IDAHOO~1.DOC

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

In the Matter of the Joint Application and Petition of PacifiCorp and Scottish Power plc for a Declaratory Order or Order Approving Proposed Transaction and an Order Approving the Issuance of PacifiCorp Common Stock )))))))

Case No. PAC-E-99-1 __________________________________

PacifiCorp

Direct Testimony of Richard T. O’Brien

February 26, 1999

INTRODUCTION

Q. Please state your name and business address.
A. My name is Richard T. O’Brien. My business address is 825 N.E. Multnomah, Portland, Oregon.
Q. By whom are you employed and in what position?
A. I am employed by PacifiCorp as Executive Vice President and Chief Operating Officer.
Q. Please summarize your education and business experience.
A. I received a bachelor’s degree in economics from the University of Chicago and a law degree from Lewis and Clark College, Northwestern School of Law. From 1983 to 1993 I served in various financial positions at NERCO, a former mining and resource development subsidiary of PacifiCorp. In 1993 I was appointed Vice President of Corporate Finance of PacifiCorp and in 1995 was appointed Senior Vice President and Chief Financial Officer. I was appointed to my current positions in 1998.
Q. What position will you hold with PacifiCorp after the transaction with Scottish Power plc (“ScottishPower”) is closed?
A. I will be the President and Chief Operating Officer of PacifiCorp.
TESTIMONY SUMMARY
Q. What is the purpose of your direct testimony in this proceeding?
A. The purpose of my testimony is to explain why PacifiCorp decided to pursue a transaction with ScottishPower and why we believe that the proposed transaction is in the public interest.
In summary, we decided to pursue the transaction with ScottishPower because we believe a combination with ScottishPower will enable PacifiCorp to become a top performing utility quicker, more fully and with a higher degree of certainty than if we were to attempt it alone. Our combination with ScottishPower is in the public interest because:
The combination with ScottishPower will result in a financially stronger company than PacifiCorp standing alone;
ScottishPower will add significantly to PacifiCorp’s ability to improve its reliability, system operations and customer service;
ScottishPower and PacifiCorp together will produce greater efficiencies, innovations and cost savings in PacifiCorp’s operations;
ScottishPower has demonstrated its commitment to employees and the communities it serves and will enhance PacifiCorp’s efforts in these areas; and
ScottishPower will complement and strengthen PacifiCorp’s efforts in environmental stewardship and the development and marketing of green power.
In addition, ScottishPower will commit to a comprehensive set of system performance standards and customer service guarantees that address our customers’ most important service quality and customer service concerns. These standards will set a new benchmark for U.S. utilities.
DESCRIPTION OF TRANSACTION
Q. Please describe the proposed transaction with ScottishPower that is the subject of this proceeding.
A. The transaction is set out in detail in the Agreement and Plan of Merger dated as of December 6, 1998 (“Agreement”) which was included with our Application in this proceeding. Since entering into the Agreement, ScottishPower has decided to create a new holding company for ScottishPower and its subsidiaries. ScottishPower and PacifiCorp have executed an Amended and Restated Agreement and Plan of Merger (“Amended Agreement”) under which PacifiCorp would become a wholly owned subsidiary of the new holding company (“HoldCo”) and a sister company to ScottishPower.
Under the Amended Agreement, Merger Sub, an indirect, wholly-owned subsidiary of HoldCo, will merge with and into PacifiCorp, with PacifiCorp continuing in existence as the surviving corporation.
Outstanding PacifiCorp common stock will be exchanged, at the option of the holder, for either HoldCo American Depository Shares (each such ADR representing four HoldCo ordinary shares) or HoldCo ordinary shares. ADR’s trade on the New York Stock Exchange and pay dividends converted to dollars. HoldCo ordinary shares will trade on the London Stock Exchange and pay dividends in pounds sterling.
As a consequence of the transaction, HoldCo will indirectly own all of the outstanding common stock of PacifiCorp. However, following the transaction, the existing stockholders of PacifiCorp will control approximately 36% of the common stock of HoldCo.
Please describe the stock issuance associated with this transaction.
To accomplish the transaction, PacifiCorp will issue new common stock to facilitate the merger of Merger Sub with and into PacifiCorp. Under the Amended Agreement, upon the closing all shares of PacifiCorp common stock will be canceled and retired, and PacifiCorp will issue new common stock to an entity wholly-owned by HoldCo. PacifiCorp will thereafter continue to exist as an indirect, wholly-owned subsidiary of HoldCo and will be an affiliate of ScottishPower.
REASONS FOR THE TRANSACTION
Q. Why did PacifiCorp enter into this transaction with ScottishPower?
A. We entered into this transaction because we believe a combination with ScottishPower represents the best and quickest way for PacifiCorp to achieve its objectives of providing top quality service to its customers and a reasonable return to its shareholders. We are also persuaded that a combination with ScottishPower would be in the best interests of our employees and the communities we serve.
Q. Please explain your objective of becoming a top quality electric service provider.
A. We have been convinced for several years that in order to prosper in the changing domestic electricity markets, a utility’s services and costs must meet world class standards. Business customers are becoming global in their operations and will expect world class performance from their electricity suppliers. Suppliers who do not meet these expectations will not succeed.
Providing world class performance does not mean that PacifiCorp must become global in scope. Instead, it requires that PacifiCorp provide a level and quality of service that is on a par with the best electric service providers in the world, and that it accomplish this objective without compromising its low prices.
Our pursuit of a combination with The Energy Group was done to a significant degree for the purpose of aiding us in our effort to become a world class electric service provider. When it became apparent that transaction could not be done, or could only be done at too high a cost, we abandoned it in favor of focusing on our core electricity business in the western United States. We were prepared to try to become a top performing electric service provider entirely on our own. We recognized the difficulty of this task and understood that it would require many years to accomplish.
Despite our decision to focus on our core electricity business, we remained convinced that our customers would be served best by a large, stable enterprise able to offer the most competitive prices while providing customer service and reliability that reflect the world’s best practices. Similarly, our shareholders would be advantaged by owning a part of such an enterprise.
How does the ScottishPower transaction fit with your objective of becoming a top performing electric service provider?
A. The ScottishPower transaction will bring to bear the combined experience, skill, innovation and commitment of PacifiCorp and ScottishPower in the areas of electric power supply and operations, customer service, community involvement, employee relations and environmental stewardship. We are in the same business and share the same objectives. We do not need to realign the objectives of either party.
ScottishPower is an excellent partner for PacifiCorp. Our assets, views and objectives are complementary. ScottishPower is fully committed to our focus on the core electricity business in the western United States and to our goal of providing world class service. They have a proven and enviable record as a utility system operator. They are innovative in their approach to the electricity business, particularly to system performance and customer service issues, which are increasingly important. They have already developed programs targeting areas in which PacifiCorp seeks to improve, including service reliability, computer systems and customer care.
ScottishPower has already demonstrated that it is both skillful and agile in transforming utilities into world class performers. By combining the experience and skills ScottishPower has developed in the United Kingdom with PacifiCorp’s own experience and skills, we expect to achieve our operations and customer service objectives faster, more fully and with more certainty than if we were to attempt it alone.
BENEFITS OF THE TRANSACTION
Q. How will the transaction benefit PacifiCorp customers?
A. Through the transaction, we will create a balanced and strong enterprise that can provide the highest level of service to our customers while maintaining or improving PacifiCorp’s low costs. ScottishPower is a leader in efficient, reliable operations and customer service. We expect that the ScottishPower experience and excellence can be brought to PacifiCorp so that the two companies together can provide service to our customers that reflects the best practices in the world.
Q. Did PacifiCorp pursue the transaction with ScottishPower in the expectation that retail energy markets would soon be deregulated in the states where it serves?
A. No. While deregulation may ultimately be pursued in PacifiCorp’s jurisdictions, this was not the motivation for our wishing to take advantage of ScottishPower’s skills and experience. Efficiency, customer service and community involvement are important regardless of the extent of regulation an electric utility faces. It is our belief that if a company can provide superior customer and community service in a deregulated environment, and at the same time be profitable and more efficient, it has a lot to offer to a utility still subject to cost-of-service regulation. If deregulation comes, we will be much better prepared for it as a result of our affiliation with ScottishPower.
Q. Please comment on the system and customer service improvements you expect will result from the transaction.
A. In their testimony, Messrs. Richardson and Moir describe a number of improvements and explicit commitments that ScottishPower is prepared to make regarding PacifiCorp’s system performance and customer service. The system performance commitments include improving system availability and reliability, improving the worst performing circuits in each state on an annual basis, improving the restoration of the system following outages and improving the company’s overall responsiveness to customers. The customer service commitments include an array of individual service guarantees accompanied by payments to customers for failure to perform. The nature and breadth of these commitments and the fact that the customer service standards are backed up by meaningful guarantees is unprecedented in the electric utility industry in the U.S. I believe these standards will be the most comprehensive offered by any investor-owned U.S. utility. They address all of the most important system performance and customer service concerns. These standards will be of great value to PacifiCorp’s customers and will set a new benchmark for U.S. utilities. It is clear to us that ScottishPower not only has unique operating experience but also a unique understanding of the critical value of service quality and customer service.
Q. Couldn’t PacifiCorp implement these service quality and customer service standards without the proposed transaction?
A. Perhaps, but not as soon, not as fully and not with as high a probability of success. As I said earlier, we looked into what we could accomplish on our own and how long it would take us to accomplish our objectives after we abandoned The Energy Group transaction. ScottishPower is willing to guarantee material service quality and customer service improvements because it has accomplished these sorts of gains before. Lacking this experience, PacifiCorp simply could not commit to achieving improvements this substantial or this broad on this short a time schedule. I also expect that PacifiCorp could not achieve these improvements as economically as it will be able to do in combination with ScottishPower.
Our objectives are to raise our service to the highest levels while at the same time maintaining or improving PacifiCorp’s low costs. In combination, these are daunting tasks, but ones we believe are necessary to serve our customers and survive in an increasingly competitive industry. Our transaction with ScottishPower is a sign that we are serious about these objectives and committed to achieving them quickly, fully and economically.
Q. How will the benefits that you expect be reflected in PacifiCorp’s prices?
A. Let me state first that improvements in service reliability, operational efficiencies and customer service are extremely important and beneficial to customers in and of themselves. These improvements require significant up-front investments and their cost reduction benefits will be realized over a longer term. That said, I would expect, based upon ScottishPower’s experience in the U.K., that its involvement with PacifiCorp’s operations will result in significant efficiencies and cost savings by the end of the five-year period discussed in Mr. MacRitchie’s testimony.
In the normal course, as cost savings are realized they will be reflected in PacifiCorp’s cost of service for ratemaking purposes. Following the initial period of service quality and customer service improvements, cost savings will begin to occur and will reduce the need for price increases. These benefits will result in prices lower than they would be without the transaction.
Q. Would it be appropriate for the Commission to require guaranteed price reductions as a condition to approving the transaction between PacifiCorp and ScottishPower?
A. No. Most regulatory proceedings involving utility mergers have related to transactions that are principally motivated by the opportunity to capture savings or efficiencies resulting from the consolidation of two domestic operating companies. In these sorts of transactions, the parties have typically quantified potential savings as part of their decision to pursue the transaction and their savings estimates are reasonably precise. Examples of these sorts of transactions are the 1989 merger of PacifiCorp and Utah Power & Light Company and the 1997 merger of Puget Sound Power & Light Company and Washington Energy Company. In these circumstances, commissions have required some measure of price reductions to reflect the projected savings that have been quantified by the parties and have served as the basis for the commission’s approval.
The present transaction does not involve the consolidation of two operating companies and is not principally motivated by potential operating improvements and savings. Even if one adopts the view that the standard for Commission approval requires “positive net benefits” to customers, the expectation that this transaction will result in better and more reliable service is more than enough to constitute positive net benefits to customers.
Q. How will the transaction benefit PacifiCorp’s employees?
A. PacifiCorp’s employees will have opportunities to work for a fast-growing, financially-stable, competitive and innovative company. As detailed in the testimony of Mr. Kelly, ScottishPower has a superb reputation in regard to the training opportunities and other benefits it offers its employees. Many of these opportunities, as well as international employee exchanges, will be available to PacifiCorp employees. ScottishPower also works responsibly and collaboratively with unions and has committed to honoring all existing labor agreements.
Q. How will the transaction benefit the environment?
A. Like PacifiCorp, ScottishPower is a leader in the industry in developing policies, programs and incentives for “green” energy, particularly wind turbines. PacifiCorp is the leading purchaser of wind power facilities in the western United States outside of California. PacifiCorp also is the largest supplier to the leading green marketer in California and has the only operating geothermal facility serving the northwest. In collaboration with environmental, consumer and regulatory groups, PacifiCorp incorporated renewable resource incentives into its alternative form of regulation in Oregon.
The combination with ScottishPower will strengthen PacifiCorp’s resources dedicated to environmental programs and the goal of becoming a leading developer and marketer of green energy. As Mr. Richardson testifies, ScottishPower will commit to implementing internal processes and systems that emphasize improving environmental performance in PacifiCorp’s operations, filing “green resource” tariffs in each state, contributing $100,000 to the Bonneville Environmental Foundation, developing an additional 50 MW of renewable resources and studying a possible expansion of the Blundell geothermal project. PacifiCorp alone would not undertake all of these initiatives simultaneously and could not accomplish them as quickly as we can with the help of ScottishPower.
Q. What about the communities in which PacifiCorp provides electric service?
A. Mr. Kelly describes in his testimony the active role that ScottishPower has taken in its local communities. A very tangible community benefit is reflected in the Agreement, and retained in the Amended Agreement, where ScottishPower has agreed add $5 million to the PacifiCorp Foundation, increasing its endowment by approximately 12.5% to $45 million. These funds will be available for charitable use throughout the PacifiCorp service territories.
Both ScottishPower and PacifiCorp are committed to developing, maintaining and improving their local presence in PacifiCorp’s service territories. Following the closing of the transaction, the new U.S. headquarters for ScottishPower will be located in Portland, Oregon. PacifiCorp will still be headquartered in Portland and will continue to have significant functions led from Salt Lake City, Utah.
While PacifiCorp will continue to be operated as an integrated utility, ScottishPower respects the unique histories of Pacific Power and Utah Power and expects to draw on the strengths of these histories in forging its community relationships. It has done the same with Manweb and Southern Water, the two utilities it acquired in the U.K.
More broadly, as a result of the transaction, PacifiCorp will be financially stronger and better able to survive and prosper in a changing electricity industry. We recognize that PacifiCorp is an important economic contributor to many communities in the western United States. The size and financial stability this transaction will bring to PacifiCorp will assure that we will be around performing that role for many years to come.
Q. Does this conclude your direct testimony?
A. Yes.
DIRECT TESTIMONY OF RICHARD T. O’BRIEN - Page 2

O’Brien, Di 1
PacifiCorp