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HomeMy WebLinkAboutVOLUME3.txt 1 BOISE, IDAHO, TUESDAY, JULY 13, 1999, 1:05 P.M. 2 3 4 ALAN V. RICHARDSON, 5 produced as a witness at the instance of 6 ScottishPower, being previously duly sworn, resumed 7 the stand and was further examined and testified as 8 follows: 9 10 COMMISSIONER HANSEN: Okay, we'll go 11 back on the record, and I think Mr. Miller has 12 requested he has one small item that he needs to 13 take up. 14 MR. MILLER: Thank you, Mr. Chairman. 15 This is very small. Questions this morning focused 16 or touched on some documents, particularly the proxy 17 statement of PacifiCorp as noticed in a meeting to 18 shareholders and a ScottishPower listing of 19 particulars document. During the lunch hour, 20 Mr. Fell was able and kind enough to obtain copies 21 of those documents and they have been provided to 22 the Commission and to the parties. We're at the 23 Chair's pleasure as to how you would like to receive 24 these, if you would like to mark them as exhibits. 25 I think the next joint Applicant Exhibit number 156 HEDRICK COURT REPORTING COLLOQUY P.O. BOX 578, BOISE, ID 83701 1 would be 223. 2 COMMISSIONER HANSEN: I'm just a 3 little confused, Mr. Miller. Do we have the two 4 different documents and both of them will be Exhibit 5 223, or 223 and 224? 6 MR. MILLER: Your pleasure. 7 COMMISSIONER HANSEN: Hey, I get to 8 make a decision. We'll go 223 and 224. 9 MR. MILLER: Wise decision. 10 COMMISSIONER HANSEN: Notice of the 11 annual meeting of stockholders to be held on June 12 the 17th, 1999, will be Exhibit 223 if that's okay, 13 and the other exhibit will be Exhibit 224. 14 Is there any objection, these being in 15 the record, identified in the record? So ordered. 16 (ScottishPower Exhibit Nos. 223 17 and 224 were marked for identification.) 18 COMMISSIONER HANSEN: Okay. We will 19 now -- we'll go back to our witness. I might 20 mention for those of you that had a big lunch, we'll 21 try to make this really exciting and move along this 22 afternoon so you won't go to sleep on us. 23 All right, we will move now to 24 Mr. Nye, the Irrigation Customers. 25 MR. NYE: Thank you, Mr. Chairman. 157 HEDRICK COURT REPORTING COLLOQUY P.O. BOX 578, BOISE, ID 83701 1 CROSS-EXAMINATION 2 3 BY MR. NYE: 4 Q. Mr. Witness, would you be willing to 5 come back in six months or whenever the transition 6 team has its numbers to give us specifics on costs? 7 A. If the Commission felt that was 8 appropriate, yes. 9 Q. You'd have no problem with that? 10 A. No. 11 Q. And could you tell us in US dollars -- 12 as best you can I was going to say -- the concrete 13 evidence of what the costs or the price that 14 ScottishPower is paying for PacifiCorp? 15 A. The transaction is worth approximately 16 $6 billion. 17 Q. Is there a set price? 18 A. It is an exchange of shares at a fixed 19 ratio. 20 Q. And for the blue sky, is there a 21 fluctuating price? 22 A. I don't understand the question. 23 Q. The bid premium fluctuates, does it 24 not? 25 A. The bid premium fluctuates, that's 158 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 correct. 2 Q. And what is your estimate as to -- 3 That's part of the cost, is it not? 4 A. It's part of the transaction price, 5 yes. 6 Q. By transaction price, do you mean the 7 acquisition cost? 8 A. Yes. 9 Q. And so tell us, for the bid premium 10 portion of the acquisition cost, by what degree or 11 by what dollar amount can that fluctuate? 12 A. Well, my understanding is the bid 13 premium has fluctuated between something like 800 14 million and $1,600 million. 15 Q. So in other words, the purchase price 16 can fluctuate by $800 million? 17 A. Yes. 18 Q. So can you tell us what the purchase 19 price is? 20 A. Purchase price is determined on the 21 price of ScottishPower shares on the day the 22 transaction closes, I believe. Mr. Morris would be 23 much more precise on that. 24 Q. But what I mean, somehow this is 25 different than buying a house or a car where you 159 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 know the cost? 2 A. Yes, it is. 3 Q. And you acknowledge that the best 4 concrete evidence you have is that the acquisition 5 cost could fluctuate by nearly a billion dollars. 6 Right? 7 A. Yes, but I think that's normal in a 8 transaction of this type. 9 Q. Okay. Do you know the population of 10 Idaho? 11 A. No, I don't. It's a few million. 12 Q. Do you know what a low-head center 13 pivot is? 14 A. It's probably a pump, is it? 15 Q. Do you know? 16 A. No, I'm guessing. 17 Excuse me. Could I ask Mr. Rudge 18 (sic) just to move a little to the left so I can see 19 as you ask the questions? Do you mind? Sorry. 20 Q. Are there center pivot systems in 21 Scotland or England where you currently have 22 service? 23 A. I don't know. 24 Q. Okay. You do -- do you know what a 25 center pivot irrigation system is? 160 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 A. No, I don't. 2 Q. Do you know how the cost of service 3 for a center pivot irrigation system differs from, 4 say, a wheel line or a hand line? 5 A. Well, you're using technical words. 6 Customers -- there's a whole range of customers for 7 electric utilities and they all have different 8 requirements when it comes to service. And I think 9 if you looked at our company closely, you'll find 10 that the full range of customers are well serviced 11 by the Company, and that's what we intend to do in 12 Idaho. 13 Q. But I'm just inquiring: Do you 14 service any customers that use wheel lines for 15 farming? 16 A. I don't know. 17 Q. Do you know what a wheel line is, sir? 18 A. No, I don't. I'm an engineer, but I 19 don't know what a wheel line is. 20 Q. You're about to be the president of a 21 major entity if the merger goes through, are you 22 not? 23 A. I am about to be chief executive 24 officer, yes. 25 Q. Do you know how many Idaho irrigators 161 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 there are on your -- on PacifiCorp's system? 2 A. There are several thousand, I 3 understand. 4 Q. Do you know? 5 A. No, I don't know. 6 Q. Do you have any knowledge as to why 7 the rates in Idaho for irrigators are higher than 8 for similar users in neighboring states on the 9 PacifiCorp system? 10 A. I would guess from my own 11 experience -- 12 Q. Please don't guess, sir. Do you know? 13 A. All right. I don't know. 14 Q. Okay. And would it be fair, sir, that 15 your testimony and your rebuttal does not -- does 16 not address the rate differential for irrigation 17 users within the PacifiCorp system specifically 18 related to Idaho, does it? 19 A. I don't believe our testimony was 20 required to address that rate differential. 21 Q. In any event, your testimony did not 22 address that, did it? 23 A. No, it did not. 24 Q. When you say, as you said this 25 morning, that PacifiCorp, in your view, is 162 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 underperforming -- 2 A. Uh-huh. 3 Q. -- do you mean underperforming in 4 terms of making money? 5 A. That is what I meant this morning, 6 yes. 7 Q. In other words, underearning? 8 A. Underearning. 9 Q. And is that because, in part, the 10 rates are too low for PacifiCorp, in your view? 11 A. That is one part of the equation, yes. 12 Q. Do you have -- does ScottishPower, if 13 you know, have a position as to whether or not the 14 current rates in Idaho are appropriate? 15 A. ScottishPower does not have a position 16 on current rates in Idaho. 17 Q. So are you saying that ScottishPower, 18 which is the Applicant here, does not have a 19 position that the rates are too high or too low or 20 just right in Idaho for the ratepayer under 21 PacifiCorp? 22 A. ScottishPower does not have a position 23 on the rates in Idaho. 24 Q. Okay. Has ScottishPower in this 25 Application or this proceeding ever taken the 163 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 position that the Idaho rates should go down? 2 A. No, we've not. 3 Q. And based upon your knowledge, sir, 4 can you say today, as you sit here now, that the 5 rates being paid by Idaho users will stay the same 6 for the next 30 months? 7 A. I could not say that. 8 Q. Is it true that approximately 26 or 27 9 PacifiCorp executives are being paid $20 million for 10 severance? 11 A. That is not true. 12 Q. Okay. What is the fact, that it's 13 contingent, the payment is contingent? 14 A. I think we covered it this morning 15 where if all those 26 executives left, the payment 16 to those executives would total something like 17 $20 million, if they left. 18 Q. And isn't it true that in the Wyoming 19 case, ScottishPower acknowledged that approximately 20 half of that amount would be borne by the ratepayers 21 if it came to pass? 22 A. I'm not sure. I think in the Wyoming 23 case we prepared an exhibit. I'm quite sure that 24 Mr. Morris would be prepared to speak to that. 25 Q. Can you tell us, sir, based on your 164 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 knowledge, how the rates in Idaho for irrigators 2 compare to other states? 3 A. I think Mr. Yankel's testimony covered 4 that to some extent. And if you believe that 5 testimony and I've not studied the detail behind it, 6 it would suggest that rates are higher or annual 7 costs are higher here than in other states, this 8 year. 9 Q. Well, has ScottishPower, as the 10 Applicant, done any investigation as to what the 11 actual rates are for irrigators in Idaho? 12 A. No, and I don't think we are required 13 to do so. 14 Q. And so would it be a fair statement, 15 Mr. Richardson, that having done no such study, 16 you're not -- ScottishPower is not in a position to 17 say that the rates won't go up? 18 A. What we have said is the rates will 19 not increase as a result of this merger. 20 Q. And so you're saying that not having 21 studied what the actual rates are for pumpers in 22 Idaho, you -- apart whether there's a merger or not, 23 you have no view on whether the rates will go up. 24 A. I think our focus is on costs. I 25 think you'll find in our testimony and in perhaps 165 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 responses to questions in the next few days that 2 there will be no costs attributed to this merger 3 which will cause rates to increase as a result of 4 the merger. 5 Q. But you won't know that for six months 6 after the merger. Is that right? 7 A. No, that's a commitment we have made 8 in testimony. Mr. Green's testimony says it very 9 clear. 10 Q. Okay. And can you tell us as far as 11 how much will be spent in Idaho if the merger goes 12 through on operating and maintaining the system as a 13 part of the whole system? 14 A. I cannot tell you that. 15 Q. Will it be proportional in some way? 16 A. Very probably. 17 Q. Proportional based on numbers or what? 18 A. I don't know, but the bottom line is 19 that in offering or committing to reliability 20 guarantees in particular, that is one way of 21 assuring the Commission or customers in Idaho that 22 operation and maintenance will be more than 23 satisfactory compared with the history. 24 Q. As the -- as the potential chief 25 executive, sir, can you tell us what portion of the 166 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 future investment on the system will be in Idaho? 2 A. No, I cannot, but I'd just refer you 3 to my previous answer which is a commitment to the 4 reliability and performance of the network in Idaho. 5 Customers are important and reliability of electric 6 service is very important to us. 7 Q. You understand that ScottishPower 8 looks to replace distribution equipment based upon 9 assessments that are driven by performance? 10 A. I don't -- 11 Q. In other words, performance driven, 12 replacement of distribution equipment? 13 A. Well, they're your words. I cannot 14 agree with that statement. 15 Q. Okay. I would allow you to supplement 16 your answer. I know we're short for time, but 17 please refer to Irrigation Pumpers Request No. 12 18 and your Response, and if you'd like, you can 19 supplement at a later time. I'd like to move on if 20 I might. 21 COMMISSIONER HANSEN: Okay. Proceed 22 on. 23 Q. BY MR. NYE: Can you tell us how 24 Idaho's rate situation differs from Wyoming's such 25 that you cannot commit to a cap as you did in 167 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Wyoming? 2 A. I think that's a question best 3 addressed to Mr. O'Brien. 4 Q. Why do you say that, sir? 5 A. Simply because you're really talking 6 about rate cases and rate filings, and I am not 7 privy to, as I've already said this morning, a lot 8 of the detail of the process, but also the detail of 9 the numbers. 10 Q. Okay. Are you aware of approximately 11 two and a half million dollars that is a payment to 12 be made or having been made to the preferred 13 stockholders for unsecured debt? 14 A. Yes, I am. 15 Q. And do you understand that that would 16 be paid by the ratepayers, that amount? 17 A. I don't understand it, and I again 18 defer the question to Mr. Morris. 19 Q. Can you tell us what concrete 20 efficiencies are to be achieved as a result of the 21 merger at this point, rather than waiting for the 22 transition report? 23 A. Simple commitment is a 10 million 24 savings in corporate costs, a net 10 million 25 savings, which will appear in full in year three. 168 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. And what portion of that would be 2 allocable to Idaho, Idaho being 3.6 percent of your 3 system, $36,000 or what? 4 A. I wouldn't hazard a guess. All I 5 would say is that I'm quite sure that through the 6 PETA process is a proper way of allocating these 7 cost savings around the states. 8 Q. Do you have knowledge that the Idaho 9 users constitute under four percent currently of the 10 PacifiCorp system? 11 A. Sorry, I don't understand the 12 question. 13 Q. Do you know what percentage of users 14 come from Idaho within PacifiCorp? 15 A. It's -- it's very small. I have the 16 numbers in front of me if you want me to look at 17 them. Have you got a number? 18 Q. I'm suggesting 3.6 percent. If you 19 can be specific, it would help. 20 A. Idaho would seem to have 53,000 21 customers out of 1.4 million, which in my terms is 22 about three percent. 23 Q. Thank you. Back to the $10 million in 24 target savings: That commitment does not cover the 25 possible 200 million per year in nonproduction cost 169 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 savings that SP hopes to achieve, does it? 2 A. Well that's a number that's been used 3 to identify the range of opportunity available to 4 ScottishPower going forward, so the ten million 5 would likely be part of that range. Whether it be 6 200 million or another number, I don't know. The 7 number would become more clear when the transition 8 plan is filed. 9 Q. And again, that's not six months from 10 now, that's six months after the merger? 11 A. Six months after merger closes. 12 Q. Approximately? 13 A. That's when it will be filed, yes. 14 Q. And the cost of that transition has 15 been estimated between one and two million, and to 16 be clear, that's to be paid by ratepayers? 17 A. That's correct. 18 Q. Does ScottishPower have any current 19 intention of passing these savings of approximately 20 200 million per year back to the ratepayer? 21 A. Our commitment is to comply with the 22 normal rules in rate making, rate cases, so in that 23 way, these savings will find their way back and will 24 eventually serve to mitigate rate increases. 25 Q. And do you consider your last 170 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 statement to be a positive assurance to this 2 Commission and to the ratepayers of Idaho that rates 3 and costs will not increase by reason of this 4 merger? 5 A. I think you're putting words into my 6 mouth. 7 Q. I certainly am. I'm asking if you 8 agree with that statement. 9 A. I don't agree with that statement. 10 What I said was rates -- rates will not increase as 11 a result of this merger. 12 Q. So why is ScottishPower not willing to 13 commit to that if you're so sure they're not going 14 to increase? 15 A. Because there are many more dimensions 16 to arriving at a rate, not just merger costs. There 17 are normal inflation costs, there are labor costs, 18 there are returns to shareholders, many others I'm 19 sure, which all of which need to be examined in a 20 rate case. 21 Q. Well, the stockholders of PacifiCorp 22 know what they're getting, don't they? They're 23 getting a certain amount for their stock. Right? 24 A. Yes. 25 Q. The executives that may leave are 171 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 getting $20 million as a golden hand shake if they 2 leave. They know what they're getting. Right? 3 A. Both of those are normal business. 4 Q. But the ratepayers don't know, do 5 they? 6 A. The ratepayers are looked after, 7 protected, by a proper process which is rate making, 8 which is delivered through this Commission I think 9 in a perfectly proper way, as far as I can 10 understand. 11 Q. But until there's a rate making 12 proceeding, you frankly cannot commit to what the 13 rates will be. Right? 14 A. You'll find from Mr. O'Brien that last 15 year PacifiCorp agreed to file a rate case in Idaho 16 this year. ScottishPower, in turn, have agreed to 17 file their transition plan six months after merger 18 approval. All of that would serve as a road map on 19 the way ahead for the destiny of rates in this state 20 from the PacifiCorp point of view. 21 Q. Thank you, sir. Does ScottishPower 22 have any current intention of rates ever being lower 23 than they are at the current time? 24 A. We have a genuine wish to focus on 25 costs, and our hope is that that focus on costs will 172 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 ameliorate and perhaps in time even reduce rates. I 2 think I've said that already. 3 Q. And do you have a problem then with 4 committing to passing all savings along to 5 ratepayers on a yearly basis? 6 A. Yes, I do have a problem, because I 7 also represent shareholders and they have an 8 entitlement to a fair return. That is a necessary 9 consideration in this equation. 10 Q. Do you stand by your direct testimony 11 found on page 18, sir, when asked, starting second 12 sentence: Are you suggesting that PacifiCorp's 13 rates will be lower than current rates after the 14 transaction is completed? 15 Answer: No, I'm not suggesting that. 16 A. I stand by that fully. 17 Q. So you're telling the irrigators of 18 Idaho and ratepayers that after the merger is 19 completed, PacifiCorp's rates will not be lower. Is 20 that what you're saying? 21 A. No. The sentence says Are you 22 suggesting that rates will be lower than current 23 rates? 24 And I answer, No. 25 Q. And, sir, is your last answer 173 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 illustrative of the positive assurance that you give 2 to this Commission and the ratepayers of Idaho that 3 rates and costs will not increase by reason of this 4 merger? 5 A. It is not at all in conflict with my 6 earlier statement. 7 MR. NYE: No further questions. 8 COMMISSIONER HANSEN: Pardon? 9 MR. NYE: Nothing further. 10 COMMISSIONER HANSEN: Okay. We'll 11 move along. How about the Public Power Council? 12 Mr. Richardson, do you have any questions? 13 MR. RICHARDSON: Mr. Chairman, we have 14 no questions of this witness. 15 COMMISSIONER HANSEN: Okay. Staff. 16 Mr. Purdy. 17 MR. PURDY: Thank you, just a few. 18 COMMISSIONER KJELLANDER: Conley. 19 COMMISSIONER HANSEN: Oh, I'm going to 20 get -- I'll come right back to you. 21 MR. WARD: Thank you. 22 23 24 25 174 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 CROSS-EXAMINATION 2 3 BY MR. PURDY: 4 Q. Mr. Richardson, if you would please 5 turn to page 5 of your rebuttal testimony, 6 specifically, lines 19 through 21. There you 7 discuss the access that ScottishPower has indicated 8 will be provided to the Commission Staff to review 9 the books and records of ScottishPower, essentially? 10 A. Yes. 11 Q. And what I'm going to do is to ask you 12 to elaborate a little bit on that, and specifically, 13 of course, Staff is concerned that we have access to 14 whatever affiliates -- books and records of 15 affiliates are necessary to ensure that costs are 16 reasonable or are being allocated appropriately. So 17 I'll just see where you take this and see what kind 18 of assurances that you will offer this Commission in 19 terms of access to those books and records. 20 A. Okay. Okay, fine. It may be 21 appropriate for some of the detail to be dealt with 22 by Mr. Morris -- I'm sure you realize that -- but 23 I'll do my best from this position. Okay? 24 Q. Sure. 25 A. Do you want me to speak? 175 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. Yes, I do. 2 A. Okay. Well, basically, we set out to 3 assure this Commission, and indeed others, that they 4 would have continued full regulatory oversight over 5 the PacifiCorp business that they presently 6 regulate. And obviously ScottishPower is a large 7 group and it has affiliates, as you rightly point 8 out. And I think what we've done through discovery 9 responses through Staff in particular is to try and 10 work out. I think we've been successful in giving 11 the basis for the necessary conditions that allow 12 you or allow this Commission to continue to have the 13 oversight to regulate this business the way they 14 used to. That is the important point. We're not 15 seeking to hide things. 16 And having said that, ScottishPower is 17 a large group and, you know, you could waste a lot 18 of time I guess looking in the wrong places, so it 19 was getting the message right. But the commitment 20 is there, and I think it is reflected in our 21 discovery responses. Okay. 22 Q. So you are making the assurance then 23 that we will have access to the books and records of 24 the ScottishPower affiliates? 25 A. That's right. You might want to 176 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 explore the detail with Graham Morris, but basically 2 what we want is that this Commission is able to 3 regulate with confidence this business. 4 Q. Thank you. I'll pursue that with 5 Mr. Morris. Now, on page 6 of your rebuttal 6 testimony, you discuss education and training costs 7 that you intend to incur in approving the efficiency 8 of PacifiCorp and its operations, and presumably are 9 going to seek recovery from ratepayers for this 10 cost. Is that a fair statement? 11 A. That's a fair statement, yes. 12 Q. And are you prepared to -- are you 13 willing today to accept the fact that ScottishPower 14 has the burden of demonstrating the benefits that 15 will be received through those expenditures will 16 exceed the costs? 17 A. We accept that burden, absolutely. 18 Q. Now, there has been mention of 19 transaction versus transition costs in this case. 20 A. Right. 21 Q. Could you just briefly differentiate 22 those two for me? 23 A. Sure. Transaction costs are the costs 24 associated with getting the deal done, and I think 25 Mr. Budge this morning referred to $215 million and 177 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 perhaps $30 million incurred last year by 2 PacifiCorp. They are below-the-line costs fully 3 funded by shareholders. 4 Transition costs are of the order of 5 one to two million. I think we covered that with 6 Mr. Nye. Those costs are associated with developing 7 the transition plan. That plan is aimed at 8 delivering real benefits to customers in terms of 9 cost and other things, and that cost rightly would 10 rest with the ratepayer as part of our rate case 11 submission. 12 Q. And can you accept the burden of 13 proving before this Commission whether a cost 14 constitutes a transition versus a transaction cost? 15 A. Absolutely. 16 Q. Now, Mr. Budge asked you a number of 17 questions about the Wyoming stipulation that was 18 entered into between PacifiCorp and the Wyoming 19 Commission or Staff, I believe, and that 20 ScottishPower has signed off on that, I understood 21 you to say? 22 A. That's correct. 23 Q. Yet you did concede in 24 cross-examination that at least one aspect of that 25 stipulation is not transferable to Idaho, that being 178 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 the rate cap -- 2 A. That's right. 3 Q. -- or the agreement not to increase 4 rates in Wyoming. Correct? 5 A. That's correct. 6 Q. Okay. Well, can you tell us if there 7 are any other aspects or components of that 8 stipulation that are not transferable to Idaho? 9 A. To be honest, that's detail -- I don't 10 have that information in front of me. I would think 11 another witness could handle that in some detail if 12 you wish. 13 Q. And who would that be? 14 A. I think it's Mr. MacRitchie, but may 15 be Mr. Morris. I always get it wrong. 16 Q. I'm sorry, what was your answer? 17 A. I think it's Mr. MacRitchie. 18 Q. MacRitchie? 19 A. It's not that I don't know. He is 20 much more familiar with the detail on how to handle 21 that. 22 I would say that Wyoming and Idaho are 23 different places, started from different places. 24 Q. Well, then let me just ask you, 25 generally speaking, what is your opinion in terms of 179 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 whether if you -- if ScottishPower offers benefits 2 or commitments in other states, how are you going to 3 determine whether those, in your mind, are available 4 to Idaho as well? 5 A. We've suggested and I think we've 6 applied already that system-wide type of benefits 7 would be applied if we agreed on them in one state, 8 they would be notified and applied appropriately in 9 the other states. And that Application would 10 normally be agreed with Staff, you know, for I guess 11 eventual submission to the Commission. 12 An example would be the $10 million 13 that was talked about, the cost savings. If you 14 looked at that in I think it was Mr. Green's initial 15 testimony, it was just a bald 10 million -- 16 10 million -- $10 million of savings. I think as we 17 progressed, we found that it became $10 million 18 guaranteed and independent of the best exchange 19 rate. And then we moved on $10 million based on 20 1999 costs. And at each turn, we offered that to 21 all of the states. 22 I think that's a good example. We're 23 not seeking to embarrass Staffs or Commissions with 24 doing in one place that really could be applied 25 system-wide. 180 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. In your mind, do you have a definition 2 of what constitutes a system-wide benefit? 3 A. Well, $10 million is a good one. 4 Difficult on the stand, but it might be in the area 5 of network reliability guarantees, for example, and 6 you know that will be our honest endeavor. 7 Q. In your direct testimony, you 8 indicated that ScottishPower tends to develop or 9 acquire roughly 50 megawatts of renewable resources. 10 Is that correct? 11 A. That's correct. 12 Q. What type of resource do you have in 13 mind? 14 A. I think -- I'm not sure if we talked 15 about it in testimony, but it's likely to be wind or 16 geothermal based on where PacifiCorp had been 17 investing. 18 Q. Do you have any idea where these 19 resources would be developed and what their cost 20 would be? 21 A. Not really in terms of what the 22 location would be, although Wyoming is a pretty 23 windy place. 24 The cost, we suggested that it might 25 cost $60 million. 181 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. $60 million for 50 megawatts? 2 A. Yeah. 3 Q. I wanted to ask you a question about 4 the PacifiCorp Foundation. In your direct 5 testimony, you indicated that PacifiCorp had made a 6 commitment, I believe, to contribute or perhaps 7 ScottishPower had made a commitment to contribute 8 $5 million to the PacifiCorp Foundation? 9 A. That's right. 10 Q. And so my question is how will that 11 benefit Idaho customers? 12 A. The Foundation is a worthwhile cause. 13 I think if you look at the history of it, it's 14 invested in some excellent community projects and 15 going forward it obviously will continue to do so. 16 One of the things we will do will be 17 to look at the governments of the Foundation to 18 ensure that they're fair over time, that there is a 19 fair spread of investments that I suppose reflects 20 the customer in this whole process. Some form of 21 reasonable allocation in response to the customer 22 base of PacifiCorp. 23 Q. Are you familiar enough with the 24 programs of the PacifiCorp Foundation to be able to 25 identify which ones specifically and directly 182 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 benefit Idaho customers? 2 A. No, I'm not. 3 Q. Do you know who is? 4 A. Mr. O'Brien probably. 5 Q. And can you tell me whether any 6 specific programs funded by the Foundation have 7 benefitted Idaho customers in the past? 8 A. No, I can't, I'm sorry. 9 MR. PURDY: Thank you. That's all. 10 COMMISSIONER HANSEN: Now we'll go to 11 the Idaho Consumer-Owned Utilities. Mr. Ward. 12 MR. WARD: Thank you, Mr. Chairman. 13 14 CROSS-EXAMINATION 15 16 BY MR. WARD: 17 Q. Mr. Richardson, I only have one area 18 to talk to you about. Do you have your Exhibit 201 19 with you on the stand? 20 A. I don't think I have 201. No, I 21 don't. Give me a moment. 22 MR. WARD: Counsel, can you give him a 23 copy? 24 THE WITNESS: Okay. 25 Q. BY MR. WARD: If you'd turn to page 19 183 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 of that exhibit, please? Let me know when you have 2 the page, Mr. Richardson. 3 A. Hold on. 4 I have the page. 5 Q. Okay. We have here a page headed with 6 the title Five Year Financial Summary, which appears 7 to be a simplified financial summary for 8 ScottishPower group. Is that your understanding? 9 A. That's correct, yes. 10 Q. And I take it in ScottishPower group, 11 that includes the various enterprises such as 12 Manweb, Southern Water, all of the ScottishPower 13 holdings on a combined basis? 14 A. Yes, it does. 15 Q. If this merger is approved, I assume 16 that -- would I be correct in assuming that a 17 similar financial summary would include PacifiCorp 18 as part of these reported results? 19 A. Yes, it would. 20 Q. Okay. Now, there's no numbered lines 21 on this exhibit, Mr. Richardson, but if you would 22 look down under Ratios and Statistics, and look at 23 the fourth line; it's labeled Return on Equity. Do 24 you see that? 25 A. Yes. 184 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. And as I read across that exhibit, I 2 see that the -- that the ScottishPower group return 3 on equity over the last five years has varied from 4 24 and a half percent to 27 percent -- 27.7 percent. 5 Correct? 6 A. That's correct. 7 Q. Is that -- first of all, let me ask 8 you, is that return on equity calculated in 9 substantially the same way it would be calculated in 10 United States reporting? 11 A. I really don't know. I think that's a 12 question you should ask a qualified accountant, so 13 Mr. Morris would be far better to respond. 14 Q. All right. Let me refer you back to 15 the prior page of this same document. 16 Well, first of all, I take it 17 ScottishPower is proud of those results that show 18 those returns on equity listed in this summary? 19 A. I think they are satisfactory, yes. 20 Q. If you turn to the prior page now on 21 page 18, here are some statements made on behalf of 22 the Company, and it starts with the statement The 23 ScottishPower group is committed to enhancing 24 shareholder value. 25 And then goes on to talk at a little 185 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 more length. 2 And if you'd look at the right-hand 3 column there -- again, I don't have numbered 4 lines -- but you'll see the second paragraph in the 5 right-hand column -- 6 A. Yes. 7 Q. -- refers to how you measure value, 8 ScottishPower measures value. And would it be 9 correct that one of the measures is earnings per 10 share? 11 A. That's correct, yes. 12 Q. And I take it also returns on equity 13 which are implied by earnings per share? 14 A. Indirectly, yes. 15 Q. Okay. Now, let me return you to the 16 return on equity calculation. Are you familiar with 17 the types, in general, in very general terms, with 18 the typs of returns on equity authorized by 19 regulatory commissions in the PacifiCorp Northwest? 20 A. Yes, I am. 21 Q. And would you disagree with me if I 22 said those returns right now are typically in the 23 area of -- let's pick a wide range -- 10 to 24 13 percent? 25 A. Yes, I'd agree with that. 186 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. And it appears to me that that's 2 roughly half or less of the return on equity that 3 ScottishPower group as a whole is earning. Is that 4 correct? 5 A. That's the way it appears, yes. 6 Q. And as you said, I'm sure 7 ScottishPower -- as this document points out -- is 8 interested in enhancing shareholder value. Let me 9 ask you how you can do that by combining with a 10 company that can never earn a return on equity 11 anything approaching the 24 percent minimum we're 12 showing here? 13 A. Well, 24 percent is the business in 14 Britain. What we're saying is we can run this 15 business to deliver more value than PacifiCorp, and 16 that really is the equation, and that is what our 17 shareholders and PacifiCorp's shareholders have 18 voted to proceed with and we hope this Commission 19 can support that. 20 Q. Well, I understand that, 21 Mr. Richardson, and I understand that ScottishPower 22 estimates that substantial savings will be possible 23 after the merger. Isn't that correct? 24 A. We have committed to developing a 25 transition plan which will identify savings going 187 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 forward, yes. 2 Q. But do you understand that under the 3 regulatory practice in this country, that if those 4 savings generate increased earnings to the point 5 that a regulatory commission determines that a 6 company is overearning, that it will order a rate 7 decrease? 8 A. We understand that very well. 9 Q. So if we were trying to make sure that 10 the -- that the earnings for PacifiCorp -- return on 11 equity for PacifiCorp were in parity with 12 ScottishPower group, we can't necessarily count on 13 doing it by cutting cost, can we? 14 A. I don't really understand your 15 question. 16 Q. Well, assume for me -- let me think of 17 another way to ask it. 18 If I were a shareholder in 19 ScottishPower group, and I'm receiving a 24 20 percent -- the benefits of a 24 percent return on 21 equity, don't you think I'm going to be a little 22 displeased by a major acquisition that generates a 23 maximum return on equity of 12 percent or so? 24 A. Well, I think the reality proves you 25 wrong, the fact that 99.5 percent of the 188 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 ScottishPower shareholders and 87 and a half percent 2 of PacifiCorp shareholders voted for the 3 transaction, which suggest that they think it's a 4 good thing. 5 Q. Well, wouldn't it be true that in 6 order to avoid diluting my return on equity, you 7 have to, one way or another, get the return on 8 equity for PacifiCorp up? 9 A. Well, I think these decisions are 10 decisions made by ScottishPower's board of directors 11 on behalf of its shareholders, and the shareholders 12 have approved that approach and that strategy, and 13 that is delivering necessarily. 14 Quite honestly, I will only be chief 15 executive and maybe Mr. Morris would be better to 16 ask any better questions you have. 17 Q. Well, Mr. Richardson, I'm not -- I'm 18 not trying to dispute the shareholder approval, nor 19 for that matter the decision-making process. I 20 really want to get to another question, which is -- 21 let me ask it in the form of hypothetical: 22 Assume for me, if you would, that in 23 order to maintain shareholder value, ScottishPower 24 will have to take the return on earnings, on equity, 25 of PacifiCorp up to something approaching its 189 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 existing level for the Company. Can you assume that 2 for just a moment? 3 A. I think it's a pretty ridiculous 4 assumption. 5 Q. If it's not -- if it's a ridiculous 6 assumption, doesn't it mean that my -- the value of 7 my investment as a shareholder is going to be 8 diminished if you don't accomplish that task? 9 MR. GALLOWAY: Mr. Chairman, I object 10 to this line of questioning. This is not the 11 financial witness put forward by the customer -- or, 12 the Applicants. Mr. Richardson has already 13 indicated that he is the policy witness here, and I 14 think questions as to the financial analyses 15 underlying this transaction are appropriately 16 addressed to our financial witness. 17 COMMISSIONER HANSEN: Mr. Ward. 18 MR. WARD: Mr. Chairman, I really 19 didn't intend to get bogged down on the financial 20 predicate. I really wanted to ask the questions 21 about the operational -- the operational 22 underpinnings of this, so let me stop with the 23 financial and move on to what I really wanted to get 24 to. 25 Q. BY MR. WARD: Now, Mr. Richardson, 190 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 leaving aside the financial hypotheticals and the 2 matters we've just been discussing, earlier today in 3 response to questions I believe by Mr. Budge, you 4 noted that there's really only two ways to increase 5 earnings for a company: That is, you must either 6 cut expenses or increase revenues. Do you recall 7 that? 8 A. Yes, I agree, I recall. 9 Q. And isn't it also true though that 10 there are other ways to increase returns for 11 investors or equity holders other than just cutting 12 costs or increasing revenue? 13 MR. GALLOWAY: Objection. This goes 14 again to questions properly addressed to the 15 Applicants' financial witness. 16 MR. WARD: Well. 17 COMMISSIONER HANSEN: Mr. Ward. 18 MR. WARD: Let me ask a specific 19 question. 20 Q. BY MR. WARD: Mr. Richardson, can you 21 affect the returns of investors by changing the 22 financial structure of a company? 23 MR. GALLOWAY: Same objection. 24 MR. WARD: Well, Mr. Chairman, he's a 25 CEO-to-be of a major utility. I think he can answer 191 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 that question. 2 MR. GALLOWAY: Mr. Chairman, there's 3 nothing in Mr. Richardson's prefiled testimony that 4 bears even slightly on financial issues. He's not 5 the witness in those matters. If Counsel wants to 6 inquire on matters of financial structuring or 7 financial theory, we have a financial witness who's 8 more than capable of responding and not obscuring 9 the record with a witness who's not expert in these 10 matters. 11 COMMISSIONER HANSEN: Mr. Ward, do you 12 have any other comment? 13 MR. WARD: Let me go at this another 14 way, Mr. Chairman. 15 Q. BY MR. WARD: Mr. Richardson, in fact, 16 your rebuttal testimony rebuts the testimony of 17 Intervenors who have suggested that there are 18 various ways in which ScottishPower might try to -- 19 and I'm going to simplify here -- recoup its 20 investment in PacifiCorp. Do you recall that 21 testimony? 22 A. Uh-huh, I do. 23 MR. GALLOWAY: Could you provide us a 24 page reference, please? 25 MR. WARD: Pages 8 and 9. Let's start 192 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 there. 2 MR. GALLOWAY: Thank you. 3 Q. BY MR. WARD: Do you have that 4 rebuttal testimony in front of you, Mr. Richardson? 5 A. I have it, yes. 6 Q. On page 8, specifically, there you're 7 answering the charge that one way PacifiCorp might, 8 in fact, benefit from the transaction is by 9 divestiture of assets. Do you recall that 10 testimony? 11 A. I do. 12 Q. Which you responded to that charge? 13 A. I have responded to it. 14 Q. Would you look at lines 18 and 19, 15 page 8. 16 A. I have that. You mean 19 and 20? 17 Q. Well, I better put my glasses on. 18 Let's try 18 and 19 in my version, but whatever. 19 A. Okay, we'll be close. 20 Q. And you say there, do you not, that 21 you do not intend to sell any assets of the 22 business? 23 A. We have absolutely no plans to sell 24 any assets, any property. 25 Q. Okay. So you're not going to try to 193 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 enhance the value, if you will, of the purchase in 2 that manner? 3 A. No, absolutely not. 4 Q. And on page 9, if you look at lines 8 5 through 10, you say there that you're rebutting the 6 charge that there will be a financial incentive to 7 cut investment, and you say there that, again, in 8 response to that, that you intend to make 9 appropriate levels of investment. Do you see that 10 language? 11 A. Yes, I find that. 12 Q. Now, if you also -- 13 Is there any other action from an 14 operational standpoint -- or financial, if you know, 15 standpoint -- that would increase the value of the 16 PacifiCorp purchase to ScottishPower? 17 MR. GALLOWAY: Objection. I don't 18 think the question is understandable. 19 COMMISSIONER HANSEN: Mr. Ward. 20 Q. BY MR. WARD: Let me ask you this, and 21 I'm sorry, I'm going to have to ask this in terms of 22 earnings, because after all, wouldn't you agree with 23 me, Mr. Richardson, that earnings are a significant 24 concern for a CEO of a company? 25 A. I would, yes. 194 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. Is it possible to increase investors' 2 earnings by changing the debt leverage of a 3 company? 4 MR. GALLOWAY: Objection, your Honor. 5 MR. WARD: Mr. Chairman, any CEO can 6 answer this. 7 COMMISSIONER HANSEN: Please state 8 your objection. 9 MR. GALLOWAY: The objection is that, 10 once again, we're calling on questions that are best 11 addressed to the financial witness in the 12 proceeding. Mr. Richardson has not sponsored 13 testimony related to the financial attributes of 14 this transaction. 15 COMMISSIONER HANSEN: I believe in 16 this case, I'm going to allow the question. I think 17 in the position of Mr. Richardson, I think he can 18 give his opinion. I'll allow the question. 19 THE WITNESS: It is opinion, and I 20 would suggest you might want to revisit the question 21 with Mr. Morris. 22 Q. BY MR. WARD: Fine. 23 A. We have no intention to manipulate in 24 the way that you might be suggesting, and I think 25 further that the commitments we've made to Staff 195 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 have been pretty clear about the intended capital 2 structure of the business. 3 The Commission has the right to know 4 just how the business will be structured going 5 forward, and I couldn't be more strong in 6 emphasizing to you, Mr. Ward, the commitment to run 7 this company in this service territory in a very 8 proper and upright fashion. That's the sort of 9 company ScottishPower are. You can check the track 10 record, you can check the annual accounts, they're 11 there for you. You can see the levels of investment 12 and the way we operate. They are very clear, and 13 that clarity and that commitment will continue in 14 the future. 15 Q. If it were necessary for corporate 16 reasons to try to ensure or to have as a goal 17 increasing PacifiCorp's return on equity to 18 something in the vicinity of the existing Scottish 19 group -- ScottishPower group, are we -- can you 20 think of any method we have not discussed from an 21 operational or financial standpoint that would 22 achieve that result? 23 A. Well, I would be a very different kind 24 of CEO from you, I think. We want to run this 25 business to earn the reasonable returns allowed by 196 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Commissions in the service territories. And we've 2 said that very, very clearly going forward for the 3 last seven months. That is the expectation of the 4 management, the board, and the shareholders of 5 ScottishPower. 6 Q. Would that be true even if it reduces 7 return to ScottishPower shareholders? Do you intend 8 to do it at the expense of shareholders? 9 A. These -- you use the word the 10 "expense" of shareholders. These are very technical 11 questions that are far better addressed by 12 Graham Morris. 13 MR. WARD: That's all I have. 14 COMMISSIONER HANSEN: Okay. Let's see 15 if we have any questions from the Commission. 16 Commissioner Kjellander. 17 18 EXAMINATION 19 20 BY COMMISSIONER KJELLANDER: 21 Q. Mr. Richardson, in your testimony, you 22 outlined the witnesses that the Company has today 23 and the testimony they will provide. Could you lead 24 me to the witness that is best equipped to talk 25 about some of the green power ventures that you look 197 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 forward to initiating? 2 A. I think that's me. 3 Q. Oh, good. The question I have is 4 related to assessments for the green power that you 5 want to develop. What assessment has been done 6 within the state of Idaho to determine customers 7 that may want to access green power? 8 A. None yet. 9 Q. I guess what I'm trying to get to 10 then, none yet. So then this is something that's 11 just on paper today; something that you would like 12 to look at and then perhaps -- perhaps -- propose to 13 the Commissions to see if they would approve that. 14 Is that correct? 15 A. That's correct, and we're coming from 16 a position where I guess our own background would be 17 to want to respond to the obvious environmental 18 questions, and also in the Northwest, responding to 19 individual groups who have represented to us very 20 strongly on the need to have a more balanced 21 portfolio. And our intention is to fully review 22 that to try and identify options; and then the 23 commitment is to bring the proposal that is prudent 24 to this Commission and others for approval. 25 Q. And perhaps prior to bringing that to 198 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 the Commission, you would have done those type of 2 assessments then? 3 A. Yes, I would think you would find this 4 and PacifiCorp are pretty thorough in this respect. 5 Q. Thank you. A question in the area of 6 Foundation. Are you the best one to respond to 7 questions there? 8 A. I think Mr. O'Brien is probably 9 better. 10 COMMISSIONER KJELLANDER: Thank you 11 very much, Commissioner. 12 COMMISSIONER SMITH: All of my 13 questions are done. 14 15 EXAMINATION 16 17 BY COMMISSIONER HANSEN: 18 Q. Mr. Richardson, I have a few 19 questions. I guess kind of a follow up on things 20 that we talked about earlier, but why do you feel 21 ScottishPower has to offer millions of dollars in 22 stock options and incentives to PacifiCorp 23 stockholders? 24 A. To PacifiCorp stockholders? You mean 25 the premium? 199 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. The preferred stockholders. 2 A. Oh, the preferred stockholders. 3 Q. Uh-huh. 4 A. Again, I think Mr. O'Brien is far 5 better qualified than I am, but I suspect that's a 6 normal process. 7 Q. Okay. How about why do you think that 8 ScottishPower had to make a commitment to the top 26 9 or 27 executives of PacifiCorp for severance pay and 10 bonuses? 11 A. I think that commitment was made by 12 PacifiCorp board, and -- 13 Q. And why do you think that needed to 14 be? 15 A. I think it's a normal way of running a 16 business in these circumstances, and quite honestly, 17 I heard Mr. O'Brien respond to this question last 18 week and his answer will be much more illustrative 19 and satisfying than mine would be. And I would 20 defer to Mr. O'Brien this question, if you could 21 allow that. 22 Q. Okay, that's fine, but wouldn't you, 23 in the position that you're in, have to be 24 supportive of this? 25 A. We need to be aware of it. I think 200 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 the reality is that in the discussions as we 2 approached the merger, we became aware of that in a 3 perfectly normal way. And as I said it, I think it 4 is a normal way of doing business that Mr. O'Brien 5 could elaborate on. 6 Q. Okay. Well, I'm going to ask you 7 another question concerning that, and if you want to 8 refer that to Mr. O'Brien, that's fine. 9 I guess the question that's in my mind 10 is do you think this severance package, bonuses, 11 and, say, millions of dollars in stock options take 12 risks away from PacifiCorp officers and stockholders 13 of PacifiCorp? Do you think it kind of softens 14 their risk that could be out there for them in this 15 merger? 16 A. I think that's one dimension, but the 17 other dimension which I think is important is that 18 we need to keep PacifiCorp focused on running a 19 business during this transaction, and I think these 20 arrangements serve to support that very, very 21 clearly. 22 Q. Isn't ScottishPower asking for five 23 years to implement improved service to customers? 24 Is that correct? 25 A. We have said that in five years is -- 201 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 it comes up in a number of ways, if you like. Five 2 years is the period at the end of which you will see 3 a ten percent, at least, improvement in reliability, 4 for example, SAIDI and SAIFI; five percent 5 improvement in MAIFI. 6 Can we just explain what they are to 7 the stenographer? 8 Q. Go ahead. 9 A. SAIDI is S-A-I-D-I, SAIFI, MAIFI: 10 M-A-I-F-I. 11 So that's one five year thing. 12 Another five-year commitment is that 13 it's our intention in five years to take PacifiCorp 14 into the top ten US utilities by a number of 15 measures, not just financial. 16 The real question maybe you're asking 17 is when will customers see improvement; and you can 18 turn to things like the customer guarantees which 19 will be implemented very quickly after the merger, 20 like telephone answering where certainly within 120 21 days after the merger we have guaranteed significant 22 improvements in telephone answering. 23 So there will be -- improvements will 24 be felt, some very soon, and others obviously will 25 take longer as we turn around the operation and turn 202 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 around the investment focus. 2 Q. Okay. Do you think it would be fair 3 to the customer to have some kind of -- or, the 4 ratepayer -- to have some kind of a guarantee as the 5 Company is asking for time to implement these 6 improvements? 7 Where you're asking them to give you 8 time to implement these savings, customer service, 9 and everything, do you think that there's another 10 side to the coin that they're -- 11 As I hear today, are they asking for 12 some kind of guarantees? 13 Do you think they deserve -- the 14 customer -- does the ratepayer deserve some kind of 15 a guarantee where you're asking for some time? 16 A. It would be nice to say "yes," but I 17 don't think it's at all appropriate to say "yes," 18 Chairman. I think what -- what we have done in the 19 testimony is made I think very firm commitments to 20 improve service, to save $10 million, to several 21 other things that we've covered; we've made a very 22 firm commitment to file a transition plan in six 23 months that will give this Commission a very clear 24 view of our intentions on costs and performance 25 going forward; and we've also agreed to file through 203 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 our discovery Response a report on progress every 2 year to this Commission in particular. 3 So I think we go a long way to giving 4 the guarantees. But to give every guarantee today I 5 think is -- is inappropriate and is not really what 6 is required for the approval of this merger, if I 7 might say so much. 8 Q. Your previous answer, Mr. Richardson, 9 kind of sparked a couple other questions I want to 10 ask; then I'll get back to where I was going. 11 I was kind of curious on when I read 12 the testimony and you just mentioned about improving 13 customer service on telephone to so many seconds. 14 Was it 20 seconds? 80 percent within 20 seconds? 15 A. That's right. 16 Q. Is that a live voice they'd receive in 17 20 seconds, or is that a recording, or is that 18 actually a live voice that puts you on hold for 19 another 10 minutes, or what are you looking at when 20 you say the customer is going to receive a response 21 within 20 seconds? What's that customer really 22 going to get? 23 A. I could go on all day, but I better 24 not. 25 Q. Brief, to the point. 204 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 A. It's very important to us that it's a 2 live voice, and it's very important to us that that 3 person is able to answer, you know, the vast 4 majority of customer inquiries. It's a very, very 5 sincere and very important initiative that we want 6 to take. Customers are -- fundamentally, we believe 7 customers seeking to get in contact with this 8 company -- PacifiCorp -- should have a good 9 experience. They should feel cared for and they 10 should feel as though the agent at the end of the 11 line has the information about their account, their 12 problem, and is able to deal with it. 13 And that's very much the way we drive 14 it: Live, good systems, information systems, going 15 into the business centers to make sure that there is 16 real-quality, leading-class telephone response and 17 telephone. Not just the response, but the quality 18 of the answer is important to us. 19 Q. In Idaho -- 20 A. In Idaho. 21 Q. -- if I was an irrigator and I was 22 having some problems with my pump or so forth and I 23 made a call, where's that call going to go, do you 24 know? Is it going to go to Salt Lake City, is it 25 going to go to Rexburg, or is it going to go to 205 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Portland, or where -- do you have an idea where that 2 call will wind up? 3 A. Yes, it's likely to go to Salt Lake 4 City. Overflow might go to Portland. 5 And I've spoken to irrigators and -- 6 they have spoken to me more likely -- and I 7 understand the problem that's behind the question. 8 And one of the gaps that we see -- ScottishPower -- 9 when we look at PacifiCorp, is they've not linked 10 the customer call issue back to the engineering 11 action; and it's something we've done very, very 12 successfully in Britain with our call center 13 systems. Our investigation has shown that, you 14 know, we could very readily apply our solutions from 15 Britain into the well-equipped business centers in 16 PacifiCorp and go a long, long way with dealing with 17 just the irrigator type of question that you're 18 asking. 19 Q. Another point that you mentioned just 20 previously, that your goal was to bring PacifiCorp 21 up to the top ten -- 22 A. Yes. 23 Q. -- customers. 24 Do you have Exhibit 215? 25 A. I don't think I do, Chairman, but I'm 206 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 sure it will be provided. What is it, sir? 2 Q. If we could have you -- 3 COMMISSIONER HANSEN: If somebody can 4 provide Mr. Richardson with 215? 5 Q. BY COMMISSIONER HANSEN: Do you have 6 that? 7 A. I have it, Chairman. 8 Q. Okay. If you look there to the right, 9 you have top ten? 10 A. Yes. 11 Q. Do you see that? 12 A. I do. 13 Q. And I know these are nongenerated 14 costs per customer, but is this the top ten as you 15 look at PacifiCorp, No. 56, is this the -- what you 16 were looking at bringing them up into, this top 17 ten? Is that what you're looking at? 18 A. That is one dimension. But I think if 19 you read -- and I can't remember which of my 20 testimonies it is -- we want to bring PacifiCorp as 21 ScottishPower are in Britain: Into the top ten on a 22 broad range of measures. This is one obviously 23 financial component that power plant performance is 24 very close to that already. But on environmental 25 commitment, on innovation, on its employee 207 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 relations, on a broad range of measures, we want 2 PacifiCorp to be a utility that you're proud to 3 regulate, that the Staff are proud to work for, that 4 customers are proud to deal with, even irrigators. 5 Q. Do you think this Exhibit 215, the 6 cost -- or, the service performance has anything to 7 do with the cost here? 8 I mean, you're trying to bring -- if I 9 read you correctly, you're trying to bring 10 PacifiCorp nonproduction costs per customer from 11 300 -- I guess they'd have to get down to 200 in 12 order to reach this top ten. 13 Does the cost have any relationship to 14 the service? 15 A. Well, it could if you did it badly, 16 but, I mean, our experience and indeed our 17 commitment -- and I think the Staff know this -- is 18 that our commitment is to raise standards, Chairman, 19 in terms of customer service, and very much positive 20 experience. 21 Customer service standards should 22 improve. The focus on costs and, importantly, 23 PacifiCorp's focus on the full business will be what 24 will deliver the cost improvement that we will be 25 seeking through the transition plan. But there is 208 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 no way that we're going to sacrifice customer 2 service. Quite the opposite: We want to hone and 3 enhance customer service as part of this. The top 4 ten is a broad set of measures which includes this 5 one. 6 Q. Definitely. I don't mean to drag 7 Idaho Power into this, but I did happen to notice on 8 the second page that Idaho Power ranks below 9 PacifiCorp as No. 70, and I guess that was just kind 10 of interesting because they met with the Commission 11 a year ago and they had an independent do a survey 12 for them, and it was a high percentage, like I think 13 only about two percent, was not satisfied with their 14 service. And I don't know what they paid the 15 consultant. 16 But I'm just kind of curious, does 17 that -- does that give you any concerns that maybe 18 here's a company that operates in Idaho that has 19 high cost, nongenerating costs to serve their 20 customer, and a survey indicates they're doing a 21 good job? Could it be that it does cost more money 22 to really provide good service, nonproductive or 23 generating service? 24 A. Well, it could be. I mean, I think we 25 all know that you can go inflate things and 209 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 provide -- I'm not suggesting that Idaho Power do 2 that, but it's possible to invest or operate in a 3 way that is more expensive than the optimum, and 4 that may be the case with PacifiCorp. As far as 5 Idaho Power is concerned, I think they're a fine 6 company and bring lots of good standards to the 7 state. 8 Q. I didn't mean to get into that. 9 I guess just one other question I had 10 concerning -- you've been asked several times about 11 would ScottishPower make this kind of a rate 12 commitment that was made in Wyoming; or we hear that 13 there's negotiations going on in Oregon and with 14 Washington on different maybe commitments there. 15 Did I understand you correctly that if 16 any commitments are made by ScottishPower concerning 17 rates, freezes, or whatever -- or reductions -- that 18 it would have to be made currently with PacifiCorp, 19 and then if PacifiCorp made some type of an 20 agreement, that it would be pretty much automatic 21 that ScottishPower would honor that? Is that what 22 you said about Wyoming? And if it's true, is that 23 what it would be for Idaho if this was to be 24 pursued? 25 A. I think that's exactly what we said 210 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 about Wyoming, which is PacifiCorp entered into a 2 rate agreement, a rate cap agreement, if you like, 3 which ScottishPower in its stipulation with Staff 4 undertook to honor. 5 I think in this state there's a 6 similarity where PacifiCorp have committed to a rate 7 filing later this year, and we stand by that 8 decision and, you know, the rate case will take its 9 normal route under your own direction and 10 ScottishPower will honor that too. 11 So it's slightly different from 12 Wyoming, but the same -- the same principle, which 13 is that PacifiCorp runs this business today and we 14 support them in running that business. We're not 15 trying to second guess them. And at some point in 16 the future there will be a change of ownership, but 17 I would say that the people running PacifiCorp in 18 the details and its operations will be the same 19 people. A few of us different, but not many. 20 Q. I can tell the Commissioners are 21 probably going to be throwing darts at me here in a 22 minute because I've asked a lot of questions, but I 23 do have just a few more I want to ask you. 24 I have a question about the $50 25 residential and $100 commercial compensation 211 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 guaranteed to customers if power is lost over a 2 24-hour period due to the Company's system. And I 3 guess the question I would ask you: Are you aware 4 of how many PacifiCorp customers in Idaho would have 5 received this credit over the last year if this 6 guarantee had been in place? 7 A. I actually don't know the number, 8 Chairman, but I would guess it would be very small. 9 That's not the point, really. 10 The point is that as chief executive, 11 if I would get to know as chief executive that that 12 payment would be made and that somewhere in our 13 performance, in our operations, we've done less well 14 than we would have liked, and then you can set about 15 the remedial action of fixing whatever went wrong. 16 It's probably a process or communication. So the 17 numbers are very few, but if you look at the 18 customer guarantees -- and I think there were eight 19 of them -- in the round, then the reports coming to 20 the chief executive and other executives give them 21 very quickly a feel for the effectiveness of the 22 business and its commitments, meeting its 23 commitments to its customers. 24 Q. So you are not really surprised with 25 Mr. Yankel's testimony, I believe, where he states 212 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 that over the last several years, there would only 2 be five customers that would qualify for that 3 credit? Does that surprise you? 4 A. Not at all, no. 5 Q. So in your mind, based on that, 6 PacifiCorp is probably doing a pretty good job of 7 restoring service within a 24-hour period. Would 8 you say that? 9 A. I think they are based on that one, 10 but there are seven hours that the scrutiny would, 11 you know, provide slightly different common sense. 12 Q. Mr. Richardson, another area, and it's 13 been beat to death here, but ScottishPower stated 14 the $10 million in savings would be guaranteed 15 through a reduction of corporate overhead. And can 16 you give me a detailed explanation of how you will 17 reduce corporate overhead, because it seems like 18 several times you've said, Hey, this is a given, we 19 are going to reduce, we're going to produce that ten 20 million, we know we are. 21 And I guess I'm aware that PacifiCorp 22 has already had significant downsizings through 23 their refocus program by reducing their head count 24 by over 900 people. And so I guess I would like to 25 know how you plan on reducing corporate overhead. 213 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Is it in people or where are you getting the 2 confidence in that number? 3 A. Well, I think -- we have provided that 4 information on a confidental basis to several 5 Intervenors, but I think Ms. Carlock's testimony 6 covers just where the corporate savings will occur 7 and if you'll given me a moment if I might quote, 8 and it's not far from the position. 9 Those savings in corporate would occur 10 in the areas of investor relation, shareholder 11 services, corporate finance, corporate 12 communications, legal services, corporate 13 strategies, human resources, and information 14 technology. 15 And that's where there would be 16 general duplication between the corporate functions 17 in Scotland and the corporate functions here of 18 PacifiCorp. 19 Q. Okay. I will probably get -- you're 20 saying I can get the details from Ms. Carlock on 21 that? 22 A. It's on page -- page 8 of 23 Ms. Carlock's testimony, but it's also in one of the 24 discovery answers, Chairman, I'm sure. 25 Q. Another question is with -- can you 214 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 tell me what the rates -- if there's been any rate 2 changes in Manweb since you took that over in '95? 3 Have they gone up or down or stayed the same? 4 A. The supplemental testimony again shows 5 the rate profile in Manweb, and I can't remember 6 which figure it is, but rates reduced -- or, put it 7 this way, total revenues reduced -- reduced, which 8 means -- I just need to be careful. 9 Q. If I was a residential customer of 10 Manweb, would my rates have gone up since '95 or 11 would they have gone down or would they have stayed 12 the same? 13 A. No, they would have most certainly 14 gone down. 15 Q. They've gone up? 16 A. Gone down. 17 Q. Oh, gone down. By what percentage, do 18 you know? 19 A. I can't say, but maybe when Mr. Morris 20 appears on the stand he could have a detailed answer 21 for you. 22 Q. What about ScottishPower? Since 1991, 23 if you were to compare the rates now with '91 for, 24 say, a residential customers, have the rates gone up 25 or down or stayed the same? 215 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 A. The rates have gone down again. I 2 mean the focus in Britain -- ScottishPower in 3 particular -- has been on costs and service, and 4 that has been a very successful focus. So rates 5 have gone down, I think, for all groups of 6 customers. 7 Q. Okay. I'm to my last question. One 8 of the standards in evaluating the merger is that 9 ScottishPower has the financial ability to operate 10 and maintain electrical property to be used in the 11 public service. And I guess my concern is that 12 Applicants need to issue up to five billion of 13 additional PacifiCorp unsecured indebtedness where 14 that's in addition to the current 2.2 billion. And 15 I believe on the balance sheet you show a billion -- 16 they show a billion in cash. 17 I guess my question is what is the 18 five billion going to be used for? 19 A. Well, I think that is a PacifiCorp 20 initiative approved by the PacifiCorp board, and if 21 I could, Chairman, Mr. O'Brien would be far better 22 positioned to answer that question. Okay. 23 Q. That's all the questions I have. 24 COMMISSIONER HANSEN: Mr. Galloway, do 25 we have any cross? 216 HEDRICK COURT REPORTING RICHARDSON (Com) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 MR. GALLOWAY: We do. 2 COMMISSIONER HANSEN: I mean any 3 redirect, excuse me. 4 MR. GALLOWAY: Little bit of both. 5 (Laughter.) 6 COMMISSIONER HANSEN: Well, we're just 7 going to give you redirect. 8 MR. GALLOWAY: You always hope it's 9 redirect, but sometimes it turns out to be cross. 10 11 REDIRECT EXAMINATION 12 13 BY MR. GALLOWAY: 14 Q. Mr. Richardson, first like to follow 15 up with you, if I could, on some of the questions 16 that Mr. Budge asked you, specifically in regard to 17 his client Solutia. You testified, as I recall, 18 that you suspected that if there was to be a new 19 contract with Solutia, that it may well require the 20 approval of the ScottishPower board. Do you recall 21 that testimony? 22 A. I do. 23 Q. Is that an unusual circumstance, that 24 a contract extension would require ScottishPower 25 board approval? 217 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 A. Yes, it certainly would be. 2 PacifiCorp and Solutia are a very large load, and 3 the contract would have a very large value, so it is 4 quite likely that a contract of that dimension would 5 proceed to ScottishPower board perhaps, and that is 6 not the norm by any means. 7 Q. Is Solutia PacifiCorp's largest 8 customer by volume? 9 A. I think Solutia are PacifiCorp's 10 largest single site load. I'm not sure if they're 11 the largest customer. 12 Q. Does ScottishPower have any larger 13 loads in Great Britain? 14 A. No, we have no load in Great Britain 15 approaching the Solutia load. 16 Q. This issue aside, what is 17 ScottishPower's general approach to permitting 18 autonomy for its operating units? 19 A. ScottishPower's philosophy is very 20 much to define the rules for the operating units, 21 and then -- if you don't mind the use of the word, 22 maybe I should use a different word -- then 23 authorize the management of chief executive to get 24 and run those businesses within the rules. So very 25 much local decisions. We hold the view as a 218 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 corporation that the center should be focusing on 2 things that centers should do and businesses should 3 be runnings businesses. 4 Q. And, finally, Mr. Budge, on behalf of 5 Solutia, asked several questions about ScottishPower 6 and PacifiCorp's Idaho rate case intentions. 7 What is your understanding of the 8 effect that rate case decisions in Idaho would have 9 on Solutia? 10 A. Well, Solutia are under a special 11 contract, so they would be rendered immune from any 12 rate case decision is my understanding. 13 Q. You were shown a diagram of the 14 proposed posttransaction corporate structure. Do 15 you recall that? 16 A. I do. 17 Q. And there were some intermediate 18 entities between ScottishPower plc and PacifiCorp, 19 and I believe your testimony was that they were 20 transitory entities that would go away as the -- as 21 the transaction was consummated. Were you referring 22 to that as a functional or legal operation? 23 A. Yes, generally got that wrong. Those 24 entities NA-1, NA-2, continue to exist in legal 25 form, and I think my answer is somewhat naively in 219 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 an operational sense. But those entities will 2 continue to exist into the future. 3 Q. Will they have any employees or 4 operations? 5 A. No, no employees. 6 Q. Next, you were asked by a number of 7 counsel about the Wyoming stipulation. Have there 8 been stipulations with any other state Staffs? 9 A. Yes, we have a stipulation with 10 Washington Staff. 11 Q. Are there any rate issues dealt with 12 in the Washington stipulation? 13 A. There are no rate issues dealt with. 14 Q. Now, in the case of Wyoming -- and I 15 think the record needs to be clarified in this 16 regard -- there are really two stipulations, are 17 there not? 18 A. There is a letter between the Staff 19 and PacifiCorp; and there is a stipulation which is 20 PacifiCorp, ScottishPower, and the Staff. 21 Q. And the rate caps that were described, 22 are they in the stipulation that ScottishPower 23 entered into? 24 A. No, they are in the first document I 25 referred to, which is the letter between PacifiCorp 220 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 and Staff. 2 Q. In your view, other than the fact that 3 ScottishPower agreed to abide by the terms of the 4 letter, is that letter agreement linked to the 5 merger proceedings in Wyoming? 6 A. No, it is not. 7 Q. Did PacifiCorp inform the Wyoming 8 Commission well in advance of any talk of the 9 ScottishPower transaction that it had in mind filing 10 a rate case in Wyoming? 11 A. I believe so. My understanding is 12 that as long ago as last November, approximately, 13 PacifiCorp indicated that it would file a rate case 14 in Wyoming. That was before the merger was 15 consummated. 16 Q. And is it your understanding that 17 results shown to the Wyoming Staff demonstrated that 18 PacifiCorp is substantially underearning in Wyoming? 19 A. That is my understanding. 20 Q. And is it your understanding that if 21 PacifiCorp were to pursue the full amount of rate 22 increase that might be available to it, that it 23 would have a very substantial shock on customers? 24 A. That is my understanding too. 25 Q. And is it your understanding that the 221 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 desire to avoid that rate shock and have a 2 manageable glide path in terms of rate increases was 3 a significant, if not principal, motivator for the 4 rate agreement referred to? 5 A. I think that's correct. I think 6 PacifiCorp took a reasonable and constructive line 7 which helped the Staff come to that agreement in 8 that letter. 9 Q. And is that an example of the 10 different sorts of circumstances that can exist in 11 PacifiCorp's different jurisdictions which suggest 12 different approaches to rates and rate concessions 13 in those jurisdictions? 14 A. Yes, I think if we pursued similar 15 examination here, the findings would be different 16 and maybe the solution different. 17 Q. Let me ask you about the -- what your 18 testimony, your supplemental testimony, estimates to 19 be $55 million of costs associated with implementing 20 the service standards improvements that 21 ScottishPower has in mind. Is that 55 million an 22 annual cost? 23 A. No, it is not, and if I could just 24 explain a little. 25 Q. Sure. 222 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 A. We, first of all, decided to identify 2 the cost of the customer service initiatives, 3 because we thought people would ask. 4 The 55 million is an amount that would 5 be spent over five years. And 55 million includes 6 about 30 million of capital expenditure and 7 25 million over five years of operating expenditure. 8 I think when you break that down in the context of 9 PacifiCorp's operating costs which are $400 million 10 a year or its investment which is about $2 billion 11 over five years, the numbers involved are very 12 modest. 13 And the important thing about the 14 55 million: It is not incremental to PacifiCorp's 15 cost base. We have said very clearly that the 16 55 million cost would be absorbed either from 17 savings, directly from savings, or from redeployment 18 of proper investment. And we have undertaken -- I 19 thought I said this earlier, but we have undertaken 20 that that investment would be shown to be cost 21 effective, and the burden and the proof for 22 demonstration of that is on ScottishPower, so we 23 have to show that that 55 million is a 24 cost-effective investment. 25 Q. And you understand in the first 223 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 instance that $55 million will be invested by 2 ScottishPower? 3 A. Yes. 4 Q. And that you are, as ScottishPower, at 5 risk if it turns out that that package of new 6 activities for which the $55 million was spent 7 proves not to be cost effective? 8 A. That's correct. 9 Q. Another related issue that was taken 10 up was the renewable resource commitment, the 11 50 megawatts, and I believe you conceded that at 12 least as judged by PacifiCorp's least-cost plan, 13 these renewable resources did not appear to be cost 14 effective. Do you recall that? 15 A. I do. 16 Q. But I believe you went on to say that 17 notwithstanding the fact that they were not 18 demonstratively cost effective, that they might 19 nonetheless be prudent? 20 A. I did, yes. 21 Q. Could you explain that distinction? 22 A. Cost effective is pretty hard business 23 measurement: Do you get your money back with some 24 return, and that return to the benefit to customers 25 as well as shareholders. 224 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 I think prudence allows for external 2 considerations, and these would be I think a right 3 response of large corporations and citizens that you 4 consider the events in the world around you, such as 5 Kyoto; global warming; the reality that as we move 6 forward, the risk on the business changes; and if 7 this business is substantially core-based in its 8 fuel resources, investments in renewables will serve 9 in time to ameliorate that risk, perhaps. And I 10 think it's also important because the investments in 11 the Company are so focused, if you'd like, on core 12 that a more diverse portfolio would be valuable for 13 the business going forward in the medium to 14 long-term. So prudence would include a range of 15 considerations with the hard economics. 16 Q. Okay. Again, is this an investment, 17 the estimated $60 million that would be made in the 18 first instance by shareholders? 19 A. Once again, but after discussion 20 obviously with different Staffs, but if we decide to 21 proceed, then the risk is with the shareholders and 22 the burden of proof for its treatment in the rate 23 base is with the shareholders to prove to the 24 Commissions. 25 Q. And you fully understand that to the 225 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 extent that ScottishPower/PacifiCorp are not able to 2 convince this or another Commission that the 3 investment was prudent, that you are at risk in that 4 jurisdiction of not getting recovery? 5 A. We do understand that. We would -- if 6 I could add that in Britain we have pursued a 7 similar line, and we have seen the costs of 8 renewable generation fall dramatically, you know, 9 almost competitive levels. And that has been 10 achieved by doing the thing patiently with I use the 11 word "prudent" support from the regulatory 12 authorities. It's been a very successful story in 13 Britain, and now we hope that we could bring a 14 similar success to the Northwest. 15 Q. You stated a high level of confidence 16 that PacifiCorp, under ScottishPower's guidance, 17 could reduce costs below a level of PacifiCorp on a 18 stand alone basis. Do you recall that? 19 A. Yes, I do. 20 Q. And yet notwithstanding that 21 confidence, you were unwilling to agree that that 22 commitment to cost reductions should translate into 23 a rate freeze or a rate reduction. Could you 24 explain why you're not able to commit to a rate 25 freeze or rate reduction, notwithstanding your 226 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 confidence in your ability to accomplish savings? 2 A. Well, I think the first point is that 3 the cost reductions won't be secured for some time. 4 You cannot simply wave a magic wand to January 1st 5 or whenever to say that costs will be reduced. You 6 have to work and part of the work is the transition 7 plan, which as we said will take some months to work 8 through and present and implement. 9 But it's not just about costs. The 10 rate case I think -- any rate case -- would examine 11 returns, cost of capital, and other costs around the 12 business which do increase. Employee costs, for 13 example. 14 So there's a broad range of issues 15 that need to be addressed fairly before you can 16 enter into the position that says we would apply a 17 rate freeze. Now, I would think the information is 18 really not before this Commission to achieve that. 19 There is a rate case filing a few weeks away which 20 will allow for a full examination of that position. 21 We have clearly made a very strong commitment to 22 move forward with a focus on call business, with a 23 focus on cost and service, and that in time will 24 bring the pressure on rates which will be very 25 helpful, I think, down the road. 227 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. And at such time as the cost 2 reductions are such that they offset cost increases 3 and permit a full regulated rate of return, will 4 that translate into price -- absolute price 5 reductions? 6 A. That is my understanding, and our eyes 7 are wide open to that situation arising and being 8 implemented. 9 Q. You've made reference to this 10 transition plan. Had the merger agreement been 11 different and permitted absolutely full access to 12 PacifiCorp information, would it have been feasible 13 to carry out the transmission -- transition planning 14 process that you have in mind? 15 A. It would have been feasible, but I 16 have to say I would query the effectiveness of a 17 transition plan conducted this side of the merger. 18 You just have to consider that we would need to work 19 very, very closely with PacifiCorp at all levels of 20 the business, and some of the questions that would 21 be asked by someone who is not yet the owner would 22 be quite difficult, I think, for PacifiCorp people 23 to answer with vigor and enthusiasm. I think that 24 changes when the ownership changes. You get the 25 focus, you get the commitment to the business 228 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 through the new owners, and things can be done much 2 more effectively. 3 Q. Can you perhaps provide an example of 4 the sort of issue that might be taken up in a 5 transition planning process that would require 6 participation and buy-in from PacifiCorp rank and 7 file employees? 8 A. Well, it would be a couple of examples 9 I would give. One would be in the area of 10 procurement where you would need a pretty extensive 11 involvement of the engineering and procurement 12 staff, perhaps the night staff, to review 13 PacifiCorp's procurement activities business-wide. 14 So at least in Utah Power and Pacific Power, 15 probably other places as well, you know, it would 16 need to be a broad look at the business and a broad 17 commitment from those people involved to doing it 18 better. And in our experience in Britain on 19 procurement, what we came up with was something like 20 two to three year plan for training and development 21 of the people, for procurement strategies, for 22 engineering strategies, that needed to be signed on 23 to and adopted in a very rigorous way. 24 So I'm not sure you could achieve that 25 when you're courting, as it will. We're still 229 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 engaged to PacifiCorp. I'm not sure you can achieve 2 that unique management focus to get the engineers to 3 realize that management's intent is to have one 4 standard. You need to get training people 5 orientated to make sure that management intent is to 6 provide that training of high quality and maybe a 7 few other things financed to understand that 8 management's intent is to make sure that finance be 9 flexed to better do the procurement. 10 Q. Now, is the standard that's going to 11 result from this transition plan a standard of 12 ScottishPower that is going to be imposed on 13 PacifiCorp's operations? 14 A. Not at all. I'm sure Mr. MacRitchie 15 will answer this in more depth. But basically the 16 transition plan is a methodology; it's a way of 17 approaching business. It's well set up in 18 Mr. MacRitchie's supplemental testimony, but it's a 19 way of doing a business review, driven out of bench 20 marking, driven out of best practice, to make sure 21 that PacifiCorp down the line is really operating in 22 a leading manner, and not just because we say so, 23 but because we've measured it and we've brought it 24 there. 25 Q. You testified as to your intention to 230 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 file the transition plan with each of the effective 2 state Commissions. Do you recall that? 3 A. Yes. 4 Q. And you would expect that -- the 5 Staffs of the respective Commissions will provide 6 input and advice in respect to its contents? 7 A. Absolutely. I mean, we would welcome 8 the input certainly as Staff and indeed of other 9 people. I guess all Intervenors will receive a 10 copy. But, we would expect that people will have 11 comment. Some of it will be constructive. We won't 12 be blind to that. We want to create a business that 13 people feel they have involved themselves in and 14 people feel that they want to feel good about at the 15 other end of the transition plan. 16 Q. Do you have an incentive to take that 17 input seriously? 18 A. I think it's my nature to take that 19 input seriously. Certainly the Company, in its 20 operation, works very closely with customers and 21 others in Britain to get these things running. We 22 don't hold all the answers, and I think it's 23 important to us to be aware of at least, but 24 preferably, you know, get comment or remarks on 25 Staff -- from Staff and Commission about just where 231 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 we're taking the business. And if we can build that 2 in properly, then so we will. 3 Q. And you understand that if you proceed 4 with a particular initiative contrary to what 5 appears to be the advice you're getting, that you're 6 at risk down the road at rate proceedings as to the 7 prudence of that? 8 A. That's well understood by 9 ScottishPower. 10 Q. I want to shift now to some of the 11 lines of questions from Mr. Nye which focused quite 12 a bit on rates. You mentioned that you are aware 13 that a rate process is about to be initiated in 14 Idaho? 15 A. I have, yes. 16 Q. Did ScottishPower have anything to do 17 with that process one way or the other? 18 A. None at all. 19 Q. Do you understand that as a result of 20 that process, there will be a determination of the 21 total amount of revenues that PacifiCorp ought to be 22 earning in Idaho? 23 A. That is my understanding. 24 Q. And do you understand that a result of 25 that process will be a determination of how that 232 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 revenue requirement should be spread among the 2 various classes of customers? 3 A. Yes, I understand that. 4 Q. And do you understand that if there is 5 currently any inappropriate rate differential 6 between the various classes of customers, that that 7 proceeding will provide a forum to address those 8 inequities? 9 A. That is my understanding. 10 Q. And do you believe that those 11 proceedings rather than these proceedings are the 12 appropriate forum to resolve any inequitable rate 13 differentials that may exist? 14 A. I most certainly do. 15 Q. Finally, I want to return to some of 16 the questions that were asked by President Hansen. 17 In your experience, are the goals of 18 efficiency and quality service mutually exclusive? 19 A. No, they're not. 20 Q. What has been your experience in that 21 respect? 22 A. Our experience, my experience, if 23 you're asking, is that you can most certainly raise 24 service standards substantially and reduce costs at 25 the same time if you approach it the right way. 233 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. And, in fact, can there be a causal 2 connection between those two phenomena? 3 A. Yes, there can. 4 Q. Can you explain that? 5 A. I think it's about -- perhaps the 6 simplest causal connection is to make the business 7 aware of all levels; that it's important to me as 8 chief executive, to the board of directors, that 9 costs and service are important. And I think 10 sometimes in businesses I've been involved in, 11 that's not been clear. And one of the things that 12 we set -- set very clearly in the way we run our 13 business is that the requirement of senior 14 management is to have a focus on costs at all times 15 and have a focus on customers and customer service 16 at all times. The two are not exclusive. You don't 17 necessarily have to spend a lot more dollars to 18 achieve customer satisfaction. Quite often, it's 19 about getting to understand just what the customer 20 needs and spending the right dollars. 21 Q. So, for example, if you find a way to 22 improve processes and call centers, can that result 23 in both improved performance at the call centers and 24 cost reductions in operating them? 25 A. Yes, it can. In the nature of the 234 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 investments we've been making in the last few years 2 in the UK has been to deliver both customer service 3 improvements and cost reductions. 4 Q. And in the case of ScottishPower 5 itself, Manweb, and Southern Water, and the 6 transformation of each of those businesses, are -- 7 have there been demonstrable improvements in both 8 cost efficiency and performance? 9 A. Without a question, and the 10 supplemental testimony demonstrates that very 11 clearing in the case of Manweb. 12 Q. And, finally, President Hansen asked 13 you about the $5 billion of unsecured debt for which 14 shareholder approval was sought in parallel with 15 approval of the merger. Do you recall that? 16 A. Yes, I do. 17 Q. Did that approval have anything to do 18 with a merger? 19 A. Nothing at all, no. 20 Q. Was that entirely a PacifiCorp 21 initiative? 22 A. Entirely. 23 Q. And did they take advantage of the 24 fact that they're already holding a shareholder vote 25 on the merger to get shareholder authorization for a 235 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 ability to issue unsecured debt that they had 2 independent interest in getting? 3 A. It was a shareholder meeting and that 4 was the right place to secure approval, so I believe 5 PacifiCorp took advantage of the opportunity of 6 timing. 7 Q. Just so there are absolutely no 8 misunderstanding of your intentions, it is, in fact, 9 ScottishPower's commitment that there will not be 10 increases in cost of service as a consequence of 11 this transaction? 12 A. Absolutely. 13 Q. And is it also ScottishPower's 14 commitment that as a consequence of this 15 transaction, there will not be a increase in rates 16 to Idaho customers? 17 A. There will be no increase in rates to 18 Idaho customers as a result of this merger. 19 MR. GALLOWAY: Thank you very much. 20 COMMISSIONER HANSEN: Thank you. 21 THE WITNESS: Thank you, President. 22 COMMISSIONER HANSEN: And now maybe 23 you can relax. 24 THE WITNESS: Thank you. 25 MR. BUDGE: I have some questions on 236 HEDRICK COURT REPORTING RICHARDSON (Di) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 redirect. 2 COMMISSIONER HANSEN: And we will all 3 relax for about ten minutes, so let's meet back at 4 ten after three. 5 (Recess.) 6 COMMISSIONER HANSEN: Before we 7 recessed, Mr. Budge, you asked or requested of the 8 Commission if you could ask a couple of questions. 9 I'm going to allow that, so you can ask the witness 10 those questions. 11 MR. BUDGE: Thank you, Mr. Chairman. 12 We'll be very brief. 13 14 RECROSS-EXAMINATION 15 16 BY MR. BUDGE: 17 Q. Mr. Richardson, I believe you 18 testified that Solutia, as a special contract 19 customer, would be immune from any rate increases. 20 Do you recall your testimony on that? 21 A. Yes, I do. 22 Q. And would you also agree that that 23 immunity would only run to the extent of the 24 expiration date of the existing contract? 25 A. Yes, I do understand that. 237 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 Q. You commented that the rates of Manweb 2 and Southern Water and ScottishPower had gone down 3 since you had taken over. Do you recall that 4 testimony? 5 A. I'm not sure if I included 6 Southern Water in that statement. 7 Q. Okay. Manweb and ScottishPower rates 8 have gone down? 9 A. Yes. 10 Q. And on the average, have the 11 competitors of ScottishPower gone down during that 12 same period -- 13 A. Yes, they have. 14 Q. -- by an equal or greater amount? 15 A. They have gone down also, yes. 16 Q. So part of that is attributable to the 17 deregulation and the competitive environment in the 18 area in which you serve? 19 A. I think much less down to deregulation 20 and much more down to costs of reducing around the 21 form of regulation that is taking place in Britain. 22 MR. BUDGE: No further questions. 23 Thank you. 24 COMMISSIONER HANSEN: Mr. Galloway, do 25 you have any redirect? 238 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 MR. GALLOWAY: I do not. 2 COMMISSIONER HANSEN: Okay. Thank 3 you, Mr. Richardson. 4 MR. NYE: Chairman. 5 COMMISSIONER HANSEN: Mr. Nye. 6 MR. NYE: May I inquire? 7 COMMISSIONER HANSEN: Yes. 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 239 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 RECROSS-EXAMINATION 2 3 BY MR. NYE: 4 Q. Mr. Witness, we're impressed with your 5 discussion of the anticipated service. My question 6 is are you aware of the -- any what's called 7 "slamming" going on by ScottishPower in the 8 United Kingdom; in other words, raiding customers 9 and having customers be signed up without their 10 knowing about it? Are you aware of the complaints 11 in the UK about that practice by ScottishPower? 12 A. I'm aware of that sort of complaint. 13 I would say that Scottish Power's approach and 14 position in terms of its dealing with new contracted 15 customers is of the highest standard, and I 16 understand and believe that independent agencies 17 have commented to that effect. 18 Q. Are you aware of the disclosure of 19 this practice in the Manchester Guardian July of 20 this year and the comment by the UK Gas and 21 Consumers Council regarding complaints about 22 ScottishPower's marketing ploys? 23 A. I'm not aware, but my understanding is 24 over the past year we've won one million new gas 25 customers or thereabouts, and I would guess in the 240 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 million customers there would be some people who may 2 have a complaint. 3 COMMISSIONER HANSEN: Mr. Nye, I'm 4 really only going to allow questions -- 5 MR. NYE: I have no further questions. 6 COMMISSIONER HANSEN: All right. 7 Mr. Galloway, do you have any 8 redirect? 9 MR. GALLOWAY: I do not. 10 COMMISSIONER HANSEN: Okay, thank you, 11 Mr. Richardson. For the third time, we're going to 12 get you off that stand. 13 THE WITNESS: I appreciate it. 14 (The witness left the stand.) 15 COMMISSIONER HANSEN: Mr. Galloway, do 16 you have any other witness? 17 MR. GALLOWAY: Yes, sir. The 18 Applicants' next witness is Richard T. O'Brien, and 19 I would ask that he come forward at this time. 20 21 22 23 24 25 241 HEDRICK COURT REPORTING RICHARDSON (X) P.O. BOX 578, BOISE, ID 83701 ScottishPower 1 RICHARD T. O'BRIEN, 2 produced as a witness at the instance of PacifiCorp, 3 being first duly sworn, was examined and testified 4 as follows: 5 6 DIRECT EXAMINATION 7 8 BY MR. GALLOWAY: 9 Q. Mr. Richardson -- Mr. O'Brien, please 10 state your full name for the record. 11 A. It's Richard O'Brien. And that's my 12 full name. Richard Thomas O'Brien. 13 Q. What is your business address? 14 A. It's 825 Northeast Multnomah Street, 15 Portland, Oregon, 97232. 16 Q. By whom are you employed and in what 17 capacity? 18 A. PacifiCorp, the capacity of executive 19 vice president and chief operating officer. 20 Q. And what are your duties and 21 responsibilities in connection with that position? 22 A. My job is to manage the overall 23 operations of the Company. 24 Q. After the proposed transaction is 25 consummated, what is your expected role with 242 HEDRICK COURT REPORTING O'BRIEN (Di) P.O. BOX 578, BOISE, ID 83701 PacifiCorp 1 PacifiCorp? 2 A. It's intended that my role be 3 president and chief operating officer. 4 Q. Mr. O'Brien, did you have occasion to 5 cause to be filed in this proceeding your direct 6 testimony consisting of 12 pages? 7 A. I did. 8 Q. And did you also cause to be filed 9 rebuttal testimony consisting of six pages? 10 A. I did. 11 Q. Are there any corrections in your 12 prepared direct or rebuttal testimony that you would 13 like to make at this time? 14 A. No. 15 Q. If I ask you the questions set forth 16 in your prepared direct and rebuttal testimony, 17 would your answers be the same as set forth therein? 18 A. They would. 19 Q. And your testimony is true and correct 20 to the best of your knowledge? 21 A. It is. 22 Q. Thank you, Mr. O'Brien. 23 MR. GALLOWAY: At this time I would 24 ask that Mr. O'Brien's prefiled direct and rebuttal 25 testimony for which there are no accompanying 243 HEDRICK COURT REPORTING O'BRIEN (Di) P.O. BOX 578, BOISE, ID 83701 PacifiCorp 1 exhibits be spread on the record as if read. 2 COMMISSIONER HANSEN: If there is no 3 objection, so ordered. 4 (The following prefiled direct and 5 rebuttal testimony of Mr. Richard T. O'Brien is 6 spread upon the record.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 244 HEDRICK COURT REPORTING O'BRIEN (Di) P.O. BOX 578, BOISE, ID 83701 PacifiCorp