HomeMy WebLinkAboutMORRIS.txt
1 (The following proceedings were
2 had in open hearing.)
3 COMMISSIONER HANSEN: The exhibits
4 213 -- will be identified as 213, 214, 221, and
5 227. Again, if there are no objections, those
6 exhibits will be raised on the record. Being none,
7 so ordered.
8 (ScottishPower Exhibit Nos. 213,
9 214, 221, and 227 were marked for identification.)
10 MR. VAN NOSTRAND: Thank you,
11 Mr. Chairman. Mr. Morris is available for
12 cross-examination.
13 COMMISSIONER HANSEN: Thank you.
14 We'll begin with you, Mr. Budge.
15 MR. BUDGE: Thank you, Mr. Chairman.
16 Just one area.
17
18 CROSS-EXAMINATION
19
20 BY MR. BUDGE:
21 Q. Mr. Green was to be the chief
22 financial officer of PacifiCorp if the merger was
23 approved. Will you have that position?
24 A. That's something that we haven't
25 decided. It's only been a few weeks since I've been
539
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 over in the US and been concentrating very much in
2 preparation for the hearings. It's a decision
3 that's yet to be made.
4 Q. You would be the proper person to
5 direct the financial questions to that Mr. Green
6 otherwise would have taken?
7 A. Yes, sir, I would.
8 Q. I had one question I wanted to ask
9 you:
10 In this proceeding, there has been a
11 lot of different discussions about the bid premium.
12 Have you been here during the whole proceeding?
13 A. I have.
14 Q. And do you recall some -- I'm not sure
15 if it was all in testimony or exhibit or argument,
16 that that bid premium could fluctuate anywhere from
17 I've heard eight-tenths of a billion to as high as a
18 billion eight?
19 A. That's correct.
20 Q. And is that bid premium calculated
21 based on some form?
22 A. Yes, it's a calculation based on the
23 share price and number of shares and the dollar
24 exchange rate.
25 Q. Could you tell us based on today's
540
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 share price and let's just assume that's $18, can
2 you just walk me through what that calculation would
3 be today to arrive at today's bid premium or
4 something relatively close? If it's too
5 mathematical to do the entire formula, just describe
6 what that formula would be so those of us that are
7 not financially inclined might understand it.
8 A. Okay. At the close last night,
9 Scottish share -- ScottishPower's share price was
10 five pounds 54. If we take that, multiple it by
11 2.32, which is the exchange for ScottishPower shares
12 for PacifiCorp shares, and multiply by I've used
13 1.62 for the pound/dollar exchange rate because that
14 was the exchange rate we used, you get a value of
15 $20.82.
16 Q. $20.82 then would be the price
17 received today?
18 A. That would be correct.
19 Q. All right. Then take it the next step
20 further. How do we get from the $20.82 per share
21 today to the bid premium? Is that simply a matter
22 of factoring the -- multiplying the $20.82 by the
23 total number of PacifiCorp shares outstanding today?
24 A. Well, the bid premium is expressed in
25 various ways. Sometimes it's expressed as a
541
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 percentage over and above the PacifiCorp share
2 price, so sometimes we hear talk of 20 percent
3 premium or 25 percent or 30 percent premium.
4 In pounds billion or dollars billion,
5 yes, you're right, some people have expressed it in
6 terms of that dollar equivalent per share and
7 multiplied by the number of shares.
8 Q. So it would be the difference
9 between -- maybe I didn't understand you
10 correctly -- the difference between today's price
11 and this $22.80 per share -- the $20.82 a share?
12 A. Yes. One of the things you'll find if
13 you do it in today's price as we get closer towards
14 the hopeful completion of the merger, the
15 calculation of the bid premium actually becomes
16 quite a meaningless calculation because one would
17 expect on the last minute of the last day the two
18 share prices will converge. But technically you're
19 correct; I'm not disagreeing with the math's work.
20 Q. Take me from the $20.82 to what is the
21 bid premium today in total. That's the part that
22 maybe I just didn't follow you.
23 A. Perhaps a better example of this is if
24 we go back to the days where the -- if we take the
25 number on the 7th of December, I'll walk you through
542
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 that example and maybe you can see the math's work
2 on that.
3 Q. That would be fine.
4 A. Okay. On the 7th of December,
5 ScottishPower's share price was six pounds 50,
6 multiplied by 2.32 -- the exchange rate -- and at
7 $1.65 at that time, we then calculated an implied
8 price of just over $25. On the day of the
9 announcement, the PacifiCorp share price was $20.75.
10 And the difference between those was just over $4.
11 And we're multiplied up, gave us a figure of
12 $1.3 billion.
13 Q. So you were simply multiplying the
14 difference by the shares outstanding?
15 A. That is correct. As I say before, as
16 we get closer to the hopeful successful consummation
17 of the marriage, that bid premium fluctuates greatly
18 over time.
19 MR. BUDGE: No further questions.
20 Thank you.
21 COMMISSIONER HANSEN: Mr. Nye.
22 MR. NYE: Thank you, Mr. Chairman.
23
24
25
543
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 CROSS-EXAMINATION
2
3 BY MR. NYE:
4 Q. Do you have before you a two-page
5 document marked Exhibit 504 for identification?
6 A. Yes, sir, I do.
7 Q. And is that a document introduced last
8 week in Wyoming by ScottishPower?
9 A. Yes, sir, it's a late-filed exhibit
10 perhaps explaining in a bit more detail than the
11 testimony did as to what my personal interpretation
12 of the how the Commission may rule things above and
13 below the line in a rate case.
14 Q. This is a document that you, what we
15 call, "sponsored" yourself in Wyoming?
16 A. That's correct.
17 MR. NYE: I'd move it's admission.
18 COMMISSIONER HANSEN: Pardon?
19 MR. NYE: I would move the admission
20 of Exhibit 504.
21 COMMISSIONER HANSEN: Okay, we have a
22 Motion to remove the exhibit of 504.
23 MR. NYE: This is a new exhibit that
24 I'd hope to introduce. I've left copies with
25 everyone. I would just offer.
544
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 COMMISSIONER HANSEN: Okay, Mr. Nye,
2 you want to introduce this Exhibit 504?
3 MR. NYE: Yes, I would, Mr. Chairman.
4 COMMISSIONER HANSEN: Okay. Is there
5 any objection?
6 MR. VAN NOSTRAND: No objection.
7 COMMISSIONER HANSEN: Being none,
8 we'll accept Exhibit 504.
9 (Idaho Irrigation Pumpers
10 Association Exhibit No. 504 was marked for
11 identification.)
12 Q. BY MR. NYE: Mr. Morris, Exhibit 504
13 is what ScottishPower said last week as to the
14 proposed treatment of merger-related cost. Correct?
15 A. Just to perhaps clarify, that is what
16 I put forward as my own interpretation of what would
17 be above and below the line. Yes, it's
18 ScottishPower, because I represent ScottishPower.
19 But just to be clear, it's my personal
20 interpretation of how I read the words that were in
21 Mr. Green's and my adopted testimony.
22 Q. And if you look at the footnote of
23 page 1 of Exhibit 504, it says A proposed treatment
24 of items identified reflect that our best judgment
25 as to their treatment; et cetera. Right?
545
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 A. Yes, sir, it does.
2 Q. The very first item on page 1, it says
3 Goodwill?
4 A. That's correct.
5 Q. Is that the same term that -- is that
6 a term that's equivalent to what we've been calling
7 the extra cost over and above the stock price?
8 A. No, sir, it isn't. That's a slightly
9 different calculation. It's a comparison of the
10 price ScottishPower paying against the book value,
11 rather than a comparison against PacifiCorp's share
12 price which we were talking about before.
13 Q. So this goodwill item is the
14 difference between the purchase price and the fair
15 value of the assets. Right?
16 A. With a few very minor adjustments.
17 Q. Okay. And does that price include the
18 fluctuation for stock?
19 A. Yes, it does.
20 Q. And according to this exhibit, the
21 price is 1,124.7 million pounds sterling. Correct?
22 A. That's correct.
23 Q. And you translated that into
24 1.8 billion US dollars?
25 A. That's correct.
546
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Q. Is there any fluctuation listed on
2 this exhibit that you introduced in Wyoming last
3 week at all from $1.8 billion?
4 A. Sorry, can I be clear on your
5 question? Are you asking has that number
6 fluctuated?
7 Q. According to this exhibit, I don't see
8 any fluctuation. Is there any shown?
9 A. No, sir, there isn't. The reason --
10 Q. Okay.
11 A. May I explain the reason for that to
12 the Bench?
13 Q. I'm sure somebody will ask you that
14 question.
15 The comment is self-explanatory, is it
16 not? Says The calculation of goodwill varies with
17 fluctuations in ScottishPower's share price.
18 Is that what you were going to say?
19 A. Yes. What I was trying to allude to,
20 the figure actually quoted was a number that was
21 quoted by the lawyer for WIEC in those proceedings,
22 and it was his figure of 1.8 which I was trying to
23 identify.
24 Q. But in this case, the price that --
25 the bid premium price has been having a variance of
547
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 point eight billion -- in other words, from
2 800 million to 1.6 billion US dollars. You've heard
3 that testimony, have you not?
4 A. I have, and I think that was in the
5 context of comparison of share price rather than
6 price against the fair value.
7 Q. And would you agree that the price
8 listed on page 1 of this exhibit is $200 million
9 more than that?
10 A. Yes, sir. It's a different
11 calculation.
12 Q. Okay. On page 2, page 2 lists --
13 First of all, the bottom of page 1
14 shows Transition Plan Development between one and
15 $2 million above the line. Do you see that?
16 A. Yes, sir, it does.
17 Q. And by above the line, you mean to be
18 paid by the ratepayer?
19 A. To be included in a subsequent rate
20 filing to be recovered through rates. Is that
21 correct?
22 Q. Yes. On page 2 -- this is your
23 exhibit. I would just like you to identify for us
24 the items you say the ratepayers should pay. Should
25 they pay some of these executive severance costs?
548
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 A. Excluding any enhanced payments, I
2 would submit yes.
3 Q. And the amount you say the ratepayer
4 should pay is $11.7 million. Right?
5 A. We would suggest that they would be
6 considered in a future rate proceedings to be above
7 the line, that's correct.
8 Q. Well, as the chief financial officer
9 tendered by ScottishPower in this case, last week
10 did you not say that $11.7 million of the
11 $20 million employee severance cost should be paid
12 by the ratepayer?
13 A. What I think, if I can paraphrase what
14 I said a week ago, is that we would put forward this
15 in a subsequent rate filing to be included in rates;
16 but the point of my clarification is that
17 continually through that cross-examination, I made
18 the point that the decision -- the burden of proof
19 will rest with ScottishPower, but the final decision
20 will be made by the Commission at that time.
21 Q. And likewise, there's about, oh,
22 another $10 million that at least ScottishPower
23 contends should be paid by the ratepayer: Bonus
24 Pool of 8.5 million is one, and two and a half
25 million for payments to preferred stockholders.
549
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 ScottishPower would contend those should be paid by
2 the ratepayer. Correct?
3 A. That's correct.
4 Q. Subject to the approval process?
5 A. These are normal business-as-usual
6 costs of PacifiCorp and we wouldn't see this in any
7 way different from normal costs that PacifiCorp
8 would have expensed absent the transaction.
9 Q. So just a rough calculation, if we add
10 up one to two million on the transition plan, plus
11 approximately --
12 Have you added these up, sir, before?
13 A. I haven't, but I could do so now.
14 As you suggest, there's about 22.7
15 taking into account Mr. McKennon, there's around
16 $23 million on the second page of business-as-usual
17 PacifiCorp costs; plus on the first page, an
18 estimate made at the time of around $1.2 million of
19 merger-related costs that we would offset against
20 any subsequent results in savings.
21 Q. And those total about 23.2 million US?
22 A. I think it was slightly more than
23 that, but subject to check.
24 Q. Okay. Would we have a transition cost
25 if there weren't a merger?
550
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 A. Sir, could I ask you to clarify?
2 Q. I'm sorry. The Transition Plan
3 Development shown at the bottom of page 1, that
4 would not be a cost that would be incurred absent a
5 merger, would it?
6 A. No, sir, I think the notes alongside
7 clarifies my proposed treatments at the Wyoming
8 hearing. What I've said there is in the very
9 unlikely event that no net savings arise as a result
10 of the plan, any net costs will be disallowed for
11 any rate-making purposes. So in those
12 circumstances, that would be below the line.
13 Q. So as of the date of this exhibit,
14 looking back on page 1, the $1.8 billion, sir, at
15 the very top --
16 A. Yes, sir.
17 Q. This is just a stock swap, isn't it?
18 A. Yes, it is.
19 Q. And so that 1.8 billion is a figure
20 you came up with as representing the cost of buying
21 the stock, plus the premium?
22 A. No, if I can just clarify that: That
23 figure actually came from the ScottishPower listing
24 particulars page 1 of seven.
25 Q. Yes, sir?
551
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 A. And is the figure in the pounds
2 millions sterling. The 1,124.7 is the difference
3 between the value of that stock and the fair value
4 of the assets which we are acquiring.
5 MR. NYE: No further questions.
6 COMMISSIONER HANSEN: Mr. Ward.
7 MR. WARD: Yes.
8
9 CROSS-EXAMINATION
10
11 BY MR. WARD:
12 Q. Mr. Morris, just to follow up on that
13 line, I take it you're going to carry the
14 acquisition adjustments on the --
15 MR. WARD: Thank you.
16 Q. BY MR. WARD: -- on the
17 ScottishPower -- you're going to carry the
18 acquisition adjustment on the ScottishPower books?
19 A. Yes, sir, we are.
20 Q. And are you going to amortize that
21 over a set period of time?
22 A. Yes, our current intention is to
23 amortize that over 20 years.
24 Q. Okay. And that leads me into another
25 area that I don't recall being discussed, and let me
552
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 preface it by a quick statement. At least when we
2 have utilities with or companies with multiple
3 subsidiaries in this country, for rate-making
4 purposes, we often deem or generally deem that they
5 will file tax returns on a consolidated basis.
6 How are you going to solve the tax
7 problem of having a multicountry/multijurisdiction
8 holding company with a subsidiary in the
9 United States?
10 A. I'm pleased to say we've got tax
11 specialists who understand that far better than I do
12 in our group.
13 Q. Well, and if you understood it and
14 could explain it to me, I probably wouldn't
15 understand it. But, do you anticipate or has it
16 been decided whether PacifiCorp will file tax
17 returns on its own?
18 A. To my knowledge, the taxes charged
19 against PacifiCorp electricity operations wouldn't
20 be affected by this transaction. I'm not sure of
21 the further detail which is implied by your
22 question. Honest answer: I do not know at this
23 point in time.
24 Q. Okay. You discuss the question of
25 cost allocations or the issue of cost allocations
553
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 between the various companies involved in this
2 transaction. I'm not sure anything has been said
3 about the allocation of costs between jurisdictions;
4 that is, states in the United States. You're aware
5 that that's a relatively keen issue in PacifiCorp's
6 case, are you not?
7 A. Yes, sir, I am.
8 Q. Do you propose any changes in the
9 jurisdictional allocations as they now stand?
10 A. We're concerned about the position
11 we're in at the moment, particularly as you're
12 alluding to Utah, and we're keen to work with all
13 the staffs in all the jurisdictions to try to get a
14 solution we can work with, but at the moment, we've
15 got an exposure there which we're not happy at all
16 about the implications on rates.
17 Q. All right. Following the allocation
18 issue on down, there's typically a question in
19 rate-making of allocation of costs between customer
20 classes as well, as you're undoubtedly well aware.
21 Does ScottishPower have in mind any
22 changes in the current allocation formulas used for
23 rate-making purposes for classes?
24 A. No, sir, we have no plans for any
25 changes.
554
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Q. Do you see -- we have discussed, of
2 course, Idaho retail rates. Do you see this merger
3 as affecting interstate rates; that is, the FERC
4 transmission rates, other jurisdictional rates?
5 A. Not to my knowledge.
6 Q. Let me turn to just a couple of quick
7 questions about your testimony. If you'd look at
8 page 7 of the direct testimony, the initial
9 testimony?
10 A. Okay.
11 Q. And there you're asked a question
12 about how the transaction will affect investors'
13 perception of PacifiCorp's financial integrity on
14 lines 9 and 10, and the answer runs from lines 11
15 through 19.
16 First of all, let me ask you,
17 doesn't -- doesn't ScottishPower have a lower equity
18 ratio than PacifiCorp at present?
19 A. Can I just -- can I just check that
20 statistic, because I think it's fairly close.
21 Q. Sure.
22 A. To save time, I'll take it subject to
23 check, but --
24 Q. I don't want you to do that,
25 Mr. Morris, because I was trying to verify what --
555
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 what I thought I picked up from reading the
2 financials, but let me suggest we can get that
3 answer later. Let's not --
4 A. Well, if you forgive me, I've actually
5 found the page now while you were chatting.
6 Yes, if we use the same definition of
7 gearing, the figures I've got here, the
8 ScottishPower gearing in the US gap is 55 percent
9 and PacifiCorps' gearing under the same definition
10 is 53 percent. So they're within a couple of
11 percentage points of each other. I thought they
12 were fairly close.
13 Q. All right. All right. Is there some
14 difference in accounting methods of defining equity
15 that would explain why I was under the mistaken
16 impression?
17 A. Yes, sir, there's quite a few changes
18 between US general accounting practices and UK
19 general accounting practices.
20 Q. All right. Thank you. Now looking at
21 that -- returning to that answer on lines 11 through
22 19, it occurs to me that had -- had you been
23 preparing testimony for PacifiCorp in the midst of
24 their attempts to acquire UK Utility Energy Group, I
25 think it was, or Powercor, I believe it was, in
556
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Australia, that one might have made quite similar
2 observations about the benefits of the strength of
3 bringing PacifiCorp's financial position to that
4 entity; but it didn't, in fact, turn out that way,
5 did it?
6 A. Can't really comment on a hypothetical
7 situation. I wouldn't have actually known what I
8 would have said in those circumstances unless I'd
9 been there.
10 Q. Well, let me put it another way:
11 Financial integrity or no, there are
12 some risks involved in international acquisitions,
13 are there not?
14 A. That's a fair comment.
15 Q. And we've talked about, in this case,
16 the question of costs and control of costs and in
17 both the context of transition costs and transaction
18 costs. What -- what assurances can customers have
19 that if for some reason this transaction goes very
20 badly, that their costs and their rates will not be
21 impacted?
22 A. I think the way that that would
23 translate in your hypothetical situation where it
24 would go very badly, it would translate or could
25 translate in a subsequent rate-making process with
557
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 the hypothetical company coming along and asking for
2 an increase in cost of capital.
3 We don't see that situation arising.
4 We would expect in any subsequent rate filing to
5 have our cost of capital compared with an equivalent
6 A-rated electricity utility, and obviously the
7 Commission at that time can allow a suitable cost of
8 capital in a line with the cost of capital of that
9 A-rated electricity utility, and hence, guard
10 ratepayers from any hypothetical adverse reaction.
11 Q. Well, that brings me to the last
12 question, and it's one I'm going to ask a couple or
13 three other witnesses:
14 If, in fact, this Commission approves
15 the acquisition -- approves the merger and the other
16 regulatory authorities are obtained and the
17 transaction closes -- try and state this in a way it
18 doesn't ask you to buy on to my legal opinion, but
19 as -- you're aware, are you not, that as a general
20 matter, that just and reasonable costs incurred by a
21 utility must be included in rates in the
22 United States?
23 A. That's my understanding.
24 Q. Is it possible that in the wake of a
25 transaction being concluded, that one could have
558
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 costs that were -- that would not have been incurred
2 but for the merger, but are nevertheless just and
3 reasonable?
4 A. I can think of one example.
5 Q. Okay. And if that were to happen --
6 and we're just talking about a hypothetical now, not
7 an allegation that it will -- wouldn't the
8 ratepayers be worse off because of the merger, in
9 that the Commission would have to approve the
10 inclusion of those costs in rates?
11 A. Yes, sir. The example I was thinking
12 of was the one that Mr. MacRitchie gave at Wyoming
13 where we're talking about what I would consider to
14 be the just and reasonable costs of bringing
15 together the transition plan. And what we said at
16 that time is we will take the burden of proof that
17 we will demonstrate the savings will be in excess of
18 the cost of the transition plan, and so the net
19 benefit will flow to -- flow through to customers in
20 subsequent rate proceedings; and if under any
21 unusual circumstances the savings weren't there,
22 then we are quite happy to commit a ScottishPower
23 commitment that those costs should -- and rightly --
24 be below the line.
25 Q. The -- in making that determination,
559
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 the Commission would have to look beyond just a --
2 just a consideration of offsetting savings, would it
3 not, in that some savings might be available
4 notwithstanding the merger?
5 A. That's true. In the consideration, I
6 would have to look at the additional savings that
7 were resultant from the merger.
8 Q. I think that's all I have. Thank you,
9 Mr. Morris.
10 A. Thank you, sir.
11 COMMISSIONER HANSEN: Mr. Richardson.
12 MR. RICHARDSON: We have no questions,
13 Mr. Chairman.
14 COMMISSIONER HANSEN: Mr. Purdy.
15
16 CROSS-EXAMINATION
17
18 BY MR. PURDY:
19 Q. To follow up on a question that
20 Mr. Nye asked you: Exhibit No. 504. Really, I
21 don't know if this is a follow-up or not, honestly,
22 but I just had a question.
23 On page 2 of that exhibit, the cost
24 item Executive Severance Costs, do you see that?
25 A. Yes, sir, I do.
560
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Q. And to the right under Comments, you
2 say Excluding enhanced payments.
3 So am I to understand that the
4 $11.7 million figure could be less or more?
5 A. No, the 11.7 was our estimate of a
6 split of a figure that was quoted early of
7 20 million; and our estimate in Wyoming was that 8.3
8 of that was attributable to the enhanced payments
9 and 11.7 was the normal severance costs that would
10 have been incurred absent the transaction.
11 Q. How much of that would be booked below
12 the line?
13 A. Of the 11.7?
14 Q. Yes.
15 A. That 11.7 represents the
16 business-as-usual costs which PacifiCorp would be
17 bringing forward as above the line, to the extent
18 that it was an expense, obviously.
19 Q. The enhanced payments, the
20 8.3 million, would be below the line?
21 A. That is correct.
22 Q. All right, now we're cracking. Back
23 on page 1, the Transition Plan Development, one to
24 two million, again, that's something you would seek
25 recovery for only in the event that you could prove
561
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 that there had been that savings achieved as a
2 result of your improved efficiencies?
3 A. That is correct.
4 Q. All right. Does the same hold true
5 then for on page 2 of the item Payments to Preferred
6 Stockholders, 2.5 million? Is that linked to some
7 showing?
8 A. Slightly different. My position on
9 that one was really as we heard Mr. O'Brien speak
10 here yesterday. The Payments to Preferred
11 Stockholders we contend is a PacifiCorp action that
12 was not directly related to ScottishPower, and we
13 would contend that that is a business-as-usual cost.
14 It's, of course, entirely up to the Commission how
15 they would allow or disallow that for the
16 appropriate rate filing.
17 Q. Would you describe what Mr. Green
18 means when he testified about the concept called
19 "ring fencing"?
20 A. Would you mind directing me to where
21 that is in the testimony?
22 Q. Sure. I believe if you look at page 6
23 of his rebuttal testimony, let's see, beginning on
24 line 13. I'll just read the first part of that
25 sentence:
562
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Moreover, there will be effective ring
2 fence conditions in place in both the UK and in the
3 US.
4 A. Yes, sir. It's something I have been
5 working on over in the UK shortly before I came out
6 here.
7 The regulators in the UK are very
8 concerned about any possible cross-subsidiaries
9 between regulated and unregulated activities within
10 the operations in the UK of all the companies --
11 this isn't specific to ScottishPower -- and have put
12 various ring fencing proposals to the companies to
13 prevent any abuse of the balance sheet.
14 Q. So ring fencing then, am I to
15 understand, is a mechanism to prevent
16 cross-subsidization or misallocatin of accounts
17 between different entities?
18 A. Yes, sir, that's correct.
19 Q. How does it work? Is it an accounting
20 mechanism or what?
21 A. It's more of a reporting mechanism.
22 In the UK, certainly the regulators would be advised
23 of dividend payments from the Company up to a
24 holding company. And they are also quite keen to
25 see within the regulatory accounts, which is the
563
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 annual filings, very detailed breakdown of
2 transactions between regulated and unregulated
3 businesses, together with quite detailed reportings
4 of the profitability of any transactions between
5 regulated and unregulated businesses.
6 Q. So it does address actual transactions
7 between various businesses?
8 A. Yes, sir, it does.
9 Q. Now, you say that there will be ring
10 fence conditions in place in both the UK and the US.
11 Will they be essentially the same or will the
12 United States condition somehow be different?
13 A. No, I think we've got to try and
14 develop the appropriate ring fencing conditions for
15 the US. There are a lot of regulatory differences,
16 as we're learning, between the UK and the US, and
17 they have got to be tailored to suit the individual
18 circumstances over here.
19 Q. Have you devised those conditions for
20 the US, and particularly, of course, Idaho
21 jurisdiction?
22 A. Not at this moment in time, no.
23 Q. When do you anticipate doing that?
24 A. This is something which, subsequent to
25 the hopeful approval by all of the states, we will
564
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 move on to these areas.
2 Q. I guess that will be addressed with
3 the transition plan, perhaps?
4 A. On a parallel track. It won't be the
5 same people working on it.
6 Q. All right. I want to follow up, I
7 think it was yesterday that I asked Mr. Richardson I
8 guess for an elaboration on a statement that either
9 he or Mr. Green had made; and if you need a
10 reference, in fact, it's -- I have written down here
11 Mr. Green's direct testimony, page 13, line 16. So
12 why don't we just go ahead and turn to that.
13 Do you have that in front of you?
14 A. I have that in front of me.
15 Q. It indicates there that the -- that
16 the Commission will have access to and may examine
17 the records of ScottishPower and those of its
18 subsidiaries.
19 Mr. Richardson thought -- seemed to
20 suggest that perhaps you would have a better idea of
21 the actual mechanism of how that would take place,
22 and so I'm going to ask you if you would -- well,
23 let me back up.
24 Do you see any conditions or any
25 impairment or impediments to the Commission's
565
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 ability to freely access the subsidiaries of
2 ScottishPower to ensure that costs are appropriately
3 booked and allocated?
4 A. I think the sentence that goes on a
5 bit further from where you stopped reading says
6 ScottishPower agrees to cooperate fully with such
7 Commission examinations.
8 And I stand wholeheartedly behind that
9 commitment.
10 Q. And in terms of actual physical access
11 to these -- to the books and records, for instance,
12 of its subsidiaries, as much as we'd probably like
13 to fly to Scotland, do you anticipate having those
14 available to us here in the United States?
15 A. Yes, insofar as they relate to the
16 transaction with PacifiCorp, there's no reason at
17 all why they couldn't be available in Oregon or
18 Salt Lake City.
19 Q. Might there be circumstances where
20 there are transactions somehow between, I don't
21 know, Manweb or Southern Water or something --
22 ScottishPower -- that would somehow affect the
23 operating results of PacifiCorp?
24 A. It's difficult to see such a
25 circumstance where they would, but if there's any
566
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 doubt that it had an impact on PacifiCorp's
2 transactions, then we'd be quite happy to include
3 them.
4 Q. All right. I believe that -- I don't
5 recall who asked you this question, but you
6 testified earlier that you did not believe that
7 ScottishPower had any anticipation or plans to
8 change, essentially, rate allocation among
9 PacifiCorp's different customer classes. Do you
10 recall that testimony?
11 A. I do.
12 Q. Are you aware of whether PacifiCorp is
13 currently preparing any type of a what we call a
14 cost of service study pertaining to its Idaho
15 jurisdiction at this time?
16 A. I believe from conversations with
17 PacifiCorp staff that they were engaged in some work
18 to bring something to you this summer. I'm not
19 aware of whether that involved any changes to
20 allocation.
21 Q. All right. And I'm sure you're well
22 aware of what we mean by a cost of service study
23 here?
24 A. Yes, sir, I am.
25 Q. All right.
567
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 MR. PURDY: Sorry, Mr. Chairman, my
2 notes are spread all over the place. Just one
3 second, please.
4 (Discussion off the record.)
5 Q. BY MR. PURDY: All right, just to be
6 sure, the ring fence conditions that you've alluded
7 to, those will be included with a development plan,
8 and I believe you testified or that's the Company's
9 expectation. Will that be provided to or filed with
10 the Commission Staff?
11 A. Yes, it was certainly one of the areas
12 which we would hopefully work with Commission Staff.
13 We see the Commission Staff as an invaluable support
14 to us in developing those ideas to make sure we're
15 not going to come up with something that would be
16 unacceptable.
17 Q. That's the assurance I need.
18 MR. PURDY: Thank you very much. No
19 further questions.
20 COMMISSIONER HANSEN: Okay, let's see
21 if we have any questions from the Commission.
22 Commissioner Kjellander.
23
24
25
568
HEDRICK COURT REPORTING MORRIS (X)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 EXAMINATION
2
3 BY COMMISSIONER KJELLANDER:
4 Q. I just have one question in the
5 affiliated interest language since you're sponsoring
6 Robert Green's testimony. Essentially what you're
7 saying is that the Commission then shall have the
8 right to inspect the records of the Utility's
9 holding company, parent affiliate, or subsidiaries
10 that engage directly in any transaction with a
11 regulated utility which then result in expenses
12 being incurred, allocated, or otherwise attributed
13 to regulated services of the public utility?
14 A. Yes, sir.
15 COMMISSIONER KJELLANDER: Thank you.
16 COMMISSIONER HANSEN: Thank you.
17 Do we have any redirect?
18 MR. VAN NOSTRAND: Yes, Mr. Chairman,
19 just a few questions.
20 COMMISSIONER HANSEN: Okay.
21
22
23
24
25
569
HEDRICK COURT REPORTING MORRIS (Com)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 REDIRECT EXAMINATION
2
3 BY MR. VAN NOSTRAND:
4 Q. Mr. Morris, when Mr. Budge first
5 started talking to you about the calculation of the
6 bid premium, I take it you were talking about the
7 differences in the share price and calculation based
8 on the stock prices. Is that correct?
9 A. That's correct.
10 Q. And you started calculating the bid
11 premium suggested by the most recent closing price,
12 which would have been $20.82, minus $18, times a
13 number of shares outstanding?
14 A. That's correct.
15 Q. What sort of figure does that
16 calculation suggest?
17 A. It's around about $2, which would be
18 in the order of about point six of a billion if my
19 maths are anything right.
20 Q. Then returning to Exhibit 504, there's
21 a discussion on the top of the first page on
22 goodwill; and I take it from your responses that
23 that is a completely different calculation of the
24 bid premium. Is that correct?
25 A. Yes, sir, that's a different
570
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 calculation.
2 Q. And could you explain the difference
3 between the calculation based on the share prices
4 versus the calculation based on the cost paid versus
5 the fair value?
6 A. As best I might. The calculation I
7 was talking originally about was the difference
8 between ScottishPower's share price and PacifiCorp's
9 share price. The second calculation which we call
10 goodwill here is the difference between the share
11 price and the book value of the assets. So by
12 having a different number in that equation, you get
13 a different answer everytime.
14 Q. And given that the share price
15 fluctuates, the calculation under either method
16 would change from day to day based on changes in the
17 share prices?
18 A. Yes, sir, it does.
19 Q. Sticking with this Exhibit 504 which
20 Mr. Nye introduced into evidence, I take it from the
21 way this is presented with merger-related costs on
22 page 1 and business-as-usual costs on page 2, does
23 this exhibit attempt to portray all these costs as
24 merger-related costs?
25 A. No, the idea was really to take page 1
571
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 as being the merger-related costs and page 2, as the
2 heading suggests, for the costs that would be
3 business-as-usual costs for PacifiCorp absent the
4 transaction.
5 Q. So the costs shown on page 2 which
6 have been proposed to be allocated to ratepayers are
7 those costs which arise from this transaction?
8 A. No, my understanding it, those are the
9 business-as-usual costs.
10 Q. And how would these costs be recovered
11 in rates?
12 A. They would be put forward by
13 PacifiCorp at the appropriate time to be considered
14 in a rate review.
15 Q. Mr. Ward asked you some questions
16 about the allocation of costs between
17 jurisdictions. Do you recall that?
18 A. I do.
19 Q. And there was some question as to
20 whether or not the Company has maybe proposed or is
21 considering the allocation of costs across
22 jurisdictions?
23 A. I remember the comment.
24 Q. Could you describe what the purpose of
25 your Exhibit 221 which accompanied your rebuttal
572
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 testimony, how that relates to this live
2 questioning?
3 A. Yes. 221 was a draft proposal which
4 was originally going to be filed, if my memory is
5 correct, some three months after the merger. We
6 decided in the interest of clarity to put our
7 proposal in the open earlier than that, so June 18th
8 we filed our proposed first merger treatment of
9 affiliate transactions and corporate costs for
10 discussion and a conference sometime in October to
11 try and get parties signed on to the proposed cost
12 allocation structure.
13 Q. Is the -- is ScottishPower proposing
14 anything different in the way of allocation of costs
15 across jurisdictions other than as provided under
16 the approach?
17 A. No, sir, we're not.
18 Q. Mr. Ward also directed you to the
19 direct testimony of Mr. Green, page 7, lines 9 to
20 19, regarding the increase in financial integrity
21 just as a result of being associated with a larger
22 entity. Do you recall that?
23 A. I do.
24 Q. Has there been any other indication
25 from the financial community that increased
573
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 financial integrity is received apart from just
2 associating with a larger organization?
3 A. We've seen from Moody's and
4 Standards (sic) and Poor's indications that
5 PacifiCorp's credit ratings have been put on review
6 with positive implications.
7 Q. And how does the credit rating for the
8 debt of ScottishPower compare to that for
9 PacifiCorp?
10 A. Even now it's still better.
11 Q. There's also some discussion of ring
12 fencing, and Mr. Ward inquired as to how PacifiCorp
13 customers could be protected from any adverse
14 financial consequences of activities of
15 ScottishPower. Do you recall that?
16 A. I do.
17 Q. How does a ring fencing provision in
18 that case protect PacifiCorp customers?
19 A. I think a lot of the processes that we
20 have in place in the US are already protecting
21 customers more than they were in the UK. A lot of
22 the protection is already in the hands of the
23 Commissions, but the Commission will allow or
24 disallow any costs which they felt were
25 inappropriate into a subsequent rate review.
574
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Q. And to the extent the parent is
2 perceived as engaging in riskier enterprises,
3 suggesting a higher cost of capital, would
4 PacifiCorp necessarily get a higher cost of capital?
5 A. No, they would not.
6 Q. What would the actual regulator like
7 that to be?
8 A. The regulator would set an appropriate
9 cost of capital. We only expect to earn a
10 reasonable rate of return, and that will be set at
11 the rate review by the Commission.
12 Q. Do you recall the questions of
13 Mr. Ward to Mr. Richardson yesterday regarding the
14 rates of return on equity as reported in the
15 ScottishPower annual report?
16 A. Yes, I do.
17 Q. And those figures ranged between 24
18 and 27 percent?
19 A. Subject to check.
20 Q. Is there a difference between how
21 return on equity is calculated for UK reporting
22 purposes and how it's covered in the United States?
23 A. Yes, sir, it is.
24 Q. Could you please describe those
25 differences?
575
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 A. Yes, it's gone through quite fully in
2 the proxy statement, but there are quite a few
3 changes in the way goodwill is accounted and
4 deferred tax, which means there's quite significant
5 difference in what is properly reported into US
6 accounting guidelines to UK accounting guidelines.
7 Q. That would tend to make the figures
8 appear much higher in the UK?
9 A. That is correct.
10 MR. VAN NOSTRAND: I have no further
11 questions, Mr. Chairman.
12 COMMISSIONER HANSEN: We thank you for
13 your testimony, Mr. Morris.
14 (The witness left the stand.)
15 COMMISSIONER HANSEN: We move on now
16 to the next witness. Kind of getting close to the
17 end, aren't we?
18 MR. MILLER: I think we're at our
19 expected last witness.
20 The Joint Applicants would call
21 Andrew MacRitchie.
22
23
24
25
576
HEDRICK COURT REPORTING MORRIS (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 ANDREW MacRITCHIE,
2 produced as a witness at the instance of
3 ScottishPower, being first duly sworn, was examined
4 and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. MILLER:
9 Q. Sir, would you state your name,
10 please?
11 A. Andrew N. MacRitchie.
12 Q. And what is your business address?
13 A. 500 Northeast Multnomah Street,
14 Portland, Oregon, 97232.
15 Q. And by whom are you employed and in
16 what capacity?
17 A. I'm employed by ScottishPower, and my
18 capacity is business and organization development
19 manager.
20 Q. What are your general duties and
21 responsibilities in that position?
22 A. I'm currently responsible for managing
23 the ScottishPower resources involved in the
24 regulatory process in the US, reporting to
25 Alan Richardson.
577
HEDRICK COURT REPORTING MacRITCHIE (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 Q. And after the hoped-for approval of
2 the transaction, what will be your duties and
3 responsibilities?
4 A. After completion, I'll be responsible
5 to the PacifiCorp chief executive officer for the
6 development and implementation of transition plans,
7 development of business plans, and strategic
8 guidance to the business.
9 Q. In connection with this proceeding,
10 did you previously have occasion to file certain
11 prefiled written direct testimony consisting of
12 13 pages?
13 A. I did.
14 Q. Were there any exhibits accompanying
15 your testimony?
16 A. Yes, there was a number of exhibits
17 accompanying testimony.
18 Q. Would those be Exhibits 215 through
19 219?
20 A. They would.
21 Q. Are there any additions or corrections
22 that need to be made to your direct testimony?
23 A. There are two corrections:
24 Firstly, there is reference to
25 Mr. Robert Green. As stated earlier in the
578
HEDRICK COURT REPORTING MacRITCHIE (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 proceedings, that reference should be to now
2 Graham Morris.
3 Also, on page 5 of my direct
4 testimony, line 8, the wording there, strike the
5 word "higher" and replace with "average" and replace
6 period following "costs" and strike "than average."
7 And that sentence now reads "I conclude from
8 Exhibit 215 that PacifiCorp has average operating
9 costs."
10 Q. That good. Any other corrections to
11 your direct testimony?
12 A. No.
13 Q. Did you also in this proceeding have
14 occasion to prefile certain written rebuttal
15 testimony consisting of eight pages?
16 A. I did.
17 Q. And accompanying that testimony, was
18 there Exhibit No. 222?
19 A. There was.
20 Q. Are there any additions or corrections
21 that need to be made to your rebuttal testimony?
22 A. No, there are not.
23 Q. With respect to both of your
24 testimonies -- that is, your direct testimony and
25 your rebuttal testimony -- if I asked you the
579
HEDRICK COURT REPORTING MacRITCHIE (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower
1 questions that are set forth there today, would your
2 answers be the same?
3 A. They would be.
4 Q. And are those answers true and correct
5 to the best of your knowledge?
6 A. They are.
7 MR. MILLER: Mr. Chairman, we would
8 ask that the direct and rebuttal testimony of
9 Mr. MacRitchie be spread on the record as if read,
10 and that Exhibits 215 through 219 and 222 be marked.
11 COMMISSIONER HANSEN: If there is no
12 objection to the direct and rebuttal testimony being
13 spread upon the record as written, there are no
14 objections, be so ordered.
15 (The following prefiled direct and
16 rebuttal testimony of Mr. MacRitchie is spread upon
17 the record.)
18
19
20
21
22
23
24
25
580
HEDRICK COURT REPORTING MacRITCHIE (Di)
P.O. BOX 578, BOISE, ID 83701 ScottishPower