20180924Scarlett Supplemental Direct.pdf

ldaho public Utilities Commission
Offic_e of the SecretarvRECEIVED '
sEP 2 { 20t8
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ON BEIIAIF OF AVISTA CORPORJATION
DAVID J. MEYER
V]CE PRES]DENT AND CHIEE COUNSEL EOR
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3121
I4!I EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3121
TELEPHONE: [phone]L6
FACSIMILE: [phone]
DAV]D . MEYERGAVISTACORP . COM
Boise,ldaho
ON BEIIALF OF HYDRO ONE LIMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUrTE 2900
SEATTLE, WA 981014-1158
TELEPHONE: [phone]
FACSIMILEz [phone]
LIZ . THOMAS GKLGATES . COM
KARI . VANDERSTOEPGKLGATES. COM
BEFORE THE IDAIIO PI'BLIC UTILITTES COMMISSTON
IN THE MATTER OE THE JOINT
APPLICATION OF HYDRO ONE L]M]TED
(ACT]NG THROUGH ITS ]NDIRECT
SUBS]DIARY, OLYMPUS EQU]TY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZTNG PROPOSED
TRANSACTION
CASE NO.
CASE NO.
AVU-E-1 1 -09
AVU-G-17-05
SUPPLEMENTAL TESTIMONY
OF
JAMES D. SCARLETT
FOR HYDRO ONE LIMITED
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I. INTRODUCTION
A. P1ease state your nErme, business address and present
position with Hydro One Limited.
A. My name is James D. ("Jamie") Scarlett, and my
business address is 483 Bay Street, South Tower, Bth Floor,
Toronto, Ontario M5G 2P5. I am Executive Vice President and
Chief Legal Officer for Hydro One Limited ("Hydro One").
O. Did you submit prefiled direct or rebuttal testimony
in this proceeding?
No.
Are you sponsoring' any exhibits that accompany your
12 testimony?
13 A. Yes. Attached to my testimony are:
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a Exh. No. 10, Schedul-e 1 - July 20Lg Letter Agreement
between Hydro One and Her Majesty The Queen in Right
of Ontario
a Exh. No. 10, Schedule 3 Governance Agreement
Exh. No. 10, Schedul-e 2
Priorities Act, 2078,
AccountabiLity Act, 2018
Schedul-e 1 of the Urgent
titled the Hydro One
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A table of contents for my testimony is as foll-ows:
TNTRODUCT]ON
JUNE .7 ,2OL8 ELECTION. . .
JULY II, 2078 LETTER AGREEMENT
HYDRO ONE ACCOUNTABTLTTY ACT, 2018..
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KEEPING THE COMMISSION APPR]SED OE DEVELOPMENTS
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IN ONTARIO
THE FUTURE OF THE GOVERNANCE AGREEMENT 20
THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) ...... 24
. SETTLEMENT CONN4ITMENTS DESIGNED TO PROTECT AV]STA'S
]NDEPENDENCE AND FINANCIAL HEALTH. .
PROPOSED NEW OR AMENDED COMMITMENTSIX.
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ADOPT]ON OF MAYO SCHMIDT TESTIMONY 4B
Surunary of Testimony
A. Please surnmarize your testimony.
A. My testimony addresses the following topics: (i) the
June I | 201,8 election of a new Ontario government, (ii) the JuIy
LL, 2018 Letter Aqreement ("Ju1y 20LB Letter Agreement") and
the resignation of Hydro One's Board and retirement of Hydro
One's Chief Executive Officer (*CEO") Mayo Schmidt, (iii) the
Hydro One AccountabiTity Act, 2018, (iv) Hydro One's and
Avista's efforts to keep the Commj-ssion apprised of developments
in Ontario, (v) the future of Hydro One's Governance Agreement
with the Province, (vi) the impact of NAFTA on the Proposed
Transaction, (vii) the settlement commj-tments designed to
protect Avista's independence and f inancial hea1th from
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proposal to add a new commitment and amend its commj-tment
regarding Avista's posL-merger board in response to the events
after the June l, 20LB Ontario election involving Hydro One,
and (ix) my adoption of Mayo Schmidt's previously filed
testimony and exhibits in this proceeding.
II. iII'NE 7 2OL8 ELECTION
a. Please describe the outcome of the Province of
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10 Ontario's election on ilune 7 , 20L8.
A. On June 7, 2078, voters in Ontario elected a new
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qovernment that wiII be led by the Progressive Conservative
Party, replacing the Liberal Party government l-ed by Kathleen
Wynne. The Premier is Doug Ford of the Progressive Conservative
Party. The Ontario Premier is the equivalent of a state governor
in the United States. The Progressi-ve Conservative Party has a
substantial majority in the Legislative Assembly of Ontario.
A. Has the new lrovernment taken office?
A. The new government was sworn in on June 29, 2018.
A. IYhat promises did the Progressive Conservative Party
make during its campaign regarding Hydro One?
A. During the campaign, promises were made by the
Progressive Conservative Party to remove Hydro One's CEO Mayo
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Directors. The Progressive Conservative Party also promised to
reduce electricity rates for Ontario residents.
O. T{hat mechanisms were available to the government to
fulfill these campaign promises regarding Hydro One's CEO and
Board of Directors?
A. If the qovernment wished to seek to remove some or
al-I of Hydro One's Board and its CEO/ they could accomplish
these objectives either (i) through procedures established by
Section 4.1 of the Governance Agreement (the "Governance
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11 of Ontario (the "Province"),or (ii) through leglslation. The
72 Governance Agreement is Exh. No. 10, Schedule 3 to my
13 supplementaf testimony.
l4 A. Please e:<plain the procedures in Section 4.7 of the
15 Governance Agreement.
L6 A. The Governance Agreement establishes an independent
L] Hydro One Board with the fol-l-owing' features: the CEO is selected
18 by the Board (not the Province), the Province nominates 40% of
19 t.he Board's directors (or its proportionate share, whichever is
20 Iess) proposed for election, the Nominating and Governance
27 Committee (now known as the "Governance Committee") nominates
22 the remaininq directors proposed for election, and other than
23 the CEO, each director must be independent of Hydro One and the
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fn order to remove the Hydro One Board, the Province must
fol-l-ow the procedures in Section 4.7 of the Governance
Aqreement:
(1) serve a Removal- Notice on Hydro One requesting the
removal of Hydro One's Board at a sharehofder meeting (the
Removal Not.ice does not apply to Hydro One's CEO even though he
is a Board member; the Province also can exempt the chair of
the Board from its Removal Notice) (Section 4.1 .!) ;
(2) the chair of the Board will est.ablish a commlttee
10 comprising representatj-ves of Hydro One's flve largest
11 shareholders, except the Province (the *Ad Hoc Nominating
72 Committee") (Sectj-on 4.7.2);o 13 (3) the Ad Hoc Nominating Committee and the Province wil-f
L4 work together to develop a slate of new Board members to be
15 considered at an upcoming shareholder meeting (the "Removal-
76 Meeting") (Section 4.'l .3) ;
L7 (4) once the slate of new Board members is estabfished,
18 the sharehol-der Removal Meeting musL be held within 50 days
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20 (5) at the Removal- Meeting,, the Province must vote in favor
2L of the sl-ate of new Board members establ-ished by the Ad Hoc
22 Nominating Committee and the Province (Section 4.7.6).
23 Under the Section 4.1 procedures, Hydro One's shareholders
24 must remove the entire Hydro One Board; they cannot remove just
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o 1 certain Board members. (Section 4.1.1) Eurther, the Board cannot
2 be replaced with any board members who were part of the previous
3 Board. (Section 4.1 .3) AII nominees must. be vetted by the Ad
4 Hoc Nominating Committee (Sections 4.7.3 and 4.3) and must meet
5 the qualification standards seL in Section 4.2.7 of the
6 Governance Agreement each director nom-inee must be an
7 individual of high quality and integrit.y who has: (i)
8 significant experience and expertise in busi-ness or that is
9 applicabl-e to business, (ii) served in a senior executive or
10 l-eadership position, (iii) broad exposure to and understanding"
11 of the Canadian or international business community, (iv) skil-ls
12 for directing the management of a company, and (v) motivation
13 and availability, in each case, to the extent appropriate for a
L4 business of the complexity, size and scale of the business of
15 Hydro One and on a basis consj-stent with t.he highest standards
16 for directors of leading Canadj-an publicly fisted companies.
l7 Section 4.7 does not permit shareholders to hire or fire
18 Hydro One's CEO. Section 4.1 simply provides a process by which
L9 Hydro One's shareholders can install a new Board. Section
20 2.3 (b) of the Governance Agreement reserves t.o the Board the
2L authority to appoint, terminate, supervise and compensate the
22 CEO, Chief Einancial Officer and other senior officers of Hydro
23 One.
A. Please e:<plain the J.egisJ.ative path available to the
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government.
A. As an al-ternative to following the Section 4.1
procedures i-n the Governance Agreement, the qovernment al-so had
the option of passing legislation during the special legislative
session convened in JuIy that would give the Province the
authority to remove and replace the Hydro One CEO and its Board.
III. JT'LY 11 2OL8 LETTER AGREEMENT
A. What did Hydro One's executive team and Board do after
the Progressive Conservative Party took a majority of the seats
in the Ontario Legislature?
A. On July 4, 2018, discussions were hel-d between
representatives of the Board and of the government,
respectively. On July 5, 2018, discussions were hel-d between
J-egal counsel to the Board and a representative of the
government and privileged and confidential discussions were held
among the Board Chair, another representative of the Board and
the Board's legal counsef. Subsequently, representatives of
the Board, the Board's legal counsel and representatives of the
government hel-d various discussions and meetings during July 6,
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22 representatives from the Cabinet Office, and representatives of
23 the Ministry of Energy, Northern Development and Mines, the
24 Ministry of Finance and the Attorney General, and led to the
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2 into between Hydro One and Ontario as represented by the
3 Honorable Greg Rickford, Lhe Minister of Enerqy, Northern
4 Development and Mines. The JuIy 2078 Letter Agreement between
5 Hydro One and Her Majesty The Queen in Right of Ontario is
5 attached as Exh. No. 10, Schedul-e 1.
7 Q. Wtry did Hydro One enter into the JuIy 2OLg Letter
8 Agreement with the Province?
9 A. The replacement of the Board and the CEO was one of
10 the campaign promises made by the Progressive Conservative Party
11 during the election campaign for the election that took place
72 on June '7 | 2018. In light of this, the Board of Hydro One
13 determined that it wou1d be in the best interest.s of Hydro One
14 to voluntarily resign to facilitate the orderly replacement of
15 the Board in a sequential manner on an expedited basis. Rather
76 than wait for the government to trigger the procedures in the
L7 Governance Agreement or pursue legislation with potentially
1B intrusive provisions, a process for replacing the Board was
79 documented in the July 20LB Letter Agreement. In doing so, the
20 Province and Hydro One complied with the spirit and intent of
2L Section 4.1 of the Governance Agreement. In order to serve the
22 best interests of the company, the parties agreed to forego the
23 requirement to hofd a sharehol-ders' meeting, thereby expediting
24 the process and reducing uncertaj-nty.
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a. What process for selecting the new Board was
established in the iluly 2018 Letter Agreement?
A. The July 20LB Letter Agireement. provides that (i) an
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Ad Hoc Nominating Committee comprised of representatives of each
of Hydro One's five largest shareholders (or a lesser number
depending on how many of the five larg:est shareholders wished
to serve on the Ad Hoc Nominating Committee), excluding the
B Province, would be formed to nominate six directors of the new
9 Board; and (ii) the Province would nominate four directors. The
10 new directors must meet the requiremenLs set out in the
11 Governance Agreement. As noted above, Section 4.2 of the
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13 nominees. The new Board woul-d then appoint a replacement Chair
14 of the Board from among their number consistent with Section
15 3.2 of the Governance Agreement
t6 The process prescribed by the July 20LB Letter Aqreement
Ll to sefect Hydro One's new lO-member Board, which consists of
18 four Provinclal desiqnees and six designees chosen by the Ad
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20 besides the Province, follows the requirements of Sections 4.3
27 and 4.-l of the Governance AgreemenL
22 A. Has the process been
23 One's new Board as provided in
completed for selecting Hydro
the JuIy 2018 Letter Agreement?
in the Supplemental Testimony of
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Hydro One's then Chair Thomas Woods ("Woods Testimony") , the Ad
Hoc Nominating Committee was formed and three of the five
largest Hydro One shareholders participated, excluding the
Province. The Ad Hoc Nominating Committee selected sj-x members
for the Board, and the Province selected four members. Hydro
One announced the members of the new Board on August L4, 20tB
and Thomas Woods as the Chair on September J, 20L8. See Woods
Testimony, SS II and III.
A. Are the new Board members announced on August L4
Each of the Replacement Directors nominated and appointed
to the Board pursuant to section 1 of this Agreement shal-l-
serve on the Board until the earlier of the 2079 annual
meeting of sharehofders of Hydro One or until his or Isrc]resignation or his or her successor is elected or appointed
in accordance with the Governance Agreement and the OBCA.
Exh. No. 10, Schedule 1-, S 2
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11 A. No. As with previous Board members, the new Board
L2 members are subject to annual- approval of the Hydro One
13 sharehol-ders, consistent with the Governance Agreement and the
74 Busrness Corporations Act (Ontarlo) (*OBCA"). Section 2 of the
15 July 2078 Letter Agreement provides:
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24 What led to the retirement of former CEO Mayo Schmidt?
25 The Governance Agreement requires that the CEO be
26 appointed by the Board and annually have his appointment
21 confirmed by a special- resol-ution of the Board (i.e., two-thirds
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2 writing by al-l- directors) . See Section 3.3 of the Governance
3 Agreement. fn light of the events outlined above and the
4 anticipated difficul-ty of him attempting to carry out his duties
5 as CEO without the support of Hydro One's single largest
6 sharehol-der, the former CEO Mayo Schmidt retired from his
7 positions, having determined that it would be in the best
8 interests of Hydro One and its stakeholders to do so.
9 Q. I{hat process for selecting the new CEO was established
10 in the JuJ.y 2OLg Letter Agreement?
11 A. Pursuant to Section 3.3 of the Governance Agreement
L2 and Section 13 of the JuIy 20L8 Letter Agreement, the new Board
13 wifl appoint a replacement CEO, who will- become the el-eventh
74 Board member.l The Board Chair wil-l- establish a CEO Selection
15 Committee, which wil-l- in turn appoint an Executive Recruiting
L6 firm. Interna.l- and external- candidates will be intervj-ewed,
l7 and a preferred candidate will be se1ected. Negotiations with
18 the preferred candidate wil-l- then take place in an effort to
79 enter into an agreement to be appolnted CEO. The Board will
20 proceed with al-l- deliberate speed in the process of finding a
1 At the time of the Joint Application, Hydro One had 15 directors, one of
whom did not stand for re-el-ectj-on at the company's 2018 annual- meeting of
shareholders. At the time of the July 2018 Letter Agreement, the Hydro Oneboard consisted of 14 directors, 13 members plus President and CEO MayoSchmidt. Pursuant to the July 2018 Letter Agreement, the new board will
lnitialIy consj-st of 10 directors plus the new CEO.Scarlett, Supp 11
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2 Testimony, S IV.
3 Q. Does the ,IuIy 2018 Letter Agreement contain any other
4 provisions besides those described ahove relating to the
5 replacement of the Hydro One Board and CEO?
6 A. Hydro One has agreed to consult with the Province in
7 respect of future matt.ers of executive compensation. Eurther,
B PauI Dobson, Hydro One's Chief Financial Officer, has been
9 appointed as acting CEO until such time as the repJ-acement board
10 of directors can appoint a new CEO.
11 A. Does the JuIy 2018 Letter Agreement impact Avista
L2 employees?
13 A. The JuIy 2078 Letter Ag:reement has no impact on Avista
L4 employees. A11 acti-ons taken pursuant to the JuIy 2078 Letter
15 Agreement involve only the replacement of Hydro One's Board and
76 retirement of Hydro One's CEO.
l1 A. Does the JuIy 2OLB Letter Ag'reement impact the Merger
18 Agreement between Avista and Hydro One?
79 A. The July 20IB Letter Agreement has no impact on the
20 Merger Agireement between Hydro One and Avista. Nothing in the
2L JuIy 20LB Letter Agreement addresses the Merger Agreement in
22 any wdy, and Hydro One has stated on multiple occasions since
23 the July 2078 Lett.er Ag'reement was executed that it remains
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2 merger.
3 Q. Does the JuIy 2OLB Letter Agreement include new merger
4 terms for Avista executives?
5 A. No. The July 20lB Letter Agreement does not incl-ude
6 "new merger terms for Avista executives" but rather documents
7 the agreement between Hydro One and the Province for the orderly
8 replacement of the board of directors of Hydro One and the
9 retirement of Mayo Schmidt as the chief executive officer
10 effective July 11.
11 A. Does the 'JuIy 2OLB Letter Agreement impact the
L2 Settlement Stipulation signed by the parties?
13 A. The July 2018 Letter Agreement has no impact on the
L4 Settlement Stipulation signed by the parties. Nothing in the
15 JuIy 201-8 Letter Agreement addresses the Settl-ement Stipulation
76 filed in this docket, and Hydro One has stated on multiple
1,1 occasj-ons sj-nce the July 20LB Letter Agreement was executed that
18 it remains committed to the merqer.
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ZU IV. HYDRO ONE ACCOT'NTABILITY ACT 20L8
2t A. Did the new government convene a special. legislative
22 session after the ,June 7 , 2018 election?
23 The new government convened a special
24 J-egislative session on July 71, 2018.
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A. Did the Progressive Conservative Party introduce
J-egisJ.ation impacting Hydro One?
A. On Monday, July L6, 2018, the new Provincial
government int.roduced the Urgent Priorities Act, 2018, which,
inc1uded as Schedule L, the Hydro One Accountabil-ity Act, 2078.
The Hydro One Accountability Act, 2018 is attached as Exh. No.
10, Schedufe 2
A. Please sununarize the requirements of the Hydro One
Accottrttability Act.
10 A. The Hydro One Accountabifity Act (the "Act") addresses
11 concerns about compensation for Hydro One executives focated in
o L2 Ont.ario. It requires the board of Hydro One to establish a new
13 compensation framework for the Board of Directors, CEO, and
L4 other executives in consul-tation with the Province and the other
15 five largest sharehol-ders. The Act gives the Manaqement Board
16 of Cabinet authority to approve this compensation framework and
Ll any amendments to it as wel-l as to issue dj-rectives qoverningr
18 the compensation of the directors, CEO, and other executives.
L9 The Act afso amends the Ontario Energy Board Act, 1998 to
20 requJ-re the Ontario Energy Board t.o exclude any amount in
2l respect of compensation paid to the CEO and executives from
22 consumer rates for Hydro One or its subsidiaries.
23 The Act requires Hydro One to annually publish on itso24 website a record of the total- compensation of execuLives as
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prescribed by regulation. The Act also requires Hydro One to
publish on its website any proposed changes to its compensation
frameworks for the board, CEO, or other executives at least 30
days prior to the date on which it seeks Management Board of
Cabinet approval- for those changes pursuant to the Act.
The new legislation does not change the fact that Hydro
One is a publicly traded commercial entity separate from the
Province of Ontario.
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10 when it became law
11 A. The Urqent Prioritres Act, which incfudes Schedule 7,
1,2 the Act, went through first, second, and third readings in the
13 Ontario Legislature. The Legislature did not amend the
L4 legislation. The Urqent Priorities Act then received Royal
15 Assent on JuLy 25,20\8, which is the day it came into force as
16 the l-aw of Ontario. Schedule 1 provides that the Act comes into
L7 force on a day to be named by proclamation of the Lieutenant
18 Governor. That proclamation was delivered on August 15, and
79 the Act is now effective.
20 O. Will the Act apply to the executives of Avista if the
2l merger of Hydro One and Avista is consununated?
22 A. No. As defined in the Act, the term "subsidiary"
23 excl-udes any subsidiary incorporated j urisdiction outs j-de
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A. What, Lf you know, was the impetus for the Act?
A. It appears that the Act was the result of a campaign
promise made by the Progressive Conservative Party to address
executj-ve compensation at Hydro One. The Act does not apply to
executives of Hydro One's subsidiaries incorporated outside of
Canada and hence, would not appfy to Avista if the merger is
consummated.
A. Will the Act impact the Merger Agreement between
Avista and Hydro One?
A. The Act wil-I have no impact on the Merger Agreement10
11 between Avista and Hydro One. As not.ed, the Act does not apply
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13 A. Will the Act impact the Set,tlement StipuJ-ation signed
L4 by the parties?
15 A. The Act wil-l- have no impact on the Settlement
76 St.ipulation signed by parties because the Act applies only to
71 Hydro One's subsidiaries incorporated in Canada.
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19 V. KEEPING THE COMMISSION APPRISED OF DE\IELOPMENTS IN ONTARIO
20 A. P1ease describe how Hydro One and Avista have kept
2! the Corunission apprised of developments related to Hydro One in
22 the most recent Province of Ontario election?
23 A. Hydro One, and enerqy policy l_n general, have
24 regularly been a focus of the media in Ontario. Tn this most
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recent election, statements regarding Hydro One were publicly
made by the various political parties and candidates runningr
during the el-ection. It was only af ter the f inal- settlement
conference between the Idaho parties in this proceeding on April
4, 2018, that electricity rates in Ontario and Hydro One's
executive management and compensation became a more prominent
issue. The first mention regarding a change of Hydro One's
B manaqement happened on April 10, 20L8. Election campaigns in
9 Canada are shorter than in the United States and starting in
10 June, 2078, Hydro One and Avista informed the Commlssj-on of the
11 recent developmenLs as it became clear they may impact Hydro
o 72 One, wel-I before the schedul-ed evidentiary hearing or any
13 potential decision on the merger.
74 Shortly after the June '7, 2078 election, Hydro One and
15 Avista notified the Commisslon of the outcome of the election
L6 and the campaign promises made by the Ontario Progressive
Ll Conservative Party regarding Hydro One in their June 20, 2078
18 Avista and Hydro One Joint Comments in Support of Stipulation
79 and Settlement in the Idaho proceedings. On June 20, 20L8,
20 Hydro One still did not know how the el-ection could impact Hydro
27 One, but chose to update the Commission regarding campaign
22 promlses made by the new government weII before the evidentiary
23 hearing schedul-ed f or JuLy 23, 20LB .
Sj-nce the filing of the June 20, 2018 comments in
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o 1 of the settlement, Hydro One and Avista have regularly updated
2 the Commissj-on on the actions of the Ontario government with
3 respect to the management and Board of Directors of Hydro One,
4 having filed with the Commission a letter, dated July 18, 2018,
5 regarding the JuIy 2078 Letter Agreement; a JuLy 20, 2078 letter
6 regrarding a Standard & Poor's Report; a Report, dated August
7 15,2018, on Hydro One Management Changes; a September 10, 20LB
B Supplemental- Report on Hydro One Chair and Managiement Changes;
9 and a September 14,20Lg Supplemental- Report on Hydro One's S&P
10 Rating.
11 A. Do you believe that Hydro One's acquisition of Avista
is stiJ-J' in the public interest?
A. Yes. Hydro One remains a strong and suitable parent
company for Avista and the deal continues to be in the public
interest. The benefits of the transaction for Avista raLepayers
remain unchanged. As was stated in the Joint Application dated
September L4, 20!7, the companies are culturally aligned. Hydro
One's market capitalization is approximately three tlmes the
size of Avista and wil-l provide Avista with improved access to
capital markeLs. Hydro One is a strategic investor, rather than
a financial investor, and its interests are aliqned with
Avista's for long-term success. To this end, Hydro One has made
a number of commitments to preserve Avista's ability to run its
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customers. Since the Joint AppJ-ication, Hydro One and Avista
joined other Idaho parties in reaching the Settlement
Stipulation filed on Aprj-J- 13, 20L8, in this docket, and agreed
to significant commitments that wil-1 have both immediate and
long-term positive impacts on Avista's Idaho customers. Hydro
One stands by these commitments. The Ontario election, the JuIy
20LB Letter Aqreement, and subsequent events have no effect on
these commitments and benefits.
Eurther, while the cost of electricity for a typical
10 residentlal customer 1n Ontario has more than doubled over the
11 last ten years, those increases have not been driven by Hydro
o 72 One, which is so1e1y a distribution and transmission utility.
13 Over that same 1O-year period, customer costs for Hydro One's
L4 Lransmission and distribution delivery services have increased
15 by an average of less than 3% annua11y. The costs that have
L6 led to the doubling of electricity costs for residentiaf
71 customers over the past 10 years were the result of cost
1B increases at electricity generation companies that were required
19 t.o comply with Provincial green power initiatives. Hydro One,
20 as the entity that sends the bill to customers, is often
27 incorrectly blamed for the entirety of the biIl, regardl-ess of
22 Hydro One's actual impact on the total bilt. To the extent that
23 t.his may subject Hydro One to the politics in Ontario, the
24 governance and ring-fencing commitments in the SettJ-ement
Scarlett, Supp 79
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Sti-pulation (including Stipulated Commitment Nos. 2, 3, 9, 10,
and 42-51) were designed to ensure that Avista's customers will
not be impaqted by Ontario pol4ics.
VI. THE ET'TT'RE OF THE GOVERNATICE AGREEMENT
O. Do you beJ.ieve that the Governance Agreement
continues to govern the relationship between the Province and
Hydro One?
A. Yes. Pursuant to Section 16 of the July 20LB Letter
Agreement between Hydro One and the Province (Exh. No. 10,
Schedul-e 1), except for the provisions of the Act which are
principally limited to compensat.ion matters pertaining to Hydro
One and its subsidiaries incorporated wlthin Canada, the
Province ratified and reaffi-rmed its commitment to the
Governance Agreement, which remains in full force and effect:
L6. Reaffirmation: By entering into this Agreement, the
Province ratifies and reaffirms its obligations under the
Governance Agreement and agrees that, except as
specifically set out in this Agreement with respect to the
subject matter hereof, (i) the execution, delivery and
effectiveness of this Agreement or any other documents
delivered in connection herewith shal-l- not amend, modifyor operate as a waiver or forbearance of any right, power,
obligation, remedy or provision under the Governance
Agreement, and (ii) such agreement shalf contlnue in ful-l-
force and effect.
Exh. No. 10, Schedule L, S L6.
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30 an investor and not a manaqer of Hydro One, and the Provj-nce's
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decision-making authority in respect of Hydro One is restricted
to that of any other investor with respect t.o voting its shares
in any decisions that are brought forward for sharehol-der
approval. The Province al-so has the right to nominate 40 percent
of the Board of Directors (other than the CEO), but al-I directors
remain subject to an annual vote by all sharehol-ders of Hydro
One.
As noted above, although the Province's rights as a
sharehol-der are Iimited by the Governance Agreement, the
Province retains legislative authority to pass legislation with
respect to subjects within its jurisdiction, such as the Act.
O. Do you know if the Province intends to take any
further actions with respect to Hydro One?
A. I am not aware of any further actions t.hat the
10
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76 mentioned above, the government has stated that it would like
11 to reduce electricity rates for Ontario residents. I do not
l-8 know what, if dDy, further actions that the Province may take
79 to address electricity rates, and am not aware of any pending
20 legislation that would lmpact Hydro One's manaqement or rates.
27 I do not believe that any such action woufd affect the agreed-
22 upon commitments reflected in the filed Stipulat.ed Settlement,
23 which insul-ate Avista's customers from provincial affairs, ds
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A. The Joint Application states that "As of JuIy 3L,
20L7, the Province owned 49.9* of Hydro One's shares with the
remainder of shares held by private investors. Based on facts
known today and assr:ming the Proposed Transaction is completed,
the Province's leve1 of ownership of Hydro One wiJ.l decJ.ine to
below 458." Does this statement continue to be accurate?
A. The statement continues to be true except that as at
August 3L, 2078, the Province owns approximately 41.4% of Hydro
One's common shares. As at July 31, 201,1, the Province did own
49.92 of Hydro One's shares. On January 2, 20L8, the Provj-nce
announced the sale of 14,39L,072 common shares of Hydro One
Li-mited, representing approximateJ-y 2 .4% of the outstanding
common shares, to OFN Power Holdings LP, a fimited partnership
wholly-owned by Ontario Eirst Nations Sovereign Wealth LP, which
is in turn owned by 729 First Nations in Ontario at a purchase
price of $18 per share, for a total purchase price of
$259, 038 ,276. That transaction ful-f ill-ed the Province' s
commj-tment in its agreement-in-principle with the Chiefs-in-
Assembly on behalf of the First Nat.ions in Ontario, which was
previously announced on July 72, 2076.
Immediately prior to the closing of that transaction, the
Province owned 296,803,660 common shares of Hydro One Limited,
representing approximately 49.9% of the common shares of Hydro
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2 approxj-mately 47 .4% of the common shares of Hydro One.
3 Q. As a follow up to the prior question, what is Hydro
4 One's understanding regarding the Province of Ontario's future
5 stake in Hydro One?
6 A. Based on facts known today, and assuming the Proposed
7 Transactj-on is completed, the Province's l-evel of ownership of
8 Hydro One wil-l- decline to approximately 422. The Province has
9 al-so agreed in the Governance Agreement not to acquire
10 previously issued voting securities if after that acqulsition,
11 the Province would own more than 45% of any cl-ass or seri-es of
12 voting securities (including common shares of Hydro One).2
13 The Province wiII likeIy continue to own at least 40% of
1,4 Hydro One's shares for the foreseeable future. The Ontario
15 El-ectricity Act, 1998 restricts the Province from selling voting
1,6 securities (including common shares of Hydro One) if it. would
71 own l-ess t.han 40% of the outstanding number of voting securities
18 of that cfass or series after the sa.Ie.
79 I f as a resul-t of the issuance of additional- voting
20 securities of any class or series by Hydro One, the Province
2 This restriction does not apply to the acquisition by the Province of voting
securitles as a result of the enforcement by the Province of any security interest
securing payment of debt obligations owing to the Province or to certain acquisitions
of voting securities by entities refated to the Province or by third party managed
funds or as passive j-nvestments. This restrictj-on also does not require the Province
to sefl- any of the common shares of Hydro One that it currently owns, nor does it
limit the Province from acquirlng voting securities on an issuance by Hydro One,
including pursuant to the exercise by the Provj-nce of 1ts pre-emptive right.Scarlett, Supp 23
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woul-d own l-ess than 40% of the outstanding number of voting
securities of that cl-ass or series, then the Province sha]1,
subject to certain requirements, take steps to acquire as many
voting securlties of that cl-ass or series of voting securities
as are necessary to increase the Province's ownership to not
less than 402 of the outstanding number of voting securities of
that cl-ass or series
B In order to assist the Province in meeti-ng its ownership
9 obligations under the El.ectricity Act, 7998, under Section 6 of
10 the Governance Aqreement, Hydro One has granted the Province a
11 pre-emptive right to subscribe for and purchase up to 452 of
o 72 any proposed issuance by Hydro One of voting securities or
13 securities that are convertibl-e or exchangeable into voting
14 securities (other than certain specified excluded issuances)
15 Any offered securities not subscribed for and purchased by the
LG Province pursuant to its pre-emptive right may be issued to any
11 other person pursuant to the proposed offering.
18
L9 VII. THE NORTH AMERICA}I FREE TRJADE AGREEMENT (NAFTA)
ZU A. Can Hydro One use NAFTA Chapter 11 to overrule or
27 impede the Conunission's authority?
22 A. NAFTA Chapter 11 cannot affect the scope of the
23 Commisslon's authority over Avlsta. NAFTA Chapter 11 only
24 provides for monetary awards or restitution of exproprj-ated
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1 property and, therefore, cannot be used to alter or nulJ-ify a
2 Commissi-on decis j-on or regulation.3 f n reviewing the Fortis/CH
3 Energy Group merqer, the New York Public Service commission
4 stated the following: * [A] state regulatory agency acting
5 lawfully within its statutory authority is not fiabl-e to a cl-aim
6 of damages under NAETA unl-ess an entity covered by the treaty
7 can demonstrate that it made its investment in the state
8 pursuant to express commj-tments by the agency which were
9 subsequently broken. "a
10 To date, the United States has been a defendant L1 times
l-l- under NAFTA Chapter 77, and none of those cfaims invol-ved a
1,2 foreign utility protesting a state utility commi-ssion's
13 decj-sj-on. Not only has the U.S. State Department never lost a
14 NAETA Chapter 11 cfaim brought by a foreign j-nvestor, but also
15 it has never settled such a claim.
76 a. Could Hydro One use NAFTA Chapter 11 to impact
71 Avista's Idaho customers?
18 A. For the reasons stated in my prior answer, Hydro One's
19 understanding is that NAETA Chapter 11 cannot affect the scope
20 of the Commission's authority over Avista, and Hydro One does
27 not believe NAFTA Chapter 11 would have an impact on AvisLa's
3 See NAETA Art. 1135 (1) (a), (b) .4 Joint Petition for Approval- of the Acquisition of CH Energy Group, Inc. by Fortis,
Inc. and Refated Transactions, New York Public Service Commission Case 72-ll.-092,
Order Authori-zing Acqulsltion at 33 (Jun. 26, 2013) and Recommended Decision ofAdmlnistrative Law Judges at 46 (May 3, 2073).
Scarlett, Supp 25
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Idaho customers.
A. The United States, Canada, and Mexico are currently
in negotiations to potentially amend and modify NAFTA. Does
Hydro One have any knowledge regarding the extent to which the
concepts addressed in Chapter 11 will be included, modified, ot
removed in a renegotiated NAFTA?
A. Hydro One's understanding of the renegotiations of
NAFTA between Canada and the U. S. are l-imited t.o what
information has been rel-eased to the public. To the extent that
Chapter 11 is belng renegot.iated 1t appears that any changies to
Chapter 11 wiff be 1ikely to reduce, not expand, the scope of
ref ief avail-abl-e to investors. Given t.his understandinq, and
because existing Chapter 11 provi-si-ons do not pose a credibfe
risk of impeding t.he Commission's authorlty, Hydro One does not
foresee changes to NAFTA' s Chapter 11 that would chanqe Hydro
One's understanding of NAFTA Chapter 11 or its impact on
Avista's Idaho customers.
A. Notwithstanding the fact that Hydro One believes that
NAFTA Chapter 11 could not be used to affect the Conunission's
jurisdiction over Avista or impact Avista's customers in Idaho,
is Hydro One willing to add a conmritment in Idaho regarding the
Conunission' s jurisdiction and the venue for any potential NAFTA
dispute?
A. Yes, for example, Oreg:on Stipulated Commitment No.
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12, f il-ed as part. of the all-party settl-ement agreement in
Oregon Public Utility Commission Docket No. UM 1891 on May 25,
2018, specifically ensures that the Oregon
Commission wj-l-1 retain jurisdict.ion over any
arise in a NAFTA Chapter 11 arbitration:
72. North American Free Trade Agreement
Pubfic Utillty
issue that could
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(NAFTA)
Avista and Parent agree that the Commissj-on would havejurisdi-ction in any future proceedings regarding any
unrecovered liabilities to the State of Oregon that may
resul-t from NAFTA Chapter Efeven mediations, arbitrations,or any other litigation brought by Hydro One's shareholders
under NAFTA. OnIy the Commisslon or the Oregon Attorney
General may initlate such proceedlng.
L4 Oregon Stipulated Commitment No. 72 confirms that Hydro
15 One and Avista recoqnize that NAFTA does not curtail t.he
L6 authority of the Oregon Public Utility Commissj-on to promulgate
L1 and enforce refevant rules and regulations, that Hydro One and
18 Avista explicitly recognize that the Commission's authority over
19 Avista's operations wil-l- remain unchanged by the Proposed
20 Transaction, that the Parties will comply with aff applicable
2L laws and regulations, and that Hydro One and Avista recoqnize
22 the Oregon Pub1ic Utifity Commission's jurisdiction. Hydro One
23 and Avista certainly are will-ing to add a simi1ar commitment in
24 Idaho.
25 Oregon Stipulated Commitment No. 18 also explicitly states
26 that all disputes involving Avista will be resolved in the
21 appropriate state and federal- regulatory bodies or courts in
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the United States:
78. Venue for and Resolution of Disputes
Avista and Parent agree that the venue for disputes
regarding the operation of Avista wilf be in state and
federal regulatory bodies or courts of competentjurisdiction, ds applicable, in Oregon, Washington, Idaho,
Montana or AIaska.
Oregon Stipulated Commitment No. 18 ensures that a NAFTA
Chapter 11 arbitration will not have jurisdiction over disputes
10 . regarding the operatj-on of Avista. Hydro One and Avista
11 certainly are willing to add a similar commitment in Idaho.
72
VIII.SETTLEMENT COMMrII{ENTS DESIGNED TO PROTECT AVISTA'S13
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IIIDEPENDENCE AND FINANCIAI HEALTH
15 A. Is there a question as to whether the Province will
16 directly interfere with Avista's independence and financial
I1 health if the merger is consumnated?
1B A. No. AIl of the parties to this proceeding filed a
79 Settl-ement Stipulatlon and Agreement with the Idaho Pubflc
20 Utilities Commission (the "Commission")on April 13, 20IB
27 ("Stipulated Sett.Iement") . The Stipulated Settlement incfudes
22 13 merger commit.ments (each, a "St j-pulated CommitmefrL, "
23 collectively, the "Stipulated Commitments") that were designed
24 by al-l of the parties to ensure the independence and financial-
25 heal-th of Avista. Through Hydro One's and Avista's opening
26 testimony filed on September 14, 20L1, and an in-persono
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2 carefully explored the risks to Avista associated with its
3 proposed acquisition by a Canadian utility whose largest
4 shareholder is the Province of Ontario. AtI of the parti-es
5 discussed these risks and developed a set of 13 Stipulated
6 Commitments designed to ensure the independence and financial-
7 heal-th of Avista in light of the fact that Hydro One's largest
8 shareholder is the Province of Ontario.
9 I firmly bel-ieve that the 73 Stipulated Commitments will
10 ful1y protect Avista's independence and financial health if the
11 merg'er is consuflrmated, and the events since the June J, 20\B
L2 el-ection do not change my conclusj-on.
13 The Province wifl- not have jurisdiction to directly affect,
L4 interact with, or directly interfere with the management and
15 strategic direction of Avista if the merger is consummated. The
16 Province cannot pass l-aws that apply to Avista. Rather, if t.he
Ll merqer is consummated, Hydro One's ownership of Avista will- be
l-8 constrained by the 13 Stipulated Commitments, any commitments
79 included in the Commission's order approving the merger, and
20 the l-aws of the United States and the five states in which
2L Avista operates (Idaho, Washj-ngton, Oregon, Montana, and
22 Al-aska) .
23 A. How do the Stipulated Conmritments protect Avista's
24 independence and ensure that the Province cannot directly
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interfere with Avista's tnanag:ement and strategic direction?
A. Stipulated Commitment No. 3 provides that only two of
the nine members of Avista's post-merger board can be executives
of Hydro One or any of its subsidiaries. The other three Hydro
One designees must be independent of Hydro One, Avista, and
Hydro One's other affiliates, and be residents of the Pacific
Northwest. Further, of the four Avista designees, three
initiall-y will be from Avista's pre-merger board, j-ncluding the
Chairman of Avista's pre-merger board, and the fourth will be
CEO. If any Avista designee resigns, retires, or
ceases to serve as a director of Avista, then the
Avista designees will have the sol-e right to replace
10 Avista's
11 oLherwise
o L2 remai-ning
13 the departing Avista des j-gnee.
I4 Presuminq that one of the two Hydro One executives on
15 Avista's post-merger board was directed by the Hydro One BoarC
L6 to bring to the Avista post-merger board an initiative that
11 would benefit. Hydro One and/or Ontario but diminish Avista's
18 financial- resources and servi-ce, the seven remaining members of
79 Avj-sta's post-merqer board,aII of whom will not be executives
20 of Hydro One, would have sufficient votes to reject that
27 initiative.
22 Eurther, Stipulated Commitment Nos. 2, 9,and 10 also
23 ensure the independence of Avista's post-merger board and the
24 continued service of Avista's executj-ve management and long-
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term presence in the Pacific Northwest:
2. Executive lulanagement
Avista wiII seek to retain all current executive managementof Avista, subject to vofuntary retirements that may occur.
This commitment wil-l- not f imit Avj-sta' s ability to
determine its organizational- structure and sel-ect andretaln personnel best able to meet Avj-sta's needs over
time. The Avista board retains the ability to dismiss
executive management of Avista and other Avista personnel
for standard corporate reasons (subject to the approval- of
Hydro One Limited ("Hydro One") for any hiring, dismissal-
or replacement of the CEO);
9. Avista' s Headquarters
Avista wlfl, and Hydro One agirees Avista will, maintain(a) its headquarters 1n Spokane, Washington; (b) Avista's
office l-ocatlons in each of its other service territories,
and (c) no less of a significant presence in t.he immediatefocation of each of such office locations than what Avista
and its subsidiaries maintained immediately prior to
completion of the Proposed Transaction,'
27 70. Local Staffingo
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Avista wiII maj-ntain Avista Util-ities' staf f ing
presence in the communities in which Avista operatesfevels sufficient to maintain the provisi-on of safereliabl-e service and cost-effective operations
consistent with pre-acquisition levels;
and
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21 The Supplemental- Testimony of Hydro One's and Avj-sta's
28 Expert Witness John J. Reed ("Reed Testimony") discusses these
29 governance commitments and explains how they represent the
30 state-of-the-art for a utility mergier. Reed Testimony, S III.
31 A. What tooLs do the Stipulated Conunitments provide the
32 Cormnission to ensure Hydro One's long-term financial support of
33 Avista's safety and reliability standards, service quality
34 measures, and customer service metrics?
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A. In addition to the protections provided by the
independence of Avista's post-merger board, Stipulated
Commitment No. 15 fimits the Avista post-merqer board's and
Hydro One's ability to remove or reduce any associated penalty
provisions for 10 years after the dat.e of the merqer:
75. Safety and ReJ,iabiTity Startdards and Serwice QuaZity
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Avista has established Service Quality Performance
St.andards, Customer Guarantees and a Service Quality
Measure Report Card for its customers i-n Washington. Avista
is currently working with the Idaho Commission Staff to
develop similar performance standards, customer guarantees
and a reporting mechanism for its customers in Idaho.
Following Idaho Commission approval of such standards,
customer guarantees and a reporting mechanism, Avista will-
not seek, and Hydro One agrees Avista wiII not seek, to
remove or reduce any associated penalty provisj-ons for ten(10) years after the date of the merger.
79
)o A. Iiltrat tools do the Stipulated Conunitments provide the
27 Conrnission to ensure Hydro One will financial.J.y support Avista
22 and cannot withdraw dividends from Avista if Avista's financial
23 health is in jeopardy?
24 A. In addition to the prot.ections provided by the
25 independence of Avi-sta's post-merger board, Stipulated
26 Commitment Nos. 26 and 34-39 require Hydro One to financially
27 support Avj-sta and l-imit the Avist.a post-merqer board's and
28 Hydro One's ability to withdraw dividends from Avista if
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26. Avista Capital Structure
At al-1 times f ollowj-ng the closing of the Proposed
Transaction, Avistars actual- coflrmon equity ratio wil-l- be
maintained at a level no less than 44 percent. This
commitment does not restrict the Commission from ordering
a hypothetical capital structure.
34. Capital Structare Support
Hydro One wil-l- provlde equity to support Avista'sB
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structure that is designed to all-ow Avista
f inancing under reasonabl-e terms and on
basis.
capitalto debt
a sustainable
ACCC S S
72 35. UtiTity-Level Debt and Preferred Stock
Avist.a will- maj-ntaln separate debt and preferred stock, if
dny, to support its utility operations.
36. Continaed Credit Ratings
Each of Hydro One and Avista will continue to be rated by
at l-east one nationally recognized statistical "Rating
Agency. " Hydro One and Avista wil-l- use reasonable best
efforts to obtain and maintain a separate credit rating
f or Avj-sta f rom at l-east one Rating Agency wlthin the
ninety (90) days following the closing of the Proposed
Transaction. lf Hydro One and Avista are unable t.o obtain
or maintain the separate rating for Avista, they wil-l- make
a filing with the Commission explaining the basis for their
failure t.o obtain or maintain such separate credit rating
for Avista, and parties to this proceeding wifl have an
opportunity to participate and propose additionaf
commitments.
29 37. Credit Ratings Notification
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35 38. Restrictions on Upward Diwidends and Distributions
Hydro One and Avista agree to notify the Commission within
two business days of any downgrade of Avista's credit
rating to a non-investment grade status by S&P, Moody's,
or any other such ratings agency that issues such ratings
with respect to Avista.
a. If either (i) Avista's corporate credit/issuer rating
as determined by both Moodyrs and S&P, or their successors,
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is investment grader or (ii) the ratio of Avista's EBITDAto Avista's interest expense is greater than or equal to
3.0, then distributions from Avista to Olympus Equity LLC
shall- not be limited so long as Avista's equity ratio isequal to or greater than 44 percent on the date of such
Avista distribution after giving effect to such Avista
distribution, except to the extent the Commission
establishes a l-ower equity ratio for ratemaking purposes.
Both the EBITDA and equity ratio shall be cal-culated on
the same basis that such cal-cul-ations would be made for
ratemaking purposes for regulated utility operations.
b. Under any other circumstances, distributions from Avista
to Olympus Equity LLC are al-lowed only with prior
Commission approval.
c. If Avj-sta does not have an investment-grade rating from
both Moody's and S&P, or from one of these entlties r orits successor, if only one issues ratings with respect toAvista, and the ratio of EBITDA to Avista's int.erest
expense is less than 3.0, no dividend distribution to
Olympus Equity LLC or its successors will occur.
39. Pension Eunding
Avista wil-I maintain its pension funding policy in
accordance with sound actuarial practice. Hydro One will
not seek to change Avista's pension funding policy.
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25 The Reed Testimony discusses these financial ring-fencing
26 commitments and explains how they represent the state-of-the-
21 art for a util-ity merger. Reed Testimony, S IV.
28 A. Wtrat tools do the Stipulated Cormnitments provide the
29 Conunission to ensure Hydro One wiJ-J. not draw Avista into
30 bankruptcy?
31 A. fn addition to the protections provided by the
32 independence of Avista's post-merger board, Stipulated
33 Commitment Nos . 42-51 ensure Hydro One wil-l- not draw Avista intoo
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bankruptcy except under extremely l-imited circumstances.
Although I wil-f not repeat. the substance of these commitments
in this testimony, the Reed Testj-mony discusses these bankruptcy
commitments and explains how they represent the state-of-the-
art in bankruptcy protections for a utility merqer, incJ-uding
requirements for a Gol-den Share and a non-consol-idation opinion.
Reed Testimony, S IV.
A. How can the Conunission be certain that Hydro One and
Avista will abide by these Stipulated Conrnitments?
A. Stipulated Commitment Nos. 7, 20, 21, 30-33, and 49
Consistent wj-th and subject to the terms of Exhibits A and
B to the Merger Agreement (referred to as "Delegiation of
Authority") contained in Appendix 5 of the Joint
Application, decision-making authority over commitment.s 2-
15 bel-ow is reserved to the Board of Directors of Avista
Corporation ("Avista") and not to Hydro One. Any change to
the policies stated in commj-tments 2-15 requires a two-thirds (2/3) vote of the Avista Board, provided that Avista
must obtain approval for such changes from al-l regulatory
bodies wj-th jurisdiction over the Commitments before such
changes can go into effect, and provide written notice to
all parties to Case No. AVU-E-7-09/AVU-G-17-05 of such
request for approval:
29 20. State Regtzlatory Authority and Jurisdiction
Hydro One and its subsidiaries, including Avista,AS
Scarlett, Supp 35
Hydro One Limited
10
o
11 ensure that the commitments appfy to Hydro One, cannot be
12 amended wit.hout Commission approval, and provide the Commission
13 (and U. S. courts , if necessary) authority to enforce the
14 commitments:
15 7. Authority Reserved
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applicable and as appropriate, wil-l- comply with all-
applicable l-aws, including those pertaining to transfers
of property, affil-iated interests, and securities and the
assumption of obligations and liabilitles. As required by
and conslstent with applicable l-aws, venue for resofution
of proceedings rel-ated to these matters will- be at the
appropriate state utility commission (s) . Hydro One and its
subsidiaries, including Avista, wiII make their employees
and offj-cers avail-able to testify before the Commission at
the Commission's request to provide j-nf ormation rel-evantto the matters within its jurisdiction.
27. CoryIiance with Existing Com,nission Or.ders
Hydro One and its subsidiaries, including Avista,
acknowledge that all existing orders issued by the
Commission with respect to Avista or its predecessor,
Washington Water Power Co., wil-l- remain in effect, and are
not modified or otherwise affected by the Proposed
Transaction.
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Hydro One
applicable
applicable
and its subsidiaries, including Avista, dsand as appropriate, wiII comply with all
future Commission orders that remain in force.o
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30. COmrnission Enforcemettt of Cornrnifuents
Hydro One and its subsidiaries, including Avista,
understand that the Commission has authority to enforce
these commitments in accordance with their terms. If thereis a viol-ation of the terms of these commitments, then the
offending party may the discretion of the Commission, have
a period of thirty (30) cafendar days to cure such
viol-ation.
The scope of this commitment includes the authority of the
Commission to compel the attendance of witnesses from
Olympus Holding Corp. and its affil-iat.es, including HydroOne, with pertinent information on matters affecting
Avista. Hydro One and Olympus Holding Corp. and its
subsidiaries waj-ve their rlghts to interpose any 1ega1
objection they might otherwise have to the Commission'sjurisdiction to require the appearance of any such
witnesses.
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37. Submittal to State Court Juri'sdiction for Enforcement
of Comnrission Orderso
ScarIett,
Hydro One
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Hydro One, Olympus Holding Corp., and Avista wil-I jointly
file with the Commission prior to closing the Proposed
Transaction an affidavit affirming that. they will submit
to the jurisdiction of the rel-evant state courts for
enforcement of the Commission's orders adopting the
commj-tments made by and binding upon them and their
affil-iates where noted, and subsequent orders affecting
Avista.
32. Annual Report on Comnifarents
By May )-, 2079 and each May 1 thereafter through May l,
2029, Avi-sta will fil-e, and Hydro One agrees Avlsta wiII
fil-e/ a report with the Commj-ssion regarding the status of
compliance with each of the commitments as of December 31
of the preceding year. The report wil-l-, dt a minimum,
provide a descrlption of the performance of each of the
commj-tments, wil-l- be fil-ed in Case No. AVU-E-I7-09/AVU-G-
17-05 and served to all- parties to the docket. If any
commltment is not being met, relative to the specific terms
of the commitment, the report must provide proposed
corrective measures and t.arget dates for completion of such
measures. Avista will make publicly available at the
Commission non-confidential portions of the report.
Z5 33. Connituents Binding
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Hydro One, Olympus Holding Corp. and its subsidiarles,
including Avista, acknowledge that the commitments being
made by them are binding only upon them and their
affiliates where noted, and their successors in interest.
Hydro One and Avista are not requesting in this proceeding
a determlnation of the prudence, just and reasonabfe
character, rate or ratemaking treatment, or public interest
of the investments, expenditures or actions referenced in
the commitments, and the parties in appropriate proceedings
may take such positions regarding the prudence, just and
reasonable character, rate or ratemakingi treatment, orpublic interest of the lnvestments, expenditures or actions
as they deem approprlate.
If Hydro One or any other entity in the chain of Avista's
ownership determines that Avista or any other entity has
failed to comply with an applicable Commitment, the entity
making such determinatj-ons shall take aIl appropriate
actions to achieve compliance with the Commitment.
49. No Azaienfuent of Ring-Fencing Provisions
Scarlett,
Hydro One
Supp 37
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Hydro One, Olympus Holding Corp. and Avista commit that no
material amendments, revisions or modifications wil-1 be
made to the ring-fencing provisions as specified in these
regulatory commitments without prior Commission approval
pursuant to a limited re-opener for the sofe purpose of
addressing the ring-fencing provisions.
A. Several of the Stipulated Conunitments in the Idaho
Stipulated Settlement require Avista's shareholder, Hydro One,
and not Avista's ratepayers, to provide funding for certain
programs (Stipulated Conrnitment Nos. 11 Corununity
Contributions; L9 Rate Credits; 58 Ftrnding for Energy
Efficiency, Weatherization, Conservation, and Low-Income
Assistance Progr€rms ; 6L - Cormrunity Contributions,' 70 - Montana
Cormnunity Transition Fund) . How can the Conunission be certain
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15 that llydro One, as Avista's sole shareholder, will ensure there
L6 is funding for these Stipulated Corunitments?
L'l A. Eirstr ds detailed in the Supplemental- Testimony of
1B Chris Lopez, S III, the $15.8 miflion rate credit wil-I simply
t9 ffow through to Avista customers in the bills issued by Avista.
20 No cash from Hydro One is needed.
2t Second, Stipulated Commitment Nos. 5B and 70 cfearfy state
22 that the funds for these programs will be arranged by Hydro One
23 and Stipulated Commitment No. 66 provides that "any commitment
24 that states Hydro One wil-l arrange funding is not contingent on
25 Hydro One's ability to arrange funding, particuJ-arly from
26 outside sources, but is a firm commitment to provide the dollar
Scarlett,
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amount specified over the time period specified and for the
purposes specified.Avista wil-l not seek cost recovery for
any of the commitments funded or arranged by Hydro One in this
l-ist of merqer commitments. Hydro One will not seek cost
recovery for such funds from ratepayers in Canada or the United
States. " Therefore, Hydro One, as Avista's sole shareholder,
u1timately bears the cost of these commitments.
Third, Stipulated Commitment No. 66 also establishes that
if Avista has retained earnings that would otherwise be
o
10 available to Hydro One as dividends, those retained earnings
11 can be used to fund Stipulated Commitment Nos. 7L,58, 61, and
L2 70: "To the extent Avista has retained earningis that are
13 avaifable for payment of dividends to Olympus Equity LLC
74 consistent with the ring fencing provisions of this l-ist of
15 merger commltments, such retained earnings may be used. Eunds
76 availabl-e from other Hydro One affiliates may be used without
I1 limitatioT7." s In essence, funds otherwj-se avail-able for payment
18 of dividends to Olympus Equity and on up the chain will instead
19 be directed to funding these commitments, as explained ln
20 Supplemental Testj-mony of Chris Lopez, S III.
27 Fourth, as noted j-n response to the prevlous questlon,
s Avista's abllity to use retained earnings to meet these commitments alsowil-l be governed by Hydro One's commitments in Stipulated Commitment Nos.
26, 34, 36-37.Scarlett, Supp 39
Hydro One Limited
o
o 1 Stipul-ated Commitment No. 33 establishes that Hydro One and/or
2 its subsidiaries are bound by the Stipulated Commitments,
3 Stipulated Commitment No. 30 subjects Hydro One and/or its
4 subsidiaries to the jurisdiction of the Commission for
5 enforcement of the Stipulated Commitments, and Stipulated
6 Commitment No. 31 provides that "Hydro One, Olympus Holding
7 Corp., and Avista will jolntly fil-e with the Commission prior
B
9
to closing the Proposed TransacLion an affidavit affirming that
they wil-l- submit to the jurisdiction of the rel-evant state
10 courts for enforcement of the Commission's orders adopting the
11 commitments made by and binding upon them and their affil-iates
o 72 where noted, and subsequent orders affecting Avista. "
13 Therefore, Hydro One, as Avista's sole shareholder, and/or its
14 subsidiaries, have submitted to the jurisdiction of the
15 Commissi-on and Idaho courts for the enforcement of al-l- of the
16 Stipulated Commitments, including those that require Hydro One
71 funding.
1B Eifth, Lf the merger is consummated, t.he Provj-nce wiII not
79 have jurisdiction to modify or nullify the -13 Stipulated
20 Commitments and any conditions included in the Commission's
27 order approving the merger. Hydro One is bound by these
22 contractuaf obligations Even though the Province is a
23 shareholder of Hydro One, Hydro One is the entity that bears
24 the ful-I 1egal responsj-bility for the 13 Stipulated Commitments
Scarl-ett, Supp 40
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and any commitments j-ncluded in the Commission's order approving
the merger if the merger is consummated. The Province is not a
party to Hydro One's contracts and commitments in this
proceeding and no action on the part of the Province is required
for Hydro One to fulfill its obligations.
A. Does Section 8.1 of the Governance Agreement make any
of Hydro One's financial and funding corunitments in the
Stipulated Settlement subject to Provincial appropriations?
A. No, none of the commitments are contingent on
8.7
Pursuant to the IEinancial Administration Act (Ontario) ],
any payment required to be made by the Province pursuant
to this Agreement 1s subject to there being sufficient
appropriation by the Legislative Assembly of Ontario for
the fiscaf year in which the payment is to be made or the
payment having been charged to appropriation for a previous
year.
10 Provincial funding because none cal-ls for any payment by t.he
1l- Province Section 8.1 of the Governance Aqreement states:
Einancial Obligations of the Provinceo72
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20 This provision in the Governance Agreement applies only to "any
2L payment required to be made by the Province pursuant to this
22 [Governance ] Agreement ... . " The Province has no payment
23 obligations, whatsoever, pursuant to Hydro One's contracts and
24 commitments related the Proposed Transaction. Therefore, to
25 the extent Section 8.1 l-imits the Province's payment obligations
26 to the availability of approprj-ated funds, such limitations have
21 no bearing or legal rel-ationship to Hydro One's contractual
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obligations with respect to the Proposed Transaction.
A. Testimony previousJ-y filed in this proceeding by
Avista's CEO Scott Morris and Hydro One's former CEO Mayo
Schmidt emphasized the strong relationship between the two CEOs
and the cultural compatibility of Hydro One and Avista. Does
the retirement of Mr. Schmidt and the Province's actions change
this justification for the Proposed Transaction?
A. No. While the strong rel-ationship bet.ween Mr. Morrj-s
and Mr. Schmidt certaj-nl-y contributed to a meeting of the minds
10 on the Lerms of the merger agreement between Hydro One and
11 Avista, dny corporate transaction of this size is not dependent
o !2 on the relationship of two executives. Eventually, executives
13 retire or .l-eave a company to pursue other opportunities. Both
14 sides understood this and negotiated a merger agreement, the
15 delegation of authority described in Mr. Morris's and Mr.
1,6 Schmidt's direct testimony, and merger commitments that provide
t-l a very clear framework for the interaction of the two companies.
18 Hydro One's commitments to (i) an Avista board with Avista
19 directors and independent directors (as defined by the NYSE
20 rules) (*Independent Directors") from the Pacific Northwest,
21 (ii) contj-nued headquarters in Spokane, WA, (iii) the continued
22 service of Avista's executives, management, and employees, (iv)
23 Avista board controf over the hiring and replacement of Avista's
24 CEO, (v) Avista's day-to-day management of its business, and
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(vi) substantial charitable and community contributions, are
all- preserved in contractual documents that continue long past
the tenure of any sj-ngle executive involved in the negot.iation
of the Proposed Transaction. Moreover, the commitments are
sufficiently cfear and detail-ed that responsibitity for
implementation wil-l fal-l not on the CEOs but on other staff.
rX. PROPOSED NEW OR A!{ENDED COMMIT!{ENTS
A. Despite your conclusion that the merger conrnitments
Avista Employee Compensation: Any decisions
regarding Avista employee compensation shal-I be made
by the Avista Board consj-stent with the terms of the
Merqer Agreement between Hydro One and Avista, and
current market standards and prevailing practices of
relevant U.S. electric and gas utilit.y benchmarks.
The determination of the Ievel- of any compensation(incl-uding equit.y awards) approved by the Avista Board
with respect to any employee in accordance with the
foregoing shall not be subject to change by Hydro One
or the Hydro One Board.
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10 in the Stipulated Settlement will fully protect Avista from
11 Provincial- interference if the mergJer is consununated, have Hydro
72 One and Avista proposed any additional conrnitments to respond
13 to the events in the Province since JuJ-y 11, 2OL8?
14 A. Yes. Hydro One and Avista have proposed one
15 additional merger commit.ment since JuIy tL, 20tB:
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27 See Letter from Joint Applicants Regarding Update on Recent
28 Changes in Hydro One Management, AVU-E-1,7-09, AVU-G-17-05, (Jufy
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Hydro One
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o 1 Although the Hydro One Accountabifity Act does not apply
2 Lo Avj-sta if the merger is consummated, Avista and Hydro One
3 have ag.reed upon this additional- commitment to provide further
4 protection t.o Avista's employees, such that Avista will be abl-e
5 to continue to recruit and retain the most hiqhly qualified
6 employee tal-ent base for Avista's customers.
-l Q. In addition to the above conrnitment which Hydro One
B and Avista have already proposed, would you adopt any additional
9 cornnritments relating to Avista governance and enforcement of
10 the conunitments?
11 A. Although Hydro One and Avista believe the current
72 Idaho commitments are sufficiently robust to insulate Avj-sta's
13 customers in Idaho from any potential effects of political,
14 management, or rate changies at Hydro One, Hydro One and Avista
15 would be willing to adopt any of the foJ-lowing Oregon
L6 commi-tments in Idaho:
L7 Oregon Stipulated Co,znituent ![o. 4 (coryare l@o
18 StipuJated Comnituent No . 2 )
L9 Executive I'Ianagement
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Subject to the remaining provisions of this commitment and
subject to vofuntary retirements and resignations that may
occur, Avista and Parent agree that Avista wil-l- retain al-l-
current executive management of Avista for a period of
three years. This commitment wil-l- not limit AvisLa/ s
ability to determine its organi-zational structure and
select and retain personnel- best abl-e to meet AvisLa's
needs over time. The post-Proposed Transaction Avista board
retains its current abil-ity to dismiss executive management
Scarl-ett, Supp 44
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of Avista and other Avista personnel- for standard corporate
reasons. Any decision to hire, dj-smiss or replace the Chief
Executive Officer of Avista shal-1 be within the discretion
of the Avista Board of Directors, and shal-l not require
any approval of Hydro One or any of its affil-iates (other
than Avista), notwithstanding anything to the contrary in
the merger agreement, and its exhibits and at.tachments,
between Hydro One and Avista.
Ozegon St:'214J-ale4 Com,nituent ![o. 5 (compare ld.aho
Awista Board of Directors (BOD)
Avista and Hydro One agiree that after closing of the
Proposed Transaction, Avista will- have a separate board of
directors from Hydro One that consists of nine (9) members,
determined as follows:
Five Hydro One Designated Directors:
Two executives of Hydro One or any of its subsidiari-es,
and
Three Independent Directors who are residents of thePacific Northwest Region.
Eour Avista Designated Directors:
Three directors who as of immediately prior to the closingof the Proposed Transaction are members of the Board of
Directors of Avista, including the Chairman of Avista's
Pre-Merger Board of Directors (if such person is different
from t.he Chlef Executive Of ficer of Avista) , and
21 Avista's Chief Executive Officer.
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At least two of
Directors.
the Avista directors must be Independent
The initial Chairman of Avista's post-closing Board ofDirectors shaff be the Chief Executi-ve Officer of Avista
as of the time immediately prior to closing for a one year
term. If any Avista designee resigns, retires or otherwise
ceases to serve as a director of Avista for any reason,
the remaining Avista designees shall have the sole rightto nomlnate a replacement director to fill such vacancy,
Scarlett, Supp 45
Hydro One Limited
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and such person shal-1 t.hereafter become an Avista designee.
Hydro One shal-l- have the unfettered right to desigrnate,
remove and replace the Hydro One designees as directors of
the Avista Board with or without cause or notice at its
sofe discretion, subject t.o the requirement that:
(i) two of such directors are executives of Parent or anyof it.s subsidiari-es; and
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(ii) three of such directors are fndependent Directors who
are residents of the Pacific Northwest region, whiJ-e such
requirement is in effect (subject in the case of cl-ause(ii) hereof to Hydro One determining, in good faith, thatit is not abl-e to appoint an Independent Director who is a
resident of the Pacific Northwest region 1n a timely
manner, in which case Hydro One may replace any such
director with an employee of Hydro One or any of itssubsidiaries on an interim basis, not exceedinq six months,
after which t.ime Hydro One shall replace such interim
director wlth an Independent Director who is a resident of
the Pacific Northwest region);4:rovided, however, that this
exception to cl-ause (ii) hereof shaJ-J- not appTy if , at any
time a circumstance arr,ses, and during the pendency of anyosuch circumstance, whereby the Province of Ontario
("Ontario" )exerc-lses r ts riqhts as a sharehofder ofParent, uses Tegislative authority or acts in any other
manner whatsoever that resuLts or wouf d resul-t l_n
Ontario a intin nominees to the board of directors ofParent that constitute, or woufd constitute a majority of
the directors of such board).
29 Note that the additional- language underlined and in italics
30 was not included in Oregon Stipulated Commitment No. 5 filed on
31 May 25, 20L8. However, Hydro One and Avista proposed this
32 addition in their Oreg'on supplemental testimony filed on Augrust
33 30, 20L8, and in their Washington supplement.al testimony filed
34 on September 5, 2078.
35 Oregon St+Wleted Com,nituent ![o. 38 (no coa,parable
Scarlett,
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Environmental LiabiTities of Parent
Hydro One will- hol-d Avista and Avista ratepayers harml-ess
from any environmental obtigations or liabil-ities of Hydro
One or its affil-iates other than Avista, including those
associated with harmful substances such as asbestos or
polychlorj-nated biphenyls (PCBs) and environmental cleanup
and restoration.
A. Have Avista and Hydro One discussed making any
revisions to the Delegation of Authority (Appendix 5 of the
iloint Application) to respond to the events after the June 7,
2018 Ontario election involving Hydro One?
A. Yes. Avista and Hydro One propose to amend this
sect.ion of the Delegation of Authority as foll-ows:
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Parent, uses legislative authoritv or acts in anv
other manner whatsoever, that resufts or wouldo
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Sharehol-der shall- have the unfettered right to
desiqnate, remove and repJ-ace the Shareholder
Designees as directors of the SurvJ-ving Corporatj-on
with or without cause or notice at its sole
discretion, subject to the requirement that (i) two(2) of such directors are executives of Parent or any
of its Subsidiaries and (ii) three (3) of such
directors are Independent Directors who are residents
of the Pacific Northwest Region, while such
requirement is in effect (subject in the case of
cfause (ii) hereof to Shareholder determJ-ning, in good
faith, that it is not abl-e to appoint an Independent
Director who is a resident of the Pacific Northwest
Region in a timely manner, in which case Sharehol-der
may replace any such director with an employee of
Parent or any of its Subsidiaries on an interim basis,
not exceeding six months, after which time Shareholder
shall replace such interim director with Independent
Director who is a resident of the Pacific Northwest
Region|; provided, however
cfause fiit nereof
circumstance aris
such circumstance, whereby the Province of Ontario
( "Onta r) o" ) exerci ses i ts rirlhfq aq a qharcho''l dcr nf
ot
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re h board
of Oirectors of Par
constitute a maioritv of the direc such board);
A. Iiltrat is the purpose of the new text in the Delegation
of Authority?
A. Thj-s proposed amendment to the Delegation of Authority
is designed to protect the independence of the Avista board in
the event that the Province takes some action in the future to
contro1 a majority of the Hydro One Board. If that evenL occurs,
10 this amendment is triggered and bl-ocks Hydro One's fimited right
11 to replace any of its three Independent Director designees on
the Avista board with a Hydro One executive or employee.72
13o74 X. ADOPTION OF }fAYO SCHMIDT TESTTMONY
15 A. Are you aware of testimony previously submitted by
76 Mayo Schmidt?
71 A. Yes.
18 A. Tltrat testimony yras previously submitted by Mayo
19 Schmidt?
20 A. The testimony previously submitted by Mayo Schmidt
2L includes:
22 o Direct Testimony of Mayo M. Schmidt, submitted
Z5 September 74 , 201,1, including Exh. No. 2 , Schedul-es
24 Land2
o Avista and Hydro One Joint Comments in Support of
Scarlett, Supp 48
Hydro One Limited
o 25
o 1 Stipulation and Settl-ement, submitted June 20, 201,8
2 Q. Do you adopt Mayo Schmidt's testimony as your own?
3 A. Yes, subject to (i) the Province's ability to
4 introduce r or threaten, Iegislation, ds evidenced by the events
5 that have transpired, (if) the passage of the Hydro One
6 AccountabiTity Act, 2018, and (iii) the government's promise to
7 reduce rates in Ontario.
B Q. Does this conclude your testirnony?
9 A. Yes it does.
Scarlett, Supp 49
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