20180620Joint Comments.pdf

Avista Corp.
141 1 East Mission P.O. Box 3727
Spokane. Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
ldaho Public Utilities Commission
Oflice ol the Secretary
RECEIVED
JUN 2 0 20t8
Via Electronic Mail
Boise,ldaho
June 20,2018
Commission Secretary
Idaho Public Utilities Commission
472W. Washington St.
Boise,lD 83702
RE: Case Nos. AVU-E-17-09 and AVU-G-17-05
Enclosed for filing with the Commission are an original and 7 copies of the Hydro One and
Avista Comments in Support of the Stipulation and Settlement in Case Nos. AVU-E-17-09 and
AVU-G-17-0s.
Please direct any questions related to the transmittal of this filing to Pat Ehrbar at 509-495-8620.
Sincerely
David Meyer
Vice President, Chief Counsel for Regulatory & Govemmental Affairs
Enclosures
AHrtsra
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that I have this 20th day of June, 2018, served the foregoing letter
and Joint Hydro One and Avista Comments in Support of Stipulation and Settlement in
the Merger Case Nos. AVU-E-17-09/AVU-G-17-05, upon the following parties, by
mailing a copy thereof, properly addressed with postage prepaid to:
Diane Hanian, Secretary
ldaho Public Utilities Commission
472 W. Washington Street
Boise, lD 83720-5983
diane.hanian@puc. idaho.qov
Brad M. Purdy
Attorney at Law
2019 N 17th Street
Boise, lD 83702
[e-mail]
Brandon Karpen
Deputy Attorneys General
ldaho Public Utilities Commission
472W. Washington
Boise, lD 83720-0A74
brandon. karpen@puc. idaho. qov
Peter J. Richardson
Richardson Adams PLLC
515 N. 27th Street
Boise, lD 83702
peter@richardsonadams. com
Danielle Franco-Malone
Schwerin Campbell Barnard
lglitzin & Lavitt LLP
18 W. Mercer St., Suite 400
Seattle, WA 98119
[e-mail]
Ronald L. Williams
Williams Bradbury, P.C.
P. O. Box 388
802 W. Bannock St., Suite 900
Boise, lD 83702
ron@wil I iamsbrad bury. com
Larry Crowley
The Energy Strategies lnstitute, lnc.
5549 S. Cliffsedge Ave
Boise, lD 83716
[e-mail]
Ben Otto
ldaho Conservation League
710 N. 6th St.
Boise, lD 83702
botto@ idahoconservation. oro
Dr. Don Reading
6070 Hill Road
Boise, lD 83703
dreadino@m indsprino. com
Dean Miller
3620 E Warm Springs Ave.
Boise, lD 83716
Paul Kimball
Sr. Regulatory Analyst
>
David J. Meyer, Esq
Vice President and Chief Counsel of
Regulatory and Governmental Affairs
Avista Corporation
1411 E. Mission Avenue
P.O. Box 3727
Spokane, Washington 99220
Phone: [phone], Fax: [phone]
IN THE MATTER OF THE JOINT
APPLICATION OF HYDRO ONE
LIMITED AND AVISTA CORPORATION
FOR APPROVAL OF MERGER
AGREEMENT
REC E IVED
zfifi Jtjtt 20 PH lr: 58
Elizabeth Thomas, Partner
Kari Vander Stoep, Par-tner , ,,',.,i!' lii3i,JK&L Gates LLP
On Behalf of Hydro One Limited
Olympus Equity LLC
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
Iiz.thomas@kl gates.com
kari. vanderstoep@klgates. com
)
)
)
)
)
)
)
CASE NO. AW-E-17-09
AW-G-17-0s
AVISTA AND IIYDRO ONE JOINT
COMMENTS IN SUPPORT OF
STIPULATION AND SETTLEMENT
I Avista Corporation and Hydro One Limited comment as follows on the Settlement
2 Stipulation and Agreement ("Stipulation") filed in this Case on April 13, 2018. The Stipulation
3 was entered into by and among Hydro One Limited ("Hydro One"), acting through its indirect,
4 wholly-owned subsidiary Olympus Equity LLC, and Avista Corporation ("Avista") (sometimes
5 hereafter jointly referred to as "Joint Applicants" or the "Companies"), the Staff of the Idaho Public
6 Utilities Commission ("Staff'), ClearwaterPaper Corporation ("Clearwater"), Idaho Forest Group,
7 LLC ("Idaho Forest Group"), Idaho Conservation League ("ICL"), the Community Action
8 Partnership Association of Idaho ("CAPAI") and the Washington and Northern Idaho District
9 Council of Laborers ("WNIDCL"). These entities are collectively referred to as the "Parties," and
l0 represent all of the parties in this consolidated Case. The Joint Applicants urge the Idaho Public
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page I
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
I Utilities Commission ("IPUC" or the "Commission") to approve their proposed merger (the
2 "Proposed Transaction") upon the terms set forth in the Stipulation.
J
4 TABLE OF CONTENTS
5 I. BACKGROUND .................2
II. APPLICABLE LAW AND LEGAL STANDARD....5
RATIONALE FOR TRANSACTION
STIPULATION AND KEY COMMITMENTS.t0
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SPECIFIC ISSUES RAISED DURING PUBLIC COMMENT HEARINGS ...........I5
CoNCLUSTON ..................29
12 I. BACKGROUND
13 On July 19,2017, Avista and Hydro One announced that they had entered into a merger
14 agreement (the "Merger Agreement"). On September 14,2017, the Joint Applicants filed
l5 applications for approval of the merger with the Commission and in the four other states where
16 Avista operates.
17 Avista is an investor-owned utility providing electric generation, transmission, and
18 distribution services to approximately 378,000 retail customers in Washington, Idaho and
19 Montana, and the distribution of natural gas to approximately 342,000 retail customers in
20 Washington, Idaho and Oregon. Alaska Electric Light & Power Company (*AEL&P"), a wholly-
21 owned indirect subsidiary of Avista, also provides electric generation, transmission and
22 distribution services to approximately 17,000 retail customers in the City and Borough of Juneau,
23 Alaska.
AVISTA AND HYDRO ONE COMMENTS TN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AW-G-17-05 Page 2
I Hydro One is an investor-owned utility incorporated under the laws of Ontario. Hydro
2 One operates a large electric transmission and distribution system in Ontario. Although Hydro One
3 recently became a publicly traded company, Hydro One is not a new company. It has a track
4 record of over 100 years as a utility providing high-quality service to its customers. Hydro One's
5 workforce and senior managers have decades of experience with the industry and extensive
6 experience leading and implementing successful mergers and acquisitions.
7 Although Hydro One's largest shareholder is the Province of Ontario, the Province does
8 not hold or exercise any managerial oversight over Hydro One. For this reason and also due to the
9 independence of the Avista board described below, the Province will not hold or exercise any
l0 managerial oversight overAvista. Of Hydro One's l4 directors, all are independent ofthe Province
l l and, with the exception of the President and CEO, all of Hydro One's directors are independent of
12 Hydro One within the meaning of Canadian securities laws.
13 The Proposed Transaction has been structured to ensure that Avista's customers will
14 continue to receive the high-quality customer service they have come to know and appreciate from
15 Avista. Post-merger, Avista will be a separate indirect subsidiary of Hydro One, with its own
16 management and its own board of directors, giving Avista a similar look and feel to customers that
17 it has today. Over time, due to the similarities between Avista and Hydro One, the Proposed
l8 Transaction will provide opportunities for increased innovation, research and development, and
19 efficiencies by extending the use of technology, best practices, and business processes over a
20 broader customer base and a broader set of infrastructure between the two companies. These
21 benefits will not only be viewed favorably by customers, but also by debt holders and rating
22 agencies. With the agreed-upon commitments described below, the Proposed Transaction clearly
23 results in net benefits to Avista's customers and is in the public interest.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 3
1 All Parties are signatories to the Stipulation. As shown above, the Parties represent a wide
2 range of interests. These constituencies include residential (including low-income constituents),
3 commercial, and industrial customers.
4 In accordance with the procedural schedule adopted at the prehearing conference, all
5 Parties attended the first scheduled settlement conference held in Boise, Idaho, on April 4 2018.
6 Based on discussions at this settlement conference and related communications, the Parties have
7 reached an agreement on commitments attached as Appendix A to the Stipulation (hereinafter
8 "Stipulated Commitments" and individually, "Stipulated Commitment") that provide a basis upon
9 which the Parties recommend Commission approval of the Proposed Transaction in ldaho.
l0 All of the Parties fully pamicipated in the settlement discussions, and all are signatories to
1l the Stipulation. The Parties, representing all who have intervened or appeared in this Case, agree
12 that this Stipulation is in the public interest, provides "net benefits" to customers, and should be
13 accepted by the Commission as a full resolution of the issues in this Case.
14 The Joint Applicants supported their merger application before the Commission ("Joint
15 Application") with 7 witnesses and 30 exhibits containing 748 pages of documentation. The
16 Parties have engaged in extensive discovery and have submitted numerous data requests, exploring
17 issues criticalto them regarding the Proposed Transaction. The Parties have sufficiently explored
18 areas of concern, are well versed in the issues, and entered into meaningful settlement discussions.
19 As noted in the Stipulation, the Parties agree that the Stipulation represents a compromise
20 in the positions of the Parties, and that the Stipulation is in the public interest. The Parties agree
21 further that the Stipulation meets the requirements for Commission approval under relevant Idaho
22 Code. As with any settlement agreement, no Party shall be deemed to agree that any provision of
23 the Stipulation is appropriate for resolving issues in any other proceeding, except those
24 proceedings involving enforcement or implementation ofthe Stipulation terms. The Parties agreed
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 4
I to support the Stipulation and recommend approval ofthe Proposed Transaction in this proceeding,
2 subject to the agreed-upon Stipulated Commitments.
3 The Proposed Transaction received approval from Avista shareholders on November 21,
4 2017. The Joint Applicants received antitrust clearance on April 5,2018 after the expiration of
5 the waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
6 amended and consent to close their merger from the Federal Communications Commission on
7 May 4,2018. The Committee on Foreign Investment in the United States completed its review of
8 the Proposed Transaction on May 18,2018, and has concluded that there are no unresolved
9 national security concerns with respect to the Proposed Transaction. More recently, the Proposed
l0 Transaction also received approval with conditions from the Regulatory Commission of Alaska on
1 I June 4, 2018 and the Montana Public Service Commission voted in favour of the merger on June
12 12, 2018. Applications for regulatory approval of the transaction are still pending with utility
l3 commissions in Washington and Oregon, however all-party settlements have been reached in
14 Washington and Oregon. Hydro One and Avista continue to anticipate closing the Proposed
l5 Transaction in the second half of 2018.
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17 II. APPLICABLE LAW AND LEGAL STANDARI)
l8 The Joint Application was filed pursuant to Idaho Code $61-328, which requires
authorization by order of the Commission before an electric public utility owning, controlling or
operating any property located in Idaho used in the generation, transmission, distribution or supply
of electric power or energy to the public may merge, sell, lease, assign or transfer, directly or
indirectly, such property, or the operation, management or control thereof.
Accordingly, the Commission has jurisdiction over the Proposed Transaction pursuant to
Idaho Code $61-328. This section prohibits Hydro One from acquiring Avista without the written
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AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 5
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1 authorization of the Commission. Before authorizing such a transaction, the Commission must
2 findthat: (l) the transaction is consistent with the public interest; (2)the transaction will not cause
3 the cost of, or rates for, supplying electrical service to increase; and (3) that Hydro One has the
4 bona fide intent and financial ability to operate and maintain Avista's operations in Idaho. Idaho
5 Code $61-328.
6 In the Stipulation, as explained below, the Parties have proposed immediate financial net
7 benefits for Avista's customers, as well as presenting the opportunity for longer-term benefits for
8 customers from efficiencies gained through best practices, technology and innovation. It is
9 consistent with the public interest and the Proposed Transaction will not cause the cost oC or rate
l0 for, supplying service to increase. Hydro One has the intent and ability to assure that Avista's
I I operations in Idaho will be maintained in the best interest of customers.
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13 III. RATIONALE FOR TRANSACTION
14 Avista's decision to merge with Hydro One was driven by the unique partnership that is
l5 possible with Hydro One. The merger with Hydro One will allow Avista and its customers to
16 benefit from being part of a larger organization (the benefits of scale), while at the same time
17 preserving local controlof Avista and the retention of Avista's employees and management team,
18 as well as its culture and its way of doing business.
19 With regard to scale, the number of investor-owned electric and/or natural gas utilities in
20 North America has decreased significantly over the years through consolidation. When comparing
2l the size of investor-owned utilities, Avista is one of the smallest remaining in North America.l
22 The merger of Avista and Hydro One will place the combined company toward the middle of the
'As measured by equity value.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT- AVU-E-17-09 & AVU-G-17-05 Page 6
1 range of investor-owned utilities, in terms of size. Through consolidation, larger utilities have the
2 opportunity to spread costs, especially the costs of new technology, over a broader customer base
3 and a broader set of infrastructure which inures to the benefit of customers.
4 Hydro One has more than 1.3 million electric distribution customers, and Avista has
5 approximately 378,000 electric customers and approximately 342,000 natural gas customers. This
6 combination will provide opportunities for efficiencies in the long-term through the sharing of best
7 practices, technology and innovation. The merger will provide benefits to Avista's customers that
8 otherwise would not occur.
9 These benefits of scale will not necessarily occur in the near-term following the closing of
l0 the transaction, but are expected to occur over the long-term. After all approvals are received and
I I the Companies merge, the Companies will work together to identify, evaluate and execute on
12 opportunities to further reduce costs through, among other things, the sharing of technology, best
13 practices, and business processes. The benefits from these cost savings will be flowed through to
14 customers in future general rate cases.
15 Customers also benefit from other Stipulated Commitments insuring financial integrity, as
16 well as "ring-fencing". Avista will be subject to tighter controls and restrictions than currently
17 exist, such as maintaining a specified equity component of the capital structure as well as
18 restrictions on dividend payments. In addition, the various ring-fencing provisions further insulate
l9 Avista from external financial risks. Avista and Hydro One believe that customers are receiving a
20 benefit in this regard. While it may be argued that these Stipulated Commitments merely satisfy
21 a'ono harm" standard, some of them provide customers with protections that do not presently exist
22 (e.g., "financial integrity"), thereby providing benefits to customers.
23 Hydro One's interest in the Proposed Transaction was driven by its desire to diversify its
24 geographic base, its regulatory jurisdictions and the types of service it provides. With Avista, it
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 7
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I found a merger partner with a similar customer base and a similar culture that could help Hydro
2 One to achieve those goals. Together, both Companies expect to be stronger.
3 At the close of the Proposed Transaction, Avista will continue to operate as a standalone
4 utility in Alaska, Idaho, Montana, Oregon, and Washington. Hydro One will serve as Avista's
5 indirect parent company through the following post-close corporate structure:
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18 Following the closing of the Proposed Transaction, the customers, employees and
19 communities Avista serves will see little or no change in Avista's operations. Avista will maintain
20 its existing corporate headquarters in Spokane, Washington, and will continue to operate as a
2l standalone utility in Washington, Oregon, Idaho, Montana and (through AEL&P) Alaska. It will
22 maintain its other office locations throughout its service areas, continue to operate under the same
23 Avista name, and seek to retain its existing employees and management team. All of these elements
24 together with other provisions embedded within the Merger Agreement and captured by the
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT- AVU-E-17-09 & AVU-G-17-05 Page 8
l0
Hydro One lnc.2486267
Ontario lnc.
Olympus Holding Corp.
(Delaware
Corporation)
Hydro One Telecom
lnc,
Hydro One Networks
lnc.
Hydro One Remote
Communities lnc.
Olympus Equity LLC
(Delaware Limited
Uability Company)
Avista Corporation
(Washington
Corporation)
Avista Corporation
Subsidiaries
Hydro One Limited
(Ontario Corporation)
Can Sub
(Ontario Corporation)
I Stipulation are designed to ensure that Avista's culture and its way of doing business will continue
2 for the long-term. Avista will continue to have a local Board of Directors consisting primarily of
3 either board members chosen by Avista, and/or members who reside in the Pacific Northwest. In
4 addition, a majority of board members will now be independent under the standards established
5 by the New York Stock Exchange (NYSE) Listed Company Manual.
6 Avista and Hydro One believe this preservation of Avista's name, its headquarters, its
7 culture and its way of doing business, among other things, is important to Avista's customers, in
8 that customers can continue to expect and experience reliable service and a high level of customer
9 satisfaction. In addition, customers will see immediate financial benefits in the form of proposed
l0 retail rate credits and other contributions beginning at the close of the Proposed Transaction. As
I I described elsewhere, the Stipulation substantially increased those Rate Credits from what was
12 proposed in the Joint Application and provides additional shareholder funding of a number of
13 customer-relatedinitiatives.
14 Furthermore, over time the merger will provide increased opportunities for innovation,
l5 research and development, and efficiencies by extending the use of technology, best practices, and
16 business processes over a broader customer base and a broader set of infrastructure between the
17 two companies. Through this unique arrangement with Hydro One, Avista's customers can receive
1 8 the benefits of scale that come with joining a larger organization while also avoiding the risk of a
19 potential subsequent acquisition by another party that may not share Avista's culture and values.
20 These immediate and longer-term benefits to Avista's customers are benefits that will otherwise
2l not occur absent the merger.
22 Following completion of the merger, the communities Avista serves will see increased
23 charitable contributions and a continuation of the strong support Avista provides in economic
24 development and innovation. Finally, Avista and Hydro One employees will experience career
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 9
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development, professional employment opportunities and personal growth as the two Companies
pursue efficiencies and innovation through the use of technology, best practices and business
processes.
ry. STIPULATION AND KEY COMMITMENTS
Exhibit A to the Stipulation contains the complete list of Stipulated Commitments that the
Joint Applicants collectively and individually agree to make in exchange for the support of the
Parties in this proceeding. The Stipulated Commitments are comprised of general commitments
applicable to all the states in which Avista's service territory extends and Idaho-specific
commitments that apply only to the activities and operations of Avista within Idaho.
The Stipulation includes a robust set of merger commitments made by Hydro One and
Avista to ensure the Proposed Transaction is in the public interest and provides net benefits to
Avista's customers in Idaho. The Stipulated Commitments address Avista's post-closing
operations, ratemaking and rate credits, corporate structure, governance matters, financial stability
and integrity, and ring-fencing. The Stipulated Commitments provide security to Avista's
customers in ldaho by, among other things, offering substantial financial commitments to those
customers through rate credits and low-income programs. Finally and importantly, the Stipulated
Commitments confirm the Commission's ongoing regulatory authority over Avista and its utility
operations, including the maintenance of and access to books and records, allocation of costs,
ratemaking, and enforcement of the Stipulated Commitments.
The Stipulated Commitments are substantially more robust than the merger commitments
included in the Joint Application. Although Hydro One and Avista included merger commitments
in their Joint Application, the Parties collectively agreed during settlement negotiations upon
various changes and additions to those commitments. The result is a group of comprehensive and
substantial commitments that provide net benefits to Avista's customers and result in a transaction
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU -E -17 -09 & AVU-G- I 7-05 Page 1 0
1 that is in the public interest. Hydro One and/or Avista have agreed to provide in Idaho a total of
2 $21.1 million in funding over time, none of which will be recoverable from customers.
3 The total level of financial commitments funded by Hydro One and Avista (excluding
4 charitable contributions) in Idaho greatly exceed what was originally proposed in the Joint
5 Application. Approximately $8.9 million (ldaho share) of such commitments were made in the
6 Joint Application. That number has more than doubled to $21.1 million, as a result of the
7 Stipulation, representing an increase of approximately $12.2 million over what was originally
8 proposed. Hydro One and Avista have committed to $5.3 million in funding over a l0-year period,
9 none of which will be recoverable from customers, to fund energy efficiency, weatherization,
10 conservation, and low-income assistance programs. As noted in the table below, if this total
11 funding of $21.1 million in Idaho were to be applied to other jurisdictions on a "most favored
12 nations" basis (see Stipulated Commitment 73), the quantifiable benefits to customers would
13 approximate $78.6 million over the five to ten year period (depending on the specific commitment)
14 after the merger closes.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT- AVU-E-17-09 & AVU-G-17-05 Page 11
Benefits Funded by Hydro One and Avista System *Idaho
Rate Credit $ 55,067,259 $ 15,811,050
A Total Rate Credit 55,067,259 15,81 1,050
Colstrip $ 4.500.000 $
B Community Transition Fund (SH Portion)4,s00,000
Low-Income, Weatherization, Miscellaneous
(total of lines C - J)s 19,049,348 $ 5,308,847
C Professional Home Energy Audits 600,000
D Weatherization 5,275,000
E Manufactured Home Replacement 2,000,000
F On-Bill Repayment Software 65,500
G Renewables (Low-lncome)5,000,000
H
General Fund for Energy Efficiency, Weatherization,
Conservation, and Low-lncome Assistance 5,308,847 5,309,947
I Low-lncome Rate Assistance Program 500,000
J SENDOUT Seats 300,000
Total $ 78,616,607 $ 21,119,897I i' This assumes "most favored nations" (MFN) treatment across all jurisdictions.
2 Avista and Hydro One are also making financial commitments to support charitable and
3 community needs. This is something that Avista is particularly passionate about. Avista's budget
4 will be almost doubled for purposes of charitable giving, with an additional $2 million annual
5 contribution to Avista Foundation - the charitable giving arm of Avista (see Stipulated
6 Commitment I l). On top of that, an additional one-time contribution of $7 million will be made
7 to the Avista Foundation at closing. The Avista Foundation provides funding to non-profit
8 organizations throughout Avista's service territory, addressing the needs of citizens served by
9 Avista. When assessing whether the Proposed Transaction serves the public interest, this
10 additional funding should be recognized. Moreover, the people ultimately benefiting from this
11 funding are largely customers of Avista. Our customers may use services made possible by this
12 funding. Absent a merger, less funding would be available.2
2 As always, any charitable contributions are "below the line" costs and are not recovered from customers.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 12
1 Specific Stipulated Commitments. The Stipulated Commitments fall into several
2 categories.
Stipulated Commitments I - 15 involve reservations of authority to the Avista board. These
commitments confirm that Avista will retain control over operation of the utility through
the retention of executive management, a stand-alone board of directors, and continued
authority over other utility activities. They also provide for increased annual charitable
contributions and budget.
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a Stipulated Commitments l6-19 relate to customer rates. They provide for Rate Credits
totaling approximately $15.8 million to its Idaho customers in the first five (5) years after
the merger closes. These commitments also flow through certain merger savings to
customers, limit recovery of travel costs and prohibit rate recovery of transaction costs.
Stipulated Commitments 20-33 address regulatory matters. They fully preserve the
Commission's jurisdiction over Avista; ensure proper allocation of costs; ensure that
Avista's cost of capital will not increase due to the Proposed Transaction; and require
Avista to retain a common equity ratio of at least 44Yo.
Stipulated Commitments 34-41 protect and enhance Avista's financial integrity.
o To protect financial integrity, Avista will maintain separate debt to support its
utility operations, will continue to be rated by at least one credit rating agency, will
notifu the Commission in the event of a ratings downgrade to non-investment grade
status, will maintain a sound pension funding policy and will comply with
applicable SEC reporting requirements and requirements of the Sarbanes-Oxley
Act. (Stipulated Commitments 35,36,37,39, 40, & 41.)
o To enhance Avista's financial integrity, Hydro One will provide equity support
designed to allow Avista access to debt financing on reasonable terms. Moreover,
Avista is prohibited from making upwards distributions of dividends under certain
circumstances that could be indicators of financial weakness. (Stipulated
Commitments 34 & 38.)
Stipulated Commitments 42-51ring-fence Avista, insulating it from any potential financial
weakness at the parent level.
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o Avista's entry into voluntary bankruptcy or the inclusion of Avista in bankruptcy
proceedings would require the consent of a two-thirds majority of all of its
directors, including the affirmative vote of at least one of its Independent Directors.
(Stipulated Commitment 43.) Under Stipulated Commitment No. 42, Avista's entry
into voluntary bankruptcy would additionally require the affirmative vote of the
holder of the Golden Share. Avista's immediate parent will be a debt-free and
bankruptcy-remote special purpose entity. (Stipulated Commitment 45.)
o Restrictions are imposed on pledges of Avista's utility assets and on inter-company
debt and lending. (Stipulated Commitments 46, 50 & 5l.)
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 13
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o Hydro One will hold Avista harmless for Hydro One's business risks and will notify
lenders of the ring-fencing requirements. (Stipulated Commitment 47.)
o Avista and Hydro One will provide the Commission with a non-consolidation
opinion to confirm that with these ring-fencing measures, a bankruptcy court would
not order the substantive consolidation of the assets and liabilities of Avista with
its parent companies. (Stipulated Commitment 44.)
Stipulated Commitments 52-55 address resource planning. These commitments confirm
Avista's continued offering of renewable power programs, its commitment to sound
resource planning policies and practices, its evaluation of the Energy Imbalance Market,
and its initiation of a stakeholder process to explore opportunities for transport
electrification.
Stipulated Commitments 56 and 57 address environmental matters. These commitments
confirm Avista's continued participation in greenhouse gas and carbon initiatives and
compliance with applicable greenhouse gas reporting requirements.
Stipulated Commitments 58-65 provide funding and other forms of support for a number
of initiatives. These include:
o Approximately $5.3 million in funding over a 10-year period for energy efficiency,
weatherization, conservation, and low-income assistance programs under the
direction of a newly-formed stakeholder committee. (Stipulated Commitment 58.)
o Support for Clearwater and Idaho Forest Group on certain demand-side
management programs. (Stipulated Commitments 59 & 60.)
o A $7 million one-time contribution to Avista's charitable foundation. (Stipulated
Commitment 61.)
o 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-income
programs. (Stipulated Commitments 62 & 64.)
o Avista's continued offering of the fee free payment program. (Stipulated
Commitment 63.)
o Avista's outreach to tribal communities. (Stipulated Commitment 65.)
a Stipulated Commitments 66-73 address miscellaneous issues. These include:
o Confirming that Hydro One's funding commitments are not contingent and are not
rate-recoverable. (Stipu lated Comm itment 66.)
o Processes for review of Avista's gas service rules and its metering policies and
practices. (Stipulated Commitments 67 & 68.)
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
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o A process through which Hydro One and Avista will support, a December 31,2027
end-of-life for depreciation purposes of Avista's l5%o ownership interest in Colstrip
Units 3 and 4. (Stipulated Commitment 69.)
o Funding for a Colstrip community transition fund. The Stipulation required $3
million for this purpose. Through a proposal to the Montana Public Service
Commission, the amount has subsequently been increased to $4.5 million.
(Stipulated Commitment 70.)
o Avista's participation in regional Colstrip transmission planning efforts.
(Stipulated Commitment 7 I .)
o Avista's commitment to pay fair and competitive wages, to principles of fairness in
bidding and contracting work, and to employ highly skilled and trained workers.
(Stipulated Commitment 7 2.)
o A "Most Favored Nations" or "MFN" process as described below. (Stipulated
CommitmentT3.)
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l5 In addition to benefits under specific Stipulated Commitments, Avista's Idaho customers
16 can expect benefits as a result of the financial and business stability associated with being owned
17 by Ontario's largest regulated transmission and distribution company. Avista's customers will
18 benefit from the backing of another, larger utility with a strong balance sheet, a credit rating higher
19 than Avista's, and a customer base somewhat similar to Avista's.
20
21 V. SPECIFIC ISSUES RAISED DURING PUBLIC COMMENT HEARINGST
22 Foreisn Ownership and Control / Impact of Canadian Politics - During the public hearings
23 held in Sandpoint and Coeur d'Alene, members of the public expressed concern regarding the fact
24 that the Province of Ontario is Hydro One's largest shareholder. On June 14,2018, the Oregon
25 Commission issued a Bench Request requiring Hydro One to file a report on the following issues:
26 (1) implications of the recent Ontario election for (a) the future management and plans of Hydro
27 One, and (b) Hydro One's acquisition of Avista; (2) a plan for keeping the Commission informed
3 Public comment hearings were held in Moscow, Idaho on June 72,201 8; in Sandpoint, Idaho on June I 3, 201 8; and
in Coeur d Alene, Idaho on June 14,2018.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT-AVU-E-17-09 & AVU-G-17-05 Page 15
I on a timely basis as to new developments; and (3) what further measures might be necessary to
2 fully develop the record if material changes are made in Hydro One's management or Board of
3 Directors ("Board"). Hydro One has prepared a detailed report in response to that Bench Request,
4 which provides a through explanation of these issues. A copy is attached at Exhibit A to these
5 comments.
6 Financial / Operating Issues at Hydro One Will Not Impact Avista - During the public
7 hearings held in Sandpoint and Coeur d'Alene, questions were raised regarding whether financial
8 or operational changes at Hydro One will impact Avista and its service to customers. This issue
9 was a central theme during the settlement negotiations involving all the Parties in this Case. The
10 Parties developed Stipulated Commitments that ensure Avista will remain a financially healthy,
I I standalone utility after the merger regardless of any negative financial or operational changes that
12 could occur at Hydro One, whether the result of the Ontario election or some other event.
13 The Province could trigger the provisions in Article 4.7 of the Governance Agreement to
14 replace Hydro One's Board or the Province's new leadership could introduce legislation for the
l5 purpose of dismissing Hydro One's CEO ormembers of the Board. These are just possibilities,
16 but even if they were to come to pass, Hydro One, Avista, and the other Parties in this Case have
17 included governance and financial ring-fencing in the Stipulation that will protect Avista and its
l8 customers and bolster the protections already provided by the Governance Agreement:
19 First, as established in the Stipulation filed with this Commission on June 14,2018, Avista
20 will have a nine-member board separate from Hydro One that will govern Avista's management
2l and day-to-day operations, as set forth in Stipulated Commitment 1. Hydro One (not the Province)
22 will select five of Avista's directors. Three of these five directors must be independent under
23 NYSE rules. Further, those three directors must be residents of the Pacific Northwest. As a result,
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT- AVU-E-17-09 & AVU-G-17-05 Page 16
1 the Province will not be able to exercise any control over Avista through selection of Avista's
2 board.
3 Second, Olympus Equity LLC's three-member board must include one independent
4 director. See Idaho Stipulated Commitment 43.
5 Third, Avista's executive management will remain in place and must be selected by
6 Avista's board -- not Hydro One. See Idaho Stipulated Commitment 2.
7 Fourth, generally, Avista's employees will be retained. See Idaho Stipulated Commitments
8 2,9,70.
9 Fifth, as part ofthe Stipulation, Hydro One is required to provide Avista with enough equity
l0 so that Avista can access debt on reasonable terms. See Idaho Stipulated Commitments26,34.
11 Therefore, the Province cannot deprive Avista of its capital and assets for the benefit of the
l2 Province.
13 Sixth, as part of the Stipulation, Avista will continue to have its own credit ratings. Hydro
14 One is required to provide Avista with sufficient equity to ensure that Avista's credit ratings remain
15 investment grade. See Idaho Stipulated Commitments 36, 37. Therefore, again, the Province
16 cannot deprive Avista of its capital and assets for the benefit of the Province.
17 Seventh, as part of the Stipulation, Avista will be prohibited from issuing dividends if
l8 certain financial metrics relating to the equity floor, credit ratings and debt coverage are not met.
19 Basically, this operates to keep retained earnings at the Avista level where they will improve
20 Avista's financial strength. See Idaho Stipulated Commitment 38. This too prevents the Province
2l from depriving Avista of its capital and assets for the benefit of the Province.
22 Eighth, as part of the Stipulation, several of the Commitments protect Avista from being
23 drawn into bankruptcy proceedings that are not in the best interest of Avista and its customers.
24 Avista will issue a single share of preferred stock referred to as the Golden Share to an independent
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT- AVU-E-17-09 & AVU-G-17-05 Page 17
I third party. The vote of this share will be required to place Avista into voluntary bankruptcy. See
2 ldaho Stipulated Commitment 42. Further, Avista's entry into voluntary bankruptcy would require
3 the consent of a two-thirds majority of all of its directors, including the affirmative vote of a
4 majority of the Independent Directors at Avista, which would have to include the affirmative vote
5 of at least two Avista-designated Independent Directors. See Idaho Stipulated Commitment 43.
6 Hydro One and Avista must also provide a non-consolidation opinion to confirm the effectiveness
7 of the ring-fencing measures to prevent the substantive consolidation of the assets and liabilities
8 of Avista with those of the entities above it in the corporate chain of ownership. See Idaho
9 Stipulated Commitment 44. The corporate structure also includes Olympus Equity LLC, a
l0 bankruptcy-remote special purpose entity that will have no debt. See Idaho Stipulated
I 1 Commitment 45.
12 Ninth, as part of the Stipulation, Avista's utility assets can be pledged only for the benefit
l3 of Avista, not Hydro One. See Idaho Stipulated Commitment 46. Therefore, the Province cannot
14 strip Avista of its capital and assets for the benefit of the Province.
15 Hydro One and Avista, along with the rest of the Idaho parties, developed the Settlement
16 Stipulation to ensure that Avista could not be negatively impacted in any way by any of the
17 hypothetical political events described in the previous sections. If any of the above-described
l8 hypothetical events were to occur, Hydro One would still be legally obligated to comply with the
19 Stipulation in this Case, the settlements it has reached in Oregon, Washington, Montana, and
20 Alaska, the Regulatory Commission of Alaska's June 4, 2018 order approving this merger, the
21 Montana Public Service Commission's forthcoming order approving this merger, and any orders
22 approving this merger issued by this Commission, the Washington Utilities and Transportation
23 Commission, and the Oregon Public Utility Commission. As a result, all of the protections
24 described above that have been built into the Stipulation to ensure that Avista will continue as a
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT-AVU-E-17-09 &AVU-G-17-05 Page 18
1 financially sound, stand-alone utility will bind Hydro One regardless of political developments
2 (e.9., Avista's independent board, financial ring-fencing, capital support). Furthermore, through
3 the Stipulation in this proceeding and the settlements in Washington and Oregon, Hydro One and
4 Avista have committed that none of the commitments in the settlements can be amended without
5 approval from Avista's state regulators. See Idaho Stipulated Commitments 1,30,33, 49.
6 Finally, the Stipulation in this Case confirms that the Commission willcontinue to regulate
7 Avista as it always has to ensure that Avista's customers are protected and continue to pay fair,
8 just, and reasonable rates. See Idaho Stipulated Commitments20-24,30-33.
9 No "Climate Change" aqenda. Some comments expressed concern that Hydro One, or
10 indirectly the Province of Ontario, might somehow seek to impose a climate change agenda on
11 Avista. First, as noted above, Avista is fully protected from any attempt by the Province to
12 influence Avista on policy matters because the merger commitments in this Case vest Avista's
13 own board with decision-making over Avista's operations and management. Second, under the
l4 Governance Agreement, the Province has no role in the management of Hydro One. Finally,
I 5 neither Hydro One nor the Province of Ontario has any desire to impose a "cap and trade" agenda
16 on Avista or its customers. The prior government under Kathleen Wynne instituted an Ontario-
17 only cap and trade program on January 1, 2017, however, Premier-Designate Doug Ford has
l8 announced that it is a priority of his to remove this program. Mr. Ford's "Plan for the
l9 People"a includes a proposal for, "scrapping the Carbon Tax and cancelling Kathleen Wynne's
20 cap-and-trade slush fund[.]" Further, even if the current cap and trade program were to remain
21 law in Ontario, it could not be enforced against Avista or have any effect on Avista or its customers.
a Available at https://www.ontariopc.calplan_forJheJreople, visited June 19,2018.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
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1 Explanation of "Golden Share". During the public hearings held in Sandpoint and Coeur
2 d'Alene, questions were raised about the provision for a Golden Share. In the context of utility
3 mergers, a Golden Share is an element of ring-fencing designed to help protect the operating utility
4 (here, Avista) from being placed by its parent company into voluntary bankruptcy under
5 circumstances where such a bankruptcy would not be in the best interests of the operating utility
6 or utility customers. The inclusion of a Golden Share provision in the Stipulated Commitments
7 provides extra comfort to state regulators that Avista will not be pushed into a "restructuring"
8 bankruptcy by Hydro One in the event Hydro One was ever to encounter severe financial
9 difficulties.
l0 Under Stipulated Commitment No.43, Avista's entry into voluntary bankruptcy or the
I I inclusion of Avista in bankruptcy proceedings would require the consent of a twothirds majority
12 of all of its directors, including the affirmative vote of at least one of its Independent Directors.
13 Under Stipulated Commitment No. 42, Avista's entry into voluntary bankruptcy would
14 additionally require the affirmative vote of the holder of the Golden Share. The holder of this
l5 share must be an independent third party with no financial stake, affiliation, relationship, interest
16 or tie to Avista or any of its affiliates (including Hydro One), or any lender to Avista or any of its
17 affiliates, which insulates Avista from being placed into voluntary bankruptcy by Hydro One or
l8 any of its affiliates. Typically, a company (rather than an individual) which specializes in
19 providing independent third party corporate services for ring-fencing purposes serves as the holder
20 of the Golden Share.
21 The sole purpose of the Golden Share is to provide this independent third party with veto
22 power over Avista's entry into voluntary bankruptcy even if the Avista Board voted, as described
23 above, in favor of such a filing. No dividends are paid on the Golden Share and the holder of the
24 Golden Share does not participate in shareholder activities unrelated to bankruptcy.
AVISTA AND HYDRO ONE COMMENTS TN SUPPORT OF STIPULATION AND
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I Hydro One and Avista commit to identify the holder of this Golden Share prior to any
2 action taken by this Commission to approve the Proposed Transaction. We will notify the
3 Commission and all parties when this occurs.
4 How will S5.3 million of fundine for Enerey Efficiency. Weatherization. Conservation.
5 and Low-lncome Assistance be distributed? Hydro One and Avista have committed to $5.3
6 million in funding over a l0-yearperiod, none of which will be recoverable from customers, to
7 fund energy efficiency, weatherization, conservation, and low-income assistance programs. The
8 funding will be disbursed as directed by the Energy Efficiency, Weatherization, Conservation, and
9 Low-Income Assistance Committee ("EWCL"), a new committee of stakeholders tasked with
10 determining which existing or new programs should receive this funding to address energy
1 1 efficiency, weatherization, conservation, and low-income needs in Avista's Idaho service territory.
12 The committee will initially consist of a broad cross-section of representatives from the following
l3 stakeholders: Avista, Staff, Lewiston CAP, Idaho Conservation League, Idaho Forest Group, and
l4 Clearwater. The Committee may add members at its discretion. The EWCL will consider the
15 needs of all parties and remain flexible on the timing of any disbursements. The EWCL will
16 convene within 90 days after the close of the Proposed Transaction, will present a 1O-year funding
17 plan to Avista by June 1,2019, and will revise this plan periodically as needed. Additional public
18 involvement may be called for, as and when needed.
19 Cost Allocation Methodoloeies are alreadv in place. A theme that was discussed by several
20 commenters at the Public Hearings was related to the rates charged by Avista, and how those rates
2l might increase because Hydro One's retail rates are significantly higher than Avista's. Quite
22 simply, it is not Avista, nor Hydro One, that sets rates for Idaho customers; rather, the Commission
23 sets ldaho retail rates. Those rates are developed based on a thorough and substantial evidentiary
24 record of expert written and oral testimony, exhibits, and work papers that include detailed
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
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1 accounting and cost allocation records, which relate only to the cost to provide service to Avista's
2 Idaho jurisdictional customers.
3 Costs related to Avista providing service in other jurisdictions served by Avista, which
4 include Oregon, Washington, Montana and Alaska, are not included in Idaho retail ratemaking.
5 Likewise, Avista and Hydro One would never seek, nor would the Commission ever allow, the
6 inclusion of Hydro One's utility costs in Idaho rates, nor would the Commission meld or somehow
7 average Hydro One's retail rates with Avista's jurisdictional rates. To do so would depart from
8 the very essence of cost-based ratemaking.
9 In addition, all costs associated with evaluating and executing on the Proposed Transaction
10 are being separately tracked and recorded below-the-line to a non-operating account, using a
11 "Direct Assignment Protocol" (the "Protocol"), attached as Exhibit No. 7, Schedule 3 to Mr.
12 Ehrbar's direct testimony. The Protocol addresses the accounting for costs both prior to the closing
13 of the transaction, as well as the accounting for costs following the closing. To the extent Avista
14 employees dedicate time and incur costs related to the operations of Hydro One, those costs will
15 be directly assigned and billed to Hydro One, and would not be borne by Avista's customers.
16 Likewise, should Hydro One employees dedicate time and incur costs associated with Avista's
17 operations, such costs would be directly assigned and billed to Avista. If a Hydro One employee's
l8 time and costs are related to Avista's regulated utility operations, the costs would be subject to
l9 review and approval by the Commission prior to being recovered in retail rates. Avista expects
20 such assignment ofcosts, both to Hydro One and from Hydro One, to be relatively small, especially
21 in the near-term, since Avista will continue to operate as a standalone utility. This methodology
22 has been used since 2014, when Avista acquired Alaska Energy and Resources Company,
23 including AEL&P, which provides electric service to customers in the City and Borough of Juneau,
24 Alaska.
AVISTA AND HYDRO ONE COMMENTS TN SUPPORT OF STIPULATION AND
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At this point in time, there are no plans to combine any specific utility operations. In the
future, however, if opportunities arise for the consolidation of certain Avista and Hydro One utility
functions, where the utilities have an opportunity to benefit from specialized expertise or to achieve
efficiencies, it may be appropriate to develop additional or different direct assignment or allocation
protocols, as has been committed in Commitment 24 provided below:
Stipulated Commitment 24
Cost Allocations Related to Corporate Structure and Afliliate Interests: Avista agrees to
provide, and Hydro One agrees Avista will provide, cost allocation methodologies used to
allocate to Avista any costs related to Hydro One or its other affiliates and subsidiaries,
and commits that there will be no cross-subsidization by Avista customers of unregulated
activities.
The cost-allocation methodology provided pursuant to this commitment will be a generic
methodology that does not require Commission approval prior to it being proposed for
specific application in a general rate case or other proceeding affecting rates. The cost-
allocation methodology provided pursuant to this commitment also will establish a
procedure for ensuring that additional costs or revenues resulting from changing currency
exchange rates will not be reflected in rates charged to Idaho customers.
Avista will bearthe burden of proof in any general rate case that any corporate and affiliate
cost allocation methodology is reasonable for ratemaking purposes. Neither Avista nor
Hydro One or its afTiliates and subsidiaries will contest the Commission's authority to
disallow, for retail ratemaking purposes in a general rate case, unreasonable, or
misallocated costs from or to Avista or Hydro One or its other affiliates and subsidiaries.
With respect to the ratemaking treatment of affiliate transactions affecting Avista, Hydro
One, and Olympus Holding Corp. and its subsidiaries, as applicable, will comply with the
Commission's then-existing practice; provided, however, that nothing in this commitment
limits Avista from also proposing a different ratemaking treatment for the Commission's
consideration, or limit the positions any other party may take with respect to ratemaking
treatment.
Avista will notifythe Commission of any change in corporate structure that affects Avista's
corporate and affiliate cost allocation methodologies. Avista will propose revisions to such
cost allocation methodologies to accommodate such changes. Avista will not take the
position that compliance with this provision constitutes approval by the Commission of a
particular methodology for corporate and affiliate cost allocation.
Avista will noti$ the Commission priorto the implementation of plans by Avista or Hydro
One or any of Hydro One's affiliates:
AVISTA AND HYDRO ONE COMMENTS TN SUPPORT OF STIPULATION AND
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a. To form an affiliate for the purposes of transacting business with Avista's regulated
operations;
b. To commence new business transactions between an existing affiliate and Avista; or
c. To dissolve an affiliate that has transacted substantial business with Avista.
Finally, Avista will commit to preparing a Master Services Agreement (MSA), itemizing
and explaining corporate cost allocation methods used to set rates. The MSA will be fully
described and supported in testimony and workpapers in Avista's first general rate case submitted
after the Joint Application is approved by the Commission. Thereafter, the MSA will be filed
along with any general rate case filed with the Commission. This filing will capture, highlight and
explain allchanges since the MSA was last provided to the Commission. The entirety ofthe MSA
and its components are subject to review and approval by the Commission in subsequent
proceedings before the Commission to confirm that cost drivers, accounting methods,
assumptions, and practices result in fair, just and reasonable utility rates.
No loss of "critical infrastructure" to foreign ownership. During the public comment
process, some of those testifying expressed a concern over "foreign ownership" (Canadian) of
Avista and its facilities. The Joint Applicants respectfully respond as follows to those concerns:
I ) After consummation of the Proposed Transaction, Avista will not be owned or
controlled by the Province of Ontario; instead it will be owned by Hydro One, which is no longer
a "Crown Corporation". At present, and following the merger, Hydro One will be majority-owned
by a much broader base of individual or institutional shareholders (As at June 12, 2018, the
Province owned 282,412,648 common shares of Hydro One, representing approximately 47.4o/o
of the common shares. Following conversion of the convertible debentures issued to finance
Hydro One's acquisition of Avista, the Province will hold less than 43Yo of Hydro One's
outstanding stock.) Those shareholders may freely exchange their shares over time on the Toronto
AVISTA AND HYDRO ONE COMMENTS TN SUPPORT OF STIPULATION AND
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Stock Exchange, in much the same manner as do current shareholders who trade shares of Avista
on the New York Stock Exchange.
2) Any concern about yielding "critical infrastructure" to foreign ownership was
squarely resolved through the filing made by Avista for approval of the transaction by the
Committee on Foreign Investment in the United States (CFIUS). Section 721 of the Defense
Production Act of 1950, as amended (section 721, codified at 50 U.S.C. $ 4565), authorizes the
President of the United States, acting through CFIUS, to review certain mergers, acquisitions, and
takeovers which could result in foreign control of any person engaged in interstate commerce in
the United States. On May 18, 2018, CFIUS informed Avista that it had reviewed the information
provided to it regarding the transaction. It concluded, "based on its review, and after full
consideration of all relevant national security factors, including the factors enumerated in
subsection (F) of section 721, CFIUS has determined that there are no unresolved national security
concerns with respect to the transaction that is the subject of the notice."
3) In reaching its conclusion, CFIUS was required to consider the plans of the foreign
person (Hydro One) for the U.S. business with respect to:
a. Reducing, eliminating, or selling research and development facilities;
b. Changing product quality;
c. Shutting down or moving outside of the United States facilities that are within the
United States;
d. Consolidating or selling product lines or technology;
e. Modifring or terminating ceftain contracts; orf. Eliminating domestic supply by selling products solely to non-domestic markets.
There are no plans to carry out any of the aforementioned activities. Following closing of
the Proposed Transaction, Avista's customers and the communities Avista serves are expected to
see little or no change in Avista'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, , and Montana. Avista's subsidiary, AEL&P, will continue to operate as a
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
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I standalone utility in Alaska. Avista will maintain office locations throughout its service areas,
2 continue to operate under the same Avista name and seek to retain its existing employees and
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Hold Harmless Provisions. Hold harmless provisions protect Idaho customers from all
business and financial risk exposures of Hydro One and its affiliates. During public comment
hearings, it was suggested that Avista's customers would only be "held harmless" from
the unregulated activity of Avista or Hydro One. This is a misreading of Stipulated Commitment
47 (a.), which quite clearly states:
a. Hydro One, its affiliates, and subsidiaries including Avista will hold Avista
customers harmless from any business and financial risk exposures associated with
Olympus Holding Co.p., Hydro One, and Hydro One's other affiliates. (emphasis
added)
The commenter apparently misread Commitment 47(c.)i, to limit any hold harmless
protection only to the unregulated activities of Avista and Hydro One only.s Quite the opposite is
true. This sub-part was added to the blanket "hold harmless" commitment in 47(a) (supra) to
expand that protection to cover the qqregulated activities of Avista and Hydro One as well.
Finally, and perhaps most importantly, the Commission will have continuing, ongoing
jurisdiction under Idaho Code $61-328 to regulate any subsequent transfers of Avista's property
to Hydro One or others. Indeed, Idaho Code $61-328 forms the very basis for Commission
jurisdiction over this transaction. ln short, the Commission's ongoing jurisdiction will form the
bulwark against any transfers that are not in the best interest of Idaho customers.
Provisions of Idaho Code $61-328 have been satisfied. The provisions of Idaho Code $61-
328 are satisfied by the proffered Stipulated Commitments. Idaho Code $61-328 provides that,
5 Commitment a7(c)(i) reads: "Hydro One, its affiliates, and subsidiaries including Avista commit that Avista's
regulated utility customers will be held harmless fiom the liabilities of any g4regulated activity of Avista or Hydro
One and its affiliates." (emphasis added)
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1 before authorizing the Proposed Transaction, the Commission must find that: (l) the transaction
2 is consistent with the public interest; (2) the transaction will not cause the cost of or rates for
3 supplying electrical service to increase; and (3) that Hydro One has the bona fide intent and
4 financial ability to operate and maintain Avista's operations in ldaho. It was suggested during the
5 public hearings that the Stipulation does not satisfr the requirement that the "cost of and rates for
6 supplying service will not be increased by a reason of such transactions." (Idaho Code $61-328
7 (3)(b))
8 The following commitment provides assurance that costs will not increase.
Commitment l7:
a. Costs associated with the Proposed Transaction will be separately tracked as non-utility
costs with no charges, either allocated or direct, to be recovered from Avista customers.
After the consummation of the Proposed Transaction, any remaining transaction costs
or other costs of Olympus Holding Corp. or Hydro One will not appear on Avista's
utility books, i.e. such costs will be recorded as non-utility. Avista shall furnish the
Commission with journal entries and supporting detail showing the nature and amount
of all costs ofthe Proposed Transaction (including but not limited to management time,
BOD time, in-house and outside counsel time, any consultants engaged, etc.) since the
Proposed Transaction was first contemplated, as well as the accounts charged, within
120 days of a Commission order in this docket.
b. Avista will exclude, and Hydro One agrees Avista will exclude, from Avista general
rate cases, or any other method of cost recovery, all costs related to the Proposed
Transaction including but not limited to: (i) all legal work from in-house counsel and
outside counsel; (ii) any financial advisory fees associated with the Proposed
Transaction; (iii) the acquisition premium; (iv) costs related to M&A consulting and
advice (v) preparation of and materials for presentations relating to the Proposed
Transaction (vi) any senior executive compensation or any Avista board of director
time tied to a change of control of Avista; and (vii) any other costs directly related to
the Proposed Transaction.
c. Technology expenditures and investments related to software and hardware
compatibility issues between Avista and Hydro One and its affiliates shall not be
recovered from Idaho ratepayers except to the extent such costs are offset by savings
over time.
Finally, some commenters suggested that this merger Case is the place to review and
determine whether costs will increase as a result to the Proposed Transaction. It is to be
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remembered that no "costs" ofthe merger could ever find their way into rates outside ofthe context
of a general rate filing -- and this is not that filing. The Commission will have ample opportunity,
in Avista's next Idaho general rate case filing, to review all costs that make up the revenue
requirement and assure itself that Avista has lived up to its Stipulated Commitments discussed
above, that exclude all such merger-related costs.
Idaho Code $61-327 is not an impediment to this transaction. A few individuals
commented that the provisions of Idaho Code $61-327 somehow prohibit the Proposed
Transaction with Hydro One. The language (indeed the very title of the section) belies any such
interpretation:
6l-327. Electric utility property - Acquisition by certain public aeencies
prohibited. No title to or interest in any public utility . . . shall be transferred or
transferable to, or acquired by, directly or indirectly, by any means or device
whatsoever, any government or municipal corporation, quasi-municipal
corporation, or governmental or political unit, subdivision or corporation,
organized or existing under the laws of any other state; . . .
There is no direct or indirect transfer of ownership to a "public agency" in the Proposed
Transaction. Hydro One is not a "public agency'., and is not a "government or municipal
corporation, quasi-municipal corporation, or governmental or political unit, subdivision or
corporation, organized or existing under the laws of any other state; . . ."
Instead, Hydro One is a publicly-traded corporation governed by its own Board of
Directors, as is Avista, as is Mid-American Holdings (which received approval to purchase
PacifiCorp's Idaho properties in Case No. PAC-E-05-8), and as is Montana-Dakota Utilities
(which acquired Intermountain Gas6).
6 The Commission took up the MDU Resources/lntermountain Gas Transaction at its August 25, 2008 regularly
scheduled Decision Meeting. The Commission did not exert jurisdiction over the purchase transaction.
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT- AVU-E-17-09 & AVU-G-17-05 Page2&
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1 VI. CONCLUSION
2 All Parties to this consolidated Case have agreed that the Stipulation is in the public
3 interest, that all of its terms and conditions are fair, just and reasonable, and that the Joint
4 Applicants have satisfied the standard under Idaho Code $61-328 for approval of the Proposed
5 Transaction. Avista and Hydro One respectfully request that the Commission issue an order
6 approving the Joint Application and the Stipulation.
7
8 DATED this 2}thday of June,2018,
HYDRO ONE LIMITED AVISTA CORPORATION
By:
Elizabeth Thomas, Partner, K&L Gates LLP
Kari Vander Stoep, Partner, K&L Gates LLP
On Behalf of Hydro One Limited and
Olympus Equity LLC
By
Attorney for Avista Corporation
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT * AVU-E-17-09 & AVU-G-17-05 Page29
-.%\
47r*ox
By:
Elizabeth Thomas, Partner, K&L Gates LLP
Kari Vander Stoep, Partner, K&L Gates LLP
On Behalf of Hydro One Limited and
Olympus Equity LLC
David J. Meyer
Attorney for Avista Corporation
AVISTA AND HYDRO ONE COMMENTS IN SUPPORT OF STIPULATION AND
SETTLEMENT - AVU-E-17-09 & AVU-G-17-05 Page 29
1 vI. CONCLUSION
2 All Parties to this consolidated Case have agreed that the Stipulation is in the public
3 interest, that all of its terms and conditions are fair, just and reasonable, and that the Joint
4 Applicants have satisfied the standard under Idaho Code $61-328 for approval of the Proposed
5 Transaction. Avista and Hydro One respectfully request that the Commission issue an order
6 approving the Joint Application and the Stipulation.
7
8 DATED this 20th day of June, 2018.
HYDRO ONE LIMITED AVISTA CORPORATION
/2
I
AVISTAAND HYDRO ONE JOINT COMMENTS IN
SUPPORT OF STIPULATION AND SETTLEMENT
EXHIBITA
BEFORE THE PUBLIC UTILITY COMMISSION OF OREGON
uM 1897
HYDRO ONE LIMITED'S
RESPONSE TO JI.]NE 14,2018
BENCH REQUEST
2
Hydro One Limited ("Hydro One") provides the following response to Administrative
Law Judge Patrick Power's Bench Request issued on June 14,2018.
I. BENCH REQUEST
The Bench Request requires Hydro One to file a report on the following issues: (l)
implications of the recent Ontario election for (a) the future management and plans of Hydro
One, and (b) Hydro One's acquisition of Avista; (2) a plan for keeping the Oregon Public Utility
Commission ("OPUC" or "Commission") informed on a timely basis as to new developments;
and (3) what further measures might be necessary to fully develop the record if material changes
are made in Hydro One's management or Board of Directors ("Board").
II. BACKGROUND
Hydro One provides the following information as context to the specifics of its response
to the Bench Request.
A. PROVINCE OF ONTARIO'S ROLB AS HYDRO ONE'S LARGEST
SHAREHOLDER
Until 2015, Hydro One Inc. was owned by the Province of Ontario and referred to as a
Crown Corporation. Hydro One, a new holding corporation, was incorporated by the Province
HYDRO ONE LIMITED'S RESPONSE TO
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Exhibit A to Avista and Hydro One Joint Comments in Support of Stipulation and Settlement Page 1 of 13
In the Matter of the Application of Hydro )
One Limited (acting through its indirect )
subsidiary Olympus Equity LLC) for an )
Order Authorizing Hydro One Limited To )
Exercise Substantial Influence Over the )
Policies and Actions of Avista Corporation )
I
-t
of Ontario on August 31,2015, under the Business Corporations Act (Ontario). On October 30,
2015, Hydro One's articles of incorporation were amended to authorize the creation of an
unlimited number of Series I preferred shares and an unlimited number of Series 2 preferred
shares, with the Series 1 preferred shares to be issued to the Province. On October 31, 2015, all
of the issued and outstanding shares of Hydro One Inc. were acquired by Hydro One from the
Province in exchange for the issuance to the Province of common shares and Series I preferred
shares of Hydro One. On November 4,2015, 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 ("lPO") on
the Toronto Stock Exchange by way of secondary offering of common shares by the Province of
Ontario, with the goal that, over time, approximately 60Yo of Hydro One would be held by
private investors. Today, Hydro One is a public company traded on the Toronto Stock Exchange
under the ticker symbol "H."
As at June 72,2018, the Province owned 282,412,648 common shares of Hydro One,
representing approximately 47.4% of the common shares. Following conversion of the
convertible debentures issued to finance Hydro One's acquisition of Avista, the Province will
hold less than 43o/o of Hydro One's outstanding stock.
The 2015 amendments to the Ontario Electricity Ac\ 1998 restricts the Province from
selling voting securities (including common shares of Hydro One) if it would own less than 40%o
of the outstanding number of voting securities of that class or series afterthe sale. If as a result
of the issuance of additional voting securities of any class or series by Hydro One, the Province
would own less than 40Yo of the outstanding number of voting securities of that class or series,
6
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then the Province shall, subject to certain requirements, take steps to acquire as many voting
securities of that class or series of voting securities as are necessary to increase the Province's
ownership to not less than 40Yo of the outstanding number of voting securities of that class or
series.
In order to assist the Province in meeting its ownership obligations under the Electricity
Act, 1998, under the Governance Agreement with the Province, Hydro One has granted the
Province a pre-emptive right to subscribe for and purchase up to 45o/o of any proposed issuance
by Hydro One of voting securities or securities that are convertible 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.
Hydro One's Board consists of Hydro One's CEO and, in addition, 13 independent
directors who must be, and are, independent of both Hydro One and the Province of Ontario.
The Governance Agreement ensures autonomous commercial operations, with the Province of
Ontario limited to acting as an investor and not a manager.
B. GOVBRNANCB AGREEMENT BETWEEN HYDRO ONE ANDPW
The Governance Agreement between Hydro One and the Province of Ontario
(Attachment A to this Response to Bench Request) is a binding contract that was a pre-requisite
for Hydro One's IPO. The Province of Ontario understood that Hydro One would not succeed as
an investor-owned utility and would lose the trust of its investors if the Province were to meddle
in the running of Hydro One's business. As a result, the Province entered into the Governance
Agreement to provide the investment and financial communities the assurance that Hydro One
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will operate like any other investor-owned utility, even though the Province will likely continue
- strictly as an investor - to own at least 40%o of Hydro One's shares.
The Hydro One Board, and not the Province, is responsible for supervising the
management of Hydro One's business and affairs. (Governance Agreement ("GA") 2.1.2 and
2.3) The Province is involved in Hydro One as an investor and not as a manager. (GA 2.1.3) The
Province has no role in the processes of appointment, removal, replacement, and compensation
relating to executive officers or related succession planning. Hydro One neither takes direction
nor seeks consent for its operations from the government of Ontario, outside of the defined
regulatory and oversight authority that the government has over the electricity sector. (GA 2.1 .3;
2.2)
While a 40%o or more shareholder of a corporation under most circumstances could
control the entire composition of the corporation's board, the Governance Agreement prevents
the Province from exercising similar influence over Hydro One. A Nominating and Governance
Committee nominates directors and advises the Board regarding its stewardship role in the
management of Hydro One. (GA 3.5). The Board consists of a minimum of 10 and a maximum
of 15 members and is comprised as follows: (i) the CEO is proposed for election, (ii) the
Province nominates 40%o of directors (or its proportionate share, whichever is less) proposed for
election,l and (iii) the Nominating and Governance Committee nominates the remaining
directors proposed for election. (GA 3.3. I ; 4. I . I )
Other than the CEO, each director must be independent of Hydro One and the Province.
(GA 4.2.2; 4.2.3) Directors must be high-quality, reputable, experienced leaders with the
I If the Province is diluted below 40%o, there will be a minimum 24-month "cure period" before any reduction in its
permitted number of nominees occurs. (GA 4.8). In any event, these directors must be independent of the Province
and Hydro One.
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requisite skills, board experience, time, and motivation for an operation of Hydro Oneos size and
scope. Directors are also chosen in light of Hydro One's core operating principles. (GA 4.2.1)
Directors must meet the requirements of applicable securities and other laws and any stock
exchange on which Hydro One securities are listed. (GA 4.2.4)
The Governance Agreement limits 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.g., amendment to articles, continuance, arrangements, and
amalgamations). (GA 2.5) The Province may vote its shares as it sees fit in the event a
fundamental change is initiated by another shareholder. (GA 2.5) 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 would be prohibited from doing directly. (GA 2.6). The Governance
Agreement may be terminated only with the mutual agreement of both parties. (GA 8.4)
C. SETTLEMENT STIPULATION COMMITMENTS:
snranarB
AVISTA FROM HYDRO ONE
Hydro One, Avista, OPUC Staff the Citizens' Utility Board, Alliance of Westem Energy
Consumers, and the Oregon and Southern Oregon District Council of Laborers (collectively, the
"Parties") filed a Settlement Stipulation on May 25, 2018. The Parties negotiated numerous
commitments designed to provide governance and financial ring-fencing between Avista and
Hydro One. Certain of these merger commitments were developed to ensure that Avista cannot
be subjected to political interference or influence by the Province of Ontario and bolster the
protections already provided by the Governance Agreement.
First, Avista will have a nine-member board separate from Hydro One that will govern
Avista's management and operations. Three of the five Avista directors selected by Hydro One
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(not by the Province) must be independent under NYSE rules. Further, those three directors
must be residents of the Pacific Northwest. Two of the four directors selected by Avista must be
independent under NYSE rules. See Stipulation Commitment No. 5. As a result, the Province
will not be able to exercise any control over Avista through selection of Avista's board.
Second, Avista's CEO must be selected by Avista's board -- not Hydro One or the
Province. See Stipulation Commitment No. 4.
Third, Olympus Equity LLC's three-member board must include one independent
director. See Stipulation Commitment No. 6.
Fourth, Avista's executive management will remain in place and must be selected by
Avista's board -- not Hydro One. See Stipulation Commitment No. 4.
Fifth, Avista's employees will be retained. ^See Stipulation Commitment Nos. I l, 12,79,
80.
Sixth, Hydro One is required to provide Avista with enough equity so that Avista can
access debt on reasonable terms. See Stipulation Commitment Nos. 44, 47. Therefore, the
Province cannot deprive Avista of its capital and assets for the benefit of the Province.
Seventh, Avista will continue to have its own credit ratings. Hydro One is required to
provide Avista with sufficient equity to ensure that Avista's credit ratings remain investment
grade. See Stipulation Commitment Nos. 45, 48. Therefore, again, the Province cannot deprive
Avista of its capital and assets for the benefit of the Province.
Eishth, Avista will be prohibited from issuing dividends if certain financial metrics
relating to the equity floor, credit ratings and debt coverage are not met. Basically, this operates
to keep retained earnings at the Avista level where they will improve Avista's financial strength.
HYDRO ONE LIMITED'S RESPONSE TO
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See Stipulation Commitment No. 50. This too prevents the Province from depriving Avista of its
capital and assets for the benefit of the Province.
Ninth, several of the Stipulation commitments protect Avista from being drawn into
bankruptcy proceedings that are not in the best interest of Avista and its customers. Avista will
issue a single share of preferred stock referred to as the Golden Share to an independent third
party. The vote of this share will be required to place Avista into voluntary bankruptcy. See
Stipulation Commitment No. 55. Further, Avista's entry into voluntary bankruptcy would
require the consent of a two-thirds majority of all of its directors, including the affirmative vote
of a majority of the Independent Directors at Avista, which would have to include the affirmative
vote of at least two Avista-designated Independent Directors. See Stipulation Commitment No.
56. Hydro One and Avista must also provide a non-consolidation opinion to confirm the
effectiveness of the ring-fencing measures to prevent the substantive consolidation of the assets
and liabilities of Avista with those of the entities above it in the corporate chain of ownership.
See Stipulation Commitment No. 57. The corporate structure also includes Olympus Equity
LLC, a bankruptcy-remote special purpose entity that will have no debt. See Stipulation
Commitment No. 58. Therefore, the Province cannot obtain Avista's capital and assets through a
bankruptcy proceeding unless that would be in the best interests of Avista's customers.
Tenth, Avista's utility assets can be pledged only for the benefit of Avista, not Hydro
One. See Stipulation Commitment No. 59. Therefore, the Province cannot strip Avista of its
capital and assets for the benefit ofthe Province.
IIL RESULTS OF ONTARIO ELECTION
On June 7,2078, voters in the Province of Ontario elected a new government that will be
led by the Progressive Conservative Purty, replacing the Liberal government led by Kathleen
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Wynne. The Premier-Designate is Doug Ford. The Ontario Premier is the equivalent of a state
governor in the United States. The new government will be sworn in on June 29,2018.
Mr. Ford has suggested that he is going to call the provincial legislature back into session
during the month of July to address several priority issues that arose during the campaign.
Normally the provincial legislature would not reconvene until fall. On Friday, June 15,2018,
Mr. Ford stated that his top priority is to dismantle Ontario's cap-and-trade system for carbon
emissions and repeal the carbon tax. Mr. Ford also wants to pass legislation that will end a strike
at Toronto's York University.
During the campaign, Mr. Ford stated that he wanted to remove Hydro One's CEO Mayo
Schmidt and some orall of the members of Hydro One's Board of Directors. On Friday, June
15, 2018, Mr. Ford made a statement reiterating his intention to remove Mr. Schmidt. We do not
know whether or how Mr. Ford will attempt to follow through on these statements.
During the campaign, members of the New Democratic Party stated that they would try
to "bring Hydro One back into public hands" by buying back some or all of Hydro One's shares
held by entities other than the Province; the precise mechanism by which this would be
accomplished was never revealed. The New Democratic Party did not win enough seats to
control the provincial government, nor offset the majority of seats now held by the Progressive
Conservatives in Ontario's Legislative Assembly. Even if a party were to attempt this in the
future, the Governance Agreement would make this more complex than simply buying back
shares, as it prevents the Province from buying any additional shares if it owns more than 45%o of
Hydro One. Mr. Ford and other members of the Progressive Conservative Party have not
suggested that they will pursue a policy of returning Hydro One to Crown Corporation status and
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had made statements throughout the campaign generally supportive of privatization in Ontario's
energy sector.
IV. PROCESS FOR REMOVAL OF HYDRO ONE BOARD ORHYDRO ONE CEO
If Mr. Ford and his Progressive Conservative Party wished to seek to remove some or all
of Hydro One's Board and its CEO, they could accomplish these objectives in one of two ways:
(l) procedures established by the Governance Agreement, or (2) legislation.
As explained above, the Governance Agreement establishes an independent Hydro One
Board with the following features: the CEO is selected by the Board (not the Province), the
Province nominates 40o/o of the Board's directors (or its proportionate share, whichever is less)
proposed for election, the Nominating and Governance Committee (now known as the
"Governance Committee") nominates the remaining directors proposed for election, and other
than the CEO, each director must be independent of Hydro One and the Province. The Province
has no role in the processes of appointment, removal, replacement, and compensation relating to
executive officers or over related succession planning.
In order to remove the Hydro One Board, the Province must follow the procedures in
Article 4.7 of the Governance Agreement: (l) serve a RemovalNotice on Hydro One requesting
the removal of Hydro One's Board at a shareholder 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 Board from its Removal Notice) (GA 4.7.1); (2) the chair of the Board will establish a
committee comprising representatives of Hydro One's five largest shareholders, except the
Province (the "Ad Hoc Nominating Committee") (GA 4.7.2); (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") (GA a.7.3); (4) once
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the slate of new Board members is established, the shareholder Removal Meeting must be held
within 60 days (GA a.7.D; and (5) at the Removal Meeting, the Province must vote in favor of
the slate of new Board members established by the Ad Hoc Nominating Committee and the
Province (GA 4.7.6).
Under the Article 4.7 procedures, Hydro One's shareholders must remove the entire
Hydro One Board; they cannot remove just certain Board members. (GA 4.7.1) Further, the
Board cannot be replaced with any board members who were part of the previous Board. (GA
4.7.3) All nominees must be vetted by the Ad Hoc Nominating Committee and must meet the
stringent qualification standards set in the Governance Agreement. (GA 4.7.3 and 4.3) Article
4.7 does not permit shareholders to hire or fire Hydro One's CEO or other members of its
management team. (GA 4.7.1) Article 4.7 simply provides a process by which Hydro One's
shareholders can install a new Board.
Although the Province cannot remove the CEO, presumably the new Board installed
pursuant to Article 4.7 procedures could take steps to consider removing the CEO if the Province
triggers this process.
As an alternative to following the Article 4.7 procedures in the Governance Agreement,
Mr. Ford and his Progressive Conservative Party could attempt to pass legislation during the
upcoming legislative session that would give the Province the authority to remove and replace
the Hydro One CEO and/or its Board. We do not know whether Mr. Ford and his party will
pursue such legislation, and we do not know what provisions and procedures would be included
in that legislation to effect the removal of the Hydro One CEO and/or the Board.
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V. REPORTS ON FUTURE POLITICAL DEVELOPMENTS IN ONTARIO
Hydro One's plan for keeping the Commission informed on a timely basis as to new
developments in Ontario and the management of Hydro One is as follows. Hydro One
respectfully requests that each report filed pursuant to the plan described below be included as
part of the record in this docket.
Hydro One will file reports in this docket (until the docket is closed) whenever a
significant event occurs or statement is made by the Province's new leadership that provides
funher new insight regarding the future of Hydro One's executive leadership and/or Board. The
next scheduled significant event would be the convening of the provincial legislature in July if
Mr. Ford follows through on his proposal to reconvene the legislature before the regular session
this fall or any media statements in the interim period containing new and significant insight into
the government's plans with regard to Hydro One. Hydro One will file reports regarding any
legislation that is proposed or statements made prior to or during that session regarding Hydro
One's executive leadership and Board. Further, Hydro One also will file reports on any
significant public statements made by the Province's new leadership that provide new insight
regarding the future of Hydro One's executive leadership and Board. Finally, Hydro One will
file reports on any efforts made by the Province to trigger the procedures in Article 4.7 of the
Governance Agreement to replace Hydro One's Board.
VI. CONCLUSION
The Province could trigger the provisions in Article 4.7 of the Governance Agreement to
replace Hydro One's Board or the Province's new leadership could introduce legislation for the
purpose of dismissing Hydro One's CEO or members of the Board. These are just possibilities,
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but even if they were to come to pass, Hydro One, Avista, and the other Parties in this docket
have included governance and financial ring-fencing in the Settlement Stipulation that will
protect Avista and its customers. Even if Hydro One's CEO and Board are replaced, that would
not change anything with respect to Avista as established by the Parties in their Settlement
Stipulation.
Even if Mr. Ford succeeded in removing Hydro One's CEO or Board, such actions would
not diminish Hydro One's deep and highly experienced management and its ability to
successfully operate Hydro One's business and be an owner of Avista. Furthermore, as
described above, Avista will be governed by its own board and operated by its own management
after the merger.
Hydro One and Avista, along with the rest of the Oregon Parties, developed the
Settlement Stipulation to ensure that Avista could not be negatively impacted in any way by any
of the hypothetical events described in the previous sections. If any of the above-described
hypothetical events were to occur, Hydro One would still be legally obligated to comply with the
Stipulation in this docket, the settlements it has reached in Washington, Montana, and ldaho, the
Regulatory Commission of Alaska's June 4, 2018 order approving this merger, the Montana
Public Service Commission's forthcoming order approving this merger, and any orders
approving this merger issued by this Commission, the Washington Utilities and Transportation
Commission, and the Idaho Public Utility Commission. As a result, all of the protections
described above that have been built into the Stipulation to ensure that Avista will continue as a
financially sound, stand-alone utility will bind Hydro One regardless of political developments
(e.g., Avista's independent board, financial ring-fencing, capital support). Furthermore, through
the Stipulation in this proceeding and the settlements in Washington and ldaho, Hydro One and
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Avista have committed that none of the commitments in the settlements can be amended without
approval from Avista's state regulators. See Stipulation Commitment No. 2.
Finally, the Stipulation in this docket confirms that the Commission will continue to
regulate Avista as it always has to ensure that Avista's customers are protected and continue to
pay fair, jusf and reasonable rates. ,See Stipulation Commitment Nos. U-71,1l0-l 14.
DATED: June 19,2018.
K&L GATES LLP on Behalf of Hydro One
Limited and Olympus Equity LLC
AVISTA CORPORATION
//2 47orrax
Elizabeth Thomas, Partner (admitted pro hac
vice)
Kari Vander Stoep, Partner (admitted pro hac
vice)
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
1., iz. thom as(g) k I gates. com
kari.vanderstoep@k I sates.conr
David J. Meyer, OSB No. 086383
Chief Counsel for Regulatory and
Governmental Affairs
Avista Corporation
l4l I E. Mission Ave., MSC-27
Spokane, WA 99220-372?
Dav id.mcyer@av istacorp.conr
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ry
EXHIBIT A
AVISTAAND HYDRO ONE JOINT COMMENTS IN
SUPPORT OF STIPULATION AND SETTLEMENT
BEFORE THE PUBLIC UTILITY COMMISSION OF OREGON
uM 1897
In the Matter of the Application of Hydro )
One Limited (acting through its indirect )
subsidiary Olympus Equity LLC) for an )
Order Authorizing Hydro One Limited To )
Exercise Substantial Influence Over the )
Policies and Actions of Avista Corporation )
HYDRO ONE LIMITED'S
RESPONSE TO JUNE 14.2018
BENCH REQUEST
2
Hydro One Limited ("Hydro One") provides the following response to Administrative
Law Judge Patrick Power's Bench Request issued on June 14,2018.
I. BENCH REOUEST
The Bench Request requires Hydro One to file a report on the following issues: (l)
implications of the recent Ontario election for (a) the future management and plans of Hydro
One, and (b) Hydro One's acquisition of Avista; (2) aplan for keeping the Oregon Public Utility
Commission ("OPUC" orooCommission") informed on a timely basis as to new developments;
and (3) what further measures might be necessary to fully develop the record if material changes
are made in Hydro One's management or Board of Directors ("Board").
II. BACKGROUND
Hydro One provides the following information as context to the specifics of its response
to the Bench Request.
A. PROVINCE OF ONTARIO'S ROLE AS HYDRO ONB'S LARGBST
SHAREHOLDER
Until 2015, Hydro One Inc. was owned by the Province of Ontario and referred to as a
Crown Corporation. Hydro One, a new holding corporation, was incorporated by the Province
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of Ontario on August 31,2015, under the Business Corporations Act (Ontario). On October 30,
2015, Hydro One's articles of incorporation were amended to authorize the creation of an
unlimited number of Series I preferred shares and an unlimited number of Series 2 preferred
shares, with the Series I preferred sharesto be issued to the Province. On October 31,2015,all
of the issued and outstanding shares of Hydro One Inc. were acquired by Hydro One from the
Province in exchange for the issuance to the Province of common shares and Series I preferred
shares of Hydro One. On November 4,2015, 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 ("IPO") on
the Toronto Stock Exchange by way of secondary offering of common shares by the Province of
Ontario, with the goal that, over time, approximately 60%o of Hydro One would be held by
private investors. Today, Hydro One is a public company traded on the Toronto Stock Exchange
under the ticker symbol "H."
As at June 12,2018, the Province owned 282,412,648 common shares of Hydro One,
representing approximately 47.4Yo of the common shares. Following conversion of the
convertible debentures issued to finance Hydro One's acquisition of Avista, the Province will
hold less than 43Yo of Hydro One's outstanding stock.
The 2015 amendments to the Ontario Electricity Act, 1998 restricts the Province from
selling voting securities (including common shares of Hydro One) if it would own less than 40%o
of the outstanding number of voting securities of that class or series after the sale. If as a result
of the issuance of additional voting securities of any class or series by Hydro One, the Province
would own less than 40Yo of the outstanding number of voting securities of that class or series,
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then the Province shall, subject to certain requirements, take steps to acquire as many voting
securities of that class or series of voting securities as are necessary to increase the Province's
ownership to not less than 40%o of the outstanding number of voting securities of that class or
series.
In order to assist the Province in meeting its ownership obligations under the Electricity
Act, 1998, under the Governance Agreement with the Province, Hydro One has granted the
Province a pre-emptive right to subscribe for and purchase up to 45o/o of any proposed issuance
by Hydro One of voting securities or securities that are convertible 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.
Hydro One's Board consists of Hydro One's CEO and, in addition, 13 independent
directors who must be, and are, independent of both Hydro One and the Province of Ontario.
The Governance Agreement ensures autonomous commercial operations, with the Province of
Ontario limited to acting as an investor and not a manager.
B. GOVERNANCE AGREBMENT BETWEEN HYDRO ONE ANDPW
The Governance Agreement between Hydro One and the Province of Ontario
(Attachment A to this Response to Bench Request) is a binding contract that was a pre-requisite
for Hydro One's IPO. The Province of Ontario understood that Hydro One would not succeed as
an investor-owned utility and would lose the trust of its investors if the Province were to meddle
in the running of Hydro One's business. As a result, the Province entered into the Governance
Agreement to provide the investment and financial communities the assurance that Hydro One
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will operate like any other investor-owned utility, even though the Province will likely continue
- strictly as an investor - to own at least 40%o of Hydro One's shares.
The Hydro One Board, and not the Province, is responsible for supervising the
management of Hydro One's business and affairs. (Governance Agreement ("GA") 2.1.2 and
2.3) The Province is involved in Hydro One as an investor and not as a manager. (GA 2.1 .3) The
Province has no role in the processes of appointment, removal, replacement, and compensation
relating to executive officers or related succession planning. Hydro One neither takes direction
nor seeks consent for its operations from the government of Ontario, outside of the defined
regulatory and oversight authority that the government has over the electricity sector. (GA 2.1.3;
2.2)
While a 40o/o or more shareholder of a corporation under most circumstances could
control the entire composition of the corporation's board, the Governance Agreement prevents
the Province from exercising similar influence over Hydro One. A Nominating and Governance
Commiffee nominates directors and advises the Board regarding its stewardship role in the
management of Hydro One. (GA 3.5). The Board consists of a minimum of l0 and a maximum
of 15 members and is comprised as follows: (i) the CEO is proposed for election, (ii) the
Province nominates 40o/o of directors (or its proportionate share, whichever is less) proposed for
election,l and (iii) the Nominating and Governance Committee nominates the remaining
directors proposed for election. (GA 3.3.1 ; 4.1 .1)
Other than the CEO, each director must be independent of Hydro One and the Province.
(GA 4.2.2; 4.2.3) Directors must be high-quality, reputable, experienced leaders with the
I If the Province is diluted below 407o, there will be a minimum 24-month "cure period" before any reduction in its
permitted number of nominees occurs. (GA 4.8). In any event, these directors must be independent of the Province
and Hydro One.
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requisite skills, board experience, time, and motivation foran operation of Hydro One's size and
scope. Directors are also chosen in light of Hydro One's core operating principles. (GA 4.2.1)
Directors must meet the requirements of applicable securities and other laws and any stock
exchange on which Hydro One securities are listed. (GA 4.2.4)
The Governance Agreement limits 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.g., amendment to articles, continuance, arrangements, and
amalgamations). (GA 2.5) The Province may vote its shares as it sees fit in the event a
fundamental change is initiated by another shareholder. (GA 2.5) 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 would be prohibited from doing directly. (GA 2.6). The Governance
Agreement may be terminated only with the mutual agreement of both parties. (GA 8.4)
C. SETTLEMENT STIPULATION COMMITMENTS:
GOVERNANCE AND FINANCIAL RING-FENCING SEPARATE
AVISTA FROM HYDRO ONE
Hydro One, Avista, OPUC Staff, the Citizens' Utility Board, Alliance of Western Energy
Consumers, and the Oregon and Southern Oregon District Council of Laborers (collectively, the
"Parties") filed a Settlement Stipulation on May 25, 2018. The Parties negotiated numerous
commitments designed to provide governance and financial ring-fencing between Avista and
Hydro One. Certain of these merger commitments were developed to ensure that Avista cannot
be subjected to political interference or influence by the Province of Ontario and bolster the
protections already provided by the Govemance Agreement.
First, Avista will have a nine-member board separate from Hydro One that will govern
Avista's management and operations. Three of the five Avista directors selected by Hydro One
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(not by the Province) must be independent under NYSE rules. Further, those three directors
must be residents of the Pacific Northwest. Two of the four directors selected by Avista must be
independent under NYSE rules. ,See Stipulation Commitment No. 5. As a result, the Province
will not be able to exercise any control over Avista through selection of Avista's board.
Second, Avista's CEO must be selected by Avista's board -- not Hydro One or the
Province. See Stipulation Commitment No. 4.
Third, Olympus Equity LLC's three-member board must include one independent
director. See Stipulation Commitment No. 6.
Fourth, Avista's executive management will remain in place and must be selected by
Avista's board -- not Hydro One. See Stipulation Commitment No.4.
Fifth, Avista's employees will be retained. See Stipulation Commitment Nos. I l, 12,79,
80.
Sixth, Hydro One is required to provide Avista with enough equity so that Avista can
access debt on reasonable terms. ,See Stipulation Commitment Nos. 44, 47. Therefore, the
Province cannot deprive Avista of its capital and assets for the benefit of the Province.
Seventh, Avista will continue to have its own credit ratings. Hydro One is required to
provide Avista with sufficient equity to ensure that Avista's credit ratings remain investment
grade. See Stipulation Commitment Nos. 45, 48. Therefore, again, the Province cannot deprive
Avista of its capital and assets for the benefit of the Province.
Eiehth, Avista will be prohibited from issuing dividends if certain financial metrics
relating to the equity floor, credit ratings and debt coverage are not met. Basically, this operates
to keep retained earnings at the Avista level where they will improve Avista's financial strength.
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See Stipulation Commitment No. 50. This too prevents the Province from depriving Avista of its
capital and assets for the benefit of the Province.
Ninth, several of the Stipulation commitments protect Avista from being drawn into
bankruptcy proceedings that are not in the best interest of Avista and its customers. Avista will
issue a single share of preferred stock referred to as the Golden Share to an independent third
party. The vote of this share will be required to place Avista into voluntary bankruptcy. See
Stipulation Commitment No. 55. Further, Avista's entry into voluntary bankruptcy would
require the consent of a fwo-thirds majority of all of its directors, including the affirmative vote
of a majority of the Independent Directors at Avista, which would have to include the affirmative
vote of at least two Avista-designated Independent Directors. See Stipulation Commitment No.
56. Hydro One and Avista must also provide a non-consolidation opinion to confirm the
effectiveness of the ring-fencing measures to prevent the substantive consolidation of the assets
and liabilities of Avista with those of the entities above it in the corporate chain of ownership.
See Stipulation Commitment No. 57. The corporate structure also includes Olympus Equity
LLC, a bankruptcy-remote special purpose entity that will have no debt. See Stipulation
Commitment No. 58. Therefore, the Province cannot obtain Avista's capital and assets through a
bankruptcy proceeding unless that would be in the best interests of Avista's customers.
Tenth, Avista's utility assets can be pledged only for the benefit of Avista, not Hydro
One. See Stipulation Commitment No. 59. Therefore, the Province cannot strip Avista of its
capital and assets for the benefit ofthe Province.
III. RESULTS OF ONTARIO ELECTION
On June 7,2018, voters in the Province of Ontario elected a new government that will be
led by the Progressive Conservative Party, replacing the Liberal government led by Kathleen
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Wynne. The Premier-Designate is Doug Ford. The Ontario Premier is the equivalent of a state
governor in the United States. The new government will be sworn in on June 29,2018.
Mr. Ford has suggested that he is going to call the provincial legislature back into session
during the month of July to address several priority issues that arose during the campaign.
Normally the provincial legislature would not reconvene until fall. On Friday, June 15,2018,
Mr. Ford stated that his top priority is to dismantle Ontario's cap-and-trade system for carbon
emissions and repeal the carbon tax. Mr. Ford also wants to pass legislation that will end a strike
at Toronto's York University.
During the campaign, Mr. Ford stated that he wanted to remove Hydro One's CEO Mayo
Schmidt and some or all of the members of Hydro One's Board of Directors. On Friday, June
15,2018, Mr. Ford made a statement reiterating his intention to remove Mr. Schmidt. We do not
know whether or how Mr. Ford will attempt to follow through on these statements.
During the campaign, members of the New Democratic Party stated that they would try
to "bring Hydro One back into public hands" by buying back some orall of Hydro One's shares
held by entities other than the Province; the precise mechanism by which this would be
accomplished was never revealed. The New Democratic Party did not win enough seats to
control the provincial government, nor offset the majority of seats now held by the Progressive
Conservatives in Ontario's Legislative Assembly. Even if a party were to attempt this in the
future, the Governance Agreement would make this more complex than simply buying back
shares, as it prevents the Province from buying any additional shares if it owns more than 45%o of
Hydro One. Mr. Ford and other members of the Progressive Conservative Party have not
suggested that they will pursue a policy of returning Hydro One to Crown Corporation status and
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had made statements throughout the campaign generally supportive of privatization in Ontario's
energy sector.
IV. PROCESS FOR REMOVAL OF HYDRO ONE BOARD OR HYDRO ONE CEO
If Mr. Ford and his Progressive Conservative Party wished to seek to remove some or all
of Hydro One's Board and its CEO, they could accomplish these objectives in one of two ways:
(1) procedures established by the Governance Agreement, or (2) legislation.
As explained above, the Governance Agreement establishes an independent Hydro One
Board with the following features: the CEO is selected by the Board (not the Province), the
Province nominates 40Yoof the Board's directors (or its proportionate share, whichever is less)
proposed for election, the Nominating and Governance Committee (now known as the
"Govemance Committee") nominates the remaining directors proposed for election, and other
than the CEO, each director must be independent of Hydro One and the Province. The Province
has no role in the processes of appointment, removal, replacement, and compensation relating to
executive officers or over related succession planning.
In order to remove the Hydro One Board, the Province must follow the procedures in
Article 4.7 of the Governance Agreement: (l) serve a Removal Notice on Hydro One requesting
the removal of Hydro One's Board at a shareholder 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 Board from its Removal Notice) (GA 4.7.1); (2) the chair of the Board will establish a
committee comprising representatives of Hydro One's five largest shareholders, except the
Province (the "Ad Hoc Nominating Committee") (GA 4.7.2); (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") (GA a.7.3); (4) once
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the slate of new Board members is established, the shareholder Removal Meeting must be held
within 60 days (GA a.7 .9; and (5) at the Removal Meeting, the Province must vote in favor of
the slate of new Board members established by the Ad Hoc Nominating Committee and the
Province (GA 4.7.6).
Under the Article 4.7 procedures, Hydro One's shareholders must remove the entire
Hydro One Board; they cannot remove just certain Board members. (GA 4.7.1) Further, the
Board cannot be replaced with any board members who were part of the previous Board. (GA
4.7.3) All nominees must be vetted by the Ad Hoc Nominating Committee and must meet the
stringent qualification standards set in the Govemance Agreement. (GA 4.7.3 and 4.3) Article
4.7 does not permit shareholders to hire or fire Hydro One's CEO or other members of its
management team. (GA 4.7.1) Article 4.7 simply provides a process by which Hydro One's
shareholders can install a new Board.
Although the Province cannot remove the CEO, presumably the new Board installed
pursuant to Article 4.7 procedures could take steps to consider removing the CEO if the Province
triggers this process.
As an alternative to following the Article 4.7 procedures in the Governance Agreement,
Mr. Ford and his Progressive Conservative Party could attempt to pass legislation during the
upcoming legislative session that would give the Province the authority to remove and replace
the Hydro One CEO and/or its Board. We do not know whether Mr. Ford and his party will
pursue such legislation, and we do not know what provisions and procedures would be included
in that legislation to effect the removal of the Hydro One CEO and/or the Board.
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V. REPORTS ON FUTURE POLITICAL DEVELOPMENTS IN ONTARIO
Hydro One's plan for keeping the Commission informed on a timely basis as to new
developments in Ontario and the management of Hydro One is as follows. Hydro One
respectfully requests that each report filed pursuant to the plan described below be included as
part of the record in this docket.
Hydro One will file reports in this docket (until the docket is closed) whenever a
significant event occurs or statement is made by the Province's new leadership that provides
further new insight regarding the future of Hydro One's executive leadership and/or Board. The
next scheduled significant event would be the convening of the provincial legislature in July if
Mr. Ford follows through on his proposal to reconvene the legislature before the regular session
this fall or any media statements in the interim period containing new and significant insight into
the government's plans with regard to Hydro One. Hydro One will file reports regarding any
legislation that is proposed or statements made prior to or during that session regarding Hydro
One's executive leadership and Board. Further, Hydro One also will file reports on any
significant public statements made by the Province's new leadership that provide new insight
regarding the future of Hydro One's executive leadership and Board. Finally, Hydro One will
file reports on any efforts made by the Province to trigger the procedures in Article 4.7 of the
Governance Agreement to replace Hydro One's Board.
VI. CONCLUSION
The Province could trigger the provisions in Article 4.7 of the Governance Agreement to
replace Hydro One's Board or the Province's new leadership could introduce legislation for the
purpose of dismissing Hydro One's CEO or members of the Board. These are just possibilities,
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but even if they were to come to pass, Hydro One, Avista, and the other Parties in this docket
have included governance and financial ring-fencing in the Settlement Stipulation that will
protect Avista and its customers. Even if Hydro One's CEO and Board are replaced, that would
not change anything with respect to Avista as established by the Parties in their Settlement
Stipulation.
Even if Mr. Ford succeeded in removing Hydro One's CEO or Board, such actions would
not diminish Hydro One's deep and highly experienced management and its ability to
successfully operate Hydro One's business and be an owner of Avista. Furthermore, as
described above, Avista will be governed by its own board and operated by its own management
after the merger.
Hydro One and Avista, along with the rest of the Oregon Parties, developed the
Settlement Stipulation to ensure that Avista could not be negatively impacted in any way by any
of the hypothetical events described in the previous sections. If any of the above-described
hypothetical events were to occur, Hydro One would still be legally obligated to comply with the
Stipulation in this docket, the settlements it has reached in Washington, Montana, and Idaho, the
Regulatory Commission of Alaska's June 4,2018 order approving this merger, the Montana
Public Service Commission's forthcoming order approving this merger, and any orders
approving this merger issued by this Commission, the Washington Utilities and Transportation
Commission, and the Idaho Public Utility Commission. As a result, all of the protections
described above that have been built into the Stipulation to ensure that Avista will continue as a
financially sound, stand-alone utility will bind Hydro One regardless of political developments
(e.g., Avista's independent board, financial ring-fencing, capital support). Furthermore, through
the Stipulation in this proceeding and the settlements in Washington and ldaho, Hydro One and
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Avista have committed that none of the commitments in the settlements can be amended without
approval from Avista's state regulators. See Stipulation Commitment No. 2.
Finally, the Stipulation in this docket confirms that the Commission will continue to
regulate Avista as it always has to ensure that Avista's customers are protected and continue to
pay fair, jus! and reasonable rates. ,See Stipulation Commitment Nos. 64-71,1l0-l 14.
DATED: June 19,2018.
K&L GATES LLP on Behalf of Hydro One
Limited and Olympus Equity LLC
%Lowax
AVISTA CORPORATION
By
Elizabeth Thomas, Partner (admitted pro hac
vice)
Kari Vander Stoep, Partner (admitted pro hac
vice)
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-l158
I., iz. thorn as(rD.k I gates. com
kari.vanderstoep@k I sates.corn
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David J. Meyer, OSB No. 086383
Chief Counsel for Regulatory and
Governmental Affairs
Avista Corporation
l4l I E. Mission Ave., MSC-27
Spokane, WA 99220-3727
David.mcyer@av istacorp.corn
Exhibit A to Avista and Hydro One Joint Comments in Support of Stipulation and Settlement Page 13 of '1 3
/n ry