UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION. Arizona Public Service Company ) Docket No. ER

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Arizona Public Service Company ) Docket No. ER MOTION FOR CLARIFICATION OR, IN THE ALTERNATIVE, REQUEST FOR REHEARING OF SOUTHERN CALIFORNIA EDISON COMPANY Pursuant to Rules 212 and 713 of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission ( Commission or FERC ), 18 C.F.R ,.713 (2016), and Section 313(a) of the Federal Power Act ( FPA ), 16 U.S.C. 8251(a) (2016) Southern California Edison Company ( SCE ) submits this Motion for Clarification, or in the alternative, Request for Rehearing of the Commission s Order Accepting Notice of Cancellation of Rate Schedule and Rejecting Proposed Ratemaking and Accounting Treatment, 156 FERC 61,006 (2016), issued on July 1, 2016 ( July 2016 Order ). SCE believes and, through this pleading, SCE requests that the Commission confirm and clarify, that the Commission did not prohibit Arizona Public Services Company ( APS ) from paying SCE $18 million pursuant to the parties Expiration Agreement and that SCE can accept such payment consistent with the Commission s orders. If the Commission rules otherwise, then SCE requests rehearing of the Commission s ruling that the Agreement Concerning Expiration of the Edison-Arizona Transmission Agreement ( Expiration Agreement ) and/or the Expiration Payment were jurisdictional.

2 I. SPECIFICATION OF ERRORS The following concise statement of the errors in the July 2016 Order relates to SCE s alternative request for rehearing. The Commission need not reach these issues if it grants SCE s motion for clarification. (a) The Commission erred in ruling that the Expiration Agreement revised the Edison Arizona Transmission Agreement ( EATA ) by setting a new termination date and thus APS should have filed the Expiration Agreement under section 205(c) of the FPA. (b) The Commission erred to the extent it prohibited APS from paying SCE the Expiration Payment on the grounds that such payment is a rate for transmission service over which it had jurisdiction. II. STATEMENT OF ISSUES The following Statement of Issues relates to SCE s alternative request for rehearing. The Commission need not reach these issues if it grants SCE s motion for clarification. Issue: Whether the Commission erred in the July 2016 Order by ruling that the Expiration Agreement revised the EATA by setting a new termination date. Position: Yes, because the EATA must be interpreted to be consistent with the parties intentions, which was for the EATA s expiration date to be tied to the expiration of APS and SCE s lease of the Four Corners Generation Station site, not just APS s lease of the site. The Expiration Agreement did not revise the EATA it only provided a process to conclude the parties obligation once the expiration of EATA had occurred. 2

3 Representative Precedent: Pennzoil v. FERC, 789 F.2d 1128 (5th Cir. 1986); Southern California Edison Co. v. FERC, 502 F.3d 176 (D.C. Cir. 2007); Taylor v. State Farm Mutual Insurance Co., 175 Ariz. 148 (1993); Phelps Dodge Corp. v. Brown, 112 Ariz. 179 (1975); Independent Oil and Gas Assoc. of West Virginia, 13 FERC 63,052 (1980); PJM Interconnection, 117 FERC 61,168 (2006); Dona Ana Mut. Domestic Water Consumers Ass n v. City of Las Cruces, 516 F.3d 900 (10th Cir. 2008); Williams Petroleum Co. v. Midland Cooperatives, Inc., 679 F.2d 815, 819 (10 th Cir. 1982); and AGA Shareholders, LLC v. CSK Auto, Inc., 589 F. Supp. 2d 1175, 1183 (D. Ariz., 2008). Issue: Whether the Commission s erred in exercising jurisdiction over the Expiration Payment from APS to SCE. Position: Yes, because the Expiration Payment is not a rate, nor does it affect a rate, for the transmission of energy in interstate commerce. Representative Precedent: 16 U.S.C. 824, 824(d)(2016). III. MOTION FOR CLARIFICATION A. Background. On July 20, 1966, SCE and APS entered into the EATA which provided for the construction and operation of a 500 kv transmission line between Four Corners and Eldorado. Under the EATA, APS would construct, own, operate, and maintain the portion of the line from Four Corners to the Arizona-Nevada border and make the capacity available for SCE to transmit its share of the output from Units 4 and 5 of the Four Corners Generating Station. In exchange, SCE would pay for the cost of construction, operation, and maintenance of APS s portion of the 3

4 line. The term of the EATA was tied to the term of SCE and APS s lease of the Four Corners Generating Station site, which had an expiration date of July 6, In 2010, APS and SCE negotiated over the sale of SCE s share of Units 4 and 5 of the Four Corners Power Plant to APS ( Asset Sale ). Concurrently, following APS s inquiry as to SCE s interest in terminating the EATA prior to its expiration date, SCE and APS negotiated the disposition of the EATA. On November 8, 2010, SCE and APS executed an agreement ( Termination Agreement ) that provided for, among other things, the termination of the EATA on the earlier of the closing of the Asset Sale or July 6, 2016, the anticipated expiration of the term of the EATA. Upon termination of the EATA, APS agreed to pay SCE $40,000,000 in lieu of any other payments that may have been payable by either party under Section 25 of the EATA. SCE noted in its intervention that it intended to flow the $40,000,000 through its formula rate as a credit to its ratepayers. 1 The Termination Agreement also provided that SCE and APS would file for cancellation of the EATA, but did not address APS s potential rate recovery of the $40,000,000 payment. On May 1, 2013, APS filed at FERC for cancellation of the EATA effective upon the date of closing of the Asset Sale and for rate recovery of the $40,000,000 from its ratepayers. The Commission ruled on this filing in its 2013 Order Denying Rate Recovery, granting the cancellation of the EATA but denying APS s request for rate recovery of the $40,000, In response, SCE filed a request for clarification, asking the Commission to make clear that its 2013 Order Denying Rate Recovery did not prejudice SCE s contractual rights to seek payment from APS. In its 2014 Order Denying Rehearing, the Commission clarified that the 2013 Order 1 See SCE Motion to Intervene and Comments at 4, Dkt. ER , (May 23, 2013). 2 Arizona Public Service Co., 144 FERC 61,200 (2013). 4

5 Denying Rate Recovery did not address SCE s contractual rights to payment from APS. 3 The Commission explained that it was not opining on the parties financial obligations to one another it was only opining on APS ability to seek rate recovery for the agreed-upon amount ($40 million) from APS ratepayers. FERC explained that its review of the EATA was to determine if it supported APS s assertion that paragraph 25.3 of the Transmission Service Agreement authorizes APS s recovery of the proposed $40 million termination payment to SoCal Edison in its jurisdictional wholesale rates. 4 The Commission then stated that its 2013 Order Denying Rate Recovery did not address or interpret SoCal Edison s contractual rights under the EATA. 5 SCE and APS then entered into informal discussions regarding the implications of these orders on APS s contractual obligations to SCE. Specifically, the parties agreed to defer termination of the EATA to its expiration date but were at odds over APS s contractual obligation to pay SCE the $40 million, which dispute would have been subject to dispute resolution under the EATA. APS contended the 2013 Order Denying Rate Recovery relieved APS of the obligation to pay SCE pursuant to the Termination Agreement. To resolve this dispute, SCE and APS agreed that APS would pay SCE $18 million regardless of whether FERC approved the pass-through of any portion of that payment in APS s rates. The parties memorialized that compromise in the Expiration Agreement on December 22, The Expiration Agreement provided for, among other things, a payment pursuant to section 25.4 of the EATA ( Section 25.4 Payment ) that was part of an overall Expiration Payment of $18 million to SCE on July 6, 2016 and termination of the Termination Agreement. 6 3 Arizona Public Service Co., 147 FERC 61,017 at P 20 (2014). 4 Id.. 5 Id. 6 Section 3.1 of the Expiration Agreement provides that, if the payment to SCE under Section 25.4 of the EATA is less than $18 million, APS agrees to pay to Edison the difference between $18,000,000 and the Section

6 On April 1, 2016 APS filed for cancellation of the EATA effective on July 6, 2016 and for rate recovery of the Section 25.4 Payment, which comprised approximately $12.7 million of the Expiration Payment. 7 On July 1, 2016, FERC issued the July 2016 Order, granting the cancellation but denying APS rate recovery of the Section 25.4 Payment and ruling that the Expiration Agreement modified the expiration date of the EATA and thus should have been filed pursuant to section 205(c) of the FPA. On July 6, 2016, APS made the $18 million payment to SCE, which SCE placed into an account separate from other SCE funds pending the clarification described below. B. The Commission Should Clarify that it Did Not Disallow the Expiration Payment. The July 2016 Order describes its ruling, in part, a disallowance of the reimbursement payment. 8 Although this statement appears in the context of the Commission s disallowance of APS s recovery of the Section 25.4 Payment in its rates, in an abundance of caution SCE seeks clarification that the Commission did not intend to affect or alter APS s payment obligation to SCE, or SCE s ability to accept such payment, which SCE will pass through to its transmission ratepayers. 9 SCE believes that the Commission did not intend to prohibit the APS payment, but in order to assure that SCE is in full and complete compliance with the Commission s orders, SCE is filing this request for clarification. Payment thereby resulting in a total Expiration Payment of $18,000,000, irrespective of the amount paid under Section See Expiration Agreement, attached as Exhibit A. 7 APS did not seek rate recovery for the remaining $5.3 million of the Expiration Payment. 8 July 2016 Order at P 41 (emphasis added). Additionally, the July 2016 Order states the resulting payment from APS to SoCal Edison is $0.00. Id. at P 40. Finally, Paragraph 1 states that APS requested that the Commission permit it to: (1) pay SoCal Edison a $12,688,457 negotiated reimbursement pursuant to section 25.4 of the Agreement. SCE is unaware of APS having made any such request to the Commission to permit it to pay money to SCE. 9 SCE stated in its Comments in this docket that, in addition to the amount collected under Section 25.4, that SCE would also pass through to ratepayers an additional amount (estimated to be about $5 million) to be paid to SCE by APS under the Expiration Agreement. SCE Comments at 2 n.1, Dkt. No. ER (Apr. 11, 2016). 6

7 Pursuant to the Expiration Agreement, APS is obligated to pay SCE the $18 million Expiration Payment regardless of any ruling on APS s proposed rate recovery. 10 The Expiration Payment is a negotiated amount that compromises a dispute over APS s obligation to pay SCE $40 million. As explained above, APS made this payment to SCE on July 6, SCE seeks here a similar clarification to that granted in the 2014 Rehearing Order that the July 2016 Order does not prevent APS from paying the Expiration Payment to SCE. A positive ruling regarding SCE s right to the Expiration Payment will benefit SCE ratepayers, who spent fifty years bearing the cost of the Arizona Transmission System, by providing them the benefits of SCE s arms-length bargain for the Expiration Payment. 11 IV. IF THE COMMISSION DISALLOWED THE EXPIRATION PAYMENT, SCE SEEKS REHEARNG If the Commission intended to disallow SCE s collection of the Expiration Payment, SCE seeks rehearing, on two grounds. First, SCE does not agree that the Commission has a basis to assert jurisdiction over the Expiration Agreement and therefore cannot prohibit the payment. Second, even if the Commission has jurisdiction over some aspect of the Expiration Agreement, 12 that jurisdiction would not extend to SCE s receipt of the Expiration Payment. A. The Commission Erred in Holding that the Expiration Agreement Must Be Filed Because It Did Not Change the Termination Date of the EATA. In its July 2016 Order (at P 32 n.45), the Commission asserted that the Expiration Agreement changed the expiration date of the EATA to July 6, 2016, reasoning that section 26 of 10 See section 5.2(a) of the Expiration Agreement. 11 If the Commission does not grant this clarification and instead holds that SCE is not entitled to the Expiration Payment, SCE will return the funds to APS, subject to the outcome any rehearings, appeals, or other appropriate legal actions SCE may choose to pursue. 12 The fact that one portion of an agreement is jurisdictional does not render the entire agreement jurisdictional. Columbia Gas Transmission Corp. v. FERC, 404 F.3d 459, 462 (D.C. Cir. 2005) (holding that the filed rate doctrine cannot be used as a jurisdictional boot-strap to assert jurisdiction over matters addressed in a contract over which the Commission lacks jurisdiction). 7

8 the EATA tied the expiration date to the expiration date of the Four Corners Power Plant site lease. However, the expiration date of the EATA was always July 6, 2016 and the Expiration Agreement merely provided for SCE and APS s mutual understanding of the events that were to occur on that day. Paragraph 32 of the July 2016 Order involves a question of contract interpretation. The starting point in interpreting any contract is determining which law applies to the interpretation of the contract. The Commission is required to apply the law that would govern the parties dealings were there no regulation at all of the contract s subject matter. 13 In this case, Section 19 of the EATA specifies that the terms of the contract are to be interpreted according to Arizona law. Under Arizona law, the over-riding principle of contract interpretation is that a contract is to be interpreted to give effect to the intention of the parties. 14 This means that the decision maker must avoid the often irresistible temptation to automatically interpret contract language as he or she would understand the words. 15 Rather, the meaning intended by the parties must be enforced. 16 To arrive at the intention of the parties as it is expressed in the contract, the contract must be read as a whole and interpreted in a way to make it effective and reasonable Pennzoil v. FERC, 789 F.2d 1128, 1142 (5th Cir. 1986); Southern California Edison Co. v. FERC, 502 F.3d 176, 181 (D.C. Cir. 2007). 14 Taylor v. State Farm Mutual Insurance Co., 175 Ariz. 148, 153 (1993). See also Independent Oil and Gas Assoc. of West Virginia, 13 FERC 63,052 at 65, (1980) (in every situation of contract interpretation, the Commission must put itself in the position of the parties). 15 Id. 16 Id. 17 Phelps Dodge Corp. v. Brown, 112 Ariz. 179, 181 (1975). See also PJM Interconnection, 117 FERC 61,168 (2006) ( Under standard contract interpretation the contract must be read as a whole, with meaning given to every provision. ); Dona Ana Mut. Domestic Water Consumers Ass n v. City of Las Cruces, 516 F.3d 900, 907 (10th Cir. 2008) (reasonable rather than unreasonable interpretations are favored by law). 8

9 Section 26.1 of the EATA provides, This Transmission Agreement shall continue in force and effect during the term of the New Lease and any and all renewals or extensions thereof. The Commission interpreted this section to mean that APS s extension of its lease of the Four Corners Generating Station Site extended the expiration date of the EATA to July 6, However, Section 5.19 of the EATA defines New Lease as, The provisions of the Supplemental Lease from The Navajo Tribe of Indians, as lessors, which are applicable to the Four Corners Project, and under which the Participants, as lessees, shall acquire leasehold rights to construct, reconstruct, use, operate, maintain, relocate and remove the Four Corners Project. (emphasis added). The EATA clearly indicates, through its definition of the term New Lease, that the term of the EATA was tied to the term of APS and SCE s lease of the Four Corners Generating Station site, not just APS s. 18 When SCE and APS entered into the EATA in 1966, they were both parties to the lease of the Four Corners Generating Station site. This 1966 lease was the New Lease, as defined by the EATA, and it was this lease s expiration date, July 6, 2016, to which section 25.4 of the EATA was referring to as the expiration date of the EATA. APS could not unilaterally extend the New Lease and thereby the EATA, and bind SCE to a longer contractual term, without SCE s consent and participation. When APS decided to continue the lease of the site without SCE, APS signed a fundamentally different lease with different parties and different terms which could not be considered an extension or renewal of 18 The EATA also makes repeated references to how the transmission service furnished by APS is for the transmission of [SCE s] entitlement to the output of the Four Corners Project. See sections 2.4 and 7.3 of the EATA. These references are inconsistent with the Commission s interpretation that the parties intended for the EATA to continue even if SCE had ceased to have an entitlement in the output of the Four Corners Project. 9

10 the New Lease. 19 Accordingly, the expiration date of the EATA remained unchanged because the expiration date of the New Lease itself remained unchanged from its July 2016 date. Further, the parties conduct after the execution of a contract is indicative of their interpretation of the meaning of that contract and the Commission should adopt such interpretation. 20 Here, SCE has been consistent in treating July 6, 2016 as the correct expiration date for the EATA, noting as far back as 2013 that such date was the anticipated expiration of the term of the [EATA]. 21 Both the language of the EATA as well as SCE s subsequent conduct favors the interpretation that parties intended the expiration date of the EATA to be July 6, 2016 and not for it to be extended if SCE was no longer a party to the lease of the Four Corners Generating Station site. The EATA did not change the July 6, 2016 expiration date it only addressed matters that required to take place upon that expiration. Therefore, the Commission erred when it determined that the Expiration Agreement revised the EATA by setting a new expiration date and was thus required to be filed by APS under section 205 (c) of the FPA. B. The Expiration Payment Is Not a Rate for Transmission Service. Sections 201 and 205 of the FPA give the Commission jurisdiction over the rates for the transmission of energy in interstate commerce. However, the Expiration Payment is not a rate, nor does it affect a rate, for the transmission of energy in interstate commerce. It provides for payment to the transmission customer (i.e., SCE), not the transmission provider. Thus, the rate is 19 Williams Petroleum Co. v. Midland Cooperatives, Inc., 679 F.2d 815, 819 (10 th Cir. 1982) (In ruling that a contract was not a renewal or extension of a previous contract, court noted that renewal and extensions normally involve a continuation of the relationship on essentially the same terms and conditions as the original contract. ) 20 AGA Shareholders, LLC v. CSK Auto, Inc., 589 F. Supp. 2d 1175, 1183 (D. Ariz., 2008). 21 See SCE s Motion for Clarification or in the Alternative, Request for Rehearing at 3, Dkt. No. ER , (October 15, 2013) (in that pleading, SCE explained that the parties had agreed to a termination date potentially earlier than the expected termination date of July 6, 2016). 10

11 not for the provision of a public utility service. The transmission service being received would have ceased and would no longer be provided at the time the payment under EATA became relevant. Any finding by the Commission that SCE is not entitled to the Expiration Payment is thus extra-jurisdictional under Section 201 and 205 of the FPA. As such, SCE respectfully believes that SCE is entitled to receive the $18 million payment from APS for the benefit of SCE ratepayers. V. CONCLUSION Wherefore, SCE respectfully requests that the Commission grant the requested clarification or, in the alternative, rehearing for the reasons stated above. Respectfully submitted, GARY CHEN By: /s/ Gary Chen Gary Chen Attorneys for SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California Telephone: (626) Facsimile: (626) Gary.Chen@sce.com Dated: August 1,

12 EXHIBIT A

31 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing MOTION FOR CLARIFICATION OR, IN THE ATLERNATIVE, REQUEST FOR REHEARING OF SOUTHERN CALIFORNIA EDISON COMPANY upon each person designated on the official service list compiled by the Secretary in this proceeding. Dated at Rosemead, California, this 1 st day of August, /s/ Gabriela Moreno Gabriela Moreno SOUTHERN CALIFORNIA EDISON COMPANY 2244 Walnut Grove Avenue Post Office Box 800 Rosemead, California 91770

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION

UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION California Independent System Operator Corporation ) ) ) Docket No. ER13-872-000 MOTION TO INTERVENE AND COMMENTS OF SOUTHERN CALIFORNIA