challenging the current order

[01:00:53] Speaker 05:
is that the court essentially is obligated to look at what authorities the agency cited, including its prior decisions that address issues you have raised in this appeal.

[01:01:14] Speaker 02:
Yes, I completely agree with that, Your Honor.

[01:01:18] Speaker 02:
And on the portfolio issue, if you scour the record and look at all the orders,

[01:01:22] Speaker 02:
including the ones that are on review and the ones that were previously issued.

[01:01:26] Speaker 02:
You will find a rationale that's essentially market participants will have an incentive to manipulate a smaller FTR for the benefit of a smaller FTR, even if it's going to cause them to lose money on their overall portfolio.

[01:01:40] Speaker 02:
And as we explained in the brief, that doesn't make any sense.

[01:01:43] Speaker 02:
If you look back at all the orders, what you'll be left with on the leverage issue is a few orders that seem to conflate the leverage in the portfolio issue.

[01:01:51] Speaker 02:
And then I believe two orders that possibly three orders that

[01:01:56] Speaker 02:
repeat the sentence about leverage being a factor but not entirely determinative.

[01:02:02] Speaker 05:
Isn't it correct though that you presented those two arguments basically together and not in these separate ways that you are explaining them and your meaning regarding these terms in response to Judge Pan's questions.

[01:02:24] Speaker 02:
I think we presented them as independent arguments, and I think they're inherently independent arguments.

[01:02:32] Speaker 02:
They cover a different subject matter.

[01:02:34] Speaker 02:
As I acknowledged earlier, they're certainly related concepts.

[01:02:36] Speaker 02:
but they're independent arguments.

[01:02:38] Speaker 02:
And the commission.

[01:02:40] Speaker 05:
Well, I understand that it's a different argument to say that something is blue and something is inequitable.

[01:02:49] Speaker 05:
But on the other hand, if you say not only is this order arbitrary and capricious for a number of reasons, it's also arbitrary because it's blue and

[01:03:07] Speaker 05:
the other factor.

[01:03:09] Speaker 05:
That's all I'm getting at.

[01:03:12] Speaker 05:
In other words, it's not as though you try and this appeal to get the kind of decision from FERC to just repeat, you disagreed with it.

[01:03:24] Speaker 05:
But as FERC said on rehearing, here are the arguments you presented on rehearing and that's what we're addressing.

[01:03:34] Speaker 02:
I think if you look at first brief in this court, their contention is that these were all jumbled together.

[01:03:41] Speaker 02:
We didn't understand them.

[01:03:43] Speaker 02:
And so we gave a jumbled together response and you should affirm because the arguments were presented in a way that was jumbled together.

[01:03:49] Speaker 02:
Their response is on the portfolio issue, you would have an incentive to manipulate regardless of your portfolio.

[01:03:55] Speaker 02:
As we covered, that doesn't make any sense.

[01:03:57] Speaker 02:
On the virtual issue, they offer a rationale for their decision on the virtual, excuse me, on the leverage issue.

[01:04:07] Speaker 02:
That again, what we hear today is an extreme elaboration on anything that we saw in the briefs or in the orders on review.

[01:04:15] Speaker 02:
The orders on review don't have a thorough explanation of their reasoning, don't provide any basis on which to conclude that their reasoning was either rational or irrational.

[01:04:25] Speaker 02:
They just state a conclusion essentially.

[01:04:27] Speaker 02:
And that's not enough under January.

[01:04:29] Speaker 02:
And to the question that Judge Pan asked earlier on, and Judge Schaub asked as well, on should the court remand or vacate and remand, our position is on the portfolio issue, there's really no way that on remand the agency is going to find the same way if they're forced to provide a rational explanation.

[01:04:49] Speaker 02:
The sort of basic APA generating principle is that we don't just assume that the agency would reach the same result.

[01:04:57] Speaker 02:
If they provided reasoning that is irrational, there has to be some kind of showing before the court takes the step.

[01:05:04] Speaker 02:
of remanding without vacator, which would leave in place a rule that has no justification for it, subject to the future actions of the agency.

[01:05:13] Speaker 02:
And I don't think it's a safe assumption in this case that if this were remanded to the agency, they would in fact come up with a rational rationale for the rule that they've adopted.

[01:05:24] Speaker 05:
Well, that must be premised on your proposition that the agency was required to adopt your analysis.

[01:05:33] Speaker 05:
And the agency specifically on rehearing said it disagreed.

[01:05:42] Speaker 05:
And so to explain why it disagrees, we can look at what it said about this very issue.

[01:05:50] Speaker 05:
That's all I'm getting at.

[01:05:54] Speaker 02:
Look at what the agency said about the issue in the orders on review and the prior orders.

[01:06:01] Speaker 02:
But to the extent, those don't provide a reliable indication that the agency.

[01:06:05] Speaker 05:
I understand that.

[01:06:06] Speaker 05:
I understand that.

[01:06:08] Speaker 05:
Yeah.

[01:06:09] Speaker 05:
Okay.

[01:06:09] Speaker 05:
Thank you.

[01:06:10] Speaker 02:
If there's something for that.

[01:06:11] Speaker 02:
Thank you.

[01:06:13] Speaker 05:
The case is submitted.