20180710Montana Final Order.pdf

Avista Gorp.
141 1 East Mission P.O. Box3727
Spokane. Washington 99220-0500
Telephone [phone]
TollFree 800-727-9170
July 10,2018
Diane Hanian, Secretary
Idaho Public Utilities Commission
Statehouse Mail
W. 472 Washington Street
Boise, Idaho 83720
RE: AVU-E-17-09/AVU-G-17-05 Final Order in the Montana Merger Proceedings
Dear Ms. Hanian:
Please find attached an electronic copy of the Final Order in the Hydro One/Avista Merger docket
in Montana.
Sincerely,
/s/ Paul Kimball
Paul Kimball
Regulatory Analyst
Enclosure
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IN THE MATTER OF Avista Corporation and )
Hydro One Lirnited's Application for )
Authorization of the Proposed Sale and Transfer )
of Avista Corporation )
DEPANTMENT OF PUBLIC SERVICE REGULATION
BEFORE THE I'UBLIC SBRVICE COMMISSION
OF THB STATE OF MONTANA
Service Date: July 10,2018
REGULATORY DIVISION
DOCKETNO. D2017.9.71
ORDER NO. 7577a
FINAL ORDER
PROCEDURAL HISTORY
L On September 14, 2017, Avista Corporation and Hydro One Lirnited
("Applicants") filed an application with the Montana Public Service Commission
("Commission") for authorization of the proposed sale and transfer of Avista Corporation
("Application").
2. On September 27,2017, the Cornmission issued a Notice of Application and
Intervention Deadline, establishing October 19,2077, as the deadline to intewene with the
Application. On November 9, 2017 , the Commission issued a Notice of Staff Action granting
intervention to the Montana Consumer Counsel ("MCC").
3 . On Novemb er 27 , 20 I 7, the Comrnission issued Procedural Order 7 577 , which
established a variety of deadlines for this docket, including a deadline for the Commission to
identify additional issues. On April 21,2018, the Cornmission issued a Notice of Additional
Issues which required the Applicants to supplement their Application with infonnation on
whether the transaction, the potential regulatory conditions associated with it, or the finalized
depreciation study regarding Avista's Colstrip generation assets will detrimentally irnpact
Montana-sited resources. The Commission provided a further oppo(unity for parties to intervene
regarding the additional issues, ancl on March 19,2018, the Commission granted intervention to
the Montarra AFL-CIO and the City of Colstrip ("Colstrip").
4. On May 15, 2018, the Commission received a Notice of Settlement fiom the
Applicants and the City of Colstrip ("Settlement"). Under the tenns of the Settlement, Avista has
DOCKETNO. D2017.9.71, ORDERNO.7577a 2
agreed, among other things, to provide Colstrip with an additional $1.5 million to the $3 million
already committed to the Applicant's Montana Community Transition Fund. Mern. of
Agreement by and among City of Colstrip, Avista Corp. and Hydro One Limited (May 15,
201 8).
5. The Commission held a public hearing on May 17,2018, to receive evidence on
the Application and the Settlement. 'fhe Comrnission received a comment o1'support for the
Application from the Montana Charnber of Commerce on May 18, 2018.
6. During a regularly scheduled work session on June 12,2018, the Commission
approved the Application, as discussed below.
LEGAL STANDARD
7. In evaluating sale and transfer applications, the Commission has histolically used
three standards: the public interest standard, the no-harm to consumers standard, and the net-
benefits standard. In re Babcock & Brov,n Inft'aslructtn'e Ltd., Docket D2006.6.82, Order 6754c
']135 (Aug, 1,2007).ln examining these standards, the Cornrnission has stated:
It rnay be irnpossible to enunciate a general standard that is applicable in all cases.
For example, if the Commission were faced with the sale of a public utility that
was not providing adequate service, it wor-rld be appropriate for the Commission
to apply a net benetlt standard that assured customers would receive adequate
service. In another case, a utility rnay be providing adequate service but just rates
for the potential acquirer may be higher than cumently charged. In such a
situation, it would be appropriate fbr the Commission to apply a no-harm to
consumers standard.
Id,
8. The Commission has recently applied all three standards in sale and transfer
dockets. In re Gas Nattn'al, Inc.,Docket D2016.11.91, Order 7534e u 20 (Jul. 20,2017); In re
Cur Bank Gas Co., Docket D2008.3.27, Order 6907b tf 20 (ltlov. 2,2009). The Montana
Consumer Counsel has requested the Cornmission again apply all three standards in this
proceeding. Hr'g Tr.19:14-21 ("I would simply urge the commission to once again articulate all
three of these standards in its final order in this case, and to recognize again that any or allof
these standards could be applied in future merger and acquisition proceedings.").
9. The Comrnission acknowledges this Application presents different concerns from
a typical sale and transfer application. See, e.g., In re Mounlain Water Co., Docket D20l 6.2.15.
Order 7475i fllT29-38,48 (May 31. 2016) (for Montana's largest regulated water utility, the
DOCKET NO. D2017.9.71, ORDER NO. 7577a
Commission imposed a lower cost of debt within the utility's revenue requirement due to the
new upstream owners' lower cost of debt); h re Babcock & Brov,n Infiaslructure Ltd., fl'!] 144-
152 (for Montana's largest regulated utility, the Commission denied Babcock & Brown's
application to purchase NorthWestern, in part, over concerns of the proposed acquisition
premium and how Babcock & Brown would recover these costs)i In re Gas Natural, hc.,\ 12
(for a utility with a history of debt management difficulties, the Commission approved the
application finding the ultimate acquirer, BlackRock Inc., is "a financially strong enterprise with
more than $5 trillion of assets under management" arrd "is the largest utility investor in the U.S.,
with substantial knowledge grading utility operations and regulation and a reputation fbr
supporting sound utility management and financing.")
10. In contrast, Avista has only 32 retail electric customers and Avista rarely comes
before the Commission with any applications, including rate increases, due to its small Montana-
jurisdictional customer base. See ln re Avista, Docket D2010.11.107, Order 7130a(Apr.27,
201l) (Avista's last rate case before this Commission, who prior to then had not been before the
Commission since 1986). As a result, a traditional examination of this sale and transfbr is not
appropriate.r Instead, the Commission examines this transaction under the public interest
standard focusing on the potential impacts on electric generation as a whole in Montana. See,
e.g., In re Cheyenne Light Fuel ond Pov,er Co., Consolidated Dockets 20003-EA-04-75 and
30005-GA-04-97,2004 Wyo. PUC LEXIS292, *43 (Aug. 26,2004) (after finding, in par1, that
there "is no evidence before us that any other utility or its customers in Wyoming would be
I The record, as presented to the Comnrission, likely fails to satis$, the net benefits and no-harm to customers
standards. The economies of scale and synergies of management which the Applicants argue suppoft approval are
neither identified nor quantified. SeeApplication !f 25. The only potentially tangible economy of scale identified-
Hydro One's $40 rnillion Move-to-Mobile techrrology-is not supported by evidence that it can, in fact, be shared
witlr Avista. Hr'g Tr. 87. Additionally, the benefit to Montana customers is de minimis. This transaction will not
provide Montana customers with short+erm rate reduction benefits, as the Applicants state it is cost-prohibitive to
commit a total propoftional rate credit of $190 for Montana customers. Appl. App. 8, Commitment 18, Hr'g. Tr.
202. Neither will tlris Transaction significantly affect the services received by Montana custorners, as the Applicants
repeatedly state that services rvill remain essentially the same post-closing. See generally Appl.T l8 ("AIl of these
features together with other provisions embedded within the Merger Agreement are designed to ensure that Avista's
customers will continue to receive the service they have conle to expect fronr a company that has been a Pacific
Northwest presence for more than 100 years."). Regardless, the intervening parties did not contest these issues and
the Commission did not raise these issues through the additional issue process. The Commission accordingly applies
the public interest standard to this case and declines to thoroughly exanrine the no harm to custonlers and net
benefits test in this case. In future sale and transfer applications, the Comrnission may continue to apply all three
standards.
aJ
DOCKET NO. D2017.9.71, ORDER NO. 7577a
advelsely affected or harmed by the transaction," the Wyoming PUC approved the proposed
transaction under the public interest standard).
I l. This case presents concerns for Montana's electric generation. Avista owns a
15 percent share in both Colstrip Units 3 and 4. Dir. Test. Jason Thackson, p. lT,Table 2
(Mar. 6, 2018). In Idaho and Washington, Avista has agreed to an accelerated depreciation
sclredule for Colstrip Units 3 and 4. In re Avista Corp., Docket U-170970, Settlement Stipulation
and Agreerrent Attacli A, p. 1 (Wash. Utils. and Transp. Corrrn'n Mar.27,2018) ("Avista
Washington Settlemenl"); In re Avista Corp., Consolidated Dockets AVU-E-18-09 and AVU-G-
17-5, Stipulation and Settlement, Ex. Ap.22 (Idaho P.U.C. Apr. 13,2018) ("Avista ldalto
Settlement"). Argr"rably, accelerated depreciation removes an economic incentive for Avista to
opemte the assets because it limits Avista's allowable revenue, See Hr'g Tr. 38:11-14
(Mr. Morris acknowledging that accelerated depreciation is "one of many strategies" interested
parties have used to facilitate premature letirement of disfavored utility generation assets). As
indicated by the different terrninal depreciation years for each owner of Colstrip Units 3 and 4 in
the table below, Avista's agreed-to accelerated depreciation potentially creates regulatory and
operational risks for the other Colstrip owners as each has diverging economic incentives to
operate their respective share ofthe assets.
Colstrip Unit 3 Colstrip Unit 4
Ownership Cument Terminal Ownership Current Terminal
Owner Percentage Depreciation Year Percentage Depreciation Year
Puget Sound Energy 25% 2027 25% 2027
PacifiCorp 10% 2046 l0% 2046
Portland General 20% 2030 20% 2030
ElectricNorthwestern O% No ownership 30% 2043
Energy, LLC
Talen Energy, LLC 30% Not a rate-regulated 0% No ownership
entity
2 Avista's ownership in Colstrip Units 3 and 4 is updated to reflect the changes proposed in the Idaho and Washington
merger dockets. This does not reflect an endorsement by the Montana Cornmission of a terminal deprecation year of
2027.
4
DOCKETNO. D2017.9.71, ORDERNO.7577a 5
Dir. Test..Tason Tliackson, p.17, Table 2 (Mar. 6,2018);Hr'g Tr. 35:16-36:5, 40:641:2,
48:1949:7,122:21-124:16 (noting that operation, including closure, of Colstrip depends on the
six owners).
12. Accordingly, the Comrnission applies the public interest standard with a focus on
the potential impact on Montana electric generation.
FINDINGS OF FACT
13. This transaction involves the sale and transfer of Avista Corporation to Hydro
One Lirnited.
14. Seller Avista is a publicly-traded electric and natural gas utility that provides
electric generation, transmission, and distribution services to over 378,000 customers throughout
Washington, Idaho, and Montana, as well as natural gas distribution to 342,000 customers
throughout Washirigton, Oregon, and Idaho. Additionally, Alaska Electric Light & Power, a
wholly-owned indirect subsidiary of Avista, provides electric generation, transmission, and
distribution service to approximately 17,000 ctrstomers in Juneau, Alaska. Appl.fl 2. Avista's
operations are prirnarily within the Westem lnterconnection power grid.
15. In Montana, Avista serves 32 retail electric customers in western Montana. Of
these customers, 14 are Avista-owned structures or facilities, nine are Avista employees living in
Avista-owned housing, and the remaining are small commercial customers with one non-Avista
employee residential customer. Id.n3. Additionally, Avista owns a 15 percent share of Colstrip
Units 3 and 4, each a 778 MW nameplate coal-fired generating facility, arrd Noxon Rapids, a
569.5 MW nameplate capacity hydroelectric genelating facility.
16. Purchaser IJydro One Lirnited is a publicly traded Ontario Corporation, with two
primary operating subsidiaries. The first, Hydro One Inc., offers rate-regulated services which
comprise 98 percent of the company's operating revenue, while Hydro One Telecon'r Inc.
provides non-rate regulated services which includes the majority of the remaining 2 percent of
the company's operating revenue. Id. n 17 , Appendix 1:1. Hydro One Inc. is an investor-owned
electric transmission and distribution utility that provides service to more than 1.3 milliori retaii
customers in Ontario, Canada. Id. n2.I{ydro One's operations are located exclusively within the
Eastern Intercomection power grid.
DOCKET NO. D2017.9.71, ORDER NO. 7 577a
17. The aggregate purchase price of the transaction is approximately $5.3 billion,
comprised of a $3.4 billion equity purchase, and the assumption of $i,9 billion of Avista's debt.
1d If the transaction is approved, Avista will become a wholly-owned indirect subsidiary of
Hydro One Limited-through its Ontario Corporation "Can Sub," its Delaware Corporation
"Olympus Holding Corp.," and its Delawar-e Limited Liability Company "Olympus Equity
LLC." Supp.Test. Lopez, at 4. Upon closing, the New York Stock Exchange will delist Avista's
colllrron stock, and Hydro One will become Avista's sole shaleholder. Appl. tl 16.
Depreciation of Colstrip Units 3 and 4
I 8. In this proceeding, Applicants have committed that the depreciation of Colstrip
Units 3 and 4 will not deviate from the existing schedule as currently approved by the
Conrmission. Suppl. Direct Test. Jason Thackston 2:204:24 (Mar.27,2018). Avista's most
recent depreciation study bolsters this commitment by indicating a respective2034 and2036
end-of-life date for Colstrip Units 3 and 4. Suppl. Direct Test. Patrick Ehrbar 5:13-24 (Mar. 6,
2018). These commitments and the depreciation study are in tension with Applicant's
settlements before the Washingtori Utilities and Transportation Commission and the Idaho Public
Utilities Commission. Avista l4/ashinglotz Setllement Attach. A, p. 1 ; Avista ldaho Settlement
Ex. A, p. 22.Itt those jr"rrisdictions, the Applicants have agreed to accelerate the end-of-usef'url
life date to 2027 for both Units. These settlements continue the recent trend of utilities settling
with interest grollps to accelerate depreciation tbr ratemaking purposes of Colstrip Units 3 and 4.
See, e.g., In re Puget Sotutd Energt, Consolidated Dockets UE-170033 and UG-170034,
Order 08 flfl 95-145 (Wash. Utils. and Transp. Comm'n Dec. 5, 2017) (establishinga202T
accelerated depreciation date fbr Puget Sound Energy's ownership interests in Colstrip Units 3
and 4, where the utility had suggested 2035 as the more appropriate end-of-life date).
19. Under traditional raternaking practices, depreciation schedules reflect the useful
remaining life of the assets. 18 CFR $ 101, FERC Uniform Systern of Accounts, No. 22
Depreciation Accounting ("Utilities rnust use a method of depreciation that allocates in a
systematic and rational manner the service value of depreciable property over the service life of
the properly."); James Bonbriglrt, Principles of Public Utility Rates 270 (Albert Danielsen &
David Kamerschen ed., 1988) ("Under a systematic and consistently applied program of rate
regulation this procedule of capital-cost amortization through annual charges to revenue account
is by no means one of mere bookkeeping. Instead, it is designed to afford a company an adequate
6
DOCKET NO. D20r 7.9.71, ORDER NO. 7577a
opportunity to recoup tiom ratepayers its investments in fixed assets during their estimated
useful-service lives.").
20. The record evidence in this docket, hou,ever, indicates that the accelerated
depreciation adopted by Washington and Idaho for Colstrip Unit 3 and 4 does not reflect the
remaining useful life of these assets and is not consistent with traditional ratemaking principles.
See Suppl. Dir. Test. Ehrbar 5:13-18 ("The present depreciable life for Colstrip Units 3 and 4 is
50 years. With Colstrip Unit 3 placed in service in 1984 and Colstrip Unit 4 placed in service in
1986, these depreciable lives extend to2034 and 2036, respectively."), Ex. 9,p.57 (summarizing
the composite remaining useful life tbr CU3 as 16.8 years and CU4 as 18.7 years); DR PSC-024
("A depreciation schedule's irnplied remaining useful life of a power plant is a reflection of the
estimated remaining useful life of a piece of plant for accounting purposes (e.g., the period over
which to amofiize the cost of the investment)."); FIr'g Tr. I 3 I :2-9 (Acknowledging that the 2027
depreciation date was the result of an all-party settlement agreement and that "all other things
being equal, in isolation. the depreciation rate for Colstrip would be 2034 and 2036 for Units 3
and 4 respectively,just as it has been.").
21. Accordingly, the Commission declines to endorse any depreciation schedule for
Colstrip Units 3 and 4. This issue will be addressed, as necessary, in future rate cases or other
contested case proceedings before the Commission. To allow the Commission's complete
understanding of the Applicants' plans for Colstrip Units 3 and 4, Applicants rnust provide the
Commission witli its integrated resource plans concerning its Montana generating resources
when those plans became available.
22. The Applicants have assured the Commission that the accelerated depreciation
adopted in other jurisdictions will not result in an early or different retirement date for Colstrip
Units 3 and 4. See Second Supp. Test, Jason Thackston 3:21-4:2 (Apr. 17,2018) ("the Joint
Applicants did not in Washington nor in Idaho, as a part of the merger process, commit to
anything that would cause an early shutdown of the Colstrip units."); Hr'g Tr. 27:20-28:19
(Mr. Morris, Avista's Chairman and CEO, testifying that closure of Colstrip Units 3 and 4 will
require approval of the six owners and will be subject to future regulatory proceedings), 36:1 l-
22 (Mr. Morris stating accelerated depreciation, for ratemaking purposes, will not irnpact on the
closure date of the plant), 5l:6-52:3 (Mr. Morris stating "whether the plant's been fully
depreciated or not on the books has, really, nothing to do with its use and useful life."), 56:24-
7
DOCKET NO. D2017.9.71, ORDER NO. 7577a
57:4 (Mr. Momis assuring the Comrnission that "nothing within the context of the merger. . .
would accelerate the closure of the Colstrip plant"), 109:21-110:7 (Mr. Schmidt, Hydro One's
CEO and President, providing the same assurances to the Commission). The Commission
approves this Application because of these representations fi'om the Applicants. The Commission
expects the Applicants to off'er consistent representations before it and tribunals in other
jurisdictions in tuture proceedings.
Commitments
23. To further support the Application, the Applicants list con'rmitments to address
common utility merger concerns. These commitments are an attempt to ameliorate various risks
raised by the transaction. Specifically, they include commitments related to reservation of ceftain
authority to the Avista Board of Directors; governance; business operations; local
presence/community involvement: rate commitments;regulatory conrmitments; financial
integrity commitments; ring-fencing commitments; environmental, renewable energy, and
energy efficiency commitments; and community and low-income assistance commitments. Appl.
App,8.
24. Concurent to this Application, the Applicants have submitted settlement
agreements in other jurisdictions where regulatory approval is required, which include revised
cornmitments. Sec, e.g., Avisla Washington Seltlement p.25; Avista ldaho Settlement, Ex. A
p.23; ln re Arista Corp., Docket UM 1897, Stipulation, App. A pp. 4647 (Or. P.U.C, May 25,
2018). The Comrnission adopts language sirnilar to the most favored nations language used in
these other jurisdictions. Specifically, the Commission reserves the right, olt its own motion, to
incorporate any heightened commitments established in other jurisdictions that are relevant to
Montana. In the event of a conflict between such commitments approved in the State of Montana
and those approved in other jurisdictions, the cornmitments that the Commission determines are
more favorable to the public interest shall govern, where appropriate. The Applicants must
supplement this Application with the final list of commitrnents determined in other jurisdictions.
CONCLUSIONS OF LAW
25. The Cornmission has provided suffrcient notice of this proceeding, and an
opportunity for interested persons to be heard. Mont. Code Am. $ 69-3-104 (2017); Mont.
Admin. R. 38.2.1801 (201 8).
8
DOCKETNO. D2017.9.71, ORDERNO.7577a 9
26. The Commission has the fullpower of supervision, regulation, and controlof
public utilities. Mont. Code Amr. $ 39-3-102.
27. Generally, the Commission's broad authority includes the power to do all things
necessary and convenient in the exercise of its powers. Mont. Code Ann. S 69-3-103(l).
28. Specifically, this broad authority includes the authority to approve, condition, or
deriy public utility sales, mergers, and acquisitions. In re Babcock & Brou,n Infrastructtre Ltd.,
\35; In re Gas Natural, Inc., \ 17.
29. The Commission concludes that the transaction is in the public interest.
ORDBR
30. The Applicants request for Flydro One Limited to purchase Avista Corporation,
including the Settlement between the City of Colstrip and the Applicants, is APPROVED.
31. The Commission reserves the right, on its own motion, to incorporate any
heiglitened commitments established in other jurisdictions that are relevant to Montana
customers. In the event of a conflict between such commitments approved in the State of
Montana and those approved in other jurisdictions, the commitments that the Commission
determines are more favorable to the public interest shall govern, where appropriate.
32. 'I'he Applicants must supplement this Application with the final list of
commitments determined in other jurisdictions.
33. The Applicants must provide the Commission with its integrated resource plans
concerning its Montana generating resources when those plans became available.
DONE AND DATED the l2th day of June,20l8, by a vote of 4-1, with Commissioner
O'Domrell dissenting.
DOCKET NO. D2017.9.71, ORDER NO. 7577a
BY ORDER OF THE MONTANA PUBLIC SERVICE COMMISSION
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a copy of the Final Order issued on July 10, 201 8 in Docket
D2017.9.71was served upon the following,
Mailing a true and conect copy:
Robert Nelson
Montana Consumer Counsel
I l1 N. Last Chance Gulch, Ste. lB
P.O. Box 201703
I{elena, MT 59620-1703
David J. Meyer Esq.,Avista Corp.
P.O. Box 3727
1411 E. Mission Avenue, MSC 27
Spokane, WA99220-3727
James Scarlett
I-lydro One
483 Bay Street, 8tl'Floor, South Tower
Toronto, Ontario, M5G 2P5
Emailing a true and correct copy:
Avista Corp.
david.mever@avistacom. com:
pat. ehlbar@avi stacorp. com:
Hydro One
Liz.thomas@kl gates. com ;
Kari. vanderstoep@kl g4tes.com :
j scar lett@hydroone. com:
dirk. middefrts@kl gates. com:
[e-mail] :
eorders
Gary A. Ryder
PO Box 1902
Colstrip, MT 59323
James P. Molloy
Gallik, Bremer, & Molloy, P.C.
777 East Main St., Suite 203
Bozeman, MT 59771
Kari Vanderstoep, Elizabeth Thomas
K&L Gates LLP
925 Fourlh Avenue, Suite 2900
Seattle, WA 98104-1158
Montana Consumer Counsel
[e-mail];
[e-mail];
[e-mail];
[e-mail]:
snelson@crowleyfl eck. com :
wbalker@crowleyfl eck. com :
mgreen@crowlevfl eck. coml
[e-mail]
grvder(@ranseweb.net
/s/Sydney KesselDated: July 10,2018
Sydney Kessel, Adrninistrative Assistant