20181212Technical Hearing Transcript Vol lII.pdf

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ORIGIIVAL CSB REPORTING
C e rtifie d S h o rt h an d Rep o rt e rs
Post Office Box9774
Boise,Idaho 83707
csbreporting@.yahoo.com
Ph: 208-890-5198 Fax: [phone]
Reporter:
Constance Bucy,
CSR
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSTON
IN THE MATTER OF THE JOINT
APPLICATION OE HYDRO ONE L]M]TED
AND AVISTA CORPORAT]ON FOR
APPROVAL OF MERGER AGREEMENT
CASE NOS. AVU-E_11_09
AVU-G-17-05
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BEFORE
COMMISSIONER PAUL KJELLANDBR (Presiding)
COMMISSIONER ERIC ANDERSON
COMMISSIONER KRISTINE RAPER
PLACE:Commission Hearing Room
412 West Washington StreetBoise, Idaho
DATE:November 27, 20Lg
VOLUME III Pages 451 - 1003
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208 .8 90 . 51 98
APPEARANCES
For the Staff:Brandon Karpen, Esg.
Deputy Attorney General
412 West WashingtonBoise, Idaho 83120-0074
For Avista Corporation:David Meyer, Esq.Avista CorporationPost Office Box 3121
Spokane, Washington 99220
For Hydro One Limited:Elizabeth Thomas, Esq.
and Kari Vander Stoep, Esq.
K&L Gates, LLP
925 Fourth Avenue, Sulte 2900Seattle, Washington 98104-1158
-and-
Deborah A. Fergruson, Esg.
EERGUSON DURHAM, PLLC
223 North 6th StreetSuite 325Boise, Idaho 83102
For Cl-earwater Paper
Corporation:
Peter J. Richardson, Esq.
Richardson Adams, PLLC
515 North 21Lh StreetBoise, Idaho 83102
For fdaho Forest Group:Ronald L. WiJ.Iiams, Esq
W]LLIAMS BRADBURY
P.O. Box 3BB
Boise, Idaho 83701
For CAPAI:Brady M. Purdy, Esg.Attorney at Law
2079 North 17th Street
Boise, Idaho 83102
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A P P E A R A N C E S (Continued)
For Idaho Conservation
League:
Benjamin J. Otto, Esg.
Idaho Conservation League
710 North 6th StreetBoise, Idaho 83102
For Avista Customer
Group:
Norman M. Senanko, Esg.
PARSON BEHLE & LATTMER
800 West Main StreetSulte 1300
Boise, Idaho 83102
For TDWR:Garrick L. Baxter, Esq.
Deputy Attorney General
322 East Front StreetBoise, Idaho 83120-0098
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APPEARANCES
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INDEX
WITNESS EXAMINATION BY PAGE
John J
( Hydro
Reed
One )
Ms. Thomas (Direct)
Prefiled Supp. Testimony
Prefiled Rebuttal Testimony
Mr. Otto (Cross)
Mr. Karpen (Cross)
Mr. Semanko (Cross)
Commissioner Kj ellander
Commissioner Raper
Ms. Thomas (Redirect)
453
,/l tr.O
498
511
514
521
531
53s
s39
James D. Scarlett
(Hydro One)
Ms. Vander Stoep (Direct)
Prefiled Direct Testimony
Prefil-ed Supp. TestimonyPrefiled Rebuttal Testi-monyMr. Karpen (Cross)
Mr. Semanko (Cross)
Commissioner Kj ellander
Commlssioner Anderson
Ms. Vander Stoep (Redirect)
541
551
613
699
789
198
842
841
849
Scott L. Morri-s
(Avista )
Mr. Meyer (Direct)
Prefil-ed Direct TestimonyPrefiled Supp. Testimony
Prefj-led Rebuttal TestimonyMr. Otto (Cross)
Mr. Wil-l-iams (Cross )Mr. Baxter (Cross)
Mr. Karpen (Cross)
Mr. Semanko (Cross)
Commissioner Raper
853
855
899
928
951
9s3
961
968
912
996
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TNDEX
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208.890.s198
EXHIBITS
NUMBER DESCRIPTION PAGE
FOR HYDRO ONE LIM]TED:
2 Exhibit A,
Governance
Schedule 2
Requirements
Premarked
Admitted 550
10 Schedulesl 3sponsoredby
James Scarl-ett
Premarked
Admitted s50
13 Schedules 1
John Reed
4 sponsored by Premarked
Admitted 458
79 Schedul-es 2- 4 sponsored by
John Reed
Identi fied
Admitted
456
458
FOR AVISTA CORPORATION:
1 Publ-ic Market Perspectives Premarked
Admitted 854
11 International- Ownership of US
Utilities, along with Schedule 2
Premarked
Admitted 854
L6 Press Release for Hydro One
and Avista
Premarked
Admitted 854
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EXHIB]TS
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BOTSE, TDAHO, TUESDAY, NOVEMBER 27, 20L8, 8:30 A. M
COMMISSIONER KELLANDER: Wel1, good
morning, everyone. We'11- go back on the record and
continue the proceedings today j-n Case No. AVU-E-17-09
and Case No. AVU-G-17-05, in the matter of the joint
application of Hydro One Limlted in the acquisition
merger case that we began yesterday. As we left
yesterday, I think that perhaps maybe there was a sense
that I was hoping things would move a l-ittle quicker
today. If that's the message you got, good. Thatrs the
message I intended to deliver, so l-et's see if we can't
plow through this and develop the record as expeditiously
as possible without creating any chilling effect for
anyone who is in the process of doing cross-examination,
so with that, I believe that we were hopefully ready for
the next witness, but before we get there, are there any
other preliminary matters that need to come before us
before we start today?
MS. THOMAS: Your Honor, w€ can handle
this either with the next witness or now. There was an
error in our filing. The next witness is John Reed. We
intended to file his CV as Schedule 7, Exhibit 13,
Schedule 1. We inadvertently --25
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COMMISSIONER KELLANDER: Coul-d you help me
wj-th one thing? CV, is that a new vehicl-e?
MS. THOMAS: Sorry, curriculum vitae,
resume, biography.
COMMISSIONER KELLANDER: Okay.
MS. THOMAS: We filed the wrong document.
is to ask for aWe have the correct one here and our plan
new exhibit number for the correct one and then simply
not move the wrong one into evidence.
COMMISSIONER KELLANDER: Okay; so I hope
that hers much smarter than he was lnitialIy laid out to
be; is that correct?
MS. THOMAS: Time will- tell.
COMMISSIONER KELLANDER: Okay, great, and
sj-nce we have it in time will teII, I l-ike that, good
answer. Wel-l-, then, let's move forward with that time
and figure that out. That sounds fine and that seems
like a minor thing
just replacing an
the stand, we can
to correct,
exhibit and,
so we can do
again, ds we
if we're ready
anything el-se
that. It's
get him on
to move
to come
do
forward, then, unless
before us, why don't
wi-tness and I bel-ieve
cal-l John Reed.
then, with your next
Reed.
that, So
there' s
we begin,
itrs Mr.
MS. THOMAS: Yes, it is. We would like to
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208.890.5198
REED (Di)
Hydro One Limited
produced as a witness
Llmited, having been
JOHN J. REED,
at the instance of
first
Hydro One
telI the truth,
you please
and your
J. Reed.
was examined and testified
duly sworn to
as f ol-l-ows:
DIRECT EXAMINATION
BY MS. THOMAS:
O Good morni-ng, Mr. Reed. Cou1d
state your ful1 name, your business address,
present position?
A Good morning. My name is John
My business
Marlborough,
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Energy Advisors
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address is 293 Boston Post Road West,
Massachusetts.
What is your current position?
I am the chairman and CEO of Concentric
and CE Capital Advisors.
How long have you held that position?
Since 2002.
O What are your current duties and
responsibilities in that position?
A Irm responsible for the management of
Concentric and CE Capital-. Our firm specializes in
management consulting and flnancial advisory work with an
excfusive focus on the energy industry in North America.25
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I supervise all of our consulting staff, which includes
most with backgrounds with regulatory agencies, with
utilities, with finance compani-es, rating agenci-es, and
other simil-ar organi-zations.
a Can you describe your educational and
professional background?
A Yes, I have more than 40 years of
experience in the energy industry, having joined Southern
California Gas Company in 7976. Since that time, I
entered consulting in 1981. Since that time, I've
provided consulting servj-ces to more than 100 major
utilities in North America. I've served as the CEO of
the largest publicly-traded management consultj-ng firm in
the world and as chief economist for the nationrs largest
gas utility.
I've been invol-ved in more than 40 utili-ty
mergers over the last 25 years. That includes recent
examples such as the Wisconsin Energy merger with
Integrys, the Great Pl-ains Energy merger with Westar, the
Northeast Utilities merger with NStar. It incl-udes
transactions that have also been proposed that didn't
move forward that provided interesting learnlng examples
in Hawaii and Texas as wel-I.
We have advised applicants in those cases.
f've also worked for intervenors in merger cases. f've
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REED (Di)
Hydro One Limited
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REED (Di)
Hydro One Limlted
recommended to commissions that mergers not be approved
broad
in for
in past cases, so
backqround on and
cl-ose to 30 years.
o Did
that was filed on
this is an issue I've got a
I've been actively involved
you sponsor supplemental- testimony
September 24th, 2078?
Yes, it was
Again, tf f asked you the questions set
A Yes, I did.
O On whose behalf did you file that
testimony?
A Hydro One and Avista.
O If f were to ask you the questJ-ons set
forth in the supplemental testimony under oat.h today,
woul-d your answers be the same?
A Yes, they woul-d.
O Did you sponsor supplemental rebuttal-
testimony filed on November 74?
A I think it was styled rebutta1 testj-mony,
yes.
O Yes, and that was also on behalf of Avista
and Hydro One?
A
0
forth there, your answers woul-d be the same?
A They would.
O Did you sponsor certain exhibits that25
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REED (DT)
Hydro One Limited
accompany your testimony?
A r did.
MS. THOMAS: I would ask if we coul-d mark
for ldentiflcation a document titled John J. Reed
Chaj-rman and Chief Executive Officer, and I think it
would be Exhibit 1,9 and I have copies here for the
Commissioners. I've given one to counsel- and the court
reporter already.
COMMISSIONER KELLANDER :
clarification, is that the document you
MS. THOMAS: Pardon me?
COMMISSIONER KELLANDER :
document you spoke of earl-ier?
MS. THOMAS: Yes, it 1s.
Your Honor.
COMMISSIONER KELLANDER: Okay; so without
objection, this would be exhibit what?
MS. THOMAS: I believe it's Exhibit 19,
COMMISSIONER KELLANDER: Exhibit 19, okay.
Subject to check, Exhibit 19.
(Ms. Thomas
COMMISSIONER
approached
KELLANDER:
A11 right, and as
spoke of?
fs this the
the Bench. )
With no
objection, that will become Exhibit 19.
(Hydro One Limited Exhibit No. 19 was
marked for identification. )25
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REED (Di)
Hydro One Limited
O BY MS. THOMAS: Mr. Reed, do you have in
front of you the document that's been marked Exhibit
79?
A I do.
O And is that an accurate CV for you or
resume?
A Yes, it is a resume fol-lowed by a list of
appearances as an expert witness.
0 Did you sponsor Exhiblt No. 13, Schedule
2, recent merger related -- merger governance related
conditions with your supplemental testimony on September
2ALh?
A Yes, I did.
O Is that exhibit still- accurate?
A It is.
a Did you sponsor Exhibit 13, Schedule 3,
recent merger ring-fencing conditions with your
supplemental testimony on September 24, 2078?
A r did.
O Is that exhibit sti}l accurate?
A Yes, it is.
O And did you sponsor Exhibit !3, Schedule
4, recent merger f inancj-al integri-ty-related conditions
with your supplemental testimony on September 24, 20!8?
A r did.25
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O And that one is al-so still accurate?
A Yes, it is.
MS. THOMAS: Your Honors, Hydro One is not
going to move for the admission of what was designated
and prefiled as Exhibit 13, Schedul-e 1. That was
supposed to have been Mr. Reed's resume, but we
inadvertently incl-uded the wrong document there, but we
are going to move for the admission of Mr. Reed's
supplemental testimony on September 24, 20L8, Mr. Reedrs
rebuttal- testimony on November L4, 2078, and Mr. Reed's
Exhibit 73, Schedules 2, 3, and 4.
COMMISSIONER KELLANDER: So without
objection as referenced by counselr we will spread the
testj-mony referenced across the record as if read and
admit the associated exhibits.
(Hydro One Limited Exhibit Nos. 13 and L9
were admitted into evidence. )
MS. THOMAS: Thank you, Your Honor.
(The following prefiled supplemental and
rebutta1 testimonies of Mr. John Reed are spread upon the
record. )
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458 REED (Di)
Hydro One Limited
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Concentrlc
I. INTRODUCTION
O. Please state your name and business address.
A. My name is John J
Chief Executive Officer of Concentric Energy Advisors,
Inc. ("Concentric") and CE Capital Advisors, Inc. ("CE
Capital"), which has its headquarters at 293 Boston Post
Road West, Suite 500, Marlborough, Massachusetts 0L152.
a. On whose behal-f are you submitting this
testi-mony?
A. I am testifying on behal-f of Hydro One Limited
( "Hydro One" ) and Avista Corporation ( "Avista" ) . Hydro
One filed an Application seeking an order authorizing
Hydro One, acting through its indirect subsidiary Olympus
Equity LLC, to acquire all of the outstanding common
stock of Avista and Avista woul-d become a direct,
wholly-owned subsidiary of Olympus Equity LLC and an
indirect, who1Iy-owned subsidiary of Hydro One (the
"Proposed Transaction" and "Application for Approval of
Transaction"). Hydro One and Avista subsequently
executed a stipulation and settl-ement ("Settl-ement
Stipulation" ) with the Staff of the Idaho Public
Util-ities Commi-ssion ("Staf f ") , Cl-earwater Paper
Corporation ("Clearwater"), Idaho Forest Group, LLC,
Idaho Conservation League ("ICL"), the Community Act.ion
Partnership Association of Idaho ("CAPAI"), and the
Washington and Northern Idaho
Reed. I am President and
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Concentrlc
District Council of Laborers ( "WNIDCL" ) (individually a
"Parties") . The Sett]-ementtt Partytt and
Stipulation
Commission
collectively the
("Commission") on April 13, 20lB.
O. Pfease describe your educationa1 background and
professional- experience in the energy and utility
industries.
A. I have more than 40 years of experience in the
energy industry and have worked as an executive in, and
consultant and economist to, the energy industry. Over
the past 29 years, I have directed the energy consulting
services of Concentric, Navigant Consulting, and Reed
Consulting Group. I have served as Vlce Chaj-rman and
co-CEO of the nation's largest publicly-traded consulting
firm and as Chief Economist for the nation's largest gas
utility. I have provided regulatory policy and
regulatory economics support to more than 100 energy and
utj-1ity clj-ents and have provided expert testimony on
regulatory, economic, and financial matters on more than
150 occasions before the Federal Energy Regulatory
Commission ("FERC"), Canadian regulatory agencies, state
utility regulatory agencies, various state and federal
courts, and before arbitration panels 1n the United
States and Canada.As an industry expert, I have been
utility transactions over the pasti-nvolved in numerous
20 years, including
was filed with the Idaho Public Utilitles
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mergers, divestitures, asset acquisitions, and
reorganizatj-ons. fn addition to this transaction, f have
advised clients involved in utility transactions in
Arizona, Connecticut, Delaware, the District of Columbia,
Hawaii, Kansas, I1linois, Indiana, fowa, Louisj-ana,
Maryland, Massachusetts, Michigan, Minnesota, New
Hampshire, New Jersey, New York, Pennsylvania, Rhode
Island, Texas, Utah, and Wisconsin. I have appeared as
an expert witness in several jurisdictions on the topics
of merger policy standards, acquisition financing plans,
merger benefits analyses, affillate codes of conduct,
impacts on competition and energy markets, and
merger-rel-ated commitments or condltions. I am a
graduate of the Wharton Schoo1 of Busj-ness at the
University of Pennsylvania, and previousJ-y attended the
University of Kansas. My background is presented in more
detail in Exh. No. 13, Schedule 1.
O. Pfease describe Concentric's activities in
energy and utility engagements.
A. Concentric provides financial and economic
advisory services to many energy and util-ity clients
across North Ameri-ca. Our regulatory, economic, and
market analysis services incl-ude utllity ratemaking and
regulatory advisory services, energy market assessments,
market entry and exit
Reed, Supp 3
Concentric
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Concentric
analysis, corporate and business unit strategy
development, demand forecasting, resource planning, and
energy contract negotiations. Our financial advisory
activities include both buy- and sell--side merger,
acquisition and dlvestiture assignments, due diligence
and valuation assignments, project and corporate finance
services, and transaction support servj-ces. In addition,
we provide litigation support services on a wide range of
financial- and economic issues on behal-f of cl-ients
throughout North America. CE Capj-ta1 is a fully
registered broker-dealer securities firm specializinq in
merger and acquisition activities. As CEO of CE Capital,
I hol-d several securiti-es licenses that cover al-1 forms
of securities and investment banking activities
O. What is the purpose of your testimony?
A. The purpose of my testimony is to provide my
assessment of the reasonabfeness and sufficiency of the
governance, financial integrity and ring-fencing
provisions of the Commitments attached as Exhibit A to
the Settl-ement Stipulationl in light of the recent
political devel-opments in the Province of Ontario (the
"Province") and changes in Hydro One's executive
management and board of directors.
1 evu-n-tl-09, AVU-G-17-05, Stipulation and settl-ement (April 13, 2018)
(including Appendix A, "Master List of Commitments in fdaho") ("Settfement
Stipulation").e 25
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O. What is your understanding of the recent
politica1 devel-opments in the Province and the governance
changes at Hydro One?
A. Hydro One agreed on July L7, 2018, that its
existing Board of Directors would resign by August 15,
2018, and Hydro One's President and Chlef Executive
Of f icer (the I'CEO'' ) would ret j-re, ef fective immedi-ateIy.
On August L4, 20!8, Hydro One announced its new 1O-member
Board of Directors (the "Board"). Hydro One's new Board
is in the process of selecting a new CEO. ft is my
understanding that the replacement of Hydro One's Board
was generally consistent with the Governance Agreement
(the "Governance Agreement") between Hydro One and Her
Majesty the Queen in Right of Ontario, provided as Exh.
No. 10, Schedul-e 3, as described in the Supplemental
Testimony of James Scarl-ett ("Scarl-ett Testimony"), and
with the July tL, 20LB Letter Agreement between Hydro One
and the Province ("Ju1y 2078 Letter Agreement"), provided
as Exh. No. 10, Schedule 1 and as an attachment to the
Letter from Joint Applj-cants Regarding Update on Recent
Changes in Hydro One Management (July 18, 20LB) ("Avista
and Hydro One Comments").
On July L6, 20!8, the new Provincial- government
introduced the Urgent Prioritjes Act, 2078, whi-ch,
included as Schedul-e l, the Hydro One AccountabiLity Act,
20L8, provided
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Concentric
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Concentric
as Exh. No. 10, Schedul-e 2. The Urgent Priorities Act
received Royal Assent on July 25, 201,8, which is the day
it came into force as law in the Province. Schedule 7,
the Hydro One Accountability Act (the "Act") came into
force on the day named by proclamation of the Lieutenant
Governor, which occurred on August 15, 20L8. The Act
requires, among other things, the Board of Hydro One to
establish a new compensation framework for the Board,
CEO, and
Province
Act will-
other executives in consultation wlth the
and the other five largest shareholders. The
not appry
Hydroofsubsldiary
Please
Avista and
discussion
Hydro One
of these
refer to the Scarlett Testimony and the
to Avista if Avista becomes a
One.
Comments for a more in-depth
at Hydro One.recent developments
remainder of yourO. How 1s
organi zed?
A. Section
the testimony
II summarizes my key conclusions. In
Section III, I evaluate the governance-rel-ated
commitments made by Hydro One and Avista in the
Settlement Stipulatlon. Section IV provides my
eval-uation of the ri-ng-fencing commitments made by Hydro
One and Avista. In Secti-on V, I evaluate the financial
integrity commitments made in the Settlement Stlpulation.
regarding theFinalIy, Section Vf presents my conclusions
Proposed Transactlon.25
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II. SUMMARY OF KEY CONCLUS]ONS B
III. THE SETTLEMENT STIPULATION'S GOVERNANCE
COMMITMENTS L2
IV. THE SETTLEMENT STIPULATION'S R]NG-FENCING
COMMITMENTS 23
V. THE SETTLEMENT STIPULATTON'S FINANCIAL INTEGRITY
COMMITMENTS 28
VI. CONCLUSIONS 33
Reed, Supp 1
Concentric
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0. Are you sponsoring any exhibits as part of your
testimony?
A. Yes. Attached to my testimony are:
Exh. No. 13, Schedu1e 1 - Resume and
testimony Iisting
Exh. No. 13, Schedul-e 2 - Recent Merger
Governance-Related Conditi-ons
Exh. No. 13, Schedul-e 3 - Recent Merger
Ring-Fencing Conditions
Exh. No. 13, Schedu1e 4 - Recent Merger
Fi-nancial Integrity-Related Conditions
A table of contents for my testimony is as follows:
I. INTRODUCTION ....1
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II. SI'MMARY OF KEY CONCLUSIONS
O. Pl-ease begin by providing your general
observations about the recent political developments in
the Province and the governance changes at Hydro One.
A. While changes 1n Directors and executives are
part of the normal course of business, si-multaneously
Board of Directors and the CEO ischanging both
unusual. It is lmportant to consider the potential
implicatj-ons of these changes for the Proposed
Transaction, Avista, its ratepayers and the public
interest. I have reviewed the Settlement Stipulation,
which incl-udes an integrated and comprehensive set of
governance, rlng-fencing, financial integrity and other
regulatory commitments (individually "Stipulated
Commitment No.", collectively, the "Stipulated
Commitments"). The Partles to the Settl-ement Stipulation
agree that the Settlement Stipulation "represents a fair,
just and reasonabl-e compromise of al-l the issues raised
in the proceeding and its acceptance by the Commission
represents a reasonabl-e resolution of the multiple issues
identified in this case. The Parties, therefore,
recommend that the Commissj-on, in accordance with RP 77 4,
approve the Settl-ement Stipulation and al-I of its terms
and conditions without material change or
the
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condition."2 Nothing in the recent political changes in
the Province and governance changes at Hydro One should
change that conclusion. The Stipulated Commitments made
in the Settlement Stipulation, in particular the Avista
governance, ring-fencing and financial integrity
commitments, provide significant protections for
customers and support the public interest. There 1s
nothj-ng to suggest that once the Proposed Transaction
cl-oses, Avista customers or the public interest in Idaho
will suffer any iII effects from the recent events
discussed above or from potential- future actions of the
Provincial government.
O. Pl-ease summarize your key conclusions regarding
the Avista Board of Directors, ring-fencing, financial
integrity and other Stipulated Commitments in the
Settl-ement Stipulation.
A. The Settl-ement Stipulation provides a robust,
state-of-the-art set of governance, ring-fencing, and
other Stipulated Commitments both to provide the
approprlat.e separation of Avista from Hydro One and its
other affiliates and subsidiaries, and to protect Avista
customers from potential future risks. The Stipulated
Commitments are very robust and well in excess of
i-ndustry norms established by
2 Settfement Stipulation at p. 2
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commitments made in other recent utility mergers and
acquisitions.
The Stipulated Commitments were specifically
designed to address Hydro One's ownership of Avista and
the Provj-nce's role as the largest investor in Hydro One.
The Stipulated Commitments also address the reguJ-ation of
Hydro One by the Ontario Energy Board (the "OEB"), an
agent of the Province which regulates natural gas and
electricity utilities in Ontario. Among other things,
the OEB sets rates and licenses aII participants in the
Province' s el-ectricity and natural- gas sectors. While
the OEB is an independent agency, it is still subject to
provincial legislation. In summary, these Stipulated
Commitments provide for:
The independence of Avista's Board of
Directors, CEO, and executives whereby
seven of Avista's nine Directors will-
either be independent as defined by the
New York Stock Exchange ( "NYSE" ) rules
("Independent Directors") or appointed by
Avista, maki-ng it impossible for Hydro
One, the Province, or any shareholder to
direct the governance or management of
Avista;
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' The Avista Board of Directors to make al-l
decisions regarding the governance, busj-ness
operations and l-ocal presence/cornmunity
invol-vement Stipulated Commitments;
' Continued capital investment 1n strategic and
economic development items;
' Hydro One's provision of equity to support
Avistars capital structure; and
' Ensuring Avista's financlal integrity by
maintaining separate credit ratings and debt
instruments, prohiblting inter-company debt and
lending, restriction on pledging utility
assets, and restrictions on Avista's upwards
dividends and distributions, ds well- as
restrictions and protections in the unlikely
event of a bankruptcy.
The efficacy of the Stipulated Commitments made as
part of the Settlement Stipulation is unchanged by recent
events. If anything, recent events highlight the
validity of these Stipulated Commitments and the unusual
level of separation they provide between Hydro One and
Avj-sta and restrictions on Hydro One and the Province as
it pertains to Avista.
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Taken as a whole, and in combination with the
Commission's on-going regulatory oversight and authority
over Avista, these Stipulated Commitments are appropriate
and fu1Iy address potential risks by ensuring that
customers are protected from potential risks of the
Proposed Transaction and wil-1 continue to enjoy safe and
reliable electric service.
III . THE SETTLEMENT STIPUI.ATION I S GO\IERNATiICE COMMITT{ENTS
O. Pl-ease briefly highlight the Stipulation
Settl-ement' s governance-rel-ated commitments.
A. The Settlement Stipulation's governance-rel-ated
commitments start with speciflc requirements regarding
Avista's Board of Directors. As dj-scussed by Hydro One's
Executive Vice President and Chief LegaI Officer James
Scarlett,3 if the Proposed Transaction is approved and
closes Avista will continue to be governed by its own,
independent Board of Directors, separate from the Hydro
One Board. Stipulated Commitment No. 3 requires that
Avista's Board of Directors consist of nine members: (1)
three Independent Directors, as defined by the NYSE
rules, and who are al-so residents of the Pacifj-c
Northwest, (2) three Dj-rectors who are members of
Avista's current Board, (3) Avista's CEO, and
3 Scarlett Testimony, S VIII
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(4) two executives of Hydro One or any of its
subsidiaries. The implementation of Stipulated
Commitment No. 3 will result in seven of the nine members
of Avista's post-closing Board of Dlrectors bej-ng either
NYSE-independent or designated by Avista, ensuring
continued Avista focus for its Board of Di-rectors.
O. How do the NYSE rules define "Independent" and
what is its import for Avista's post-closing governance?
A. The NYSE rul-es define "independent" as "no
material- rel-ationship" with the company "either directly
or as a partner, shareholder or officer of an
organization that has a relationship with the companyw.4
In establ-ishing this definition, the NYSE noted that
" Ie] ffective boards of directors exercise independent
judgment in carrying out their responsibilities.
Requiring a majority of independent directors will
increase the quality of board oversight and lessen the
possibillty of damaging conf l-icts of j-nterest. "5
4 NYSE, Inc., Listed Company Manual Section 3O3A.02 (2018),
http: ,/ /wa1 Istreet . cch. com/LCMTools /P1at formViewer. asp? selectednode:chpt 5 E1? 5
E4E5F3&manual:?2F1cm?2Esections?2FlcmB2DsectionsB2F (Iast visited Sept. 5,
201,8 , 4: 17 PM ) .
5 NYSE, Inc., Listed Company Manual Section 3O3A.O1 Commentary (2OlB),
http: /,/wa1 1st reet . cch. com/LCMTool s / Plat formViewer. asp?se lectednode:chp? 5F1 I 5
F485F3&manual:%2Fl-cm?2Fsections?2Efcm%2DsectionsS2F (Iast visited Sept. 5,
2018, 4:18 PM).
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O. Were commitments made
compos j-tion of Avista's Board of
No. 3 wiIIStipulated Commitment
future as individual-
to ensure that the
Directors provided in
be maintained in the
Directors may turn over?
A. Yes. Stipulated Commitment No. 3 specifically
provides that if any Avista designee resigns, retires or
otherwlse ceases to serve as a director of Avista for any
reason, the remaining Avista designees shal-I nominate a
replacement director to f111 such vacancy. Nominations
are approved by the Avista Board of Directors.
The Delegation of Authority (see Appendix 5 of the
Joint Applicationl 0 provides that Hydro One may replace
the Hydro One designated Directors, provided that three
are Independent. The Delegation of Authority also
provides Hydro One with some limited latitude in
satisfying this commitment: if it were unable to appoint
an Independent Dlrector residing in the Pacifj-c Northwest
in a timely manner, Hydro One could appoint an interim
Di-rector for no more than a si-x-month term who is an
employee of Hydro One or one of its subsidiaries while 1t
found a suitable Independent Director.
6 avu-n-tl-O9, AVU-G-17-05, Joint Application for Order Authorj-zing Proposed
Transaction, Appendix 5 Delegation of Authority to Avista Board of Directors
(Sep. 14, 2011).25
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O. Are you aware of Hydro One and Avista's
proposal to
Hydro One's
Avlsta post.-merger board?
A. .Yes. Hydro One
Delegation of Authority to
f imit Hydro One's l-atitude with respect to
designated Independent Di-rectors on the
and Avista propose to amend the
eliminate this limited
l-atitude under certain circumstances. As discussed in
would result, in Ontario appointing nominees
of Directors of Hydro One that constitute,
the directors of suchor would constltute a majority of
the Scarl-ett Testimony,
this exception shaff not
circumstance arises, and
Hydro One and Avista propose that
apply if, at any time a
during the pendency of any such
Province exercises its rights
legi s lat ive
whatsoever, that
amendment to the
Delegation of
the independence
to control a majority of the
event occurs, this amendment is
circumstance, whereby the
as a sharehol-der of Hydro One, or uses
authority, or acts in any other manner
resul-ts , or
to the Board
board.
a. What is the importance of this
Delegation of Authority?
A. This proposed amendment to the
Authority provj-des extra protection for
of the Avista Board in the event that the Province takes
some action in the future
Hydro One Board.
triggered and
If that
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blocks Hydro One' s l-imited
three Independent Director
with a Hydro One executive
makes clear that there are
right to replace any of its
designees on the Avista board
or employee. This limitation
no circumstances under whlch
control- the Avista Board.
Stipulation inc1ude any
the Province or
O. Does
other specific
A. Yes.
Avista will- seek
Hydro One can
the Settlement
governance commitments?
Stipulated Commitment No. 2 provides that
to retain its current executives
post-closing of the Proposed Transaction subject to
vol-untary retirements and Avista's ability to select and
retain personnel best able to meet its needs over time.
The Avista Board of Directors retains the ability to
and other Avistadismiss executive management of Avista
personnel for standard corporate reasons. This
commitment reinforces Avista's control- over its
executives.
O. Has Hydro One made any additional-
governance-rel-ated commitments incremental- to those made
in the Settl-ement Stipulation?
A. Yes. In response to recent events, Hydro One
and Avista have proposed an additional commitment to
provlde additional clarity regarding the responsibiJ-ity
of the Avista
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Board of Directors. In the Avista and Hydro One
Comments, Hydro One made the following additional
commitment:
Avista Employee Compensation: Any decisions
regarding Avista employee compensation shall be
made by the Avista Board consistent with the
terms of the Merger Agreement between Hydro One
and Avista, and current market standards andprevailing practices of refevant U. S. e1ectric
and gas utility benchmarks. The determination
of the leveI of any compensation (including
equity awards) approved by the Avista Board
with respect to any employee in accordance with
the foregoing shall not be subject to change by
Hydro One or the Hydro One Board.T
This new commitment makes clear that the Avista
Board, and not the Hydro One Board, the Province, or any
other party, wj-ll- make decisions regarding Avista
employee compensation.
O. Did you eval-uate how the Settl-ement
Stipulation's governance commitments compare to other
recent utillty mergers and acquisltions in the U.S.?
A. Yes. I considered 40 transactions involving
the merger or acquisition of a U.S. investor owned
utility ("IOU") that have been completed sj-nce 20L0. My
review was based upon publicly-avail-abl-e information
about these transactions including state commission
orders and information published by SNL Einancial, an
industry-specific financial market data source for public
and private companies worldwide.25
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O. How do the governance Stipulated Commitments
commitments made in these other IOUcompare to governance
transactlons ?
A. The governance Stipulated Commitments compare
very favorabl-y with the governance commj-tments made in
these other IOU transactions. Exh. No. 13, Schedule 2
provides a summary of the governance conditions in these
transactions. As shown in that exhibit, none of the
transactions I reviewed incl-uded all of the governance
commitments made by the Parties in the Stipulated
Commitments. In particular, the new commitment regarding
executive compensation was only made or required in one
other transaction f reviewed or have been i-nvol-ved in.
Further, commitments similar to Stipulated Commitment No.
3, Board of Directors, and Stipul-ated Commitment No. 2,
Executi-ve Management, are rarely used or required.
O. Why is comparing the Stipulated Commitments
made by Hydro One and Avista to the commitments made by
counterparties to IOU transactions informatj-ve?
A. Whil-e the commitments made in a given
transaction shoul-d be specific to that transaction's
specific circumstances, there are clear industry norms
regarding the nature of merger commitments. Some amount
of governance-related commitments, ring-fencing-related
commitments, andO25
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fi-nancial integrity commitments are seen in many
transactions. The Parties' Stipulated Commitments,
however, are well- beyond industry norms. f discuss this
further in my review of ring-fencing commitments. The
import of this observation is si-mpIy that more
restrictive commitments are being made by Hydro One and
Avista through the Settl-ement Stipulation to ensure that
Avista and its fdaho customers are protected from risk.
O. Did your comparison incl-ude foreign
acquisitions of U.S. IOUs?
A. Yes. Eleven of the transactions I reviewed
invol-ved the acquisition of a U.S. IOU
entity.
Canadian
by a foreign
ten invol-ved a
acquirer. See Schedule 2. None of
these transacti-ons included all of the Parties'
governance Stipulated Commitments. Only two, Alta Gas'
acquisition of WGL and Eortis' acquisition of CH Energy,
contained both a majority
and a commitment to offer
fndependent Board requirement
employment to executives of the
acqulred utility.
0. Are there examples of mergers invol-ving the
S. IOU by a foreign government?
Of these efeven
U
transactions,
Exh. No. 13,
acqulsition of a
A. Yes.While less cofirmon, there are examples of
foreign government ownership of U.S. IOUs. EPCOR
Utilities Inc., an
wastewater utility Edmonton, Alberta-based water and25
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company owned by the City of Edmonton, has acquired four
U.S. water utilities col-Iectj-ve1y serving approximately
175r 000 customers for a combined transaction value of
approximately
was approved
("APSC"). No
any governance
transactions.
governance
conditions
$510 mifIion.B Each of these transactions
by the Arizona Public Service Commission
commitments were made, nor were
required by the APSC in these
O. Does the Settlement Stipulation j-nclude other
Stipulated Commitments supportive of its governance
commitments?
A. Yes. Several- other Stipulated Commitments
pertaining to Avista's bus j-ness operations and local-
presence/community involvement post-merger make clear and
binding Hydro One's commitment to Avista's management and
provision of safe and reliabl-e utility service regardless
of changes at Hydro One or the Province. Stipulated
Commitment No. 4 specifies that Avista w1l-l maintain its
brand and Avista will- establ-ish the plan for its
operation. Avista will also maintain both its staffing
and presence in the communities in which Avista operates
at l-evels sufficient to maintain the provision of safe
and reliab1e service and cost-effective operations,
consistent with pre-merger l-evel-s (Stipul-ated
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B ZOtt acquisition of Chaparatl, 2072 acquisition of Arizona-American Water,
2013 acquisltj-on of North Mohave, and 2016 acquisition of Viillow Valley
Water Company. Source: SNL.
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Commitment No. 10) and its headquarters in Spokane,
Washington and offi-ce locations in each of its other
service territories (Stipul-ated Commi-tment No. 9) .
Stipulated Commitment No. 5 specifies Avista will
maintain existing l-eveIs of capital allocations for
capital investment in strategic and economlc development
items. Avista has specific safety and reliability
standards and policies and servj-ce quality measures in
place in Washington and is working with the Staff to
develop similar performance standards, customer
guarantees and a reporti-ng mechanism for its customers in
Idaho, which will inc1ude penalty provisions (Stipulated
Commitment 15). Einal1y, Stipulated Commitment No. 1
reserves all decj-sion-making authority over the
governance, business operations and local
presence/communlty invol-vement StipuJ-ated Commj-tments to
Avista's Board of Directors. Any changes to policies
provided for in these Stipulated Commitments requires a
two-thirds vote of the Avista Board and approval from the
Commission and all- regulatory bodies with jurisdiction
over the Stipulated Commitments (Stipulated Commitment
No. 1). Collectively, these Stipulated Commitments
support the Settlement Stipulatj-on's governance
Stipulated Commj-tments and make clear that Avista's
governance wil-l be independent of Hydro One and
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Avista's focus will be on the provision of safe and
rel-iabl-e service to its customers.
0. Do the recent politica1 developments in Ontario
and changes in governance at Hydro One have any impact on
the Settlement Stlpulation's governance commitments?
A. No. The governance Stipulated Commitments
clearly separate and insulate Avista from the governance
of Hydro One and its largest shareholder, the Province.
The efficacy of this separation and insul-ation was
demonstrated through the recent developments in the
Province, in part.icular in the acknowl-edgement and
commitment that the Hydro One AccountabiLity Act, 2078
will not appfy to Avlsta if Avista becomes a subsidiary
of Hydro One, as discussed in the Scarlett Testimony
(Exh. No. 10, Schedule 2) . The governance-related
Stipulated Commitments provide Avista and its Idaho
customers with appropriate independence and protections;
recent events have not created any need for modifications
to these commitments. Further, these governance
Stipulated Commi-tments are binding (Stipulated Commj-tment
No. 33), the Commission has the authority to enforce them
(Stipul-ated Commitment No. 30) and Avista and Hydro One
and/or it subsidiaries submit to state court jurisdiction
for enforcement of the Commission's orders (Stipulated
Commi-tment
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No. 31). Taken as a whole, and in combination with the
Commissionrs on-going regulatory oversight and authority,
as well- as the ring-fencing and financial integrity
Stipulated Commitments that I discuss later in my
testimony, the Settlement Stipulation's governance
Stipulated Commitments provide customers with appropriate
protections and assurances that they will continue to
enjoy safe and re1iable el-ectric servj-ce at rates that
reflect their Commission-approved cost of service.
IV. THE SETTLEMENT STIPI'I,ATION'S RING-FENCING COMMIIA{ENTS
0. In addition to its governance Stipulated
Commitments, have you also reviewed the ring-fencing
Stipulated Commltments?
A. Yes, I have. While the governance-related
Stipulated Commitments address the independence of the
going-forward governance of Avlsta under Hydro One
ownershj-p, the ring-fencing Stipulated Commitments
provide cl-ear objectives, practices and policies, and
restrictions to protect Avista and its Idaho customers
from the unlikely event of a bankruptcy and other
potential risks, incl-uding potential risks perceived with
the recent governance changes at Hydro One and political
changes in the Province.
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O. Please briefly hiqhliqht the Settlement
Stipulation's
Commitments.
A. Stipulated
intended to protect
Commitment Nos. 42 through 45 are
Avista in the
bankruptcy-related ring-fencing Stipulated
"Golden Share" in the event Avista
bankruptcy. Stipulated Commitment
unlikely event of a
No. 42 provides for a
were to declare
Share" is the sol-evoluntary bankruptcy. The "Go1den
share of Preferred Stock authorized by the Commission and
held by an independent third-party with no financial-
stake, affiliation, rel-ationship, interest, or tie to
Avi-sta or any of its af f iliates. The hol-der of the
Golden Share must be authorized by the Commission. Any
declaration of voluntary bankruptcy would require the
vote of the ho1der of the Golden Share and in any matters
of bankruptcy the Go1den Share will override all- other
outstanding shares of all- types or classes of stock. In
addition to the holder of the Golden Share, a two-thirds
majority vote of Avista's Board of Directors, including
the affirmative vote of the Independent Director at
Avista, is required for Avista to enter into voluntary
bankruptcy (Stipulated Commitment No. 43).
Stipulated Commitment No. 44 requires Hydro One and
Avista to fil-e with the Commission within 9O-days of the
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closing of the Proposed Transaction a non-consolidation
opinion, which is a legal opinion addressing the
1j-kelihood of the utility becoming an involuntary party
to the bankruptcy of an affil-iate, concluding that the
ring-fencing Stipulated Commitments are sufficient that a
bankruptcy court would not order the substantive
consolidation of the assets and l-iabil-ities of Avista
with Hydro One or any of its other affiliates or
subsidiaries in the unlikely event of bankruptcy. If the
Settl-ement Stipulation's ring-fencing commitments are not
sufficient to secure such a non-consolidation opinion,
then Hydro One must propose and implement upon the
Commission's approval additional- ring-fencing protections
sufficient to obtain a non-consolidation opi-nion.
Further, Hydro One and Olympus Holding Corp. must fil-e an
affidavit with the Commission stating that neither Hydro
One, Olympus Holding Corp., nor any of their
subsidiaries, will seek to include Avista in a bankruptcy
without the consent of a two-thirds majority of Avj-sta's
board of directors including the affirmative vote of at
l-east one of Avista's independent directors.
Fina1ly, Stipulated Commitment No.45 provides that
be owned by
special purpose
all of the common stock of Avista wil-l-
Olympus
entity,
Equity LLC, a bankruptcy-remote
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O. Please briefly highlight the Settlement
Stipulation' s other ring-fencing Stipulated Commitments.
A. Stipulated Commitment Nos. 46 through 51 work
together to provide for the separation and independence
of Avista from Hydro One and Hydro One's other
affil-iates. Stipulated Commitment No. 48 provides that
Olympus Equity LLC will- not operate or own any business
and will- l-imit its activlties to investing in and
attending to its sharehol-dings in Avista. Stipulated
Commitment No. 49 commits Hydro One and Avista to making
no materia.l- amendments to the ring-fencing provisions
without the approval of the Commission. Stipulated
Commitment No. 47 requires that Avista customers be hel-d
harmless from any buslness and financial risk exposure
associated with Hydro One and its other afflliates and
any liabil-ities of any unregulated activity of Avista or
Hydro One and its affiliates. Notice wil-l be provided to
al-l current and prospective lenders describing the
rlng-fencing Stipulated Commitments and stating that
there is no recourse to Avista assets as col-lateral or
security for debt j-ssued by Hydro One or any of its
subsidiaries. Olympus Holding Corp. and Avista wil-l-
notify the Commissj-on of any acquisition by Olympus
Holding Corp. of a regulated or unregulated buslness that
is equivalent to 5U or more of the capitalization ofAvista or
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any change j-n control or ownership of Avista. In
additj-on, Commission approval will- be sought of any sale
or transfer of any material part (i.e. 10? or more) of
Avista, or of any transaction or series of transactions,
regardless of size, that would result in a person or
entity, other than a who1Iy owned subsidiary of Hydro
One, directly or indirectly, acquiring a controlling
interest in Avista or Olympus Holding Corp. Fina11y,
Commission approval will be sought of any divestiture,
spin-off, or sal-e of any integral Avista asset as
required by Idaho Code 67-328 and neither Avista nor
Hydro One will assert in any future proceedings that, by
virtue of the Proposed Transaction, the Commission is
without jurisdiction over any transaction that results in
a change i-n control of Avista.
Stipulated Commitment Nos. 46 and 51 prohibit the
pledging of Avista utility assets and inter-company
lendi-ng without prior Commlssion approval. Stipulated
Commitment No. 50 prohibits inter-company debt without
prior notification to the Commission.
O. How do the Settl-ement Stipulation's
ring-fencing Stipulated Commitments compare to other
recent utility mergers and acquisitions?
Reed, Supp 21
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A. The Settlement Stipulation's ring-fenci-ng
Stipulated Commitments compare very favorably with the
ring-fencing commitments made in other IOU transactions
effectuated since 20L0. Exh. No. 13, Schedul-e 3 provides
a summary of the ring-fencing conditions in these 40
recent transactions. As shown in that exhibit, the
ring-fencing Stipulated Commitments made by the Parties
are rarely offered or required. As shown in that
exhibit, only one of the transactions f reviewed included
all of the rlng-fencing commitments in the Settl-ement
Stipulation. In fact, most transactions included none or
very few of the ring-fencing Stipulated Commitments.
These ring-fencing Stipulated Commitments, in combination
with the governance Stipulated Commitments made by the
Parties, provide a very strong degree of separatJ-on of
Avista from Hydro One post-merger. The efficacy of this
separation and insulation is unaffected by the recent
developments in the Province.
V. THE SETTLEMENT STIPT'I.ATIONIS FINAI{CIAL INTEGRITY
COMMIII!{ENTS
O. Please briefly highliqht the Settl-ement
Stipulation's financial integrity Stipulated Commitments.
A. Financial integrity Stipulated Commitment Nos.
34 through 4l work together to ensure that Avista's
Reed, Supp 28
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financial integrity, including its access to capital and
ability to make
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the investments necessary to continue to
customers with safe and reliable service,
provide its
will be
maintained post-merger. Stipulated Commitment No. 34
addresses Avistars post-closing access to capital,
committing Hydro One to providing Avi-sta with equity to
support Avistars capital structure and allow it to access
debt financing on reasonable terms and on a sustainable
basis. Avista wil-l- also maintain separate debt and
preferred stock (Stipulated Commitment No. 35). Hydro
One and Avista will use reasonable best efforts to ensure
that Avista's debt wifl continue to be separately rated
rati-ngs agencyby at l-east one nationalJ-y
(Stipulated Commitment No.
Commission of any downgrade
non-investment grade status
37).
Stipulated Commltment
paid by Avista to Hydro One
detrimental to Avista. If
recogni zed
36) and wil-l notify the
credit rating to
Commitment No.( Stipulated
No. 38 ensures that dividends
cannot be financially
Avista does not have an
of Avista's
investment-grade credj-t rating and the ratio of earnings
before interest, taxes, depreciation and amortization
("EBITDA") to Avista's interest expense is l-ess than 3.0,
then no dividend distribution to Olympus Equity LLC will
occur.
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pension funding policy and Avista will maintain this
policy 1n
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accordance wlth sound actuarial practice (Stipulated
Commj-tment 39), and Avista wil-l continue to file reports
with the Securities Exchange Commission (Stipulated
Commitment No. 40) and comply with the Sarbanes-Ox1ey Act
(Stipulated Commitment No. 4I) .
0. Are there any other Stipulated Commltments
which support the financial integrity commitments that
you would like to highlight?
A. Yes. In addition to the ring-fencing
Stipulated Commitments which insulate Avista and its
customers from Hydro One, a number of other regulatory
St j-pulated
Stipulation
Commitments were made in the Settlement
protections from
wil-I not advocate for
that provide additional-
potential financial risks. Avista
a higher cost of debt or equity capital as compared to
what Avista's cost of debt or equity capital- would have
been absent Hydro One's ownership (Stipulated Commltment
No. 25) . In addition, Avistars actual cofirmon equity
ratlo wil-I be maintained at a level no less than 442
(Stipulated Commitment No. 26). Fina11y, as I noted
earlj-er in my testimony, Avista wil-l- hold Avista
customers harmless from any business and financial risk
exposures associated with Olympus Holding Corp., Hydro
One, and Hydro One's other affil-iates (Stipulated
Commitment No. 47) .25
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O.
integrity
How do the Settlement Stipulation's financlal
Stipulated Commltments compare to other recent
utility mergers and acquj-sltions?
A. The Settlement Stipulation's financial
integrity Stipulated Commitments compare favorably with
financial integrity commitments made in other IOU
transactions effectuated since 2070. Exh. No. 13,
Schedule 4 provides a summary of the financial integrity
conditions in these 40 recent transactions. As shown in
that exhibit, none of the transactions I reviewed
incl-uded al-l- of the financial integrity commitments in
the Settl-ement Sti-pulation. In fact, most transactions
incl-uded only a few of the financial integrity Stipulated
Commitments. These financial integrity Stipufated
Commitments, in combination with the governance and
ring-fencing Stipulated Commitments made by the Parties,
provide for the continued prudent financial management of
Avista and ensure that Avista's financial management
cannot be harmed by Hydro One ownership.
O. Do the recent political- developments in the
Province and changes in governance at Hydro One have any
impact on the Settlement Stipulation's financial
integrity Stipulated Commitments?
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A. No. The financial integrity Stipulated
Commitments agreed to by the Parties provide Avista and
its Idaho customers with appropriate assurances,
independence and protections. These Stipulated
Commitments insulate Avista and its Idaho customers from
Hydro One and anything the Province may do in its rol-e as
an investor in Hydro One. As I discussed earlier, the
dlvidend restrictions and commitment that Hydro One wilI
provide equity to Avista to support Avj-sta's capital
structure agreed to by the Parties to the Settlement
Stipulation ensure that Avista cannot be stripped of its
capital (Stipulated Commitment 38) .
Recent events have not created any need for
modifications to these Stipulated
recent or future changes at Hydro
have no impact on the facts that
Commitments are binding
Stipulated
Commitment No. 33)
to enforce them
Stipulated
Commitments.
One or in the
Any
Province
the
and the Commlssion has
( Stipulated
the authority
(Stipulated Commitment No.
a. Are the financial
Commitments included in the Stipulation
comblnation
the
30).
integrity
Settl-ement
appropriate for the Proposed Transaction?
A. Yes. Taken as a whol-e, and in
with the other Stipulated Commitments and
Commission's on-going regulatory oversight and authority,the financial integrity25
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interest. Eor
Stipulated Commitments provide customers with appropriate
assurances that they w111 continue to enjoy safe and
reliable electric service at rates that reflect their
Commission-approved cost of servj-ce.
vI. coNcl,usloNs
0. Do the recent developments at the Province and
Hydro One
Idaho?
A.
have any lmpact on the public interest in
No,these developments do not
all the reasons described
affect the public
above, the
Stipulated Commitments are fu11y protective of the public
interest in ldaho, ES wel-l- as the j-nterests of Avista's
Idaho customers.
a. If the Province took action in the future to
exercise infl-uence over or contro1 of the Board of Hydro
One, would that negatlveJ-y impact Avista and its
customers or the public interest in Idaho?
A. No. The governance, bankruptcy and financial-
ring-fencing and other Stipulated Commitments, coupled
with the Commission's on-going regulatory oversight of
Avista and the l-aws of the United States in the five
states in which Avista operates (Idaho, Oregon,
Washington, Montana, and Alaska) put parameters around
how Avista will be
discussed earlier,
owned and operated post-merger.
the Stipulated Commitments
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are binding regardless of any actions the Province might
take in the future. The Province has no ability to
directly influence Avista. The Province cannot pass laws
that apply to Avista. Further, even in the speculative
scenario where the Province took control of Hydro One and
directed the two Hydro One executives on Avista's
post-merger board to pursue initiatives that woul-d
benefit Hydro One and/or Ontario to the detriment of
Avista's fi-nancial resources or service, the remaining
seven independent or Avista-designated directors on
Avlsta's post-merger board coul-d override that direction.
O. Are the Stipulated Commitments included in the
Settlement Stipulation appropriate for the Proposed
Transaction?
A. Yes. The Stipulated Commitments are robust and
ensure, ds intended, that recent developments at Hydro
One and the Provincer ds well as potential future
changes, can have no adverse effect on Idaho customers or
on the interest of the public in Idaho. Nothing in the
recent developments even suggests that Avistars financial
management, access to capital, cost of capital, quality
of service, rates r or Hydro One's attention to Avj-stars
needs wil-l be adversely affected. The Settl-ement
Stipulation provides a comprehensive set of Stlpulated
Commitments that coll-ectively ensure the
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appropriate l-eve1 of separation between Avista and Hydro
One and Hydro One's other affiliates. The package of
Stipulated Commj-tments exceeds industry norms established
by the 40 utility transactions completed since 201,0 that
I reviewed. These Stipulated Commitments insulate
Avista, protect its customers from potential risks, and
support the public interest. In combination with the
Commission's on-going regulatory oversight and authority,
the Stipulated Commitments ensure that stakeholders wil-I
experience the benefits from the Proposed Transaction,
wil-1 be insul-ated from potential risks, and wiIl continue
to ensure safe and rel-iabl-e service at rates that reflect
their Commj-ssion-approved cost of service.
0. Does this concl-ude your testimony?
A. Yes, it does.
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Concentric
I. INTRODUCTION
O. Please state your name and business address.
A. My name is John J. Reed. I am President and
Chief Executive Officer of Concentric Energy Advisors,
Inc. ( "Concentric" )
Capital-"), which has
and CE Capital Advisors, Inc. ("CE
its headquarters at 293 Boston Post
Road West, Suite 500, Marlborough, Massachusetts 07152.
O. On whose behalf are you submitting this
testimony?
A. I am testifying on behal-f of Hydro One Limited
("Hydro One") and Avista Corporation ("Avista").
O. Are you sponsoring any exhibits that accompany
your Rebuttal Testimony?
A. No.
A tabl-e of contents for my testimony is as follows:
DESCRIPTION PAGE NUMBER
I. INTRODUCTION 1
I]. RESPONSE TO STAFE WITNESS CARLOCK 2
O. What is the purpose of your testimony?
A. The purpose of my Rebuttal Testimony is to
respond to the Direct Testimony of Terri Carlock, the
Idaho Public Util-ities Commj-ssion, Utilities Division
Administrator, as it pertains to the ability of the
Province of Ontario ("Province") to impactt,trLJ
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Avista and the sufflciency
integrity and ring-fencing
Commitments. l
of the governance, financial-
provisions of the Stipulated
II. RESPONSE TO STAI'F WITNESS CARLOCK
O. What is your overall response to Ms. Carl_ock's
Direct Testimony?
A. Ms. Carlock has concl-uded that the transaction
meets Idaho's statutory standard for mergers because it
is 1n the public interest, protects and provides benefits
to Avista's Idaho customers, and assures that rates will
not go up as a result of the transaction.2 I certainly
agree with her overal-l concl-usion.
However, she al-so states that risks from the
transaction cannot be completely eliminated, that utility
ownership where the parent company is parti-a11y-owned by
a foreign government is very different from being owned
by an investor-owned utility:, that she is concerned that
there is no apparent limit on the Province's authority
over Hydro One, and that the new government
1 eVU-n-17-09,/AVU-G-17-05 Stipufation and Settl-ement (Apri1 13, 2018)
( ("Stipu1ated Sett1ement"). The Stlpulated Settl-ement includes 73 merger
commitments (each, a "Stipulated Commitment, " coflectively, the "Stipulated
Commitments").
2 avU-s-11-09,/AVU-G-17-05 - Direct Testimony of Terri Carlock at pg. 4 (Nov.
6, 20tA) ("Carlock Direct Testimony") .
3 Carlock Direct Testimony at pg. 13.o 25
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of Ontario has spoken in favor of a t2e" reduction in the
cost of power to Ontario consumers.4 She does note that,
even with these concerns, "Commitments including
ring-fencing provisions have been agreed to in the
Stipulated Settl-ement by most Idaho parties that I
believe will- provide financial benefits that like1y wil-l-
not occur absent the merger while protecting customers
from negative operational, structural or financial-
harm. tt5
My review of the recent events involving the new
government of Ontario and Hydro One, and of the
ring-fencing and governance commitments offered as part
of the proposed transaction, leads me to conclude that
Ms. Carlock's remaining
and fuIly addressed by
commi-tments.
O. What evidence
concerns have been effectively
the transaction's proposed
there to support your
have been effectively andconclusi,on that these
fully addressed by the
commitments ?
IS
rls ks
transaction' s proposed
A. As T stated in my Supplemental Testimony filed
on September 24, 2078, in this proceeding, the proposed
ring-fencing and governance commitments in this
transaction represent robust, state-of-the-art provisions
that wil-I very effectively protect Avista and itso25
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customers. The experience gained over the last four
months provides very compelling evidence regarding
4 Carlock Direct Testimony at pg
5 Carlock Direct Testimony at pg
74.
B.
Reed, Supp. Reb. 3a
Concentri-c
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the effectiveness of these provisions.
As the record in this case shows, after the election
i-n Ontario, and the government's actions that l-ed to the
resignation of the Hydro One board and retirement of the
CEO, Standard and Poor's ("S&P") downgraded Hydro One one
notch to A-, based on S&Prs negative assessment of
"governance" issues for Hydro One.6 Nonethel-ess,
Avista's credit rating was not
remained on Credit Watch with
downgraded and it has
positive implications.
outlook reflects, among
effectiveness of the ring
That striking
other things,
differential in
the strength and
fencing and governance
in this transacti-on.
notwithstanding the
Avista and Hydro One
profiles.
essentially represented a "test
transaction's commitments. This
provisions that have been proposed
It also reflects the fact that
one notch downgrade for Hydro One,
strong credithave retained very
These events, and S&P's reaction to them, have
the Commlssion with
events such as those
not fead to negative
the transaction will
Avlsta's customers in
a very high
that have
drive" of the
outcome should provide
l-evel- of confidence that
arisen for Hydro One wil-l
consequences for Avista, and that
continue to provide benefits for
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6 Sep Gfobaf RatingsDirect, Hydro One Ltd. and Subsidiary Downgraded to
'A-r on Lower Governance Assessment; Ratings Remain on CreditWatch,
September L3, 2078.
Reed, Supp. Reb. 4a
Concentri-c
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O. Please address Ms. Carlock's concerns that
"there does not appear to be a l-imit on the Provj-nce of
Ontario's authority over Hydro Oner"7 and that a foreign
company owning an American utility is very different from
being owned by a foreign company whose controlling
shareholder is a foreign government. E
A. The fact that Hydro One is the parent company
of a Canadian utility, and that 1t has the Province as a
minority owner, does not suggest that Hydro One's
ownership of Avista woufd create any special or new class
of issues affecting whether this transaction is in the
public interest. As an investor-owned public utility,
Avista already operates in fi-ve dlfferent states, and is
subject to the political and regulatory actions of five
different state governments, and the U.S. federal
government, in both its gas distribution and el-ectric
service operations. I doubt that anyone woul-d suggest
that these six governments all agree on every policy
j-ssue facing Avista. Yet, Avista operates quite
effectively to meet customer needs and governmental-
policies in each jurisdiction.
In evaluating this transaction, I believe the
Commission should distinguish between the influence and
authority that the Province could have on Ontario
ratepayers versus the influence and authority that the
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Province coul-d have on Avista and its
7 Carlock Direct Testimony at pg.
B Carfock Direct Testimony at pg.13.
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ratepayers. V'ihile it is possible that legislation
created by the Province could pressure Hydro One to
decrease rates in Ontario, with the Stipulated
Commitments in place in Idaho this would not have any
becauseeffect on Avista or Avistars customers. In fact,
of the Stipulated Commitments put 1n place that create
clear separation between Avista and Hydro One, Avista's
customers in Idaho would be protected from political or
regulatory actions in Ontario, in a number of significant
ways that they are not currentl-y protected from political
or regulatory actions arising in Washington, Oregon or
Al-aska.
With regard to the issue of ownership by a parent
company that is partially-owned by a foreign government,
I can only add that this issue has been raised, and
rejected, in transactions involving energy infrastructure
assets that go far beyond el-ectric or gas distribution
assets, including ownership of nuclear power plants and
LNG facil-ities in the U.S. When one considers that the
Nuc1ear Regulatory Commission saw no problem with
Electricit6 de France (which is fuIly control,led by the
government of Erance) owning 49.9 percent of five nuclear
reactors in the U.S., and planning to buil,d more, or that
GDF Suez (now Engie, which al-so had significant
government ownership) was permitted to own an LNG import25
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facility located virtually
becomes difficul-t to make
ownership of Hydro One by
in the heart of Boston, MA, it
any plausible case that partlal
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the government of Ontario represents an unacceptable risk
to Hydro One, Avista or Avistars customers.
Ultimately, these concerns come down to the question
of whether the transaction creates risks for Avista's
customers in Idaho. In consj-dering that question, the
conclusion of S&P j-n eval-uating the outlook for the
financial strength of Avista and Hydro One is qulte
compelling. S&Prs CreditWatch positive listing for
Avista refl-ects the increased potential for higher
ratings on Avista when the transaction closes. More
notable is S&Prs conclusion that, even after fu1ly
reflectlng the recent actions of the Ontario government,
Hydro One faces l-ess business risk (considering the
respective regulatory and political environments) than
Avista does from its regulators. Coming from a business
whose job it j-s to assess ri-sk, that concl-usion shou1d
assure the Commission that this transaction does not
carry incremental risk for Avista's customers in Idaho.
Simply put, the Stipulated Commitments fully protect
the public interest in Idaho as well as interests of
Avista's Idaho customers even if something extraordinary
happens in Ontario.
0. Does anything in Ms. Carlock's testimony
detract from or l-imit her conclusion, or your conclusion,
that the Proposed Transactj-on is in the public interest?
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A. No. I fu1ly concur with Ms. Carlock's ultimate
concl-usion that the Proposed Transaction is in the public
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interest and that Avista's customers are well protected
by the Stipulated Commitments.
O. Does this conclude your testimony?
A. Yes, it does
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(The fol-l-owing proceedlngs were had in
open hearing. )
MS. THOMAS: Mr. Reed i-s avail-abIe for
cross-examination.
COMMI SS]ONER KELLANDER :Thank you very
Mr. Purdy will bemuch and just as
j oining us l-ater
Mr. Otto.
a note for the record,
this morning, so we will- begin with
MR. OTTO: I do have a few questions.
COMMISSIONER KELLANDER: Thank you, please
proceed.
CROSS-EXAMINATION
BY MR. OTTO:
0 Let's see how we need this. There we go.
Good morning, Mr. Reed.
A Good morning
O Can you see me through
A I can.
O Okay. It's always fun
I just have a few short questions and
rebuttal testimony, your supplemental
on page 6. Do you have that with you?
A I do. Go ahead.
the crowd here?
being j-n the back.
they're about your
rebuttal-, and it ' s
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O I'm l-ooking at a
at the very l-ast word of
sentence that actually
Iine 4 and it's the endbegins
of that
sentence
paragraph and I'm
to try to shorten
just going to character.'ze that
it up, but basically you're
the stlpulations here provide more protectj-ons forsaying
Idaho customers for events in Ontario than Idaho
customers have from events in Oregon and Washington; is
that a fair summary?
A I think the key words were better than
exist currently with regard to events or activities in
Washington, Oregon or Alaska.
O Okay; so my question is could you just
tal-k a little bit more about that? Could you explain why
that is?
A I can and I think this is an important
point given the discussion yesterday with regard to
legislative activities in Ontario and how they might
affect Hydro One or Avista. Today you have a structure
in which legislatj-on or regulatory activities in the
other states in which Avista currentl-y operates can
certainly have an effect on customers in Idaho without
recourse to ring-fencing, governance restrictions or
other things like that that are created by the
transaction, and we've seen this in the industry many
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If you look at the experi-ence in many of
the Eastern states where one state ordered divestiture of
generation, for example, and created stranded costs and
other states were l-eft with having to deal wlth how that
legislation from another state, another jurisdiction,
that affected their multi-jurisdictional utility shoul-d
be dealt with individually by that commission, so we've
always had the structure where legislation and regulatory
actions of a multi-jurisdictional- utility can affect a
state that's doing nothing.
Here we have protections in terms of debt
covenants, equity covenants, governance covenants,
service coverage covenants, al-l- of those features and the
avail-ability of capital and the independence of the board
members that are built into the structure for the first
time, and by creating those, you actually provide a
degree of insulation from activities in other states or
other jurlsdictions thatrs greater than what exists
today.
O Thank you for that, and you've been
invol-ved in quite a few of these kind of transactions I
gather?
A I have.
O And you testifj-ed that this is a
state-of-the-art agreement,' is that true?
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A Yes, in my view, the financj-al
ring-fencing, the financial protections, the covenants,
the hold harmless provisions, and the governance
restrictions are as strong as any merger that has been
approved in the past 25 years.
MR. OTTO: Thank you. This issue has been
a primary thing for my members, so hearing that from you
glves us a fot of comfort. Thank you. That's al-l-.
COMMISSIONER KELLANDER: Mr. Richardson.
MR. RICHARDSON: Thank you, Mr. Chairman.
I have no questions for this witness.
COMMISSIONER KELLANDER: MT . Wi]-Iiams .
MR. WILLIAMS: No questi-ons.
COMMISSIONER KELLANDER: Mr. Baxter.
MR. BAXTER: Mr. Chairman, no questions.
Thank you.
COMMISSIONER KELLANDER: And Mr. Karpen.
MR. KARPEN: Yes.
CROSS-EXAMINATION
BY MR. I(ARPEN:
Good morning, Mr. Reed.
Good morning.
I'11 make this pretty quick. In your
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supplemental rebuttal testimony, you talk about kind of
what we have been circling around for the l-ast day and
that is the electi-on that took place in Ontario and the
sacking of the board and CEO, the actions that
essentially l-ed to that. You comment how those led to a
downgrade from S&P; is that accurate? I believe it's
page 4 of your supplemental rebuttal testimony.
A lt's not entirely accurate. I don't want
to accept the premise of your question about the sacking
of the CEO and that's rea11y a matter of opinion, not
argument, but y€s, S&P did take action to downgrade Hydro
One one notch on the basis of what it call-ed governance.
This is one of the ratings criteria that S&P uses to
distinguish the actual credit profile from the standalone
credi-t profile, and here it brought the ratlng down by
one notch because of governance.
I woul-d say the rating report by Standard
& Poorrs really speaks in terms of the Hydro One
Accountability Act and the controls on compensation as
being the precipitating event for the downgrade, not the
replacement of the board, not the replacement or the
resignation, I shoul-d sdy, of the CEO. It was perhaps
the straw that broke the camel's back for that one notch
downgrade.
What's most remarkable to me as stated in
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the testimony is that
Credlt Watch positj-ve
effectiveness of the
Standard & Poor's left Avista on
said it's really unusual to
come up during the approval
because it al-most provides a
and to me, that really spoke to the
ring-fencing
said whil-e we
and governance
controls, because it see probl-ems with
regard to government actions and governance at the Hydro
One l-evel- that causes a downward movementr we stil1 are
opti-mistic about upward movement with Avista's rating and
credit profile.
I can tell you from having worked with
Standard & Poorrs a lot, if they thought that government
interference would bleed through to Avista, you would not
have Avista on Credit Watch positive. In fact, it may
have had the same one notch governance downgrade if S&P
thought that type of bleed-through could occur. The fact
that you've got the moving in potentially opposite
directions, I think, speaks to how effective the
ring-fencing and governance provisions real1y are
expected to be.
a Yeah, I think you refer to it as a test
that accurate?drive 1n your test.imony; is
A I did, and I
have these kinds of events
process for the Commission,
basis for the Commission to say hey, we can see up cl-ose
in the real wor]d how effective theseand personalt25
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ring-fencing
a disturbance
and governance
at the top.
rating actions
proceedings and
final degree of
o
of questionj-ng,
Avista's credit
you believe that
some other opinion about Avista's access
regard to credit ratings?
provisions are. We have had
to capital with
outl-ook at the operating
l-evel, and that speaks to
We still have a posi-tive
company level, the utility
said earlier, that is very
a degree of insulation, as I
effective.
O So in your review of the S&P downgrade and
the negative outlook, did that downgrade and the comments
associated with it, did they speak to the ring-fencj-ng
and governance provisions that you're referring to?
A They didn't, but if you know Standard &
Poor's, the ratings are always forward-looking and they
monitor these proceedings very closeIy, and the
util-ities, of course, continue to make presentations to
the rating agencies about what's likely to happen in the
transaction. I can tel-l- you from transactions I've been
invol-ved 1n that fell apart based upon Standard & Poor's
that they closely monitor these
are very concerned about what does the
ring-fencing and governance look like.
So continuing down the credit rating line
you've evafuated both Hydro One and
ratings, even after this downgrade, do
this will improve, maintain, or have
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A I do have an opj-nion. That j-s that
Avista's access to capital will be improved by the
transaction. I thj-nk it's speaklng both to debt and
equity. I think its cost of debt will actually be
improved by the transaction. We stil-l see Credit Watch
positive for Standard & Poorrs and that speaks to their
confj-dence in the ability of the transaction to enhance
their credit profile.
For those of you that don't follow it that
closely, it's important to understand that even with al-l-
of the disturbance that's happened in Ontario, Standard &
Poor's still- rates Hydro One as a safer, less risky
utility than Avi-sta is today, okay, so remember that we
stil1 have a two notch step-up from the current Avista
bond rating to where Hydro One is today. That's after
the downgrade of Hydro One, so you still have two notches
of improvement there, so on debt, I think there's an
improvement in cost of capital and availability of
capital, and on equity, the larger company will
defj-nitely have more mass in capitaf markets and in my
opinion wil-I be able to attract capital on more favorable
terms.
O You have reviewed Ms. Carl-ock' s testimony
in this matter; is that correct?
A Yes, I have.
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O And I think you spoke to some of her
concerns that she expressed in her testj-mony in your
supplemental- rebuttal-. Can you just generally speak to
how the rlng-fencing provisions provide adequate
protection with regard to those concerns; namely,
lnfl-uence from the Province as it rel-ates to Avista?
Coul-d there be, for example, a trickle-down effect from
the Province to Avista?
A I think that question was posed by the
Commisslon yesterday as well about the trickle-down
effect. Letrs start from the bottom up and then answer
terms of rate impacts, there
this Commission does not
cost of debt, cost of
that question in stages. In
will- be no rate impacts that
approve, fuII stop, okay, so
equity, A&G cost, allocated cost, whatever, there wifl be
no rate impacts from the transaction that the commissj-ons
don't approve.
Secondly, with regard to the covenants,
there is an overall covenant that there wil-l- be no
adverse consequences for ratepayers stemming from the
transaction, none, fu11 stop. Then you start peeling
back the l-evels or layers of the onj-on and you see at
every element of cost of capital and operating expenses
and capital availability, there are similar standal-one
restrictions saying that there will be no increase in25
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debt cost associated with the transaction. There will- be
a minimum equi-ty ratio
transaction.
You have
to block dividends;
retained at al-l times for the
new features, such
flow
as the ability
of dividends
if either there
or if the equity
distribution of
that is, no upward
a bond rating below
ratio would be
investment grade
by the
at each level
and
1S
imperiled
so, again,that dividend,
of cost, you
protections
important.
have independent restrictions
and then fina11y, a governance, which 1s very
You have the independence of the directors
of the Avista board. You have the commi-tment that Avista
and Hydro One will both contj-nue to be bound by the
Commission's jurisdiction and al-l state laws, and you
have the abllity if therefs any change with regard to the
government of Ontario's invol-vement 1n Hydro One's
actj-vities where they become either a majority owner or
take an action that wou1d be unfavorabl-e to the utility,
you have the ability to return to the Commission and to
address through a reopening of the docket any further
commitments or conditions that need to be added, so that
feature, by the way, is one that I have never seen in a
merger transaction where you have the ability to reopen
Commissionthe record for future events and to have the25
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come in and reconsider whether additional- protection is
necessary.
O Now, in faj-rness, aoy party could petition
the Commission at any time for reconsideratj-on or to
consider new actions against the utility; is that
accurate?
A Yes, but to have a provision built into
the merger commitments, the settl-ement commitments, to
directly address the right of the party to do that and
that Hydro One wil-l- not oppose reopening that record,
that's pretty remarkable.
MR. KARPEN: Thank you.. I have nothing
further for this wi-tness.
COMMISSIONER KELLANDER: Thank you. Mr.
Semanko.
CROSS-EXAMINAT]ON
BY MR. SEMANKO:
O Yes, good morning and wel-come to Boise.
A Good morning.
0 I'm going to pick up where Mr. Karpen l-eft
off there. I think you were referring to commitment 74;
is that correct?
A Let me pu11 up my l-ist. I think that'sotrLJ
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correct. Yes.
O And
youtve never seen
before?
A No,
is it fair to say before this merger
anything quite l-ike that commitment
someone came into the country, bought
decided to 1eave. That's not really
specificity and the
nothing that provi-ded that degree of
trigger that's contained in No . 1 4.
O So given your understanding of that
commitment, would the Commission and the parties be able
to undo or unwind the merger once it has cl-osed under
that provision?
A That probably call-s for a legaI opinion as
to the powers and authorities of the Commission. I don't
want to provide a legal opinion, but I think that the
settl-ement provision '14 does not limit the remedj-es, so
if the remedies if the issue could not be addressed
through other remedies such as additional commitments or
additional protections, to me, as a busj-nessman, that
issue is on the tabl-e for discussi-on.
O Have you ever seen a merger unwound
before?
A I have seen acquisitions and mergers, I
about Scottishwon't say unwound,
Power before where
util-itles and then
but I mean, we talked
unwindlng, but it's a subsequent transaction thato25
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effectively undid the prior transaction.
O You mentioned being in the Hearing Room
for yesterday's testimony; is that correct?
A I was.
O For all three witnesses?
A Yes.
O Did you hear anything that those three
witnesses testified to that you disagree with?
A No. What I heard was a personal
affirmation by executives of the company to stand by the
commitments and to come back to this Commisslon if
anything changed.
O Thank you. You mentioned the test drive.
This merger in fact has not yet occurred; correct?
A That is correct.
O And the commitments, the revised
commitments, were fil-ed with the Commission just
recently,' correct?
A Yes.
A So how do we know -- how can you
characterize it as a test drive when there is no merger,
I don't
thattest drive a car
doesn't exist yet.
A You're test driving the terms and
no commitments in place yet?
quite understand how you can
Explain that.
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conditions ahead of them actually being put into effect.
That's why I made the point that Standard & Poor's
ratings are forward-looking and in fact, tf you read both
Moody's and Standard & Poorrs, they specifically speak in
terms of the impact of the transactj-on on the
post-transaction credit profiles of Hydro One and Avista,
so because it's forward-looking and because they notched
down Hydro One one notch because of the governance issue,
which again is a forward-lookj-ng concern, if they had had
a simil-ar concern about Avista post-transaction, they
woul-d not have l-eft it on Credit Watch positive as they
were bringing Hydro One's rating down, so whil-e you don't
actually have the transaction structure in p1ace, you
don't have that consolidated credit profile, you do have
S&P and Moody's looking at the entirety of the two
companies and saying whatrs the effect of this, so in
that sense, it is a test drive.
to the effect that
with the potential
Ontario, perhaps among
you add to that?
A Yeah, I
I think you testified
these provisions are
threats of additional
other things; is
earl-ier something
designed to deal
legislation from
that fair? Would
OSo
certainly, of protecting against
Ontario. I'm not sure that was
has the effect,
legislative actions in
necessarily the intent,
think it
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but. it has that effect.
O Are you familiar with other mergers in
which these kinds of conditions have been incl-uded?
A Let me think. On a few issues, yes. I
have seen, for example, in the recent Westar/GPE merger,
which was Kansas and Missourj- as the primary
jurisdictions, there was a condition with regard to the
adoption of integrated resource planning in the other
jurisdiction, so they were looking, again, across
jurisdictional- l-ines to the effect of what one commission
was doing on the rates of the customers in another
jurisdiction and trying to create some isolation, so it's
very uncommon, but you can find isol-ated examples like
that.
O Are you fami1iar with other cases where
the parent corporation has an agreement such as the
governance agreement, the letter agreement in this matter
with the sovereign government who al-so happens to be a
sharehol-der in that corporation?
A The only similar transactj-ons
aware of, I mentioned, I think, in my earlier
that I'm
piece of
e]ectric andtestimony, EPCOR is a utllity that 1s in the
water busj-ness that is owned by the City of
Alberta. They have been acquiring utilities in the U.S.,
including a small gas utiJ-ity in Texas and some
Edmonton in
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medium-s:-zed water utilities in Arizona.They have
by the
compactr ds I
It did not
page 11 of your
2L and 22? Let me know
they are 100
municipality,
recall-, with
supplemental
when you're
A
u
A
o
Coul-d you
testimony,
there.
percent owned by the city,
and they have a governance
the city, with their owner.
become it did not get imported into the regulatory
approval- process for their transactions, but that same
type of government-owned utility making acquisitions and
subject to the actions in that case of the city council
is probably the closest para1Ie1.
O And thatrs spelled out in your direct
testimony?
A In my supplemental- testimony.
O Sorry, your first testimony?
A Eirst piece, yes.
a If you could bear with me just a minute.
Your answer to the question about the other witnesses
expedites things quite a bit., So I'11 see what else I
have for you here.
go to
lines
I have that.
Line 27 begins, "they provide."
Yes.
So in that sent,ence toward the end of line25
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2!, you talk
Province as
restrictions
commi-tments ?
A
through the Hydro
management team of
One board and ffow through the
Hydro One and the
they are restrictions on anything of
Province having a detrimental- effect
to the Avlsta organlzation. ft's
about restrictions on Hydro One and the
it pertains to Avista. Can you explain what
are placed on the Province in the stipulated
The restrictions or protections there flow
Avista board, so
any actlon of the
as it flows through
not, per ser a
Ontario doing something.
of those actions to
restriction on the government of
ft's a restriction on the ability
have any adverse effect on Avista or its ratepayers.
O Thank you
would, of that
for that clarification. Page
32, if you same testimony.
A I have that.
stlpulated
customers
O Lines 4 through 5 you testify, "These
commitments insulate Avista and its Idaho
from Hydro One and
in its role as an investor in
anything the
Hydro One. "
Province may do
Do you recal-l-
that testimony?
A
o Do the stipulated commitments insulate
from the Province's role as a legislative body as opposed
to an i-nvestor?
I do.
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A Yes, with regard to any impact on Avista
or Avista's customers. Again, the restrictj-on, the
protections that are provided for ratemaking, for access
to capital, for adequacy of capital are absolute and
regardless of what may or may not happen with regard to
the legislative authorlty or activities of the Province
of Ontario, those commitments that are there to protect
customers are absolute.
O So are you fami1iar with the Hydro One Act
recently passed?
A Iam.
O So if that Act passed after the merger and
it did not include the speciflc exclusion for
subsidiaries of Hydro One outside of Canada or the
Province, would your answer be the same?
A Yes, my answer woul-d be the same. Eirst
of all, the question is to whether that woul-d in fact be
1ega1 for the Province
to activitles outside
to legislate something with regard
of the Province. I'm not going to
oplne on that, but
prohibiti-on end up
Avista's customers
servr-ce or
with regard to would that type of a
having any detrimental- effect on
through rates or through terms of
of service, I dontt see any
happening, so regardless of whether
woul-d ever actually stand or be able
possibility
that type of
quality
of that
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REED (X)
Hydro One Limited
to be implemented, the answer is compensation, which was
the issue of the Hydro One Accountability Act, it's quj-te
clear that compensation for Avista's officers and
Avista's employees is set by the Avista board. That is
completely clear in the terms of the settlement
commitments, so regardless
to do outside the Ontario
of what that Act may attempt
Provincial boundaries, it's not
going to come down to Avista.
O Doesn't the Act require Provincial
approval of compensation?
A It does with regard to Hydro One.
O My hypothetical- incl-udes aIl subsidiaries
of Hydro One, so would it affect Avista's compensation?
A It may affect the ability of Hydro One to
secure that approval, but T stand by what I said before.
fL's quite clear under the terms of the settlement
commitments that Avista's actual compensation is set by
the Avista board, so that protectJ-on is paramount.
0 Thank you; so page 34, if you would, on
line 2 you sdy, "The Province has no ability to directly
influence Avista." I'm goJ-ng to ask you in the context
of the Premier's campaign promise about 12 percent rate
reductions in Ontario. Is there any potential if that is
Iegislated or somehow an edict comes down that those
reductions occur that there could be an indirect impactt25
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REED (x)
Hydro One Limited
on Avista as a who1Iy-owned subsidiary of Hydro One?
A I see that as nothing is impossible, but I
see that as being virtually impossible. You would have
to have the Province take actions that are so extreme
that you
downgrade
detrimental
woul-d have to have a probably four notch
l_n Hydro One
impact on
before it's going to have a
the credit profile of Avista. If
you saw the Provj-nce have that effect on Hydro One and
Hydro One's borrowing costs go up that much, I think
there would be very dramatic backl-ash in Ontario.
It's not ever happened before. I canrt
see it happening in the future, but it woul-d take that
type of what I would call- al-most a crisj-s event, and,
again, you have that in any multi-jurisdictional- utility
where acti-ons in one state can have a very detrimental
i-mpact which coul-d f l-ow through to another state. My
point made earl-ier is you actually have many more
protections with this merger against those kinds of
actlons hurting customers than you do today.
O So under this merger, would the revenue,
the dividends, the earnings from Avista to Hydro One be
signiflcant to Hydro One?
A Yes, significant in terms of, let's sdy,
15 percent of income or somethlng j-n that range, that's
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208 .8 90. 5198
REED (Com)
Hydro One Limited
O Ifm going to move just very briefly to
your rebuttal testimony and see if there's anything el-se
I need to ask you. Are you being compensated in
assocj-ation with providing your testimony here today?
A f'm being compensated for my time, yes.
O By whom?
A I bel-ieve actually the bil-1 goes to Hydro
One.
O And can I ask in what amount?
A Our f irm charges tlme and material-s. Our
billing rates range on this assignment from, I think,
about $200 an hour to $850 an hour.
MR. SEMANKO: Thank you. I have no
further questions.
COMMISSIONER KELLANDER :Thank you, and
we'f1 move now to questions from the Commission and I
have a couple.
EXAMINATION
BY COMMISSIONER KELLANDER:
0 Mr. Reed, in looking
, other than this case
at your curriculum
and its associatedvitae, your CV
proceedings, T
that you have
didn't seem to see anythlng that
had any other appearances before
suggested
any of theo25
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208.890.5198
REED (Com)
Hydro One Limited
states that have jurisdiction over this merger; is that
correct ?
A No. I certainly testifled in Al-aska
before
Okay.
Let me
I
A
have not testifled in
0 Until-
A Until
go back to the list and see. I
Idaho before.
today.
today.
0 So it was a quick glance, but I saw that
you did appear in Oregon, you did appear in Washington,
but they were al-l tled to this case.
A Riqht.
O Subject to check, it would appear that
this is your first exposure to those jurisdictions, and
getting to the question that Mr. Otto was posing to you
in relationship to the Idaho jurisdiction in rel-ationship
to other states and what might be passed in their
legislatures, you're not suggesting that when
legislatures in other states pass public policy through
legislation that we in Idaho just sort of sit on our
hands and pass those costs on to Idaho customers? You're
not suggesting that, are you?
A Not at aII. I have seen situations where
legislation in other states creates an issue for ao25
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different jurisdiction in how they're going to handle
whatever has been mandated, whether it's environmental- on
carbon policies ox r as I said, generation divestiture, So
it creates j-ssues, but certainly, frve not seen
commissions, nor would I respect a commission to sit on
its hands and just pass costs along.
O I appreciate that and thanks for your
recognition of that. Let's take specifically Washington
and you've appeared in Washington State. Have you l-ooked
at their renewable portfolio standard thatrs been passed
in Washington? Have you done any j-nvestigation to see
how those costs were treated in the Idaho jurisdiction?
A I've not tried to determine how they were
treated in the Idaho jurisdiction. I'm generalJ-y
familiar with their RPS.
O Okay, l-et me ask you, then, in the State
of Oregon, are you familiar at aII with the legislation
that the Oregon legislature passed a few years ago that
essentially dealt with PacifiCorp? And I know you've
represented or at least appeared in rel-ation to
PaciflCorp. I saw that in your curricul-um vitae. You
may not be attuned to this issue, but in Oregon State,
they passed legislation that essentially said by 2029,
there wil-l be no coal-fired generation serving customers
in that state, and PacifiCorp operates in six Western
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REED (Com)
Hydro One Limited
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208.890.5198
REED (Com)
Hydro One Limited
states , of which Idaho is one. Are you aware that those
state regulators have been for years working on a cost
allocation protocol to deal specifically with the issues
associated with cost allocation as a result of things
creatingthat may happen,
public policy as
j urisdictions ?
AI
example, in North
Xcel system.
OSo
that we don't have additiona]
ourselves from our nelghbors
U. S. is
ability
fashion
because it's not necessary, because we
go and
effects
like Iegislatures acting and
1s their right within their own
am aware of that. Irve seen that, for
Dakota and Minnesota as wel-l- on the
woul-d it be safe to say that
ring-fencing to
across the border
the reason
protect
within the
have the
ami-cabIeto perhaps
through the
resolve those issues in an
civil discourse that exists among
regulators and our ability to recognize
to serve in the public interest and to
that iL's our job
ensure that cost
all-ocations are appropriately dealt with through
j urisdictions ?
A I accept, Mr. Chairman, that that civil
discourse among regulators is certainly the right way to
seen circumstances when theunfortunately, I have
in one state are detrimental to another state and
some form of fj-nancial protection has to be created, butt25
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208.890.5198
REED (Com)
Hydro One Limited
I would much prefer to see it dealt with as you've
addressed through civil- discourse with other
j urisdictions .
COMMISSIONER KELLANDER: Mr. Reed, I
appreciate your
very much.
response to the questions and thank you
THE WITNESS: Yes.
COMMISSIONER KELLANDER: Are there any
other questions from members of the Commission?
Commissioner Raper.
EXAMINAT]ON
BY COMM]SSIONER RAPER:
O Good morning.
A Good morning.
O Some jurisdictions are more clvil- than
others. I'11- just put that out there.
A I'm glad to be j-n one of the more civil.
O Thank you. That was nice. You have a
unique background in mergers, so f'm going to pick your
brain a little bit in that regard. f'm going to move
more to what Mr. Karpen and Mr. Semanko were tal-king
about regarding Standard & Poorrs and credit ratings.
You have been through a 1ot of mergers. You've seen a25
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208 .8 90. s198
REED (Com)
Hydro One Limited
lot of things happen.
that this
You represented that this is
merger has some extraordinary
it that you wouldn't normally see. Would you
actually --
elements to
agree, though, that
of those additlonal
see in a merger is
part of
el-ements
because of
that you might not
the circumstances
the reason that it has some
normally
of Hydro
One bei-ng largely
add in the recent
owned by the
exit of their
Province of Ontari-o and
CEO and board, no matter
how you want to identify how that occurred? I mean,
woul-dn't you agree that
additional- protections
everyone a littl-e more
merger?
A Sure. I
some of the reasons that those
have been included is to gi-ve
comfort with regard to the
think the
some unique features, which you've
merger structurally has
tal-ked about i-n terms
of the ownership
recent events of
while there was
]evel of the Province of
heightened
a settfement
concerns, and
before, with
there was additional-
Ontario and the
I think, again,
the hei-ghtened
protection
now and
staffs in
concern,
necessary
certainly
people fel-t
and I think it has come forward
satisfied the Staff here and the
other commissions.
a Okay, I al-so heard you say Hydro One was
downgraded, but Avista stayed the same and to you that
was significant, because they're forward-looking and25
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because they would have considered the elements of this
merger even though the merger had not been consummated
yet; is that correct?
A Yes, and to be falr, when you say Avista
stayed the same, they stayed with a positive credit
profile, meaning that an upgrade was more than 50 percent
likely, and when you realj-ze that that upgrade that is
addressed by Standard & Poor's is ti-ed specifically to
the merger, y€S, it is the fact that that credit profile
remains positive while Hydro One was being notched down
one l-evel, that speaks to me as to the importance of what
we're doing here.
a So how do you know that any upgrade is
rel-ated specifically to the possibility of a merger as
opposed to the way that the utility is run and their
history and their current status? I mean, I appreciate
the fact that they're forward-looking
A Right.
O in how they analyze that, but isn't it
a presumption on your part that any upgrade has to do
with the merger?
A No. In this case, Standard & Poor's made
it easy for us, actual1y. They issued thelr decision
when the merger was announced and they specifj-cally tied
it to the consol-idated credit profile with Hydro One, so
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REED (Com)
Hydro One Limited
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208 .8 90. 5198
REED (Com)
Hydro One Limited
the Credit Watch positive
Standard & Poor's in its
event was specifically tied by
report to the transaction.
O Okay; so then based on your experience,
should we, the Commissj-on, be confident that Standard &
Poor's wou1d not take negative action against Avista
should the merger be permitted?
A Yes, I think you can be highly confident
of that. I think in fact it will be beneficial, not
detrimental, in terms of Standard & Poorrs reaction and
you can be absol-uteIy certain that if there were any
negative consequences in terms of the cost of debt that
they wou1d not f 1ow through to customers.
O Okay; so what if the flip side occurred?
What if one of the several- states that has to approve
this transaction doesn't, does Avista get downgraded
because the presumption in the upgrade was that a merger
would commence?
A You'd probably just not get downgraded,
but it gets taken off of Credit Watch positive, so that
expected uplift would not occur. That's my opinion.
COMMISSIONER RAPER: Okay, thank you. I
appreciate it.
THE WITNESS: Gl-ad to he1p.
COMMISSIONER KELLANDER: Any additional
questions from the Commission? If not, let's move tot25
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208.890.5198
REED (ReDi )Hydro One Limited
redirect.
O BY MS. THOMAS: Your Honor, we do have one
redirect question, but we noticed Mr. Purdy has arri-ved
and we weren't sure if he had questions for the witness.
COMMISSIONER KELLANDER: I appreciate your
recognition of that. Mr. Purdy, welcomer doy questions
of this witness?
MR. PURDY: I appreciate it as well and I
have none. Thank you.
COMMISSIONER KELLANDER: Thank you, and if
you couldn't hear that, he said he had none. A11 right,
thank you.
RED]RECT EXAMINATION
BY MS. THOMAS:
o
the test drive
A
o
the analogy to
Poor's ratings
impact of the
you recall- that
way you knew
Standard &a test drive arose
are forward-looking
transaction on Hydro
testimony?
I do.
Mr. Reed, do you recal-l- testifying about
statement in your prefiled testimony?
I do.
And you testified that the
because
and they evaluated the
One and Avista. Do
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O Was the evaluat.ion conducted prior to or
after the filing of the revised versions of the
commitments that resulted from recent discussions among
the parties?
A Standard & Poor's most recent rating
publication for Hydro One and Avista was before, f
beli-eve, the last version of the commitments was filed
here.
O And I bel-ieve the current and final
version of the commitments was fil-ed on November 6th with
the testimony of Ms. Carl-ock. Vfith the revised
commitments, do the is the degree of insul-ation
greater or lesser than before the revisions to the
commitments ?
A It is marginally stronger.
MS. THOMAS: Thank you. I have no further
redirect.
COMMISSTONER KELLANDER: Thank you very
much and Mr. Reed, we appreciate your presence and your
testimony today. Thank you.
THE WITNESS: Thank you, sir.
(The wltness l-eft the stand.)
COMMISSIONER KELLANDER: And werre ready
for the next witness.
MS. THOMAS: Ms. Vender Stoep will conduct
CSB REPORTlNG
208.890.5198
REED (ReDi )Hydro One Limited
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208.890.s198
SCARLETT (Di)
Hydro One Limited
the examination of the next wi-tness.
COMMISSIONER KELLANDER: Thank you very
much and we'II also ask counsel to ldentify himself for
and it looks l-ike it may
f'm sorry, who did you
the record as we move forward,
take him a moment or two to be
say was going to conduct this? Oh,
I saw people moving and new bodies.
confusion.
thank you very much.
for mySorry
JAMES D. SCARLETT,
the instance ofproduced as a witness at Hydro One
tel-l- the truth,Limited, having been first
was examined and t.estified
duly sworn to
as f o1l-ows:
DIRECT EXAMINATION
BY MS. VANDER STOEP:
o
h
u
Good morning.
Good morning.
State your name,
Hydro One
your business address,
and your posltion
AMy
at Limited.
name is James Scarlett.I go by Jamie
Floor,My business address is 483 Bay Street, Bth
Toronto, Canada. I'm the executive vice president and
chief legal officer at Hydro One.Z5
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208.890.5198
SCARLETT (DT)
Hydro One Llmited
0 How long have you held that position at
Hydro One?
and I run major
0
Since September L, 2076.
What are your duties in that position?
I oversee lega1 and regulatory compliance
transactions such as this one.
Please describe your educational- and
professional background.
A f have an undergraduate coilrmerce degree
from McGill University in Montreal, which f received in
t975. I worked in banking for a few years; went to law
schoo1 at the University of Toronto where I received my
JD in 1981. I've been in private practi-ce from then
until 2076 with a three-year stopover at the Ontario
Securities Commission during that time.
O Did you sponsor supplemental testimony
that was filed on September 24t-h, 20t8?
A Yes, I did.
O Dld you adopt the direct testimony of
former CEO Mayo Schmidt that was fil-ed on September 14th,
201"7, in your supplemental testimony?
A Yes, I did.
0 If I were to ask you the questions that
are set forth 1n your supplemental- testimony today, would
your answers still be the same?
A
o
A
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208.890.5198
SCARLETT (Di)
Hydro One Limited
A Yes.
O Did you al-so
that was filed on November
sponsor rebuttal testimony
14th, 2078?
you please go to Tab 4,
is your rebuttal-
A
O
Yes, I did
And if I
rebutta1 testimony under
asked you the questions in your
oath today, would your answers
be the same?
A Yes, but I wou1d like to strike four
questions and answers from my supplemental rebuttal
test j-mony of November 74.
O Why do you want to strike these four
questions and answers from your rebuttal- testimony?
A Prior to today's hearing, Commission Staff
notified counsel for Hydro One that they believe four
questj-ons and answers contain 1egal conclusions.
O What is your understanding as to whether
Commission Staff wil-l- object to your rebuttal testimony
belng made a part of the record if you remove these four
questions and answer?
A I understand the Commlssion Staff wil-I not
object to
rebuttal
Hydro One's motlon to make my supplementaf
testimony part of the record with the removaf of
those four i-tems.
0 Mr. Scarlett, can
Subtab I in your notebook, which25
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CSB REPORTING
208.890.5198
SCARLETT (Di)
Hydro One Lj-mited
testimony?
and answer
3B through
through 1?
A
o
A I have.
A Yes.
O Can you turn to page 36?
question and
question and
l-ines 18 and
31?
A
0
would assume, can you
O And can you confirm that the
answer that should be removed
answer that starts at line
first
is the
that goes from
that you're on page 3f , I
that the second question
removed is page 3f, lines
on to page 38, l-j-nes 1
26 on page 36 to page 31, Iines t through
And can you now
confirm
woul-d l-ike
continuing
Can you confirm that the
and answer that should be removed is on
COMMISSIONER KELLANDER :
you to slow down just quite a bit. In
that you
39, and
Yes.
going to ask you to back up once
because Irm tryi-ng to track with
say that we have volumes up here,
here. What was the
sections were being
third questj-on
page 47?
I'm going to ask
fact, I'm actually
through this,
this and not to
we have volumes up
we get
you
but
on
page again, page 30 what and what
stricken?25
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MS. VANDER STOEP: Do you want me to go
back to the begi-nning?
COMMISSIONER KELLANDER: You know, that
would be much appreciated for me. I'm sorry that f'm
sfow on the uptake.
MS. VANDER STOEP: Page 36.
COMMISSIONER KELLANDER: Page 35 is the
first there were four questions and answers that were
going to be removed someplace?
MS. VANDER STOEP: Yes, and this is the
first one.
COMMISSIONER KELLANDER: This is where
that starts, okay.
MS. VANDER STOEP: Yes.
COMMISSIONER KELLANDER: So page 36 in
rebuttal-.
MS. VANDER STOEP: Lines l-8 through 26.
COMMISSIONER KELLANDER: Okay, on 36,
lines 18 through 26, so strike that question. Got it,
okay.
MS. VANDBR STOEP: And then contj-nuing on
to page 31.
COMMISSIONER KELLANDER: Yes.
MS. VANDER STOEP: Lines 1 through 37.
COMMTSSIONER KELLANDER: Excellent, got
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SCARLETT (Di)
Hydro One Limited
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208.890. s198
SCARLETT (Di)
Hydro One Limited
it.
MS. VANDER STOEP: Then the second
question and answer starts on page 31, Iines 38 and 39.
COMMISSIONER KELLANDER: Thank you, got
that.
MS. VANDER STOEP: And then continuing
to page 38, fines 1 through 1.
COMMISSIONER KELLANDER: One through
seven, okay.
MS. VANDER STOEP: And then the third
on
question and answer that shoufd be removed starts on 47.
COMMISSIONER KELLANDER: Okay, ffm on
41.
MS. VANDER STOBP: And it's line 74
through 20.
COMMISSIONER KELLANDER: Fourteen through
20, thank you.
O BY MS. VANDER STOEP: And Mr. Scarlett,
can you confirm that that is the third question that
should be removed?
A Yes.
O And then for the fourth and final-
question, please go to page 44.
COMMISSIONER KELLANDER: I'm there, thank
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CSB REPORT]NG
208.890.5198
SCARLETT (Di)
Hydro One Limited
Mr.
to
O MS. VANDER STOEP: And can you confirm,
Scarlett, that the question and answer from lines 14
20 shoul-d be removed?
A Yes.
u
from page 40
14th,1ines
Okay. I would
of your rebuttal
L6 through 2L.
Commissioner
COMMISSIONER
like to read an excerpt
testlmony filed on November
Kjellander, are you there?
KELLANDER: I am apparently
not there. Cou1d you try one more time?
MS. VANDER STOEP: Sure; so it would be
page 40. We're going back a littl-e bit.
COMMISSIONER KELLANDER: Thank you.
MS. VANDER STOEP: Lj-nes 16 through 2L.
COMMISSIONER KELLANDER: Yes, that we
oh, itrs not stricken, okay.
MS. VANDER STOEP: Right.
O MS. VANDER STOEP: Mr. Scarlett, at lines
76 through 2L it says, "Question: Who wil-I own Avista
after the merger has been completed?"
And then it says, "Answer: The immediate
owner will be Olympus Equity LLC, a Delaware limited
liability company. The ultimate owner will be Hydro One
because Olympus Equity LLC is a who1ly-owned indirect
subsidiary of Hydro One."25
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CSB REPORTING
208.890.5198
SCARLETT (Di)
Hydro One Limited
Is this statement
A No, the statement
to form Olympus Equity
LLC.
stiIl accurate?
is now incorrect. Hydro
One plans LLC as an Idaho LLC, not
a Delaware
O Was this decislon made by Hydro One
because Commission Staff concl-uded that Idaho Code 67-327
will- not bar this transaction if its immediate parent is
an Idaho company?
A Yes.
O WilI Hydro One remain the ultimate parent
of Avista because Olympus LLC is a wholly-owned indirect
subsidiary of Hydro One?
A Yes.
O Did you sponsor Exhibit No. 10, Schedul-e
7, which is the July 201,8 letter agreement between Hydro
One and the Province with your supplemental testimony on
September 24th?
A Yes, I did.
a Is that exhibit stil-I accurate?
A Yes, it is.
O Did you sponsor Exhibit 10, Schedule 2,
which is the Hydro One Accountability Act with your
supplemental testimony on September 24?
A YeS.
0 Is that exhibit stil-I accurate?25
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CSB REPORT]NG
208.890.5198
SCARLETT (Di)
Hydro One Limited
A Yes, it is.
A Did you sponsor Exhibit 10, Schedule 3,
which is the governance agreement with your supplemental
testimony on September 24?
Yes, I did.
Is that still accurate?
Yes, it is.
And finaI1y, did you
which is Exhibits A and
adopt Exhibit No. 2,
Schedule 2,Bto the merger
as part of youragreement from Mayo Schmidt's testimony
September 24th testimony?
A Yes, I did.
MS. VANDER STOEP: Your Honors, Hydro One
moves for the admission of the following documents with
the changes previously noted in Mr. Scarlett's testimony,
so that wou1d be Mr. Scar1ett's supplemental- testimony
fil-ed on September 24th, Mr. Scarlettrs rebuttal
testimony filed on November l{Lht, Mr. Scarlettrs Exhibit
10, Schedules 1, 2, and 3, and Mr. Schmidt's direct
testimony filed on September 14th, 201J, and then
fina11y, Mr. Schmidt's Exhibit 2, Schedule 2.
COMMISSTONER KELLANDER: Wi-thout
ob j ection, we' l-l- admit the prefiled testimony as amended
record as if read and al-so admltto be spread across the
the associated exhibits.
A
O
A
O
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(Hydro One Limited Exhibit Nos. 2 and 10
were admitted into evidence. )
(The foll-owing prefiled direct testimony
of Mr. Mayo Schmidt (sponsored by Mr. James Scar1ett) and
the prefil-ed supplemental- and rebuttal testimonies of Mr.
James Scarl-ett are spread upon the record.)
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CSB REPORTING
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SCARLETT (Di)
Hydro One Limlted
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Schmidt, Di 1
Hydro One
I. INTRODUCTION
O. Pl-ease state your name and business address.
A. My name
address is 483 Bay
Reception,
o.
A.
(CEO) , ds
("Hydro One")
North American
is Mayo Schmidt, and my business
Street,
Ontario
South Tower, Bth Floor
M5G 2P5.Toronto,
By whom are you employed and
I am the President and Chief
well as a Director, of both
in what capacity?
Executive Officer
Hydro One Limited
utility,
business
a.
experaence.
A. IreceivedaB.
and an honorary Doctorate
University. I al-so have
at U.C.L.A., the
University. My
and Hydro One Inc. Hydro One is a major
electric transmission and distribution
serving more than 1.3 mil-l-ion residential and
customers in Ontario, Canada.
Pl-ease summarize your education and business
joining Hydro
O. What
B.A. from Washburn University,
of Commerce from Washburn
fol-l-owed advanced study courses
University of Nebraska, and Harvard
16sum6 outl-ining my background prior to
One is Exhibit No. 2, Schedule 1
position wil-1 you hold with Avista
the transaction is("Avista") after
wil-l- be a member of the post-merger Avista
I wil-I continue to be President and
Corporation
completed?
A. I
Board of Directors
CEO of25
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Schmidt, Di 2
Hydro One
Hydro One.
Summary gE IeE!1rngny
O. What is the
this proceeding?
A. The purpose
to describe
to describe
purpose of your direct testimony in
of my testimony is:
Hydro One and its affiliates,
the transaction,
to explain the reasons for Hydro One's
proposed purchase of Avista,
to describe Avista's operations once thetransaction is completed, and
to demonstrate that the transaction willbenefit Avista's customers, employees and
communities.
O. Pl-ease summarize your testimony.
A. My testimony demonstrates that Hydro One is
well sulted to serve as the parent company of Avlsta. I
also explain how the transaction, if approved by state
and federal regulators, wil-l- resul-t j-n Avista's regulated
electric busj-ness becoming a new, ring-fenced, business
platform under Hydro One (the "Proposed Transaction").
My testimony explains the reasons for Hydro Oners
proposed purchase of Avista: (1) growth, (2)
diversification both in terms of jurisdictj-ons and
service areas, (3) increased scale and benefits that come
from being a larger player in the utility industry, and
(4) cost savings over the Ionger term.o 25
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Schmidt, Di 3
Hydro One
My
Avista's
testimony provldes evi-dence of the beneflts to
customers, communj-tj-es, and employees if the
Proposed Transaction is approved. In my testimony and
that of other Hydro One witnesses, we are offering dozens
of commitments to the benefit of the customers and
communlties served by Avista.
the benefits ofSpecifically,
Transaction include
commitments, among
testimony:
In addition to
can expect benefits
the foregoing commitments, customers
that will resul-t from the financial
the following
others, which
the Proposed
Hydro One and Avista
I detail later in my
Avista will provide Rate Credits totaling $31.5million to its el-ectrlc and natura1 gas
customers in Washington, Idaho, and Oregon for
10 years beginnlng at the time the merger
closes;
The Proposed Transaction wiII preserve theauthority of the Avista Corporation board tocontinue to make operational decisions in theordinary course of busi-ness. These decisionsalso incl-ude funding for innovation and
economic development in the communities served
by Avista,'
A substantiaf contri-bution wil-l- be made toAvista's charitable foundation and programs;
and
Over time, both Avistars and Hydro One's
customers wil-l benefit from their utilities'j-ncreased purchasing power, sharing of bestpractices and economies of scale.
and business stability associated with North American25
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ownershj-p of Avista by Ontario's largest regulated
transmission and distribution company.
Schmidt, Di 3a
Hydro One
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Hydro One
O. Who el-se wil-l be providing testimony on behalf
of Hydro One?
A. Hydro One wil-I al-so offer testimony from the
fol1owing witnesses:
Chris Lopez, Senior Vice President of
Einance of Hydro One, will- describe the
Proposed Transaction; discuss Hydro One's
corporate structure and where Avista will-reside withi-n that structure; discuss
Hydro One's capitaJ- structure; describe
Hydro One's financing for, and the
mechanics of , the Proposed Transaction,'
describe Avista's post-transaction accessto capital; enumerate certain financial,structural, and ring-fencing commitments
that Hydro One and Avista are proposing aspart of their request for approval of the
Proposed Transaction; and describe the
Rate Credits incl-uded as part of the
Proposed Transaction.
Ferio Pugliese, Executive Vice President,
Customer Care and Corporate Affairs at
Hydro One Networks Inc., will- describe
Hydro One Networks' customer service
phllosophy and supporting programs;
describe Hydro One Networks' customerservice record and improved practices that
have been deployed; describe Hydro One
Networks' experience and priorities
related to provi-ding electric service to
the rural and remote regions of Ontario,
including First Nations Communities; and
dj-scuss opportunities for Hydro One andAvista to collaborate on enhancing and
improving service to the customers of
Hydro One and Avj-sta.
A table of contents of my testimony is as follows:
a 25
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tion
I INTRODUCTION 1
II. HYDRO ONE AND ITS BUSINESS ACTIVTT]ES 5
ITI. THE PROPOSED TRANSACTION 24
]V. HYDRO ONE'S REASONS FOR ACQUIRING AVISTA 26
V. AVISTA'S POST_TRANSACTION OPERATIONS 29
V]. PROPOSED TRANSACTTON BENEFITS 40
o.
testlmony?
A.
Are you sponsoring exhibits with your
Yes.Attached to my testimony are:
Exhibit No. 2, Schedul-e 1: Mayo Schmidt
R6sum6, and
Exhibit No. 2, Schedul-e 2z Exhibits A and
B to Merger Agreement ("De1egation of
Authority" ) .
II. HYDRO ONE AND ITS BUSINESS ACTIVITIES
0. Who is Hydro One and what areas does it serve?
A. Hydro One is an investor-owned electric
transmissj-on and distribution utility headquartered in
Toronto, Ontario, Canada.l Through its subsidiaries,
Hydro One provides efectric distribution service to more
than 1.3 mil-lion retail end-use customers, as well as
electric transmission service to many l-ocal- distribution
Schmidt, Di 5
Hydro One
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companies and
1 Pl-ease see Appendix 9 for identification of the officers, Executive
Leadership Team and SVP of Einance of Hydro One.
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Hydro One
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Hydro One
large industrial- customers. We
3, 300
have approxj-mately 5, 400
casual and temporary
external- contractors). Hydro One
annual- revenues and
fu11-time
employees
has over
employees and
(not including
C$6.5 bill-ion in
approximately C$14 billion in market capitalization.
activities of HydroO. Please explaln the business
One.
A. Hydro One was established in 1906 as the
Ontario-owned Hydro-Electric Power Commission of Ontario
(Iater renamed Ontario Hydro). Until 2075, Hydro One was
owned by the Province of Ontario. Today, Hydro One is a
public company traded on the Toronto Stock Exchange under
the ticker symbol "H. " Hydro One is the sol-e owner of
Hydro One fnc., which, among other things, is the sole
sharehol-der of two rate-regulated businesses: Hydro One
Networks Inc. and Hydro One Remote Communitj-es Inc.
These rate-regul-ated businesses produce approximately 98%
of Hydro One Limited's revenue. Hydro One also is the
sole indirect owner of Hydro One Telecom Inc., which is
not regulated by the Ontario Energy Board and is
registered with the Canadian Radio-tel-evision and
Tel-ecommunications Commission as a non-dominant,
facilities-based telecommunications carrier. The
following corporate organizational chart depicts these
relationships:25
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Hydro One
I].].ustration No. 1
Current Corporate Structu re
The diagram below depicts the current relationship of Hydro One Limited and its primarv
operatine subsidiaries that are referenced in the Joint Application.
Public Company
(TSX: H)
loo%
Public Debt lssuer
700%70e/.70e/o
Rate Regulated Eusinesses
(98% of Revenues)
Non-Rate-Regulated Business
O. Pl-ease discuss the restrucLuring of Ontario
Hydro that led to the creation of Hydro One Inc.
A. In 1999, Ontario Hydro was restructured into
five separate entitles, i-ncJ-udlng Hydro One Inc. as the
successor to its transmission and distribution business,
and Ontario Power Generation Inc., as the successor to
its generation business. Hydro One Inc., Hydro One's
whoIly-owned subsidiary, was incorporated on December l,
1998 under the Busjness Corporations Act (Ontario) as a
separate corporation providing transmission and
distribution services, with the Province of Ontario as
its sole shareholder. Hydro One was incorporated by the
Province of Ontario on August 37, 2015, under the
Busjness Corporations Act (Ontario). On October
roe/"
Hydro One Limited
Hydro One lnc.2486267 Ontario lnc.
Hydro One Networks Hydro One Remote
lnc.
Hydro One Telecom
lnc.
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Hydro One
amended to
30, 2015,Hydro One's
authori ze
artlcles of incorporation were
the creation of an unlimited number
of Series 1 preferred shares and an unl-imited number of
Seri-es 2 preferred shares,
shares to be issued to the
with the Series 1 preferred
Province. On October 31,
outstanding shares of Hydro20L5, aII of
One Inc. were
exchange for
the issued and
acquired by
the issuance
Hydro One from the Province in
to the Province of common
shares and Series 1 preferred shares of Hydro One. On
November 4, 2075, the articles of Hydro One were amended
to authorize the consolidation of its outstanding common
shares such that 595,000,000 common shares of Hydro One
were issued and outstanding. The preferred shares
continue to be outstanding. On November 5, 2015, Hydro
One completed its initial public offering on the Toronto
Stock Exchange by way of secondary offering of coflrmon
shares by the Provj-nce of Ontario, with the goal that,
over time, approximately 60% of Hydro One would be held
by private investors.
O. What is the current ownership interest of the
Province 1n Hydro One?
A
of Hydro
As of July
by private investors.
assuming the Proposed
facts known today and
Transaction is completed, the
One's shares
31, 2071,
with the
Based on
the Province owned 49.9%
remainder of shares held
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Province's Level- of ownership of Hydro One wil-I decl-ine
to bel-ow 45%. f n
Schmidt, Di 8a
Hydro One
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Schmidt, Di 9
Hydro One
addition, the Ontario El-ectricity Act, 7998 restricts the
Province from selling voting securities (including coflrmon
shares of Hydro One) if it would own less than 40% of the
outstanding number of voting securities of that cl-ass or
series after the sale. If as a result of the issuance of
additional voting securities of any class or
the Province woufd own less than
series by
402 of theHydro One,
outstanding number of voting securities of that class or
series, then the Province shall-, subject to
requirements, take steps to acquire as many
securities of that cl-ass or series of voting
as are necessary to
not l-ess than 40% of
i-ncrease the Provi-nce's
the outstanding number
or series.
certain
voting
securi-ties
ownership to
of voting
securities of that class
In order to assist the Province in meeting its
ownership obligations under the El-ectricity Act, 7998,
under the governance agreement with the Province, Hydro
One has granted the Provj-nce a pre-emptive right to
subscribe for and purchase up to 45% of any proposed
issuance by Hydro One of votlng securities or securitj-es
that are convertible or exchangeable into voting
securities (other than certain specified exc1uded
j-ssuances). Any offered securities not subscribed for
and purchased by the Province pursuant to its pre-emptive
rlght may be issued to
proposed offering.any other person pursuant to thea25
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Over the past two years, the Province of Ontario has
divested a majority stake i-n Hydro One. In November
201,5, Hydro One debuted on the Toronto Stock Exchange
with a 153 initial public offering (IPO by way of
secondary offering of approximately 15% of the issued and
outstanding coflrmon shares, followed by subsequent
secondary offerings of the issued and outstanding shares
in April 20L6 (approximately 15%) and May 20L1
(approximately 20%) ). Hydro One is now governed by an
independent board, other than myself as CEO, and a
governance agreement that ensures autonomous commercial
operations, with the Province of Ontario as an investor
and not a manager.
O. Does the Province of Ontario's continued
ownership of Hydro One stock mean that Hydro One's
business and operations are controlled by the provincial-
government?
A. No. The Province of Ontario is a shareholder
and pursuant to its governance agreement with Hydro One
it does not hold or exercise any managerial oversight
over Hydro One. Of Hydro One's 15 directors, al-I are
independent of the Province within the meaning of
Canadian securities laws, and, with the exception of the
President and CEO, all of Hydro One's directors are
independent of Hydro One. The governance agreement and
Schmidt, Di 1-0
Hydro One
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Hydro One's independent board ensure that Hydro One's
business and operations are completeJ-y independent from
the government of the Province of Ontario.
Schmidt, Di 10a
Hydro One
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Hydro One
Hydro One's Transmission Business:
o.
regulated
A.
P1ease expand on the nature of Hydro Oners
transmission business .
Hydr o Oners transmission business consists of
owni-ng, operating and maintalning its transmission
system, which accounts for approximately 9BU of Ontario's
transmission capacity. Hydro One's transmission business
is a rate-regul-ated business that receives revenues from
charging transmission rates approved by the OEB. Hydro
One's transmission busj-ness accounted for approximately
51% of Hydro One's total assets on December 3L,2076, and
approximately 51% of its total revenues, net of purchased
power, in 2076. The following map depicts the
transmi-ssion network :
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a
hrdroi)"
IffikimUc
Iruirdoliu
ll5tv
-
230tv
-
500lv
fsrisi6hrromrrfoo
<> Erhlit€
Illustration No. 2
EJ.ectricity Transmission Systen Map
Hydro One Networksr dS depi-cted in ll-l-ustration No. 2
above, is involved 1n the planning, construction,
operation, and maintenance of our transmissj-on and
distribution network. Our transmission system carries
electricity from generating stations to focal
distribution companj-es and large industrial- customers
through our
transmission
high-voltage network of transformer stations,
towers and wires. Through its
Hydro One Inc., Hydro One owns
who1ly-owned
and operates
with over
subsidiary,
98% of the transmission system in Ontario
30,000 km of high-voltage transmission l-ines
(approximately 19,000 miles) and an approximately 123,000
circuit km (approximately
Schmidt, Di 1,2
Hydro One
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. ,:)...,'1.. :
, gLi'@-r
trAr'rIIorA ONTARIO
rNs'trffi
d;
./'
I
,l
'L
. : otJfrEc' '
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Hydro One
11,000 miles) of Iow-voltage distribution network. The
Company's transmission system is interconnected to
systems in Manitoba, Michigan, Minnesota, New York and
Quebec and is part of the North American el-ectricity
grid's Eastern Interconnection.
A11 of Hydro One's transmission business is carried
out by its who11y-owned subsldiary Hydro One Inc.,
through its whol-Iy-owned subsidiary Hydro One Networks
Inc. and through other wholly-owned subsidiaries of Hydro
One fnc. Hydro Oners distrj-bution system delivers
electricity at lower voltages to homes, farms and
businesses through our network of poles and power 1ines,
mostly in rural areas.
Hydro One's core competency rests with its
construction and operation of its slgnificant
transmission and distribution system. In particular,
Hydro One has deep experience with building transmissj-on
and distribution, particularly in rural and remote areas.
We have a helicopter fleet with expertise in constructing
and maintaining our transmission system. We also have
significant development experience, having designed and
built substantially all of Ontario's transmj-ssion system
and a large portion of its distribution system. This
incl-udes the Bruce to Mil-ton transmission project, the
largestover 20
project in Ontario intransmission infrastructureyears. It invo1ved the25
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Hydro One
construction of approximately 700 transmission towers and
180 km (approximately 110 miles) of doubl-e cj-rcuit l-ines.
More recently, w€ were selected to develop the Northwest
Bulk transmission l-ine, another large scale transmission
project that if approved by the Ontario Energy Board,
would reinforce the connection between Thunder Bay and
Dryden (a distance of approximately 1300 km or 800
miles).
0. You mentioned that Hydro One's transmission
system is interconnected to systems in Manitoba,
Michigan, Minnesota, New York and Quebec and is part of
the North American electricity gridrs Eastern
Interconnection. Can you describe in further detail-
Hydro One's interconnections with utilities in the United
States ?
A. Hydro One has a number of interconnections with
the states of Michigan
transfer of
and New York that provide for a
signi ficant
u. s. wirh Michigan, there are 4 tie lines, three at
230kV and one at 345kV. Collectlvely these interties
power between Ontarj-o and the
provide a
With New
transfer capability of approximately 1,700 MW
230kV andYork, there are 6 tie lines, four at
two at 345kV. Col1ectively these interties provide a
transfer capability of approximately 2,000 MW. The
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with other jurisdlctions facilitates a more competitive
marketplace in both Ontarj-o and the U.S.
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Hydro One
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Schmidt, Di 15
Hydro One
These interties also connect Ontario to a larger
North American system known as the Eastern
Interconnection. The Eastern Interconnection is a
contj-guous el-ectricity transmission system that extends
from Manitoba to Fforida and from east of the Rocky
Mountains to the North American east coast. Being part
of the Eastern Interconnection provides benefits to
Ontario, such as greater security and stability for
Ontario's power system and emergency support when there
are generation constraj-nts or shortages in Ontario. In
reciprocal manner, Ontario can provide support to other
jurisdictions 1n the Eastern Interconnection.
O. Pl-ease provide some insight into Hydro One's
philosophy regarding operations of transmission and
distribution facilities.
transmi-ssion and distribution
A. Hydro One Inc. is a pure-play electric
utility. As a result, we
that we maintain andare hiqhly
expand our
focused on ensuring
transmissj-on and distribution systems to
ensure our customers receive the best possible service.
Between 2017 and 2027, we are planning projects that are
intended to renew and modernize the grid, including
upgrading and replacing infrastructure nearing the end of
its lifespan, with a corresponding projected capital
investment of approximately $9.7 b111ion.25
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a. Pl-ease relate Hydro One's recent experience
with maintaining and upgrading its transmission system.
A. Two recent medium-scal-e capital projects are
representative of the investments Hydro One makes in its
transmission system:
Clarington Transmission Station: This $267 millionproject consists of two 750MVA, 500/230 kV
transformers and associated termination facilities.
The Clarington Transmission Station wil-I connect
Hydro One's bul-k transmission network to Eastern
Ontario upon retirement of the Pickering Nuclear
Generation Station. The station's anticipatedin-service date is 2078.
Richview Transmission Station: This $103 millionproject replaces end-of-Ilfe equipment at the
Richview Transformer Station to ensure secure andreliabl-e power supply to the City of Toronto and
surrounding communities. The anticipated in-servicedate is 2019.
Hydro One's Distributio :
Hydr o One's distribution
operating and maintainlng
One's distrj-bution system
principally serves rural
distribution business is
business consists of owning,
its distribution system. Hydro
is the largest in Ontario, and
communities. Hydro One's
a rate-regulated business that
receives
approved
accounted
December
revenues,
following
One:
revenues by charging distribution rates that are
by the OEB. Hydro One's distribution business
for approximately 312 of its total assets on
31, 2076, and approximately 47% of its total-
net of purchased power, in 2016. The
map depicts the distribution footprj-nt of Hydro
Schmidt, Di 16
Hydro One
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Illustration No. 3
E].ectrici Distribution tem
Hydro One has more than 1.3 million end-use
customers, and has deployed smart meters to near1y all of
i-ts customers. Hydro One has more than 10 years of
experience working with automated metering infrastructure
('AMI," al-so known as smart meters). As part of its
industry leadershlp in the deployment of smart meters,
Hydro One received the Utilities Tel-ecom Council Apex
Award for demonstratj-ng excellence and j-nnovation in
developing telecommunications solutions for Hydro One's
rural utility Smart Grid Project.
O. Given Hydro One's dispersed service area
throughout Ontario, whatrecovery efforts?is its experience j-n storm
hydrolJ*
o**ffiH"
o si*"
Diddhrtion
Schmidt, Di 11
Hydro One
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Hydro One
A. Hydro One has developed an award-winning team
responsible for speedy storm recovery. Indeed, Hydro One
prides itsel-f in having a longstanding history of
responding to emergencies. We are an active member j-n
the Edison Electric Instltute Mutual Aid Agreement and
are often cal-l-ed upon to assist with storm restoration
efforts in the U.S. In the past, Hydro One has sent
crews to Massachusetts, Michigan, Elorida, Ohio, Vermont,
Washington,
In July
Washington,
wind storm
D. C . , and the Carol-inas .
20L2, Hydro One dispatched 200 employees to
Bal-timore and Virglnia after a devastating
knocked out power to more than
A few months later,
three million
homes and businesses.in November
2072, 225 Hydro One employees travel-Ied to Long Tsland,
N.Y., to assist in the Hurricane Sandy restoration
efforts. Hydro One was awarded EEI's prestigious
Emergency Assistance Award for supporting the June 20L2
Mid-Atlantic and Midwest derecho and Hurricane Sandy
recovery efforts.
0. Does Hydro One own or operate any generation
assets ?
A. As explained further below, Hydro One Networks
Inc. and Hydro One Remote Communities Inc. are two
regulated subsldiarles. The largest, Hydro One Networks,
does not own or operate any generation assets; j-t is25
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solely a transmission and distributi-on utility. Hydro
One Remote Communities Inc.
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Hydro One
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Hydro One
owns a de minimls portfolio
serve. Remoted communities
of generation assets to
in Ontarlo.2
O. Please describe Hydro One Remote Communities
Inc. and Hydro One Tefecom Inc.
A. Hydro One Remote Communities Inc.
regulated subsidiary of Hydro One.
Remote Communities fnc., Hydro One
the generation
el-ectricity to
Through
operates
is another
Hydro One
and maintains
to supply
ACTOSS
the province's
and distribution assets used
approximately 27 communj-ties
northern Ontario that are not connected to
electricity grid, 15 of which are Ei-rst Nations reserves.
Hydro One Tel-ecom Inc. is an j-ndirect subsj-diary of
Hydro One that markets dark and l-it fiber optic capacity
to telecommunications carriers and commercial- customers.
This business, whi-ch is not regulated by the Ontario
Energy Board, generated more than $85 million in revenue
in 2016. Hydro One Tel-ecom leverages Hydro Oners network
fiber assets used to monitor and manage power grid
circuitry. Hydro One Telecom's customers include data
centers, cloud service providers, enterprises, internet
service providers (ISPs), other telcos and public sector
entities.
2 nydro One Remote Communities has a maximum generation capacity of 31.6 MW.25
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O. What previous acquisit.ions has Hydro One
Limited undertaken in the energy industry?
A. As the largest distributor in Ontario, Hydro
One has been an active consolidator of local- distribution
companies ("LDCs"). By the early 2000s, Hydro One
acquired 88 individual LDCs in Ontario, which were
subsequently integrated into Hydro One's di-stribut.ion
business.3 More recently, we strengthened our
capabilities to acquire and integrate LDCs, thereby
positioning Hydro One for future earnings growth having
completed the acquisitions of Woodstock Hydro Services
Inc. (October 2015), Haldimand County Hydro (June 2015),
and Norfo1k Power (August 2014) . In 2076, we acquired
Great Lakes Power Transmission for approximately $370
mill-ion, increasing Hydro One's transmission market share
in Ontario to 98?.
O. Pfease discuss Hydro One's experience with
energy efficiency programs and Demand Side Management
(DSM) programs.
A. Hydro One currentl-y provides Conservation and
Demand Management (CDM) programs, covering all of its
customer segments; from residential to agriculture and
smal1 business to large industrlal-. Employing online,
sel-f-serve tools and
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Hydro One
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3 witf, the exception of Hydro One Brampton Networks fnc., which was operated
as a stand-a.l-one entity.
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Hydro One
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Hydro One
in field tablet enrol-lment processes, Hydro One has
endeavored to make participation in its CDM programs
ef fortl-ess and seamless. Endeavoring to promote local-
busj-ness development in the many communities that Hydro
One serves, one such program employs over 150 local
electrical contracting companies working in our
communities. One
Lighting Program.
retrofitted over
programs have saved
CDM program
This direct
is the Smal-f Business
install program has
2009, and generates over $24 milfion in
savings for participating Hydro One smal-1 business
customers. OveraII, conservation and
39,000 businesses since
approximately 395
been the experience
its inception in
annual bill
demand management
Giga-Watt hours.
of Hydro OneO. What has
regarding envlronmental
A. Hydro One is
Canada to achleve the
designation from the
Hydro One transmits
electrical power in
stewardship?
one of only four utilities in
Sustainabl-e Energy Company
Canadian Electrical Association.
and distributes some of the cleanest
North Ameri-ca. We are committed to
managing our facilities and operati-ons through a
avoids and/or minimizes
and
risk-based
impact on
protection
addition,
approach that
the environment
and conservation of
we have taken steps
our
supports ecosystem
biologlcal diversity. In
to mitigate greenhouse gas25
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emissions from our facilities and operations and adapt to
the
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Hydro One
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adverse effects of climate change on electricity
infrastructure.
Given the scale of our operations, and in particular
the si-ze of our transmission system, we are keenly aware
of our responsibility to help build a l-ow carbon economy.
We do this by supporting the provincial and federal
governments as they address cl-imate change, by preserving
local habitats and protecting biodiversity, and by
continuously looking for ways to reduce our own carbon
footprint.
Our operations are highly regulated from an
environmental perspective. There are financial and
reputational risks associated with the safe
transportation, storage and disposal of waste and
polychlorinated biphenyl (PCBs). Similarly, preserving
and protecting l-ocal- species at risk, managj-ng potential
land contaminations, responding to spills and managing
greenhouse gas emissions are al-l- critical- aspects of our
environmental responsibility mandate.
To assess and mitigate these risks, Hydro One has an
integrated Health, Safety, and Environmental Management
System (HSEMS) that is aligned with the ISO 14001
Environmental Management Systems framework. Each line of
buslness at Hydro One is expected to identify high
environmental risks in its area of operation and assign
teams to reduce risks.
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Hydro One
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Hydro One
As the owner of thousands of kilometers of
transmission grid corridor lands in Ontario, Hydro One is
particularly focused on managing these corridor lands to
ensure habitat preservation and protection of species at
risk. Hydro One uses a multifaceted approach to
biodiversity management, combining regulatory
requirements with government priorities wherever
possible. Our Biodiverslty Advisory Committee (BAC) has
representatives from relevant l-ines of business and is
mandated to develop, review and recommend strategies to
improve performance while ensuring we respond to
provincial acts such as the Endangered Species Act,
Migratory Bird Convention Act, Fish and Wi1dlife
Conservation Act, and the fnvasive Species Act, among
others. Hydro One's new Cl-arington Transformer Station is
an example of Hydro One's approach to biodiverslty
preservation and protection. After undertaking a Cl-ass EA
(environmental assessment), Hydro One committed to
creating habitats on excess property at the site to
offset the project's impacts.
O. What has been Hydro One's experience with its
utility workforce?
A. Hydro One
rel-ationships with
believes in maintaining constructive
its unions. We have a strong
safety andpartnership with our unions on health and25
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continued improvement in this area. We have structured
committees for exchanging
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Hydro One
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Hydro One
dialogue and
and company
resol-ution
resolving issues,
executive. We have
which include the union
innovative dispute
resolution offorums that ensure the timely
disputes
for the
when they arise and minimize time and expense
company and the union.
IIT. THE PROPOSED TRA}ISACTION
O. Please describe Hydro One's proposed
acquisition of Avista.
A. The boards of directors for Hydro One and
Avista unanimously approved an all-cash transaction
through which Avista shareholders wilI receive US$53
conrmon share, representing a 24% premium to Avista's
per
last
sal-e price of $42.14 per share on July 18, 20L7. Avista
shareholders wil-l- together receive cash consideration
totaling approxj-mately $3. 4 bill-1on.
Together, Hydro One and Avista will- service more
than two mi111on retail end-use customers and we will
operate across multiple North American j urisdictions,
Idaho, Montana andincludj-ng
AIaska.
O.
Ontario, Washington, Oregon,
Pl-ease describe Hydro
structure after the
One's corporate
proposed merger withorganization
Avista.
A. Upon completion of the Proposed Transaction,25
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Avista wil-1 be an indirect, whoIly-owned
Hydro One as shown in the organizational-
Ill-ustration No. 4 below:
subsidiary of
chart in
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Hydro One
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Illustration No. 4
Avista
Once acquired by Hydro One, I expect Avista to be
operated much as it is today, and it wil-l- contj-nue to be
headquartered in Spokane, Washj-ngton.
O. Does Hydro One vlew Avista as a short-term or
long-term investment?
A. Hydro One plans to be a long-term partner.
This is the first ti-me that Hydro One has embarked on the
acquisition of a U.S. utility. As a util-ity that serves
more than 1.3 mill-j-on customers, Hydro One is focused on
long-term
Schmidt, Di 25
Hydro One
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Hydro One
opportunities that are beneficial
employees, shareholders, and the
to customers,
communiti-es we serve.
IV
O.
proposed
A.
years a9o,
was owned
Hydro One
utility.
of LDCs in
HYDRO ONE r S REASONS FOR ACQUIRING AVISTA
Pl-ease describe the reasons for Hydro One's
acquisltion of Avista.
For more than 100 years and until just
Hydro One, and j-ts predecessor Ontario
solely by the Province of Ontario. In
became a
two
Hydro,
20t5,
owned
a numberOver the
Ontario
commercially operated investor
years, Hydro One had acquired
to increase its di-stribution
footprlnt. Since 1998, Hydro One has successfully
acquired and integrated approximately 90 separate LDCs.
Hydro One continues to pursue growth and the benefits
that will accrue to its customers, communities and
shareholders from that growth.
Hydro One is a pure-play transmission and
distribution utility located solely within Ontario. It
seeks diversification both j-n terms of jurisdictions and
service areas. The Proposed Transaction with Avista
achieves both goals by expanding Hydro One into the U.S.
Pacific Northwest and expanding its operations to natural
gas distribution and electric generation. The Proposed
Transaction with Avista will deliver the increased scale25
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and benefits that come
utility industry.
from being i larger player in the
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Hydro One
The utility
the deployment of
industry is changing dramatically, with
resources, and the
distributed generation and storage
ever increasing reliance on renewabl-e
generation. Avista and Hydro One acting separately will
be challenged to participate in these innovations on a
scale similar to the larger utilities due to the size of
their bal-ance sheets and customer bases. Combined,
however, Avista and Hydro One wil-l- become more
competitive by creati-ng scale and cost efficiencies over
time. Hydro One and Avista intend to continue investing
in innovatj-on. Together, with nearly two million
customers, they can spread some of these costs over a
larger base.
FinalIy, Hydro One and Avista bel-ieve that the
Proposed Transaction will deliver cost savings over the
longer term. Wh1le Hydro One and Avista cannot quantify
those savings at this time, the companJ-es shou1d achi-eve
savlngs over time through scale and collaboration in
supply chain activity, IT development and implementation,
innovation, and potentially other areas.
Both Hydro One and Avista have simil-ar cultures and
values, including a strong commitment to their respective
communities, which will enabl-e a seaml-ess lntegration.
Both companies make customer service, high customer
satisfaction, relj-abiIity, safety, respect for theenvironment, ando25
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Hydro One
reasonabfe retail rates a high priority. Because of
their shared cufture and values, both companies have high
expectations that Avistars and Hydro One's objectives for
the Proposed Transaction will be achieved.
O. Please describe the simil-aritles between
Avista's and Hydro One's existlng utility operations.
successfuf transactionA. The opportunitles for
and transition are enhanced by
simj-larities between Hydro One
utillties' simil-arlties include: service focused on
rural areas wlth just a few urban centers; revenues
derived nearly exclusively from regulated utility
businesses; and a focus on customer satisfaction and
employee safety. Similar to Avista, Hydro One: (i) has
expertise providlng service to remote communities, (fj-)
rel-ies extensively on hydropower generati-on, (iii) has a
service territory that includes extensive forests and an
active forest products industry, and (iv) provides
service to rural- areas where there are more poles than
customers.
We expect to gain operating efficiencies by
extending the use of technology, best practices and
business processes over a broader customer base and
broader set of infrastructure. We expect efficiencies in
areas such as procurement, IT and operations. In
a
the significant
and Avista. The
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general-, our sharehol-ders will- al-so benefit from
geographic, economic and asset
Schmidt, Di ZBa
Hydro One
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Hydro One
regulatory diversity
The markets that we
and positive and
are in geographic
to those that we
that this transaction will
are enterj-ng have expanding
customer demographics,growing
provide.
economi-es
and they
territories that are remarkably simll,ar
serve today in Ontario.
As a result of the uniquely similar yet also
complementary profiles of the two companies, once the
Proposed Transactj-on j-s complete, the profiles of the
regulated utilitles wiIl remain intact, with the vast
majority of revenues generated by rate-regulated
operations and further enhanced by the virtue of asset
and geographic diversification.
V. AVISTA' S POST-TRA}ISACTION OPERATIONS
O. How wj-l-I Avista operate after completion of the
transaction?
A
Avista
Hydro
Avista
directors.
. Avista will- operate very much as it does today.
will- become a separate indirect subsidiary under
One; it w1l-I not be merged with other subsidiaries.
wilf have its own management and its own board of
In short, Avista wil-l- have the same l-ook and
feel to customers after the merger as it has today.
a. Pl-ease describe Hydro One's and Avistars
agreement regarding decisions reserved to Avista's board.
a 25
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Hydro One
A. One of the issues most important
Scott Morris as we discussed the prospect
seek to retain its existing employees
team. All of these elements together
provisions embedded within the Merger
to Avista CEO
ofa
ensuring that Avista customers wiIl benefit in
merger was
the years
to come from the unique features of this transactj-on:
Avista will- mai-ntain its existing corporate headquarters
in Spokane, Washington; Avista wil-1 continue to operate
as a standalone utility in Washington, Oregon, Idaho,
Montana and Alaska; Avista will maintain its other office
locations throughout its service areas,' and Avista wil-l-
and management
with other
Agreement were
request to ensurespecifically
that Avista's
designed at Mr. Morris's
customers continue to receive the service
they have
Ieader in
come to expect from a
the Pacific Northwest
One gave Mr.
company that has been a
for more than 100 years.
Morris and Avista the
assure that Avista had the assurances
EssentiaIly, Hydro
"draftlng pen" to
it needed in order
Transaction.
to enter into this Proposed
This effort resulted in the unique Delegation of
Authority (Exhibits A and B to the Merger Agreement,
Appendix 5 to the Joint Application, and Exhibit No. 2,
Schedule 2 Lo my testimony) , which reserves to Avista's
post-transaction board ongoing management authority overa25
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post-transaction Avista
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Hydro One
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Hydro One
board's authority to make specified decisions without
obligation to obtain any separate authorization or
approval from the Hydro One board, subject to l-imited
exceptions for extraordinary j-temsr ds descrj-bed in the
Delegation of Authority.
Decision-making authority with respect to the
following issues w1l-l- remain with the Avista
post-transaction board :
Keeping Avista's headquarters in Spokane;
Keeping Avista's brand the same;
Keeping Avista's office locations in each ofits service areas, with no less of asignificant presence in each focation than thatin place prior to the merger;
Preventing workforce reductions resulting fromthe Proposed Transaction;
Retaining Avista's existing management team;
Maintaining existing compensation and benefj-tpractices;
Negotiating and entering lnto agreements withbargaining unit employees;
Maintaj-ning Avista's safety and reliability
standards and policles and service quality
measures in a manner that is substantially
comparable to, or better than, those prior tothe merger;
Malntalning Avista's community involvement andsupport initiatives at levels equal to orgreater than those prior to the merger;
Maintaining a $4.0 mill-lon annual budget
charltable contributions (funded by both
for
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and the Avista
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merger;
Foundation) as compared to an5 million level prior to the
Schmidt, Dl 31a
Hydro One
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Hydro One
Making a $2.0 mill-1on annual contribution to
the Avista Foundation (following an initiafcontribution to the Eoundation of $7. 0 mil-l-ionat the time the merger closes);
Malntainlng at l-east the level of economj-c
development that existed prior to the merger,including the expenditure of funds to supportregional economic development and relatedstrategic opportunitles consistent wlth past
practi-ces;
Maintaining existing levels of capitalallocations for capital investment in strategic
and economic development, including property
acquisitions in the university district,
support of loca1 entrepreneurs and seed-stage
investments;
Continued development and funding of Avista's
existing and future innovation activities; and
Maintaining dues paidindustry trade groups
organizations.
by Avista to various
and membership
O. Will Avista have its own individual- business
plan?
A. Yes. As part of the Delegation of Aut.hority
described above, the Hydro One board acknowledges that
the post-transactlon Avista board and management team,
wil-l- plan for the operation of 1ts business. Hydro One
approval would be requi-red, however, for an action
expected to resul-t in a materiaL change to the nature of
the business of Avista or Avistars subsidiaries.
O. Will Avista have control- and responsibility for
making decisions that achieve objectives such as customer
satisfaction, rel-iabl-e servj-ce, employee safety,25
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environmental stewardship and regulatory/legislative
credibility?
Schmidt, Di 32a
Hydro One
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Schmidt, Di 33
Hydro One
A. Yes.
O. In addition to the fact that you will be
Directors, how wil-l- Avista' sBoard ofjoinj-ng the Avista
Board of Directors
Directors, flve of
and four by Avista.
chair of the board;
A. Avista wil-I have a
change after the merger?
whom will
nine-member Board of
be designated by Hydro One
CEO Scott Morris wiII beAvista
one other
will- join the Avista board.
executive and I
w1l-1 identify
Paclfic
employees or
of Avista or Olympus
Hydro One
Hydro One
three additional- directors who reside in the
Northwest and who are not officers,
directors (other than as a director
Equity LLC) of Hydro One or its affillates.
O. Are there any plans for a reduction in force at
Avista as
A.
a.
contracts
A.
contracts,
the Avista
o.
commitment
A
new
are
a resul-t of the transaction?
No.
Do you anticipate changing the existing labor
as a resul-t of the Proposed Transaction?
No. Avista will honor existing l-abor
and the Delegati-on of Authority acknowledges
board's authority over l-abor issues.
Has Hydro One received recogni-tj-ons for i-ts
to customers, communities and employees?
Yes. Hydro One has a long history of deploying
technol-ogy and resources to ensure that our customers25
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Schmidt, Di 34
Hydro One
receiving the highest qual-ity service. Our efforts have
been recognized on numerous occasions, examples of which
f o1l-ow:
January 2007: We became the first utilityoutside of the United States to receive the
Edison Institute Emergency Recovery Award for
outstanding efforts in restoring power to more
than 500,000 customers following four
successive severe storms.
2008: Hydro One undertook the largest smart
meter deployment initiative in North America
and was selected as a finalist for aprestigious Pl-atts Gl-obal- Energy Award in the
category of Sustalnabl-e Energy Initiative ofthe Year, for work on the meter/networkinitiative and our commitment to creating aworld in which energy use and resources are
sustainabl-e.
September 20ll: Utj-limetrics awarded Hydro Onewith the Utilimetrics Excellence in Project
Management Award for superior achievement in
lnnovatj-on for the Smart Grid Program. This
award recognized our central role in securingwireless spectrum for use by the utility sectorin Canada.
January 2015: Hydro One recej-ved a Sustainabl-e
Energy Company designation from the CanadianElectricity Association one of only four
companies in Canada to earn the prestigious
award.
December 2016: Hydro One was selected as one ofGreater Torontors Top Employers for 2011 byMedlacorp Canada Inc. This designation
recognizes Hydro One as an industry leader inoffering employees an exceptional place to
work.
In 2016, Hydro One recej-ved the 2076 Esource
Utility Ad Awards, 2076 Summit Creative Awards,
and Corporate Knights Canada's top utility on
measures of corporate social responsibility.
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O. Would it be reasonabl-e for the Commission to
expect continued strong performance by Avista in the area
of customer service as a consequence of the Proposed
Transaction?
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Hydro One
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Schmidt, Di 35
Hydro One
A. Yes. There wi-l-I be a concentrated ef fort and
commitment by both Hydro One and Avista to ensure that
customer service wil-1 benefit as we share best practices.
a. Will Avista remain in charge of assuring safe
and rel-iable service?
A. Yes. Under the Delegatlon of Authority,
Avista's existing executive management team will manage
Avista's business and will develop and execute Avista's
business plan under the oversight of the Avista board.
The Avista leadership team and board will have authority
to maintain Avista's and its subsidiaries' safety and
reliability standards and policies and
measures in a manner that is consi-stent
service quality
wi-th those
currently maintained at the time of the merger by Avista
and its subsldiaries.
O. Based on Hydro One's experience, how can the
Proposed Transaction be expected to affect Avista's
resource planning process?
A. We anticipate that the Proposed Transaction
will- not affect Avista's resource planning process in any
of its servi-ce territories.
a. How do you expect
commitment
the Proposed Transaction to
affect Avista's to renewable generation
resources ?
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A. We anticipate that the Proposed Transaction
wil-l- not af f ect Avista' s commitment to renewable
generation resources.
O. What is Hydro One's experience with wind and
renewabfe resources?
A. As both the operator of over 988 of the
transmission system 1n Ontario and as the largest
distributor in the province, Hydro One has been at the
forefront of integrating Ontario's significant renewable
generation additions over the past decade. Sj-nce the
beginning of the Provj-nce's renewabl-e generati-on
Feed-j-n-Tariff program, Hydro One has connected over
12,000 renewable energy projects totaling over L,200 MW
of install-ed capacity to the distribution system and
connected over 100 projects to the transmj-ssion system
equaling over t2,000 MW of installed capacity. Further,
as much of this renewable generation was connected in a
short period of time, Hydro One was forced to rise to the
challenge of bringing a variety of renewabl-e projects
incl-uding wind, sol-ar, hydro and biomass onto the system.
This developed a unique and diverse experience within the
Company and new learning in system planning, system
performance and operation, and customer service.
a. What will Hydro Oners ownership of Avista mean
for the communities that Avista serves?
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Hydro One
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Hydro One
A. The Proposed Transaction
to these communi-ties. Avista wil-l-
annual contribution to the Avista ( following
$7.0 mi]lionan initial contribution to the Foundati-on of
at the time the merger closes). Under the Delegation of
Authorlty described above, Avista's board has the
dlscretion to maintain a $4.0 mil-l-ion annual budget for
charitabl-e contributions (funded by both Avista and the
Avista Eoundation) as compared to an approximate $2.5
mil-l-lon level prior to the merger.
0. Does Hydro One support Avista continuing its
economic development and innovation efforts in the
communities it serves?
A. Yes. Hydro One has a long hlstory of
supporting economj-c development in Ontario, and specific
examples are provided below. The Delegation of Authority
ensures t.he post-merger Avista board has the authority to
maintaln Avista's and its subsidiaries' existing l-evel-s
of economic development, incl-uding the ability of Avista
to spend operati-ons and maintenance fundsa to support
regional economic development and related strategic
opportunities in a manner consistent with the past
practices of Avista and its subsidiaries. The Delegation
of Authority also ensures the
provides a big boost
make a $2.0 million
Foundation
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4 Operations and maintenance funds dedicated to economic development and
non-utility strategic opportunities wifl be recorded "bel-ow-the-fine" to a
nonoperating account
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Hydro One
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post-merger
Avista's and
Avist.a board has the authority to maj-ntain
its subsidiaries' exist j-ng levels
allocations for capital investment in strategic
economic development items, including property
acquisitions in Spokane's university district,
loca1 entrepreneurs and seed-stage investments.
support of
We
of capital
and
understand, however, that any charitabl-e and economic
development expenditures are not to be recovered from
customers under current practj-ce.
O. Pl-ease expand on Hydro One's commitment to its
communities.
A. Hydro One has a long history of
corporate resources and talent to support
in which it operates:
dedicating
the communities
August 2006: The Kleinburg Training Centre
opened its doors to teach Ontario's future
electricity workers. The centre not onJ-y
provides vltal- training to Hydro One
apprentices, j-t's a Ministry of Training,
Co1leges, and Universities certified facility.
November 2001: Hydro One entered into apartnership with four Ontario community
colleges: Algonquin, Mohawk, Georgian and
Northern, to educate and attract future
employees necessary to respond to the upcomingstaff retirements in our company and across our
industry.
November 2010: Hydro One earned the Canadian
Electricity Association's (CEA) 20L0
Sustainabl-e Elect.ricity Social Responsibility
Award in recogniti-on of our leadership in
engaging our stakeholders.
Schmidt, Di 38
Hydro One
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2072: Hydro One employees and pensioners rai-sedover $1,000,000 for the Charity Campaign,
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Hydro One
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Hydro One
beneflting more than 800 charities in local
communities across the province.
January 2013: Hydro One received theprestigious Edison Electric Institute's 2072
Emergency Assistance Award for supporting the
recovery efforts in the Mid-Atlantic and
Midwest storms from Hurricane Sandy.
March 2073: Hydro One partnered with RyersonUniversity, University of Ontario fnstitute of
Technology, the University of Waterloo and
Western University to increase enrol-l-ment and
career opportunities for female studentspursuing Science, Technofogy, Engineering, and
Mathematics.
2016: Hydro One donated $125,000 to Sunnybrook
Health Science Centre Eoundation for Ross
TiJ-ley Burn Centre Tissue Research, supporting
research to better treat electrically lnjuredpatients.
2016: Hydro One partnered with Frontier Collegeto fund its Lieutenant Governor's Aboriglnal
Summer Reaching Camps, contributing $120,000towards camps dedicated to building literacyskills in Aboriginal youth.
20L6: Each year, Hydro One provides an in-kind
donation towards the International Plowing
Match in the form of a temporary minielectrical grid for the five-day event, a vafueworth approximately $350, 000.
20L6: Hydro One supported the TransCanadaTrai-l's Chapter 150 Campaign with a $90,000gift to help complete an important
11. B-kilometre link between Barrie and
Springwater in Ontario. The TransCanada Trailis also known as The Great Trail.
2015: Hydro One sponsored the Amici CampingCharity by providing $25,000 to the 50thAnniversary Heroes Gala, a celebration of
sending children to camp for 50 years.
2071: Hydro One is providing a $100,000 gift
over four years to the Say I'Norr to "Can't Go"Capital Campalgn Project for Camp Oochigeas,a25
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summer camp for chil-dren suffering from cancer.
Funds will be
Schmidt, Di 39a
Hydro One
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Hydro One
allocated to double the current square footage
of the camp, enabling facil-itators to meet
current and future demands while providing a
fun, safe and accessible year-round experience
to its campers.
VI. PROPOSED TRA}ISACTION BENEFITS
a. What impact woufd the Proposed Transaction have
on the degree of regulatory oversight this Commission has
over Avista?
A. It would have no impact. The Commission wil-I
continue to exercise the same degree of regulatory
oversight over Avlsta as it does today.
O. Will the Proposed Transaction provide net
beneflts to Idaho customers?
A. Yes. Customers will see immediate financial
benefits in the form of proposed retail Rate Credits
of the Proposed Transaction.beginning
Avista and
at the cl-ose
Hydro One are
Avista's retail customers
proposing to flow through to
in Idaho, Washington, and
Oregon a Rate Credit
period, beginning at
Rate Credit consists
increased level- of savings
in the table be]ow.
of $31.5 million over a lO-year
the time the merger closes. The
of two components, and refl-ects an
in years 5-10 as illustrated
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Hydro One
Two-Step Rate Credit Proposal
Annual Credit
Years 1-5
Annual Crcdit
Yean 6-10 Total Credit
ToklCredit $2.65 Millbn $3.65 Millbn $31.50 Million
Oftetable Credit $1.70 Millbn $2.70 Millbn $22.00 Million
The mechanics of the Rate Credit are provided in the
Morris and Patricktestimony of Avista witnesses
Ehrbar and Hydro One witness
term following the closing
expected to occur over the
the Rate Credit is larger
Scott
Chri stopher Lopez.
between AvistaOver time, due to the similarities
and Hydro One, the Proposed Transaction will provide
opportunities for increased innovatlon, research and
development, and efficiencles by extending the use of
technology, best practices, and business processes over a
broader customer base and a broader set of infrastructure
between the two companies.
These benefits of scale will not occur in the near
merger, but are
term. That is also
6-10, dS we begin
approvals arerealize greater
received and the
work together to
opportunities to
savr-ngs.
companies
identify,
of the
longer
in years
After aIl
why
to
merge, both companies will
evaluate and execute on
benefits from these cost savingsto
reduce costs for both companies. The
will- be flowed through
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Hydro One
customers in future general rate cases. Areas Hydro One
and Avista expect to prioritize in eval-uatlng
include:opportunj-ties for cost savings
Investing in innovation that could help both
Hydro One and Avista to better meet their
customers' growing expectations for choice of
energy supply and tools to manage energy
consumption and costs. Leveraging theinnovation, research and development
investments of both companies coul-d acceleratetheir ability to bring the benefits of new
ideas and technologies to their customers.
Exercising their purchasing power at greater
scal-e for equlpment and materials.
Employment of common technoloqy platforms
outage management, dlstribution managementother operations.
for
and
It will take time to identify and capture al-I of these
potential benef its. The l-evel- of annuaf net cost savings
(and/or net benefits) will be tracked and reported on an
annual basis, and compared against the offsetable level
of savings.
O. Why do you believe the similarities between
Avista and Hydro One provide evidence that the Proposed
Transaction will provide net benefits to Idaho customers?
A. The similarities between Hydro One's and
Avista's service territories, culture, and val-ues will
support the real-lzation of the customer benefits
ldentified above.a
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Providing mutual assistance during and after
storm and emergency events.
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Hydro One
O. Is the Proposed Transaction in the public
interest ?
A. Yes. As described 1n my testimony,
benefits
the Proposed
Transaction provides
customers in the form
immediate net to Avista's
of Rate Credits. In the long-term,
additlonal- benefits will accrue to Avista's customers
through its combination with a larger utility that will-
provide benefits of scafe and savings in the years to
come. In addition, the Proposed Transaction secures
increased charitable contributions and sustains economic
development investments in the communities in which
Avista operates.
O. Does this concl-ude your pre-fiIed direct
testimony?
A. Yes, it does.
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.AL.)
Scarlett, Supp 1
Hydro One Limited
o
I. INTRODUCTION
Pl-ease state your name, business address and
position with Hydro One Limited.
is James D. ("Jamie") Scarlett,
present
A.
busi-ness
My name
address is 483 Bay
Ontario M5G
Street,
2P5. I am Executive
and my
Brh
Vice
South Tower,
Fl-oor, Toronto,
President and Chief Legal Officer for Hydro One Limited
("Hydro One").
O. Did you submit prefiled direct or rebuttal
testlmony in this proceeding?
A. No.
O. Are you sponsoring any exhibits that accompany
your testimony?
A. Yes. Attached to my testimony are:
' Exh. No. 10, Schedul-e 1 - July 20tg Letter
Agreement between Hydro One and Her Majesty
The Queen in Right of Ontario
Exh. No. 10, Schedule 2 - Schedule 1 of the
Urgent Prioritjes Act, 20L8, titl-ed the
Hydro One AccountabiLity Act, 2018
Exh. No. 10, Schedule 3 Governance
Agreement
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A table of contents for my testimony is as foll-ows:
I. INTRODUCT]ON 1
rt. JUNE J , 2078 ELECTTON 3
rrr. JULY lt, 2078 LETTER AGREEMENT 7
IV. HYDRO ONE ACCOUNTABILITY ACT, 2078 13
V. KEEP]NG THE COMM]SSION APPRISED OF DEVELOPMENTS
IN ONTAR]O t6
V]. THE FUTURE OF THE GOVERNANCE AGREEMENT 20
VII. THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) ...24
VIII. SETTLEMENT COMMITMENTS DESIGNED TO PROTECT
AVISTA'S ]NDEPENDENCE AND FINANCIAL HEALTH 28
IX. PROPOSED NEW OR AMENDED COMM]TMENTS 43
X. ADOPTION OF MAYO SCHMIDT TEST]MONY 4B
Suqmary of JeqQqqqy
O. Pl-ease summarize your testimony.
A. My testimony addresses the following topics:
(i) the June l, 2078 e1ection of a new Ontario
government, (ii) the July 11, 2018 Letter Agreement
("July 20lB Letter Agreement") and the resignation of
Hydro One's Board and retirement of Hydro Oners Chief
Executive Officer ("CEO") Mayo Schmidt, (iii) the Hydro
One AccountabiLity Act, 2078, (lv) Hydro One's and
Avista's efforts to keep the Commisslon apprised of
developments in Ontari-o, (v) the future of Hydro One's
Scarlett, Supp 2
Hydro One Limited
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Governance Agreement with the Province, (vi) the impact
of NAFTA on the Proposed Transaction, (vii) the
settlement commitments designed to protect Avista's
independence and financial- health from
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Hydro One Limited
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Hydro One Limited
Provincial interference, (viii) Avista's and Hydro One's
proposal to add a new commitment and amend its commitment
regarding Avista's post-merger board in response to the
events after the June 7, 2078 Ontario electj-on involving
Hydro One, and (ix) my adoption of Mayo Schmidt's
previously filed testimony and exhibits in this
proceeding.
rr. .lrrNE 1 , 2oL8 ELECTTON
O. Pl-ease describe the outcome of the Provj-nce of
Ontario's el-ection on June 7, 2018.
A. On June l, 2078, voters in Ontario elected a
new government that will be led by the Progressive
Conservative Party, replacing the Liberal- Party
government 1ed by Kathleen Wynne. The Premier is Doug
Ford of the Progressj-ve Conservative Party. The Ontario
Premier is the equivalent of a state governor in the
United States. The Progressive Conservative Party has a
substantial majority in the Legislative Assembly of
Ontario.
O. Has the new government taken office?
A. The new government was sworn in on June 29,
201,8.
O. What promises did the Progressive Conservative
Party make during its campaign regarding Hydro One?25
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A. During the campaign, promj-ses were made by the
Progressive Conservative Party to remove Hydro One I s CEO
Mayo Schmidt and some or al-l- of the members of Hydro
Oners Board of
Scarlett, Supp 3a
Hydro One Limited
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Hydro One Limited
Directors.
promised to
residents.
The Progressive Conservative Party also
reduce efectrlclty rates for Ontarj-o
O. What mechani-sms were avail-able to the
government to fulfill these campaign promises regarding
Hydro One's CEO and Board of Directors?
A. If the government wished to seek to remove some
or all of Hydro One's Board and its CEO, they could
accomplish these objectives either (i) through procedures
establ-ished by Section 4.1 of the Governance Agreement
(the "Governance Agreement") between Hydro One and Her
Majesty the Queen in Right of Ontario (the "Province"),
or (fi) through legislation. The Governance Agreement is
Exh. No. 10, Schedule 3 to my supplemental testimony.
O. Please explain the procedures in Section 4.1 of
the Governance Agreement.
A. The Governance Agreement establ-ishes an
lndependent Hydro One
the CEO is selected by
Province nominates 408
Board with the
the Board (not
of the Board's
following features:
the Province), the
directors (or its
proportionate share, whichever is less) proposed for
el-ection, the Nominating and Governance Committee (now
known as the "Governance Committee") nominates the
remaining di-rectors proposed for electj-on, and other than
the CEO, each dlrector must
and the Province.
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In order to remove the Hydro One Board, the Province
must follow the procedures in Section 4.1 of the
Governance Agreement:
(1) serve a Removal- Notice on Hydro One requesting
the remova1 of Hydro One's Board at a sharehol-der meeting
(the Removal Notice does not apply to Hydro One's CEO
even though he is a Board member; the Province also can
exempt the chair of the Board from its Removal Notice)
(Section 4.7 .L) ;
(2) the chair of the Board wil-I establish a
committee comprising representatives of Hydro One's flve
largest sharehol-ders, except the Province (the "Ad Hoc
Nominating Commlttee") (Section 4.1.2) ;
(3) the Ad Hoc Nominating Committee and the Province
will work together to develop a slate of new Board
members to be considered at an upcoming shareholder
meeting (the "Removal Meeting") (Section 4.1.3);
(4) once the slate of new Board members is
establlshed, the shareholder Removal- Meeting must be held
within 60 days (Section 4.7.4); and
(5) at the Removal MeetJ-ng, the Province must vote
in favor of the slate of new Board members establ-ished by
the Ad Hoc Nominating Committee and the Province (Section
4.7.6) .
Under the Section 4.7 procedures, Hydro One's
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shareholders must remove the entire Hydro One Board; they
cannot remove just
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certain Board members. (Section 4.1.1) Further, the Board
cannot be replaced with any board members who were part
of the prevj-ous Board. (Section 4.1 .3) A11 nominees must
be vetted by the Ad Hoc Nomlnatj-ng Committee (Sections
4.1.3 and 4.3) and must meet the qualification standards
set in Section 4.2.1 of the Governance Agreement each
director nominee must be an individual of high quality
and integrity who has: (i) significant experience and
expertise j-n business or that is appllcable to business,
(ii) served in a senior executive or leadership position,
(iii) broad exposure to and understanding of the Canadian
or international business community, (iv) skills for
directing the management of a company, and (v) motivatlon
and availability, in each case, to the extent appropriate
for a business of the complexlty, size and scale of the
business of Hydro One and on a basis consistent with the
highest standards for directors of leading Canadian
publicly fisted companies.
Section 4.1 does not permit shareholders to hire or
fire Hydro One's CEO. Section 4.1 simply provides a
process by which Hydro One's sharehol-ders can install a
new Board. Section 2.2(n) of the Governance Agreement
reserves to the Board the authority to appoj-nt,
terminate, supervise and compensate the CEO, Chief
Einancial- Offlcer and other senior officers of Hydro One.
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0. Pfease explain the legislative path available
to the
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government.
A. As an al-ternative to following the Section 4.1
procedures in the Governance Agreement, the government
also had the option of passing legislation during the
special legislatlve session convened in July that would
give the Province the authority to remove and replace the
Hydro One CEO and its Board.
III. JI'LY 11 2018 LETTER AGREEMENT
a. What did Hydro One's executj-ve team and Board
do after the Progressive Conservative Party took a
majority of the seats in the Ontario Legislature?
A. On July 4, 2078, discussions were held between
representatives of the Board and of the government,
respectively. On JuIy 5, 2018, dj-scussions were held
between legal counsel to the Board and a representative
of the government and privileged and confidential-
discussions were held among the Board Chair, another
representative of the Board and the Board's 1egaI
counse1. Subsequently, representatives of the Board, the
Board's Iega1 counsel and representatives of the
government held various discussions and meetings during
July 6, 20tB through July 8, 2018. These discussions
involved representatives from the Cabinet Office, and
representati-ves of the Ministry of Energy, Northern25
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Attorney General, and 1ed to the
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July 20LB Letter Agreement being approved by Cabinet and
entered into between Hydro One and Ontario as represented
by the Honorabl-e Greg Rickford, the Mi-nister of Energy,
Northern Development and Mines. The July 20Lg Letter
Agreement between Hydro One and Her Majesty The Queen in
Right of Ontario is attached as Exh. No. 10, Schedule 1.
O. Why did Hydro One enter into the July 2078
Letter Agreement with the Province?
A. The replacement of the Board and the CEO was
one of the campaign promises made by the Progressive
Conservative Party during the election campaign for the
el-ection
this,
in the
the
on June 7, 2018. In liqht of
One determined that it woul-d be
best interests of Hydro One to vol-untarily resign
of the Board in ato facilitate the orderly replacement
sequentiaf manner on an expedited basis. Rather than
wait for the government to trigger the procedures in the
Governance Agreement or pursue legislation with
potentially intrusive provj-sions, a process for replacing
the Board was documented in the July 2078 Letter
Agreement. In doing so, the Province and Hydro One
complied with the spirit and intent of Section 4.7 of the
Governance Agreement. In order to serve the best
interests of the company/ the parties agreed to forego
the requirement to hold a sharehol-ders' meeting, therebyexpediting the process and reducing uncertainty.
that took place
Board of Hydro
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O. What process for selecting the new Board was
establ-ished in the July 2078 Letter Agreement?
A. The July 20L8 Letter Agreement provides that
(i) an Ad Hoc Nominating Committee comprised of
representatives of each of Hydro One's five largest
sharehol-ders (or a lesser number depending on how many of
the five largest sharehol-ders wished to serve on the Ad
Hoc Nominating Committee), excluding the Province, would
be formed to nominate six directors of the new Board; and
(ii) the Province would nominate four directors. The new
directors must meet the requirements set out in the
Governance Agreement. As noted above, Section 4.2 of the
Governance Agreement outlines the qualifications for
director nominees. The new Board would then appoint a
replacement Chair of the Board from among their number
consistent with Section 3.2 of the Governance Agreement.
The process prescribed by the July 2078 Letter
Agreement to select Hydro One's new 10-member Board,
which consists of four Provj-ncial designees and six
designees chosen by the Ad Hoc Nominating Committee of
Hydro One's largest investors besldes the Province,
fol-lows the requirements of Sectlons 4.3 and 4.7 of the
Governance Agreement.
O. Has the process been completed for selecting
Hydro One's new Board as provi-ded in the JuIy 2018 Letter
Scarl-ett, Supp 9
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Agreement?
A. Yes. As explained in the Supplemental
Testimony of
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Hydro One Limited
Hydro One's
the Ad Hoc
the five
excluding
sel-ected
then Chair Thomas Woods
Nominating Committee was
( "Woods Testimony" ) ,
formed and three of
Iargest Hydro
the Province.
six members for
One shareholders participated,
The Ad Hoc Nominating Commj-ttee
the Board, and the Province
sel-ect.ed f our members. Hydro One announced the members
of the new Board on August !4, 2078 and Thomas Woods as
the Chair on September '7, 2078. See Woods Testimony, SS
II and III.
O. Are the new Board members announced on August
L4 appointed on an interj-m basis?
A. No. As with previous Board members, the new
Board members are subject to annual approval of the Hydro
One shareholders, consistent with the Governance
Agreement and the Business Corporations Act (Ontario)
("OBCA"). Sectj-on 2 of the July 20lB Letter Agreement
provides:
Each of the Replacement Directors nominated and
appointed to the Board pursuant to section 1 of this
Agreement shall serve on the Board until the earl-ier
of the 2019 annual meeting of shareholders of Hydro
One or until- his or [sic] resignation or his or her
successor is elected or appointed in accordance withthe Governance Agreement and the OBCA.
Exh. No. 10, Schedule 1, S 2
O. What led to the retirement of former CEO Mayo
Schmidt?
A. The Governance Agreement requi-res that the CEO25
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be appointed by the Board
appoj-ntment confirmed by
Board ( r. e. , two-thirds
and annually have hi-s
a special resolution of the
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of the votes cast at a directors' meeting, or consented
to in writing by aII directors). See Section 3.3 of the
Governance Agreement. In light of the events outl-ined
above and the anticipated difficulty of him attempting to
carry out his duties as CEO without the support of Hydro
One's singl-e largest shareholder, the former CEO Mayo
Schmidt retired from his positions, having determined
that it would be in the best interests of Hydro One and
its stakeholders to do so.
O. What process for selecting the new CEO was
established in the July 2018 Letter Agreement?
A. Pursuant to Section 3.3 of the Governance
Section 13 of the July 20lB LetterAgreement and
Agreement, the new Board w1l-l-appoint a replacement CEO,
Board member.l The Boardwho will- become the el-eventh
Chair will establ-ish
wil-I in turn appoint
Internal- and externa]
a preferred candidate
a CEO Selectj-on Committee, which
an Executive Recruiting firm.
candidates wj-11- be interviewed, and
w111 be
with the preferred candidate
selected. Negotiations
will then take place j-n an
effort to enter into an agreement to be appointed CEO.
The Board will- proceed with al-l- deliberate speed in the
process of finding a
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1 at the time of the Joint Application, Hydro One had 15 directors, one of
whom did not stand for re-election at the company's 2018 annuaf meeting of
sharehofders. At the time of the July 2018 Letter Agreement, the Hydro One
board consisted of 14 directors, 13 members plus President and CEO Mayo
Schmidt. Pursuant to the July 2018 Letter Agreement, the new board will
ini-tia1ly consist of 10 directors plus the new CEO.
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CEO. The status of the CEO search is described in Woods
Testimony, S IV.
O. Does the July 201-8 Letter Agreement
those described aboveother provi-sions besj-des
to the replacement of the
A. Hydro One has
Province in respect of
compensation. Further,
Fj-nancial Officer, has
contain any
relating
CEO?
the
Hydro One Board and
agreed to consult with
future matters of executive
Paul-
been
such time as the replacement
Dobson, Hydro One's Chief
appointed as acting CEO until-
board of dlrectors can
appoint a new CEO.
0. Does the July 20lB Letter Agreement impact
Avista employees?
A. The July 2078 Letter Agreement has no impact on
Avista employees. A11 actions taken pursuant to the JuIy
201,8 Letter Agreement involve only the replacement of
Hydro One's Board and retirement of Hydro One's CEO.
O. Does the July 20tB Letter Agreement impact the
Merger Agreement between Avista and Hydro One?
A. The July 2078 Letter Agreement has no impact on
the Merger Agreement between Hydro One and Avista.
Nothing in the July 2078 Letter Agreement addresses the
Merger Agreement in any wdy, and Hydro One has stated on
multj-p1e occasions since the July 201,8 Letter Agreement
was executed that it remains25
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bound by the Merger Agreement and remains committed to
the merger.
a. Does the July 20!8 Letter Agreement j-ncl_ude new
merger terms for Avista executives?
A. No. The July 2018 Letter Agreement does not
include "new merger terms for Avista executives" but
rather documents the agreement between Hydro One and the
Province for the orderly replacement of the board of
directors of Hydro One and the retirement of Mayo Schmidt
as the chief executive officer effective JuIy 11.
0. Does the July 20L8 Letter Agreement impact the
Settl-ement Sti-pulation signed by the parties?
A. The July 2078 Letter Agreement has no impact on
the Settlement Stipulation signed by the parties.
Nothing in the July 20!8 Letter Agreement addresses the
Settlement Stipulation filed in this docket, and Hydro
One has stated on multiple occasions since the JuIy 20LB
Letter Agreement was executed that it remains committed
to the merger.
IV. HYDRO ONE ACCOI'NTABTLITY ACT 20t8
O. Did the new government convene a special
election?
a special
legislative session after the June l, 20LB
A. Yes. The new government convened
legislative session on July 11, 2018.o 25
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O. Did the Progressive Conservative Party
introduce legislation impacting Hydro One?
A. On Monday, July !6, 20!8, the new Provincial
government introduced the Urgent Priorities Act, 2078,
which, included as Schedul-e 7, the Hydro One
AccountabiLity Act, 2018. The Hydro One AccountabiTity
Act, 2078 Ls attached as Exh. No. 10, Schedule 2.
O. Please summarize the requirements of the Hydro
One Accountability Act.
A. The Hydro One Accountabil-ity Act (the "Act")
addresses concerns about compensation for Hydro One
executj-ves located in Ontario. It requires the board of
Hydro One to establish a new compensatlon framework for
the Board of Directors, CEO, and other executives j-n
consultation with the Province and the other five largest
shareholders. The Act gives the Management Board of
Cabinet authority to approve this compensation framework
and any amendments to it as well- as to issue directj-ves
governing the compensatj-on of the directors, CEO, and
other executives.
The Act also amends the Ontario Energy Board Act,
L998 Lo require the Ontario Energy Board to exclude any
amount in respect of compensation paid to the CEO and
executives from consumer rates for Hydro One or its
subsidlaries.
Scarlett, Supp 74
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The Act requires Hydro
its website a record of the
executives as
One to annually publish on
total- compensation of
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prescribed by regulation. The Act afso requires Hydro
One to publish on its website any proposed changes to its
compensation frameworks for the board, CEO, or other
executives at l-east 30 days prior to the date on which it
seeks Management Board of Cabinet approval for those
changes pursuant to the Act.
The new legislation does not change the fact that
Hydro One is a publicly traded commercial- entity separate
from the Province of Ontario.
O. Pl-ease describe the legislative status of the
Act and when it became law.
A. The Urgent
Schedule I, the Act,
Prioritjes Act, which includes
went through flrst, second, and
Ontario Legislature. Thein thethird readings
Legislature did
Priorities Act
2078, which is
" subsidiary"
j urisdiction
Ontario. Schedule 1 provides that the Act comes into
force on a day to be
Lieutenant Governor.
named by proclamation of the
That proclamation was del-ivered on
August 15, and
o. will
if the merger
A. No.
the Act is now effective.
the Act apply to the executives of Avlsta
of Hydro One and Avista is consummated?
As defined in the Act, the term
not amend the legislation. The Urgent
then received Royal Assent on JuJ-y 25,
the day it came into force as the l-aw of
excludes any subsidiary incorporated in a
outside of Canada.
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O. What, tf you know, was the impetus for the Act?
A. It appears that the Act was the resul-t of a
campaign promJ-se made by the Progressive Conservative
Party to address executive compensation at Hydro One.
The Act does not apply to executives of Hydro Oners
subsidiaries incorporated outside of Canada and hence,
woul-d not appfy to Avista if the merger is consummated.
O. Will the Act impact the Merger Agreement
between Avista and Hydro One?
A.
Agreement
Act does
The Act wil-f have no impact on the Merger
apply to
out s ide
Hydro
incorporated
O. Wilt the Act i-mpact the Settl-ement Stipulation
signed by the parties?
A. The Act wil-1 have no impact on the Settlement
Stipulation signed by parties because the Act applies
only to Hydro One's subsidiaries incorporated in Canada.
\/. KEEPING THE COMMISSION APPRISED OF DE\ZELOPMENTS IN
ONTARIO
between Avista and
not
of Canada.
Hydro One. As noted, the
Oners subsidiaries
O. Please describe how Hydro One and Avista have
kept the Commission apprised of devel-opments related to
Hydro One in the most recent Province of Ontario
electi-on?
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A. Hydro
regularly been a
most
One, and energy policy in general, have
f ocus of the media i-n Ontario. In this
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recent election, staLements regarding Hydro One were
publicly made by the various political parties and
candidates running during the efection. It was only
after the final- settlement conference between the Idaho
parties in this proceeding on April 4, 2078, that
el-ectricity rates in Ontario and Hydro One's executive
management and compensation became a more prominent
issue. The first mention regarding a change of Hydro
One's management happened on April 10, 2018. Electlon
campaj-gns in Canada are shorter than in the United States
and starti-ng in June , 2018, Hydro One and Avista informed
the Commission of the recent developments as it became
cfear they may impact Hydro One, well- before the
scheduled evidentiary hearing or any potential decision
on the merger.
Shortly after the June 7, 2078 el-ection, Hydro One
and Avista notified the Commission of the outcome of the
el-ection and the campaign promises made by the Ontarlo
Conservative Party regarding Hydro One inProgressive
their June 20, 20lB Avista and Hydro One Joint Comments
in Support of
proceedings.
know how the
Stipulation and Settlement in the Idaho
On June 20, 2018, Hydro One still did not
election could impact Hydro One, but chose
to update
by the new
the Commission regarding campaign promises made
government weII before the evidentiary hearing
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schedul-ed for July 23, 2018.
Since the filing of the June 20, 2078 comments in
support
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of the settlement, Hydro One and Avista have regularly
updated the Commission on the actions of the Ontario
government with respect to the management and Board of
Directors of Hydro One, having fil-ed with the Commission
a letter, dated JuIy 18, 20L8, regarding the JuIy 20lB
Letter Agreement,' a July 20, 2078 fetter regarding a
Standard & Poor's Report; a Report, dated August 15,
20L8, oD Hydro One Management Changes; a September 10,
20LB Supplemental Report on Hydro One Chair and
Management Changes; and a September 74, 2078 Supplemental
Report on Hydro One's S&P Rating.
0. Do you believe that Hydro One's acquisition of
Avista is stj-l-l- in the public interest?
A. Yes. Hydro One remains a strong and suitable
parent company for Avista and the deal continues to be in
the public i-nterest. The benefits of the transaction for
Avista ratepayers remain unchanged. As was stated in the
Joint Application dated September 14, 20L'1, the companies
are cul-tural-1y aligned. Hydro Oners market
capltalization is approximately three times the size of
Avista and will provide Avista with improved access to
capital
rather
markets. Hydro One is a strategic investor,
than a financial investor, and its interests are
aligned wlth Avista's for long-term success. To this
end, Hydro One has made a number of commitments to25
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preserve Avista's
ongoing basj-s , for
ability to run its own business on an
the benefit of Avista's
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customers. Since the Joint Application, Hydro One and
Avista joined other Idaho parties in reaching the
Settl-ement Stipulation filed on April 13, 2018, in this
docket, and agreed to significant commitments that wil-l-
have both immediate and long-term positive impacts on
Avista's Idaho customers. Hydro One stands by these
commitments. The Ontario el-ection, the July 20lB Letter
Agreement, and subsequent events have no effect on these
commi-tments and benef its.
Eurther, while the cost of electricity for a typical
residential customer in Ontario has more than doubled
over the last ten years, those increases have not been
driven by Hydro One, which is so1e1y a distribution and
transmission utility. Over that same 1-O-year period,
customer costs for Hydro One's transmission and
distribution delivery services have
average
l-ed to
customers
doubllng
over the
of less than 3Z
the
annua11y.
electricity
increased by an
The costs that have
costs for residentialof
past 10 years were the result of cost
increases at electricity generation companies that were
required to comply with Provincial green power
initiatives. Hydro One, as the entity that sends the
bill to customers, is often incorrectly blamed for the
entirety of the bill-, regardl-ess of Hydro One's actual
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subject Hydro One to the polj-tics 1n Ontario, the
ring-fenci-ng commitments in the Settlementgovernance and
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Stipulation (including Stipulated Commitment Nos. 2, 3,
9, 10, and 42-57) were designed to ensure that Avistars
customers will- not be impacted by Ontario politics
VI. THE EUTT'RE OF THE GOVERNA}ICE AGREEMENT
0.
continues
and Hydro
A
Do you believe
to govern the
One?
Yes. Pursuant
that the Governance Agreement
relationship between the Province
to Section L6 of the July 20LB
Letter Agreement between Hydro
No. 10, Schedule I), except for
which are principally l-lmited to
One and the Provj-nce (Exh.
the provisions of the Act
compensation matters
subsidiarj-es incorporateditspertainlng to Hydro One and
within Canada, the Province ratified and reaffirmed its
commitment to the Governance Agreement, which remains 1n
full force and effect:
76. Reaf firmation: By enterj-n q into this Agreement,the Province ratifies and reaffirms its obligatlons
under the Governance Agreement and agrees that,except as speciflcally set out in this Agreementwith respect to the subject matter hereof, (i) theexecution, delivery and effectiveness of this
Agreement or any other documents del-ivered in
connection herewith shal-l not amend, modify or
operate as a waiver or forbearance of any right,
power, obligation, remedy or provision under the
Governance Agreement, and (ii) such agreement shal-l-continue in full force and effect.
Exh. No. 10, Schedule 7, S 16.
The Governance Agreement requires that the Province act25
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as an investor and not a manager of Hydro One, and the
Province's
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Scarlett, Supp 20a
Hydro One Limited
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Scarlett, Supp 27
Hydro One Limited
decision-making authority
restricted to that of any
i-n respect of
other investor
that
Hydro One is
with respect to
are broughtvoting its shares in any decisions
forward for shareholder approval.
the right to nominate 40 percent of
Directors (other than t.he CEO) , but
The Province also has
the Board of
all directors remain
subject to an annual- vote by aII sharehol-ders of Hydro
One.
As noted above, although the Province's rights as a
sharehol-der are Iimited by the Governance Agreement, the
Province retains legislative authority to pass
legislation with respect to subjects within its
jurisdiction, such as the Act.
0. Do you know if the Province intends to take any
further actions with respect to Hydro One?
A. I am not aware of any further actions that the
Province intends to take with respect to Hydro One. As I
mentioned above, the government has stated that it would
like to reduce electricity rates for Ontario residents.
I do not know what, if dfly, further actions that the
Province may
not aware of
Hydro One's management
any such action would
reflected in the filed
take to address electricity
any pending legislation that
rates, and am
would impact
bel-i-eve thator rates. I do not
affect the agreed-upon commj-tments
Stipulated Settlement, which25
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j-nsulate Avista's customers from provincial affairs,AS
di-scussed below.
Scarlett, Supp 21a
Hydro One Limited
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Scarlett, Supp 22
Hydro One Limited
O.
31, 20]-1 |
with the
The Joint Application states that
the Province owned 49.92 of Hydro
private
the
"As of July
One I s shares
investors.
Proposed
remainder of shares held by
Based on facts known today and assumlng
Transaction is completed, the Province's Ievel of
ownership of Hydro One will decline to below 45%." Does
this statement continue to be accurate?
A. The statement continues to be true except that
as at August 31, 201,8, the Province owns approximately
47.4% of Hydro One's common shares. As at July 31, 2017,
the Provlnce did own 49.92 of Hydro One's shares. On
January 2, 2018,
74,397,012 common
the Province announced the sale of
shares of Hydro One Limited,
2.42 of the outstanding conrmon
share, for a total-
transaction
its
representlng approximately
shares, to OEN
whoIly-owned by
LP, which is
Ontario at a $18 per
purchase price of $259,038 ,216. That
ful-f il-l-ed the Province's commitment in
Power Holdlngs LP, a limited partnership
Ontario First Nations Sovereign Weal-th
129 Eirst Nations inin turn owned by
purchase price of
agreement-in-principle with the Chiefs-in-Assembly on
behalf of the First Nations in Ontario, which was
previously announced on JuIy 12, 2016.
Immediately prior to the closing of that
transaction, the Province owned 296,803,660 common sharestZJ
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of Hydro One Limited, representing approximately 49.92 of
the common shares of Hydro One. After completing the
transaction, the Province owned
Scarl-ett, Supp 22a
Hydro One Limited
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Scarl-ett, Supp 23
Hydro One Limited
282,412,648 common shares of Hydro One, representing
approximately 41.4% of the common shares of Hydro One.
O. As a follow up to the prior questlon, what is
Hydro One's understanding regarding the Province of
Ontario's future stake in Hydro One?
A. Based on facts known today, and assumlng the
Proposed Transaction 1s completed, the Province's level-
of ownership of Hydro One wiIl decline to approxJ-mately
42eo. The Province has al-so agreed in the Governance
Agreement not to acquire previously issued voting
securities if after that acquisition, the Province woul-d
own more than 452 of any class or series of voting
securities (including common shares of Hydro One).2
The Province will- likeIy continue to own at feast
402 of Hydro
The Ontario
One's shares for the foreseeabl-e future.
El-ectricity Act, 1998 restricts the Province
from selling voting securities (including common shares
of Hydro One) if it wou1d own less than 402 of the
outstanding number of voting securitj-es of that cl-ass or
series af ter the sal-e.
If as a resul-t of the issuance of additiona1 voting
securj-ties of any class or series by Hydro One, the
Province
a 25
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.AL.)
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a
2 rhls restriction does not apply to the acquisition by the Provj-nce of
voting securities as a resu1t of the enforcement by the Province of any
security interest securing palment of debt obligations owing to the Province
or to certain acquisitions of voti-nq securj-ti-es by entities related to the
Province or by third party managed funds or as passive investments. this
restriction afso does not require the Province to seI1 any of the cornmon
shares of Hydro One that i-t currentLy owns, nor does it limit the Province
from acquiring votj-ng securities on an j-ssuance by Hydro One, including
pursuant to the exercise by the Province of its pre-emptive right.
Scarlett, Supp 23a
Hydro One Limited
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Scarlett, Supp 24
Hydro One Limited
woul-d own less than 402 of the outstanding number of
voting securities of that cl-ass or series, then the
Province shal-I, subject to certain requirements, take
steps to acquire as
or series of voting
increase the Province's ownership
the outstanding number of voting
or series.
many voting securities of that cl-ass
securities as are necessary to
to not fess than 40% of
securi-ti-es of that class
In order to assist the Province in meeting its
ownership obligations under the ELectricity Act, 7998,
under Section 6 of the Governance Agreement, Hydro One
has granted the Province a pre-emptive right to subscrlbe
for and purchase up to 452 of any proposed issuance by
Hydro One of voting securitj-es or securiti-es that are
convertibl-e or exchangeable into voting securities (other
than certain specified excluded issuances). Any offered
securities not subscribed for and purchased by the
Province pursuant to its pre-emptive right may be issued
to any other person pursuant to the proposed offering.
VII. THE NORTII A}'ERICAIiI EREE TRADE AGREEMENT (NAFTA)
0.
or impede
A.
Can Hydro One use NAFTA Chapter 11
the Commlssion's authority?
NAFTA Chapter 11 cannot affect the
to overrul-e
scope of the
Commission's authority over Avista. NAFTA Chapter 1125
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only provides for monetary awards or restitution of
expropriated
Scarlett, Supp 24a
Hydro One Limited
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Scarlett, Supp 25
Hydro One Limited
property and, therefore, cannot be used to alter or
nullify a Commission decision or regulation.3 In
reviewing the Fortis/CH Energy Group merger, the New York
Publ-ic Service commj-ssion stated the following: " [A]
state regulatory agency acti-ng lawfully within its
statutory authority is not liable to a claim of damages
under NAFTA unless an entity covered by the treaty can
demonstrate that it made its investment 1n the state
pursuant to express commitments by the agency which were
subsequently broken. "4
To date, the United States has been a defendant 77
times under NAETA Chapter 77, and none of those cl-aims
invol-ved a foreign utility protesting a
commission's decision. Not only has the
Department never l-ost a NAFTA Chapter 11
state utility
U. S. State
a foreign investor, but also it has never
cl-aim.
claim brought by
settled such a
O. Could Hydro One use NAFTA Chapter 11 to impact
Avista's ldaho customers?
A. For the reasons stated in my prior answer,
Hydro One's understandi-ng is that NAFTA Chapter 11 cannot
affect the scope of the Commission's authority over
Avista, and Hydro One does not believe NAFTA Chapter 11
would have an impact on Avistars
25
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3 See NAETA Art. 1135(1) (a), (b).
4 Joint Petition for Approvaf of the Acquisition of CH Energy Group, Inc. by
Fortis, Inc. and Related Transactions, New York Public Servi-ce Commission
Case 12-M-092, Order Authorizing Acquisition at 33 (Jun. 26, 2013) and
Recommended Decision of Administrative Law Judges at 46 (May 3, 20L3).
Scarlett, Supp 25a
Hydro One Limlted
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Scarl-ett, Supp 26
Hydro One Limited
Idaho customers.
O. The United States, Canada, and Mexico are
currently in negotj-ations to potentially amend and modify
NAFTA. Does Hydro One have any knowledge regarding the
extent to which the concepts addressed in Chapter 11 will
be incl-uded, modified, or removed in a renegotiated
NAFTA?
A. Hydro One's understanding of the renegotiations
of NAFTA between Canada and the U.S. are limited to what
information has been rel-eased to the public. To the
extent that Chapter 11 i-s being renegotiated it appears
that any changes to Chapter 11 will be Iikely to reduce,
not expand, the scope of relief available to investors.
Given this understanding, and because existing Chapter 11
provisions do not pose a credible risk of impeding the
Commissj-on's authority, Hydro One does not foresee
changes to NAFTA's Chapter 11 that would change Hydro
One's understanding of NAFTA Chapter 11 or its impact on
Avi-sta's Idaho customers.
O. Notwithstanding the fact that Hydro One
could not be used tobelieves that NAETA Chapter 11
affect
impact
to add
the Commission's jurisdiction over Avista or
Avista's customers in Idaho, is Hydro One willing
the Commission'sa commitment in ldaho regarding
jurisdlction and the venue for any potential NAFTA25
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dlspute?
A. Yes, for example, Oregon Stipulated Commitment
No.
Scar1ett, Supp 26a
Hydro One Limited
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Scarl,ett, Supp 21
Hydro One Limited
J2, f1l-ed as part of the all-party settlement agreement
UM 1897 onin Oregon Public Utility Commlssion Docket
May 25, 2018, specifically ensures that the
Utility Commission will retain jurisdiction
No.
issue that could arise in a NAFTA Chapter 11
Oregon Pub1ic
over any
arbitration:
72. North Arnerican Free Trade Agreement (NAFTA)
Avista and Parent agree that the Commission would
have jurisdiction in any future proceedi-ngs
regarding any unrecovered liabil-itj-es to the Stateof Oregon that may result from NAFTA Chapter Efeven
mediations, arbitrations r or any other litigation
brought by Hydro One's sharehofders under NAFTA.
Only the Commission or the Oregon Attorney General
may initiate such proceeding.
Oregon Stipulated Commitment No. 12 confirms that
Hydro One and Avista recognize that NAETA does not
curtai.l- the authority of the Oregon Public Utility
Commisslon to promulgate and enforce relevant rules and
regulations, that Hydro One and Avista explicitly
recognize that the Commission's authority over Avista's
operations wil-l remain unchanged by the Proposed
Transaction, that the Parties wil-l comply with all
applicable l-aws and regulations, and that Hydro One and
Avista recognize the Oregon PubIic Utility Commission's
jurisdiction. Hydro One and Avista certainly are willing
to add a similar commitment in Idaho.
Oregon Stipulated Commitment No. 1B al-so explicitly
states that all- disputes involvj-ng Avista will be25
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resolved in the appropriate state and federal regulatory
bodies or courts in
Scarlett, Supp 21a
Hydro One Limited
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Scar1ett, Supp 28
Hydro One Limited
the United States:
78. Venue for and ResoJ.ution of Disputes
Avista and Parent agree that the venue for disputes
regarding the operation of Avista wil-l- be in state
and federal regulatory bodies or courts of competentjurisdiction, ds applicable, in Oregon, Washington,
Idaho, Montana or Al-aska.
Oregon St
NAFTA Chapter
over disputes
One and Avista
commitment in
ipulated Commitment No.
11 arbitration will not
regarding the operation
certainly are wilJ-ing
Idaho.
18 ensures that a
have jurisdiction
of Avista. Hydro
to add a similar
VIII.SETTLEMENT COMMII!4ENTS DESIGNED TO PROTECT
AVISTAI S IIIDEPENDENCE ATiID FINA}iICIAI HEALTH
O. Is there a question as to whether the Provj-nce
wil-I directly interfere with Avista's independence and
financial health if the merger is consummated?
A. No. A11 of the parties to this proceeding
filed a Settl-ement Stipulation and Agreement with the
Idaho Public Util-ities Commission (the "Commission") on
April 13, 201,8 ("Stipulated Settl-ement"). The Stipulated
Settl-ement inc1udes 73 merger commitments (each, a
"Stipulated Commitment, " col-l-ectively, the "Stipulated
Commitments") that were designed by all of the parties to
ensure the independence and financial health of Avista.
Through Hydro Oners and Avista's opening testimony filed
on September 14, 2071, and an in-person
25
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Scarlett, Supp 29
Hydro One Limited
settlement
proceeding
as sociated
explored the rj-sks to Avista
proposed acquisition by a Canadian
utility whose largest shareholder is the Province of
Ontarlo. A11 of the parties discussed these risks and
developed a set of 73 Stipulated Commitments designed to
ensure the independence and financial- heal-th of Avista in
Iiqht of the fact that Hydro One's largest sharehol-der is
the Province of Ontario.
I flrmly believe that the 13 Stipulated Commitments
wil-I fuI1y protect Avi-sta's independence and f inancial-
health if the merger is consummated, and the events since
the June 1, 2018 electj-on do not change my concluslon.
The Province will not have jurisdiction to directly
affect, interact with, or directly interfere with the
management and strategic direction of Avista if the
merger is consummated. The Province cannot pass l-aws
that apply to Avista. Rather, if the merger is
consummated, Hydro One's ownership of Avista wil-l- be
constrained by the 73 Stipulated Commitments, dDy
commitments included in the Commission's order approving
the merger, and the laws of the United States and the
five states in which Avista operates (Idaho, Washington,
Oregon, Montana, and Alaska).
O. How do the Stipulated Commitments protect
conference, all of the parties to this
carefully
with i-ts
25
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Avista's independence and ensure that the Province cannot
directly
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Scarlett, Supp 29a
Hydro One Limited
a 25
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Scarl-ett, Supp 30
Hydro One Limited
interfere with Avista's management and strategic
direction?
A. Stipulated Commitment No.
two of the nine members of
be executlves of Hydro One
The other three Hydro One
3 provides that only
post-merger board can
its subsidiaries.
lndependent
af f i-1iates,
Further, of
Avista' s
or any of
designees must be
of Hydro One, Avista, and Hydro One's other
and be residents of the Pacific Northwest.
the four Avista designees,three initial-l-y will be from
including the Chairman of
and the fourth will be
Avista's pre-merger board,
Avista's pre-merger board,
Avista's CEO. If any Avista designee resigns, retires,
or otherwise ceases to serve as a director of Avista,
then the remaining Avlsta designees wil-l- have the sol-e
right to replace the departing Avista designee.
Presuming that one of the two Hydro One executj-ves
on Avista's post-merger board was directed by the Hydro
One Board to bring to the Avista post-merger board an
initiative that woufd benefit Hydro One and/or Ontario
but diminish Avista's financial resources and service,
the seven remaining members of Avista's post-merger
board, all- of whom wil-l- not be executives of Hydro One,
woul-d have sufficj-ent votes to reject that initiative.
Eurther, Stipulated Commitment Nos. 2, 9, and 10
also ensure the independence of Avista's post-merger25
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board and the continued service of Avistars executive
management and long-
ScarIett, Supp 30a
Hydro One Limited
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Scarlett, Supp 31
Hydro One Limited
term presence in the Pacific Northwest:
2. Executiwe l,Ianagaent
Avista will seek to retain afl- current executi-ve
management of Avista, subject to voluntary
retirements that may occur. This commitment wiIl not
limit Avlsta's ability to determine its
organj-zational structure and sel-ect and retain
personnel best abl-e to meet Avistars needs over
time. The Avista board retains the ability to
dismiss executive management of Avista and otherAvista personnel for standard corporate reasons
(subject to the approval of Hydro One Limlted
("Hydro One") for any hiring, dismissal- or
replacement of the CEO);
9. Avista' s Headqlu,artezs
Avista wiII, and Hydro One agrees Avista wi11,maintain (a) its headquarters in Spokane,
Washington; (b) Avista's office locations in each ofits other service territories, and (c) no less of a
significant presence in the j-mmediate location of
each of such office focations than what Avista and
its subsidiaries maintained immediately prior to
completion of the Proposed Transaction;
70. LocaL Staffing
Avista will maintain Avista Utilitiesr staffing and
presence in the communj-ties in which Avlsta operates
at level-s sufficient to maintain the provision of
safe and rel-iable service and cost-effective
operations and consistent with pre-acquisition
Ievel-s;
The Supplementa1 Testimony of Hydro One's and
Avista's Expert Witness John J. Reed ("Reed Testimony")
discusses these governance commitments and explains how
they represent the state-of-the-art for a utitity merger.
Reed Testimony, S III.
O. What tool-s do the Stipulated Commitments25
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Scarlett, Supp 31a
Hydro One Limited
provide the Commissj-on to ensure Hydro One's long-term
financial support of Avista I s safety
service quality measures,
and relj-ability
and customer servicestandards,
metrics ?
25
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A. In addition to the protections provided by the
independence of Avista's post-merger board, Stj-pulated
Commitment No. 15 limits the Avista post-merger board's
and Hydro One's ability to remove or reduce any
associated penalty provisions for 10 years after the date
of the merger:
75. Safety az:.d ReJ,iabiJ,ity Stand.ards aa'd Service
Quality Measures
Avista has establ-ished Service Quality Performance
Standards, Customer Guarantees and a Service Quality
Measure Report Card for its customers in Washington.Avista is currentl-y working with the Idaho
Commission Staff to develop similar performance
standards, customer guarantees and a reporting
mechanism for its customers in Idaho. Following
Idaho Commission approval of such standards,
customer guarantees and a reporting mechanism,Avista will- not seek, and Hydro One agrees Avistawill- not seek, to remove or reduce any associatedpenalty provisions for ten (10) years after the dateof the merger.
O. What tool-s do the Stipulated Commitments
provide the Commission to ensure Hydro One wil-L
financially support Avista and cannot withdraw dividends
from Avista if Avista's financial- heal-th is in jeopardy?
A. In addition to the protections provided by the
independence of Avista's post-merger board, Stipulated
Commitment Nos. 26 and 34-39 require Hydro One to
financially support Avista and limit the Avista
post-merger board's and Hydro One's ability to withdraw
dividends from Avista
j eopardy:
if Avista's financial heal-th is i-n25
668 Scarl-ett, Supp 32
Hydro One Limited
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Scarlett, Supp 33
Hydro One Limited
26. Avista Capital Structare
At al-l- times following the closing of the Proposed
Transaction, Avista's actual- common equity ratio
will be maintained at a l-evel- no fess than 44percent. This commitment does not restrict the
Commission from ordering a hypothetical capital
structure.
34. Capital Structure Sutrtport
Hydro One wil-I provide equity to support Avista'scapital structure that is designed to allow Avista
access to debt financing under reasonable terms and
on a sustalnable basis.
35. UtiTity-Level Debt an:.d Preferred Stock
Avista wil-l- maj-ntaj-n separate
stock, if doy, to support its
debt and preferred
utility operations
36. Coatinued Credit Ratings
Each of Hydro One and Avista wj-II contj-nue to berated by at Ieast one nationally recognized
statistical- "Rating Agency. " Hydro One and Avista
will use reasonable best efforts to obtain and
maintain a separate credit rating for Avista from atleast one Rating Agency within the ninety (90) daysfollowing the closing of the Proposed Transaction.If Hydro One and Avista are unable t.o obtain or
maintain the separate ratinq for Avista, they wil-l-
make a filing with the Commission explaining thebasis for their failure to obtain or maintain such
separate credit rating for Avista, and parties tothis proceeding will have an opportunity toparticipate and propose additional commitments.
37. Credit Ratings Notification
Hydro One and Avista agree to notify the Commissionwithin two business days of any downgrade ofAvista's credi-t rating to a non-investment grade
status by S&P, Moody's, or any other such ratings
agency that lssues such ratings with respect to
Avista.
38. Restzictions oa Upward Divider'ds and
Dis/Eribatioas25
669
t 1
Z
3
4
q
6
1
8
9
a. If either (i) Avistars corporate credit/issuer
rating as determined by both Moody's and S&P, ortheir successors,
Scarlett, Supp 33a
Hydro One Limited
10
I
11
72
13
l4
15
L6
t1
1B
79
20
27
22
23
24Iatrz-J
610
t 1
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4
5
6
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9
10
11
12
o 13
74
15
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79
20
27
22
23
24
o
Scarl-ett, Supp 34
Hydro One Limited
1s investment grade, or (ii) the ratio of Avista's
EBITDA to Avista's interest expense is greater than
or equal to 3.0, then distributions from Avista to
Olympus Equity LLC shal-I not be 1imited so long asAvista's equity ratio is equal to or greater than 44percent on the date of such Avista distributionafter giving effect to such Avista distribution,
except to the extent the Commisslon establ-ishes a
Iower equity ratio for ratemaking purposes. Both the
EBITDA and equity ratio shall be calculated on the
same basis that such calcufations woul-d be made for
ratemaking purposes for regulated utility
operations.
b. Under any other circumstances, distributions from
Avista to Olympus Equity LLC are allowed only withprior Commission approval.
c. If Avista does not have an investment-grade
rating from both Moody's and S&P, or from one of
these entities r or its successor, if only one issuesratings with respect to Avista, and the ratio of
EBITDA to Avista's interest expense is less than
3.0, no dividend distribution to Olympus Equj-ty LLCor its successors will- occur.
39. Pensioa E\ndir.g
Avista will maintain its pension funding policy in
accordance with sound actuarial practice. Hydro Onewill- not seek to change Avista's pension fundingpolicy.
The Reed Testimony dj-scusses these financial ring-fencing
commitments and explains how they represent the state-of-
the-art for a utility merger. Reed Testimony, S IV.
O. What tool-s do the Stipulated Commitments
provide the
Avista into
Commission to ensure Hydro One will not draw
bankruptcy?
addition to
of Avistars
the protections provided by the
independence post-merger board, Stipulated
In
25
611
I 1
2
3
4
5
6
1
B
9
Commitment Nos. 42-51 ensure Hydro One wil-l- not draw
Avista i-nto
10
11
72
I 13
74
15
76
71
1B
19
20
2t
22
)?
24
o
Scarlett, Supp 34a
Hydro One Limited
25
612
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5
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9
10
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18
19
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2I
ZZ
24
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Scarlett, Supp 35
Hydro One Limited
bankruptcy except under extremely l-imited circumstances.
Although I wil-l- not repeat the substance of these
commitments in this testimony, the Reed Testimony
discusses these bankruptcy commj-tments and explains how
they represent the state-of-the-art in bankruptcy
protections for a utility merger, including requirements
for a Gol-den Share and a non-consolidation opinion. Reed
Testimony, S IV.
O. How can the Commlssion be certain that Hydro
One and Avista will abide by these Stipulated
Commitments ?
A. Stipulated Commitment Nos. I, 20, 27, 30-33,
and 49 ensure that the commitments apply to Hydro One,
cannot be amended without Commission approval, and
provide the Commission (and U.S. courts, if necessary)
authority to enforce the commitments:
7. Aathotity Regezwed
Consistent with and subject to the terms of Exhibits
A and B to the Merger Agreement (referred to as
"Delegation of Authority") contained in Appendix 5of the Joint Application, decision-making authority
over commitments 2-15 below is reserved to the Boardof Directors of Avista Corporation ( "Avista" ) andnot to Hydro One. Any change to the policies statedin commitments 2-75 requires a two-thirds (2/3) vote
of the Avista Board, provided that Avista mustobtain approval for such changes from all regulatory
bodies with jurisdiction over the Commitments before
such changes can go into effect, and provide writtennotice to all partles to Case No. AVU-E-7-09/
AVU-G-17-05 of such request for approval:
25
673
I 1
2
3
4
5
6
1
d
9
20. State Regtlatory Aatbotity and Jurisdiction
Hydro One and its subsidiaries, j-ncluding Avista, as
Scarlett, Supp 35a
Hydro One Limited
10
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11
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13
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19
20
27
22
23
24
a 25
614
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9
10
11
72t13
74
15
76
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19
20
27
22
23
24
a
Scarl-ett, Supp 36
Hydro One Limited
applicable and as appropriate, wil-I comply wi-th al-1
applicable l-aws, including those pertaining totransfers of property, affiliated interests, andsecurities and the assumption of obligations and
l-iabilities. As requlred by and consistent with
applicable laws, venue for resolution of proceedings
rel-ated to these matters wil-I be at the appropriate
state utility commission (s) . Hydro One and its
subsidiaries, including Avista, wilI make their
employees and officers avail-able to testify beforethe Commission at the Commission's request toprovide information relevant to the matters within
its jurisdiction.
27. CoryTiaace with Existing Co,tlnissioa Orders
Hydro One and its subsidiaries, includj-ng Avista,
acknowledge that al-l- existj-ng orders issued by the
Commission with respect to Avista or its
predecessor, Washington Water Power Co., wil-I remain
i,n effect, and are not modlfied or otherwise
affected by the Proposed Transaction.
Hydro One and its subsidiaries, includlng Avista, as
appllcable and as appropriate, wil-1 comply with alI
applicable future Commission orders that remain in
force.
30 . Conrnission EnfOr3entent of Cortt nifuents
Hydro One and its subsidiaries, including Avista,
undersLand that the Commission has authority to
enforce these commitments in accordance with their
terms. If there is a violation of the terms of these
commitments, then the offending party may thediscretion of the Commission, have a perlod ofthirty (301 calendar days to cure such violation.
The scope of this commitment j-ncludes the authorityof the Commission to compel the attendance of
witnesses from Olympus Holding Corp. and itsaffil-iates, incl-uding Hydro One, with pertj-nent
information on matters affecting Avista. Hydro One
and Olympus Holding Corp. and its subsidiaries waj-vetheir rlghts to interpose any legal objection they
might otherwlse have to the Commission'sjurisdiction to require the appearance of any such
witnesses.
25
615
t 1
2
3
4
5
6
1
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9
37. Sttfuittal to State Coart Jurisrli etion for
Eaforcaeat of Cormnission Orders
Scarlett, Supp 36a
Hydro One Limited
10
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11
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13
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15
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23
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616
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9
10
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18
19
20
27
ZZ
23
24
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Scarlett, Supp 31
Hydro One Limited
Hydro One, Olympus Holding Corp., and Avista willjointly fil-e with the Commission prior to closing
the Proposed Transaction an affidavit affirmlng that
they will submit to the jurisdiction of the relevant
state courts for enforcement of the Commission's
orders adopting the commitments made by and blnding
upon them and their affiliates where noted, and
subsequent orders affecting Avista.
32. Ana,ual Report on Cowifuents
By May l-, 2079 and each May 1 thereafter through May
7, 2029, Avista will file, and Hydro One agrees
Avista wj-ll fi-1e, a report with the Commission
regarding the status of compliance with each of the
commitments as of December 31 of the preceding year.
The report will, dt a minimum, provide a descriptionof the performance of each of the commitments, will
be filed in Case No. AVU-E-I1-)1IAVU-G-17-05 and
served to all- partles to the docket. If any
commitment is not being met, relative to thespecific terms of the commitment, the report must
provide proposed corrective measures and target
dates for completion of such measures. Avj-sta will
make publicly availabl-e at the Commission
non-confidential portions of the report.
33. Con 'ituents Biadiag
Hydro One, Olympus Holding Corp. and its
subsidiaries, including Avi-sta, acknowledge that the
commj-tments being made by them are binding only upon
them and their affiliates where noted, and their
successors in j-nterest. Hydro One and Avista are not
requesting in this proceeding a determination of the
prudence, lust and reasonabl-e character, rate or
ratemaking treatment, or publj-c interest of t.he
investments, expendit.ures or actions referenced in
the commitments, and the parti-es in appropriate
proceedings may take such positions regarding the
prudence, just and reasonabfe character, rate or
ratemaking treatment r or public interest of the
investments, expenditures or actions as they deem
appropriate.
If Hydro One or any other entity in the chain of
Avista's ownership determines that Avista or any
other entity has fail-ed to comply with an applicable
Commitment, the entity making such determinations25
611
I shalf take
compliance
aII appropriate actions to achievewith the Commitment
49. No Amendltn,ent of Ring-Eencing Provisions
Scarlett, Supp 37a
Hydro One Limited
10
I
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72
13
74
15
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71
18
19
20
27
22
23
24t25
618
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2
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76
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20
27
22
23
24t
Scarfett, Supp 38
Hydro One Limited
Hydro One, Olympus Holding Corp. and Avista commit
that no material amendments, revlsi-ons or
modificatj-ons will be made to the ring-fenclng
provisions as specifi-ed in these regulatory
commitments without prior Commission approval
pursuant to a limited re-opener for the sole purpose
of addressing the ring-fencing provisj-ons.
a. Several of the Stlpulated Commltments in the
Idaho Stipulated Settlement require Avistars shareholder,
Hydro One, and not Avista's ratepayers, to provide
funding for certain programs (Stipulated Commitment Nos.
11 Community Contributions; 79 Rate Credits; 58
Eunding for Energy Efficiency, Weatherization,
Conservation, and Low-Income Assistance Programs; 6t
Community Contributions; 10 - Montana Community
Transition Fund). How can the Commission be certain that
Hydro One, as Avista's sol-e shareholder, will ensure
there is funding for these Stipulated Commitments?
A. Eirst, ds detailed in the Supplemental
Testimony of Chri.s Lopez, S IIf , the $15.8 mil-l"ion rate
credit wil-l- simply flow through to Avista customers in
the bil-Is issued by Avista. No cash from Hydro One 1s
needed.
Second, Stipulated
state that the funds for these programs
by Hydro One and Stipulated Commitment
that "any commitment that states Hydro
Commitment Nos.58 and 70 clearly
will be arranged
No. 66 provides
One will
funding is not contingent on Hydro One's ability
arrange
to25
619
t 1
2
3
4
5
6
1
B
9
arrange funding, particularly from outside sources, but
is a firm commitment to provide the dollar
10
11
l2
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74
15
76
l1
1B
19
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27
22
23
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a
Scarl-ett, Supp 3Ba
Hydro One Limited
25
680
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2
3
4
5
6
1
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9
10
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11
72
13
74
15
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ScarIett, Supp 39
Hydro One Limited
amount specified over the time period
.. Avista will
specified and for
not seek costthe purposes
recovery for
Hydro One in
will not seek
specified.
any of the
this Iist
commitments funded or
of merger commitments.
arranged by
Hydro One
from
Therefore,
ultimately bears
such
from
IN
cost recovery for such funds
Canada or the United States. "ratepayers
Hydro One,
the cost of
as Avlsta's sole shareholder,
these commitments.
Third, Stipulated Commitment No. 66 al-so estabfishes
that if Avista has retained earnings that would otherwise
be avail-able to Hydro One as dividends, those retaj-ned
be used to fund Stipulated Commitment Nos.
and 70: "To the extent Avlsta has retained67,
that are availabl-e for payment of dividends to
Equity LLC consistent with the ring fencing
provisions of this list
earnings
77,58,
earnings
Olympus
can
of merger commitments,
used. Funds avail-abIe
other Hydro One affil-iates may be used without
l-imitation."5 In essence, funds otherwise avail-able for
payment of dividends to Olympus Equity and
retained earnings may be
chain will- instead be directed to funding
commitments, as explained in Supplemental-
Chris Lopez, S III.
Fourth, ds noted in response to the
question,
on up the
these
Testimony of
prev].ous
25
6B 1
I 1
2
3
4
5
6
1
B
9
5 Avistars ability to use retained earnings to meet these commitments also
wiff be governed by Hydro One's commitments in Stipulated Commitment Nos.
26, 34, 36-31.
10
11
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16
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1B
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23
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Scarlett, Supp 39a
Hydro One Limited
t 25
682
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2
3
4
5
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9
10
11
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21,
22
23
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Scarlett, Supp 40
Hydro One Limited
25
683
Stipulated Commitment No. 33 establishes that Hydro One
and/or its subsidiaries are bound by the Stipulated
Commitments, Stipulated Commitment No. 30 subjects Hydro
One and/or its subsidiaries to the jurlsdiction of the
Commission for enforcement of the Stipulated Commitments,
and Stipulated Commitment No. 31 provJ-des that "Hydro
One, Olympus Holding Corp., and Avista will jointly fil-e
with the Commission prior to closing the Proposed
Transaction an affidavit affirming that they will submit
to the jurisdiction of the rel-evant state courts for
enforcement of the Commission's orders adopting the
commitments made by and binding upon them and their
affj-liates where noted, and subsequent orders affecting
Avista." Therefore, Hydro One, as Avista's sole
shareholder, and/or its subsidiaries, have submitted to
the jurisdiction of the Commlssion and Idaho courts for
the enforcement of all of the Stlpulated Commitments,
including those that require Hydro One funding.
Fifth, if the merger is consummated, the Province
will- not have jurisdiction to modify or null-ify the 13
Stipulated Commitments and any conditions inc1uded in the
Commissionrs order approving the merger. Hydro One is
bound by these contractual- obligations. Even though the
Province is a shareholder of Hydro One, Hydro One is the
entity that bears the fuII 1egal responsibility for the
1 3 Stipulated Commit.ments
o 1
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3
4
5
6
7
9
10
11
72
o 13
74
15
16
71
1B
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27
22
23
24
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Scarlett, Supp 4l
Hydro One Limited
and any commitments included in the Commlssion's order
approvrng
Province
commitments in
of the Province
the merger if the merger is
is not a party to Hydro One's
this proceeding and no
is required for Hydro
consuflrmated. The
contracts and
action on the part
One to fulfil-I its
obligations.
O. Does Sect j-on
make any of Hydro One's
8.1 of the Governance Agreement
financial- and funding commitments
in the Stipulated Settlement subject to Provincial
appropriations ?
A. No, none of the
Provincial- funding because
the Province. Section 8.1
states:
commitments are contingent on
none calls for any
of the Governance
payment by
Agreement
8.7 fir,ar,cial Obligatioas of t&'e Proviace
Pursuant to the IFinancial Administration Act
(Ontarlo) l, any payment required to be made by the
Province pursuant to this Agreement is subject to
there belng sufficient appropriation by the
Legislative Assembly of Ontario for the fiscaf year
in which the payment is to be made or the payment
having been charged to appropriation for a previous
year.
This provision in the Governance Agreement applies only
to "any payment required to be made by the Province
pursuant to this IGovernance] Agreement ...." The Provj-nce
has no payment obligations, whatsoever, pursuant to Hydro
One's contracts and commitments rel-ated the Proposed25
684
I 1
2
3
4
5
6
1
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9
10
11
72t13
t4
15
76
71
18
79
20
2t
22
23
24
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Scarlett, Supp 41a
Hydro One Limited
Transaction. Therefore, to the extent Section 8.1 l-imits
the Province's payment obligations to the
appropriated funds, such limltations have
availability of
no bearing or
Iegal relationship to Hydro One's contractual
25
685
I 1
2
3
4
5
6
1
B
9
10
11
72
I 13
l4
15
76
71
1B
19
20
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)?
24
Scarlett, Supp 42
Hydro One Limited
I 25
685
obligations with respect to the Proposed Transaction.
O. Testimony previously fil-ed in this proceeding
by Avista's CEO Scott Morris and Hydro One's former CEO
Mayo Schmidt emphasized the strong rel-ationship between
the two CEOs and the cultural compatibility of Hydro One
and Avista. Does the retirement of Mr. Schmidt and the
Province's actions change this justification for the
Proposed Transaction?
A. No. Whil-e the strong relationship between Mr.
Morris and Mr. Schmj-dt certainly contributed to a meetlng
of the minds on the terms of the merger agreement between
Hydro One and Avista, any corporate transaction of this
size is not dependent on the refationship of two
executives. Eventually, executives retire or leave a
company to pursue other opportunities. Both sides
understood this and negotiated a merger agreement, the
deJ-egation of authority described in Mr. Morrisrs and Mr.
Schmidt's direct testimony, and merger commitments that
provide a very clear framework for the interaction of the
two companies. Hydro Oners commitments to (i) an Avista
board with Avista directors and independent directors (as
defined by the NYSE rules) ("Independent Directors") from
the Pacifj-c Northwest, (ii1 continued headquarters in
Spokane, WA, (iii) the contj-nued service of Avista's
executives, management, and employees, (iv) Avista board
t 1
2
3
4
5
6
1
9
control- over the hiring and replacement of Avista's
(v) Avista's day-to-day management of its business,
CEO,
and
10
11
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20
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24I
Scarlett, Supp 42a
Hydro One Limited
25
681
o
10
11
72t13
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15
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19
20
2t
22
23
24
Scarl-ett, Supp 43
Hydro One Limited
(vi )
are
long
the
the
substantial charitable and community contributions,
documents that continue
responsibillty for
CEOs but on other
commitments in the Stipulated
protect Avista from Provincial
is consummated, have Hydro One
of any single executive invol-ved in
the Proposed Transaction. Moreover,
sufficiently cl-ear and detaited that
implementation will fall not on the
staff.
all preserved in
past the tenure
negotiation of
commitments are
contractual
IX. PROPOSED NE}I OR AMENDED COMMITMENTS
O. Despite your conclusion that the merger
Settl-ement wil-1 fu1ly
i-nterference if the merger
and Avista
additional commitments to respond to the
proposed
events in
any
the
Province since July 77, 201,8?
A. Yes. Hydro One and Avista have proposed one
additional merger commitment since JuIy 17, 20lB:
Avista Employee Compensation: Any decisions
regarding Avista employee compensation shaIl be made
by the Avista Board consistent with the terms of the
Merger Agreement beLween Hydro One and Avista, andcurrent market standards and prevailing practlces ofrefevant U.S. electric and gas utility benchmarks.
The determination of the level- of any compensati-on(including equity awards) approved by the Avista
Board with respect to any employee in accordancewith the foregoing shall- not be subject to change by
Hydro One or the Hydro One Board.
See Letter from Joint Applicants Regarding Update on
Recent Changes in Hydro One Management, AVU-E-11-O9,
AVU-G-17-05, (July 18, 20LB), pp. 5-6.I 25
688
1
2
3
4
5
6
1
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9
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2
3
4
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6
1
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9
10
11
72
I 13
74
15
76
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19
20
27
))
23
24t
Scarl-ett, Supp 44
Hydro One Limited
apply to
Hydro One
provide further
that Avlsta will
have agreed upon this
Although the Hydro One AccountabiTity Act does not
Avista if the merger is consummated, Avista and
additional commitment to
protection
be abl-e to
to Avista's employees, such
conti-nue to recruit and
retain the most highly qualified employee tal-ent base for
Avista's customers.
O. In addition to the above commitment whlch Hydro
One and Avista have already proposed, would you adopt any
additional commitments relating to Avista governance and
enforcement of the commitments?
A. Although Hydro One and Avista believe the
current Idaho commitments are sufficiently robust to
insulate Avista's customers in Idaho from any potential
effects of political, management, or rate changes at
Hydro One, Hydro One and Avista would be willing to adopt
any of the fol-l-owing Oregon commj-tments in Idaho:
Oregoa StiPuJ,ated Comitunt No. A (coryaq" Idabo
Stipulated Co,mtitueat No. 2)
Exe cut iwe l,Ianagener:t
Subject to the remaining provlsions of this
commitment and subject to voluntary retirements andresignations that may occur, Avista and Parent agree
that Avista wilI retain al-1 current executive
management of Avista for a period of three years.
This commitment will not limit Avista's ability to
determine its organizational structure and sel-ect
and retain personnel best abl-e to meet Avista's
needs over time. The post-Proposed Transaction25
689
a 1
2
3
4
5
6
1
B
9
Avista board retains its
executive management
current ability to dismiss
10
11
t2
o 13
74
15
76
71
1B
19
20
2t
ZZ
Z3
24t
Scarlett, Supp 44a
Hydro One Limited
25
690
I 1
2
3
4
tr
6
1
U
9
10
t
11
72
13
t4
15
76
71
1B
19
20
2T
23
24I
Scarlett, Supp 45
Hydro One Limited
of Avista and other Avista personnel for standard
corporat.e reasons. Any decj-sion to hire, dismiss orreplace the Chief Executive Officer of Avista shal-l-
be within the discretion of the Avista Board ofDirectors, and shall- not require any approval of
Hydro One or any of its affiliates (other thanAvj-sta), notwithstanding anything to the contrary inthe merger agreement, and its exhibits and
attachments, between Hydro One and Avista.
Oregoa StiPulated Conrnituent No. 5 (coryare Id,aho
Stipu1ated Co,mrrr.fuent No. 3)
Avista Board of Directors (BOD)
Avista and Hydro One agree that after closing of the
Proposed Transaction, Avista will have a separateboard of directors from Hydro One that consists ofnine (9) members, determined as follows:
Eive Hydro One Desj'gaated Dizectors:
Two executives of Hydro One or any of itssubsidiaries, and
Three IndependentPacific Northwest
Directors who are residents of the
Region.
Four Avista Desiga.ated Direetors :
Three directors who as of immediately prior to theclosing of the Proposed Transaction are members ofthe Board of Directors of Avista, i-ncluding the
Chairman of Avista's Pre-Merger Board of Directors(if such person is different from the ChiefExecutive Officer of Avista), and
Avista's Chief Executive Officer.
At least two of the Avista directors must be
Independent Directors.
The initial Chairman of Avlsta's post-closing Board
of Directors shall- be the Chief Executive Officer ofAvista as of the time immediately prior to closingfor a one year term. If any Avista designee resigns,
retires or otherwise ceases to serve as a director
of Avlsta for any reason, the remaining Avista25
697
o 1
2
3
4
5
6
1
8
9
designees sha11 have
replacement director the sofe right to nominate ato fill such vacancy,
10
11
12I13
74
15
t6
t1
1B
79
20
2t
23
24I
Scarl-ett, Supp 4 5a
Hydro One Limited
25
692
t 1
2
3
4
5
6
7
B
9
10
I 13
11
t2
74
15
16
T1
18
t9
20
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24
Scarlett, Supp 46
Hydro One Limited
and such person shall- thereafter become an Avista
designee. Hydro One shall have the unfettered rightto designate, remove and replace the Hydro One
designees as directors of the Avista Board with orwithout cause or notice at its sole discretion,
subject to the requirement that:
(i) two of such directors are executj-ves of Parentor any of its subsidiaries,' and
(ii) three of such directors are Independent
Directors who are residents of the Pacific Northwestregion, while such requirement is in effect (subject
in the case of cl-ause (ii I hereof to Hydro Onedetermining, in good faith, that it is not able toappoint an Independent Director who is a resident ofthe Pacific Northwest region in a timely manner, inwhich case Hydro One may replace any such directorwith an employee of Hydro One or any of itssubsidiaries on an interim basis, not exceeding sixmonths, after which time Hydro One shal-l- replace
such interim director with an Tndependent Director
who is a resident of the Paciflc Northwest regi-on);provided, however, that thLs exception to cLause(ii) hereof shaff not appTy if, at any time a
circumstance arises,and durinq the pendency of any
such circumstance whereb the Province of Ontario("Ontario") exerc-zses rts riqhts as a sharehofder ofParent, uses legislative authority or acts in anyother manner whatsoever that results, or wouLdresyJ-t, in Ontario appointing nominees to the board
of directors of Parent that constitute r or woul-d
board)
Note that the additional language underlined and in
italics was not incl-uded in Oregon Stipulated Commitment
No. 5 filed on May 25, 2018. However, Hydro One and
Avista proposed this addition in their Oregon
supplemental- testimony filed on August 30, 2078, and in
their Washington supplemental testimony filed on
September 6, 201,8 .t 25
693
constitute a majority of the directors of such
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Oreggn tlipq].eled Commitment No. 38 (no comparable
commitment in Idaho
Scarl-ett, Supp 46a
Hydro One Limited
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Envirolloaental LiabiJ,ities of Parent
Hydro One wil-l- hold Avista and Avlsta ratepayers
harml-ess from any environmental obligations orliabilities of Hydro One or its affiliates other
than Avlsta, including those associated with harmful
substances such as asbestos or polychlorinated
biphenyls (PCBs) and environmental cleanup and
restoration.
O. Have Avista and Hydro One discussed making any
revisions to the Delegation of Authorlty (Appendix 5 of
the Joint Application) to respond to the events after the
June 7, 2018 Ontario election involving Hydro One?
A. Yes. Avj-sta and Hydro One propose to amend
this section of the Delegation of Authority as f ol-l-ows:
Sharehol-der shall- have the unfetteredright to designate, remove and replace the
Shareholder Designees as directors of theSurviving Corporation with or without cause ornotice at its sol-e discretion, subject to the
requirement that (i) two (2) of such directorsare executives of Parent or any of itsSubsidiaries and (ii) three (3) of suchdirectors are Independent Directors who are
residents of the Pacific Northwest Region,
while such requirement is in effect (subject in
the case of clause (if ) hereof to Sharehol-derdetermining, in good faith, that it is not ableto appoint an Independent Director who i-s aresident of the Pacific Northwest Region j-n atimely manner, 1n which case Sharehol-der may
replace any such director with an employee of
Parent or any of its Subsidiaries on an interimbasis, not exceeding six months, after whichtime Shareholder shall- replace such interimdirector wlth Independent Dj-rector who is aresldent of the Pacific Northwest Reglon);
however that this tion to
clause LL hereof sha].]. not if at,
time a circunstance arises and dur the
the
Province of Ontario ("Ontario") exercises itstance
Scarlett, Supp 41
Hydro One Limited
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Scarl-ett, Supp 41 a
Hydro One Limited
r ts as a shareholder of Parent usesve au rL or acts in other
mann€lr whatsoever, that resuJ-ts rot
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Scarlett, Supp 4B
Hydro One Limited
triggered
any of its
result in Ontario nominees to the boardrectors o Parent t cons tute or
constitute a ma of the directors of such
board) ;
O. What is the purpose of the new text in the
Delegation of Authority?
A. This proposed amendment to the Delegation of
Authority is deslgned to protect the independence of the
Avista board in the event that the Province takes some
action in the future to controf a majority of the Hydro
One Board. If that event occurs, thj-s amendment is
and blocks Hydro One's limited right to replace
thethree Independent Director designees on
Avista board with a Hydro One executive or employee.
X. ADOPTTON OF }4AYO SCHMIDT TESTIMONY
O. Are you aware of testimony previously submitted
by Mayo Schmidt?
A. Yes.
O. What testimony was previously submitted by Mayo
Schmidt ?
A. The testlmony previously submitted by Mayo
Schmidt includes:
' Direct Testimony of Mayo M. Schmidt, submitted
September 74, 2017, including Exh. No. 2,
Schedules 1 and 2
' Avista and Hydro One Joint Comments in Support of25
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Stipulation and Settlement, submitted June 20,
2OLB
0. Do you adopt Mayo Schmidt's testimony as your
own?
A. Yes, subject to (f) the Provincers ability to
introduce, or threaten, legislation, ds evidenced by the
events that have transpired, (ii) the passage of the
Hydro One Accountabil-ity Act, 20L8, and (iii) the
government's promise to reduce rates in Ontario.
O. Does this concl-ude your testimony?
A. Yes it does.
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Scarlett, Supp 49
Hydro One Limited
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Scarlett, Supp. Reb 1
Hydro One Limited
0. Pl-ease
present positlon
A. My name
business address
state your
wlth Hydro
is James D
I. INTRODUCTION
name, business address and
One Limited.
. ("Jamie" ) Scarl-ett, and my
Street, South Tower, Bth
2P5. f am Executive ViceFloor, Toronto, Ontario
President and Chief Legal Officer for Hydro One Limited
("Hydro One").
O. Did you submit prefiled direct, rebuttal or
supplemental- testimony in this proceeding?
A. Yes. I submitted supplemental- testimony on
September 24, 2078.
O. Are you sponsoring any exhibits that accompany
your testimony?
A. No.
A table of contents for my testimony is as fol-lows:
Contents
] . INTRODUCTION. .
II. NEW SETTLEMENT COMMITMENTS DESIGNED
PROVINCE'S MINORITY SHAREHOLDING IN
TO ADDRESS
HYDRO ONE
III. STAFF'S LIST OE UNADDRESSED RISKS RELATED TO THE
PROPOSED TRANSACTION. . . . .
is 483 Bay
M5G
IV.NOTICE REGARD]NG ONTARIO ELECTION AND
ELECTION ON HYDRO ONE GOVERNANCE.....
V. COMPL]ANCE WITH IDAHO CODE S 67-321.
V]. COMPLIANCE WITH ]DAHO CODE S 67_328
1
2
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IMPACTS OF
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Scarl-ett, Supp. Reb 2
Hydro One Limited
Sr:mmary of Testimony
O. Pl-ease summarize your testimony.
A. My testimony addresses the new and amended
commitments developed by Hydro One, Avista, and
Commission Staff to address the potential for Provinciaf
infl-uence over Avista's operations and rates; Hydro One's
and Avista's conclusion that the set of merger
commitments developed in this proceeding address all
risks of Provincial influence identified by Commission
Staff; Commission Staff's concerns regarding the notice
provided by Hydro One and Avista regarding the Ontario
electj-on in June 20lB and the impacts on Hydro One's
board and management.; the facts rel-evant to the
Commission's consideration of whether Idaho Code S 67-321
applies to this transactlon; and the facts and merger
commitments showing that al-l of the requj-rements in Idaho
Code S 6l-328 have been met.
II. NEW SETTLEMENT COMMII1IIENTS DESIGNED TO ADDRESS
PROVINCE I S MINORITY STIAREHOLDING IN HYDRO ONE
a. Commission Staff testified that amendments to
Stipulated Commitment Nos. 2 and 3 and a revision to the
Delegation of Authority in the Merger Agreement help
resolve concerns that the Province wil-l- attempt to
influence the policj-es and actions of Avista as the
Iargest sharehofder of25
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Scarlett, Supp. Reb 3
Hydro One Limited
Avista's sole owner, Hydro One.1 Can you
detail on those amendments and revisions
wiII protect Avista from influence by the
provide more
and why they
Province
A.
Staff and
following
3 and the
influence
Hydro One and Avista worked with the
other parties to this proceeding to
amendments to Stipulated Commitment
Delegation of Authority to protect
by the Province:
Commission
develop the
Nos. 2 and
Avista from
Araended StipuJ,ated Contnitnent No. 2 - Exeeatiwe
l,Laaagaent: Avista will seek to retain al-l- current
executive management of Avista, subject to vofuntaryretirements that may occur. This commitment wil-l- not
l-i-mit Avista's ability to determine itsorganlzational structure and sel-ect and retain
personne] best abl-e to meet Avista's needs overtime. The Avista board retains the ability to
dj-smiss executive management of Avista and otherAvista personnel for standard corporate reasons.
Any decision to hire, dismiss or replace the Chief
Executi-ve Officer of Avista shall be within thediscretion of the Avista Board of Directors, andshall not requj-re any approval of Hydro One Limited
("Hydro One") or any of its affiliates (other thanAvista), notwithstanding anything to thecontrary in the merger agreement, and its exhibits
and attachments, between Hydro One and Avista.
Avista Employee Compensation: Any decisions
regarding Avista employee compensation sha1l be madeby the Avista Board consistent with the terms of the
Merger Agreement between Hydro One and Avista, andcurrent market standards and prevalling practi-ces ofrelevant U.S. el-ectric and gas utility benchmarks.
The determj-nation of the l-evef of any compensation(including equity awards) approved by the Avista
Board with respect to any employee in accordance
1 evu-u-17-09/AVU-G-17-05 - Direct Testlmony of Terri Carlock at pg. 7,
lines 9-15 (Nov. 6, 20LB) ("Carlock Direct Testimony").25
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Scarlett, Supp. Reb 4
Hydro One Limited
with the foregoing shal-I not be subject to change by
Hydro One or the Hydro One Board.
Amended Stipulated Commitment No. 3 - Board of
Directors: After the closing of the Proposed
Transaction, Avista's board wiIl consist of nine (9)
members, determined as foflows: (i) two (2)
directors designated by Hydro One who are executivesof Hydro One or any of its subsidiaries; (ii) three(3) directors who meet the standards for
"independent directors" - under section 303A.02 of
the New York Stock Exchange Listed Company Manual(the "Independent Directors") and who are citlzensof the United States and are and have been residents
of the Paclfic Northwest region for at least twoyears, to be designated by Hydro One (collectiveIy,
the directors deslgnated in clauses (i) and (ii)
hereof, the "Hydro One Designees"), subject to the
provisions of Clause 2 of Exhibit A to t.he Merger
Agreement; (i-ii) three (3) directors who as of
immediately prior to the closing of the Proposed
Transaction are members of the Board of Directors ofAvista, including the Chairman of Avista's Board ofDirectors (if such person is different from the
Chief Executlve Officer of Avista); and (iv)
Avista's Chlef Executive Officer (collectively, the
directors designated in clauses (iii) and (iv)
hereof, the "Avista Designees"). Avista and Hydro
One shall consult with each other prior to the
designation of any Independent Directors. The
initial Chairman of Avista's post-closing Board of
Directors shall be the Chief Executive Officer of
Avista as of the time immediately prior to closing
for a one year term. If any Avi-sta Designee
resigns, retires or otherwise ceases t.o serve as a
director of Avista for any reason, the remaini-ng
Avi-sta Designees shall have the sol-e right to
nominate a replacement director to fill such
vacancy, and such person shall thereafter become anAvista Designee.
The term "Pacific Northwest region" means the
Pacific Northwest states in which Avista serves
reta1l el-ectric or natural- gas customers, currently
Alaska, Idaho, Montana, Oregon and Washington;.
The Independent Directors will- haverelationship with Hydro One and its no material-
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and affiliated entities, the Provi-nce of Ontario,or Avlsta and its subsidiaries and affiliatedentlties currently or within the previous 3 years.
Former directors of Avista
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Hydro One Llmited
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Scarl-ett, Supp. Reb 5
Hydro One Limited
who otherwise meet these qualifications qualify
Independent Directors .
AS
Amended Delegation of Authorlty - Clause 3: Sole
Shareholder shal-l have the unfettered right to
designate, remove and replace the Shareholder
Desi-gnees as directors of the Survivj-ng Corporatlonwith or wi-thout cause or notlce at its sol-e
discretion, subject to the requirement that: (i) two(2) of such directors are executives of Parent or
any of its Subsidiaries and (ii) three (3) of suchdj-rectors are Independent Directors who are citizens
of the United States and are and have been residents
of the Pacific Northwest Region for at least twoyears, while such requlrement is in effect (subject
1n the case of cl-ause (fi) hereof to Shareholderdetermining, in good falth, that it is not abl-e toappoint an Tndependent Director who is a citizen ofthe Unlted States, and resident of the Pacific
Northwest Region in a tlmely manner, in which case
Shareholder may replace any such director with any
person who is a citizen of the United States,excluding any employee or executive of Parent or anyof its Subsldiaries other than Avista, on an interimbasis, not exceeding six months, after which time
Sole Shareholder shall replace any such interim
director with a non-employee an Independent Director
who is a citizen of the United States and is and has
been a resident of the Pacific Northwest Regionfor at least two years). If, at any time a
circumstance arises, and during the pendency of any
such clrcumstance, whereby the Province of Ontario
( "Ontarj-o" ) exercises its rights as a shareholder of
Hydro One, uses legislative authority or acts in any
other manner whatsoever, that results, or wouldresult, in Ontarj-o appointing nominees to the boardof dlrectors of Hydro One that constitute, or woul-dconstitute a majority of the directors of suchboard, then Hydro One's authority to replace an
Independent Director on an interi-m basis is
suspended for the pendency of such circumstance.
For purposes of this modification to the
of Authorlty, the following definitions,
set forth in the Delegation of Authority
Agreement, wilf apply:
Delegation
which are
and Merger
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Hydro One Limited
"Independent. Directors" means any director of the
Surviving Corporation who (i) meets the standardsfor "independent director" under section 303A.02 ofthe New York Stock Exchange Listed Company Manualwith respect to Parent and its Subsldlaries,including the Surviving Corporation, (ii) has no
material relatj-onship wlth Parent, its Subsldiariesor affiliated entities currently or in the prior
three years, and (iii) if and to the extent requi-redwith respect to a specific director, who meets suchother qualifications as may be required by any
applicable state utility regulatory authority for an
independent director. Notwithstandi-ng anything tothe contrary in this definition of "IndependentDirector, " (a) a director who also serves as an
independent dj-rector of the Surviving Corporation or
any of its Subsidiarj-es or the Shareholder and who
otherwise satisfies the criteria set forth above for
an "Independent Dj-rectorr " may stilI be considered
independent within the meaning hereof, and (b)
former officers of the Company or the Surviving
Corporatlon, who otherwise satisfy the criteria setforth above for an "Independent Directorr " may stil1
be considered independent within the meaning hereof.
"Pacific Northwest Region" means the Pacific
Northwest states in which the Surviving Corporation
serves retail el-ectric or natural gas customers,
currently Alaska, Idaho, Montana, Oregon and
Washington.
t'Parent tt shaf l- mean
organized under the
Hydro One Limlted, a
Iaws of the Province
corporation
of Ontario.
"Sharehofder" shaII mean Olympus Equity LLC, a
Del-aware 1imlted liability company.
"Sharehol-der Designees" shall mean (i) two (2)
directors designated by Sharehol-der who are
executives of Parent or any of its Subsidiaries;
(ii) three (3) Independent Directors who are
residents of the Pacific Northwest Region, to be
designated by Sharehol-der (the "Shareholder
Independent Directors"). lNote: for purposes of this
modificatlon to the DoA, "Shareholder Designees" has
the same meaning as "Hydro One Designees" in
Commitment No. 3.1
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hereto, sha1l mean any corporation, limited
Iiability company, partnershi-p, association, trust
or other entity of which securiti-es or other
ownership interests representing more
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Scarlett, Supp. Reb 6a
Hydro One Limited
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Hydro One Limited
than 50% of the equity and more than 50% of theordinary voting power (or, in the case of a fimitedpartnership, more than 50? of the general
partnershlp interests) are, as of such date, owned
by such party or one or more Subsidiaries of suchparty or by such party and one or more Subsidiariesof such party.
"Surviving Corporation" shal-1 mean Avista
Corporation, a Washington corporation.
O. What other amendments and new
added by the parties to this proceeding
risk of Provinclal inffuence over Avista
commitments were
to address the
if the proposed
consummated?
the Commission
transaction (the "Proposed Transaction") is
A. Hydro One and Avista worked with
Staff and other parties
following amendments to
to create new Commitment
to this proceeding to
Stipulated Commitment
1 4 to protect Avista
develop the
No. 1 and
from
influence by the Province:
Amended Stipulated Commitment No. 1 - Authorlty
Reserved: Consistent wj-th and subject to the termsof Exhlbits A and B to the Merger Agreement(referred to as "Delegation of Authority") containedin Appendix 5 of the Joint Application,
decision-making authority over commitments 2-15
bel-ow is reserved to the Board of Directors ofAvista Corporation ("Avista") and not to Hydro One.Any change to the policies stated in commitments2-75, plus 30 (Commission Enforcement of
Commitments), 31 (Credit Ratings Notificatj-on), 3B(Restrictions on Upward Dividends andDistributions), 43 (Independent Directors), 49 (No
Amendment), 14 (Notice and Petition to Amend orAlter), 15 (North American Free Trade Agreement),
and 16 (Venue for and Resolutlon of Disputes),requires a two-thirds (2/3) vote of the Avlsta
Board, provided that Avista must obtain approval for
such changes from al-1 regulatory bodies with25
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jurisdictlon over the Commitments before such
changes can go into effect, and provide writtennotice to
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Hydro One Limited
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Scarlett, Supp. Reb B
Hydro One Limited
all parties to Case No. AVU-E-71-09IAVU-G-1,1-05 of
such request for approval:
New Commitment 74 - Notice and Petition to Al-ter or
Amend: If any event occurs that woul-d have an effect
on Avista's operations and/or customer rates becauseof Avista's corporate relationship with Hydro One,or affects Hydro One's compliance with any
commitment in this stipulation (an "Event"), any ofthe parties to this proceeding may petition the
Commission at any time to alter or amend the final-order in Case Nos. AVU-E-11-09 and AVU-G-17-05, andneither Hydro One nor any of its subsidiaries,including Avista, wj-11 oppose initiation of such aproceeding. Hydro One or Avista will report to the
Commission any material Event as soon aspracticabl-e. For purposes of the Commj-tment f 4, amaterial event means (i) an event that a properly
informed person would reasonably conclude would havea significant effect on Avista's operations or
customers' rates; or (ii) making it more probable
than not that Hydro One would be out of compliancewlth any Commitment herein. Nothing in this
Commitment 14 shal-l be interpreted to l-1mit thepositions or arguments that Avista or Hydro One may
take or advance in any such proceeding, includingthe right to argue that a petition presentsinsufficient grounds or evj-dence. Prior to filing apetition with the Commission under this Commitment
J 4, a party must provide Hydro One and Avista at.least 30 days advance written notice and anopportunlty to meet and confer about resol-utionsother than fillng with the Commissi-on under this
commj-tment. Nothing in this commitment 1s intendedto restrict the rights of the parties to petition
the Commission concerning its order(s) in this
docket, or to l-imit the authority of the Commission.
0 Do you agree with
that the Province
Commi-ssion Staff that there
is a risk wilI influence Hydro One's
selection of its three independent directors for the
post-merger Avista board?2
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2 Carlock Direct Testimony at pg. 16, lines 6-9.
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Hydro One Limited
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Hydro One Limited
A. No. As discussed in more detail in Section IV
of my testimony, Section 2.1.3 of the Governance
Agreement between Hydro One and Her Majesty the Queen in
Rj-ght of Ontario dated November 5, 2015 (the "Governance
Agreement")3 states that "The Province shall ... engage 1n
the buslness and affairs of Hydro One and the Hydro One
Bntities as an investor and not as a manager. " The
Province has reaffirmed this obligation in Section 76 of
the July 11, 2078, Letter Agreement (the "Ju1y 2078
Letter Agreement") approved by Cabinet and entered into
between Hydro One and the Province.4 Eurthermore, on
November '7, 2078, Hydro One and Avista announced the five
Independent Directors
Avista's post-merger
that they have sel-ected to serve on
board if the Proposed Transaction is
consummated. The Province played no role whatever in the
fndependent Directors :selection of these
di-rector and has been an Avista Director since 2000. She
o Kristianne Bl-ake (Avista
serves on the current Avista Board
seLection) z Ms. Bl-ake
of Directors as lead
Washington, and has a
Spokane community.
accounting firm of
i-s a long-time resldent of
rich history of involvement
She has been the president
Kristianne Gates B1ake, P.S
Spokane,
in the
of the
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3 th" Governance Agreement 1s Exh. No. 10, Schedufe 3 to my supplemental
testimony filed on Septemlcer 24, 2078.
4 The July 2O1B Letter Agreement between Hydro one and Her Majesty The Queen
in Right of Ontario was attached as Exh. No. 10, Schedule J-, to my
supplementa1 testimony filed on September 24, 2OLB.
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Hydro One Limited
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Hydro One Limited
since 1,981 and has an
accounting. She was
years, and she worked
extensj-ve background in public
a Certified Pubfic Accountant for 33
for 13 years for an international
accounting firm.
boards of public
She has served for 22 years on various
companies and
Blake is also
registered investment
companies. Ms
chair for the
currently serving as board
Russell Investment Company and the Russell
i-nvestment Funds.
o DonaLd Burke (Avista sel-ection) z Mr. Burke
serves on the current Avista Board of Directors as the
chair of the audit commi-ttee and has been an Avista
Dj-rector since 20L7. As a director, he serves as the
Board's designated flnancial expert. He al,so currently
serves as an independent director for the Virtus mutual
fund complex and Duff & Phelps cl-osed-end funds complex.
Erom 2006 to 20L0, Mr. Burke served as a trustee for
numerous global funds that were advised by BlackRock,
Inc. Erom 2006 to 2009, he was a managing director of
BlackRock and served as the president and CEO of the
Bl-ackRock U.S. mutual funds. In this role, Mr. Burke was
responsi-ble for all of
reportlng requirements
the accounting, tax and regulatory
for over 300 open and cl-osed-end
mutual funds. Mr. Burke joined BlackRock in connection
with the merger with Merril-l- Lynch Investment Managers
( "MLIM" ) , taking a lead role in the integration of the25
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two f irms' operating j-nfrastructures. Whil-e at MLIM, Mr
Burke was the Head of Global Operations and Client
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Hydro One Limited
Services and al-so served as the Treasurer and Chief
Fj-nancial Of f icer ("CFO" ) of the MLIM mutual- funds. He
brings significant financial experience to the board from
his years in public accounting and his rol-e as the
treasurer and CFO of numerous mutual funds. He has
extensive board experience, having served on the audit,
contract reviewcompliance, governance
committees of various
& nominating, and
boards. Through his service as an
Avista director, Mr. Burke has demonstrated his
commitment to the Pacific Northwest region.
o Christine Gregoire (Hydro One sei.ection): Ms.
Gregoire is the CEO for Challenge Seattler dD
organization comprised of 1B major international
companies and non-profits l-ocated in the Seattle region.
Previously, she served for two terms as Governor of the
State of Washington with a $328 biennial- budget and over
60,000 employees. fn her first term as Governor, she
created the Department of Early Learning and led on
reforms to the K-72 system and investment in higher
education. She 1ed the state in a historical- investment
in infrastructure, addressed the water wars in the state,
l-ed an historic number of trade missions, reformed the
foster care system to protect children, and was among the
first to l-ead in health care reform. During her second
term, Ms. Gregoire led the state in major reforms,25
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management and budgeting to
the most financially secure
position the state as one of
to come out of the "Great
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Hydro One Limited
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Recession. " Prior to becoming Governor, she served for
three terms as Washington Attorney General and, prior to
becoming Attorney General-, she served four years as the
Dlrector of the State Department of Ecology. She is al_so
a member of the Fred Hutchinson Cancer Research Center
and the Bipartisan Governors' Counci-1, and she serves on
the advisory boards of the William D. Ruckel-shaus Center
and the Progressi-ve Coalition for American Jobs. Ms.
Gregoire recently compJ-eted her third year as Chair on
the Nationaf Export-Import Bank Advisory Board. She is a
graduate of Gonzaga University School- of Law, and she and
her husband al-so have a home in north Idaho.
o Scott Maw (Hydro One se-Z.ection): Mr. Maw serves
on the current Avista Board of Directors and has been an
Avista Director since 2076. He has been executi-ve vice
president and CFO for Starbucks Coffee Company since
February 2014. He is responsible for Starbucks' Global
Finance organization. Prior to that, he served as senior
vice president of Corporate Finance for Starbucks where
he was responsibl-e for corporate finance, including
accounting, tax, and treasury. Mr. Maw also had
oversight for al,l fj-nancial and securities-related
regulatory f11ings. He joined Starbucks as globa1
controfler in 201L. Prlor to joining Starbucks, Mr. Maw
served as CFO of SeaBright Insurance Company from 2070 to
Scarlett, Supp. Reb 12
Hydro One Limited
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2017. From 2008 to Eebruary 2070 he served as CFO of the
Consumer Banklng division of JPMorgan
Scarlett, Supp. Reb l2a
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Hydro One Limited
Chase & Co. He is a Seattle
roots in Eastern Washington.
High School, just north
Gonzaqa University.
o Marc Racicot
Washington, resident wlth
He graduated from Deer Park
of Spokane, and is a graduate of
serves on the current
One selection): Mr. Racicot
Board of Directors and has
2009. Prior to that, he was
Bracewel-1 & Giuliani, LLP
(Hydro
Avi-sta
been an Avista Di-rector since 2009. He served as
president and CEO of the American Insurance Association
from August 2005 to February
Iaw firm ofa partner at
from 2001 to
the
2007) and attorney general (1989 to
Montana. Mr. Racicot was nominated
2005. He is a former governor (1993 to
1993) of the state of
by Presldent Bush and
chair of theunanimously elected to serve
Republican National Committee
as the
from 2002 to 2003 prior to
assuming the position of chair of the Bush/Cheney
Re-electj-on Committee from 2003 to 2004. He previously
served as a director for Siebel Systems, A11j-ed Capital
Corporation, Burlington Northern Santa Ee Corporation,
Pl-um Creek Timber Company, and The Washington Companies,
and he presently serves as a director for Weyerhaeuser
Company and Massachusetts Mutual Life Insurance Company.
Tn addj-tion, throughout his career Mr. Racicot has
strongly committed himself to children, education and
community j-ssues. He was appointed to the board of TheI25
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Corporation for National and Community Service by
President Cl-lnton, and he has also served on the boards
of Carroll- CoIlege, Jobs for America's
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Hydro One Limited
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Hydro One Limited
Graduates,
life-1ong
Col1ege.
O.
the April
before the
influence
A.
and United Way of Helena, Montana. He is a
resident of Montana and a graduate of Carroll
Please summarize the Stipulated
that were
Commitments in
L3, 2078
Ontario
Stlpulation
election, to
designed,
Provlncial-
well
NYSE
to
prevent
First, ds established in the Stipulation filed
2018, Avista w1l-l- havewith thls Commission on Apr11 13,
a nine-member board separate from Hydro One that will
govern Avi-sta's management and day-to-day operations.
See Stipulated Commitment No. 3. Hydro One, not the
Province, w111 sel-ect five of Avista's directors. Three
of these five directors must be independent under
recent amendmentsrules. Further,
over Avista.
Commitment No. 3
pursuant to the
described above,those three directors
must be U.S. Citizens and residents of the Pacific
Northwest for at least two years. As a resul-t, the
Province will- not be able to exercise any control over
Avista through sel-ection of Avista's board.
Second, Olympus Equity LLC's three-member board must
incl-ude one independent director. See Stipulated
Commitment No. 43.
Third, Hydro One is required to provide Avista with
sufficient equity to ensure that Avista's credit ratings25
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remain investment grade. This ensures that the Province
cannot deprive
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Hydro One Limited
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Scarlett, Supp. Reb 15
Hydro One Limited
Avista of its capital and assets for the benefit of the
Province. See Stipulated Commitment No. 31.
Eourth, Avista will be prohibited from issuing
dividends if certain financial metrics relating to the
equity f1oor, credit ratings and debt coverage are not
met. This prohibition operates to keep retained earnings
at the Avlsta l-eveI, where they will improve Avista's
financial strength. This, too, prevents the Province
from depriving Avista of its capital and assets for the
benefit of the Province. See Stipulated Commitment No.
38.
Flfth, Avista's utility assets can be pledged only
Therefore, the
and assets for
for the benefit of Avista, not Hydro One.
Province cannot strip Avista
the benefit of the Province.
of is capital
See Stipulated Commitment
No. 46.
Lastly, Hydro One and Avista, along with the rest of
the parties to the Stipulation and Settl-ement, developed
the Stipulation to ensure that Avlsta could not be
negatively impacted in any way by any of the political
events described beJ-ow. Hydro One is 1ega11y obligated
to comply wlth the Stipulation in this Case, the
settl-ements it has reached in Oregon, Washington,
Montana, and Al-aska, the Regulatory Commission of
Afaska's June 4, 20L8, order approving this merger, the25
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Hydro One Limited
Montana Public
merger, and any
this
Service Commission's order approving this
orders approving this merger issued by
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Commission, the Washington Utilities and Transportation
Commission, and the Oregon Public Utility Commission.
At1 of the protections described above that have
been buil-t into the Stipulation to ensure that Avista
will continue as a financially sound, stand-alone utility
(e. g. , Avista' s independent board, financial
ring-fencing, and capital support) wilI bind Hydro One
regardless of political developments. Furthermore,
through the Stipulation in this proceeding and the
settl-ements in Washington and Oregon, Hydro One and
Avista have agreed that none of the commltments in the
settl-ements can be amended without approval from Avista's
Commitment Nos. 7, 30,state regulators. See Stipul-ated
33, 49.
III. STAFFIS LIST OF T'NADDRESSED RISKS REI,ATED TO TIIE
PROPOSED TRAI{SACTION
Commission Staff asserts that the Province's
force the removal of
o.
ability to
retirement
the Hydro One
passage of the
that there are
Board, the
Hydro One
no bounds
One.5 Do
CEO, and the
demonstrate
of the
Accountability Act
to the Province's
you agree with
A. No.
Section IV of
ability to influence Hydro
those concl-usions?
As will be described in greater detail in
this testimony, the removal- of the Hydro
Scarlett, Supp. Reb 16
Hydro One Limited
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One Board foflowed alI relevant and materiaf aspects of
the provisions in the
5 Carlock Direct Testimony at pgs. 14-15.
Scarl-ett, Supp. Reb 16a
Hydro One Limited
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Hydro One Limlted
Governance Agreement and the retirement of Mayo Schmidt
removed uncertainty and was in the best j-nterests of
Hydro One. In addition, the Province, in Sectlon 16 of
the July 2078 Letter Agreement,
its commitment to the Governance
in full- force and ef f ect. As a
ratified and reaffirmed
Agreement, which remains
result, the Governance
Province's ability toremains a check on theAgreement
inf l-uence Hydro One.
Further, the Province's legislative authority over
Hydro One is l-imited to matters within the Province's
jurisdiction. This limitation was clear in the Hydro One
Accountabifity Act: It defined the term "subsidiary" to
specifically excl-ude application of the Act to Hydro One
subsidiaries incorporated in a jurisdiction outside of
Canada. This is extremel-y important to consider in this
proceeding, as the Provincers legisJ-ative authority
simply does not extend to the operations and rates of
Avlsta. Rather, the operations and rates of Avlsta are
strictly within the jurisdiction of the five states in
which Avista operates: Idaho, Washington, Oregon,
Montana, and Alaska.
To the extent that the Province could employ some
other type of action to exercise infl,uence over Hydro One
to reach Avista, the previous section of this testi-mony
explains how the new commitments negotiated by the25
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parties to this proceeding since the Ontario electionr ds
well as the Stipulated
Scarl-ett, Supp. Reb 17a
Hydro One Limited
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Commitments in the April 73, 201,8, Stipulation wil-1
protect Avista from any direct infl-uence from the
Province.
O. Commission Staff states that "the practical
implicatj-ons of the North American Free Trade Agreement
(NAFTA) and/or its successor, the U.S. Mexico Canada
Agreement (USMCA), oD Avista and its customers are
unknown and unknowable."6 Do you agree wlth this
characteri zation?
A. No. The established l-aw and precedent
regarding NAFTA, particularly when coupled with the new
Commitment 75 negotiated by the parties after I filed my
Supplemental Testimony on September 24, 2018, leave no
reasonable doubt that the Commission's authority will be
unencumbered by NAFTA and this merger.
Hydro One and Avj-sta recognize and affirm in the
Stipulated Commitments that NAETA does not curtail the
authorlty of the Commission to promulgate and enforce
rel-evant rul-es and regulations, that Hydro One and Avista
explicitly recogni-ze that the Commissj-on's authority over
Avista's operations wil-I remain unchanged by the Proposed
Transaction, that the parties wilL comply with al-l-
applicable laws and regulations, and that Hydro One and
Avista recognize the Commission's jurisdlction. See
Stipulated Commitment Nos. 20, 27, 23, 30, 31, 33, 15,
Scarl-ett, Supp . Reb 1B
Hydro One Limited
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and 7 6.
6 Carfock Direct Testimony at pq. 10, Lines 22-25.
Scarl-ett, Supp. Reb 1Ba
Hydro One Limited
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Scarlett, Supp. Reb 19
Hydro One Limited
O. Can you describe how new Commitment No. 75
ful1y protects Avista from any potential risk under NAFTA
or the USMCA?
A. First, Hydro One and Avista forego their rights
to bring any claim under NAFTA or similar provisions of
the anticipated successor to NAFTA, the United States
Mexico Canada Agreement (USMCA). Second, Hydro One wil-l
not support or voluntarily participate in any claims
asserted by a third party. Thus, Hydro One is barred
from attemptj-ng to use NAETA, so the Commissi-on's
jurisdiction over Avista is protected. Fina1ly, Hydro
One will indemnify Avlsta from any damages payable by
Avista in respect of any such claim. I/{ith this
indemnlfication provision, in the very unlikely event
that a third party somehow prevails on a NAFTA claim,
Avlsta wil-l- be held harm]ess:
15 North American Free Trade Ag'reement (NAFTA) :
Hydro One and Avista commit to forego their rightsto bring any claim under NAETA, or similar provisionof the United States Mexico Canada Agreement (USMCA)
challenging, or seeki-ng monetary damages related to,
any regulatj-ons, 1aws, orders or actions passed or
taken by the State of Idaho or any instrumentalitythereof or the government of the United States inrelation to the production, transmission ordistribution of el-ectri-c power, natural gas or otherenergy sources by Avista. In the event that such aclaim is brought under NAFTA (or the USMCA) thatinvolves or impacts Avista, Hydro One commits thatit will- not voluntarily participate in, support or
otherwise encourage such action. Hydro One will
indemnify Avista from any damages payable by Avistaj-n respect of any such claim as determined by afinal- non-appealable judicial order.25
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Hydro One Limited
We worked with Staff to develop this set of protections.
IV. NOTICE REGARDING ONTARIO ELECTION AT{ID IMPACTS OF
ELECTION ON HYDRO ONE GOVERNA}.ICE
O. Pl-ease summarize questions that have been
raised as to whether Hydro One and Avista discl-osed the
potential impacts of the Ontario El-ection on Hydro One in
a timely manner and whether Hydro One and Avista
potentially misled the parties to this proceeding
regarding the relationship between Hydro One and the
Province of Ontario (the "Province").7
A. Commission Staff states: "it may be viewed by
some that the Applicants did not adequately report in a
timely manner and were not entirely forthcoming regarding
the independence of Hydro One from the Province, Hydro
One as a campaign issue in Ontario, and the impact of the
election on Hydro One."8
O. Commission Staff states that Hydro One and
Avista should have notified them that Hydro One had
become the subject of campaign promises leading up to the
June 7, 2078, election. Commission Staff al-so states
that Hydro One and Avista should
Commission of the July 1-L, 20L8,
Board and CEO before sending the
the Commission, Commission Staff
have notified
removal- of the
JuIy 18, 2018,
and the other
the
Hydro One
l-etter to
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7 Carfock Direct Testimony at pg.
B Carlock Direct Testimony at pg.
10.
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Hydro One Limited
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to this proceeding describing the events of July 11. Do
you agree with these criticisms?9
A. I do. fn hindsight, we should have discussed
with the parties to this proceeding the campaign promises
being made by the Progressive Conservative Party and the
New Democratic Party prior to knowing the outcome of t.he
June '7, 2078 efection. During the lead up to the
election, however, Hydro One and Avista simply could not
predict the outcome of the election, and for that reason
waited for the election to occur. Although the
Progressi-ve Conservative Party did not take office until
June 29, 201,8, Hydro One and Avista did notify the
Commj-ssion and the parties of the potential impacts of
the election on Hydro One on June 20, 2078,t0 as
discussed in greater detail below, well- in advance of any
action by the Commission on the their Joint Application.
Eurther, I also agree that Hydro One and Avista
should have acted more quickly to notify the Commission
and the parties after Hydro One entered into the July
201-8 Letter Agreement with the Province to remove the
Hydro One Board and arrange the retirement of the CEO.
Although information l-ike this cannot be released
prematurely due to the impact that 1t coul-d have on
Scarlett, Supp. Reb 27
Hydro One Limited
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9 Carlock Direct Testimony at pgs . 12-t3.
10 See AVU-E-17-09/AVU-G-17-05, Avista and Hydro one Joint Comments in
Support of Stipulation and Settfement (June 20, 2018) ("Joint Comments")
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Hydro One Llmited
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Scar1ett, Supp. Reb 22
Hydro One Limited
stock pri-ces, Hydro One and Avista should have acted more
quickly than JuIy 18, 2018.
O. Did Hydro One and Avlsta fail to disclose the
potential impacts of the Ontarlo el-ection on Hydro One in
a timely manner or misl-ead the parties to this proceeding
regarding the rel-ationship between Hydro One and the
Province?
A. No. In fact, the opposite is true. As the
rest of my testimony will explain in greater detail, this
proceeding started in September 2011, well before any of
Ontario's political parties started forming their
platforms and campalgning for the June 2078 Ontario
election.
As part of
Corporation to a
public offerings
One and the Province entered into
fal-l- of 2075, Hydro
the Governance
Governance Agreement
Hydro One's transition from being a Crown
public corporation through severa1
commencing in the
Agreement. 11 Section 2.1,.
states that "The Province shaI1,
ownership interest in Hydro One,
and affairs of Hydro One and the
investor and not as a manager. "
al-so j-ncludes explicit provisions
with respect to its
engage in the business
Hydro One Entities as an
The Governance Agreement
that fimit. the
3 of the
Province's role as Hydro One's largest investor, which I
wlll describe in more detail below.25
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1 1 _-rr The Governance Agreement is Exh. No. 10, Schedu.Ie 3 to my supplemental
testimony filed on September 24, 2OlB.
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Hydro One Llmited
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Hydro One Limited
0. Did former CEO Mayo Schmidt's direct testimony
filed on September 74, 2011, accurately describe the
relationship between Hydro One and the Province?12
A. Yes, Mr. Schmidt's September 74, 2071, direct
testimony accurately described the relationship between
Hydro One and the Provj-nce. As Commission Staff noLed,
Mr. Schmidt's testimony stated: "Hydro One is now
governed by an independent board, other than myself as
CEO, and a governance agreement that ensures autonomous
commercj-aI operati-ons, with the Province of Ontario as an
investor and not a manager."13 Mr. Schmidt al-so stated:
"The Province of Ontario is a shareholder and pursuant to
its governance agreement with Hydro One it does not hol-d
or exercise any managerial oversight over Hydro One."14
On September 14, 2011, these statements were true, and
apart from the enactment of the Hydro One Accountability
Act thls summer, which gives the Province new regulatory
oversight over executive compensation at Hydro One, these
statements remain true today.
As noted above, Section 2.7.3 of the Governance
Agreement
investor
states that the Province sha1l act as an
and not
Section 16 of the
as a manager of Hydro One. Pursuant to
July 2078
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12 Carlock Direct Testimony at pg. 11.
13 avu-r-17-09/AVU-G-17-05 - Direct Testi-mony of Mayo schmidt at pg. 10
(Sept. 14, 2071 ) ("Schmidt Direct Testimony").
14 schmidt Direct restimony at pg. 10.
Scarlett, Supp. Reb 23a
Hydro One Limited
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Scarlett, Supp. Reb 24
Hydro One Lj-mlted
Letter Agreement between Hydro One and the Province, l5
the Province ratified and reaffirmed its commitment to
the Governance Agreement, which remains in ful-l- force and
effect:
76. Reaffirmation: By entering j-nto this Agreement,the Province ratifj-es and reaffirms its obligations
under the Governance Agreement and agrees that,
except as specifically set out in this Agreement
with respect to the subject matter hereof, (i) theexecution, delivery and effectiveness of this
Agreement or any other documents delivered in
connection herewith shall- not amend, modify or
operate as a waiver or forbearance of any right,
power, obligation, remedy or provision under the
Governance Agreement, and (if) such agreement shall
continue in fuII force and effect.
Mr. Schmidt's September 14, 2071, testimony
explaining that the Province is an investor in, and not a
manager of, Hydro One did not mis1ead the Commission or
the parties to this proceeding.
O. What happened in these proceedings after Mr.
Schmidt fil-ed his direct testimony on September 14, 2071?
A. After Hydro One and Avista submitted their
Joint Appllcation and direct testimony on September 74,
2077, the parties to this proceeding fited motions to
intervene, and Hydro One and Avista responded to
production requests. On April 4, 2018, the partles to
this proceedingl6 had their first in*person settlement
conference. During that settl-ement conference, the
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Hydro One Limited
15 The July 2O1B Letter Agreement is Exh. No. 10,
supplementaf testj-mony filed on Septemlcer 24, 20IB
16 the Avista Customer Group and rdaho Department
not granted intervention in this proceeding untif
20, 2OlB, respectively.
Schedul-e 1 to my
of Water Resources were
July 19, 2018, and.ruly
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Hydro One Limited
parties reached an agreement in principle. The parties
by email
was filed
then engaged
and phone to
with the Commission
in further settlement negotiations
reach an all-party settlement that
on April L3, 201,8 .
On May 16, 2018, the Commisslon issued a Notice of
Settlement, Notice of Modified Procedure, NoticeProposed
of Public
No. 34061.
Hearings,
In that
One, Avista, and
file comments in
2078.
O. PIease
and Notice of Amended
order, the Commlssion
the other parties to the
support of the settlement
Schedul-e, Order
directed Hydro
settlement to
by June 20,
describe
June 'l , 2078 election in
results.
the campaign leading up to the
Ontario and the election
Avlsta, and
negotlating the
A. At the same time that Hydro One,
on April 13, 20lB (the "Stipulation"), the campaigns for
the June 7 , 2018 Ontario el-ection began in earnest.
Hydro One became aware of the Progressive Conservative
Party's campaign promise to remove Hydro One's CEO during
the other parties to
settlement agreement
a campaign
to remove
officially
During
this proceeding were
that was filed with this Commission
event on April 10, 2078. The campalgn promise
Hydro One's CEO and Board of Dj-rectors was
announced on April 72, 2018.
Apri-1, May, and June, the Progressive25
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Hydro One Limited
Conservative Party, the incumbent
New Democratic Party were engaged
campaign to win the Ontario
Liberal Party, and the
in a hotly contested
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Hydro One Limited
premi-ership and obtain a majority of the seats in the
Ontario J-egislature. During this period, Hydro One was
unsure how the campaign would unfold and which party
would ul-timately prevail on June 1, 2018. It was
impossible to determine whether any of these parties had
an interest in or the ability to follow through on their
campaign promises prior to the election on June 7 , 20L8.
A. When did Hydro One and Avista notify the .
Commission and the parties to this proceeding that the
Ontario el-ectj-on might impact Hydro One?
A. El-ection campaigns in Canada are shorter than
in the United States. Starting in June 20L8, Hydro One
and Avista informed the Commission of the recent
political developments as it became clear they may impact
Hydro One, well before any potentia1 decision on the
merger by the Commission.
On June '1, 2078, the Progressive Conservative Party,
which made campaign promises to remove Hydro One's CEO
and Board of Directors, won the premiership and a
majority of the seats in the Ontario legislature. At our
next opportunity in this proceedi-ng, Hydro One and Avista
described the outcome of the June J, 20L8, election and
the potential
Joint Comments
risks to Hydro One in our June 20, 2078,
and Settlement.in Support of Stipulation
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O. Do you believe that the June 20, 2078, Joint
Comments in Support of the Stipulation and Settl-ement
were misleading wlth respect to how the resul-ts of the
Ontario el-ection might impact Hydro One?17
A. Not at all. The June 20, 2018, Joint Comments
stated that "Ia]Ithough Hydro One's largest shareholder
is the Province of Ontari-o, the Province does not hold or
exercise any managerial oversight over Hydro One. "18 On
June 20, 2078, the Governance Agreement remained in full-
force and effect, and the new government of the
Progresslve Conservative Party had not taken any act.ions
or engaged with Hydro One in any way to explain if or how
it was going to fulfiIl its campai-gn promises with
respect to Hydro One.
Commission Staff expressed concern that "in
addressing legitimate concerns of the impact of the
Province of Ontario could exercise over the operations
and management of Hydro One, the Applicants labeled the
possibility of dismissing the Board of Directors and CEO
as 'hypothetical eventsrr even as such events were in the
processes of actually occurring. "19 Agai-n, dt the time
Hydro One and Avista submitted their Joint Comments on
June 20, 2078, the new government of the Progressive
Conservative Party had not taken any acti-ons or engaged
with
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Hydro One Limited
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Hydro One Limited
17 Carlock Direct Testimony at pg.
1B Carl-ock Direct Testimony at pg.
19 Carlock Direct Testimony at pg.
11, .l-ines 14-24.
11 (citing Joint Comments at pg. 2).
11 (citing Joint Comments at pg. 18)25
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Hydro One Limited
Hydro One in any way to demonstrate whether or how it was
going to fulfill- 1ts campaign promj-ses with respect to
Hydro One. On June 20, 2078, the possibility that the
Province woul-d exercise its rights pursuant to Section
4.1 of the Governance Agreement to remove Hydro Oners
Board of Directors or would try to remove Hydro One's CEO
remained very much unknown and therefore were
"hypothetical events. " As noted in my September 24,
20L8, Supplemental Testimony, the Progressive
Conservative Party was not sworn in as the new government
until- June 29, 2018 .
We did our best in the June 20, 2018, Joint
Comments,just 13 days after the June l, 20L8, election
the new government was even sworn in on June
to explain the possible ways in which the new
coul-d impact the governance and management of
and before
29, 2078,
government
Hydro One,
decided to
First,
or potentially Avista, if the new government
foll-ow through on its campaign promises:
Hydro One and Avista attached a detailed
13-page report to the Jolnt Comments20 that
outlined (i) the history of the Provj-nce's
rel-ationship with Hydro One, (ii) the Province's
role as Hydro One's largest shareholder under the
Governance Agreement, includlng its rol-e in
selecting 402 of Hydro One's Board members and its
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right to seek
20 S"e AVU-E-17-Og/A7U-G-71-05, Exhibit A to the Avista and Hydro One Joint
Comments in Support of Stipulation and Settlement (June 20, 2018).
Scarlett, Supp. Reb 2Ba
Hydro One Limited
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Hydro One Llmited
removal of Hydro One's entire Board of Directors
pursuant to Section 4.f, (iii) the results of the
June '1, 2078, Ontario election and a summary of the
campaign promises leading up to the election, (iv)
how the new government could carry out its campalgn
promises if it chose to do so, and (v) how
fulfillment of these campaign promises coul-d impact
Avista if the merger was approved.
Second, the June 20, 2018, Joj-nt Comments carefully
explained how the Stipulated Commitments incl-uded in
the April 13 , 2018, Stipulation between the parties
to this proceeding would protect Avista from any
negative impact or infl-uence by the new government
1f the new government decided to follow through on
its campaign promises to remove the Hydro One Board
and CEO.21
Third, the June 20,
that (i)
foreign
because
(ii) the
Avista was
government
Hydro One
Committee
20L8, Joint Comments explained
not going to be owned by a
if the merger was approved,
is an j-nvestor-owned utility; and
on Eoreign Investment in the
had concl-uded that there wasUnited States already
no risk to critical infrastructure in the United
States as a resul-t of the transact..on.22
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t 25
750
2l See Joint Comments at pgs. 16-19.
22 See Joint Comments at pgs. 24-26, 28.
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The Jolnt Comments' use of the term "hypothetical
event, " when read in context, clearly was not a
dlsmissal23 by Hydro One and Avista of the
that these events could occur. Rather, the
Comments made clear what could occur in the
poss ibility
Joint
wake of the
election:
Moreover, the Joint Comments
possibility of financial or
One impacting Avista and its
The Province could trigger the provisions in Article4.1 of the Governance Agreement to replace Hydro
One's Board or the Province's new leadership couldintroduce Iegislation for the purpose of dismissing
Hydro One's CEO or members of the Board. These arejust possibilities, but even if they were to come topass, Hydro One, Avista, and the other Parties inthis Case have included governance and flnancialring-fencing in the Stipulation that wil,l- protectAvista and its customers and bol-ster the protections
already provided by the Governance Agreementl.)24
expl-ained that the
operational changes at Hydro
service to customers was "a
central theme during the settl-ement negotiations
involvlng al-l- the Parties in this Case" and "[t]he
Partles developed Stipulated Commitments that ensure
Avlsta wil-I remain a financially healthy, standal-one
utility after the merger regardless of any negative
financial or operational changes that could occur at
Hydro One,
some other
that al-l of
whether the resul-t of the Ontario election or
event. "25 The Joint Comments also made cl-ear
the Stipulated Commitments
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23 Carlock Direct Testimony at pg. 11, Iines 19-24
24 Joi.rt Comments at pg. 16.
25 Joi.,t Comments at pg. 16.
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Hydro One Limited
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Reb 31
Limlted
that woul-d protect Avista in the event that the Province
took any of the actions discussed would be binding on
Hydro One regardless of political developments and that
none of the commitments could be amended without approval
from Avista's regulators.26
fn conclusion, the June 2018, Joint Comments
were as clear as posslble at
20,
that
potential risks to Hydro
days after a hard-fought
time regarding the
then, just thirteen
in which the outcome
One as of
campaign
simply was not known in advance and nine days before the
new government was even sworn in.
O. Do you agree with Commission Staff's suggestion
that the June 20, 2018, Joj-nt Comments' characterization
of the risks to Hydro One as "hypothetical events" was
not accurate because the dlsmissal of the Hydro One Board
of Directors and CEO were in the "process [ ] of actually
occurrin g" ?21
A. No. As I explaJ-ned, under oath, in my
September 24, 2078, Supplemental Testimony, it was not
until July 4, 2018, that discussions were held between
representatj-ves of t.he Hydro One Board and the new
government of the Progressive Conservative Party. On
July 5, 2078, discussj-ons were held between independent
Iegal counsel to the Hydro One Board and a representative
of the new government, and privileged and25
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26 .]oi.rt Conrments at pgs. 18-19.
27 Carlock Direct Testimony at pg. 11.
Scarlett, Supp. Reb 31a
Hydro One Limited
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confidentlal discussions were held among the Hydro One
Board Chair, another representative of the Board, and the
Board's independent 1ega1 counsel-. Subsequently,
representatives of the Hydro One Board, the Board's
independent 1ega1 counsel, and representatives of the
government hel-d various discussj-ons and meetj-ngs from
July 6, 2078, through July 8, 2018.
These discussions involved representatives from the
Cabinet Office as well as representatives of the Ministry
of Energy, Northern DeveJ-opment and Mines, the Mj-nistry
of Finance, and the Attorney General, and they Ied to the
JuIy 2018 Letter Agreement.28 The July 2078 Letter
Agreement establ-ished (i) the process for the orderly
replacement of the Hydro One Board in compliance with all
refevant and material aspects of Section 4.1 of the
Governance Agreement and (ii) the process by which Hydro
One' s CEO Mayo Schmldt woul,d retire.
AIl of this happened after June 20, 2078. On June
20, Hydro One and Avista simply did not know whether or
how the new government would fol-low through on its
campaign promises to remove the Hydro One Board and CEO.
These were hypothetical events on June 20, as neither
Hydro One nor the new government had taken any actions to
make them real-.
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Hydro One Limited
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28 the July 2018 Letter Agreement between Hydro One and Her Majesty The
Queen in Right of Ontario was attached as Exh. No. 10, Schedule 1, to my
supplemental testimony filed on September 24, 20!8.
Scar1ett, Supp. Reb 32a
Hydro One Limited
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O. When did Hydro One and Avista notify the
Commission and Commj-ssion Staff of (i) the new
governmentrs decision to exercise its rights to remove
the Hydro One Board pursuant to Section 4.1 of the
Governance Agreement and (ii) the retirement of Hydro
One's CEO?
A. On July 18, 2078, seven days after the public
announcement by press rel-ease of the July 20lB Letter
Agreement between Hydro One and the Province, Hydro One
and Avista submitted a letter to the Commission
explaining the July 2078 Letter Agreement and the next
steps in replacing Hydro One's Board and CEO. Further,
this letter to the Commj-ssion also explalned that the new
government had introduced the Hydro One Accountability
Act on JuIy 15, 20L8, to give the Province regulatory
oversight over the compensation structure for Hydro One's
executives.
O. Do you belleve that "al-l- of the [Hydro One]
Board of Dj-rectors and the Chief Executive Officer (CEO)
bowed to pressure from the Province of Ontari-o and
resigned rather than being removed following the
establ-ished sharehol-der voting process"?2e
A. I would not characterize the events in that
fashj-on. I believe the board members and CEO took steps
that they properly
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Hydro One Limited
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29 Carlock Direct Testimony at pg. 6, lines 12-16.
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Hydro One Limited
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Hydro One Llmited
viewed as being in fundamental compliance with the
best interests ofGovernance Agreement and in the Hydro
outOne. Section 4.7 of the Governance Agreement sets
to call for the removal- ofprocess for the Provj-nce Hydro
and atOne's entire Board,
the Province's sole
with the exception of the CEO,
discretion, the Chair, which I
described in my supplemental testimony filed in this
docket.30 This process has been avail-abl-e to the
Province since the Governance Agreement was executed on
November 5, 2015.
The removal and replacement of the Hydro One Board
through the July 20tB Letter Agreement complied with the
process outlined in Section 4.1 of the Governance
Agreement, with just one excepti-on. Pursuant to the
Province's and Hydro One's authority to amend t.he
Governance Agreement with mutual consent (Section 26 of
the Governance Agreement), the July 2078 Letter Agreement
dropped the step of convening a sharehol-ders' meeting
(Sections 4.1 .4 - 4.1 .1 of the Governance Agreement).
The Province and Hydro One complied with all relevant and
material- aspects of Section 4.1 of the Governance
Agreement, but in order to serve the best interests of
the company, the Province and Hydro One agreed to forego
the requirement to hold a shareholders' meeting, which
would have added approximately 60 days to the Board
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replacement process. Hydro One concluded it
30 avu-e-17-09,/AVU-G-17-05 - Supplementaf Testimony of James scarlett at
pgs. 4-6 (Sept. 24, 20LB) ("Scarlett Supplementaf Testimony").
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Hydro One Limited
was in its best interests to expedite the replacement
process
Province
and reduce uncertainty, partlcularly since the
hol-ds a sufficient number of shares to determine
the outcome of a shareholder vote under Section 4.1 of
the Governance Agreement. A shareholders' meeting would
have served no useful purpose, but. would have been
damaging to Hydro One.
With respect to former CEO Mayo Schmidt's
retlrement, one might percei-ve Mr. Schmidt's retirement
as forced by the Province due to the Progressive
Conservative Party's campaign pledges to remove Mr.
Schmidt. One might also take the position that his
retirement was in viol-ation of Section 2.3 of the
Governance Agreement, which gives the Hydro One Board the
sol-e authority to appoint and terminate the CEO. This
si-tuation is more nuanced than that.
As noted above, the Province has the authority to
cal-l- for the removal and replacement of the entire Hydro
One Board, wj-th the exception of the CEO, and at the
Province's sole discretion, the Chair, pursuant to
Section 4.7 of the Governance Agreement. Furthermore,
Section 3.3.2 of the Governance Aqreement requires that
the Hydro One Board annual-J-y confirm the continued
service of the CEO through a two-thirds affirmative vote
in a Special Board Resolution at the Annual Confirmation25
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Hydro One Limited
Meeting.
introduce
Rather than wait to see if the Province might
legislation to terminate his employment, or
Hydro One's new Board would either
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Hydro One Limited
remove him immediately or fail
service pursuant to Section 3.
Agreement, Mr. Schmidt removed
to confirm his continued
3.2 of the Governance
uncertainty by retiring.
realized heconcfude that Mr. Schmidt
effectively continue as CEO without
One's single largest shareholder and
positions, havlng determj-ned that it
interests of all- concerned to do so.
One can fairly
would not be able to
the support of Hydro
he retired from his
would be in the best
V. COMPLIA}ICE WITH IDAHO CODE S 6L-327
O. Pl-ease summarize Commission Staff 's posi-tion on
whether the Proposed Transaction complies with Idaho Code
s 6r-321 .3L
A. Commission Staff asserts that because Hydro
One's largest shareholder is the Province, a governmental-
entity, "fdaho Code S 67-327 may provide a total bar to
the proposed merger. rr32
O. V'lhat does ldaho Code S 67-327 state?
A. Idaho Code S 6l-327 provides:
(restimony stricken) / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /// //// / /// / ///// //// / / //// / ////// //// / /// / / / / /// / / / / / /// /
/ / ///// // / ////// //// / //// / ////// / //// //// // /////// / / /////
31 Carlock Direct Testimony at pgs
32 Carlock Direct Testimony at pgs
2-3
2-3
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(restimony stricken) / / / / /// / / // / / / / // // / / / ///// /// //
// / / // /// ///// / // / / / / /// / / / / //// / /// / / /// ///// ///////////// / / / / / // / //// ///// / / / / / / / / / //// //// / / // / / / //// // / / / / / ///
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(restimony stricken) / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
/ // / / / / / / / / / / / / // / / / / / / / / // / / / / / / / / / / / / / / / / / / / / / / / / / / / //
O. What facts are relevant to the Commission's
assessment of whether the Proposed Transaction is barred
by Idaho Code S 6!-321?
A. A number of facts are relevant to determining
whether Idaho Code S 6l*327 bars or even applies to the
Proposed Transaction, which I will address in this
section of my testimony.
O. Pl-ease describe the nature of the Proposed
Transaction.
A. It is a merger. An indirect subsj-diary of
Hydro One will merge with and into Avista. Avista will-
be the surviving corporation.
O. Will Avista Corporation continue to exist as a
distinct lega1 entity?
A. Yes. The same corporation wil-l- continue to
exist. Avista wil-l- have its own board of di-rectors and
its own CEO. It wil-l- operate as a stand-al-one utility.
Scarlett, Supp. Reb 3B
Hydro One Limited
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Scarlett, Supp. Reb 39
Hydro One Limited
O. What will happen to Avistafs property and other
assets ?
A. None
change hands.
operate aII of
of Avista's property or
Avista wiIl continue to
the assets it has
other assets wil-1
own, control, and
for the provision of
and other states in theelectric and gas service in Idaho
Northwest.U. S. Pacific
O. If Hydro One is not acquiring Avista's assets,
what is Hydro acquiring?
A. Hydro One, through an indirect subsidiary, is
essentially buying all the shares of Avista's stock from
Avista's current shareholders. Thus, Hydro One is
acquiring property from j-nvestors in Avista. It is not
buylng any of Avista's own property.
O. After the merger is complete, could Hydro One
require Avista to transfer any of its utility assets to
Hydro One or anyone else?
A. No. That is impossible for several reasons.
Stipulated Commitment 46 expressJ-y prohibits any pledge
of Avista's utility assets for the benefit of any entlty
other than Avista. And Avista's board retains broad
controf over utility operations. For example, Avista
(and not Hydro One) determines Avista's organizational
structure,' has sole authority over the hiring and firing
of Avista's CEO and other Avista personnel,' sel-ects itsrepresentatives to its board; plans its operations,'25
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Hydro One Limited
invests j-n economic development incl-uding property
acquisitions; funds innovation activities; and negotiates
labor agreements. See Stipulated Commitments 2-13.
O. Can Hydro One force action by Avistafs board?
A. No. Only two members of Avista's nine-member
board are Hydro One executives or employees. See
Stipulated Commitment 3.
0. As a result of the merger, will there be any
direct or indirect transfer of title to or an interest in
any type
transmit,
A.
of property that is used by Avista to generate,
No, there will
Avista wil-l- retain afl of its property.
interest in Avista's property wilI be transferred to, or
the Proposed
distribute or supply electric
be no transfer
power?
of property.
Furthermore, no
acquired by,
Transaction.
O. Who
completed?
A. The
Hydro One as a result of
will own Avlsta after the merger has been
a Delaware limited Iiability company.
Olympus Equity LLC,
The ultimate owner
will be Hydro One because Olympus Equity LLC is a whoIly
owned indirect subsidiary of Hydro One.
O. Is Hydro One a Governmental Entity, assuming
that "Governmental- Entity" means any government or
municipal corporation, quasi-municipal
governmental or
corporation, or
immedlate owner will be
I 25
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political unit, subdivision or corporation, organized or
existing under the laws of any other state; or any
person, firm, associati-on, corporatj-on or organization
acting as trustee, nominee, agent or representative for,
or in concert or arrangement with, dtry such government or
municipal corporation, quasi-municipal corporation, or
governmental or politica1 unit, subdivision or
corporation?
A. No. Hydro One is a corporation formed under
the laws of Ontario, much as Avj-sta is (and wil-l- remain)
a corporation formed under the laws of Washington.
O. Does Hydro One have issued capital stock?
A. Yes. Hydro One has j-ssued capital stock, which
is traded on the Toronto Stock Exchange (TSX).
O. Is Hydro One's capital stock owned or
controlled, directly or indirectly, by a Governmental
Entity?
A. A number of j-nvestors, including some investors
that are governmental- entities, own some of Hydro One's
capital stock. No single investor owns or controls all-
or even a majority of Hydro One's capital stock. Thus,
no investor has a controlli.ng j-nterest in Hydro One.
O. Among your investors, which Governmental Entity
is the largest?
A. The largest is the Province, whJ-ch currently
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Scarlett, Supp. Reb 47
Hydro One Limited
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owns approximately 412 of Hydro One's stock. After
completion of the
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Hydro One Limited
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Scarfett, Supp. Reb 42
Hydro One Limited
merger, the Province will
One's stock.
0. Please describe
respect to Hydro One.
A. The rol-e of the
One is established by the
own l-ess than 432 of Hydro
the rol-e of the Province with
Province with respect to Hydro
Governance Agreement that was
tn 2015.34 The Governance Agreement between
the Province of Ontario is a bindlng
a pre-requisite for Hydro One's
PubIlc Offering ("IPO"). Neither the
entered into
Hydro One and
contract that was
successful Initial
Province nor any other major investor has any
representatives on the Hydro One Board. Instead, with
the exception of the CEO, all- directors must be
independent of Hydro One and the Province. (Governance
Agreement (r'GA'r ) 4.2.2; 4.2.3) . Directors must be
high-quality, reputable, experienced leaders with the
requisite skill-s, board experience, time, and motivation
for an operation of Hydro One's size and scope. Direct.ors
are al-so chosen in light of Hydro One's core operating
principles. (cA 4.2.1). Directors must meet the
requirements of corporate and securities l-aws and any
stock exchange on which Hydro One securities are listed.
(GA 4.2.4) .
The Province nominates four of the ten directors
(other than the CEO) , whil-e Hydro One's Governance25
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Committee nominates
34 scarfett SuppJ-emental Testimony, Exh. No. 10, Schedule 3
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Hydro One Limited
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Scarlett, Supp. Reb 43
Hydro One Llmited
six of the ten. (GA 4.7). The Board itself chooses the
CEO, who
Province
serves as the 11th member of the Board. The
does have the authority to require
but if it does so, it
resignation
stilI canof all- Board members,
appolnt only forty percent of the new Board members, and
al-l- Board members must meet independence and other
qualifications.
The Governance
is responsible for
management of
2.1.2). The
Province will
Hydro
Agreement establ-ishes that the Board
the management of or supervising the
One's business and affairs. (GA
Governance Agreement states that the
be involved 1n Hydro One as an investor and
not as a manager.
direction nor seeks
(GA 2.1.3) . Hydro One neither takes
consent for its operations from the
Province, outsi-de of the defined regulatory and oversight
authority that the government has over the all util-ities
operatlng in Ontario. (GA 2.1.3; 2.2).
Severa1 provisions in the Governance Agreement limit
the Province's shareholder rights:
' The Province cannot initiate fundamental
changes to Hydro One described in Part XIV of
the Business Corporations Act (Ontario) (e.9.,
amendment to articles, continuance,
arrangements, and amalgamations). (GA 2.5). The
Province may voLe its shares as it sees fit in25
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the event a fundamental change is initiated by
another shareholder. (GA 2.5).
Scarlett, Supp. Reb 43a
Hydro One Limited
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Scarl-ett, Supp. Reb 44
Hydro One Limited
' The Province cannot solicit (either on its own
or acting with others) any person to exercise
rights as a shareholder in a manner that the
Province woul-d be prohibited from doing
directly. (GA 2.6).
O. Does the Province control Hydro One's stock?
A. No, it does not. It currentl-y owns l-ess than
503 of the stock and, upon closing of the Proposed
Transaction, its ownership share wil-I be less than 432.
More than half of Hydro One's stock j-s and wil-l be owned
by investors other than the Province. The Governance
Aqreemenl35 expressly prohibits the Province from
acquiring additional- issued shares if that would result
1n the Province having control over more than 452 of any
class or series of shares. (GA 2.7) .
(restimony stricken) ///////// / /// ////// /////////////
/ // / / /// // / / / /// //// / / / // / / / / //// //// / /// / / / ////// / / / / //
/// / / /// /// / / //// ////// // / / / ///// ///// / //// ////////// / //
O. If the merger is completed, what role woul-d the
Province have with Avista?
35 Scarlett Supplementaf Testimony, Exh. No. 10, Schedule 3.25
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Scarlett, Supp. Reb 45
Hydro One Limited
A. The Province wou1d have no ownership of or
controf over Avista. It woufd receive no revenues from
Avj-sta. To the extent Hydro One makes dividends to its
investors, regardless of the source of Hydro One's funds,
the Province and other investors wil-1 receive dividends
proportionate to their ownership interests. The absence
of control 1s reinforced by the Avista Board structure,
where only two of nine board members will- be executives
or employees of Hydro One, as well as the Hydro One board
structure, where no board members may be executives or
employees of the Province.
O. Does Hydro One serve as a trustee, nominee,
agent or representatj-ve for, or in concert or arrangement
wj-th, the Province?
A. No, Hydro One does not serve in such a role.
These are Iega1 concepts that woul-d need to be
establ-ished by re1evant facts. There is no evidence to
suggest that any supporting facts exist.
O. Will Hydro One and its affiliates in the chain
of ownership between Hydro One and Avista be subject to
the jurisdiction, regulation, and control- of the
Commisslon under the public utilj-ties law of this state?
A. Yes, Hydro One and its affiliates in the
ownership chain wifl be
jurisdiction under Idaho
List of Commitments. See
to the Commi-ssion's
set forth 1n the Master
subj ect
Iaw as25
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Scarlett, Supp. Reb 46
Hydro One Limited
Stipulated Commitment
and Jurisdiction); 27
Nos. 20 (State Regulatory Authority
(Compliance with Existing
to and Maintenance
Enforcement of
Commission Orders); 23 (Audit, Access
of Books and Records); 30 (Commission
Commi-tments),' 31 (Submittal to State Court Jurisdictlon
for Enforcement of Commission Orders),' 33 (Commitments
Binding) ; 1 4
16 (Venue for
(Notlce and Petition to Alter or
and Resolution of Disputes). As
and affirmed by Commission Staff, the Commission will
retaj-n regulatory jurisdiction over Avista after the
Proposed Transaction just as it has in the past. Nothing
about the Proposed Transaction changes the Commi-ssion's
jurisdiction over Avj-sta's rates and quality of service.36
VI. COMPLIATICE WITH IDAHO CODE S 6L-328
0. Does Commission Staff conclude that the
Proposed Transaction complies with Idaho Code
s 6l-328?31
A. Yes. Commission Staf f concl-udes that (i) the
Proposed Transaction is consistent with the public
interest (Idaho Code S 6l-328(3) (a)),38 (fi) Avista's
cost of and rates for supplying service will not be
increased by reason of the Proposed Transaction (Idaho
Code S 6l-328(3) (b)),3e and (iii) Hydro One
Amend) ,' and
recognized
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36 Cartock Direct Testimony at pg.
37 Carlock Direct Testimony at pgs.
38 Carlock Direct Testimony at pg.
39 Carlock Direct Testimony at pgs.
5,1ines 4-16.
,E
4, fines ll-25.
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Scar1ett, Supp . Reb 46a
Hydro One Limited
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Scarlett, Supp. Reb 41
Hydro One Limited
has the bona fide lntent and financial ability to operate
Code Sand maintain Avista in the public service (Idaho
61,-328 (3) (c) ) .ao
With respect to Idaho Code S 6!-328 (3) (a) ,
Commission Staff note that although the public interest
requirement is judged based on a "no harm" standard, the
partiesal negotiated Stipulated Commitments to ensure that
Avista's customers will- "receive a net overal-1 financial-
benefit"42 a step above and beyond "no harm. " With
respect to Idaho Code S 6l-328 (3) (b), Commission Staff
emphasizes that "Ia]ny customer rate increase must be
approved by the Idaho Commission before Avista can
increase rates to Idaho Avista
Avista's cost of
customers, " thereby
and rates for supplyingensuring that
service will
Transacti-on.
O. Do
not be increased by reason of the Proposed
you agree with Commission Staff that the
Proposed Transaction complies with Idaho Code S 6t-328?
A. Yes.
O. Which of the Stipulated Commitments in Exhibit
101 to Terri Carlock's Direct Testimony ensures that the
Proposed
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Hydro One Limited
40 Carlock Direct Testimony at pg. 4, lines 19-25.
41 As noted above, the Avista Customer Group and Idaho Department of Water
Resources ("IDWR') were not granted intervention in this proceeding untj.I
July 19, 2018, and July 20, 2018, respectively. The Avista Customer Group
has not joined the Stipulated Settfement. IDWR settled its concerns with
the Proposed Transaction in a separate agreement with Hydro One and Avista
that is attached to the Stipulated Commitments.
42 Car]ock Direct Testimony at pg. 7, lines 20-23.
43 Carlock Direct Testimony at pg. 3, lines L4-L6.25
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Scarlett, Supp. Reb 48
Hydro One Limited
Transaction is consistent with the public j-nterest (Idaho
Code S 67-328 (3) (a) ) ?
A. Hydro One, Avista, Commission Staff, Clearwater
Paper Corporation ("C1earwater"), Idaho Forest Group, LLC
("Idaho Forest Group"), Idaho Conservation League
("ICL"), the Community Action Partnership Association of
fdaho ("CAPAI"), and the Washington and Northern Idaho
District Council- of Laborers ("WNIDCL") agreed to
numerous Stipulated Commitments that ensure that the
public interest will be served by the Proposed
Transaction.
The followlng Stipulated Commitments ensure that
Avista's Idaho customers wil-l- continue to receive safe
and reliabl-e service after the Proposed Transactj-on is
consummated:
' 15 - Safety and Rel-iability Standards and
Service Qual-ity
with Commission
Measures: Avista is working
Staff to develop performance
standards,
mechanism
customer guarantees, and a reporting
for its customers i-n Idaho that are
simil-ar to Avista's Service Qual-ity Performance
Standards, Customer Guarantees, and a Service
Quality Measure Report Card in Washington.
28 - Partlcipation in National- and Regional
Forums: Avista will continue to participate in
national and
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Scarl-ett, Supp. Reb 49
Hydro One Limited
regi-onal forums to protect the interest of its
customers.
The following Stipulated Commitments ensure that
Avista's Idaho customers wil-l- receive benef its after the
Proposed Transaction is consummated:
' L9 - Rate Credlts: See Lopez Rebuttal-
Testimony.
' 58 Funding for Energy Efficiency,
Weatherization, Conservation, and Low-Income
Assistance Programs: $5.3 million in funding
over a 10-year period for energy efficiency,
weatherization, conservation, and low-income
assistance programs under the direction of the
Efficlency, WeatherizatJ-on, Conservation, and
Low-Income Assistance Committee ("EWCL") .
' 62 - Addressing Other Low-Income Customer
Issues: Avista wil-l- continue to work with
Iow-income agencies to address issues of
low-income customers.
' 63 Fee Free Payment Program: Avista will
continue to offer the Eee Free Payment Program
to i-ts residential customers.
The following Stipulated Commitments ensure that
several- programs designed to assist Avista's customers
after the Proposed Transaction iswill be enhanced
consummated:
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Hydro One Limlted
' 61 Service Rules for Gas Utilities: Process
to review the Commission's Service Rules for
Gas Utilities (IDAPA 31.31.01) to determine
which provisj-ons should be retained and/or
modified.
' 58 - Meters: Process to revi-ew Avista's meter
placement and protection policies and
practices.
The following Stipulated Commitments ensure benefits
the environment after the Proposed Transaction is
consummated:
52 Renewable Energy Resources: Avista will
continue to offer renewabl-e power programs in
consul-tation with stakehol-ders.
to
55 - Transport Electrification: Avista
lnitiate a stakeholder process within
wiII
60 days
toof the close of the Proposed Transaction
explore opportunities for transport
el-ectrificatlon that beneflts al-l Idaho
customers.
56 Greenhouse Gas and Carbon Initiatives
Avlsta wilI continue to work with interested
parties on its Greenhouse Gas and Carbon
Initlatives.
51 Greenhouse Gas fnventory Report: Avista25
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will report greenhouse gas emissions as
required.
58 Funding for Energy Efficiency,
Weatherization, Conservation, and Low-Income
Assistance Programs:
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Hydro One Limited
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ScarIett, Supp. Reb 51
Hydro One Limlted
$5.3 mi1fion in funding over a 10-year period
for energy efficiency, weatherization,
conservatj-on, and low-income assistance
programs under the direction of the EWCL.
The following Stipulated Commitments ensure that the
communities in which Avista operates will receive
benefits after the Proposed Transaction is consummated:
' 11 - Community Contributions: Eor five (5)
years after the cl-ose of the Proposed
Transaction,
annual budget
additionally,
wil-l be made
Avista wil-I mai-ntain a $4 million
for charitable contributions, and
a $2 million annual contribution
to Avista's charitable foundation.
72 Community InvolvemenL: Avista will-
maintaj-n its existing l-evel-s of community
involvement.
59 - Clearwater Paper DSM Assistance: Avista
will support efforts with Clearwater Paper to
qualify certain projects for DSM funding under
Tariff Schedule 90, and a portion of the costs
wiII be considered for funding under Stipulated
Commitment No. 58.
60 - Idaho Forest Group (IFG) DSM Assistance:
Avlsta will- support efforts with IFG to qualify
under Tariffcertain projects for DSM funding
Schedule 90,
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Scarlett, Supp. Reb 52
Hydro One Limited
and a portion of the costs will be
considered for funding under Stipulated
Commitment No. 58.
67 - Community Contributions: Avista will make
a $7 million one-ti-me contribution to Avista's
charitabl-e foundation.
64 Improve Penetration of Low-Income
Programs: Hydro One and Avista will- continue to
work to j-mprove the penetration rate of
low-income programs.
65 - Tribal Communiti-es: Avista will- reach out
to tribal communities to encourage
participation
receiving the
10 - Mont.ana Community Transitj-on Fund:Hydro
towardsOne wil-l arrange funding of $3 million
a Colstrip community transition fund.
77 - Colstrip Transmission Planning: Avista
will work with others to resol-ve questions
regarding new generatj-on once Colstrip Units 3
and 4 retire, and work with Commission Staff
and stakeholders to determine the transiti-on
plan and impacts to Idaho ratepayers prior to
any closure of Colstrlp Units 3 and 4.
of members of such communiti-es in
benefits of this settlement
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' J2 Contract Labor: A11 employees,
contractors, and subcontractors of Avista shal-l-
be paid a fair and competitive wage.
The Rebutta1 Testimony of Chris Lopez for Hydro One,
filed November 14, 20L8 ("Lopez Rebuttal Testimony"),
lists additional commj-tments that ensure the Proposed
Transaction is in the public interest.
O. Besides these Stlpulated Commitments, what
factors demonstrate that the Proposed Transaction is
consistent with the public interest (Idaho Code S
61,-328 (3) (a))?
A. Hydro One's strong bal-ance sheet and credit
ratings, the similarities in the areas served by Hydro
One and Avista, and the two utilities' shared values and
cul-ture make Hydro One an excel-lent parent company for
Avista, which is a relatively smal-I utility in a time of
consolidation in the energy industry. These factors are
detail-ed in former Hydro One CEO Mayo Schmidt's direct
testimony,4a Christopher Lopez's direct4s and supplemental-
testimonY,46 and Scott Morris' directaz and supplemental-
testimonY. aB
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Hydro One Limited
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Hydro One Lj-mited
44 sch*idt Direct Testimony at pgs. 26-29.
45 avu-s-17-09/AVU-G-17-05 - Direct Testimony of Christopher E. Lopez at
pgs. B-10, L3'L4, 15-16 (Sept. 1,4, 201,1 ).
46 evu-n-17-09/AVU-G-17-05 - Supplemental Testimony of Christopher E. Lopez
at SS III-IV (Sept. 24, 2018).
47 avu-e-17-09/AVU-G-1?-05 - Direct Testimony of scott L. Morris at pgs.
72-L1 (Sept. 74, 2011).
4B avu-s-t7-09/AVU-G-17-05 - Supplementaf Testimony of Scott L. Morris at S
II (Sept. 24, 20lB\.25
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Scarl-ett, Supp. Reb 54
Hydro One Limited
0. Which of the Stipulated Commitments in Exhibit
101 to Terri Carlock's Direct Testimony ensures that
Avista's cost of and rates for supplying service will not
be increased by reason of the Proposed Transaction (Idaho
Code S 67-328 (3) (b) )?
A
O
PIease see the Lopez Rebuttal Testimony.
Which of the Stipulated Commitments in Exhibit
Dlrect Testimony ensures that
fide intent and financial ability
101 to Terri Carlock's
Hydro One
to operate
has the bona
and maint.ain Avista in the public service
(Idaho Code S 67-328 (3) (c) ) ?
A. Please see the Lopez
Tom Woods
Rebuttal Testimony and the
Rebuttal Testimony of
November 14, 201,8.
for Hydro One, filed
O. Does this concl-ude your rebuttal- testimony?
A. Yes, it does
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CSB REPORT]NG
208.890.5198
SCARLETT (X)
Hydro One Limited
(The following proceedings were had in
open hearing. )
MS. VANDER STOEP: Your Honors, Mr.
Scarl-ett is availabl-e for cross-examination.
COMMISSIONER KELLANDER: Thank you.
Mr. Purdy.
MR. PURDY: I have no questions. Thank
you.
COMM]SSIONER KELLANDER: MT. Otto
MR. OTTO: I have no questions. Thank
you.
COMMISSIONER KELLANDER: Thank you.
t^L(J
Mr
Richardson may or may not be back. We'If go
Mr. Williams.
MR. WILLIAMS: No questions.
COMMISSIONER KELLANDER: Mr. Baxter.
MR. BAXTER: Thank you, Mr. Chairman, oo
questions.
COMMISSIONER KELLANDER: And Mr. Karpen.
CROSS-EXAMINATION
BY MR. KARPEN:
O Yes, good morning, Mr. Scarl-ett . How are
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A Good morning, Mr. Karpen. I'm weIl, thank
you -
O Great. Throughout this proceeding, I
think we have all gone down a well--trod road over what
had occurred this summer with the Provi-nce of Ontarlo and
the removal of the board. I'm sure you've heard numerous
testimony on that,
jurisdictions; is
A Yes, that's accurate.
O I think yesterday Mr.
as a bol-d move by the Province. Mr.
as a political action. Nonetheless,
these proceedings, f bel-ieve
maintained that the Province
that Hydro One has
is stilf acting as an
spite of the unusual
that accurate?
probably here
that accurate?
l_n
and in other
Woods described it
Lopez described it
throughout aII of
investor and not a manager
actions that were taken; is
Ms. Carl-ock;
That's
Okay,
is that
That's
A
o
accurate from my opinlon, yes.
you've reviewed the testimony of
correct?
correct.A
O
starting
that Ms.
on page 76,
Carlock had
you speak
expressed
lnfluence
page, You
Province's abiJ- j-ty to
on the bottom of the
I think in your supplemental- rebuttal-
to some of the concerns
with regard to the
Hydro One. Specifically,
don't agree with25
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Ms. Carlock's concl-usions that there doesn't appear to be
at l-east any apparent bounds over the Provj-nce's ability
to at l-east infl-uence Hydro One? You don't agree with
that conclusion, do you?
A No, I don't.
0 Okay, you also state in response that the
removaf of the Hydro One board followed all- rel-evant and
material aspects of the provisions in the governance
agreement and retirement of Mayo Schmidt removed
uncertainty. Now, that's not entirely correct that it
followed al-l- the relevant and material- aspects of the
governance agreement, is it?
A No, I think that is correct.
O Oh; so the board didn't voluntarily step
down through a different agreement? My understanding was
that they woul-d have to take through the governance
agreement, the Province would have to take different
actions in order to fol-Iow the letter of the governance
agreement.
A Yeah, I intentionally let me just
explain a bit. I intentionally said all material and
relevant aspects of the governance agreement had been
adhered to. What I meant by that was the governance
agreement, and I can go more on this if you're
interested, but the governance agreement constraj-ns the
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ability of the government to act as a 47 percent
shareholder could otherwise act if they didn't have an
that curtailed theiragreement
that more
not an
if you want, but
document.
it
powers. I can explain
is a constraining document,
empowerrng
The governance agreement contains a
procedure if the Province wants to change the board, and
the procedure the key elements are there has to be a
new nominating committee. It has to be run by the
outgoing chair. They have to adhere to al-l- of the
standards in the governance agreement for the new
directors to come in. They have to meet the matrix of
qualifications. They have to remove the whole board and
that's done not as an empowering act, but to make it,
frankly, a more challenging act to change the board, and
all of those aspects of the governance agreement were
adhered to and it was very important in my view that they
be adhered to.
The only part of the governance agreement
that wasn't fol-lowed was the normal requirement that is
in that agreement to call a shareholder's meeting and the
reason that that wasn't adhered to and it was my
recommendation, in fact my strong urging, that it not be
adhered to is that it simply would have added 60 days of
process time that would have had no effect on the25
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outcome, and when you're going through the kind of
challenge and change that we had, that we were facing at
that point, the l-ast thing that we wanted, the last thing
that would be good for the company, for staff or al-l- of
our stakeholders would be an elongated period of
uncertainty as to what was going to happen, so by
removing what in my view woul-d have been a meaningless
shareholder's meeting, we took a 90-day process down to
30 days. That's the only part of the governance
agreement that wasn't adhered to. The JuIy 11 agreement
simply memorial-ized that understanding.
a Okay, and then as part of that whol-e
thing, that
occurred.
number of
Eor example,
board members?
process, there were some other changes that
there was a reduction in the
A Correct.
a There was also a letter agreement that
gave the Province oversight with regard to executj-ve
Ietter agreement,
Bill 2, but it's
Act, that gives the
compensation;
A
O
regard to the
is that accurate?
governance agreement I'm sorry, the
I think -- f don't know if it refers to
BiIl 2, the Hydro One Account.ability
The
Now,
Hydro
government that oversight role.
you refer to the term subsidiary with
One Accountability Act. Can I have25
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you refer to Exhibit 10 of your direct testimony --
excuse me, supplemental testimony, Schedul-e 3?
A What i-s that item, please?
O Itrs the governance agreement.
A Oh, the governance agreement?
O Yes.
A Absolutely.
0 I belleve it's page the numbers on the
top are different than the numbers on the bottom.
A What's the section number, please?
O It is Section 2.70. It's page L2 from the
numbers on the top.
A Yes.
O It refers to Governance of Subsidiaries.
A Uh-huh.
O Now, there's nothing in at l-east this
governance agreement that limits the Province's authority
in any way or jurisdlction for companies or affiliates or
subsidj-aries of Hydro One that are incorporated outside
of Canada; isnrt that right?
A It doesn't speak to subsidiaries outside
Canada. Of course, when t.his was done, there were no
subsidiaries outside Canada.
O Okay. In fact, Section 2.10.3 actually
says the real- obligation of the Province is to comply
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with its obligations under Section 2.L.3, which is it
shall conduct itself essentialj-y as an i-nvestor and not
as a manager.
A Uh-huh.
O Is that accurate?
A The section referenced, yes, that's a
correct recitation of the section.
a So I guess kind of circling back, a
reduction I guess the removal of the board and the CEO
and a reduction in the number of board members and
oversight over the compensation packages of the executive
board you feel still falls within the definition of
investor and not manager?
A Yes, I do. I can expand on that if you'd
l-ike, but I do bel-i-eve t.hat.
O That's okay.
probably extract more than I
of al-l- of the concerns of Ms.
I think Mr. Semanko wil-I
will. Nonetheless, in spite
Carlock, whether you agree
with those concerns or not, do you feel- that the
ring-fencing provisions that have been agreed to between
the company, Staff, and most of the intervenors are
strong enough to protect Idaho Avista customers from any
action by the Province?
A Yes, I do and I mean, I'd l-ike to expand
on that, if possible.25
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Hydro One Lj-mited
O Pl-ease.
A We've heard from other witnesses how the
financial ring-fencing works and how j-t in fact bolsters
and protects Avista's financial integrity in a way that
doesn't exist today. Therers also been some questi-ons
raised about the kind of potentlal for an indirect effect
on Avista if the Province does something with its
legislation that affects Hydro One, and the point I'd
l-ike everyone to remember is that the Province could pass
legislation or can take acts as a shareholder that coul-d
affect Hydro One and that's for Hydro One
but the Province doesn't have
reach through Ontario down to
affect Avista directly, and I
understood and accepted, but
to deal wj-th,
authority to
pass l-aws that
been
legislative
the U.S. and
think that's
even if the Province tried
to do something, itrs hard to imagine what it could do,
to direct. Hydro One to do something, vis-a-vis Avista,
Hydro One can't just wave a wand and do it.
There's a corporaLe structure in place.
Hydro One has to come the only way Hydro One can do
anything with Avlsta is through the board of Avista. The
Avi-sta board, we have locked in a nine-person board. Two
of nine wil-l- be Hydro One employees or executives. Seven
of nine wil-I be independent of Hydro One; probably two
people from Avista and five fu1Iy independent directors.25
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There simply won't be the ability
say do such and so because Ontari-o
to go to that board and
has said do such and
so.
If that puts Hydro One offside some edict
from the government in Ontario, that will be Hydro Oners
issue to deal with, but it will not reverberate down to
Avista, and I believe that very strongly, and even if
it's something that might you might sdy, weII, what
about a financial impact, I think as we heard our expert
Mr. Reed say, 1t woul-d have to be such a dramatic impact
at Hydro One before it cou1d have any fj-nancial effect at
Avista that it's simply not a realistic concern to have,
so for those reasons, I think the package that's being
built and not just by us, but with lnput from Staff and
intervenors 1n this state and others I think is very
robust.
MR. KARPEN: Thank you. I have nothing
further for this wi-tness.
COMMISSIONER KELLANDER: Thank you.
Mr. Semanko.
MR. SEMANKO: Thank you.
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CROSS-EXAMINAT ]ON
BY MR. SEMANKO:
0
A
a
were you in
yesterday?
A
o
you disagree
A
0
Good morning,
Good morning,
I'11- start of f
Mr.
Mr.
by
for
Scarl-ett.
Semanko.
asking, first of all,
the Hearing Room the three wi-tnesses
Yes, f was.
Is there anything in their testimony that
with?
No.
You mentioned that the governance
document, not an empoweringagreement
document;
is a constraj-nlng
correct ?
A That's correct.
O And you were
owner status of
Correct.
referring to the 41 percent
the Provi-nce; correct?shareholder
A
With regard to the legislative
of Ontario, would it be falr to
power of
say that the
not a
the Province
governance agreement is
constraining document?
A I don't
a reserving document,
understand the distinction you're
reserving documentdriving at. I don't understand what aI
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means.
O If you cou1d turn to
agreement to 2.2.1(d) .
A Yes, I see it.
O Does sub (d) reserve
or constraj-ning
the regulation
the enforcement
the powers of the Province in
or any Hydro One
laws applicable to
entity for
Hydro One
as confirming that quite
the government's ability
the
the governance
as opposed to waiving
re]ation to
or any Hydro One
AI
Ontario lawyer,
of Hydro One
of Ontario
I read 2.2.t(d)
restricti-ons on
entity?
read as a matter of Ontari-o law and
apart
to act
from the
as a sharehol-der that (d) confirms that
Province, and this wouldn't surprise anybody, retains its
legislative authority to pass l-aws, and the key words are
at the bottom of that section, "in rel-ation to the
enforcement, promulgation or enactment of Ontario l-aws or
in relation to Ontario regulatory policy, " which, of
course, is speaking to broader issues that any government
would retain authority overr so if that's what you mean
by reserving, I would say it's confirmatory of the
Province's legislative authority.
O So confirming would be a better word?
A In my view, yes.
O So woul-d it be to fair to say that as to25
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Hydro One Limited
the legislative power of the Province of Ontario, the
governance document is a confirming document, not a
constraining document?
A
way. I think
of it is; is
to act as an
confirmation is a separate
authority as a
I simply wouldn't charactertze it that
this governance agreement, that the essence
about constraining the government's ability
unfettered shareholder. It has in it
that that
government's existing
but this section (d)is not the core aspect or an
anj-mating aspect of this agreement in my view.
O But it is part of the agreement;
correct ?
Yes,
Thank
I sald that, y€s
familiar with Premier
A
0 you. Are
the effect
toplc from the
legislative body,
Hydro One is not a
you
thatFord's statement to
private corporation, but
the Province?
A I be]ieve
news at one point, yeah.
a Are you at
has or may be manifest in
has been and is controlled by
I heard that or saw that in the
alI concerned that that view
the future by the Premier or
the Iegislature that's controfled by his party?
a comment made in aANorI
political context.
think it was
It wasn't technical, it wasn't)c.
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Hydro One Limited
particularly accurate, and I think it doesn't concern me,
no
O Are the events that occurred with regard
to the retirement of the CEO consistent with Premier
Ford's statement?
A I think the two are separate. I don't
think you can draw that connection.
O Was that not a campaign promj-se of his?
A It was a campaign promise, but the
statement that you read I think occurred wel-l- after the
election.
The quot.e that
After he was sworn in?
Sorry, just to back up so we're cl-ear.
you read that Premier Ford said something
O
A
about Hydro
company, I
that quote,
nothing
he said on
not sure what
One is not
can't quite
a private
remember
I believe, is from October,
it's completely disconnected
the or what happened in
you want me to make
company or is a private
what the quote
maybe,
in time
was, but
so it had
Ju1y, so I'm
between the
from what
campaign
connection
two. That's all.
O Okay, thanks for
was not campaign rhetoric or a
A I'm sorry, that
the clarification; so it
campaign statement?
specific thing you sald
about it being25
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o Yes.
-H.private and controlled, I believe
you have the quote, do
O I don't
the date on it?
commitment quite wel-l-. We
from Staff. Yes, what
this ?
in front of me, I'm sorry.
recol-lection is
you -
comment was in
on the l1ne of questioning with
Reed, commitment 1 4
is pretty new in the process;
you have
have it
A f 'm sorry as wel-l. My
that it's post all of this happening.
O That's heIpfu1, thank
A Whereas, his campaign
Apri1. It started in April.
0
the previous
A
a
correct?
A
o
Picking up
witness, Mr.
Yes.
Yoq
And that's the one that allows for or
recognizes the ability of a party to ask for
reconsideratj-on or how would you charactertze that?
A Let me just turn to it if you don't
mind.
O Absolutely.
A I remember the
crafted it with a l-ot of help
would you l-ike to ask me about
a What does it allow a party to do?25
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Hydro One Limited
aspects.
think was
A WeI1, I think it's got
I think the first important
very important to the Staff
obligation on Hydro One to
Staff at the earl-iest date
this
a couple of
aspect, and this I
and intervenors, is
come forward and
Hydro One's
stipulation, " so I
it puts
advise if something
the room, "If
happens,
and I'l-l- just read the words for any event
occurs that would have an effect on Avista's operations
and/or customer rates because of Avista's corporate
relationship with Hydro One, or affects
an
compliance with any commitment in
think the first thing that is new
obligation to come forward, and I
events that happened and frankly,
What it goes on
statement that we
is our positive
think that glven the
our own failure to
to after that., of
advi-se the Commissj-on Staff as promptly as we cou1d have
of what happened in Ju1y, this makes perfect sense and it
puts a positive obligation and it's additive to the whole
package so that the Commission Staff and intervenors have
an early opportunity to consider something that's
occurring and think about whether steps need to be taken
to address it.
course,
inis a positive
initiating a
if steps can
event happens
participate
commi-tmentsproceeding to reopen
or should be taken to
to be. Thatrs how I
will
the and see
address whatever this
understand it will25
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operate.
OSo
question of remedy
remedy under that
Mr. Reed seemed to demur on the
a possibJ-e
undoing the
at least 1n part. Would
provision be unwinding or
merger after it has closed?
A Honestly, I donft know what powers there
are in the Commission. f don't think the Commission has
the power to order the dispositlon of a subsidiary or of
assets, but whatever powers the Commission have they
have. We could always agree to other steps that would be
consensual-. f canf t reaIly envj-sion one where we would
happily say we're going to seIl off Avista. I can te11
you as a corporate lawyer, it's certainl-y possible to
either sel-l- a subsidiary or to carve out assets of a
company and sel-1 them.
ft's difficult. It involves a lot of
considerations, but if you're asklng me is that
technically possible, yeS, and the other thing to keep in
mind here, although this is called a merger, which is
U.S. parlance for a takeover, itrs not a, sort of not
a I don't know how do you put it. When people speak
of merger, they think of two things coming together, like
scrambl-ing an egg and this is not that kind of a merger.
It is an acqui-sitlon of a separate entity.
Let me give you an example. We talked25
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Hydro One Limited
yesterday about our
companies. That's
we buy the company
tol-d us de-merge it
of it out. This is
acquisition of local distribution
more of a non-term art of merger
us and ifand we absorb it into
where
laterr w€ would have to carve
you
pieces
an acquisition of a separate company,
standalone. Everything will be going forward the way it
is today in terms of structure, so selling that, if we
were told we had to sell- it, then technically, yeah, you
could do that. I hope it never comes to that, but does
that answer your question?
O Yes, thank you; so how many utilities has
Hydro One acquj-red in Ontario?
A f'm not entirely certain of the exact
number. I've heard 60. I've heard up to 90. These are
very, very smal-I focal distribution companies. None of
them are transmission companies, because Hydro One is
transmission in Ontario. None of it's generation,
because our only generation is a smal-l- amount of dlesel
and so on up in the far north. Itrs all these small
municipal distributlon companies and most of that
activity occurred some years dgo, reaIIy when we were a
Crown corporation and the Provincial- government had a
policy of wanting to consolidate them, because I believe
there was something like 300 and it was very inefficient
and now I think there's about 10 left, and we're25
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currentl-y seeking approval to complete the acquisiti-on of
two others.
O And Avista woul-d still be the first one in
the United States?
A Yes, i-t would be.
0 So on page 4 of your supplemental
testimony --
A Let me get there, please.
O You bet.
A Supplemental; right?
O Yes, supplemental.
A Yes, I have it.
O You were asked what mechanisms were
available to the government, Ontario, to fuIfilI Premier
Ford's campaign promises regarding Hydro One's CEO and
board of directors, and on line L!, you say one of the
mechanisms j-s legislation; correct?
A Correct.
0 Is that true for other campai-gn promises
that this Premier has made?
A f'm not sure I understand your question,
but generally speaking, that's how governments act. They
pass legislation and in the Canadian system if you have a
majority government, you can pass legislation quite
swiftly. If you have a minority government, that can be
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much more dif f lcul-t.
0
governments in
A
o
prevents the Province
would increase the
And that would be true for future majority
Ontario as well?
Yes, it would be.
Thank you.
from
have
Is there anything that
enacting legislation that
the effect of increasing the
Ontario to 50 percent plusownership of Hydro One by
one ?
A Wel1, they would have to pass legislation
to do that, because right now they're contractually
constrained not to go to that l-eveI.
0 Is there anything that I guess I ' 1l- ask
the question again. Is there anything that prevents that
type of legislation from being passed? Does the
governance agreement prevent that?
A No.
O Thank you. Other than the governance
agreement and the July 11th letter agreement, are you
aware of any other agreements or written formal
arrangements between Hydro One and the Province?
A No, I'm not aware of any.
O Other than the Hydro One Act that you
referred to this morning and it's an exhlbit to your
testimony, are you aware of any other acts that are25
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Hydro One Limited
directly -- that directly impact Hydro One?
A The Electricity Act, I believe, directly
impacts Hydro One. It has limits on the government's
ownership and then there's other leglslation that
regulates the energy industry generally, l-ike the Ontario
Energy Board Act, which sets up the regulator.
O Irm sorry, I meant to ask any other
legislation that's specific to Hydro One as opposed to
generally applicabl-e to el-ectric utilities.
A I think you would still- say the
Electricity Act because it has a section that
specifically talks about Hydro One.
O So an Act passed in 1998 and an Act passed
this year; correct?
A I havenrt verified the dates. Whenever
they were passed they were passed, but they are in effect
I know.today. That much
o
A
O
testimony, you
the development
that testj-mony?
A
Can those Acts be amended?
Yes.
So on page 8 of your supplemental
talk about the background with regard to
of the l-etter agreement. Do you recall-
Yes, I do.
And on l-j-nes 15 and on it says, "RatherO25
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than wait for the government to trigger the procedures in
the governance agreement or pursue legislation with
potentially intrusj-ve provisions, " and it goes on that
the letter agreement was entered into. What kind of
intrusj-ve provisions were you referring to there?
A It was conjecture that intrusive could
have been a variety of things, but what it woul-d be in my
mind was they could have passed legislation that just
said we're changlng the board period and herers the new
board, and f woul-d have considered that to be an
intrusion on governance. I would have considered that to
be contrary to the governance agreement and negative in
the financial markets. There's a whol-e context here
about the financial market we haven't tal-ked about and
about Ontario's securities regulation that we havenrt
talked about, and I thought that would be negative and
intrusive and it was probably the animating reason why I,
to the extent that I could, advocated for compliance with
the governance agreement to achieve the government's
decided outcomes.
O So is it fair to say that in this
instance, the threat of legislation, the possibility of
potentially intrusive provisions helped drive Hydro One's
actions ?
A I think the who1e context helped drive the
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Hydro One Limited
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actions and, if f may, I think it's important to real-ize
that the only reason the government would have needed to
use legislation is because the governance agreement
constrained its ability to act as an unrestrained 41
percent sharehol-der. If it weren't for the governance
agreement and you just had a 41 percent shareholder, a 47
percent sharehol-der can on j-ts own change the entire
board, change the CEO, change compensation, pick the new
CEO, pick a1I of the board and have the board do exactly
what it wants. Our government coul-dn't do that because
of the governance agreement, so the only way that it
could move forward, if we hadn't come to a sensible
outcome with them, would have been legislation, so the
governance agreement is a very powerful tool in
constraining the government and that I think is missed in
some of this discussion.
O It's a two-party agreement; correct?
A ft's a two-party agreement.
O So do some of the actions contemplated
under the governance agreement require a two-thirds
vote?
A No, the governance agreement can be
amended by the parties and that amendment is by parties.
It's not by two-thlrds vote. There are some things in
the governance agreement that deal with governance that
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require a two-thirds vote and that constrains both the
independent the non-government nominees and the
government nominees on the board.
OSo if you could go to
the definition on
the governance
page 1.1.59, Specialagreement again to
Board Resolution.
Yeah
Tt means a resoluti-on passed by at least
two-thirds of the votes; correct?
A
O
A Yes.
O What kind of actions require a special
board resolution to be effective?
A
example, Lf you
it real quickly
I may not catch
to secti-on
everything, but as an
l-et's see if I can findgo
for you. I'm sorry, I just have to look
I'11 be there in a moment.through. I'm sorry,
Take
Yeah,
your
here
2.4,2.5,2.6, these are
Province's ability to act
O
A
time.
we go, if you look at Section
some sections that restrain the
as a large sharehol-der; for
inltiate a fundamental change,
concept. 2.6, they can't act in
example,
which is
concert
and when
2.5, they can't
a corporate l-aw
with other parties . 2.4 has governance standards
the company went public, it adopted policies and
procedures such as a board diversity policy, a skil-ls25
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Hydro One Limited
matrix, majority voting policy, and none of those can be
changed, except by special board resolution, so that
means that you need two-thirds of the board to make
changes to the governance, and, again, that was done in
the context of a pub11c offering where the message to the
market was we're going to run this company in accordance
with public company standards, which is set out in 2.4.L,
so there's examples of where a special resolution would
be required.
a So under the agreement is a two-thirds
vote required to annually retain the CEO?
A It's two-thirds, you're right.. ftrs a
two-thirds conflrming vote a
confirm the chairman and the
fter every annual meeting to
So for both of
CEOrs position.
those positions?
it's for both of them,Yes, I believe
after the annuaf meeting, but it requires
to be
on by the
they take
the Province doesn't I want
because the people who are put
are not nomi-nees in the sense that
0
A
yeah, and it's
two-thirds, so
careful here,
government
instruction
0
A
o
from the government.
But 40 percent
But 40 percent woul-d defeat it, yes.
Thank you, I appreciate that. One other
the governance agreement, there's anquestion about25
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Hydro One Limited
interesting provision there, in 2.4.2 on page 10, at the
bottom of page 10
A Yes.
O it says, "No amendment, supplement
or addltlon to Hydro One's governance standards sha1l
be effective unl-ess approved by a special board
A Yes.
O "except to the extent required by any
applicable l-aws. "
A Uh-huh.
O My question is can the governance
standards be amended by statutes?
A That would be a correct reading of laws
my view not what is
if you wanted to
Let me just read laws. It's in
contemplated,
extend it that
but that would be
is that
wdy, sure. What that is referring to, of
securities regulatj-on, both by t.hecourse,
Ontario Securiti-es Commission under the Ontario
Securities Act and the Toronto Stock Exchange on which
this company is listed, those bodies pass governance
standards and requirements. For example, majority voting
policy is a requirement of any company listed on the
Toronto Stock Exchange. This is speaking to those sorts
of requirements.
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O Thank you. 2.6 on page
A I beg your pardon?
O 2.6 on page 11
A Yes.
A -- with regard to acting jointly or in
concert for the Provi-nce
A Yes.
O is it your experience that the Province
solicits proxies?
A No, it doesn't.
0 It does not as a matter of course?
A Well, wefve had a couple of elections and
they haven't solicited proxj-es. It doesn't work that
wdY, no.
0 Thank you, but nothing restricts them from
doing that?
A WeIl, 1et me
restricti-on here.
O If it helps,
after voting securities, it
shal-1 restrlct the Province
A Yes, I think
just take a look at the
I'm on the eighth l-ine down
says nothing in this section
from soliciting proxies.
that's speaking about votes
generally. The
other sections
voting on the board is all set out in
which require them to vote on b1ock.
picking up where Mr. Karpen l-eft offa Now,)tr.
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orr on 2.70.3 on page 12
A Yes.
O Hydro One shall use its best efforts to
cause each of its who1Iy-owned Hydro One Entities and
shal1 use aI1 commercially reasonab1e efforts to cause
them to manage their business and affairs in a particular
family,way. Once
w11l- that
to Avista?
Avista becomes part of the Hydro One
2.L0.3 apply to Hydro Oners efforts with regard
A Wel-I, this section is an obligation on
cause its subsidiariesHydro One to use
to manage their
best efforts to
businesses on a basis that facilitates
and is consistent with the Province complying with its
obligations under 2.L.3, which is to act as an j-nvestor,
any applicationnot a manager.
or any impact
0 Once the merger is fina1,closed, wilI
meaning of thisAvista be a Hydro One entity within the
agreement?
A Yes.
O Does that carry any particul-ar
j-mplications in your mind under the governance agreement
in terms of the obligat.ions of subsidiarj-es where your
obligation to subsidiaries, Hydro One's obligation to
subsidiaries, under the agreement, does it spark anything
I don't see how that has
on Avista at all.
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in particul-ar in your mind?
A No.
a Is it difficult in Ontario to convene a
specj-al Iegislative session? I have no idea. I'm just
curi-ous.
A I honestly don't know.
O Okay, but it did happen on July 11th,
right, of this year? Page 13 maybe to refresh your
memory, the bottom there, lines 23 through 24 of your
supplemental-.
A Let me just take a look. Page 13 you
said?
O Yeah, the very last two lines there.
A I'm sorry, what l1ne are you looking at?
O The l-ast two lines , 23 and 24.
A Ah, yeah, I think it takes a few days when
you have a majority government to you have to call the
legislature back. What the procedure is for that Irm not
an expert in, I don't know, but I think they can do it
fairly promptly.
O Did you say two days?
A I think it's a few days, but honestly, I
don't want to sound l-ike I know more than I do.
O Sure, but obvj-ousIy, it was very soon
after the el-ection and the swearing in in June.
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Hydro One Limited
think.
o
A
n\z
supplemental
referred to
A
o
electricity
comply with
Yeah.
Thank you.
testimony, I
On page 79 of
had a
your testimony,
about something
you there?
A Swearing in was the 29Lh of June, I
So l-ess than two weeks anyway.
this questi-on
that have been
the hearing I
A
O
in lines 71 through
Yes, I am.
question
19. Are
You tafk about cost increases at
generation companies that were required to
the Provincial green power initiatives, so
has been raised in a number of the comments
submitted
was present
Right.
Can these
to the Commission. f know at
at in Coeur d'Alene it came up.
provincial green power
initiatives be required to be complied with or future
such initiatives within the boundaries of the states, of
the United States, after the merger?
A No.
O Why is that?
A Well, Ontarj-o, while the majority
government in Ontario has very significant legislative
powers const.rained only by our Constitution, they
don't those powers don't extend beyond the borders of25
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Hydro One Limited
Ontario. They can't pass a law if they passed a l-aw
that said Avista shall comply with our green power
initiatives, my view is that wou1d be outsj-de
the jurisdiction it would be ul-tra vires to use the
lega1 term -- of the Province of Ontarlo and it would not
be enforceable and would not be acted on.
O But Hydro One is required to comply with
the laws of Ontarlo; correct?
A Yes. It woul-d not be a val-id law of
Ontario and frankly, if it was tried to be enforced in
the states, it wou1dn't be enforceable in the states,
which is where it woul-d matter.
O Thank you; so on page 20, at the top there
of page 20
A Yeah.
O
language on lines
particular reason
do you know?
AI
attention. Itrs
just wanted
deep in the
I just had a question of why the
2 and 3 is underlined. Is there any
for that or 1s that an editing issue,
to make sure everyone
document. You know,
can get a blt sleepy by t.hen, at least I can.
O Is it correct to say
closes your corporation, Hydro One,
in public util-ity property located
that after the merger
pald
people
wil-I have an interest
in Idaho?I 25
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A ltiell, it sounds like
and as much as I have lots
a 1ega1 conclusion
opinions, I don't
from a strict
not correct.
of legal
1aw, but
think that's
thlnk f 'm an expert in U.S
corporate 1aw matter, I
O So as the 100 percent owner of Avj-sta,
in the generic term, a
physical capabilities,
Post Fall-s Dam?
want to venture into
woul-d you have an interest,
concern with the status, the
ability to generate power of
A Again, f don't
U. S. Iaw, but let me
the merger, we cfose
downstream subsidiary of
interest in sort of the
Like I'm i-nterested i-n
say this: Hopefully, when we
the acquisition, and Avista is
Hydro One, we will have an
that
the
legaI
cl-ose
a
have,
the
do
this year, I'Il be interested j-n how Avista is
its business. f'11 be interested in the state
Avista properties in each of the states where
on business.
I wil-l- not have, Hydro One
a 1egaI interest as in title or ownership
assets of its subsidiaries. That's what
colloquial use of
how the Maple Leafs
term.
in hockey
running
of the
they carry
w1l-I not
in any of
corporate
personality means. Shareholders
ownership interest in the assets
own.
do not have any
of the company that they
O So does your generi-c interest 1n Post25
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Hydro One Limited
Falls Dam
else would
doing and
success f ul-
economic interest is from the shares that
stem from your ownership of Avista stock? Why
you care?
A I care about everything that Avista is
I care about it because I want it to be a
company, a successful business,and my
are owned and
the shares I own in Hydro One
interest is because these are
indirectly. My personal
my colleagues and I want
them to be successful- and happy.
O Thank you. How are the Maple Leafs
doing?
A Pretty well this year. I'm not actually a
big Maple Leafs fan, just so it's known.
O T was going to ask you about the Raptors,
but we need to move on.
A I don' t understand basketbal-l-, I 'm
sorry.
O We'1I get to that with
A Football I understand.
O On page 2L of your testimony, you talk
about on lines 9 through 11 the Province retaj-ns
legislative authority to pass legislation with respect to
subjects within its jurisdiction, such as the Act. My
questl-on is what is not within the jurisdlction of the
Province?25
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Hydro One Limited
A Anything outside of Ontario.
0 So they have the ability to order the
reduction of rates in Ontario?
A Yes. I think that any jurisdiction has
that authority within its jurisdiction f mean.
O So on page 22, you talk about 2.4 percent
ownership by the whol-1y-owned Ontario First Nations
Sovereign Wealth LP owned by 129 First Nations in
Ontario. I asked this question yesterday, sorry to
repeat it, but
First Nations
you seem to be the 1ega1
position and
within their
expert, so are
Canada?
the 1ega1 stature of
own nat j-ons. Having
Sovereign governments in
A ft's a complicated question and a
complicated answer. I'm not an expert in First Nations
law, but First Nations in Canada are call-ed Eirst Nations
because they have the
sovereign
said that,
governance
they're not sovereign in the way a country
woul-d be sovereign. It's an area of f ederal-
jurisdiction. Canada's government system j-s the same as
the states, federal, so you've got federa1 Iaws,
provincial laws, just like you have federal and state
laws, and there's a statute in the government of Canada
cal-Ied the Indian Act where the federal government
retalns certain authority and jurisdiction over First
Nations and the operation of their lands and their25
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businesses and so oo, so it's a bit of a mixed bag. Is
that responsive?
O Yes, thank you very much.
A Yes. They certainly act independently on
their shareholdings in Hydro One.
O So on page 29 of your supplemental
testimony on line 13 and down through 16, that sentence
you tal-k about the Province not dlrectly affecting or
directly i-nterfering wlth Avista. Omltted is the word
indirectly. Isn't there a potential of indirect lmpacts
on Avista?
A No, I don't believe so.
O None?
A No, none.
O What's the basis for that conclusion?
A We have 13 commitments. We have a l-ot of
them dealing with governance. I mean, I can go through
them if you'd like, but I think everybody here has them
and have seen them, and it's what I said before, Avista
wil-l- be a separate corporate entity. Corporate l-aw
protects that. Washington corporate law protects that.
There will be nine directors. We wil-I have two
representatives from Hydro One. There wil-l- be seven
non-Hydro One representatives. Five of them are fu1ly
independent of both companies and it's simply not in my
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view possibl-e that the government of Ontario can tell
Hydro One do such and so down at Avista. If the Avista
board doesn't want to do it, it won't happen.
a So the commitments woul-d be
A The commitments are very robust. We've
heard Mr. Reed say theyrre state of the art and I believe
they are and I think they were robust on June 29th and
they've been made more robust since June 29Lh.
O Do those commitments alter or amend the
governance agreement?
A No, they have nothing to do with the
governance agreement.
O Is the governance agreement governed under
Ontarlo 1aw?
A Yes, it is. The commitments are not.
a Page 49 of the supplementa1 you talk about
Mayo Schmidt's testimony and adopting it.
A Yes, sir.
0 Can you please explain the subject to
provisions in lines 3 through 7? I think those are
important qualifications. Can you explaj-n what you mean
by each of those in terms of adopting the testimony
subject to those things?
A Yes. Mayo's testimony was done earl-ier in
this process before the political events of the summer
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and he had some generic and
f'm notabout government
it's to the effect that the
broadly-written testimony
entirely sure what it ls, but
government had no role and
had no effect
business and
adopted his
what
that
everybody would already
language in its broadest
to highlight that
that j-f you read
on anything that was going on with our
really out of an abundance of caution when I
testimony, I just wanted
know is
Ianguage in his testimony
specific or particular
you would not
get hls testimony and go
1t wasn't that
context, you'd have to say
well, but there is some debate about what the Provj-nce
has done with the events of the sufirmer and that's all
that is. ft's just ca11j-ng that out out of an abundance
of caution.
O So is there any
that
A I would have to
back and take a look at it, but
specific.
O I have another question about the
governance agreement on page 71, Section 2.1.2.
A Yes.
O So beneficial ownership of or control or
direction of voting securities shal-l not be taken into
account and it l-ists certain things. Do you have any
idea what percentage of total shares fal-1s under these
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that it's
tel-l- you what I think this is speaking to. Again, this
was drafted back in 2075 before f was invo]ved with the
company, but I wouldn't I don't know for certaj-n, but
I wouldn't be surprised if when the Province sold some
shares to the Eirst Nati-ons, they did so under some
financing arrangements and so those shares
completely controfl-ed by the First Nations.
are now being
their decisions on votes and al-l- the rest of
They make
it and so if
doesn't pu1I
A Let me finish
O Absolutely.
A I don't have a
a smal-I number, and
there was a security interest
them back into the Province's
Generation and some pensions,
invesLments on thelr own, but
they make those decisions and
says even
attribute
reading, please
precise number. I know
if it's of any help, I can
on those, that
number, and Ontario Power
they've made some
they run those investments,
so this is a clause that
though that's a Crown corporation, you don't
that ownership back to the Province. ft's a
way of making clear that the Province's
percentage holding, doesnrt get fattened
that they have no control- over
O Very good; so
A -- but it's a relatively
think, a few percent.
holdings,
up with shares
smal-f number, I
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Hydro One Limited
O So when these numbers were thrown around
the l-ast couple of days, 49 percent, 4J percent, 42
percent, over 45 percent, do those numbers include these
numbers?
A
numbers are 47
and 45 percent.
o
have a few more
talking about?
A
o
A
No, they do not, so the only relevant
percent and change, 42 percent and change,
49 percent has no relevance anymore.
So under 2.1 .2 (a) and (b) , they could
shares than the numbers we've been
They do not have more shares.
They do not?
No. These are shares owned by other
is not tryi-ng toparties and what this is
attribute ownership back
word Benefi-clal, that has
securiti-es 1aws. That's
O Thanks for
document, page 76, 4.2.3,
A Uh-huh.
4.2.3, the director nominee
Province if (a) he or she is
getting
to the Province. You see the
a particul-ar meaning in
all.
clarifying that. Same
the l-ast section on that page.
It tal-ks about independence.
Uh-huh.
It says that in the third l-ine of that
at
O
A
O
shalI be independent of the
lndependent of Hydro One.25
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SCARLETT (X)
Hydro One Limited
say that the
Uh-huh.
And it goes on a couple of lines l-ater to
Provj-nce and each specified Provincial
entity is deemed to be a "parent" of Hydro One under that
Ontario securi-ties faws, so am Idefinition referring
to read that that the Province and Hydro One are one and
the same for this purpose?
A I think you're reading too much into it.
When this was done, Hydro One was a Crown corporation, so
this was speaking to that tlme. Itfs also a way of
A
u
to
making
of both Hydro One, as all of our
CEO.directors are, except our
O AII right,I can understand that I may be
reading this wrong, but where it says it shall be
independent of the Province, the director nominee, if he
or she is independent of Hydro One, what does that
mean?
Withj-n the meaning of Ontario securities
sure that the Province's nominees are independent
the Province and
A
laws, so it
definition
means that Ontario securities law has a
of independence for any board member. It
being an employee or an officer for theincludes not past
wouldseveral years. It includes some other factors that
make someone not independent.
O And what does it mean that the Province isI25
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Hydro One Limited
deemed to be a parent of Hydro One under that
de finit ion ?
A Welf, the definition,and I'm going on
Ontario, it ismemory here, under securities laws in
either the same or very similar to the New York Stock
Exchange
example,
Hydro One
standard, you're not
as a seni-or offlcer
at the end
the board
wouldn't
independent, so for
of the company, if I l-eft
of the year and they said oh, would
1n January, you're no longer an
be independent, because I had been
you come on
employee, I
an employee
think it's
of Hydro One, you
three-year, two- or
this is saying, and remember,
it's a Crown corporation, that
know, just recently. I
three-year, window. What
it was done at a time when
definition not only looks
at the company, but it looks at the parent of a company
so that you couldn't be an independent director on the
board of company A if you had been an executive of the
parent company of company A, so this is just making sure
that the net is spread out wider. It's reinforcing the
requirement for truly independent directors on the board
of Hydro One. I don't think it's anything more than
that.
O Thank you. Have you been involved in the
ongoing meetings with the Province regarding the, and
others regarding the, potential 72 percent reduction in25
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SCARLETT (X)
Hydro One Limited
rates in Ontario that were referred to yesterday?
A
No, not at all.
Okay, thank you. Page 2'l
Are we in the governance agreement?
8.6, looking specifically at (b) , but
more there. Does this mean that
YeS,
obviously, there's
only
A
o
A
a
Hydro One can
agreement?
A
0
did you have
So you're
I'm sorry,
Yes.
Does that
enforce the
looking at whlch one?
8.6, No Third Party Rights.
mean that only the Province and
provisions in the governance
Yes, that's what that means.
I think you alluded to this earlj-er, but
any involvement in the drafting of this
governance agreement?
A No, I did not.
O And just one more question on the
governance agreement, the
A Yes.
very last page of text, 31
0
A
{l
A
under B -72
I'm sorry, what page?
B.I2 on page 31.
Sorry, yes.25
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SCARLETT (X)
Hydro One Limited
agreement
wlth both
Canada?
A What, if dny, significance is there to the
being governed by and construed in accordance
the l-aws of the Province and the l-aws of
A Therers no significance. In fact,
referring to the laws of Canada applicable in Ontario is
superf Iuous. The l-aws of Ontario incl-ude the l-aws of
Canada appllcable therein, but this 1s a fairly standard
formulation in Canadian contracts.
O Thank you. I'm going to Mayo Schmidt's
testimony and see if f have any questions for you there.
A If you do, I would ask my counsel to bring
me a copy because I didn't bring it up here.
MR. SEMANKO: Can we do that?
COMMTSSIONER KELLANDER: Yes, so whil-e
you're looking, if we could go ahead and have counsef
approach the witness providing that testimony.
THE WITNESS: Thank you, Mr. Chairman.
(Ms. Thomas approached the witness.)
O BY MR. SEMANKO: Thank you for alerting us
to that. I'm on page 6 of the Mayo Schmidt testimony --
A Yes.
O and can you please as f'm asking these
questions if any of the provisions Irm asking you about
are amongst the ones that are subject to your earlier25
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Hydro One Limited
testimony --
A Yes, I will point that out.
O Okay, thank you. Just by way of
background, this question came up yesterday, but it
wasn't very precise in the answer. I'm l-ooking at l-ines
B through 11.
A Yes.
O So is it correct to say that for a1most
110 years, Hydro One and its predecessors in interest
were owned 100 percent by the Province?
A Yes, that's correct.
O It's been now about three years as a
publicly-traded company?
A Yes, that's
O What percent
be produced by Avista after
A f 'm a lawyer,
correct.
of Hydro One's revenue wil-f
the merger closes?
you're stretching me with a
numbers question.
O If you don't
A Yeah, I'm not
from Mr. Reed 15 percent just
O I'm on page 10
l-ines 21, through 24.
A Yes.
know, that's fine.
certain. f think we heard
before the changeover.
of the Schmidt testimony,
O "The governance agreement and the Hydro25
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Hydro One Limited
One's independent board ensure that Hydro One's business
and operations are completely independent from the
government of the Province of Ontario. " Is that one of
those subject to provisions where
A Yes, that woul-d be one of them.
O How woul-d you modify that testimony?
A I would have put a coflrma and I woul-d have
said, "subject to the Province's ability to pass
legislation" or words to that effect.
O Thank you. Page 15 of Mayo Schmidt's
testimony on l-ine 6 tal-ks about the Eastern
Interconnection, being a part of that and how that
benefits Ontario.
A Uh-huh.
O Do you foresee any of that benefiting
directly or indirectly Avista customers?
how these things work, but flo, I don't see
an expert in
that.
O Lines 79 through 23 tal_ks about a $9.7
bill-ion capital investment projected between 20L1 and
2027 for renewing and modernizing the grid in Ontario;
correct?
A Correct.
O Is any of that cost going to be allocable
to Avista?
A I don't see that. ffm not
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SCARLETT (X)
Hydro One Limited
A No.
O From a lega1 perspective at Hydro One,
what wou1d be the basis or the determining factor for
whether to al-locat.e any costs to Avista from Hydro One?
A I think we've heard qui-te clearly f rom
other witnesses, and I think it's crystal cfear in the
commitments, Hydro One's costs are Hydro One's costs
period, fu1l stop. If we do -- my own view is that 1f we
did something jointly with Avista once the merger has
cl-osed that would be posltive for both companies and we
would do 1t. because it would resul-t in cost savi-ngs that
woul-d be anto our ratepayers
allocation, but
woul-d flow that there
appropriate
clear in the
I also think it's crystal
that untilcommj-tments we can't actually do
we have approval from the commj-ssions. I believe that's
cal1ed regulatory lag.
0 Thank you. Page 21 of the Schmidt
testimony
A Yes.
O on line '7 , he tal-ks about Avista and
Hydro One becoming more competitive after the merger by
creating scal-e and cost efficiencies over time.
A Uh-huh.
O Do you agree with that?
A f do.25
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Hydro One Limited
O And then it goes on in line 10, "Together,
with nearly two mil-l-ion customers, they can spread some
of these costs over a larger base"; correct?
A Yes.
O How much of these costs wou1d be spread to
Avista customers?
A That would depend on the al-l-ocation
methodology and what we were found to be approved by the
commissions in each state where those costs were
attempting to be al-l-ocated.
O At the time of a ratemaking?
am told that willA Yes,
after we've actually
always be
incurred the costs, which is why we
have a fag.
0 On page 29, at the top of page 29,
Mr. Schmidt uses the word "regulatory diversity" and go
ahead and take the time , af you need to, to read that.
A Can you telI me the line that's on?
O
diversity, so
Line L, the very top,
and I
please take the time to
regulatory
read that sentence
in the context, but my question
know what he intended in terms
is going to
of what the
be, do you
meaning of
regulatoryregulatory diversity is or
diversity means?
A f know what
do you know what
I think it means. Regulators25
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SCARLETT (X)
Hydro One Limited
in different jurisdictions take different approaches to
l-ssues.Some of them are more positive, some of them are
more restrictive.
have today, which
all- the strengths
in Ontario and we
When you have your business that we
is so1ely in Ont.ario, we are subject to
and all- the weaknesses of the regulator
have you know, we bear the benefits
When we have a
different
stock
and the challenges that come from that.
growing part of our business in multiple
jurisdictions, it's Like investing your
You know, you do better in some and worse in
portfolio.
others and
it evens out to a better overall picture and that's what
we're talking about here.
O And that applles to both Hydro One and
Avista?
A We1I, I don't know about it applying to
results don't f l-ow downAvista so much as us, because
to Avista's. Avista's flow up
our
to us.
O fs this whol-e answer not referring to
Hydro One and Avista?
A Yes, generally it is. The reason I'm just
a l-ittle cautious on that particular part of the answer
is I'm just trying to envision how the regulatory
diversity would affect Avista. They already have
regulatory diversity that we don't have.
a Thank you. I'm now to your rebuttalZJ
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208.890.5198
SCARLETT (X)
Hydro One Limited
testimony. Bear with
ask you anything efse
A Please
don't.
O I will;
A Yes.
me while I figure out if I need to
or if werve covered everything.
feel free to concl-ude that you
line 24, by your earlier deletions from
are you talking in this testimony about
Idaho Code 67-327 now?
No, I'm not.
Okay; so that has no applicability, that
so on page 1
V
this testimony,
compliance with
A
oY
Iine 24?
1n I believe that's correct, other than
factual- statements that do not go to a legal concfusj-on.
O Thank you. We spent a lot of ti-me talking
about in the last couple of days the regulatory authority
of Ontario. I'm not going to ask any more about that,
but I am going to ask you, would it be 1n the public
interest for the ratepayers in Ontario
A I'm sorry, what would be in the public
O For them not to be, for Hydro One not to
be, subject to this power and authority, legislative
authori-ty, over Hydro One by the Province, would that be
in the public interest of ratepayers in Ontario?
A I'm not sure I understand your question,25
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208.890.5198
SCARLETT (X)
Hydro One Limited
but I'11- try and answer. f think it is in the public
interest of ratepayers in Ontario that we are subject to
regulation by the Ontario Energy Board. We have a
business that's a monopoly in the markets where we carry
on that business and to regulate monopolies, you need a
regulator period. I think that itrs in the public
interest that the government of Ontarj-o have legislative
authority over the energy market i-n general. They have
policy obligations. They initlate developments, so I
think that's in the public interest. I don't know if
that answers your question.
0 Is it in the public interest for the
Province to approve your compensation rates for your
executives ?
A I think it has no bearing on the public
interest.
O Woul-d it be in the public interest for
them to tell you what to do with your rates?
A WeII, I think that the regulator has that
authority and I think the regulator does that.
0 So by definition, is it in the public
interest that the legislature can do it?
A If the legislature can do it.
0 Maybe I didn't understand your last
answer.
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208 .8 90 . 5198
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Hydro One Limited
A Yeah, f mean,
question. f just think it's
than a simple public interest
answer. f think you have to
clarify, I think it's to
percent, what wetve heard
not involved in, but f've
I'm not trying to evade the
a littl-e more complicated
yes or no,
unpack it a
black and white
Iittle bit. If
you were to say to me is it in the public interest for
any body to simply have the power to say do this or do
that without understanding the impacts of that action,
without understanding everything that goes into
ratemaking, which as I've come to see is a very
complicated set of assessments, that kind of unilateral-
almost unthinking determination wou1d not be i-n anyone's
interest, but we're not talking about that.
If what you're getting at is the whol-e
government promise about reducing rates, and I'11 just
place with a very
consideration of
residential consumers by 12
in other testimony, which I am
heard the testimony, is taking
and thoughtful and deepcareful
the various issues and the various
alternatives, and I'm personally confident that what
comes out of that will be a thoughtful and practical- and
actionable way of moving forward that wiII be in the
pubIlc j-nterest and will not be detrimental to Hydro One.
Thatrs what I think w1l-] come of it. Does that answer
the question better?25
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Hydro One Limited
O Yes. I'm on page 40 of your supplemental
through 27, which waslines 76rebuttal testimony,
previously modified;
A Yes,
correct ?
correct.
brief that wiff discuss the issue fu11y.
mean to ask you a 1ega1
what the motivation was and I
I didn't
as king
Thank you. I'm on page 45 now of that
rebuttaf , and I'm 1ooking at l-ines 11
Uh-huh.
O Basically from Defaware to fdaho in line
79; is that correct ?
That's correct.
And you stated that the reason for that
because of Staff concerns about 61*327; ischange was
that correct?
A That's correct.
O So is this change to ldaho from Delaware
an attempt to make sure you fall- outside, this
transaction fall- outside, of that statute?
A I woul-dn't say f all outside. My
understanding is that we comply with the statute. Again,
I'm not an Idaho lawyer. I know that the Chair has
mandated briefs that will dj-scuss this issue ful1y and we
A
O
wiff have a
oY
question.
think it's
And
Irm just
clear.
supplemental
through 71.
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Hydro One Limited
O Does Hydro One serve as a trustee,
nominee, agent, or representative for the Province.
Clearly not,'right?
A Clearly not.
O Or in concert or arrangement with the
Province. I understand your answer is no; correct?
Correct.
Does the we've already established,
-H.
n
have we not, that the Province has severa1 agreements or
at least two with Hydro One, written agreements;
correct ?
A That's correct.
O Do you
Province of Ontario in
A I think
or cooperate with the
regard?
coll-aborate
any other
you've heard from other
that there's ongoing discussion that
A Thank you.
A Nothing that ri-ses to
our Chair
this standard.
testimony
has.
0 Do you agree that's a factua1 question,
l-ines 15 and 16; right?
A I think it's mixed facts, fact and law.
Certainly, in Canada there's very cl-ear and long and old
body of 1aw, but what it takes to constitute a
relationship of trustee, nomi-nee, agent, representative
or actlng in concert or arrangement with somebody, youI25
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Hydro One Limlted
need the facts to get there, but it's a Iegal conclusj-on
based on facts.
a It would be construed under Idaho 1aw,
though; correct?
A Yes, I think so.
O Thank you.
A I doubt that the
l-aw based on fact conclusion.
O A11 right, we're
the first fulf paragraph there
standard.
O Fair enough.
point whether the rates are
A Honestly, I
know.
I 'm sure it ' s still- a
al-most done. Page 41,
about the no harmyou talk
standard and the Commi-ssion Staff's review of that.
A Uh-huh.
O I direct you to l-ines 10 through 74. You
tal-k about customer rate j-ncreases coming before the
Commission in a rate case; correct?
A Correct.
O So at that point isn't the question
whether the increases are fair and reasonab]e?
A I'm sorry, I donrt know the 1ega1 standard
thehere. If that's the standard, then thatrs
Is the question at that
increasing or not?
don't know. I just don't
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Hydro One Lj-mited
O Thatfs the standard here,
rates can't increase as a result of the
A The rates can't increase
the merger, that's correct.
correct, that
merger?
as a result of
MR. SEMANKO: Thank you for your time.
Mr. Chairman, I have no further questions.
COMMISSIONER KELLANDER: Thank you, and
before we get to questions from the Commissioners,any
didMr. Richardson,you have any questions?
MR. RfCHARDSON: Thank you for your
indulgence, Mr. Chairman. I do not.
COMMISSIONER KELLANDER: Thank you. Now
we'fl move to the Commissioners and I do have a couple of
questions, Mr. Scarlett.
EXAMTNATION
BY COMM]SSIONER KELLANDER:
Thank you again for being here today.
Would you say that success and fail-ure of mergers and
acquisitions relies a 1ot on trust, albeit negotiated
trust, but trust nonethel-ess?
A Yes.
0 Okay. With that, then, I look at and I
appreciate in your supplementa1 rebuttal on page 2L, and25
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Hydro One Limited
you referenced this twice, that in hindsight, you wish
you had notified Staff of certain events a little sooner.
A Yes.
O And I do appreciate that, but in
recognition of the fact that on page 26 of your
supplemental rebuttal-, and maybe I'm reading this
incorrectly, but it states on line 19 through 23 t.hat at
our next opportunlty in this proceedi-ng, Hydro One and
Avista described the outcome of the June 7th, 2078,
election and the potential- risks to Hydro One in our June
20Lh, 2018, Joint Comments in Support of Stipulation and
Settl-ement. As I read that, I'm interpreting that to
mean that Staff and other parties in the case were
finally
might be
el-ection
noti fied
apprised of potentlal- campaign promises that
an issue as a result of the outcome of the
on June 7thr, but the first time
was 1n the filing that you made
the deadl-ine; is that correct?
A That's correct.
that they were
on June 20Lh,
which was
O Okay, when f went
sort of interested in
back and looked at that
filing, I'm
time stamped
Staff filed
when they were actually
and I looked at on that filing deadline that
their comments and it was time stamped at
2:O2 p.m. and yours was date stamped at 4:58 p.m., about
two mj-nutes before the close of business. Now, I25
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208.890.5198
SCARLETT (Com)
Hydro One Limited
after June 'lLh, f 'm wondering why it took so long.
f mean, given the fact that June Bth could
have been the next opportunity, could have been a phone
Ietter,cal-l-, could
coul-d have
have been a text, could have been a
recognize that the
midnight that date
I l-ook at that and
opportunity, which
been form ofany
hash.y, something changed
enough to the way the
received 1n the states
deadline was actually, I think, at
for it to actually be filed, but when
f see the statement that at our next
turned out to be almost two weeks
communication to just say
up here and we wanted to make
you aware of it. When I start to look at trust, it
starts to raise a questi-on in my mind as to why wait
unt11 such a late date to notj-fy that as it rel-ates to
fi-1ing testimony in support of a stipulation and
settlement and T'm wondering if there was any dlscussion
or concern about waiting to that point because if it came
out sooner that it may al-ter some of the parties'
considerations as it rel-ated to their comment.s in
rel-ationship to the settlement stipulation.
A Let me start by saying that we clearly
could have done a better job and we werenrt sensitive
Ontario election news woufd be
where we had our applications, and
will- do better andI apologize for that
commitment 1 4 speaks very issue.
and, you
to that
know, we
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208 .8 90 . 51 98
SCARLETT (Com)
Hydro One Limited
explanation, I
speak for Hydro
There was not a
something that
In terms
can tell-
One on
thought
would be
was no intention to hold
of what happened by way of
you personally, and I rea1ly
thls, there was no intended deIay.
for a moment that there was
troubling to the states. There
it back relative to the l-ast
point you
you would
then that
impact on
an event.
made about
be upset in
the changes
Avista. I
some way.
in Ontario
Personally, I
wou]d have no
told you,
thought
real-
being concerned that if we
dldn't see it as that slgniflcant of
That was a poor
the other thing I would say is
on my part, and
easy to forget
we were in an
j udgment
and i-t's
butnow that the events have happened,
information vacuum at the tlme. I
back, we were here in April before
his first statements about what he
election. The NDP made statements
making for a couple
that they woul-d have
on.
and the
popular
peopJ-e
mean, Lf you play this
Candidat.e Ford made
would do if he won the
that they would be
were so far-fetchedof years that
been practically impossible to act
The el-ection campaign wound itsel-f forward
NDP and the Conservatives were very close in
vote. The week before the actuaf election,
were predicting either one might form a minority25
845
o government, and we had no communication with any
political party during that period. It wasn't that we
weren't trying. We were trying to get information. A
Iot of people were telling us they'11 never do this.
Don't worry, it's just campaign stuff. We thought we
might hear something on June Bth. Vrle heard nothing. We
heard nothing. We had no conversations whatsoever, not
because we weren't open to them, we were s j-mp1y not able
to get through the government until- July 4t.h or 5th, I
think, so when you think about what happened in Juner we
simply were in a vacuum and all we could have said wou1d
have been this has happened, this was the campaign
promi-se, and we don't know what's going to come of it.
Could we have done that on June 8th or 9th, yes, we coul-d
have and it was a mistake that we didn't.
COMMISSIONER KELLANDER: Thank you. Any
other questions from members of the Commission?
Commissioner Anderson.
COMMISSIONER ANDERSON: Thank you,
Mr. Chairman.
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SCARLETT (Com)
Hydro One Lj-mited
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SCARLETT (Com)
Hydro One Limited
EXAMINATION
BY COMM]SSIONER ANDERSON:
O And thank you, Mr. Scarlett. Just a quick
observation if you can perhaps help me here. If there
was no confidence in the Ford government going forward
A If there was what?
O No confidence decision from the Province
itsel-f that they were -- perhaps I don't understand
A No, I'm just pausing because a no
confidence means something i-n parliamentary practice in
Canada. I'm not sure what you're getting at.
O If it was a challenge to the government of
Premier Eord and they had to have a special election and
that special el-ectj-on would have to form a new coalition
government; would that be correct?
A A vote of no confidence in the government
essentially doesn't happen with a majority government,
because the government will always win that vote under
legislative practice, but theoretically, if there was a
vote of no confidence, the government fal1s. The
government can then go to the l-ieutenant governor who is
the representative head of state and either try to form a
new government or call a new el-ection.
O Let me stop you there. I apologize for my25
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SCARLETT (Com)
Hydro One Limited
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101 non-understanding. Let me just rephrase this real-
quickly. If there was a new government formed either at
the end of this term or whenever and it was some form of
government as with the New Democratic party which we
discussed earlier or something to that effect and they
decided that Hydro One, the Province, Hydro One is going
to take a new they're going to look at Hydro One
differently and they're going to have over 50 percent
ownership. They're going to do al-l- those things. Can
you perceive anything in the future if that were to
happen, because that theoretically could happen, that
those actions woul-d have a negative effect to the
governance agreement, the letter? I mean, is there any
way that this could have an impact on the future of this
merger with Avista?
A T realIy don't think so. I really think
that the structures that we've built and the corporate
governance that's in place and the regulation by the
states 1n which Avista carries on business precludes any
real chance or any real possibility that what happens to
Hydro One in Ontario is going to somehow come down and
affect Avista. I keep coming back to it. It's simple,
but it's incredibly powerful, the structure we built at
the board is incredibly powerful and 1t is i-mpervious to
someone in Ontario saying do somethi-ng different.
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208.890. s198
SCARLETT (ReDi)
Hydro One Limited
Werve only got two people on the board. I
mean, if we had nine people on the board down here, that
would be a different story, but we have two and al-l- the
rest are independents and I thlnk you've seen the resumes
of the five independents. I mean, these are very
impresslve, accomplished people who are going to act in
the best interests of Avista as a whole. They're not
going to do something because of a political movement in
Ontario, plus on top of that, we have an obligation to
te1I you when things are happening, so you'11 have a
chance to respond and not get caught fl-at-footed. I
realIy think that the structure we have in place protects
against any of those changes in the future
COMMISSIONER ANDERSON: Thank you.
COMMISSIONER KELLANDER: Any other
questions? Redirect.
MS. VANDER STOEP: Thank you, Chairman.
REDIRECT EXAMINATION
BY MS. VANDER STOEP:
O Mr. Scarlett, do you remember your
testimony 1n response to Mr. Semankors questions
regarding potential amendments to the Hydro One
Accountability Act and the Electricity Act of L998?25
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208.890.5198
SCARLETT (ReDi)
Hydro One Limited
A Yes.
O If there is
One Accountability Act or
would that trigger Hydro
commitment 14 to notify
that proposal?
a proposal to amend the Hydro
the Electricity Act of 1998,
responsibility underOne's
the parties and the Commission of
A Most likeIy.
and assess
I meanr we would have to
look at the change its potential impact. We
would discuss it with our colleagues at Avista and
certainly, if
triggered '14,
u
to Mr. Semanko's
we felt there was any prospect that it
we would be down here rlght away.
you remember your testimony in
questions about confirmation of
Do response
Hydro
One's CEO?
A Yes.
O Does the Province select CEO candidates?
A No.
O Can you explain the independence of the
Province' s nominees on the Hydro
A It's described in governance
to be independent
I'm going on
can't be
employees in the
Province.
One board?
the
agreement. It's mandated. They have
from the Province. They canrt have been
memory here, but
employees of the
past. They must
I believe it
Province or
says they
have been
be independent of theI25
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208 .8 90. 5198
SCARLETT (REDi)
Hydro One Limited
O And under Ontario law, do they have a
fiduciary duty to Hydro One's sharehol-ders and
stakeholders ?
A Yes, under Canadian corporate 1aw,
directors have fiduciary obligations to the company,
which means al-l the sharehol-ders and al-l- the other
interested stakeholders.
O Do you remember your testj-mony about
Avista becoming a Hydro One entity?
A Yes.
O Okay, will Avj-staf s status as a Hydro One
entity change the Province's legislative jurisdiction?
A No.
O Will Avista's status as a Hydro One entity
change Hydro One's or Avistars obligations under the
merger commitments?
A No.
WiII it change
comply with the
jurisdiction and
Hydro One's or Avista's
commitment regarding this
the juri-sdiction of the
o
obligation to
Commission's
Idaho courts?
A
v
No, not at aI1.
In terms of
testimony, do you remember
Semanko regarding the Eirst
page 22 of your supplemental
giving testimony to Mr.
Nations ?I 25
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208.890.5198
SCARLETT (ReDi)
Hydro One Limited
A Yes.
O Can you clarify whether the First Nations
are shareholders in Hydro One or its limited partnerships
are ?
A I believe it's spelled out on page 22.
It's a limited partnership. It's a fund, basically.
It's a limited partnership whol1y owned by the Ontario
First Nations Sovereign Wealth Limited Partnership, which
in turn is owned by 729 Eirst Nations.
MS. VANDER STOEP: Thank you. That's all
I have, Your Honors.
COMMISSIONER KELLANDER: Thank you, and as
we hit
going
back,
fet's
just a little past the
to recommend a 10-minute
I'll glve
resume and
more witnesses.
hour of 11:00 o'clock, f'm
break. If you coul-d be
you a few more minutes, dt quarter past,
l-et' s see if we can't clip through some
Thank you.
(The witness left the stand. )
(Recess. )
COMMTSSIONER KELLANDER: Before we took
the recess, and thanks everybody for returning in a
timely fashion, we had concluded as I see the witness
l-ist as it rel-ated to Hydro One.
MS. THOMAS: Yes, Your Honor.
COMMISSIONER KELLANDER: Thank you, and if25
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208.890.5198
MORRIS (Di)
Avista Corporation
we were to continue with the list, it woul-d appear that
now wetre ready for Avista and its witnesses.
MR. MEYER: We are. Thank you,
Mr. Chairman.
COMMISSIONER KELLANDER: Pl-ease proceed.
SCOTT L. MORRIS,
produced as a witness at
Corporation, havlng been
truth, was examined and
the instance of the Avista
first duly sworn to tell the
testified as follows:
BY MR. MEYER:
O So for
and your employer and
A Scott
O Good afternoon almost.
A Almost good morning, Mr. Meyer.
DIRECT EXAMINATION
the record, just state your name
your titIe.
Morris. I work for Avista. I am
the Chairman and CEO.
O And have you prepared three items of
testimony: your direct testimony, your supplementaf
testimony, and your supplemental rebutta1 testimony?
A I have.
a Any changes to that?25
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208.890.5198
MORRIS (Di)
Avista Corporation
A
v
No.
Are you also sponsoring Exhibits l, 11,
and 16?
A Iam.
0 Any changes
A No.
MR. MEYER:
testj-mony be spread as if
those exhibits.
to those?
With that, I ask that his
read and move the admission of
COMMISSIONER KELLANDER: Without
objection, we will have the testimony spread as if read
and admit the exhibits.
MR. MEYER: Thank you.
(Avista Corporation Exhibit Nos. 1, 17,
and 16 were admitted into evj-dence. )
(The following prefiled direct,
supplemental, and rebuttal testimonies of Mr. Scott
Morris are spread upon the record. )
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Morris, Di 1
Avista Corporation
I. INTRODUCTION
O. Pl-ease state your name, employer and business
address.
A. My name is Scott L. Morris and I am employed as
the Chairman of the Board, President and Chief Executive
Officer of Avista Corporation (Company or Avista), at
1-ALI East Mission Avenue, Spokane, Washington.
O. Woul-d you please briefly descri-be your
educational background and professional- experience?
A. Yes. I am a graduate of Gonzaga University
with a Bachel-ors degree and a Masters degree in
organizational leadership. f have also attended the
Kidder Peabody School- of Financial Management.
I joined the Company in 19Bl and have served in a
number of roles including customer service manager. In
7991-, 7 was appointed general manager for Avista
Utilities' Oregon and California natural- gas utillty
business. I was appointed President and General Manager
of Avista Utilities, an operating division of Avista
Corporation, in August 2000. In Eebruary 2003, I was
appointed Senior Vice-President of Avista Corporation,
and in May 2006, f was appointed as President and Chief
Operating Officer. Effective January 7, 2008, r assumed
the position of Chairman of the Board, President, and
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Morris, Di 2Avista Corporation
I am a member of the Edison Electric Institute board
of directors, a member of the American Gas Association
board of directors, a member of the Washington
Roundtable, and I also serve on the board of trustees of
Greater Spokane Incorporated. I am also on the board of
directors of the Federa1 Reserve Bank of San Francisco,
Seattl-e Branch, and Gonzaga University board of trustees.
f currently serve as Chair for both organizations.
O. Please provide an overview of your testimony.
A. I wj-II provide an overview of the Proposed
Transaction through which, if approved by this
Commission, Avista wou1d become a wholly-owned indirect
subsidlary of Hydro
a brief introduction
One. My testimony wil-l- also provide
of Hydro One. I will-
to the organization and operations
explain that Avista's decision to
merge with Hydro One was driven by the unique partnership
that will allow Avista and its customers to benefit from
being part of a larger organization (the benefits of
scale), while at the same time preserving l-ocal control
of Avista and the preservation of Avista's culture and
way of doing business. Agreements to preserve Avista,
essentially as it is today, for the long-term are
memorialized in the Merger Agreement.
I wil-l- summarize how the Proposed Transaction
provi-des benefits to what I have often referred to as the
four legs25
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of the stool: customers, employees, sharehol-ders, and
the communities Avista serves, and provide an overview of
the numerous commitments Avista and Hydro One have
proposed as part of our request for approval of the
Proposed Transaction. I will also brlefly summarize
Avista and Hydro One's proposal to provide lmmediate
financial benefits to Avista's customers at the closing
of the Proposed Transaction.
Fina1ly, I will
Commission schedul-e a
in a time frame that
explain our
review of
would allow a
request that the
the Proposed Transaction
Page
Commiss j-on on or before August 74,
decision by the
2078.
A table of contents for my testimony is as follows:
Description
I Introduction
Joint Applicantsr Proposal and
Request of the Commission
Joint Applicants' Wj-tnesses Sponsoring
Testimony
Descrlption of the Proposed Transaction
Avista's Reasons for the
Proposed Transaction
Hydro One's Reasons for the
Proposed Transaction
Overview of Hydro One
1
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]II.
IV.
VI.
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Morris, Di 3Avista Corporation
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VIII. Overview of Avista 20
rx.Post-Closing Corporate Structure
Post-Closing Governance, Management and
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Morr j-s, Di 4
Avista Corporati-on
Operations of Avista
24X1. Benefits to Customers from the
Transaction
XII. Satisfaction of the Public Interest
and Joint Applicants' Commitments
XIII. Required Approvals
XIV. Concfusion
O. Are you sponsoring exhibits with your direct
testimony?
26
30
34
35
A. Yes. Exhibit
chart that is indicative
North America, ranked in
showing Avista as one of
\, Schedule 1 incl-udes a bar
of investor owned utilities in
size from largest to smal1est,
the smal-l-est investor-owned
util-ities in North Amerj-ca. Exhibit !, Schedule 2
incl-udes a diagram showing Avlsta's current corporate
structure. Exhibit !, Schedul-e 3 includes a map of
Avista's electric and natural gas service area in the
Pacific Northwest.
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Morris, Dl 5
Avista Corporation
O.
filing.
A.
rr. JorNT APPLICAIITS r PROPOSAT AIID REQUESE
OF THE COMMISISON
Please identify the Jolnt Applicants in this
Joint Applicants incl-ude Avista Corporation,
as Avista Utilities (hereinafter referreddoing business
to as "Avista"), and Hydro One Limited (hereinafter
referred to as "Hydro One"), acting through Olympus
Equity LLC, an indirect, whol1y-owned subsidiary. Avista
and Hydro One will be referred to as Joint Applicants.
Avista is an investor-owned utility providing
electrj-c generation, transmission, and distribution
service to approximately 378,000 retail customers in
fdaho, Washington and Montana, and the distribution of
natural gas to approximately 342,000 retail customers in
Idaho, Washington and Oregon. Afaska Electric Light and
Power ( "AEL&P" ) , a whol1y-owned indirect subsidiary of
Avista, dlso provides electric generatj-on, transmission
and distribution service to approximately 17r000 retail
customers in the City and Borough of Juneau, Alaska.
Hydro One, through 1ts subsidiary companies, is an
investor-owned electric transmission and distribution
utility headquartered in Toronto, Ontario, Canada. Hydro
One provides electric distribution service to
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Morris, Di 6Avista Corporati-on
1.3 mi]lion retail end-use customers, as well- as electric
transmission service to many l-ocal- distribution companies
and large industrial- customers. Approximately 98% of
Hydro One's business consists of regulated utility
operations, which is regulated by the Ontario Energy
Board. Additional details related to both Avista and
Hydro One will be provided later in
O. What are Joint Applicants
filing, and what is the request of
A. On JuIy 79,
Olympus Holding Corp.
( "Merger Sub" ) entered
all- approvals, at the
2071, Avista,
my testimony.
proposing in this
this Commission?
and Hydro One,
("US Parent"), and Olympus Corp.
into a Merger Agreement. Eollowing
effective date, Avista will- become
a whoIIy-owned indirect subsidiary of Hydro One. Through
this filing, Joint Applicants request an order of the
Idaho Public Utilities Commission (the "Commission")
authorizing the Proposed Transaction.
III. iIOINT APPLICAI{TS' IIITNESSES SPONSORING TESTIMONY
O. Pl-ease identlfy the Avista and
witnesses sponsoring testj-mony on behal-f
Applicants, and a brief summary of their
Hydro One
of Joint
testimony.
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Morris, Di 1
Avista Corporation
A. In addition to myself, the following
One are sponsoringrepresentatives of
testimony on behalf
For Avista:
Avista and Hydro
of Joint Appllcants:
Mark Thies, Senior Vice President, Chief Einancial
Officer and Treasurer of Avista, will describe
Avista from a financial perspective and will testify
about the financial detail-s of the ProposedTransaction. Mr. Thies wilI afso describe the
corporate and financial structure and commitmentsthat will be in place after completi-on of the
Proposed Transaction, and how the Proposed
Transaction provides protection for customers by
"Ring Fencing" Avista and its customers from Hydro
One and its affiliates.
Kevin Christie, Vice President of Customer
Solutions, wifl- provide testimony describing how the
Proposed Transaction wlll be beneficial to Avista's
customers. He will- also explain Hydro One's
commitment to increase funding for Avista'sphilanthropic initiatives and maintain the support
of economic development initiatives, as well as a $2milfion annual- contribution to the Avista
Foundation.
Patrick Ehrbar, Director of Rates at Avista, wlfl
describe some of the regulatory commitments beingoffered by the Joint Applicants, includlng testimony
regarding proposed Rate Credits that would be
provided to customers if the Proposed Transaction isapproved. He will also discuss the assignment of
any costs between Avista and Hydro One before and
after the Proposed Transaction, to prevent
cross-subsidization. Eina11y, he will provide
testimony related to the interaction of this
application and the Proposed Transaction with the
pending general rate case currently before the
Commission.
For Hydro One
t'Iayo Schrnidt, President and Chief Executive Office
of Hydro One, will describe Hydro One and its
business platforms, with a specific focus on its25
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Transaction,
Morris, Di la
Avista Corporation
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Morris, Di IAvista Corporation
explain the reasons for Hydro One's proposed
purchase of Avista, and describe the corporate
structure of Hydro One and Avista after closing.
Mr. Schmidt will- al-so explain why the Proposed
Transaction is consistent with the public interest
and provides a net benefit to Avista's customers,
and will explain that Avista's operations, once the
Proposed Transaction closes, will essentially be nodifferent than Avista's current operations.
Christopher Lopez, Senior Vice President, Einance of
Hydro One, will- provide details regarding Hydro
One's corporate structure, Avista's place within
that structure, Hydro One's capital structure, theflnancial and accounti-ng aspects of the Proposed
Transaction, how Avista will become a ring-fenced
business under Hydro One, including the structural
and financial commitments to be provided by Hydro
One, to ensure that the Proposed Transaction will-not expose Avista's customers to any risk of harm.
Ferio Pug1iese, Executive Vice President, Customer
Care and Corporate Affairs will provide an overviewof Hydro One from a customer care perspective,
describing, among other things, the various customerinitiatives Hydro One has put into place to provide
and enhance service to 1ts customers.
IV. DESCRIPTION OF THE PROPOSED TRA}iISACTION
O. Please summarize the proposed transaction.
A. On July 19, 2071, Hydro One, Olympus Holding
Corp., and Olympus Corp. entered into the Merger
Agreement with Avista which provides for, among other
things, the acquisition of Avista by Hydro One through
Olympus Equity LLC. The proposed merger was unanimously
approved by the Boards of Directors of both companies.
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Following the receipt of al-l approvals and the
closlng of the Proposed TransactJ-on, Avista wil-l become a
who11y-owned indirect subsidiary of Hydro One. At the
closing, Avista's common stock will be de1isted from the
New York Stock Exchange ( "NYSE" ) , and Avista will have
one shareholder i.e., Olympus Equity LLC, which is an
indirect, who11y-owned subsidiary of Hydro One.
Under the terms of the al-l--cash transaction, Avista
shareholders wilI receive $53 per conrmon share,
representing a twenty-four percent (24e") premium to
Avista's last sale price of $42.74 per share on July 18,
20!7. The aggregate purchase price is approximately $5.3
bilIion, comprised of an equlty purchase price of $3.4
billion and the assumption of approximately $1.9 bil-lion
of debt. Hydro One's financing plan is designed to
maintain a strong investment grade bal-ance sheet
following completion of the acquisition, and Hydro One's
regulated util-ity profile will remain intact with
approximately ninety-eight percent (984) in regulated
earnj-ngs. Hydro One will finance the Proposed
Transaction through a combination of medium and long-term
borrowings amounting to approximately C$3.4 bil1ion,
incl-uding C$1. 54 bil-l-ion convertible unsecured
subordinated debentures, which will form the permanent
equity component of the financing plan upon conversion at
closing of the Proposed Transaction.
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Hydro One's conimon shares are listed on the Toronto Stock
Exchange ("TSx" ) under the ticker symbol rrHrr .
Fol-lowing the cfosing of the Proposed Transaction,
the customers, employees and communities Avista serves
wil-l see l-ittle or no change in Avj-star s operations.
Avista will maintain its existing corporate headquarters
in Spokane, Washington, and will continue to operate as a
standalone utility in Idaho, Washington, Oregon, Montana
and Alaska. It will- maintain its other office locations
throughout its service areas, continue to operate under
the same Avista name, and seek to retain its existing
employees and
together with
Agreement are
and j-ts way of
management team.
other provisions
A11 of these elements
embedded within
is important
can continue
the Merger
cul-ture
the
to
designed to ensure that Avista's
doing buslness wil-l- continue for
long-term. In addition, Avista wil-l continue to have a
local- Board of Directors consi-sting primarily of either
board members chosen by Avista, and/or members who resj-de
in the Pacific Northwest.
Avista and Hydro One believe this preservation of
Avista's name, its headquarters, its culture and its way
toof doing business, among other things,
Avista's customers, in that customers
expect and experience reliabl-e servlce
sat j-sf action. In addi-tion,
and a high level
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financial benefits in the form of proposed retail- rate
credits beginning at the cfose of the Proposed
Transaction. Furthermore, over time the merger will
provide increased opportunities for innovation, research
and development, and efficiencies by extending the use of
technology, best practices, and business processes over a
broader customer base and a broader set of infrastructure
between the two companies. Through this unique
arrangement with Hydro One, Avista's customers can
receive the benefits of scal-e that come with joining a
larger organi-zation whil-e also avoiding the rj-sk of a
potential subsequent acquisition by another party that
may not share Avista's culture and values. These
immediate and longer-term benefits to Avista's customers
are benefits that wil-l- otherwise not occur absent the
merger.
Following completion of the merger, the
Avista serves will see increased charitable
communities
contributions
and a continuation of the strong support Avlsta provides
in economic development and innovation. FinaIIy, Avista
and Hydro One employees wil-l experience career
development, professional employment opportunities and
personal growth as the two companies pursue efficiencies
and j-nnovatlon through the use of technology, best
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V. AVISTAI S REASONS FOR THE PROPOSED TR;A}ISACTION
the unique partnership that
The merger with Hydro One
and its customers to beneflt from being part of a larger
organization (the benefits of scale), wh1le at the same
time preserving l-ocal- control- of Avista and the retention
of Avista's employees and management team, as wel-I as its
cufture and its way of doing business.
With regard to scal-e, the number of investor-owned
electric and/or natural- gas utilities in North America
has decreased significantly over the years through
size of i-nvestor-ownedconsolidation. When comparing the
utilitles from largest to smal-l-est, Avista is one of the
smallest investor-owned utilities remaining in North
America.l A bar chart indicat.ive of the investor-owned
o.
Agreement
A.
drlven by
Hydro One.
utilities
attached
and Hydro
middle of
of size.
Why did Avista choose to enter into the Merger
with Hydro One?
Avista's decision to merge with Hydro One was
is possible with
will aIlow Avista
in North America, from
as Exhibit L, Schedule
Iargest to smal-l-est, is
1. The merger of Avista
One will place the combined
the range of investor-owned
company toward the
utilities, in terms
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Through consol-idation, larger util-ities have the
opportunity to spread costs, especially the costs of new
technology, over a broader customer base and a broader
set of infrastructure which inures to the benefit of
customers.
Hydro One has more than 1.3 m11Iion electric
distributlon customers, and Avista has approximately
378,000 electric customers and approximately 342,000
natural gas customers. This combination wil-l- provide
opportunities for efficiencies 1n the long-term through
the sharing of best practj-ces, technol-ogy and innovation.
The merger will- provide benefits to Avistars customers
that otherwise would not occur.
These benefits of scafe w111 not occur in the
near-term following the closing of the transactj-on, but
some are expected to occur over the long-term. After al-l-
approvals are received and the companj-es merge, both
compani-es wil-f work together to ldentify, evaluate and
execute on opportunities to reduce costs for bbth
companies through, among other things, the sharing of
technology, best practices, and business processes. The
benefits from these cost savings will be flowed through
to cusLomers in future general- rate cases.
Morris, Dl 13Avista Corporation
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O. How was the Merger Agreement structured i-n
order to preserve Avista I s culture and its way of doing
business , for the beneflt of Avista's customers and the
communities?
A. The specific provisions in the Merger Agreement
will- aI1ow Avista to preserve its culture and the way it
does busi-ness for the long-term, including the retention
and management team. This includes aof its employees
continued focus on providing reliable service to
customers and high customer satisfaction at a reasonable
cost. Provisions in
designed
Avista to
the Merger Agreement
the level of support
the local communities it serves,
among other things, charitabl-e giving
support of economic development. The
and
to increase
are also
provided by
including,
continued
combination with
Hydro One accomplishes all of these important goal-s for
the indefinite future.
The agreements between Hydro One and Avlsta for
operation of the business post-closing were memorial-ized
in Exhibits A and B to the Merger Agreement, hereafter
referred to as the "Delegation of Authority" (see
Appendix 5 in the Joint Application). Under the
Delegation of Authority, Avistars Board of Directors
retains i-ts authority to review, authorize and approve
certain specified matters related to Avista, without any25
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obligation to
from the Hydro
obtain separate authorlzation or approval
One Board. Among
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the matters decided by the Avista board pursuant to the
Merger Agreement are the following:
' Keeping Avista's headquarters in Spokane;
' Keeplng Avista's brand the same;
' Keeping Avistars office locations in each of its
servj-ce areas, with no less of a significant
presence in each l-ocation than that in place pri-or
to the merger,'
' Preventing workforce reductions resulting from the
Proposed Transaction,'
' Retaining Avista's existing management team;
' Maintaining existing compensation and benefit
practices;
' Negotiating and enterlng into agreements with
bargaining unit employees;
' Maintaining Avista's safety and refiability
standards and policies and service quality measures
in a manner that is substantially comparable to, or
better than, those prior to the merger;
' Maintaining Avlsta's community invol-vement and
support initiatives at levels equal to or greater
than those pri-or to the merger;
' Maintaining a $4.0 mil-l-ion annual budget for
charitabl-e contributions (funded by both Avi-sta and
the Avista Foundation), as compared to an
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approximate $2.5 million l-evel prior to the merger;
the
to the
Making a $2.0 million annual contribution to
Avista Foundation (following a
Foundation of $7.0 million at
contribut.ion
the time the merger
closes ) ;
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' Maintaining at least the leve1 of economic
development that existed prior to the merger,
including the expenditure of funds to support
regional economic development and related strategic
opportunities consistent wlth past practi-ces;
' Maintaining exlsting levels of capital allocations
for capital investment in strategic and economic
development, including property acquisitions in the
university distrlct, support of local- entrepreneurs
and seed-stage investments;
' Contlnued development and funding of Avista's
existing and future innovation activities; and
' Maintaining dues paid by Avista to varj-ous industry
trade groups and membership organizations.
Changes to these provisions in the Merger Agreement
require a two-thirds majority vote of the Avlsta board.
In addition to these and other commitments, the makeup of
the Avista Board of Directors will further reinforce and
preserve the way Avista currentl-y does business. After
completion of the merger, Avista wil-l be governed by a
nine member Board of Directors, with myself serving as
the Chairman of the Board. Three additional board
members will- be chosen by Avista and these four board
members will be referred to as Avj-sta "designees. " There
will- always be a total of four members chosen by Avista
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designees, and these Avj-sta board members will choose
thej-r successors. Of the five board members chosen by
Hydro One, three of the five
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wil-l reslde in the Paclfic Northwest. The remaj-ning two
board members will- be executj-ves of Hydro One or one of
its subsidiaries. The Avista board wil-l- be a l-oca1 board
primarily consisting of either board members chosen by
Avista, and/or members who reside in the Pacific
Northwest.
The Joint Applicants' agreements included in the
Merger Agreement and the makeup of the Avista Board of
Directors are designed to ensure that Avista's culture
and its way of doing business wil-l- continue for the
long-term, inuring to the benefit of customers. The
Proposed Transaction i-s not designed to target the
elimination of jobs, ot cost cutting that may lead to a
deterioration of customer service, customer satisfaction,
safety, reliability, or a deterioration of charitable
giving, economic development or innovation in the
communities Avista serves.2
2 on Jufy 19, 2Ol-7, s&P affirmed its ratings, including the'BBB' issuer
credit rating, on Avista and revised the outfook to positive from stabl-e.
The positive outlook reflects S&P's view of the potential for higher ratings
on Avista if the merqer is completed as proposed based on its view that
Avista wiff be an important member of the Hydro One group, highly unlikely
to be sold and integral to overall- group strategy and operations. In
addition, on July 79, 2071, Moody's affirmed the ratings of Avista's (i)
issuer rating (Baa1); (ii) multiple seniority medium-term note program
( (P)A2) ; (iii) senior secured medium-term notes (A2l ; (iv) senior secured
first mortgrage bonds (A2l; (v) senior secured medium-term note program
((P)A2); and (vi) senior unsecured medium-term note program ((P)Baa1) and
kept the outlook at stable. Moody's indicated that the stable rating outlook
on Avista reflects its view that the merger will- not materially affect the
credit quality of Avista.
Morris, Di Ll
Avista Corporation
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VI. HYDRO ONE'S REJASONS FOR THE PROPOSED TRAIiISACTION
O. Why did Hydro One choose to enter into the
Merger Agreement with Avista?
A. Mr. Schmidt, Hydro One's Chief Executive
Officer (CEO), wilJ- explain in his testimony why the
proposed transaction was attractive to Hydro One. He
wil-l- discuss how the Proposed Transaction with Avista
achieves Hydro One's goals by providing diversification
both in terms of jurisdiction and service area. The
Proposed Transaction will- deliver the increased scale and
benefits that come from being a larger player in the
utility industry. Hydro One anticipates over time that
there wil-l- be savings through scale and col-l-aboration in
supply chain activity, IT development and implementation,
innovation, and potentlally other areas.
VII. OVERVIETV OF HYDRO ONE
O. Pl-ease provide a brief overview of Hydro One
and its operations.
A. I will provide a brief overview of Hydro One,
and Hydro Oners witnesses Mr. Schmidt, Mr. Lopez and Mr.
Pugliese will provide more details.
Hydro One is an investor-owned electrj-c transmission
and dlstribution ut1l1ty headquartered in Toronto,
Ontario,25
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Canada. Through its subsidiaries, Hydro one provides
electric distribution service to more than 1.3 milli-on
retail- end-use customers, as wel-1 as el-ectric
transmi-ssion service to many l-ocal- distribution companies
and large industrial- customers.
Hydro One connects
and operated by others
retail customers. The
to generating facilitles owned
and delivers the power to its
costs of these power purchases are
a "pass-through" to Hydro One's retail customers, i.e.,
these customers pay a commodity power cost equal to that
paid by Hydro One. Hydro One's whol-esale customers and
its large-use customers that are market particlpants
purchase commodity directly and do not rely on Hydro One
to purchase commodity for them. Therefore, Hydro One has
no materiaf exposure to variations in the commodity cost
of power.
Like Avista, Hydro One is committed to the
communities it serves, and has been rated as the top
utility in Canada for its corporate citizenship,
sustainability, and diversity initiatives. It is one of
only four utility compani-es in Canada to achieve the
Sustainable Energy Company designation from the Canadian
Electricaf Association.
Hydro One has approxJ-mately 5,40 0 full-time
employees and 3,300 casual and temporary employees (not25
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including external contractors) with total assets of C$25
bi11ion,
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annual revenues over C$6.5 bil-l-ion, and with a market
capitalization of C$14 biIlion. As explained by Mr.
Lopez, Hydro
both Standard
One maintains strong credit ratings from
and Poors (Seel and Moody's.
VIII. O\TERVIEW OF AVISTA
0. Pl-ease provide an overview of Avista and its
operati-ons.
A. Avista, headquartered in Spokane, Washj-ngton,
operates a vertj-cal1y-integrated electric system in
Idaho, Washington, and western Montana. Avista's owned
generating resource portfol-io lncludes a mix of
hydroelectric generation projects, base-Ioad coal and
base-foad natural gas-fired thermal- generation
facilities, wood-waste-fired generation, and natural
gas-fired peaking generation. Avista-owned generation
facilities have a total capacity of I,925 MW, which
includes 562 hydroelectric and 442 thermal resources.
Avista has approximately 18,300 miles of primary and
secondary electric distribution lj-nes, and an electric
transmj-ssion system of 685 miles of 230 kV lines and
1,534 miles of 115 kV lines.
Avista provides naturaf gas distributlon service in
northern Idaho, eastern Washington and in southwestern
and northeastern Oregon. Avista owns and maintains a
total of25
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1,650 mj-l-es of natural- gas distribution lines, and is
served off of the Wil-l-iams Northwest and Gas Transmission
Northwest (GTN) pipelines. The Company is also one of
the three original developers of the underground storage
facility at Jackson Prairie, which is located near
Chehalis, Washington.
Of Avista's 378,000 electric and 342,000 natural gas
customers (as of June 30, 20L1), 729,000 and 81,000,
respectively, are Idaho customers. Avista serves
approximately 30 retail el-ectric customers j-n western
Montana, many of whom are our employees who operate our
Noxon Rapj-ds generating facility. In 2014, Avista
acquired AEL&P, which serves electric power to
approximately 17,000 customers in the City and Borough of
Juneau, Alaska. A diagram of Avista's current corporate
structure is provided in Exhibit 1-, Schedul-e 2.
A map showing the Company's el-ectric and natura1 gas
service area in the Pacific Northwest is provided bel-ow
in fllustration No. 1 beIow, as well- as in Exhibit L,
Schedul-e 3.
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11 As of December 37, 20\6, Avista Utj-lities had total-
assets (electric and natural gas) of approxJ-mately $5.0
bill-ion (on a system basis), wi-th el-ectrj-c retail
revenues of $760 million (system) and natural gas retail-
revenues of $294 milfion (syst.em) . As of December 2016,
the Utility had L,142 employees.
Avista's credit ratings, assigned by S&P and Moody's
are as follows:
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lbrr}',
{3 lrrrarl*fr
Imrrrrrrrr**
S&P Moodyos
Corporate Crcdit Rating BBB Baal
Senior Secured Debt A-A2
Positive StableOutlook
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BB2
Illustration No. 1
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IX. POST.CLOSING CORPORATE STRUCTURE
O. Following the closing, where wilf Avista reside
within the corporate
. After the
structure of Hydro One?
A closing,Avista will be owned by
series of wholl-y-owned
the Illustration No. 2
Hydro One Limited, through a
subsidiaries, dS depicted in
befow:
Illustration No, 2
:i
1
2 LLC
OneHydro
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Avista will continue to issue debt financj-ng, as
needed. Hydro One will provide equity to support
Avista's capital structure that is designed to alIow
Avista access to debt financing under reasonabl-e terms
and on a sustainabl-e basis. Mr. Thies and Mr. Lopez
provide additional details related to the post-closing
corporate structure, as wel-l
strenqth of Avlsta following
transaction.
as the continuing financial-
the closing of the
X. POST-CLOSING GO\IERNA}iICE, T'IATIAGEMENT
A}ID OPERATIONS OF AVISTA
O. Please describe the governance, management and
fol-lowing the cl-ose of thethe operations of Avlsta
Proposed
A.
Proposed
immedlate
Transaction.
Ac
Transaction.
explained earlier,
Avista's customers
following completion of
and the communities Avistathe merger,
serves will- see l-ittle or no change in the operations of
Avista, ds compared to Avista's operations prior to the
Customers wiI1, however, see
retail rate
closing of
additlonal-
through the
i-nnovation.
financial benefits in the form of proposed
beginning at thecredits (the "Rate Credits")
the transaction, as wefl as opportunitles for
longer-term benefits from efficiencles gained
sharing of best practices, technofogy and
Avista's25
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customers can
avoiding the
by another
values.
party that may not share Avista's
while also
acquisit j-on
culture and
The communities Avista serves will see increased
charitabl-e contributions and a continuation of the strong
support Avj-sta provides j-n economic development and
innovation. Avista and Hydro One employees will see
increased opportunities as the two companies pursue
efficiencies and innovatj-on through the sharing of
technology, best practices and business processes.
The Merger Agreement provides for the retention of
Avista's existing employees and management team.
Fol-lowing completion of the merger, Avj-sta will be
governed by a nine member Board of Directors, as
explained earlier, with myself as the Chairman of the
Board.
State regulators and other stakeholders will see a
continued focus by Avista on providing reliable service
to customers, hiqh customer satj-sfaction, and energy
service to customers at a reasonable cost. The vari-ous
provisions of the Merger Agreement are designed to enable
Avista to do so f or the i-ndef inlte future.
recei-ve the benefits of scal-e
risk of a potential subsequent
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XI. BENEFITS TO CUSTOMERS E.ROM TIIE TRANSACTION
O. Are the Joint Applicants proposing immediate
closing of thebenefits to customers following the
transaction?
A. Yes. There will be some immediate cost savings
following the closlng, such as reduced expenses
assocj-ated with Avista no longer having publicly traded
common stock. Some savings will materialize wlth
respect to filings with the Securities and Exchange
Commission ("SEC"), including legal and accounting costs.
In addition, the post-closing Avista Board of Directors
w1ll have fewer non-employee members which wil-I resul-t in
Iower costs. The total estimated annual cost savings
to customers, on
approxlmately $f
a system basis,
7 mifflon. Mr.
for Avista is
Thies
on the cost savings associated with the
Transaction.
Avista and Hydro One are
to Avista's retail- customers
Oregon a Rate Credit of $31.5
period, beginning at the time
Rate Credit consists of
provides details
Proposed
to fl-ow through
Washington and
proposing
in Idaho,
million over a 1O-year
the merger cl-oses.3 The
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3 The AEL&P operations i-n the City and Borough of Juneau, Alaska, operate
substantially independent of Avista Utilities, and the costs from which the
merger-related cost savings are derived, are currently not being charged to
AEL&P. Therefore, there are no financial cost savings to fLow through to
AEL&P customers. For Avi-sta's retail operations in Montana, Avista has
approximately 30 retail customers and total retail
Morris, Di 26aAvlsta Corporation
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two components, and reflects an increased level of
savings in years 6-10 as ill-ustrated in Tabl-e No. 2
below.
Tab].e No. 2
Two-Step Rate Credit Ploposal
Annual Crcdit
Year:s 1-5
Annual Crcdit
Yean 6-10 Total Crcdit
Total Credit
Oftetable Credit
The total Rate
$2.65 Million
$1.70 Million
Credit to
$3.65 Million
$2.70 Million
customers for the
$31.50 Million
$22.00 Million
first five
million peryears following the closing
year, and the credit would
would be $2.65
increase to $3.65 million per
year for the last five years of the 1O-year period.
Durj-ng the 10-year period, the financial benefits of the
Rate Credit will fl-ow through to customers either through
a separate tariff
revenue of approximately $74,000. Due to the very limited retail- operations
by Avista in Montana, for administrative efflciency the past practice by the
Montana Public Service Commission has been to review the final rates
recently filed and approved in the State of ldaho, and approve those for
Avj-sta's Montana customers, when a request is made by Avista. The date of
the last approved retail rates j-n Montana for Avista was April 2'7, 20LL,
Since that time electric retail rates have j-ncreased in the State of Idaho,
but Avista has not proposed similar j-ncreases for its Montana customers.
Because Avista's current retail rates for its Montana customers are already
below its cost of service, and for the sake of admlnistrative efficiency,
Avista and Hydro One are not proposing to flow through the small- financiai
benefit to Avista's Montana customers related to the Proposed Transaction.
(If a proportionate benefit to Montana customer were to be cal-culated based
on the level of retail revenue, the total annual Rate Credit for all
customers combined would be approximately $190.)
Morris, Di 21
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schedule or through a reductlon to the underlying cost of
service as these benefits are reflected in the test
period numbers used
fully below. At the
million benefit will
for ratemaking as described more
time of the closing, the
be provided to customers
as long as the reduction
$2 .65
through a
in costs
for
separate Rate
is not already
Credit,
ref.l-ected in base retail rates
of the annua] total Rate Credit would be
indicated 1n the table above. To the
the Rate Credit
Avista's customers.
A portion
offsetable, as
extent Avista demonstrates in a future rate proceeding
that cost savinqs, or benefits, directly related to the
Proposed Transaction are already being flowed through to
customers through base retail rates, the separate Rate
Credit to customers would be reduced by an amount up to
the offsetable Rate Credit amount. The portion of the
total Rate Credit that is not offsetable effectively
represents acceptance by Hydro One of a lower rate of
return during the 10-year period.
The $31.5 mil-lion represents the "fIoor" of benefits
that will be flowed through to Avista's customers, either
through
incl-uded in base retail
or through
rates over
benefits otherwise
ti-me. To the extent
the identifiable benefi-ts exceed the annual offsetable
Rate Credit amounts, these additlonal benefits wil-f be
flowed
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through to customers in base retail rates 1n general rate
benefits tocases as they
customers for years 6-10 provide time for Avista and
Hydro One to identify and capture an increased level- of
benefits, directly related to the Proposed Transaction,
that can be fl-owed through to customers. As explained
earl-ier, we believe additiona] ef f iclencies (benefits)
will- be rea1ized over time from the sharing of best
practices, technol-ogy and innovation between the two
companies. It wil-l take time, however, to identify and
capture these benef its. The l-evel- of annual- net cost
savings (and/or net beneflts) will be tracked and
reported on an annual basis, and compared against the
offsetable level of savings.
Avista and Hydro One are not aware of any net
increase in costs to Avista's customers related to the
Proposed Transaction.a Therefore, the annuaf Rate
Credits proposed by the companies represent an immediate
net benefit to customers. Mr. Ehrbar explains in his
testimony the manner in which the Rate Credit is proposed
to be f l-owed through to Avista's el-ectric and natural gas
customers.
4 None of the costs associated with the Proposed Transacti-on wil-I be fl-owed
through to the customers of Avista or Hydro One.
occur. The increase in total
Morris, Di 29Avista Corporation
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XII. SATISFACTION OF THE PI'BLIC INTEREST A}iID
.IOINT APPLICA}ITS I COMMIIS{ENTS
O. What are the standards for approval of the
transaction by the Commission?
A. The Commission has jurisdlction over this
Code S 67-328. Thistransaction pursuant to Idaho
section prohibits Hydro One from acquiring Avista without
the written authorization of the Commission. Before
authorizrnq such a transacti-on, the Commlssj-on must find
that: (1) the transaction is consistent with
not cause
the public
the cost ofinterest; (2)
or rates for
the transaction will
supplying service to
the bona fide intent
and maintain Avista's
increase; and (3) that
and financial ability
operations in Idaho.
and Hydro One have
benefits for Avista's
Hydro One
to operate
has
As explained above, Avista
immediate financial netproposed
customers, as wel-1 as presenting the opportunity for
longer-term benefits for customers from efficj-encies
gained through best practices, technol-ogy and innovation.
It is consistent wlth the public interest and the
transaction will not cause the cost of or rates for
supplying service to increase.
0. Pl-ease explain why the Proposed Transaction is
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A. As explained earlier, Avistars choice to merge
with Hydro One wil-I all-ow Avista and j-ts customers to
benefit from belng a part of a larger organization (the
benefits of scale), while at the same time preserving
l-ocal control of Avista and the retention of Avista's
cul-ture and its way of doing business. Fol-lowing
completion of the merger, Avista wil-I continue to have a
local- Board of Directors consisting primarily of either
board members chosen by Avista, and/or members who reside
in the Pacific Northwest. The Avista board will have the
authority to maintain Avista's headquarters in Spokane,
Washington, to maintain its other office Iocations
throughout its service areas, to continue to operate
under the same Avi-sta name, to retain its existing
employees and management team (although CEO selectj-on is
subject to Hydro One approval), and otherwj-se to ensure
that Avista's culture and its way of doing business wil-l
continue for the long-term. Following the closing of the
transaction, Avista's customers and the communities it
serves will- see little or no change in the operations of
Avista, ds compared to Avista's operations prior to the
transaction.
Avista and Hydro One believe this preservation of
Avista's name, its headquarters, its cufture and its way
of doing business, among other things, is important to
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Avistars customers, in that customers can continue to
expect and
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experience reliable service and a high fevel- of customer
satisfaction. fn addition, customers will see immediate
dol-l-ar benefj-ts in the form of proposed retail rate
credits beginning at the closj.ng of the Proposed
Transaction, as well as opportunities for additional-
longer-term benefits from efficiencies gained through the
sharing of best practices, technology and innovation.
These immediate and longer-term benefits will not
otherwise occur absent the proposed merger.
Followlng the closing of the Proposed Transaction,
the communities Avista serves wilI see increased
charitable contributions and a continuation of the strong
support Avista provides in economic development and
innovation. Furthermore, Avista and Hydro One employees
will- see increased opportunities as the two companies
pursue efficiencies and innovation through the use of
technology, best practices and business processes.
Commitments between the two companies embedded in
the Merger Agreement, including the Delegation of
Authority, and the make-up of the post-closing Avista
Board of Dj-rectors are all designed to ensure that
Avista's cufture and its way of doing business can
continue for the indefinite future, for the benefit of
customers. Under the Delegation of Authority, Avista's
Board will retain the authority to
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Morris, Di 33Avista Corporation
review, authorj-ze and approve certain specific matters
rel-ated to Avista, without any obligation to obtain
separate authorization or approval from the Hydro One
Board. These commitments are set forth in Exhibits A
B of the Merger Agreement, which is attached to Mr.
Thies' testj-mony as Exhibit No. 3, Schedule 3.
O. Are Hydro
and
commitments through
of thefor approval
A. Yes. As
for approval of the
Avista are offering
One and Avista offering additional
this filing as part of your request
Proposed Transaction?
part of the Joint Applicants' request
Proposed Transaction, Hydro One and
other commitments in additlon to the
Delegation of Authority in the Merger Agreement. The
commitments included in the Joint Application total 55
commitments offered by Hydro One and Avista related to
approval of the Proposed Transaction. The 55 commitments
are grouped together into the categories identifled
below. The master list of all 55 commitments is attached
as Exhibit 3, Schedule 4 to Mr. Thies' testimony.
A Reservation of Certain Authority to the Avista
Board of Directors
1. Governance2. Business Operations3. Locaf Presence/Communlty Involvement
B. Rate Commitments
C. Regulatory Commitments
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Morris, Di 34Avista Corporation
Financial Integrity Commltments
Ring-fencing Commitments
Envj-ronmental-, Renewable Energy, and Energy
Ef f icj-ency Commltments
Communi-ty and Low-Income Assistance Commitments
xrrr. REQUTRED APPROVATS
O. What approvals must be received prior to the
Proposed Transaction closing?
A. The Proposed Transactj-on was unanimously
approved by the Boards of Directors of both companies.
The merger must be approved by Avistars sharehol-ders,
which involves a majority vote (50U of shareholders
voting, plus 1). A proxy statement will be filed by
Avista with the SEC in September 2011, in preparation for
a vote of Avista' s sharehol-ders. Approval-s are required
by this Commission, the Washington Utilities and
Transportation Commission, the Pub1ic Utility Commj-ssj-on
of Oregon, the Public Service Commission of the State of
Montana, the Regulatory Commission of Alaska, and the
Federal Energy Regulatory Commission. A11 of these
filings with state commissions and FERC requesting
approval are expected to be made on or around the same
date.
A filing for approval from the Federal
Communications
Avista's radio
Commission will be made related to
l-icenses.
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Morris, Di 35Avista Corporati-on
In addition, clearance is required by the Committee on
Foreign Investment in the United States, and compliance
with applicable requirements under the U.S.
Hart-Scott-Rodino Antitrust Improvements Act of 791 6, ds
amended, and the satisfaction of customary closing
conditions. Mr. Thies wil-l- provide additional details
rel-ated to these required approvals.
Joint Applicants are anticipating receiving all
approvals in a time frame that woul-d a1low the Proposed
Transaction to close in the second half 2018.
XIV. CONCLUSION
O. Pl-ease briefly summari-ze why the proposed
merger is in the public interest.
A. Avi-staf s choice to merge with Hydro One will
allow Avista and its customers to benefit from being a
part of a larger organlzation (the benefits of scale),
whil-e at the same time preserving l-ocal- control of Avista
and the preservation of its cul-ture and its way of doing
business. Agreements to preserve Avista, essentially as
it is today, for the long-term are memorialized in the
Merger Agreement.
The Proposed Tr ansaction provides benefits to
employees, shareholders, and theAvista's customers,
communities Avista
benefits to
serves,' including immediate flnancial-25
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Avista's customers. Avista and Hydro One have proposed
numerous commj-tments as part of the Joint Application,
including ring fencing commitments and other protections
for various stakeholders.
Avista and Hydro One request that the Commission
schedule a review of the Proposed Transaction in a time
frame that wil-l a1low approval by the Commission on or
before August !4, 2018.
O. Does this conclude your pre-fiIed direct
testimony?
A. Yes.
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upp. 1orporation
I. INTRODUCTION
0. Will you please state your name, business
address, and position with Avista Corporation?
A. My name is Scott L. Morris and I am employed as
the Chief Executive Officer of Avista Corporation
("Avj-sta"), at 1471 East Mission Avenue, Spokane,
Washington. f al-so serve as the Chairman of the Board of
Avista.
0. Are you the same Scott L. Morris who sponsored
pre-filed direct testimony on behalf of Avista
Corporation (Avista) ?
A. Yes, I sponsored Direct Testimony and Exhibit
L, Schedules 1 through 3.
O. Are you sponsoring any exhibits in this
supplemental testimony?
A. Yes, I am sponsoring Exhlbit 7!, Schedul-e !,
which is a map that shows foreign ownership of American
util-ities. It is provided for no other purpose than to
show the extent of foreign ownershlp of util-ities in this
country, and that such a phenomenon is not unique to thls
transaction (the "Proposed Transaction"). I am al-so
sponsoring Exhibit 11, Schedule 2, which is notice to
Hydro One of Avistars extension of the September 30, 20lB
deadline for closing this transaction set forth in the
merger agreement to Marcht25
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Morris, Supp. 2Avista Corporati-on
29, 2019.
A table of contents for my testimony is as follows:
T. INTRODUCTION
of the Board of Di-rectors of
aa
1
II. REASONS EOR THE PROPOSED TRANSACTION 15
III. MERGER PROTECTIONS.1B
IV. EORETGN OWNERSHIP OE UNITED STATES UT]L]TIES.... . 23
O. Please summarize your Supplemental Testimony.
A. The intent of my Supplemental Testimony is to
reaffirm Avista's commitment to the Proposed Transaction
followlng the July 11, 20L8 agreement entered into by
Hydro One and the Province of Ontario for the purpose of
the orderly replacement
well as theHydro One
the chief
retirement of Mayo Schmidt as
executive officer. As I wil-I discuss i-n this
Supplemental- Testimony, specific merger protections, by
way of agreed-upon commitments (each, a "Stipulated
Commitment", col-Iectively "Stipulated Commitments" )
contaj-ned within the filed Settl-ement Stipulatlon
("Stipulation"), protect Avista from political
interference or inffuence by the Provj-nce of Ontario,
preserve Avista's self-governance, and protect Avista and
our customers from harm. The sLructural- safeguards
lncluded as part of this Proposed Transaction were
designed to withstand the test of time and changes in25
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Hydro One management, and I contj-nue to believe that all
of
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Morris, Supp. 3Avista Corporation
the reasons previously stated in support of the merger
that approval is i-n theremain
public
o
best interest
equally true today, and
interest.
Do you stil-l- believe that this merger is in the
of Customers?
A. Yes, I strongly believe so. This merger was
never about who sits in the Chief Executive Officer
( "CEO" ) chair at Hydro One or who is on its Board of
Directors. That will change from time to time as each
company refreshes its management team. The structuraf
safeguards, in
neqotiated with
the form of multiple commitments
test of time and
the parties, are meant to withstand the
changes in management at both Hydro One
and Avista, as well as changes in government. The
underlying rationale for this merger remains the same:
The need to preserve and enhance Avista's ability to
provide cost-effective and rel-iabl-e servj-ce to its
customers, in a rapidly evolving industry, by partnering
with an organization that shares Avista's val-ues all
with Avista's autonomy intact.
O. Therefore, knowing what
sti1l recommend that this merger
A. Yes.
O. Has Hydro One, for its
commitment to this merger?
now know, would you
place ?
you
ta ke
part, reaffirmed its
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Morris, Supp. 4Avista Corporation
A. Yes, it has. As Hydro One witness Mr. Woods
testifies, on September 19, 2018, the new Hydro One Board
affirmed Hydro One's obligations under the Merger
Agreement and with respect to the merger-related
commitments to be performed by Hydro One and/or its
subsidiaries if the Proposed Transacti-on is consummated
pursuant to
intention to
the Merger Agreement; and (ii) Hydro One's
consummate the Merger; i-n each case in
accordance with the terms of, and subject to the
conditions set out in, the Merger Agreement and the
merger-related commitments .
O. To that end, has Avista extended the deadline
for closing this transaction beyond the September 30,
201-8 deadline set forth in the merger agreement?
A. Yes, it has. Section 1.7 (b) (i) of the merger
agreement (Appendix 2 Lo Joint Application) al-l-ows either
party to extend the deadline for up to an additional six
(6) months, if necessary to satisfy aI1 of the conditions
for closing. On September 19, 2018, Avista provided
notice to Hydro One, extending the deadline to March 29,
201,9, see Exhibit No. ll, Schedule 2.
O. Do Avista and Hydro One stil-I want to receive
al1 regulatory approval-s and close this transaction by
year-end?
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order in Washington, dS is required by statute, and we
have a
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schedule in Oregon that a1lows for a decision in
December. Other than ldaho, those are the only two
remaining regulatory jurisdlctions that need to act on
this merger.
The parties in ldaho have agreed upon a schedul-e
that may a11ow for an Order in Idaho that would allow for
a closing by year-end, if this Commlssion so chooses. A
year-end closing woul-d al-l-ow for better accounti-ng and
reporting, than woul-d a l-ater closing refl-ecting a
partial year in the first quarter of 2079. Mr. Thies, in
his supplemental testimony, also speaks to this.
O. What el-se has Avista done to facilitate
approval in this jurisdictlon?
A. Recognizing that any prolonged merger approval
process presents a dynamJ-c situation, Avista has since
entered into an agreement with the Idaho Department of
Water Resources ("IDWR"), an intervenor in this
proceeding, that addresses the treatment of Avista's
water rights in Idaho in a manner acceptable to the IDWR.
Mr. Bruce Howard, an Avista witness, wlfl testify to the
terms of that agreement and w111 sponsor it as Exhibit
No. 14, Schedule 1. As a resul-t, the IDWR has concluded
that the public interest, ds it relates to Avista's water
use, will not be adversely affected by the merger, under
Idaho Code 561-328 and 542-1701(6) . (See l-etter of IDWR
to Commission, dated August 10, 2018, a
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copy of which is incl-uded as Exhibit No. 74, Schedule l-.)
This is indicative of Avista's willingness to work with
all affected parties.
(restimony stricken) / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /
/ / / / / /// ///// / /// ///////////// / // // / //// / / / / //// / / / / / / /
/ / / / / / ////// / //// / /////////// / / /// / / //// / // / / /// / / / / / //
O. Have Avista and Hydro One responded to other
issues?
A. Yes. Avista and Hydro One have explained
recent events in Ontario and how there are sufficient
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Avista Corporation
in place to protect Idaho customers. Additional
discovery was made of the companies, and through those
responses, and by means of supplemental testimony, the
Companies have addressed those issues head on. Again,
this demonstrates our willingness to l-isten and respond
to concerns raj-sed by the parties. At the end of the
day, I have to be able to look each Commissioner in the
eye and say that this merger is the right thing to do. I
can do that.
O. What additional commitments are you willi-ng to
offer, that don't
Stipulation?
A. Avista and
already appear in the Settlement
Hydro One are proposing to amend the
of Authority to add protection of the
Province takes some action in the
existing Delegation
Avista Board if the
future to control a majority of the Hydro One board. If
that happens, Hydro One wil-l- lose its ability to replace
any of its three Independent Director designees on the
Avista board with a Hydro One executive or employee.
This essentially provides "downstream" protection for
Avista and its customers. Avista and Hydro One propose to
amend the Delegation of Authority (Appendix 5 of Jolnt
Application) as follows:
Shareholder shall have the unfettered right to
designate, remove and replace the Shareholder
Desi-gnees as directors of the Surviving25
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Morris, Supp. 8Avista Corporation
Corporation with or without cause or notice at its
sole di-scretion, subject to the requirement that (i)
two (2) of such directors are executives of Parent
or any of its Subsidiaries and (ii) three (3) of
such directors are Independent Directors who are
resj-dents of the Pacific Northwest Region, while
such requirement is in effect (subject in the case
of clause (ii) hereof to Sharehol-der determinlng, in
good faith, that it is not abl-e to appoint an
Independent Dj-rector who is a resident of the
Pacific Northwest Region in a timely manner, in
which case Shareholder may replace any such director
with an employee of Parent or any of its
Subsidlaries on an interj-m basis, not exceeding six
months, after which time Shareholder shal-l- replace
such interim director with Independent Director who
is a resldent of the Pacific Northwest Reqion;provlded, however, that this exceptj-on to cl-ause(ri )hereof shall not apply if, at any time a
circumstance arises and durin the endenc of an
such circumstance,whereby the Province of Ontario
( "Ontario" )exercj-ses 1ts riqhts as a shareholder of
Parent uses Ie isl-ative authorlt or acts in an
other manner whatsoever,that resul-ts , or would
result, in Ontario a oi-ntin nominees to the board
of directors of Parent that constitute, or would
constitute a ma orit of the directors of such
board) .
0. What 1s the purpose of
Delegation of Authority?
A. This proposed amendment
the new text in the
Authority 1s
Avista board
action in the
One
designed to
in the event
protect
to the Delegation of
the independence of the
that the Province takes some
future to control a majority of the Hydro
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Board. If that event occurs, this amendment is
and blocks Hydro Onefs limlted rj-ght to replace
its three Independent Director designees on the
board with a Hydro One executj-ve or employee.
O. Notwithstanding the above discussion,
triggered
any of
Avista
are
Avista and Hydro One offeri-ng an additional commitment
based on the recent changes in management at Hydro One?
A. Yes. As discussed in the "Comments of Avista
and Hydro One as Joint.
Management Changes at
Hydro One and Avista
commitment:
Applicants
Hydro One"
provided the
in Reference to
fil-ed on July 18, 2078,
fol-lowing new
"Avista Employee Compensation: Any decisions
regarding Avista employee compensation shall- be made
by the Avista Board consj-stent with the terms of the
Merger Agreement between Hydro One and Avista, andcurrent market standards and prevailing practices ofrelevant U.S. electric and gas utllity benchmarks.
The determination of the l-evel of any compensation(including equity awards) approved by the Avista
Board wlth respect to any employee in accordancewith the foregoing shall not be subject to change by
Hydro One or the Hydro One Board. "
Thls new commitment provides further protection to
the AvistaAvista's employees, such that it 1s only
Board, and not the
Ontario, which w1l-l-
continue to recruit
Hydro One
determine
Board nor the Province of
how Avista wil-l be able to
and retain the most highly qualified
employee talent base for our customers.
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O. Are
Companies are
A. Yes.
there sti1l other new commitments the
willing to make?
We would modify Commitment No. 2 Lo
Avista Board would have the sole ability
or replace the Chief Executive.
assure that the
to hire, dismiss
Accordingly, Commitment No. 2 is modified to read as
follows:
Executive Management:
Avista will seek to retain aI1 current executive
management of Avista, subject to vol-untaryretirements that may occur. This commitment wilI notl-imit Avistars ability to determine its
organizational- structure and sel-ect and retain
personnel best able to meet Avista's needs overtime. The Avista board retains the ability to
dismiss executive management of Avista and otherAvista personnel for standard corporate reasons(subjeet Eo Ehe appreval ef Hydro ene Lim*Eed("Hlrdre ene") for anlr hiringz dismissal or
; [Any deci-sion to hire,
dismiss or replace the Chief Executive Officer ofAvlsta shalf be withln the discretion of the Avista
Board of Di-rectors, and shal-l- not requi-re anyts qffiliates(other than Avista), notwithstanding anything to thecontrary :n lhg lqgrger agreement, and its exhibits
and attachments, between Hydro One and Avista.l
O. Given
surrounding the
recent
change
are Avista's
events in the Provi-nce of Ontario
in leadership at Hydro One, how
Idaho customers?protected
A.Very protected. If I weren't
wouldn't recoflImend to my Board
confident of
to continue wlththis, I
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Morris, Supp. 11Avista Corporation
transaction. Our customers, community and employees wil-1
continue to see benefits over time and that rationale
has not changed. More to the point, those same customers
are al-so protected from any risk of Provincial-
invol-vement in the af f airs of Avista.
It makes sense to carefully distinguish between
risks (political or otherwise) invol-ving Hydro Oners
affaj-rs and operations in Canada and risks impacting
Avista in its service terri-tories.
My emphasis is on the potential
Provincial- interference, directly or
affairs of Avista. At the end of the
risks of any
indirectly, in the
day, it may not
have done our jobif wematLer what happens 1n Ontario,
right (and I think we have) in
and safeguards, with the
construct ing commj-tments
help of all partj-es, that
communiti-es we serve.
such protections
protections assure
center in
protect customers and the
O. How have the Parties achieved
and structural safeguards?
A. The building blocks of these
that this Commission remains front and
enforcing the
these consist
merger commitments. For ease of reference,
of commitments that assure that:
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1)
2) Avista and Hydro One wil-l- comply with al-l-
orders of the Commission:
Authority is reserved to the Commission with
the respect to interpretation and enforcement
of aIl commitments:
Commitment No. 1 Authority Reserved: Consistentwith and subject to the terms of Exhibits A and
B to the Merger Agreement (referred to as
"Delegation of Authority") contained in
Appendix 5 of the Joint Application,
decision-making authority over commitments 2-75
bel-ow is reserved to the Board of Directors ofAvista Corporation ( "Avista" ) and not to HydroOne. Any change to the policies stated in
commitments 2-15 requires a two-thirds (2/3)
vote of the Avista Board, provided that Avista
must obtain approval for such changes from all-regulatory bodies with jurisdiction over the
Commitments before such changes can go into
effect, and provide written notice to al-l-parties to Case No. AVU-E-17-0glavu-e-17-05 of
such request for approval:
Commitment No. 20 State Regulatory Authority
and Juri-sdlction
Hydro One and 1ts subsidiarj-es, includingAvista, ds applicable and as appropriate, wil-I
comply with al-1 applicable l-aws, including
those pertaining to transfers of property,
affiliated interests, and securities and the
assumption of obligations and liabil-ities. As
required by and consistent with applicableIaws, venue for resolution of proceedings
related to these matters wil-I be at theappropriate state utllity commi-ssion(s) . Hydro
One and its subsidiaries, including Avlsta,will make their employees and officersavail-able to testify before the Commission at
the Commission's request to provlde informationrelevant to the matters within 1t.s
j urisdict j-on.
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Commitment No. 27 Compliance with Existing
subsidiaries, including Avista, acknowledgethat aII existing orders issued by the
Commission with respect to Avista or itspredecessor, Washington Vrlater Power Co., wil-l-
remaln in effect, and are not modified or
otherwise affected by the Proposed Transaction.
Hydro One and its subsidiaries, includingAvlsta, ds applicable and as appropriate, wiII
comply with aIf applicable future Commission
orders that remain in force.
3) Commission retains ful-I authority to enforce
compelling witnessescommitments, including
from Hydro One
Commi-tment No.
to appear:
30 Commission Enforcement of
Commitments: Hydro One and its subsidiarj-es,including Avista, understand that the
Commisslon has authority to enforce these
commitments in accordance with their terms. Ifthere 1s a viol-ation of the terms of these
commitments, then the offending party fidy, atthe discretion of the Commission, have a period
of thirty (30) cal-endar days to cure suchviofation.
The scope of this commitment includes theauthority of the Commission to compel the
attendance of witnesses from Olympus Holdj-ng
Corp. and its affiliates, lncluding Hydro One,with pertinent information on matters affectingAvista. Hydro One and Olympus Holding Corp. andits subsidiarles waive their rights tointerpose any Iegal objectj-on they might
otherwj-se have to the Commission's jurisdiction
to require the appearance of any such
witnesses.
With these
speculate about
interference in
protections in place, we needn't
aIl possible means of Provincial
the affairs of Avi-sta, because, dt the
Morris, Supp. 13Avlsta Corporation
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end of the d.y, this Commission (and the Commissions in
al-1 other affected
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states) will have the final- say - and they wil-l exercise
all powers to regulate in the public interest.
And it is not just Avista and the other parties who
want this - Hydro One, I bel-ieve, wants this as well. It
wants Avista to have the freedom it needs to effectively
manage its utility without outside interference, because
only in that way will it deri-ve value from a well-run
company that wil,I benefit its shareholders.
O. Are these the only commitments that safeguard
Avista customers?
A. No. As I wil-l discuss later in my testimony,
there are mul-tip1e commitments that assure that Avista
will contj-nue to operate without outside interference, -
e.9., maintenance of corporate headquarters, existing
management team and employees, a majority of independent
directors on Avista's board. These are found in the
express "delegation of authority" to Avista, and are
embedded in the first fifteen commitments set forth in
the Settlement Stipulation.
The purpose of highlighting the earlier commitments
was to underscore the authority of this Commissi-on to
enforce (or modify if need be) the commitments that
preserve its jurisdictions and regulate all matters 1n
the public interest.
Morris, Supp. 74Avlsta Corporati-on
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Morr j-s, Supp. 15
Avj-sta Corporation
Mr. Jamie Scarl-ett, of
the potential adoption
Hydro One, will further discuss
of certain commitments from the
OPUC Settlement Stipulation:
4
5
Executive Management
Avista Board of Directors (BOD)
And for his part, Mr. Lopez,
discuss the potential adoption of
the OPUC Settl-ement Stlpulation:
of Hydro One, will
these commi-tments from
39. Foreign Exchange and Hedging on Dj-vidends Payments
and Allocations
43. Cost of Capital
54. Avista Cash Flows
]]. REASONS FOR THE PROPOSED TRANSACTION
0. Are the reasons for the Proposed Transaction
sti1l as compelling now as they were when you agreed to
the merger with Hydro
A. Absolutely.
(Morris Testimony, pp.
merger with Hydro One
to benefit
One?
In my pre-filed direct testimony
72-L1) , I expJ-ained that the
wiIl allow Avista and its customers
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12. North Amerj-can Free Trade Agreement (NAFTA)
18. Venue for and Resol-ution of Disputes
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Morris, Supp. 16Avista Corporation
from being part. of a larger organizatj-on (the benefits of
scale), while at the same time preserving l-ocal contro]
of Avista and t.he retention of Avista's employees and
management team, as well as 1ts cu1ture and way of dolng
business. That is unchanged as a result of the
management changes at Hydro One.
With regard to sca1e, Avista's perspective was that
the number of investor-owned electric and/or natural gas
utilities in North America has decreased significantly
over the years through consol-idation. When comparing the
size of investor-owned utilities from largest to
smal-lest, Avista is one of the small-est investor-owned
util-ities remalning in North America. A bar chart
indicative of the investor-owned util-ities 1n North
America, from largest to small-est, is attached to my
direct testimony in Exhibit No. !!, Schedule 1. The
merger of Avista and Hydro One wil-l place the combined
company toward the middle of the range of investor-owned
utilities, in terms of s j-ze. Avista' s vi-ew is that,
through consol-idatj-on, larger utilities have the
opportunity to spread costs, especially the costs of new
technology, over a broader customer base and a broader
set of infrastructure to the benefit of customers.
Hydro One has more than 1.3 million electric
distribution customers, and Avista has approximately
37 B, 000
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Morris, Supp. 11Avista Corporation
electric customers and approximately 342t000 natural gas
customers (approximately 102,000 of which reside in
Oregon as of the end of 2011) . This combj-nation will
provide opportunities for efficiencies in the long-term
through the sharing of best practices, technol-ogy and
innovatj-on. Avi-sta's view was that the merger will-
provide benefits to Avistars customers that otherwise
would not occur. That view 1s unaffected by the
management changes
As previously
will not occur in
at Hydro One.
noted, many of these benefits of scale
the near-term following the closing of
the Proposed Transaction, but are expected to occur over
the long-term. After all- approvals are received and the
companies merge, both companies have stated that they
will work together to identify, evaluate and execute on
opportunities to reduce costs for both companies througth,
among other things, the shari-ng of technology, best
practices, and business processes. To the extent that
such savings materialize, the benefits from these cost
savings will be reflected in subsequent rate proceedings.
In the end, Avista's choice to merge with Hydro One
will allow Avista and its customers to benefit from bei-ng
a part. of a J-arger organization, while at the same time
preserving local- control- of Avista as well as its cul-ture
and its way of doing business. Agreements to preserve25
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Morris, Supp. 18Avista Corporation
Avista, essentially as it is today, for the long-term are
The Proposedmemorialized in the Merger Agreement.
Transaction also provides benefits to Avista's customers,
employees, shareholders, and the communities Avista
serves; including immediate financial benefits to
Avista's customers. Those have been exhaustively
discussed in prior testimony supporting the Stipulation.
III. MERGER PROTECTIONS
O. Many of the Stipulated Commitments offered in
the Stipulated Commitments were designed to preserve
Avista self-governance and demonstrate the separati-on
between Avista and Hydro One. Pl-ease descrj-be these
governance Stipulated Commitments, and how the y are
affected by events in Ontario.
A. Certainly. Eirst, Avista wil-l- have a
nine-member board separate from Hydro One that wiIl
govern Avista's management and operatj-ons. Stipulated
Commitment No. 3 ensures that Avi-sta's post-merger Board
of Directors and exi-sting executive leadership wiIJ-
manage Avista - not Hydro One's Board.
f believe that the unique construct of the Board,
which consists of four Avista designees (at least two of
whom are Independent Directors and five Hydro One
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three of whom are Independent Directors residing in the
Pacific Northwest), will have enough independence and
separation from influence by Hydro One (and the Province
of Ontario).
O. Certaj-n of these Stipulated Commltments were
developed to ensure that Avista cannot be subjected to
polltical interference or influence by the Province. Do
you belj-eve these Stipulated Commltments are adequately
designed to prevent the Provlnce or any other party from
exercising inappropriate control- over Avista?
A. Yes. I befieve the structure of Avista's board
woul-d protect it from inappropriate infl-uence by the
Province. Al-though the Province is permitted under the
Governance Agreement to nominate 40% of Hydro One's Board
members, those Board members must be independent of the
Province and, other than the CEO, Hydro One. Hydro One's
management and Board, and not the Province, will be
responsible for selecting five of Avista's nine Board
members (three of whom must be independent and reside in
the Pacifj-c Northwest) .
O. Do you believe there are adequate financial and
bankruptcy ring fencing Stipulated Commitments to protect
al-l- Parties and customers?
Morris, Supp. 79Avista Corporation
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Morris, Supp. 20Avista Corporatj-on
A. Yes. The Stipulated Commitments appended to
the Stipulation contain a substantial number of financial-
and bankruptcy/ring-fencing protections that wiII protect
the financial health of Avista. Neither Hydro One, nor
the Province, can deprive Avista of its capital and
assets. There are Stipulated Commitments that (i) Avista
will continue to have its own credit ratings, (ii) assure
that Hydro One wiII provide equity capital injections to
support Avista's capital structure and al-low Avista to
access debt financing under reasonable terms and on a
sustainable basi-s, and (iii) provide restrictions on
dlvidends and distributions that help preserve Avista's
financial integrity. Hydro One and Avlsta also committed
to issue a single share of preferred stock referred to as
the Golden Share to an independent third party to address
any bankruptcy concerns. A11 of these Stlpulated
Commitments are further discussed in Mr. Thies'
Supplemental- Testimony.
O. Are there other specific Stipulated Commitments
that serve to protect
Provi-nce of Ontario?
A. Yes. There
aqainst outside control of the
are several Stipulated Commitments
that assure all- the existing pieces that make Avista
"Avi-sta" w11l- remain in pIace. More specifically, the
Commitments highlight this.followlng Stipulated
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Morrls, Supp. 27Avista Corporation
Commitment No. 2 speaks to Avj-stars executive management,
as discussed earlier. Stipulated Commitment No. 9 speaks
to maintaining Avista's headquarters location:
Avlsta wil-I, and Hydro One agrees Avista wiIl,
maintain (a) its headquarters in Spokane,
Washington,' (b) Avj-sta's office locations in each ofits other service territories, and (c) no less of a
significant presence in the immediate l-ocation of
each of such office locations than what Avista andits subsidiaries maintalned immediately prlor to
completion of the Proposed Transaction.
Stipulated Commitment No. 10 addresses local- staffing:
Avista wifl maintain Avista Utilities' staffing and
presence in the communities in which Avista operates
at levels sufficient to maintain the provision of
safe and reliable service and cost-effective
operations and consistent with pre-acquisition
IeveIs.
And Stipulated Commitment No. 39 protects pension andpost retirement expenses and assets:
Avista w1l-l- maintain its pension funding policy in
accordance with sound actuarial practice. Hydro Onewil-I not seek to change Avista's pension fundingpolicy.
I bel-ieve this preservati-on of Avj-sta's
headquarters, its culture and its way of doing business,
among other things, are important commitments to our
employees and Avista's customers, as they continue to
expect and experience rel-iabl-e service and a high level-
of customer satisfaction. This demonstrates our
commitment to best serve the public interest, given our
rich heritage of serving
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customers with safe, re1iab1e, and cost-effectj-ve
service.
O. Do you believe the Stipulated Commitments filed
in the Stipulation ensure that Avista could not be
negatively impacted in any wdy, and that these Stipulated
Commitments preserve Avista self-governance and l-ocal
control for the purpose of maintaining safe and rel-iabl-e
service to Avistars utility customers?
A. Yes. In my view the Stipulated Commitments
offered in the Stipulatj-on were negotiated and designed
to provide separate governance and financial ring-fencing
between Avista and Hydro One, and to preserve Avista's
headquarters in Spokane, along with retentj-on of existing
management and employees. A11 of the protections
described above in addition to all of the other
Stipulated Commitments incfuded in the Stipulation ensure
that Avista wil-l- continue as a financially sound,
stand-alone utility and wil-l- bind Hydro One, regardless
of political developments and change in management. In
short, aIl- of these Stipulated Commitments were designed
by the Parties to "stand the test of time."
Furthermore, Avista and Hydro One have committed
that none of the Stipulated Commitments can be amended
without approval from Avista's state regulators (see
Stipulated Commitment No. 30, "Commission Enforcement of
Morris, Supp. 22Avista Corporatj-on
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Commitments"), which assures that the Commission will
continue to regulate
Morris, Supp. 22aAvista Corporation
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Avista as it always has, to ensure that Avista's
customers are protected and continue to only pay fair,
just, and reasonable rates.
rv.
o.
group of
service
American
A.
FOREIGN OV{NERSHIP OF T'NITED STATES UTILITIES
There have been general concerns among a small
customers in certain portions of Avista's
territory about a
utility. Do you
No, I do not.
foreign company purchasing an
share these concerns?
Fi-rst,aII of the protectj-ons
how Avista will, or w1l-I
ownership. Second, this
the United States where a
discussed briefly above dictate
not be, affected by Hydro One's
is not the first transaction in
foreign entity purchased aII or a portion of an American
utility. Approximately 30 States have util-ities that are
owned by foreign entities, including many that are owned
by Canadian entities (utilities, pension funds, etc. ) .
Exhibit No. 77, Schedul-e 1 provldes a map showing where
there is foreign ownership of American utilities. In
addition, we are unaware of any issues resulting from
foreign ownership. It is al-so important to remember that
the Proposed Transaction has al-so been cleared by the
Commj-ttee on Foreign fnvestment in the United States
(CFIUS) . In the end, I bel-ieve the purchase of Avista by
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novef or scary - such transactions are actually quite
coflrmon, and if designed we1l, have and will continue to
provide benefits for American utility customers. And, as
Hydro One and Avista witness Mr. Reed notes in hls
testimony (Reed Supp Testimony), this Proposed
Transaction has been designed with "state-of-the-art"
protecti-ons.
a. Do you have any concluding comments?
A. Yes. As I stated earlier, I understand that
the recent events in Ontario were unexpected. However,
when the smoke cl-ears and one looks at this Proposed
Transaction through the l-ens of the Stipulated
Commitments, nothing fundamentaf has changed. The reason
for the Proposed Transaction st1ll hol-ds - Hydro One will-
in essence be the primary shareholder of Avista, but the
Avista Board, along with Avista management under the
oversight of this Commisslon, will continue to operate a
wel-1-run utility for the benefit of our customers. The
Parties careful-Iy crafted protections and commitments to
withstand the test of time, and the inevitable changes in
management. I fu11y support the Proposed Transaction,
believe it is in the public j-nterest (especially given
the rate credits, 1ow-income fundj-ng, and community
support), and request the Commission approve the Proposed
Transaction.
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Morris, Supp. 25Avista Corporation
O. Any conclusions?
A. By way of
Hydro One's witness
at a set of robust
art", based on his
summary, and as noted by Avista's and
John Reed, the parties have arrived
commitments that are "state of the
revfew of other mergers. We have been
and are eager to get on with
with Hydro One to best service
responsive to aIl- concerns
the business of partnerlng
the need of our customers.
O. Does this conclude your Supplemental- Testi-mony?
A. Yes.
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I. INTRODUCTION
O. WiII you please state your name, business
address, and position with Avista Corporation?
A. My name is Scott L. Morris and f am employed
the Chief Executive Offlcer of Avista Corporation
AS
( "Avista" ) ,
Washington.
Avista.
o.
pre-fi1ed
testimony
A.
Are you the same Scott L.Morris who sponsored
as supplementaldirect testimony, as
on behal-f of Avista Corporation (Avlsta) ?
Yes, I sponsored Direct Testimony and Exhibit
L, Schedules 1 through 3 and Supplemental Testimony and
Exhibit lt, Schedule 1.
0. Are you sponsoring any exhibits in this
supplemental- testimony?
A. Yes, I am sponsoring Exhiblt No. \6, Schedule 1
which is a Press Release entitled "Hydro One
Directors
and Avista
Announce Selection of Independent
Post-Merger Avista Board". A table of contents for my
testimony is as fol-l-ows:
at 7ALL East Mission Avenue, Spokane,
I also serve as the Chairman of the Board of
weII
for
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Morris, Supp. Reb. 2Avista Corporation
T. INTRODUCTION 1
I]. RESPONSE TO COMM]SSION STAFE SUPPLEMENTAL
TESTTMONY.... ........2
I]I. NOTICE
ELECTION ON
REGARDING
HYDRO ONE
ONTARIO ELECTION AND IMPACTS OE
GOVERNANCE... ......8
IV. INTRODUCTION OF NEW AV]STA BOARD OE DIRECTORS.....10
rI. RESPONSE TO COMMISSTON STAFF SUPPLEMENTAI, TESTTMONY
O. Overall-, do you believe the conditions set
forth in Idaho Code 561-328 have been met?
A. Yes, as provided in the Joint Application,
Idaho Code S61-328, the Idaho Publ-ic Utilities Commission
(the "Commission") must find that: 1) the transaction is
consistent with the
will not cause the
interest; 2) the transaction
or rates for supplying
3) that Hydro One has
ability to operate and
public
cost of
electrical service to increase; and
the bona fide intent and financial-
maintain Avista's operations
the Joint
in Idaho. I belleve Avista
One, as Applicants have met the
conditions.
Does Commission Staff also believe the
and Hydro
required
o.
conditions in ]daho Code 561-328 have been met?
A. Yes. Commissi-on Staff witness Ms. Carlock
states the followlng j-n her supplemental testi-mony:1
Yes, I believe ldaho Code S61-328 (3) requirements
will- be met. The transaction is consi-stent with thepublicI,tr
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interest because the Stipulated Commitments protect
Idaho customers, provide financial- rate credj-ts,
provj-de funding for other customer benefits and
enhance r rams. The Stipulated Commj-tments al-so
assure that the cost of and rates for supplying
service wilf not be increased by reason of suchtransaction. Rating agency reports and publicly
available financial statements document that Hydro
One has the bona fide financial ability to operate
and maintain said property in the public service.
O. Ms. Carlock states that there are a number of
benefits that would accrue to Idaho
Commission approve the transaction.
a few of those commitments that are
customers shoul-d the
Can you provide just
beneficial for Idaho
customers?
A
very much
parties in
Stipulated
Yes. First, 1et me start by saying that Avista
appreciates the hard work put forth by the
this case who helped deve1op the strong set of
Commitments and their continuing support. of
Staff has beenthe transaction. In particul,ar Commission
instrumental- in strengthening some of the commitments on
behalf of customers.
FolIowing the closing of the merger (the "Proposed
Transaction"), the customers, employees and communities
Avlsta serves in Idaho will see little or no change in
Avista's operations. Avista will maintain its existing
corporate headquarters in Spokane, Washj-ngton, and will
continue to operate as a standalone utility in Idaho. It
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Morris, Supp. Reb. 4Avista Corporation
will maintain its other office l-ocations throughout its
Idaho service territory, continue to operate under the
same Avista name, and seek to retaln its existing
employees and management team. Avista's culture and its
way of dolng business will continue for the long-term.
of Avista's name,Avista believes
its headquarters, its
business, among other
Application.
the close of the Proposed
of financial commitments
( excludlng
exceed what
this preservation
culture and its
Transaction. The
in the Joint
of doing
to Avista's
provide funding
initiatives
way
things, is lmportant
Idaho customers, in that customers can continue to expect
and experience rel-iable
customer satisfaction.
service and a high leve1 of
In addition, customers wiII see
immediate financial benefits in the form of proposed
beginning at
total- l-evel-
and Avista
retail rate credits and other contributions
funded by Hydro One
charitable contributions) in Idaho greatly
was originally proposed
Stipulated Commitments 5B-65
and other forms of support for a number of
that, absent the t.ransaction, would not accrue to the
benefit of Idaho customers. These include:
Rate Credits totaling approximately $15.8 million toits Idaho customers in the flrst five (5) years
after the merger closes. (Stipulated Commitment
19. )
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Morris, Supp. Reb. 5Avista Corporation
Approximately $5.3 million in fundinq over a 10-yearperiod for energy efficiency, weatherizaLron,
conservation, and low-income assistance programs
under the direction of a newly-formed stakehol-der
committee. (Stipulated Commitment 58. )
Support for Clearwater Paper and
on certain demand-side management(Stipulated Commitments 59 e 60.)
Idaho Forest Group
programs.
A $7 million one-time contribution to Avista'scharitable foundation, and a $2 million annualcontribution for five years after close.(Stipulated Commitments 11 & 61.)
Avista's continued work with low-income agencies to
address the needs of low-income customers, and
efforts to improve the penetration rate of
low-lncome programs. (Stipulated Commitments 62 &
64 .)
In the end, Idaho customers wil-I see rea1,
substantive benefits if the Commlssion approves the
transacti-on - benefits that will not otherwise accrue to
Idaho customers.
Lastly, this transaction is supported by
representatives of each segment of our customer base:
1ow-income, residential, commercial- and industrial. OnIy
the l-ate intervention of the self-styled "Avista Customer
Group" is in opposition.
a. Do you agree with Ms. Carlock's conclusions
related to the Governance Commitments contained within
the Stipulated Commitments?
A. Yes. Ms. Carlock is correct in that the
governance-rel-ated Stipulated Commitments 2 and 3 assure25
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Hydro One, as the sole sharehol-der of Avista (or the
Province
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I of Ontario as a large minority sharehol-der of Hydro One),
does not have the control to change the operations and
regulatory environment of Avista. Eor exampfe, Stipulated
Commitment 2 was modified so that the Avista Board of
Directors is responsible for declsions around empJ-oyee
compensation, not Hydro One. Stipulated Commi-tment 3 has
been strengthened to add citizenship and residency
requirements for Independent Directors on the Avista
Board of Directors, and Cl-ause 2 of the Delegation of
Authority was afso strengthened to protect Avista if
Hydro One is temporarily unable to appoint an Independent
Director to the Avista Board.
O. Do you believe there are adequate financial and
bankruptcy rlng-fencing Stipulated Commitments to protect
all Parties and customers?
A. Yes. The Stipulated Commitments appended to
the First Amendment to Stipulatlon and Settlement contain
a substantial number of financial- and
bankruptcy/rtng-fencing protections that will protect the
financj-al health of Avista. There are Stipulated
Commitments that (i) Avista wil-I continue to have its own
credit ratings, (ii) assure that Hydro One will provj-de
equity capi-ta1 injections to support Avista's capital
structure and aIlow Avista to access debt financing under
reasonabl,e terms and on a
Morris, Supp. Reb. 6Avista Corporation
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Morris, Supp. Reb. 7Avista Corporation
sustainable basls, and (iii) provide restrictions on
dividends and distributions that help preserve Avista's
financial integrity. Hydro One and Avista also committed
to issue a single share of preferred stock referred to as
the Golden Share to an independent third party to address
any bankruptcy concerns.
O. Have the
anticipate future
A. Yes, and
All- identified or
quantified and
Stipulation and
parties
risks?
made reasonable efforts to
we are appreciative of their efforts.
reasonably likely risks have been
addressed in the Eirst Amendment to
to
Settlement. In addition to the specific
Avista'scommitments that ensure t.he independence of
board and its financj-al- integrity are protected from
Provincial influence, a new Stipulated Commitment,
provide that if an eventCommitment 1 4, was added
occurs that woul-d have an effect on Avista's operations
and/or customer rates because of Avistars corporate
rel-ationship with Hydro One, or affects Hydro One's
compliance with any commitment, any of the parties to
this proceeding may petition the Commission at any time
to after or amend the final- order in the Case. That, I
bel-j-eve, should help to mitigate any fear of the unknown.
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Morris, Supp. Reb. 8Avista Corporation
III. NOTICE REGARDING ONTARIO ELECTION AND IMPACTS OF
ELECTION ON HYDRO ONE GO\IERNN{CE
O. Commission Staff states "it may be viewed by
some that the Applicants did not adequately report in a
timely manner and were not entj-re1y forthcoming regarding
the independence of Hydro One from the Province, Hydro
One as a campaign issue in Ontario, and the impact of the
election on Hydro One."2 Commission Staff states that
Hydro One and Avista should have notlfied them that Hydro
One had become the subject of campaign promises leading
up to the June J, 20!B el-ection. Commission Staff also
states that Hydro One
Commission of the JuIy
and Avista should have notified the
tt,
the
2078 removal of the Hydro One
before sendingBoard and reti-rement of Hydro One CEO
the July 18, 2018 letter to the Commission. Do you agree
with these criticisms?3
A. I do. Avista prides itself on engaging with
its regulators and the parties to its proceedings in an
open and transparent way. Leading up to the election,
Avista and Hydro One did not know which of the three
major parties in Ontario woul-d win the premiership and
whether any of the parties woul-d win a majority of the
seats in the Ontario parJ-iament. It was lmpossible to
determine whether any of these parties had an j-nterest in
or the abj-1ity to fol-low25
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2 Carlock Direct Testimony at pg.
3 Carlock Direct Testj-mony at pgs.
10.
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Avista Corporation
through on their campaign promises prior to
on June J, 2078. In hindsight, however, I
the election
do agree with
One could have
fn
Commi-ssion Staff that Avista and Hydro
a1erted them to the issues being raj-sed
contested Ontario election prior to June 1
the hotly
, 2018.
Once the el-ectj-on occurred on June "7 , 2018, however,
Avj-sta and Hydro One used their next opportunity to al-ert
the Commission and parties to this proceeding to the
risks to Hydro One that emerged from the Ontario
el-ection. In Avista's and Hydro One's Joint Comments in
Support of Stlpulation and SettlemenL,4 filed just 13
days after the June J, 20LB election and before the new
government was sworn in on June 29, 2078, Avista and
Hydro One explained all of the possible ways in which the
new government coul-d impact the governance and management
of Hydro One, or potentially Avista, if the new
government decided to follow through on its campaign
promises.
I also agree with Commissj-on Staff that Avista and
Hydro One should have reached out to Commissi-on Staff and
the parties to this proceeding in a more timely manner
after Hydro One announced on ,Ju1y 7L, 20L8, that it
reached an agreement with the new government in Ontario
to effectuate
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4 See AVU-E-17-09/AVU-G-17-05, Avista and Hydro One Joint Comments in
Support of Stipulation and Settfement (June 20, 2018) ("Joint Comments")
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Avj-sta Corporation
the resignation of
the Hydro One CEO.
the Hydro One
Although it
Board and retirement of
was not possible to
the July 77, 2078disclose these changes in advance of
announcement because of the potential impacts on Hydro
One's and Avista's stock price, Avista and Hydro One
should have contacted Commission Staff and the parties to
this proceeding prior to the letter we sent on July 18,
2078.
IV. INTRODUCTION OF NEIT AVISTA BOARD OF DIRECTORS
O. Have Avista and Hydro One
serve as the Independent members of
Directors, shoufd the transaction be
announced who will-
the Avista Board of
approved?
announced onOneA. Yes. Avista
Wednesday, November 7
directors selected to
and Hydro
, 2078, the five independent
serve on the new Avista Board of
DJ-rectors, if the proposed merger is approved by utility
commi-ssions in Washington, Idaho and Oregon. The press
rel-ease has been included as Exhibit No. L6, Schedu1e 1.
A11 five selections are independent of both
organi-zations, ds defined by New York Stock Exchange
rul-es, and have tles to the U.S. Pacific Northwest.
Moreover, all of the Hydro One appointees are U.S.
citizens who are and have been residents in the Pacific
Northwest for at least two years. The four remalning
directors
chairman,
woufd incl-ude myself, continuing in my role ascurrent Avista president and director Dennis
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Morris, Supp. Reb. 11
Avj-sta Corporation
Vermillion, the CEO
executive from Hydro
The independent
of Hydro One and one other senior
One, to be named.
directors were sel-ected at
so that the Avista board of directors woul-d be
this time
prepared
theand ready to begln serving their
Proposed Transaction is approved
terms assuming
and closes, which is
requested by the end of this year. The newly selected
directors are:
Kristianne Blake (Avista selection and Current
Avista Board Member) : Ms. Blake serves on the
current Avi-sta Board of Directors as lead director
and has been an Avista Director since 2000. She is a
long-time resident of Spokane, Washington and has a
rich history of involvement in the Spokane
community. She has been the president of the
accountlng firm of Kristianne Gates Blake, P.S.
sj-nce 7981 and has an extensive background in public
accounting. She was a Certified Publ-ic Accountantfor 33 years, and she worked for 13 years for aninternational accounting flrm. She has served for 22
years on various boards of public companies and
registered investment companies. Ms. Blake is also
currently serving as board chair for the Russell
Investment Company and the Russel-1 investment Funds.
Donafd Burke (Avista sel-ection and Current Avista
Board Member): Mr. Burke serves on the currentAvista Board of Di-rectors as the chair of the audit
committee and has been an Avi-sta Director si-nce
20L1. As a director, he serves as the Board's
designated financial expert. He also currently
serves as an independent director for the Virtus
mutuaf fund complex and Duff & Phelps cl-osed-end
funds complex. From 2006 to 2010, Mr. Burke servedas a trustee for numerous global funds that were
advised by BlackRock, fnc. From 2006 to 2009, he was
a managing director of BlackRock and served as the
president and CEO of the Bl-ackRock U.S. mutual
funds. In this role, Mr. Burke was responsible for
al-I of the accounting, tax and regulatory reportinge
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requirements for over 300 open and closed-end mutua]
funds. Mr. Burke joined Bl-ackRock 1n connection with
the merger with Merrill Lynch Investment Managers
( "MLIM" ) , taklng a lead role
Morris, Supp. Reb. 11aAvista Corporation
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in the integration of the two firms' operatinginfrastructures. Whil-e at MLIM, Mr. Burke was the
Head of G1oba1 Operations and Cl-ient Services andalso served as the Treasurer and Chief Einancial-Officer ( "CFO" ) of the MLIM mutua] funds. He bringssignificant flnancial experience to the board fromhis years in public accounting and his rol-e as thetreasurer and CFO of numerous mutual funds. He has
extensive board experi-ence, having served on theaudit, compliance, governance & nominating, and
contract review committees of various boards.
Through his service as an Avista director, Mr. Burke
has demonstrated his commitment to the Pacific
Northwest region.
Christine Gregoire (Hydro One selection): Ms.
Gregoire is the CEO for Chal-lenge Seattle, dD
organization comprised of 18 major international-
companies and non-profits located in the Seattleregion. Previously, she served for two terms as
Governor of the State of Washington with a $32Bbiennial- budget and over 60,000 employees. fn herfirst term as Governor, she created the Department
of Early Learning and 1ed on reforms to the K-L2
system and j-nvestment in higher education. She l-ed
the state in a histori-cal- investment ininfrastructure, addressed the water wars in thestate, 1ed an historic number of trade missions,
reformed the foster care system to protect children
and was among the first to Iead in health carereform. During her second term, Ms. Gregoire led t.he
state in major reforms, management and budgeting toposition the state as one of the most financially
secure to come out of the "Great Recession. " Priorto becoming Governor, she served for three terms as
Attorney General- for the State and prior to becoming
Attorney General, she served four years as theDirector of the State Department of Ecology. She isalso a member of the Fred Hutch Cancer Research
Center and the Bipartisan Governor's Council, and onthe advisory boards of the Wllfiam D. Ruckelshaus
Center and the Progressive Coal-ition for American
Jobs. Ms. Gregoire recently completed her third year
as Chair on the Nationaf Export-Import Bank AdvisoryBoard. She is a graduate of Gonzaga University
School of Law, and she and her husband also have a
home in north Idaho.I 25
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Scott Maw (Hydro One selection and Current Avista
Board Member): Mr. Maw serves on the current Avista
Board of Directors and has been an Avista Director
since 2076.
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Avista Corporation
He has been executive vice president and CFO for
Starbucks Coffee Company since Eebruary 20\4. He is
responsible for Starbucks' GIobaI Finance
organization. Prior to that, he served as senior
vice president of Corporate Finance for
Starbucks where he was responsible for corporate
finance, including accounting, tax and treasury. Mr.
Maw al-so had oversight for afl financial and
securitles-refated regulatory filings. He joined
Starbucks as qlobal control-Ier in 2011. Prior tojoining Starbucks, Mr. Maw served as CFO of
SeaBright Insurance Company from 2070 to 2077. From
2008 to February 2010 he served as CFO of the
Consumer Banking divislon of JPMorgan Chase & Co
is a Seattle, Washington resident, with roots in
Eastern Washington. He graduated from Deer Park
School, just north of Spokane, and is a graduate
Gonzaga University.
He
High
of
Marc Racicot (Hydro One selection and Current Avista
Board Member): Mr. Racicot serves on the currentAvista Board of Directors and has been an Avi-staDirector since 2009. He served as president and CEOof the American Insurance Association from August,
2005 to February, 2009. Prior to that, he was a
parLner at the law flrm of Bracewel-l & Giuliani, LLP
from 2001, to 2005. He is a former governor (1993 to
2001) and attorney general (1989 to 1993) of thestate of Montana. Mr. Racicot was nominated by
President Bush and unanimously elected to serve as
the chair of the Republican National Committee from
2002 to 2003 prior to assuming the position of chair
of the Bush/Cheney Re-election Committee from 2003
to 2004. He previously served as a director for
Sj-ebel Systems, A11ied Capital Corporation,
Burllngton Northern Santa Fe Corporatlon Plum Creek
Timber Company, and The Washington Companies, andpresently serves as a director for Weyerhaeuser
Company and Massachusetts Mutual Life Insurance
Company. In addition, throughout hls career, Mr.
Racicot has strongly commltted himsel-f to children,
education and community issues. He was appointed tothe board of The Corporation for National and
Community Service by President Clinton and has also
served on the boards of Carrol-l- College, Jobs for
Ameri-ca's Graduates and United Way in Helena,
Montana. He is a life-long resident of Montana and a
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Morris, Supp. Reb. 74Avista Corporation
O. How many existing Avista Board members would
serve on the new Avista Board?
A. Including Dennis Vermillion (President of
Avista) and myself, a total of six existing Avista board
members would transi-tion to the new Avista Board. The
new Avista board would be extremely strong, given that
the majority would be intimately
its operations. Indeed seven of
either resi-dents of the Pacific Northwest or existing
Avista Board members.
0. Do you continue to believe that this merger is
in the best interest of Customers?
A. Yes, I do. The development of the robust
Stipulated Commitments, which include a
customer benefits and protectj-ons, and
recent selection of the aforementioned
members, I believe that this merger is
interest of our Idaho customers and is
famillar with Avista and
the nine directors are
multitude of
now with the
independent board
in the best
in the
interest 1n Idaho. The structural safeguards,
of multiple enhanced commitments negotiated and
by the Commission Staff,
Group, Idaho Conservation
Clearwater Paper, Idaho
public
in the form
supported
Eorest
League,
I daho,
the Community Action
the Washington and
Laborers, and the
Partnership Association of
Northern Idaho District Council- of
Idaho Department of Water Resources are meant to
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Avista Corporation
The underlying rational-e for this merger remains the
same: the need to preserve and enhance Avistars ability
to provide cost-effective and reliable service to its
customers, i-n a rapidly evolving
with an organization that shares
with Avistars autonomy intact.
O. At the end of the day,
industry, by partnering
Avista's values all
have Avista,Hydro One,
thatStaff,
satisfy
A.
and other parties
the requirements
developed
of Idaho
commitments
Code 561-328?
Yes. This Commission has been quite
responsibil-ities underclear-sighted in describlng its
the statute:
The statutory criteria gove rninq our review of the
mer er do not allow for ca rice or sub ectivit
While public sentiment has been used to imposesignificant merger conditions, it cannot be used asa surrogate for the cl-ear letter of the law. Inthis case, that law (Idaho Code S 6L-328) provides
that the merger "shall" be authorized unless theJoint Applicants have fail-ed to satisfy the threecrj-teria discussed throughout this Order. The Joint
Applicants carried the burden of proof in
demonstrating that the merger woul-d not adverselyaffect the public interest, would not resul-t in anincrease in rates to exlsting PacifiCorp ratepayers
and that they have the bona fide intent and
financial ability to continue operating the systemin the public j-nterest.s (Emphasis added)
The Commi-ssion has reiterated what the "clear letter
of
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5 In the Matter of the Joint Application and Petition of PacifiCorp and
Scottish Power PLC for a Declaratory Order Approving the Issuance of
PacifiCorp Common Stock, Case No. PAC-E-99-1, Order No. 28213, at p.57
(November 15, 1991],.
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the l-aw" requires and that a merger "shall-" be approved
if the three criteria of Idaho Code 561-328 have been
satlsfied. It is not a matter to be governed by "caprj-ce
or subjectivity. " As explained by Avista, Hydro One, and
Staff, al-I three requirements of ldaho Code S61-328 have
been satisfied. Whil-e the Commisslon or other parties
may prefer a different "marriage partner", the business
judgement of Avj-sta's executive team should be recognized
and the merger must be approved if Idaho Code 561-328 is
satis fied.
0. Does this conclude your Supplemental Rebuttal
Testimony?
A. Yes it does.
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MORRTS (X)
Avista Corporation
(The fofl-owing proceedings were had in
open hearing. )
MR. MEYER: And he's available for
CTOSS.
COMMISSIONER KELLANDER: Thank you. Let's
look to Mr. Otto.
MR. OTTO: As a side matter, Mr. Purdy
informed me he has no questions just for your
information.
COMMISSIONER KELLANDER: I assumed by the
fact that he was no longer in his seat that that was the
CASC.
MR. OTTO: Just wanting to make that
crystal clear, sir, trying to be heIpfuI.
COMMISSIONER KELLANDER: Okay, thank you.
MR. OTTO: I do have some questions.
COMMISSIONER KELLANDER: Pl-ease proceed.
CROSS-EXAMINATION
BY MR. OTTO:
O Good morning', Mr. Morris.
A Good morning.
O So you said you're the Chairman and the
CEO of Avista; is that right?25
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208.890.5198
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Avista Corporation
A Yes.
O So is it fair to characterize your
andresponsibll-ities as both long-term strategy
overseeing the day-to-day execution?
A Yes.
0 When you look at this merger agreement and
stipulation, does it del-iver more benefits to fdaho, to
your customers in Idaho, than they would receive absent
the merger agreement?
A f would say yes. With t.he $20 million of
benefits that we have negotiated with the parti-es, as
well as the stipulati-ons around the 1 4 commitments we
have in ldaho, I feel that putting this merger together
does indeed benefit Idaho customers.
MR. OTTO: Thank you. No further
questions.
COMMISSIONER KELLANDER: Okay,
Mr. Richardson.
MR. RICHARDSON: Thank you, Mr. Chairman.
I have no questions.
COMMISSIONER KELLANDER: Thank you, Mr.
Richardson. Mr. Williams.
MR. WILLIAMS: Yes, Mr. Chairman, I do.
COMMISSIONER KELLANDER: Please proceed.
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MORRIS (X)
Avista Corporation
CROSS_EXAMINATION
BY MR. WILL]AMS:
0 Good morning, Mr. Morris.
A Good morning.
O I represent Idaho Forest Group. I assume
you're fami1iar with them as a customer.
A And thank you for your bus j-ness. We
appreciate it.
O Idaho Forest Group is a signatory to the
stipulation and settlement. You're aware of that?
A Yes, sj-r.
O So in the context of Idaho Eorest Group's
continued support for the both the stipuJ-ated settlement
and the merger, my questions to you will be in that
context.
A Okay.
O So if you would turn to page 26 of your
direct testimony.
A I am there.
O Okay, and to paraphrase the question and
answer there, you refer to lmmediate cost savings that
you identify as approximately $1.7 mil-l-ion, is that
correct, annual?
A Yes.25
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Avista Corporation
O And how much is this merger going to cost
Avista?
A How much is this we are currently
accruing costs as we go through this merger process. Mr.
Thies coul,d give you the exact number, but we are
expensing those now and they are not part of the rate
proceeding. They will not be passed along to customer
rates. I donft have an exact
O And f understand that, but do you have an
this point and where they willidea of where they are at
be when this 1s completed?
A Again, can
because I don't want to be
pass that to Mr. Thies,
incorrect ?
I
0 Sure. Do you think they will exceed $1.7
mill-ion?
A Yes.
O By orders of magnitude?
A Yes.
O And in your mind, does that incl-ude
executive bonuses if the merger is successful-?
A As part of it, yes.
O Now, if you'd turn to the next page, you
talk about on page 21 of your direct testimony a two-step
rate credit and you identify $31.5 miLl-ion in a 1O-year
period of time on this testimony. Do you see that?25
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208.890.5198
MORRTS (X)
Avista Corporation
A I do.
O Is this total system or is this Idaho?
A This was the original starting point of
conversation with al-l- of the i-ntervenors in al-l- of the
states. That number is now approximately $80 million in
the states that we do serve and my understanding is out
of the $80 mil1ion, roughly, of credits that this merger
will bring to the customers of Avista, $20 million of
those credits will- be accrued to ldaho.
O Okay; so I want to bear down a little bit,
so when you look at line 8, it says total- credits of $31
mil-l-ion on that page, that's now an $80 million number?
A Roughly. I think it's 79 point somet.hing,
but if I may round up to 80, I bel-ieve it's $80 mi11ion,
subject to check on the exact number.
0 So is there any testimony anywhere in
yours or others that updates this number or comes back
and makes that correction?
A I am not sure. I'd have to I'm not
sure. If not, we need to do that, but it might be in
here.
O So when you were asked if your testimony
fact notin this was accurate today previously, it's in
accurate ?
A It was accurate when I filed it and thent25
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we did do rebuttal and supplemental and if I may, I'm not
sure if counsel can point me to the place 1n my
supplemental- if it is in there.
MR. MEYER: We have updated numbers
probably in several- places in the combined testimony of
joint applicants. We will l-ook again to make sure that
we take a snapshot in time as of this date what are those
numbers. f think they can be found in there already.
COMMISSIONER KELLANDER: MT. Williams,
does that satlsfy your concern?
MR. WILLIAMS: I can move on. It's
helping me to understand, I guess, what I thought
where I'm confused and I'm trying to just cl-arify some
issues.
O BY MR. WILLIAMS: So if you go to No. 19
rate credits on the stipulated settlement, do you have
those in front of you?
A No. L9?
O That's correct.
A Rate credits, y€s, sir.
O So you talk about an Idaho annual credit
years one through five of 3.2 million and a total ldaho
credit of 15.8 mil-l-ion. These are in fact ]daho credits
and not system credits?
A Yes, sir.
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Avista Corporation
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Avista Corporation
of f setabl-e
a A11 right, and when I l-ook at the
credit on this commitment 19, of f setabl-e
credlt is 521,000?
Yes.
How does that relate back to your direct
testimony when you had an offsetable credit of $1.7
million on an annual basis years one through five? What
changed on those two numbers?
MR. MEYER: In an effort to be helpful and
move this aIong, I think Mr. Ehrbar who has worked with
these numbers extensively can tal-k about how some numbers
are Idaho only and how some numbers are system numbers.
He would be able to reconcile those for you.
know.
A
O
O BY Mr. WILLIAMS: If you
A I would wholeheartedly concur with that.
Okay. In the merger application and in
your supplemental testj-mony at page 76, you don't
necessarily have to turn there because I'l-1 try and
paraphrase it, but you and other witnesses have explalned
the idea of there being significant savings that will
occur through a scale of economies.
A Yes.
O And if I were to look at this offsetabl-e
credit of $1.7 million strike that. If I look at your
testimony when you say the savings w1ll- generate $1.725
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208.890. s198
MORRTS (X)
Avista Corporation
miflion of savings, would
that that's less than one
you accept, subject to check,
percent of your annual revenues
in Idaho, that savings,
A Sure.
0 Okay, and
378,000 customers,
of over 1.3 million
savings of less
standpoint?
A
recall, is realIy around no
publicJ-y-traded company and
with beinq part of the Hydro
having to incur those costs.
$1.7 million?
you have a utility of roughly
with a utilityyour customers,mergrng
you t recustomers, but only expecting
than one percent from a cost control
WeIl-, that initial 1.1 million, if I can
longer being a
all of the numbers that go
We have
together to extensively
opportunities, but we're
One companies and no
This deal- was never
that this was
opportunity to
research future
longer
done on
neverthe idea, and you've heard it today,
of andone on the idea of synergies integration, if
will-. That was not our board's interest, that was
you
not my
interest, in
maintai-ns its
have provided
order to make sure that this company
reputation and its great service that we
for 129 years.
not had the bring
bestour teams
practice
some of
enthusiastic about what
those mlght be. We've had teams meet, but we
have to continue to follow laws that on that we don't25
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208.890.s198
MORRIS (X)
Avista Corporation
share too much privileged information even though we're
in this merger process. We're confident that we will-
find over tlme savings for our customers. I think you
heard Mr. Lopez refer to things around supply chain that
werre very excited about, i-ncreasing our buying power.
We're looki-ng at opportunities,
particularly around information technology, where the
utility industry is rea11y going through an j-ncredibl-e
time of change, partj-cu1arly around distribution
automation. A l-ot of great things can happen for
customers, but they're expensive, particularly for a
company our size. We think therers opportunities for us
to continue to have those conversations and where it
makes sense that can we come together that can do things
that benefit both the Ontario customers as well as the
Avista customers, so I guess that 1,.7 is on day one as no
longer being a listed company, but the real story is to
be continued as we get our teams together t.o think about
it in terms of what could happen. We're confident that
we'11 find some great opportunlties through best practice
sharing,
board is
not integration, which is key as far as our
concerned around the splrit of this merger that
we'11 find savings.
a We11,
you, but you have to
and I appreciate hearing that from
-- would you agree that in most
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208 .8 90. 5198
MORRTS (X)
Avista Corporati-on
mergers of companies, especially when
to completely
company of 129
integrate and to take
years and to integrate it
the service territory,
1t from a perspective
other models of mergers
you have a larger
identifiabl-e costone acquiring a smaller one, that more
savings are usually up front as opposed to promises,
actual- or illusionary, 1n the future?
A If you're a board and your
this
philosophy is
publicly-traded
into something
where you ellminate jobs in
give up control, you look at
of that, yes, but there are
you
of not
where
that can fl-ow to benefits for customers, communities,
employees, and sharehol-ders and we chose the model- that
we want to talk about, which is this coming together as a
separate entity with a strong board of directors
continuing to operate the way we have for 729 years and
sharing best practices, so we think thatrs a better model-
for the Avista customers, a better model for the Avista
communitj-es, a better model for our shareholders, and a
better model for our employees, so we are absolutely
committed to that model.
O What about your customers?
A f said customers first.
O I'm sorry, I missed that; so in your
testimony, you talk about the merger allows Avlsta to
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208.890.5198
MORRIS (X)
Avista Corporation
A Yes.
O Thatrs pretty important?
A Yes.
0 From Idaho Forest Group's perspective,
your way of doing business has essentially been a series
of annuaf rate increase filings that have been some
multiple of the Consumer Price Index. Do you expect that
business practice to continue?
A I'm extremely proud of how our company has
operated. In my opinion, we're seen as one of the best
operating companies not just in the Northwest, but in
O But thatrs not my question. My question
relates to your past business practices of perpetual
annual rate increases that have been in excess of the
cost of living. Is that a business
MR. MEYER: I object to the form of the
question.
ant icipated
that's one
If he's aski-ng more specifically about
question,
thing, but the
it's impossible
COMMISSIONER KELLANDER: I don't know that
rate increases in the future for his client,
mishmash contained within that
to answer.
it's impossible to answer.
question and if the witness
he can say he can't answer
actually asking a question,
I think you can ask the
decides he can't answer 1t,
it. AIso , Lf
if you could
you're not
just mute your25
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208.890.5198
MORRTS (X)
Avista Corporation
microphone, because
from an open mic.
THE
I think we're gettlng some feedback
WITNESS: So yes, what I can say is
this, is that we have contj-nued to look at how we
continue to provide outstanding safe and rel-iabl-e service
to aII of our customers. I mentioned the need for new
technologies, the need for an aging infrastructure and
that we're making the right, proper, prudent investments
to ensure that we have outstanding customer service, safe
and reliable servj-ce, and some of that takes investment,
and we are making those smart investments.
It has caused some rate pressure. We have
been abl-e to l-ower costs and manage costs in other areas,
so overalI, I think our performance has been quite good,
but we have been investing in our infrastructure and will
continue to do so 1n order to provide safe and reliabfe
service to our customers.
O BY MR. WILLIAMS: So the core of my
questions along this line have to do with trying to
identify a more -- wel-l, to find more identifiable cost
control measures and savings to Avista that coul-d come
of this merger so that we don't havefrom the synergi-es
to experj-ence those
assumption on Idaho
rate increases. Is that a reasonable
Forest Group's standpoint?
I'd like to restate is thatA Again, what25
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208.8 90.5198
MORRTS (X)
Avista Corporation
through
entity,
confident that
on both sides,
opportunities to lower costs. In
will always continue to try to run
efficlently as possible. We have
doing that. I appreciate your
increases, but as you do know,
thls process of where we wil-l remain a standalone
however being able to share best practices, Irm
to the future we will find opportuni-ties
Hydro One and Avista, to enabl-e us to find
additlon to that, we
our business as
a great track record of
comments about our rate
we have some of the lowest
electric rates 1n the United States and we are
that. We continue to manage around having some
United States and we will doIowest rates in the
proud of
of the
that and
that's done by good management as wel1 as forward-looking
thinking and making sure we do the right thing for our
customers and our business.
O And you've heard the testimony of
Hydro One wj-tnesses
is possibly changing
as others in Ontario
under scrutiny
to contain their costs?
talking about
as they come
their business
the
practice
as well
A Yes, I've
O Okay, and
that. You testified and
about the Avista's local
phiJ-anthropy; correct?
A Yes.
heard that.
is that we11, I ' l-1
there's been a lot of
community support and
strike
testimony
its
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208.890.5198
MORRIS (X)
Avista Corporation
O And those are significant parts of the
merger conditions in this case?
A Absolutely, yes.
O Would it surprise you that Idaho Forest
Group would prefer to retain the doll-ars themselves and
make their own philanthropy decisions with their dol-l-ars
as opposed to passing them through Avista?
A I appreciate that, but as a reminder, none
of our philanthropy dollars are in rates. They are al-l
shareholder retained dollars, so you aren't paying for
any of our philanthropy. They are sharehol-der dollars
that we choose to invest in the communities that we
serve. We currenLl-y invest $2.6 mil-lion annually and as
part of this agreement, we've agreed with Hydro One to
increase that to 4 million as wel-l as a $2 million annual
contribution to our foundation as well- as a $Z mil-l-ion
contribution from Hydro One, al-1 of that shareholder
money, none of it customer money.
O And thank you for that clarification.
That was going to be my so are you familiar with
settl-ement term No. 60 as it rel-ates to Idaho Forest
Group?
Excuse me, say that again.A
u Are you famlliar with the settfement term
No. 60 that is specifically related to Idaho Forest25
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208.890. s198
MORRTS (X)
Avista Corporation
Group?
A Oh, No. 60.
O Six zero.
A Okay, thank you. Let me look, please. I
have it in front of me, sir.
O AI1 right, and first, I want to thank you
and your company and the people in particul-ar for working
with Idaho Eorest Group on that, but to the point, these
promises, these commitments woufd require Avista to
devote human and financial and technical- resources to
implement those terms. I assume those commitments remain
solid?
A Yes, sir.
a A11 right, and one last question, are you
familiar with your NQ proxy -- I'm sorry, your Schedul-e
Avj-sta 14 (a) proxy statement 1n the disclosure of this
merger? You signed it.
A Yes, f am. Irm not famil-j-ar with the
reference, but if you help me with
O Sure, f'11 get right
what it says.
the schedule on page 45 of your 2071
to my question. In
disclosure of the
merger
talks
in the proxy statement, you have a schedul-e that
about prospective financia1 information and you
for 20lB ofshow net income of Avlsta Utilities estimated
729 m:-llion and for 2079 that jumps to 150 mill-ion, and
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MORRTS (X)
Avista Corporation
that's the time frame we're in right now, and that's
about a 16 percent increase in expected net revenues.
With a rate freeze in effect for thls
period of time in your jurisdictions, what is the basis
for that 16 percent jump j-n net income that you were your
projecting back then?
AIn
that, I 'd l-ike to
wal-k you through
think it would be
order to make sure that
Iet Mr. Thies, our CFO,
that. I can lightly tal-k
much better for Mark to
why
net
f'm accurate
go ahead and
about, but I
give you the
to pass that
on
todetall that I think you want, so Ird like
O But you're the one that signed the proxy
statement.
Absolutely.
Are you aware of these numbers?
I am.
And the budgeting process that
I am, absolutely. I've been with the
company 31 years.
O And you have no i-dea
Mark.
proj ecting a 16 percent increase on
n
A
A
you are
incomes with
MR. MEYER: I object to thls continuing
questlon. The witness has explained the extent of his
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208.890.5198
MORRTS (X)
Avista Corporati-on
behind the numbers shoul-d be referred to Mr. Thies.
COMMISS]ONER KELLANDER: On this one f'm
going to agree
that you don't
with you
get what
Morris is in the room and we'Il
and, Mr. WiIIiams, to the extent
you need from Mr. Thies, Mr.
put him back on the
stand.
MR. WILLIAMS: A11 right, thank you. I
have no further questions. Thank you.
COMMISSIONER KELLANDER: Thank you and
appreciate your willingness for us to move forward.
Thank you. Mr. Baxter.
MR. BAXTER: Thank you, Mr. Chairman. I
do have a couple of questions real quick, Mr. Morris, if
I can.
CROSS_EXAMINATION
BY MR. BAXTER:
o My name
the Idaho
is Garrick Baxter and I'm an
attorney for
you're aware,
Department of Water Resources and
aren't you, of a settlement agreement
reached between the Department of
Iast year?
am.
O And can you for the record here today
Water Resources and
Avista here this
AI
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Avista Corporation
affirm Avista's commitment to this settlement
agreement?
A Yes.
MR. BAXTER: Thank you. No further
questions, Mr. Chairman.
COMMISSIONER KELLANDER: Thank you. Mr
Karpen.
MR. KARPEN: Yes, thank you
CROSS-EXAMINATION
BY MR. I(ARPEN:
O Good morning, Mr. Morri-s.
A Good morning.
O f 'd l-ike to reflect a little bit on the
phj-lanthropy and community support that Mr. Wil-Iiams had
talked about. To the extent that you can answer those
items, I'd appreciate it. In particular, I would Iike to
ask if Avista intends on continuing it.s support of the
NAIA World Series in Lewiston?
A Absolutely. I lived in Lewiston for four
years, so a big fan of NAIA and Boise State, absolutely.
It's one of our key note sponsorships that we do and
we'11 contlnue to do that. We love that relationship.
O And just as a personal interest, doesI4tr,
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Washington State University?
A As you do know that we do have Avista on
the logo on the scoreboard and there's enough Cougs in
our buil-ding that we are constantly I'm under constant
barragement to increase my commitment to WSU.
0 Great. Now, to a less comfortable subject
and f 'm sure Mr. Wllliams al-so referred to some executive
bonuses and I don't know if you had the opportunity to
review any of the customer public comments on the matter.
We've got about 600 now. A number of them express
concern with the executive compensation and bonuses that
are coming through as a result of this merger. Just as a
matter of clarity, we've seen at feast in my review of
these customer comments or public comments a very wide
range of numbers and perhaps you can clarify this for me.
Can you te11 me, if thls merger does go through and is
approved by all the jurisdictions, what exactly wilI you
stand to gain personally?
A So to clarify that, one of the things that
I woul-d like to say is t.hat when I became an officer in
the year 2000, ds part of what I would say as a standard
part of an executive compensation package is a change of
control- agreement. I signed the change of control
agreement that you referred to in 2000, and as one of the
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Avista Corporatj-on
named executive officers, that chart has been in our
proxy statement every year probably sj-nce f became
2002.probably sj-nce
It's certainl-y been public knowledge since
2008 when f became Chairman, President, and CEO, and so
that number has been there. Itrs never changed. There's
been no additions as part of this, So
in front of you are really two
the numbers that
things. One is an
plan that lrm a
is as well as a
J-ong-term
have, and
The
the
is I would
employment. or
point in time when
you see
acceleration of my long-term incentive
executive officer teampart of
number
and our
of
incent ive
long-term
of close,
incentive
our directors are all part of a long-term
plan, and that is part of that p1an.
If there was a change of control, those
lncentive stock shares accelerate at the time
it just accel-erates and I get it in one chunk.
second piece is a change of control. Part of
so basically half of that is for the
pIans, stock that I've earned that I
whichagreement which is around, a part of it
say around, you know, termination of my
that change of control so that at some
I do retire and do
time, I am abl-e to
compensation, but
months after that.
leave the company after a period of
receive that piece of the
it is after I retire and it's six
It will not be paid at the time ofI25
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Avista Corporation
the merger and anybody with
provision in it does not get
some future tlme, dt time of
does not increase. It stays
a change of control- with that
it on day of cl-ose. f t' s at
retirement, and the value
exactly as it is today, so
what it is.
Can you teIl me what it is, the number?
I don't
If I said about 18 mill-ion, would that be
So I kind of had a hunch that somebody
think about, Soso this is not something T
this chart,
what it is is
O
A
o
right ?
A
might ask me,
according to
2B0G gross-up,
y€s, my number
which is a
1s 16,995
yeS, 1f
part of
is what
you
the
include the Section
tax piece of this,
f see.
MR. KARPEN: Okay, thank you. I have no
further questions for this witness.
COMM]SSIONER KELLANDER :
Mr. Semanko, before we move to you, as we
noon hour, do you have a lot of questions
witness ?
close in
for this
Thank you,and,
on the
MR. SEMANKO: I don't think so. Are you
askj-ng if I can be done by noon?
COMMISSIONER KELLANDER: That's exactly
what I'm asking.
MR. SEMANKO: I think I can be pretty25
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Avista Corporation
cl-ose. f can certainly try
COMMISSIONER KELLANDER: Great. Why don't
we give you a
a challenge.
shot at that and we'Il actually put you on
MR. SEMANKO: Okay.
CROSS_EXAMINAT]ON
BY MR. SEMANKO:
O So I have to ask you first, Mr. Morris,
what is it l-ike having
what is it like being
trustees of the number
in the United States?
grown up in north
a grad and chairman
Idaho myself,
of the board of
one ranked men's basketbal-l team
Alf it wasn't for my dynamic visionary
chair of the board, I doubt we'd beleadership
number one,
as the
Mr. Semanko.As a matter of fact,
second time Gonzaga
under my
has been
good as the
chairmanship, th j-s
rated number one in
chair of the board,
O ilm
1s the
the country, so I'm super
I think.
sure you know you Coach Few well
enough that he will take that with a grain of salt.
A I'm sure Coach Few will- take that with a
big grain of sa1t. I keep asking if he'll put me in, I
have ellgibility, but he's not taklng me up on it.25
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Avista Corporation
O A11 right, hockey,
basketball. On that fast questj-on
you have those and my question
same source of Mr. Karpen's, a l-ot
basebaII, now
from Mr. Karpen, do
stems from the exact
of public commenLs.
Ei-rst of all, have you
written public comments
Commission?
had a chance to
that have been
review any of the
submitted to the
A I have some of them. My
of them and I have been briefed on aII
team has read all-
not read all 635, but we have people that
them,
have and they
the
of so I have
have told me generally the categories and what
comments have been, so yeS, I'm famillar with them.
a So do you have numbers or can you direct
us to someone who does have the numbers what Avista
executives stand to earn or receive as a resul-t of the
merger that they would not otherwise receive? Do you
have those numbers? Do you know where we can get those
numbers, because there's a lot of confusion?
A I assume they're someplace in an exhibit,
but I'm not exactly sure what the exhibit number would
be.
MR. MEYER: WC responded to a data
43, and that can be maderequest, and
part of the
be made part
itrs which one,
record,
of the
1et me
record.
just revj-ew it, so that coul-d
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have specific numbers for specific officers. It cross
references here to the proxy. The proxy in turn for the
named executive officers has specific numbers relating to
the top five named individuals there.
MR. SEMANKO: Counsel, would it be okay if
we conferred during one of the breaks with Mr. Karpen and
others about what might be helpful to bring into the
record? I don't want to stall- this testimony, but maybe
we could have that di-scussion off-line and --
COMMISSIONER KELLANDER: Perhaps during
the l-unch break, that would be an excel-l-ent opportunity
to go that path and I appreciate your guys' will-ingness
to work that through, so thank you and if you'd l-ike to
proceed.
MR. SEMANKO: Thank you.
O BY MR. SEMANKO: Mr. Morrj-s, oo page 6 of
your direct testimony, you talk on lines 3 through 5
about the percentage, large percentage, al-most al-l- of it,
of Hydro One's business that consists of regulated
utility operations under Ontario Energy Board. My
questj-on is, is your conc1usj-on any different than what
you heard earlier today about the percentage of Hydro
One's i-ncome that will come from Avista after this
merger?
A Roughly 15 percent sounds reasonabl-e.
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MORR]S (X)
Avlsta Corporation
the negotlations for
O Thank
credit that would be
With regard to page '7 , Mr.
that fall-s
all- of those.
you. You talked about the rate
flowinq through for Idaho customers.
residential customer can
a Thank you.
Christie, Mr.Thies, Mr Ehrbar,anything
to theunder those areas you would defer testimony of
those folks?
A Particul-arly around the cost allocation
questions and I would reaIIy strongly encourage that you
let Mr. Ehrbar answer those. He's been extensively in
Can you
expect
several
tell us what the average
to receive 1n terms of a rate credit over the next
years ?
A I have not done the math, but I know that
$20 mil-lion or $15 mil-l-ion spread over five years divided
by roughly 130,000 electric and 81,000 natural gas
customers, I woul-d say that itrs probably in the
MR. MEYER: WeIl, before you do the mental
math, we actually have that number in Mr. Ehrbar's
testimony.
THE WITNESS: Thank goodness, so Mr.
Ehrbar does have that number, the exact number. Can I
l-et Mr. Ehrbar answer your question because I do not
A BY MR. SEMANKO: Sure. It seemed like you
were about to answer it, but I'm fine with that.,tr
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Avista Corporation
A But I don't have
COMM]SSTONER KELLANDER :
ask counsel, there's a lot of cross talk
appreciate that you're trying to help us
appreciate you responding to my concern
noon, thank you; however, in terms just
have the ability for the court reporter
things fl-ow through that we coul-d maybe
Chair and make this all a littl-e formal.
appreciate that.
MR. MEYER: Sure.
COMMISSIONER KELLANDER: Thank you.
MR. MEYER: Thank you.
THE WITNESS: So the exact number Mr
Ehrbar could answer.
tab to him. On
the advantages
the benefits of
A
0 Are
are they to being
ASo
If I coul-d just
here and I
get there and I
about gettlng to
ensurj-ng that we
to make sure that
go through the
I would
Thank you, I wil-l- move that
your testimony, you talk about
part of a larger organization,
you recal-l that testimony?
MR. SEMANKO:
page 12 of
of becoming
scal-e. Do
I do.
there any advantages and, if sor what
a "small-er utility"?
I think that one of the things that as
we started having these conversations, it's been a rea1Iy
interesting evol-utlon of the utllity industry and f've25
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MORRTS (X)
Avista Corporation
said before that when I started with the company 31 years
d9o, there were wel-1 over 100 j-nvestor-owned utilities,
and in about 2000 when f was made the president, there
was roughly
utifities.
'15. Today there's only 50 investor-owned
Out of those 50, we're number 46 out of 50,
and that certai-n1y
that the
isn't a reason to do anything, but it
continued consolidation of the
now the smallest investor-owned utility
employees.
to do, so from
te1ls you
industryr we are
in the West other than Northwest Natural Gas, so what I
would tell you is that any time that you have an
opportunity -- I think some of our strengths have been
around being a smal-l-er utility. We ' re nimble, we ' re
highly innovative, we're col-l-aborative.
People know me. I can walk the halls.
I've been there 31 years. I am someone who grew up in
department andthe company.
worked my way
I've done just
I started basically in a
know union/non-union
everything there is
that perspective, it's been a wonderful opportunity for
that size, andto have a companyme and for our
the beauty, I
is that a]I of
thinking about
with someone,
and who could
up. r
about
company
think, of this transaction, if I may sdy,
we startthat gets maintained, and as
al-I of those
were going to come together
things had to remain the same
if indeed we
we find as a partner that will respect
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MORRTS (X)
Avista Corporatlon
that, would cherish that as we do and we'd want it to
continue and Hydro One was the company that stepped
forward to say that, so in my mi-nd, we're getting the
best of both worlds.
We're getting the J-arge scale that is so
important, I think, as the industry continues to evolve,
to innovate, ds costs come at us from an j-nnovation
perspective, but we get to keep our size. We get to
continue to do the things we've always done in our
service terrj-tory, so from our board's perspective, from
a management's perspective, and from the employees' and
communities' perspective, I feel reaIly strongly that
what you just said is we get to capture the best of both
of those worfds.
O Thank you; so from your testimony, I take
1t not just your l-ive testimony here, but also what's now
been admitted, that if you fel-t like any of those
advantages of being a small- utility would be threatened
or impacted potentially by this merger, you'd be the
first one to say we need to walk away?
A Yes, if I may expand. One of the things
when we started having these conversations around whether
or not we even wanted to do something, we came up with
what I wou1d call a list of non-negotiables, that if we
were to find anybody, it had to have things that25
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MORRIS (X)
Avista Corporatlon
maj-ntained all- of those things, and I would rea1ly say
that if you fook at the commitments, I think the first 15
were really some of the initial thoughts that we had that
know what, we're not going to do anything wlthsaid you
anybody unle s s
headquarters.
own course. We
we can maintain things like corporate
We don't lose any jobs. We get to set our
have a strong board of directors thatrs
j-ndependent, that people recognize and real-i-ze how
important we are
that isn't always
to the communities that we serve, and
an important thing for some companies
it's putin consolidations,
them together, cut
We
wanted to maintain
we mentioned those
you've heard that. Often
the costs, and move on
weren't interested in that, so we
that, so when Hydro One approached us,
val-ues and they absolutely said, you
know what, those are our values, too. We want to work
with you to make that. happen, so that's why crafting
this, I think, highly innovative 74 commitments in rdaho,
but more in Washington and Oregon, commitments in each
state that cannot be changed unless the commissions
change them, which is, again, very unique, that was al-l-
part of the strategy.
O So in that specific list of reserved
authorities, whatever you'd call- it, under that.
commitment, does it specifically include decision making25
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Avista Corporation
ability with regard to whether, when, and how to go to
the Commission with a rate increase proposal?
A What we've said is that under that on
the day after the cl-ose is that we will continue to
operate our company as we always wil-l-, so we understand
that we make investments and that we wil-l- continue to
how we file rate cases in
of course, they have to be
and the expenses that wefair, just, and reasonable rates
have have to be prudently incurred, and our regulators do
an outstanding job of hol-ding us accountabl-e to that, and
we will continue to operate our business the most
prudently way we can, and if with what we do means we
have to come in for rates, we will do that, but we will
do all that we can to stay efficient as wel1, but I don't
see any change in the process.
O So in a future rate case decision by
folfow the current process of
all of our jurisdictions and,
Avista to
that? Are
speci fics
it there
go forward, does Hydro One have to
they invo1ved in that? Aqain, f 'm
in the commitments. I'm not seeing
somewhere and Irm not understanding
approve
asking for
it, so is
it and
missing it?
A Soinmy
O The first
One have to approve your
I'm sorry, does
to come forward
question,
decision
Hydro
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208.8 90.5198
MORRTS (X)
Avlsta Corporation
for rate increases?
A No, and I think how f would answer that is
that the creation of an independent board of directors
that has the strategic and fiduciary responsibility of
oversight of our company has that ul-timate
responsibility, so before I go before this Commission
today, I have to convince my board that it's a prudent
action for us to take in order to fil-e that general rate
CASC.
That will conti-nue in this new
jurisdiction that we have, the current, the new nine
board members, five of which are independent, four of
which are current Avista board members, by the wdy, and
one being the former Governor of the State of Washlngton,
a very strong group, as well as myself staying as the
Chair of the board, Dennis Vermilli-on, our President,
being on the board and two Hydro One. That board worklng
with senior management wiff make the decision whether or
not it's prudent for us to go before the Utilities
Commission to ask for a rate case, so we won't ask Hydro
One, but the CEO of Hydro One wil-l- be in the room.
That ' s great. I 'm g1ad. It ' s col-l-aborative. I don' t
want this to seem I j-ke we're you know, it's a
col-l-aborative collegial- relationship that we're going to
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Avista Corporation
0 I'm sorry, I think f referenced the
commitments, but you've been speaking to the merger
agreement,' right?
A Yes, I'm sorry. That's what I thought you
were referring to, I apologize.
a No, that's great. Can you poi-nt us to the
specific provision in the merger agreement that you thlnk
says that Avista board can independently move forward,
make decisions about ratemaking without Hydro One
approval? Can you point to that?
A So f woul-d just say in the commitment
where it establishes the independent board of directors
and that Hydro One allows all of the responsibilities of
that board to run the company, in my mind, that's where
that l-ies. Maybe it's not spelled out verbatim, but they
spell out the responsibilities of what a board does and
they've delegated that authority to this board, so,
therefore, this board has that responsibility.
0 Are you speaking of the commitments now or
the merger agreement?
A I'm l-ooking at commitment No. 3 of the
board of dj-rectors, the independent board.
O Great; so is it your understanding that
the merger agreement itself includes specific things that
don't require Hydro One approval, that the Avista board25
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MORRIS (X)
Avista Corporation
has that sole authorj-ty, 1s
merger agreement generally
A Yes, but I'm
point me. I apologize, I'm
question, but f can't I
merger agreement.
MR. SEMANKO:Counsef, can you put the
merger agreement in front of your witness?
MR. MEYER: I can.
COMMISSIONER KELLANDER: Pl-ease approach
the witness with a copy of the merger agreement.
MR. MEYER: May I approach the witness?
COMMISSIONER KELLANDER: Certainly, thank
you.
(Mr. Meyer approached the witness.)
THE WITNESS: Thank you. Okay, I have it
it your recollection of the
speaking?
struggling without a place to
not trying to beg the
donrt have it memortzed, the
MR. SEMANKO: Can you identify the
agreement that you believe provides the
unfettered authority to make ratemaking
Hydro One approval?
in front of me.
OBY
provision in that
Avista board with
decisions without
A Without spending extensive tj-me
this document, sir, I probably am not going to
reading
be able to
in here, itfind it, if indeed it's in here. If it's
would be my interpretation that the master
not
fist of25
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MORRTS (X)
Avista Corporation
commitments in Idaho as an addendum to the merger
agreement supplies that responsibility, gives that
responsibility to our board and to our company, so
whether it's specifically stated in the merger agreement,
I'm not sure, but having it spelled out in the master
tist of commj-tments in Idaho gives me comfort that indeed
that is how it will be post-merger.
O Can you go to page 74 of your testimony,
your di-rect testimony?
A Okay, I'm there.
O And carrying forward to page 15 and 16,
does this testimony outline what Avj-sta's board can do in
the words of lines 23 and 24 there on 14, "without any
obtain separate authorization or approvalobligation to
from the Hydro
A
a
One board"?
Yes.
So on pages 15 and 16, can you identify
if dtry, ratemakingfor us which of those encompass,
deci s ions ?
A Vrlhen you say ratemaking decisions, around
whether or not we go in for a rate case as opposed to the
things that are costs to the business that might later go
into rates, most of the things on this list are not
things that are normally part of rates. They are
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208.890.5198
MORRTS (X)
Avista Corporation
n\z
question is the
forward to the
If I coul-d interrupt
decision of whether,
clarify, the
and how to go
you, to
when,
A No, theyrre not spelled out in these
commi-tments.
O So does that mean Hydro One has to approve
that before it happens?
A The rate case or these commitments?
Commission with a rate increase.
The ability to go forward to make that
On rates?
Whether, when, and how to pursue a rate
of the Commission.
o
decision.
A
o
case in front
A
delegated that
Again, oo,
authority to
directors as per the
out, and f think one
and they've delegated
they do not, because they have
our independent board of
commitments that are spelled
ones is board of directors
merger
of the
those responsibilities.
that decision, not Hydro
the authority to the board for
Our lndependent board wil-1 make
One.
-T ldl_L
O And you're quite sure that Hydro One
agrees with that concl-usion?
A Yes.
0 Based on --
A Based on the commitments that are written25
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MORRTS (X)
Avista Corporation
down, through conversations,through the meaning of what
the authority to thatit means to delegate aII of
board.
O Thank you. You've been in the Hearing
Room the l-ast day-and-a-ha1f; correct?
A I have been.
O So you heard all the testimony of the
Hydro One witnesses?
Yes, sir.
So you've talked a lot in your
about the benefits of larger scale,of being
benefitslarger
smal-l-er
company, while preservlng the
company; correct?
A Yes, sir.
O Do you have any concerns, particularly in
Iight of the events of the summer and the testimony
you've heard here, particularly with regard to the
Province of Ontario, about the potential- impacts of being
part of a larger company headquartered in Ontario,
Canada?
A We do not, but let me candid. When the
events happened in JuIy, we al-l- were taken aback and, you
know, it was a surprise to us as well-. I think Mr.
Scarl-ett talked about from the time of the el-ecti-on to
the time of July 1lth, there was a l-ot of uncertainty.
A
testimony
part of a
of being a
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MORRIS (X)
Avista Corporation
knew if the campaign commitments were going to be
When they finally were, one of the very first
as a board is
commitments.together and looked at all- of the
We started thinking in terms of what else
is there that we need to look at that would beef these
up, that woul-d make them more robust. Are we at risk.
Are our customers at risk,
we Iooked
communities, employees,
shareholders,
fact, it was
date, that we
and at them. As a matter of
of the commitments, the merger agreement, what does it
mean.
Our conclusion was that because of the
the agreements that maybe a few coul-d be
Nobody
kept.
things
we got
robustness of
beefed up and
with some good
the Monday
spent the
that we did as an officer team and
after that, I don't remember the
enti-re morning going through all
have no concern, oo concern
fortunately,
suggestions,
reach in to the business
our intervenors have done that
but our position is that we
that the Premier of Ontario
can in any
customers,
that we do
directors,
my business
protections
service territory
it is under the
of Avj-sta, our
dictate anything
purview of our
of
j udgment,
way
and andour
AII of
utility commissions and our independent board
board' s busi-nessso our board, our
judgment is that indeed the production the
are so robust that we are not concerned25
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208.890.5198
MORRTS (X)
Avista Corporatj-on
about let me say, of course, we t re
we know that
always concerned
we're not concernedabout what happens,
that will impact us
but
directly. Of course, we would be
concerned about another if something l-ike that
happened.
O Are you concerned at all- about indirect
impacts; for example, if Hydro Oners credit rating goes
down after the next episode or event and so on and so
forth, do you have concerns about that as being, I think
an important part of thein your testlmony
Hydro One family?
AI
you say bei-ng,
think I heard today that people said it
woul-d take about a four notch downgrade, so I think
realistically, I am not concerned. I think clearly, that
as a sharehol-der of Hydro One, it is not in the
Province's best interest to drive this company into the
ground. It is not in their best interest to do that.
Why would they do that? They're going to do all they can
do to preserve an outsLandlng company that provides great
servj-ce, so whil-e maybe the things the Premier did were
unorthodox, I believe at the end of the day that they
clearly want to have a wel-I-run utility providing
outstanding service at reasonable rates and they're going
to do all they can do to help support Hydro One to do
that, so going forward, I don't have a concern that a25
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208.890.5198
MORRTS (X)
Avista Corporation
premier is
just don't
that that
going to
have that
would be something that
their customers.
come in and destroy this company. I
concern. It does not seem logical
O So if you've reviewed the comments or been
briefed on the comments from the public that have been
aware that this is a concern to asubmitted here, you're
number of customers; correct?
A Yes, I know that some customers have
company and to
commented that they're
some comments that are
know that some of the
somebody wou1d do to a
concerned. I know that we've had
aren't even Idaho customers that are
know that some of them aren't even a
supportive of
comments have
them as well. I
come from people that
part of that 635. I
part of l-ive in
the state, so I do know
all of them and I don't
they're not supportive,
that we have and if you
that I mean, I haven't parched
know exactly how many have said
but out of the 220,000 meters
times that by how many people
that with thisfive in households, I feel- confident and
merger having been in the news for more than 18 months
that we've received wefl less that one-tenth of one
percent of customers. Even one customer concerns me and
I care about that, but on the whoIe, I would say that
whether you can say silence
but I'm not
means they're supportive, f'm
not saying that,saying that we do have some,25
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208.890.5198
MORRTS (X)
Avista Corporation
but f am not in a place to say it's overwhefmlng.
O Yourre familiar with those concerns?
A
o
your opinion
the reasons
Yes.
The question I
that those folks
have to follow up, is it
should not be concerned for
you've stated about what' s goi-ng on in
Ontario?
A Absolutely, sir, yes.
O I'm sorry, I'm trying.
A Sorry.
O Mr. Baxter asked you about the
with the Department of Water Resources that's
this merger proceeding; correct?
A Yes, sir.
agreement
part of
Idaho your
agreement,
better that
with Water
O
A Okay.
O and you talk
generatJ-on pro j ects, including
O Can you tel1 me which river basins in
hydroelectric facil-itles are located on?
A Wel-l- , Lf it's in regards to that
I would really appreciate I think it's much
Bruce Howard who negotiated the settlement
Resources be the one.
I'm on page 20 of your direct testimony
and my question without reference
there about
50 percent
to that
a mix of hydro
hydroelectric
agreement25
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MORRTS (X)
Avista Corporation
specifically is on what river basins in Idaho do you have
hydroelectric facil-ities?
A Wel-l, the Cl-ark Fork and the Spokane,
primarily.
O So two?
A Yes.
O Thank you. Page 25, at the top of your
direct testimony on page 25, you talk about one of the
reasons for the merger with this partJ-cular, f think you
used the term, dance partner later on avoiding the risk
of a potential subsequent acquisition by another party
that may not share Avistars cul-ture and values. By that
comment or that testJ-mony, are you concerned? Has there
been evidence of an attempt at a hostile takeover or is
this golng to be forced on you?
A What I wou1d say is we're f ortunate we
work in a industry where hostile takeovers are not
common, but I woul-d say that prior to this that we had a
l-ot of interest and I was getting interest and our answer
was always flo, we are not interested
that. Our board
1n having any
declded that ifconversations around
indeed we coul-d find
strength that would
for another 729
the right partner
ensure the company
from a position of
as we are today
we shou]d at
least engage in
years with a great
those and find out
partner,
is there somebody25
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MORRTS (X)
Avista Corporation
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992
that's willing to do it that way, so that's what l-ed to
the conversations with Hydro One, but yeS, we had had --
I would not describe anything was hosti1e, but we had
multiple inquiries about whether we were interested in
consolidation with other companies.
O But to take on any dance partner, amongst
others, there would have to be approval from your board
and your sharehol-ders; correct?
A Absolutely.
COMMISSIONER KELLANDER: I feel like the
music from Jeopardy might be of some assistance.
MR. SEMANKO: Yes. WeI1, fortunately, the
three sets of testimony are very similarr so I'm rapidly
going through the second one and my tabs are getting
smaller and smaller amounts here.
O BY MR. SEMANKO: I had a question on page
71 of your supplementaf testimony
A Okay.
O if you could get to page Ll.
A Yes, sir.
O At the top there you're discussing the
number of customers that you have and then in parentheses
you talk about Oregon. Is there some particular reason
or rel-evance to t.hat statement there?
A I think -- oo, I think we were just saying
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208.890. s198
MORRTS (X)
Avista Corporation
how many customers we have in our service territory.
thank you. Do you
have any
a I'm just trying
concerns as the CEO of
in Ontario's campaign promise to reduce hydro rates in
Ontario by 12 percent?
A I do not.
0 Not one iota?
A I do not.
to
Avista about the Premier
O Even with your
A I do not. How
completely separate from Hydro
Ontario wil-l- not bleed into the
serve.
O Thank you.
page 4 and on page 5, I'm
wrapping up here, earller
service territory that we
You have rebuttal testimony on
on the rebuttal-testimony now,
about your
those pretty
connection?
we operate our
One and what
company is
happens in
you were asked
fdaho-related financlaf commitments. Are
well- outlined on pages 4 and 5?
A I bel-ieve they are.
O So the rate credits for Clearwater Paper
and Idaho Forest Group, all thatrs l-aid out on those two
pages ?
A Yes, sir.
O Fo1lowing up on a question earlier
buffer some of these concerns about the political
to help
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208.890. s198
MORRTS (X)
Avista Corporation
in Ontario, is Avista willing to commit to rate increases
over any particular period of time at CPf or some other
index?
A No. What we will- commit to is we wil_l
continue to run our business as prudently and efficiently
as possible and if we feel- like we need go in for a
general rate caser we will do that.
O Thank you. At the bottom of that
testimony on page 5, you mention Avista Customer Group
and the Iate intervention. Just for matter of
clarification, Avista didn't oppose Avista Customer
Group's interventlon, did they?
A No, we did not.
O Thank you. Commitment 14, the question
that I asked earl-ier to the Hydro One wltnesses, do you
see a potential remedy under that section being unwinding
or undoing of the merger?
A Again, I wou1d answer it as everyone did.
I don't know all the rul-es of what the Commission can do,
but they have all the rules, so whatever they can do, we
those rules towant to let them be able to fu11y apply
this.
n\z
position you
merger, what
From a practical standpoint and the
are 1n and that you wi-ll be in after the
woul-d that look like? How woufd that work?25
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208.890.5198
MORRTS (X)
Avista Corporation
Is it even possible to do?
A Obviously, it woul-d be really difficult to
unwind anythlng and you wou1d hope that there would be
nothi-ng that extreme, but could there be more things that
would add further protections down the road and if there
was that something came up, I think that wou1d be 99.9
percent of what woufd need to happen.
O And then fina1Iy, on page 15, thank you,
of your rebuttal testimony, you talk about 6t-328, that
statute. Do you recall that testimony?
A Yes, sir.
O You do recognize under that statute that
the burden of proof is on the appllcants; correct?
A I do.
O And then finally, on the last page your
discussion about the busi-ness judgment of Avista
A Yes, sir.
0 are you
should defer to Avista's
suggesting that the Commission
business judgment, that that's
the cri-terla to be applied here?
No, I think what we'reA
of the things
effect i-s that
saying is that one
woul-d take into
public
their
interest
the Commission, I hope,
our business judgment as well- as the
in this needs to be fully weighed in
decision making process.25
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208.890.5198
MORRTS (X)
Avista Corporation
MR. SEMANKO: Thank you. I have no other
questj-ons. Sorry f went a little long.
COMMISSIONER KELLANDER: Yourre fine.
THE WITNESS: I thlnk it's on me, sir. I
apologize, too.
COMMfSSIONER KELLANDER: I recognize the
complexity of sorting through the volumes. I actually
have mine cofor coded, but I actually had a Staff member
put that together for me, so I'm at an advantage. Wlth
that, then, are there any questions from members of the
Commisslon?Commissioner Raper.
COMMISSIONER RAPER: WelI,
your
out to
first, I want
plan is, but I
Mr
to note that I don't know what
think someone should point it
constantly see hlm squlnting
Meyer, because I
for things.
and deaf lawyer,
and
VIS].ON
looking
a blindMR. MEYER: Just
just what the company needs.
COMMISSIONER RAPER:
attorneys, are you?
MR. MEYER: No.
You're not insulting
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208.890.5198
MORRIS (Com)
Avista Corporation
EXAMINATION
BY COMMISSIONER RAPER:
O Thank you for being here, Mr. Morris.
Mr. Semanko hit some of the generalities that I was going
to address as to what it was that Avista thought was in
their best interest, why this merger, why this timlng, So
I think that you've addressed that through him. You made
a comment to Mr. Semanko that Hydro One came to Avista,
not that you looked outside the company.
A Absolutely. We never ever went out and
looked for a partner. At that time we had gotten a
to al-l-. At onenumber
point
not
of lnquirles. We had said no
Hydro One had actually reached out to us and we did
we said we were not interested. After further
conversations wlth our board and wi-th the conversations
of the work that I -- the things that I said being one of
the smal-Iest utilitles, understandlng that there was a
fot of continued consolidation that was going to happen
in the industry, knowing that we didn't have to do
anything, absolutely, our board tafked about that.
We could stay independent. Should we,
though, dL least say from a positlon of strength, Lf you
would find somebody that absolutely would keep your
cul-ture, your vafues, that independence, create a25
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208.890.5198
MORRIS (Com)
Avista Corporation
separate board, do
keep that and find
the things that you wanted to do to
a partner, is there anybody out there,
Scott, and if there is, you should at least have a
conversation, and we began that conversation with Hydro
One and when we shared that wj-th them, they
enthusiastically said
started down the path
y€S, that's what
of conversations
we want, so we
around that.
O Okay,' so would it be
that it rocked your world a I1tt1e
removed, essentlally removed, the
it seems as if you've overcome any
initiall-y may have caused?
A Yes, it did.
that we were all surprJ-sed.
before, but I want to say it
fair to say, though,
bit when the Premier
CEO and the board, but
hesitation that that
Absolutely, I can teff you
You know, f've said this
rea11y
him and
as you can see
about an
again, is that I
admired Mayo and had a great relationship with
Iooked forward to working with him, but
from these commitments, this was never
opportunity for Scott and Mayo to work together. I mean,
I'm 60, al-most 6L. I mean, f don't know how much longer
I'm going to do this. Mayo was in his 60's. You know
that shelf lives of CEOs now are around five years.
There was going to be change. I've been
the Chair of our board since 2008. f've changed out the
majority of our board to new board members in the time of25
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208 .8 90. 5198
MORRIS (Com)
Avista Corporation
my Chairmanship. Boards come and go, so what our
thinking was that how do you craft something that stands
the test of time. I think Mr. Semanko mentioned that.
We're a L29-year-ol-d company, how do we
create something that ensures that, and a big pj-ece of
this wasn't just having commitments and handshakes, but
part of our strategy, and Hydro One agreed, was actually
embed them in the regulatory process so that not just the
normaf ring-fencing things that commissions get to
decide, but you see things like economic
communi-ty
or not we
things
get to
Woods, who's
working with
I'm going to
be there. I
time, that it
all this will
communities and that
the boardrs charge:
go make it happen.
a Okay,
that commissions
development and
decide whether
agreed, put
decide this
wasn't a
get
Hydro One
to
them in the record so the commissions can
stock those and
an outstandlng person,
Paul- Dobson, but they
be there, I donrt know
wanted something that
didn't matter who were
always be here for our
Mayo or trust now Tom
and I really l-ike
don't know how long
how long lrm going to
stood the test of
the l-eaders, that
customers and
thinking. That was
that happen,Scott,
ir.we're not doing
question rel-ated
stuff, so what was important to us
handshake, not that I didn't trust
that it
realIy was the
If you can make
If you can't,
and the last to25
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208.890.5198
MORRIS (Com)
Avista Corporation
25
1000
Mr. Semanko's line of questioning about the Avista
board's autonomy following any merger and whether you
woul-d have to ask the parent company of Hydro One. Is it
your understanding, generally speaking, and this is
legitimately my ignorance, I'm not leading you down a
path, is it your understanding that in any kind of
subsldiary situation that an independent board of a
subsidiary would have to ask someone upstream for
permission to go in for a rate case to recover additional
monies? And in my head, I'm thinking about Rocky
Mountain Power, PacifiCorp, Berkshire Hathaway and that
chain, is that a typical- function?
A Sure. What f don't know about Rocky and
Pacific, I don't think those organizatj-ons have separate
boards that oversee those companies. They have a
Berkshire board, but they don't have a separate board as
we do, so my understanding is that and there are some
boards that would be what I wou1d cal-l advisory as
opposed to having the governance to actually oversee. In
this case, we've strengthened it, so this is a real- board
with real responsibilities having to make these real-
decisions, so that was part of the strategy, So I think
that's a big piece of it, and I do think that if there is
concern on this Commlssion's part, if there is ever any
interference with the Province, I think that our
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independent directors, I, woul-d be happy to sign annual-
affidavits to say there's no -- we I re not being
pressured. I'm convinced that that won't happen, but if
that would give more comfortr we'd be happy to do that.
COMMISSIONER RAPER: Thank you, I
appreciate that. Thatrs all- I have.
COMMISSIONER KELLANDER: Commission
Anderson.
COMMISSIONER ANDERSON: Thank you, Mr.
Chairman. My questions have been answered. I just want
to make one observation of I being 62 years old, you're
stil-I a young man.
THE WITNESS: Thank you, Mr.
Commissioner.
COMMISSIONER KELLANDER: And before we
move away f rom your testimony, j-t's not a question
directed toward you, Mr. Morris, but more to your 1ega1
counsef, Mr. Meyer, in the Morris supplemental on page 6,
lines 4 through 20, there is reference to Mr. Sprague's
testj-mony which has been re-cal-l-ed and will not be
entered lnto the record, and there are segments within,
again, oD page 6 of the supplemental, lines 4 through 20,
references to that testimony. Would it be wise to strike
all of that or some of that? Is there a recommendation
you coul-d make so we could cfear up the record?
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Avista Corporation
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208 .8 90. s198
MORRIS
Avista Corporation
MR. MEYER: I think the most efficient
wdy, Mr. Chairman, is for us to just submit revised pages
that reflect the fact that Mr. Sprague isnrt testlfying
and we can furnish before the record cl-oses.
COMMISSIONER KELLANDER: Thank YOU,'SO
and thatwe'l-l- see a replacement page, then, for No. 6
language will be excl-uded.
MR. MEYER: Thanks for bringing
our attention.
COMMISSIONER KELLANDER: Thank you, and I
think that brings us to redirect.
MR. MEYER: And there is no redirect.
Thank you.
COMMISSfONER KELLANDER: Mr. Morris, we're
that to
going to l-et you away
you to be nearby just
that are satisfactory
earlier.
from the witness stand, but we want
in case we don't get the responses
to 1ega1 counsel- that had questions
THE WITNESS : Yes, si-r.
COMMISSIONER KELLANDER: Thank you.
(The witness left the stand. )
COMMISSIONER KELLANDER: With that, we are
at 12230 and it's my intent to actually all-ow you to have
lunch and so we will go yes.
MR. SEMANKO: Mr. Chairman, would it be25
7002
O
o
o
1003 COLLOQUY
possible, I had spoken with
about this, but after lunch
Call SheIIey Keen, followed
the water issue that Mr.
neither of those will be
particularly Shelley to,
some of the other counsel-
to allow the Department to
to focus i-n onby Mr. Howard
Morris just tal-ked about and
very long and to al-low them to,
leave ?
aII concur,
talki-ng. 1n
is something
so I don't
conversations to occur.
COMMISSIONER KELLANDER: Without any
objection, I don't see a problem with people
fact, what we have here as the witness list
that we can easily adjust if you
have a problem with those kind of
That's fine and T appreciate the willingness of the
parties to have that communication, so with that said, we
are is there any other matter that needs to come
before me before we take a break?
I'm going to try to make this a tight
lunch. You've got an hour. I recognj-ze there's food
trucks there. It may not be your forum, but, wel-l, it is
what it is. We'1,1 be back at 1:30 and, again, if there
needs to be some communication with regards to witness
to have thatlists, please
discussion and
take the opportunity
thank you. Wer11 reconvene at 1:30.
(Lunch recess. )
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