HomeMy WebLinkAbout20180719Avista to Staff_PR_14 Attachment A.pdfExh. CSH-1Tr Docket U-170970
Witness: Christopher S. Hancock
BEFORE THE WASHINGTON
UTILITIES AND TRANSPORTATION COMMISSION
TESTIMONY OF
Christopher S. Hancock
STAFF OF
WASHINGTON UTILITIES AND
TRANSPORTATION COMMISSION
Commission Staff’s Testimony in Support of Settlement
April 10, 2018
Revised May 7, 2018
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TESTIMONY OF CHRISTOPHER S. HANCOCK Exh. CSH-1Tr
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TABLE OF CONTENTS
I.INTRODUCTION ...............................................................................................................1
II. STAFF’S INTERESTS IN THIS PROCEEDING ..............................................................2
III.HOW STAFF’S INTERESTS HAVE BEEN ADDRESSED .............................................4
A.Commitments to Important Public Service Obligations ..........................................5
1. Customer service, reliability, and safety ......................................................5
2. Support for low-income customers ..............................................................6
3. Energy efficiency, conservation, and environmental
stewardship ..................................................................................................7
B.Protection from Costs Associated with the Proposed Transaction ..........................9
C.Protecting the Commission’s Ability to Regulate the Utility
in the Public Interest ..............................................................................................11
D.Financial Integrity ..................................................................................................12
E.Ringfencing ............................................................................................................17
F.Managerial and Financial Fitness ..........................................................................19
G.Other Interests ........................................................................................................19
IV.THE STANDARD OF REVIEW FOR PROPERTY TRANSFERS
AND HOW THE SETTLEMENT MEETS THE STANDARD .......................................26
A.Net Benefits ...........................................................................................................26
B.The Public Interest .................................................................................................29
V.CONCLUSION ..................................................................................................................30
Staff_PR_14 Attachment A Page 2 of 33
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LIST OF EXHIBITS
Exh. CSH-2 Attachment A to Hydro One Response to ICNU Data Request No. 30, Moody’s
Exh. CSH-3 Attachment B to Hydro One Response to ICNU Data Request No. 30, S&P
Exh. CSH-4 Hydro One Q4 2017 Analyst Call Slides
Exh. CSH-5 Attachment A to Avista Response to UTC Staff Data Request No. 8, Moody’s
Exh. CSH-6 Attachment B to Avista Response to UTC Staff Data Request No. 8, S&P
Exh. CSH-7 Avista Response to NWEC Data Request No. 18
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TESTIMONY OF CHRISTOPHER S. HANCOCK Exh. CSH-1Tr
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I. INTRODUCTION 1
Q. Please state your name and business address. 3
A. My name is Christopher Scott Hancock. My business address is The Richard
Hemstad Building, 1300 S. Evergreen Park Drive S.W., Olympia, WA 98504.
Q. By whom are you employed and in what capacity? 7
A. I am employed by the Washington Utilities and Transportation Commission
(Commission) as a Regulatory Analyst in the Energy Regulation Section of the
Regulatory Services Division.
Q. Are you the same Christopher Scott Hancock who is sponsoring joint testimony 12
in Exh. JNT-1T? 13
A. Yes. My educational and professional background is included in Exh. JNT-2.
Q. Have you prepared any other exhibits in support of your testimony? 16
A. Yes. I have prepared four exhibits addressing the ratings outlook for Hydro One
Limited (Hydro One) and Avista Corporation (“Avista” or “Company”),
respectively. These are Exhibits CSH-2, CSH-3, CSH-5, and CSH-6. In addition, I
provide Exhibit CSH-4, which is a series of slides presented during Hydro One’s
Fourth Quarter 2017 Earnings Teleconference. Finally, I provide Exhibit CSH-7
which contains information on the amount of Avista’s asset retirement obligations
(AROs) associated with Colstrip.
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Q. Please describe the scope of your testimony in this docket. 1
A. I articulate Commission Staff’s (Staff’s) support of the Settlement Stipulation and
Agreement (“Settlement”) entered into by all parties to this docket. The Settlement
expresses the parties’ support for the proposed acquisition of Avista by Hydro One
(Proposed Transaction), conditioned upon the commitments listed in the Settlement.
To explain Staff’s support of the Settlement, I include additional detail on certain
commitments in the Settlement that address Staff’s concerns in this case. In addition
I provide Staff’s perspective on the new “net benefit” standard as it applies to this
case.
II. STAFF’S INTERESTS IN THIS PROCEEDING 11
Q. What standard governs the Commission’s decision to approve or deny the 13
Proposed Transaction? 14
A. RCW 80.12.020 requires that mergers and acquisitions of public service companies
like Avista in Washington be approved by the Commission. In order to approve the
Proposed Transaction, the Commission must find “that the transaction would provide
a net benefit to customers of the company.”
In the Commission’s property transfer rules, WAC 480-143-170 provides that
if “the commission finds the proposed transaction is not consistent with the public
interest, it shall deny the application.”
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Q. What are Staff’s interests in this proceeding? 1
A. Staff is interested in ensuring that the Proposed Transaction meets the Commission’s
standard for approval, meaning that Avista’s ratepayers will receive a net benefit
from the Proposed Transaction, and that the Proposed Transaction is in the public
interest.
In more detail, Staff’s principal concerns with the Proposed Transaction are
as follows:
1) Whether there are commitments by the purchaser to important public
service obligations such as:
i) Customer service;
ii) Safety;
iii) Reliability;
iv) Resource adequacy including energy efficiency and conservation;
v) Support for low-income customers;
vi) Environmental stewardship;
2) Whether customers are protected from rate increases that might result
from the transaction and from financial distress that might occur as a
result of the manner in which the purchase was financed or distress at
other companies affiliated with the purchaser;
3) Whether the Commission’s ability to regulate the utility in the public
interest is fully protected, including preserving access to all necessary
information;
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4) Whether the purchaser has the financial and managerial fitness to own
and operate the utility in fulfillment of its public service obligations;
5) Whether the commitments made in the transaction are enforceable.1
Q. Does Staff believe that the Settlement addresses all of these concerns? 5
A. Yes. Taken together, the Settlement reasonably assures that the Proposed
Transaction provides a net benefit to customers, and is in the public interest.
To my knowledge, the result contains the most comprehensive provisions and
protective arrangements surrounding a transfer of property that this Commission has
ever considered.
III. HOW STAFF’S INTERESTS HAVE BEEN ADDRESSED 12
Q. How will you address how Staff’s interests have been met? 14
A. This testimony will highlight particular commitments the Parties have agreed to in
Appendix A to the Settlement (Exh. JNT-3). Specific considerations around net
benefits and the public interest are addressed in section IV of this testimony.
The Joint Testimony (Exh. JNT-1T) provides an overview of the Settlement.
This testimony will highlight specific commitments that address Staff’s concerns in
this proceeding.
1 In the Matter of the Joint Application of Puget Holdings LLC and Puget Sound Energy, Inc. For an Order Authorizing Proposed Transaction, Docket U-072375, Order 08, 48-49, ¶ 115 (Dec. 30, 2008) (PSE-Macquarie Order).
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A. Commitments to Important Public Service Obligations 1
1. Customer service, reliability, and safety 3
Q. Which customer service commitments would you like to highlight? 5
A. The Settlement provides several commitments from Hydro One and Avista (together
“Joint Applicants”) that support consumer protection.
Commitment 71, “Security Deposits,” provides for the return of security
deposits to residential customers, and a discontinuation of the practice of requiring
security deposits from these customers going forward.
Commitment 72, “AMI Consumer Protection,” provides for guidelines
prohibiting the remote-disconnection of customers under certain temperature
extremes as the Company’s AMI program expands. It also provides a path for
resolving matters around prepayment billing and remote disconnection.
Commitment 79, “On Bill Repayment,” establishes that Hydro One will
provide the initial funding for establishing an On-Bill Repayment program, while
establishing that the ratepayer population will not be responsible for defaults on
obligations paid through the On-Bill Repayment program. The Commitment also
establishes that customers will not be disconnected from service due to non-payment
of non-utility obligations.
Commitment 33, “Commitments Binding,” has been modified to include an
obligation by Hydro One and Avista to rectify any failure to comply with the merger
commitments.
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Q. Which commitments address safety? 1
A. Commitment 15 (“Safety and Reliability Standards and Service Quality Measures”);
and Commitment 80 (“Contract Labor”), which Washington and Northern Idaho
District Council of Laborers elaborates upon in its individual testimony.
Q. Which commitment addresses reliability? 6
A. Commitment 15 (“Safety and Reliability Standards and Service Quality Measures”)
provides for performance-based ratemaking of a sort. If Avista’s reliability declines
significantly during the first ten years of Hydro One’s ownership of Avista,
customers will receive an increased rate credit of $250,000 annually. This represents
a substantial incentive for Avista to continue to provide reliable service to its
customers in Washington.
2. Support for low-income customers 14
Q. Which commitments address support for low-income customers? 16
A. One of Staff’s most important considerations in entering into the Settlement with the
Joint Applicants and the other parties was securing protections for low-income
customers. The broad support among the parties for addressing low-income issues is
captured in Commitments 64 through 74.
Commitment 67 (“Funding for Low-Income Participation in New
Renewables”) dedicates $5 million in funding for renewable programs that benefit
low-income customers, and Commitment 70 (“Low Income Weatherization”)
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provides for $4 million of additional funding for weatherization of low-income
customers’ homes.
Commitment 69 (“Replacement of Manufactured Homes”) provides for the
replacement of inefficient manufactured homes by Hydro One over a ten-year
period. Homes built prior to 1976, which tend to be the least energy-efficient homes,
are prioritized for replacement. This commitment is important because it will not
only assist customers in lowering their bills but it will also increase conservation.
Two million dollars is allocated to this program.
Commitment 70 (Low Income Weatherization) similarly benefits individual
customers by potentially lowering bills and benefits all customers by increasing
conservation. The Commitment provides that existing funding for low income
weatherization will continue and, in addition, Hydro One will furnish $4 million over
10 years in additional funding.
3. Energy efficiency, conservation, and environmental stewardship 15
Q. Please describe Commitment 55, “Cost of Greenhouse Gas Emissions.” 17
A. The Washington State Legislature recently considered proposed legislation on
pricing carbon emissions. The legislative effort failed, but the possibility of such
legislation remains.
The Joint Applicants agreed to acknowledge this possibility through Avista’s
resource planning process. Commitment 55 requires Avista to work with its
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Integrated Resource Plan Advisory Group to determine a range of greenhouse gas
costs to model.
Q. Have the Joint Applicants and other parties agreed to commitments around 4
conservation and energy efficiency? 5
A. Yes. Several of the commitments directly address conservation; some of these
directly target low-income customers, who stand to benefit the most from
conservation measures funded by a third-party.
Commitment 69 (“Replacement of Manufactured Homes”) and Commitment
70 (“Low Income Weatherization”) have been previously addressed in the discussion
of low-income issues, but merit acknowledgement here again as energy efficiency
and conservation issues.
Commitment 63 establishes a Professional Home Energy Audit program,
funded by Hydro One to reach approximately 2,000 homes over a ten year period.
This program will provide participating customers an understanding of the lowest-
hanging fruit for improving the energy diet of their homes, at no charge.
Commitment 61 (“Industrial Customers’ Self Direct Conservation”)
establishes the option for industrial customers to engage in large conservation
projects, using a mix of funding from Schedule 91 and the Joint Applicants. A
project under this program will then be repaid by the customer over a period of time
through the Schedule 91 charges to the customer. The program creates no financial
burden on other customers, and provides an energy efficiency benefit to all
customers.
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B. Protection from Costs Associated with the Proposed Transaction 1
Q. How does the Settlement protect customers from costs associated with the 3
Proposed Transaction? 4
A. Several items in the Settlement address this matter. Commitment 16 (“Treatment of
Net Cost Savings”) requires that any cost savings that Avista achieves as a result of
the transaction will be captured in future rate proceedings.
Commitment 17 (“Pre-Transaction Test Year”) establishes the test year to be
used in future general rate case filings, thus preventing controversy surrounding the
appropriate test year in those proceedings. Sub-item “c” in this commitment provides
for a second test year, presented for informational and comparison purposes only, in
order to capture the effect of the acquisition.
Commitment 81 (“Most Favored Nation”) ensures that Washington
ratepayers can receive the benefits as well as protections that the Joint Applicants
agree to in other jurisdictions.
Commitment 24 (“Cost Allocations Related to Corporate Structure and
Affiliate Interests”) provides important structure around cost allocations as Avista
integrates with Hydro One in the coming years.
Q. Please describe how Commitment 17, “Treatment of Transaction Costs,” 20
addresses Staff’s concerns. 21
A. Staff and other parties advocated for, and secured, clarifications to the proposed
commitment by the Joint Applicants around costs associated with the Proposed
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Transaction. The revisions to this commitment clarify the types of transaction and
transition costs that cannot be recovered from ratepayers.
These costs are to be tracked and furnished to the Commission. Specific costs
to be excluded from recovery must be identified, without limiting the ability of the
parties to dispute unspecified costs in a future general rate case. This Commitment
makes clear that the costs of the Proposed Transaction are to be borne by Avista and
its new shareholder, and not Avista’s customers.
Q. Please describe how Commitment 18, “Rate Credits,” addresses Staff’s 9
concerns. 10
A. The settlement process produced a larger rate credit than originally proposed by the
Joint Applicants, and represents a larger rate credit (five percent of base revenues,
rather than 3.1 percent) than was provided in the acquisition of Puget Sound Energy,
Inc. (PSE) by an investor consortium that included the Macquarie Group.2
Furthermore, the rate credit is delivered over a shorter period of time, increasing the
time-value of money to Avista’s ratepayers. This concentrates the distribution of the
rate credit over the crucial first few years of Avista’s integration into Hydro One.
A rate credit not only protects customers from cost increases due to the
Proposed Transaction; it provides a cost decrease for the five-year period in the
Commitment. This commitment undoubtedly confers a benefit to customers that,
absent the Proposed Transaction, would not otherwise exist.
2 See PSE-Macquarie Order.
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C. Protecting the Commission’s Ability to Regulate the Utility in the Public 1
Interest 2
Q. Have the parties agreed to commitments that preserve the Commission’s ability 4
to regulate the utility in the public interest? 5
A. Yes. Commitment 30 (“Commission Enforcement of Commitments”) makes clear
that the Commission can compel not only Avista witnesses, but also witnesses from
Olympus Holding Corp.3 and Hydro One.
Commitment 23 (“Access to and Maintenance of Books and Records”)
preserves the Commission’s access to Avista’s books, and makes clear that the
Commission may review Avista-related documents at Olympus Holding Corp. and
its subsidiaries, as well as at Hydro One.
Commitment 22 (“Separate Books and Records”) requires separate books and
records for Avista, preventing unnecessary complication of records.
Commitment 31 (“Submittal to State Court Jurisdiction for Enforcement of
Commission Orders”) further clarifies the enforceability of the Commitments the
Joint Applicants have made in this proceeding.
Commitment 47 (“Hold Harmless; Notice to Lenders; Restriction on
Acquisitions and Dispositions”) requires the Joint Applicants to seek Commission
approval of any sale or transfer of any material part of Avista, or any other
transaction that would result in an entity other than Hydro One directly or indirectly
acquiring a controlling interest in Avista.
3 Olympus Holding Corp. is an intermediate corporate entity between Avista and Hydro One. See Appendix B to Settlement Stipulation, Revised Post-Closing Corporate Structure.
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Together, these commitments preserve, and in some cases enhance, the
Commission’s ability and authority to regulate the Company in the public interest.
D. Financial Integrity 4
Q. What are some concerns that arise when a regulated utility transitions from 6
being publicly-traded, to being privately-held? 7
A. A publicly-traded company is regulated both by financial regulators, like the
Securities and Exchange Commission (“SEC”), and its diverse body of shareholders.
When a company becomes privately-held, especially by a single entity like Hydro
One, it no longer is subject to balancing the competing interests of a large body of
owners with a diverse set of interests, and will instead begin to reflect the priorities
of the single shareholder, which can be myopic.
The concern is that Avista may be run in a manner that best suits the singular
interests of its singular owner, and not the diverse interests of a broad body of
shareholders.
The commitments obtained in this Settlement provide an analog for the
discipline that would otherwise be imposed on Avista by a large, diverse ownership
base.
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Q. Have major credit ratings agencies commented on the Proposed Transaction? 1
A. Yes. Both Avista and Hydro One have maintained sound investment-grade ratings
from the major ratings agencies.4
Q. What do ratings agencies think of Hydro One, given Hydro One’s decision to 5
purchase Avista? 6
A. Both major ratings agencies have negative outlooks for Hydro One;5 however, they
also explain that these negative outlooks are the result of an expectation of less
extraordinary support from the Province of Ontario for Hydro One. Despite the
negative outlooks, Hydro One maintains strong investment-grade ratings.
In addition, Moody’s noted that “the additional debt that Hydro One Limited
plans to issue will not limit the ratings of Hydro One Inc.”6
Hydro One has significant access to several billions of dollars of credit.7
Q. What do ratings agencies think of Avista, given the announcement of a purchase 15
by Hydro One? 16
A. On the understanding that Hydro One Limited would issue the debt used to finance
the purchase of Avista, Moody’s stated that it believed Hydro One Limited’s
“ownership will be credit neutral.” Moody’s went on to say that “the stable rating
4 “Major ratings agencies” refers to Moody’s and S&P.
5 Hancock, Exh. CSH-2, Attachment A to Hydro One Response to ICNU Data Request No. 30, Moody’s; Exh. CSH-3, Attachment B to Hydro One Response to ICNU Data Request No. 30, S&P.
6 Hancock, Exh. CSH-2. 7 Hancock, Exh. CSH-4, Q4 2017 investor report slides.
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outlook reflects our view that the pending acquisition by [Hydro One Limited] will
not materially affect the credit quality of Avista.”
Moody’s noted that it could provide a downgrade if Avista’s “dividend
payout increased meaningfully to support the new parent company’s acquisition
debt.”9 In this statement, Moody’s has raised the possibility that Avista will be relied
upon to pay for the debt used to acquire itself.
S&P looked more favorably on the proposed transaction’s effects on Avista,
revising its outlook from “stable” to “positive.”10
Q. How leveraged is the Proposed Transaction? 10
A. If one considers the convertible debentures as debt, the Proposed Transaction is
leveraged at 53%.11 However, as C$1.54 billion of the borrowings are unsecured,
and will be converted upon closure of the Proposed Transaction, this portion of the
financing functions much more like equity. Treating the convertible debentures as
equity produces a debt leverage of approximately 24 percent.12 As a matter of
comparison, the PSE-Macquarie deal was 20 percent leveraged, a figure the
Commission found to be “substantially less” than the leverage involved in the two
preceding transactions that the Commission approved.13
8 Hancock, Exh. CSH-5, Attachment A to Avista Response to UTC Staff Data Request No. 8, Moody’s. 9 Id.
10 Hancock, Exh. CSH-6, Attachment B to Avista Response to UTC Staff Data Request No. 8, S&P.
11 Leverage = total debt divided by total capital. Figures used are after accounting for retired debt + new debt. $2.81 billion / $5.3 billion ≈ 0.53.
12 $1.27 billion / $5.3 billion ≈ 0.24. 13 PSE-Macquarie Order at 7, ¶ 18.
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The entirety of this debt will sit on Hydro One’s books, not Avista’s.
Furthermore, Avista is not the sole entity available to service this debt.
Q. How has the Settlement promoted financial integrity of Avista? 4
A. Staff sought to obtain commitments that promote continued financial integrity of
Avista. Absent the disciplining effects of being a publicly-traded company with a
broad and diverse base of shareholders, Avista’s balance sheet may
disproportionately suit the interests of a single shareholder. Staff and other parties
worked together with Avista and Hydro One representatives to arrive at a suite of
commitments that promote continued financial health of Avista.
Q. Which commitments that address financial integrity are of particular interest to 12
Staff? 13
A. Commitments 34 through 41 address Avista’s financial integrity.
Commitment 34 (“Avista Capital Structure”) ensures that the company
remains adequately capitalized, and Commitment 37 requires Avista and Hydro One
to notify the Commission within two business days of any downgrade of Avista’s
credit rating to a non-investment grade status.
Additionally, Commitment 22 requires Avista to maintain separate books and
records from affiliates
Q. As a whole, do the commitments sufficiently address financial integrity at 22
Avista? 23
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A. Yes. The total balance of Commitments 34 through 41 promote sound financial
practices at Avista, and serve the interests of Avista’s customers in the absence of the
moderating force of a diverse set of shareholders.
This group of commitments requires Hydro One to provide equity support of
Avista under reasonable terms and on a sustainable basis, the maintenance of
separate debt and preferred stock, continued evaluation by credit rating agencies,
prioritization of debt service over upward distributions; continued reporting to the
Securities and Exchange Commission, compliance with the Sarbanes-Oxley Act, and
maintenance of Avista’s pension funding obligations.
Q. Please address Commitment 38, “Restrictions on Upward Dividends and 11
Distributions.” 12
A. This Commitment has been improved from the Joint Applicants’ original filing.
Through negotiation, the parties have agreed that Avista will be required to have an
“investment” grade rating from both Standard & Poor’s and Moody’s, rather than
only one of these entities, before issuing a dividend to Hydro One or Olympus
Equity. This change is consistent with the requirements made of PSE and the
Macquarie Group in PSE’s acquisition case.14
By requiring several agencies to make an “investment” grade assessment,
Avista’s customers can have stronger assurance that Avista is not paying dividends
upstream unless it has a strong balance sheet and wide credibility in the eyes of
investors. Requiring that more than one ratings agency must find that Avista is
14 See PSE-Macquarie Order at 29-30, ¶ 69.
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investment-grade would also be consistent with the requirements placed on PSE in
its merger/acquisition.
Absent meeting this condition, Avista can still make an upward distribution if
the ratio of Avista’s EBITDA to interest expense is greater than or equal to 3.0. This
requirement ensures that Avista has pre-tax earnings more than sufficient to meet the
company’s debt obligations.
However, in either of these two scenarios, the Company is required to
maintain an equity ratio of at least 44 percent.
Altogether, these restrictions ensure that Avista’s finances are not
jeopardized in order to satisfy parent organizations, and instead prioritize the use of
Avista’s cash flow to service debt before paying dividends. In its current status as a
publicly-traded company, Avista is not bound by such restrictions.
E. Ringfencing 14
15
Q. What is ringfencing? 16
A. The Commission has aptly described ringfencing as “a term of art in the world of
mergers and acquisitions” that “refers to financial and corporate structuring in a
transaction that results in a newly acquired company being isolated from the
upstream corporate structure of its new owners and, thus, insulated and protected
from any financial distress suffered at the higher levels in the organization.”15
15 PSE-Macquarie Order at 8, n. 11.
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Q. Please highlight some of the ringfencing commitments of particular interest to 1
Staff. 2
A. All parties have agreed to important commitments from the Joint Applicants that
hold Avista customers harmless from any business and financial risk exposures
associated with Hydro One, Olympus, and their affiliates. These commitments
provide important protections to Avista ratepayers if Hydro One, Olympus, or their
affiliates ever enter bankruptcy.
These commitments restrict the Company from acting as a lender to Hydro
One without the Commission’s formal approval (Commitments 50 and 51). The
parties have also agreed to commitments restricting the pledge of utility assets for the
benefit of any entity other than Avista (Commitment 46).
Importantly, Avista customers are protected from the cost of the debt Hydro
One issued to finance its purchase of Avista (Commitments 18, 25, and 35). Hydro
One, and not Avista customers, will bear the full risks of their investment in eastern
Washington’s largest investor-owned utility.
Commitments were also secured that require obtaining a non-consolidation
opinion to independently verify that the ringfencing commitments obtained in this
settlement are suitable to insulate Avista and its ratepayers (Commitment 44). The
Company is required to notify lenders of these commitments as well (Commitment
47). The suite of ringfencing commitments is fortified by a restriction on modifying
these commitments without receiving Commission approval.
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F. Managerial and Financial Fitness 1
Q. Is Hydro One financially and managerially fit to purchase Avista? 3
A. Yes. Hydro One has several decades of experience operating a large electric utility
over diverse topology in a highly variate climate with hot summers and bitterly cold
winters. As previously explained above, Hydro One is a financially-sound company
with investment-grade ratings from major credit ratings agencies.
Q. Will Avista’s experienced leadership team continue in their roles after the 9
Proposed Transaction is completed? 10
A. Yes. Hydro One has committed (Commitment 2) to retain Avista’s leadership as
Avista transitions into ownership under Hydro One. Three of Avista’s Board of
Directors will be individuals who are currently on Avista’s board (Commitment 3).
This also ensures a smooth transition and retains valuable institutional knowledge.
G. Other Interests 16
Q. What other commitments would Staff like to highlight? 18
A. Commitment 76 addresses the depreciable life of Colstrip Units 3 and 4. An array of
circumstances provided for a unique opportunity to more quickly recover
depreciation expense of these units in a manner that provides no increase in rates.
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Q. What confluence of factors provided the opportunity for addressing Colstrip? 1
A. On December 5, 2017, the Commission issued Order 08 in Dockets UE-170033 and
UG-170034, Puget Sound Energy’s most recent general rate case.16 Many parties to
the current proceeding were parties to those dockets. Order 08 approved a settlement
which, among other things, uses Production Tax Credit dollars to pay for costs
associated with Colstrip Units 1 and 2. Furthermore, that settlement established an
end-of-life date of December 31, 2027, for Colstrip Units 3 and 4.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was passed,
and was enacted on January 1, 2018. The reduction in the corporate tax rate from
35% to 21% resulted in an excess amount of deferred federal income taxes on
Avista’s books, to the tune of several millions of dollars.
Subsequently, on February 22, 2018, the Company filed a depreciation study
in Dockets UE-180167 and UG-180168. This depreciation study found a useful
economic life of Colstrip Units 3 and 4 to be 2034 and 2036, respectively.17
The confluence of these events provided an opportunity to address the
recovery of Colstrip 3 and 4 costs from customers, in a docket that included parties
interested in this matter. This proceeding has the right parties at the right time.
16 Wash. Utils. & Transp. Comm’n v. Puget Sound Energy, Dockets UE-170033 and UG-170034, Order 08 (Dec. 5, 2017) (Order 08). 17 In the Matter of the Petition of Avista Corporation, d/b/a Avista Utilities, For an Order Authorizing the
Company to Revise its Electric Book Depreciation Rates and Authorizing Deferred Accounting Treatment for the Difference in Depreciation Expense, Attachment C, p. III-10, Docket UE-180167; In the Matter of the Petition of Avista Corporation, d/b/a Avista Utilities, For an Order Authorizing the Company to Revise its Natural Gas Book Depreciation Rates and Authorizing Deferred Accounting Treatment for the Difference in Depreciation Expense, Attachment C, p. III-10, Docket UG-180168.
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TESTIMONY OF CHRISTOPHER S. HANCOCK Exh. CSH-1Tr
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Q. Of what relevance is Colstrip and excess deferred federal income tax to this 1
case? 2
A. A core consideration in this case is whether or not Hydro One’s purchase of Avista
provides a net benefit for Avista’s ratepayers. One area in which Hydro One’s
purchase of Avista, and the attending process, can provide a benefit to ratepayers is
by rectifying Colstrip-related generational inequities that may burden current and
future ratepayers, and mitigating the risks of an earlier-than-expected closure of
Units 3 and 4.
Q. What do you mean by Colstrip-related generational inequities? 10
A. Avista has recently filed a depreciation study that continues to indicate an economic
end-of-life for Colstrip Unit 3 at 2034, and Colstrip Unit 4 at 2036. However, coal-
fired power plants around the country are closing much sooner than anticipated by
utilities and their regulators. It is already the case that ratepayers in the near and
medium term will incur more than their fair share of costs; if utilities and regulators
had a crystal ball, and that ball said that 2035 was the end-of-life for Colstrip 3 and
4, past depreciation expenses related to Colstrip 3 and 4 would have been higher, and
future depreciation expenses related to these plants would be lower.
For example, not a single dollar for Asset Retirement Obligations, or AROs,
has ever been collected from ratepayers.18 In Avista’s recently-filed depreciation
18 Hancock, Exh. CSH-7, Avista Response to NWEC Data Request No. 18. An Asset Retirement Obligation is a liability associated with the future retirement of a long-lived capital asset.
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study, the Washington-allocated balance for AROs stands at $37.6 million, or over
37% of the depreciable balance.19
The Legislature also recently considered a bill, backed by Governor Inslee,
which would have implemented a carbon tax. While that bill narrowly failed to pass
the Legislature, Washington voters may approve a ballot initiative adopting a carbon
tax. Such a program is likely to make electricity generated from fossil fuel plants
more expensive, and thus likely to reduce the economic life of fossil fuel plants like
Colstrip 3 & 4. With a non-zero probability that such a policy may become law, it
would be wise to consider the impact of a carbon tax on the economic viability of
Colstrip 3 & 4 – and the accompanying ratemaking ramifications.
Staff believes that it is appropriate to exercise some caution in this area, and
to take advantage of a unique set of circumstances that can ameliorate the
generational inequities that have already occurred, and that may occur in the future.
Q. Does the Settlement adjust the depreciable life of Colstrip Units 3 and 4? 15
A. Yes. The Settlement establishes an economic end-of-life of December 31, 2027, for
Colstrip Units 3 and 4.
Q. Does the Settlement establish a closure date for Colstrip Units 3 and 4? 19
A. No. The parties agree that there is no agreement to shut down or cease operations at
Colstrip Units 3 and 4.
19 The total incremental change to the depreciable balance of Colstrip Units 3 and 4 is $42.7 million, of which approximately $37.6 million is AROs.
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Q. Other than addressing intergenerational equity concerns, what benefits are 1
there to adjusting the depreciable life of Colstrip Units 3 & 4 to the year 2027? 2
A. Doing so provides the following benefits:
Aligns Avista Colstrip 3 & 4 with PSE;
Removes barriers to early closure, if such a situation arises;
Addresses Colstrip 3 & 4 depreciable life, before Avista potentially enters
a three-year stayout period if the stayout is approved in the pending
Avista general rate case in Dockets UE-170485 and UG-170486.
Q. Why is this a good idea? 10
A. The Tax Cuts and Jobs Act, or TCJA, was recently enacted. Its most significant
change to law for our purposes is a reduction of the corporate tax rate, from 35% to
21%. However, under the 35% tax rate, Avista collected funds from ratepayers for
the purpose of paying taxes at a future date in the form of Deferred Federal Income
Taxes, or DFIT. Because these funds were collected for the purpose of paying
federal income taxes that the company now is no longer obligated to pay, it is
appropriate to return these funds to customers.
However, “ratepayers” is a constantly-changing group. In a perfect world, we
would identify the exact amount of excess taxes paid by every single customer prior
to the enactment of the TCJA, and return that amount to these individuals and
organizations. That is simply impossible. Typically, we would just return these funds
to “ratepayers” writ large – creating a generational inequity between previous
generations of ratepayers, and the ratepayers of today and tomorrow.
Staff_PR_14 Attachment A Page 26 of 33
TESTIMONY OF CHRISTOPHER S. HANCOCK Exh. CSH-1Tr Docket U-170970 Page 24
Revised 5/7/18
We are therefore faced with two intergenerational inequities that run in
opposing directions to one another. The intergenerational inequity posed by Colstrip
3 and 4 benefits previous ratepayers at the expense of the ratepayers of today and
tomorrow. The intergenerational inequity posed by the reduction in corporate tax rate
benefits the ratepayers of today and tomorrow at the expense of previous generations
of ratepayers.
This Settlement presents a unique opportunity to resolve these
intergenerational inequities, by assigning funds collected from previous generations
of ratepayers to cover costs that were not recovered from previous generations of
ratepayers.
Q. How does Commitment 76 accomplish this? 12
A. First, all funds available for immediate return to customers (approximately $16.710.4
million)20 will be put towards the balance of customer liabilities related to Colstrip 3
and 4. This produces an immediate reduction in Net Plant of $16.710.4 million.
Second, the Settlement establishes that the depreciation expense for these
assets will remain at the current level of approximately $4.53 million per year,
through 2027. The cumulative amount of Net Plant recovered through 2027 will be
approximately $45 million.
Third, the Settlement proposes that the remaining portion of customer
liabilities (approximately $52 58.5 million) related to Colstrip 3 and 4 are accounted
for
20 This consists of unprotected excess DFIT as well as protected excess DFIT that meets the Average Rate
Assumption Method provision and excess taxes collected since January 1, 2018. This consists of unprotected excess DFIT as of December 31, 2017.
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as a regulatory asset. In other words, the remaining plant balance of Colstrip 3 and 4
is split between a regulatory asset, and what will remain in Net Plant.
Under this commitment, Avista will receive a return of (that is, would
recover) the balance of the regulatory asset through amortization of the asset. The
company will also earn a return on the regulatory asset, as it would be included in
rate base. Thus, the Company is made whole.
A key element is the length of the amortization period. The Settlement calls
for the regulatory asset to be amortized in a manner than best matches the
amortization of the regulatory liability that is protected Excess DFIT.
Q. What is accomplished by amortizing the regulatory asset in this manner? 11
A. By matching the amortization schedule of the regulatory asset (which can be thought
of as the portion of Colstrip 3 & 4 costs under-recovered from previous generations
of customers) to the amortization schedule of the regulatory liability (which are
excess taxes paid by previous generations of customers), we will have matched a
stock and flow of funds from previous generations of customers to cover a stock and
flow of costs attributable to previous generations of customers.
As a result, we will have mitigated intergenerational inequities21 related to
Colstrip 3 and 4, particularly in the event that Colstrip 3 and 4 have a shorter
economic life than currently anticipated – all while maintaining the status quo for
ratepayers in terms of recovering depreciation expense.
21 Similar reasoning around intergenerational equity was used to justify the use of Production Tax Credits in the PSE general rate case. See, e.g., Order 08 at 40, ¶ 110.
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IV. THE STANDARD OF REVIEW FOR PROPERTY TRANSFERS AND 1
HOW THE SETTLEMENT MEETS THE STANDARD 2
A. Net Benefits 4
Q. What is the language of the “net benefits” standard? 6
A. This is found in RCW 80.12.020(1):
“The commission shall not approve any transaction under this section that would result in a person, directly or indirectly, acquiring a controlling interest
in a gas or electrical company without a finding that the transaction would
provide a net benefit to the customers of the company” (emphasis added).
Q. Are there specific criteria for determining whether a net benefit is provided to 14
customers of the company? 15
A. No. “Net benefits” are not further defined in statute or in rule.
Q. What differentiates this standard from the previous standard? 18
A. The previous standard was known as the “no harm” standard, and was developed
through Commission “case law.” The no harm standard required the Commission to
deny an application for transfer of property if the Commission found that it was “not
consistent with the public interest.” There was no mention in statute or rule of “net
benefit to customers.” A “no harm” standard required that ratepayers be, at worst,
indifferent to the transfer of property. In contrast, a “net benefits” standard requires
that the transfer of property leave ratepayers better off as a result.
Staff_PR_14 Attachment A Page 29 of 33
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Docket U-170970 Page 27
Q. Is the “net benefit” standard really just a repackaged “no harm” standard? 1
A. No. The Legislature took action to change the language of the law, which I
understand to mean that the intent was to change the practical effect of the law.
Furthermore, the Commission has distinguished between the “no harm”
standard and the “net benefits” standard itself, relatively recently. For example, in
the PSE-Macquarie Order, the Commission said of the “no harm” standard that was
applicable at the time: “To be ‘consistent with the public interest,’ a transaction need
not confer net benefits on customers or the public by making them better off than
they would be absent the transaction. It is sufficient if the transaction causes no
harm.”22 Clearly, the Commission has found these to be distinctly different
standards.
12
Q. Has the Commission considered the new “net benefits” standard in any other 13
proceeding?
A. Yes, in a recent filing involving the corporate reorganization of Northwest Natural
into a holding company structure. In its order approving the reorganization, the
Commission stated, “our decision today does not provide specific guidance for future
transactions under RCW 80.12.020,” noting that its finding of net benefits “is based
on the particular facts and circumstances of NW Natural’s reorganization request and
the negotiated commitments.”23 I glean from the Commission’s decision that it is
22 PSE-Macquarie Order at 48, ¶ 115.
23 In the Matter of Northwest Natural Gas Company’s Application for Approval of Corporate Reorganization to Create a Holding Company, Docket UG-170094, Order 01, 3, ¶ 14 (Dec. 28, 2017).
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important to identify the benefits of a transaction and to seek protections against
harms based on the individual context of each proceeding.
Q. Are benefits limited to those than can be dollar-denominated? 4
A. No. Benefits can be tangible or intangible; they can be financial or non-financial.
Although it may be tempting to account for the net benefits of a transaction in
currency, this measure only tells part of the story.
Q. Are all previously approved transfers of property, which passed a “no harm” 9
standard, necessarily short of the “net benefits” standard? 10
A. No. It is quite possible that previous mergers and acquisitions, approved under the
“no harm” standard, would have passed a “net benefits” standard as well. For
example, the Commission noted in the PSE-Macquarie Order that “there is a
persuasive argument that PSE and its customers will be better off under the
transaction than under the status quo, but we need not decide that issue under the ‘no
harm’ standard.”24
Q. Does the Settlement provide a net benefit to Avista’s customers? 18
A. Yes. Staff and the other parties have secured important commitments from the Joint
Applicants on all of the matters previously identified as concerns for Staff in this
matter. These include protections from potential harms as well as identifiable
benefits. Collectively, the Settlement produces an improvement from the status quo
24 PSE-Macquarie Order at 49, n. 70.
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for Avista’s customers. The unanimous support of all parties to this proceeding
strongly indicates that the Settlement provides net benefits to customers.
Q. Has the Commission made any other relevant comments on the ‘net benefits’ 4
standard? 5
A. Yes. In the PSE-Macquarie Order, the Commission also noted that “a ‘net benefit’
standard effectively imposes a burden on the shareholders’ right to sell by making
any potential buyer pay a premium to non-owners. This imposes costs in addition to
those necessary to protect the public interest from harm.”25
Q. Does the Settlement impose costs on Hydro One that are both reasonable and 11
necessary to meet the standard? 12
A. In Staff’s view, yes.
B. The Public Interest 15
Q. Is approving the Proposed Transaction in the public interest? 17
A. Yes, but only with the protections and benefits of the Settlement. The Settlement
renders the Proposed Transaction in the public interest not only because it provides
net benefits to Avista’s customers, but also because it benefits a community that
extends beyond ratepayers. Prime examples are the commitments that support energy
efficiency, conservation, and renewable energy (Commitments 52-63). These
25 PSE-Macquarie Order at 50, ¶ 118.
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commitments are in the public interest because they provide for a greener, cleaner
means of meeting customer energy demand, which ultimately benefits everyone in
the region. Further examples are found in the “community contributions”
commitments in Commitment 11 and Commitment 64; and in Commitment 77
(“Montana Community Transition Fund”).
Together, these commitments provide for millions of dollars of one-time
contributions and ongoing community support.
V. CONCLUSION 9
Q. Do you recommend that the Commission approve the Settlement? 11
A. Yes. I recommend that the Commission approve the Settlement, thereby authorizing
the Proposed Transaction between Avista and Hydro One. The Settlement is
supported by all parties to this proceeding, representing the interests of industrial
customers, environmentalists, laborers, residential and small business customers,
Commission Staff, and low income customers. The commitments in the Settlement
provide substantial benefits for Washington ratepayers. These benefits, as well as
protections secured by the commitments, render the Proposed Transaction in the
public interest.
20
Q. Does this conclude your testimony? 21
A. Yes.
Staff_PR_14 Attachment A Page 33 of 33