20181005Avista - Washington Testimony.pdf

Schn erin Carn;:beJl lSarna rd lglitrin & I"avitt Lt"p
l' t' l'{ I l(t"rfit$ .\'f L'{\!'
$f (,1rnn*cl Lx*r'crr*t Sr"'hrrtriit
Ianus tJ. Llsw'ald
icrano Public Utilities Commission
Office of the SecretaryRECEIVEDDeNrnrlp FnaNco-MALoNE
.fr a n c o @w o r k e r I aw. c o m ocT 0 5 2018
October 4,2018 Boise, ldaho
E -ft I e d at www. atc, w a. go v/e-/i lin g
Washington Utilities and Transportation Commission
1300 South Evergreen Park Drive SW
P. O. Box 47250
Olympia, WA 98504-7250
RE: HYDRO ONE LIMITED and AVISTA CORPORATION
Docket No. UE-170970
Our File No. 3293-999/Avista
Dear Commissioners:
The Washington and Northern Idaho District Council of Laborers ("WNIDCL") submits
this letter in lieu of additional testimony to supplement that it previously filed in this matter.
WNIDCL continues to support the proposed transaction. It remains supportive of the terms of
the settlement reached by all the parties, and supports the new and modified terms proposed by
the parties, as reflected in Exhibit CRM-2 to the testimony of Chris McGuire.
Sincerely,
Danielle Franco-Malone
l8 Wcrl Jllqrcrr 6t,5k 4f}fi
Scrr-rl*" \vlrrhirr$tdn liltl Iu
s'nrkcrltw,cour
l7t,6l 2ts5-2b2g
{*o0} :.38".r}l I
{ Jtn } "t?ll,,,l I };l
l t-L
ll,
l. 1\
Docket U-170970
Exh. SMC-3
Page I of I
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
TEP
Data Request
TEP-044(1-ll)
EMA TL: [e-mail]
DATE PREPARED: September 20, 2018
WITNESS: Chris Lopez
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
RE: Supplemental Testimony of Christopher F. Lopez, Exh CFL-IT at 10:15-12:14.
Mr. Lopez testifies that the Commission can be certain about the funding of certain listed
Community and Low-income Commitments (Commitments 63, 64, 67, 69, 70, 77, and 79) based
on the availability of funding through the use of Avista's retained earnings, indicating that "With
this approach there is no need for cash to flow from Hydro One to Avista."
a. Please explain whether there are any factors that would limit the use of retained earnings for
funding the listed Commitments.
b. Please confirm that Hydro One is able to and will make "funds available from other Hydro
One affiliates" to fund the Stipulated Commitments listed.
c. Please state whether, in the event retained earnings are not available at Avista for any reason,
there exists any uncertainty, condition or other limitation, on funding the listed Commitments
from other Hydro One sources.
d. Please state whether any electric rate reduction required by the Province of Ontario would
impair Hydro One's ability to fund the listed Commitments.
RESPONSE:
a. To the best of our knowledge, we are not aware of any factors that would limit the use of
available amounts of A vista's retained earnings for funding of the listed Commitments.
b. Hydro One could if needed make use of its retained earnings to fund the Stipulated
Commitments.
c. Please see the reply to part b above.
d. As the Commitments are expected to be funded from the retained earnings of Avista, any
electric rate reductions required by the Province of Ontario would not have any bearing
on the ability to meet these Commitments.
Page I of I
Docket U-170970
SMC-4
Page I of2
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
TEP
Data Request
TEP - 040(H 1)
DATE PREPARED: September 21, 2018
WITNESS: James Scarlett
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
RE: Supplemental Testimony of James D. Scarlett, Exh. JDS-lT at 3: 1-14.
Mr. Scarlett testifies, in summary that Premier Ford had two options to implement certain goals
for Hydro One announced during the election campaign, either by means of the Governance
Agreement, or by means of legislation. Please state:
a) Whether these two options remain available to the Provincial goverrunent for implementing
future political, policy, operational, management, or financial changes of any kind for Hydro
One and any of its subsidiaries?
b) Whether the Province, under the Governance Agreement or through legislation, retains the
right to replace the entire Hydro One Board of Directors? If so, please explain with
specificity.
c) What options are available to the Province or Provincial government to reduce electric rates
through legislation?
d) Describe any limitations on the legislative authority of the Province to modify or abrogate
contracts entered into by Hydro One or any of its subsidiaries, including any contractual
obligations u.nder the Settlement Stipulation in this case.
e) Whether and to what extent the Province or Provincial government has authority in any
respect to direct, control, require, or influence the compliance by Hydro One with any of the
Commitments under the Settlement Stipulation.
RESPONSE:
a) Yes, these two options remain available to the Provincial government for implementing
future political, policy, operational, management, or financial changes of any kind for
Hydro One and any of its subsidiaries, other than Avista (assuming the merger is
consummated). The Province will not have jurisdiction to directly affect, interact with, or
directly interfere with the management and strategic direction of Avista if the merger is
consummated. The Province cannot pass laws that apply to Avista.
b) The Province continues to have the authority through Section 4.7 of the Governance
Agreement to call for the replacement of Hydro One's entire Board, with the exception of
the CEO, and at the Province's discretion, the Chair.
c) The Ontario Energy Board ("OEB") is an agent of the Province which regulates natural
gas and electricity utilities in Ontario. Among other things, the OEB sets rates and
licenses all participants in the Province's electricity and natural gas sectors as set out in
Page I of2
Docket U-170970
SMC-4
Page 2 of2
the Ontario Energy Board Act, I 998. While the OEB is an independent agency, it is still
subject to provincial legislation and government directives.
d) The Province's legislative authority to modify or abrogate contracts entered into by
Hydro One or any of its subsidiaries is limited to those matters over which it has
jurisdiction. The Province has no legislative jurisdiction outside the Province of Ontario.
e) The Governance Agreement (the "Governance Agreement") between Hydro One and Her
Majesty The Queen in Right of Ontario (the "Province") dated November 5, 2015, which
continues to be of force and effect, requires that the Province act as an investor and not a
manager of Hydro One, and the Province's decision-making authority in respect of Hydro
One is restricted to that of any other investor with respect to voting its shares in any
decisions that are brought forward for shareholder approval. The Province also has the
right to nominate 40 percent of the Board of Directors (other than the CEO), but all
directors remain subject to an annual vote by all shareholders of Hydro One.
If the merger is consummated, the Province will not have jurisdiction to modify or nullify
the Stipulated Commitments and any commitments included in the Commission's order
approving the merger. Hydro One is bound by these contractual obligations. Even
though the Province is a shareholder of Hydro One, Hydro One is the entity that bears tbe
full legal responsibility for the Stipulated Commitments and any commitments included
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.
Page 2 of2
Docket U-170970
Exh. SMC-6
Page I of I
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
TEP
Data Request
TEP- 043(H1)
DATE PREPARED: 9/17/2018
WITNESS: James Scarlett
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
RE: Supplemental Testimony of James D. Scarlett, Exh. JDS-lT at 23:14-15.
Mr. Scarlett testifies that "Hydro One is bound by these contractual obligations."
a. Please confirm that this statement refers to the 81 Stipulated Commitments and any
conditions included by the Commission.
b. Please identify the documents constituting the contract, and the parties to the contract.
c. Please identify the remedies available to the Commission for any breach of the terms of the
contract, and the fora in which the Commission is authorized to seek enforcement of the
contract.
RESPONSE:
a. Yes this statement refers to the 81 Stipulated Commitments and any conditions included
by the Commission.
b. The documents constituting the contract is the all-parties, all-issues settlement agreement
in the merger proceeding (the "Settlement Agreement") before the Washington Utilities
and Transportation Commission (the "Commission") filed on March 27, 2018. The
parties to this Settlement Agreement are: Avista, Hydro One, Commission Staff, the
Public Counsel Unit of the Washington Office of Attorney General, The Energy Project,
NW Energy Coalition, Renewable Northwest, Natural Resources Defense Council, Sierra
Club, the Washington and Northern Idaho District Council of Laborers, the Northwest
Jndustrial Gas Users and the Industrial Customers of Northwest Utilities.
c. Please refer to Commitment Numbers 30 and 31 for the remedies available to the
Commission for any breach of the terms of the contract.
Docket U-170970
Exh. SMC-5
Page I of I
HYDRO ONE LTMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
TEP
Data Request
TEP-042(Hl)
DATE PREPARED: 9/14/2018
WITNESS: James Scarlett
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
RE: Supplemental Testimony of James D. Scarlett, Exh. JDS-lT at 22:21-23:12.
With regard to the referenced testimony, please state:
a. Regarding Commitment 30, please state whether there are any limitations of any kind on the
Commission's authority to enforce the Commitments of the Settlement Stipulation as against
Hydro One Limited, or any Hydro One subsidiarybased upon the phrase "in accordance
with their terms" or any other basis. lfso, please describe the limitation with specificity.
b. Does Commitment 31 (Submittal to State Court Jurisdiction) bind Hydro One Limited, or
any other Hydro One corporate entity above the level of Olympus Holdings to submit to state
court jurisdiction in Washington?
c. Regarding Commitment 33 (Commitments Binding), please explain the specific import of the
phrase "where noted" and identify with specificity any situation where commitments are not
binding upon Hydro One Limited, Olympus Holding Corp. or any other Hydro One entity.
RESPONSE:
a. Except as otherwise stated in the Commitments themselves (hence, the language "in
accordance with their terms"), there are no limitations on the Commission's authority to
enforce the Commitments of the Settlement Stipulation as against Hydro One Limited, or
any Hydro One subsidiary.
b. While Commitment 31 specifically refers to "Olympus Holding Corp. Olympus Holding
Corp., on its own and its subsidiaries' behalf, including Avista", Hydro One agrees to
submit to the jurisdiction of the Washington courts for enforcement of violations of the
Commitments in the Settlement Stipulation, as was agreed to in the Oregon Settlement
Stipulation.
c. Each Commitment specifies which entity has agreed to it and be bound by it. For
example, if a Commitment reads that "Avista shall. ... ", it means Avista is bound by the
Commitment. If a Commitment reads "Hydro One and its subsidiaries shall", then Hydro
One and each of its subsidiaries are bound by the Commitment (including Avista once the
merger is consummated).
Page I of I
Docket U-170970
Exh. SMC-7
Page I of I
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHJNGTON
U-170970
TEP
Data Request
TEP- 038(Hl)
DATE PREPARED: 9/18/2018
WITNESS: John J. Reed
RESPONDER: Carrie O'Neill
DEPT: Concentric Energy Advisors
TELEPHONE: [phone]
EMAIL: [e-mail]
RE: Supplemental Testimony of John J. Reed, Exh. JJR-lT at 24:14-15.
Mr. Reed testifies that "the Stipulated Commitments are binding regardless of any actions the
Province might take in the future."
a) Please list the specific Commitments referred to by Mr. Reed in this statement.
b) Please list each Hydro One entity that is bound by the specific Commitment listed in item b.
RESPONSE:
a) Mr. Reed is referring to Stipulated Commitments I through 81.
b) As signatories to the Settlement Stipulation, Hydro One and Avista will be bound by the
Settlement Stipulation and all of the commitments made in Appendix A to the Settlement
Stipulation if the transaction is approved by the Commission as contemplated in the
Settlement Agreement and if the transaction closes. Hydro One and Avista have also put
forth additional commitments through their supplemental testimony (see Scarlett
Testimony) which they will also be bound by if the transaction is approved by the
Commission and closes. ln addition to Hydro One and Avista being bound by these
commitments, all corporate entities existing between Hydro One and Avista will be
bound as well, including Olympus Holding Corp. and Olympus Equity LLC.
Page I of I
Docket U-170970
Exh. SMC-8
Page I of I
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
TEP
Data Request
TEP - 039(H I)
DATE PREPARED: 9/18/2018
WITNESS: John J. Reed
RESPONDER: Carrie O'Neill
DEPT: Concentric Energy Advisors
TELEPHONE: [phone]
EMAIL: [e-mail]
RE: Supplemental Testimony of John J. Reed, Exh. JJR-IT at 24: 16-17.
Regarding a "speculative scenario where the Province took control of Hydro One," assuming a
scenario where the Province takes control where to occur, please state Mr. Reed's understanding
of any limitations, legal or otherwise, that would be faced by Hydro One in taking any action that
would be inconsistent witb any current obligation of Hydro One under any Commitment in the
Settlement Stipulation in this case.
RESPONSE:
While Mr. Reed cannot provide a legal opinion on this topic, it is his understanding that the
entirety of the Settlement Stipulation would be such a limitation. Mr. Reed does not envision a
scenario in which the Province's actions to take control of the Hydro One Board would provide
any basis for Hydro One taking any action that would be inconsistent with the Commitments in
the Settlement Stipulation. Please also see the response to TEP _DR_038(HI).
Page I of I
Docket U-170970
Exh. SMC-9
Page I of I
HYDRO ONE LfMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
TEP
Data Request
TEP-04l(Hl)
DATE PREPARED: 9/17/2018
WITNESS: James Scarlett
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
Does the immunity from civil liability created by the Hydro One Accountability Act in any way
limit the Washington Commission's enforcement authority with respect to any of the
Commitments in the settlement stipulation?
RESPONSE:
No.
Page I of I
BEFORE THEW ASI-nNGTON
UTILITIES AND TRANSPORTATION COMMISSION
In the Matter of the Joint Application of DOCKET U-170970
HYDRO ONE LIMITED (acting through
its indirect subsidiary, Olympus Equity
LLC)
And
AVISTA CORPORATION
For an Order Authorizing Proposed
Transaction
SUPPLEMENTAL TESTIMONY OF
SHAWN M. COLLlNS (EXH. SMC-2T)
DIRECTOR OF
THE ENERGY PROJECT
In Support of Settlement Stipulation and Modified Commitments
October 4, 2018
Docket U-170970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
LIST OF EXHIBITS FOR SHAWN M. COLLINS (SMC-2T)
Exh. SMC-3 Hydro One Response to TEP Data Request No. 44
Exh. SMC-4 Hydro One Response to TEP Data Request No. 40
Exh. SMC-5 Hydro One Response to TEP Data Request No. 42
Exh. SMC-6 Hydro One Response to TEP Data Request No. 43
Exh. SMC-7 Hydro One Response to TEP Data Request No. 38
Exh. SMC-8 Hydro One Response to TEP Data Request No. 39
Exh. SMC-9 Hydro One Response to TEP Data Request No. 41
2 Q:
' A: j
4
5 Q:
6 A:
7
8
9 Q:
10 A:
I 1
12 Q:
13 A:
14
15
16
17
18
19
20
21
Docket U-170970
Shawn M. Collins
Ln Support of Settlement Stipulation
Exh. SMC-2T
I. INTRODUCTION
Please state your name and business address.
I am Shawn Collins. My business address is 3406 Redwood Avenue, Bellingham,
WA 98225.
By whom are you employed and in what capacity?
I am the Director of The Energy Project (TEP), a program of the Washington
State Community Action Partnership housed at the Opportunity Council in
Bellingham, WA.
Would you please state your educational and professional background?
My educational and professional background is covered in Exh. JNP-2 submitted
with the Joint Testimony in this docket, April 10, 2018.
On whose behalf are you testifying?
I am testifying for TEP, an intervenor in this proceeding, on behalf of the
Community Action Partnership (CAP) organizations that provide low-income
energy efficiency and bill payment assistance for customers in Avista's service
territory. These agencies include: SNAP (Spokane Neighborhood Action
Partners) (Spokane County), Rural Resources (Ferry, Lincoln, Stevens Counties),
Community Action Partnership (Asotin County), Community Action Center
(Whitman County), Opportunities Industrialization Center (OIC) of Washington
(Adams County), and Washington Gorge Action Programs (Skamania and
Klickitat Counties).
Q:
2 A:
3
4
5
6
7
8
9
10
I I
12 Q:
13 A:
14
15
16
17
18
19
Docket U-170970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
Have you previously provided testimony in this proceeding?
Yes. On April 10, 2018, I provided testimony in support of the Settlement
Stipulation (Settlement), filed as Testimony of Shawn M. Collins, Exh. SMC-IT.
I appeared as a witness on the settlement panel at the Commission's May 22,
2018, evidentiary hearing to review the Settlement. On July 18, 2018, TEP filed
comments in response to the Commission Notice of Intent to Conduct Additional
Process, supporting the Commission's intention to conduct supplemental
proceedings to ensure the record will be fully developed regarding the impact of
the Ontario election, and that the commitments of Avista and Hydro One remain
viable and enforceable.
U. PURPOSE OF TESTIMONY
Could you please summarize the purpose of your supplemental testimony?
The purpose of my supplemental testimony is to respond to the Supplemental
Testimony of Joint Applicants filed on September 6, 2018, and to provide TEP"s
perspective on the impact of the events affecting Hydro One and the proposed
merger transaction subsequent to the Ontario Provincial election. As discussed in
more detail below, TEP continues to recommend approval of the Settlement,
subject to approval of the modified Commitments submitted by TEP and by the
other parties.
2
Q:
2
3 A:
4
5
6
7
8
9
10
1 J
12
13
14
15
16
17
18
19
20
21
22
Docket U-170970
Shawn M. Collins
ln Support of Settlement Stipulation
Exh. SMC-2T
Can you provide a recap of the key elements of the all-party Settlement
currently before the Commission that address low-income issues?
The Settlement includes a number of important components that provide benefits
for low-income customers:
• Commitments to maintain the current Low-Income Rate Assistance
Program (LIRAP) and related pilots (Commitment 66), to maintain the
existing low-income weatherization program (Commitment 70), to
improve penetration of these programs (Commitment 73), and to work
with the advisory groups to address other low-income issues, including
program funding levels. (Commitments 65, 68)
• $4 million of additional funding over a I 0-year period for existing low-
income weatherization programs, (Commitment 70)
• $5 million in funding over a 10-year period for new renewables projects to
benefit low-income customers. (Commitment 67)
• $2 million over a l 0-year period for replacement of manufactured homes.
(Commitment 69)
• A goal that 30 percent of residential program EVSE funds be dedicated to
projects that serve low-income customers. (Commitment 62)
• Consumer protection commitments related to AMI including limitations
on remote disconnection and prepayment. (Commitment 72)
• A modified security deposit policy eliminating deposits for new customers
and returning some security deposits. (Commitment 71)
3
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18 Q:
19
20 A:
21
22
Docket U-170970
Shawn M. Collins
ln Support of Settlement Stipulation
Exh. SMC-2T
• A commitment to maintain existing levels of community involvement and
support for tribal and low-income organizations. (Commitment 12)
• A commitment to reach out to tribal communities to encourage
participation in settlement benefits. (Commitment 74)
These elements of the settlement are essential components enabling the
transaction to meet the "net benefit" standard. The Energy Project believes it is
important, when evaluating the impact of the Ontario events, to recognize that the
Settlement has botb a "no-harm" aspect (e.g., ring-fencing, financial integrity,
local presence) and a "net benefit" aspect (e.g., community and low-income
commitments). Even if the "no harm" components, such as ring-fencing, are
adequate to protect Avista itself from financial barm and undue interference, the
Commission and the parties must also be satisfied that Hydro One and its
subsidiaries above Avista are fully committed and capable of fulfilling their
obligations to provide net benefits to customers, and that the Commission has the
necessary jurisdiction and enforcement authority to address any problems that
might arise involving entities above Avista in the corporate structure.
III. THE IMPACT OF THE ONTARIO ELECTION
Did The Energy Project have concerns with the impact of the Ontario
election on the proposed transaction in this docket?
Yes. The events surrounding the departure of Hydro One's CEO Mayo Schmidt,
a witness in this proceeding, and the resignation of the Hydro One Board of
Directors in July 2018 were unsettling. Occurring after TEP and other parties had
4
2
3
4
5
6
7
8
9
10 Q:
11
12 A:
13
14
15
16
17
18
19
20
21
Docket U-170970
Shawn M. Collins
ln Support of Settlement Stipulation
Exh. SMC-2T
signed the Settlement in March and testified at the hearing in May, these events
raised concerns for TEP regarding the Provincial government's future ability to
direct or influence Hydro One's compliance with the Settlement. The Energy
Project's concerns focused on two primary areas: (1) potential uncertainty
regarding the Commitments to fund increased renewables (Commitment 67) and
weatherization (Commitment 70) for low-income customers in Washington; and
(2) the sufficiency of the Commitments with regard to Commission jurisdiction
over Hydro One and its subsidiaries, and enforcement of the Settlement and the
81 listed Commitments.
Could you explain The Energy Project's concerns regarding funding of the
renewables and weatherization commitments?
As originally filed, the commitments regarding low-income renewables and
weatherization provided that funding would be made available over a l O-year
period. The Energy Project's expectation was that Hydro One and Avista would
fund projects as they were approved by the Advisory Groups. However, no
specificity was stated with regard to the timing of the payments. Commitments
67, 70, and 72 provide that Hydro One is ultimately responsible for these
payments. The events following the Ontario election introduced some uncertainty
from TEP's perspective regarding the vulnerability of Hydro One to Provincial
action via legislation or otherwise, that could affect Hydro One's funding of the
low-income commitments, or the timing of the funding.
5
Q:
2 A:
" J
4
5
6
7
8
9
10
11
12
13
14
IS
16
17
18
19
20
21
22
23
24
25
26
27
28
29
Docket U-170970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
Has this concern been addressed, and if so, how?
The concern has been addressed in two ways. First, the Joint Applicants have
agreed to modification of Commitments 67 and 70 such that the payments will be
made at a minimum on a pro rata basis ( one tenth per year) over the I O-year
period. For Commitment 67 this means a minimum payment of $500,000 per
year, and for Commitment 70 a minimum payment of$400,000 per year. This
provides additional certainty regarding the timing of the payments that was not
previously included in the Commitments.
Under TEP's agreement with Joint Applicants, the following language will
be added to Commitments 67 and 70:
Funding will be made available for eligible projects as they are
identified and approved by the Advisory Committee throughout U1c
I 0-vear timeframe of the commitments; provided, however. that
funding will be made available, at a minimum. on a pro rata basis
over the period (i.e., one-temh of the total each vear). but need not
occur anv more frequently than on a pro rata basis over the I 0-vear
period. Funding commitmt:nts may be made at any time during the
I 0-vcar period.
For example. if no funding is approved by the Advisory Committee
until the third year of the 10-vear period. up to ($1.5 million for
Commitment 67 I $1.2 million for Commitment 70) must be made
available in the third year. Nothing in this provision shall be
interpreted lo preclude payment of funding in installments over time
for large projects that arc approved early in the l 0-vcar period. For
example. a $5 million project could be approwd in Year 3 !'under
Commitment 671 with $1.5 million due in Year 3 and $0.S million
per vear due each vear for the next seven years, assuming no funding
had been made available under Commitment 67 in Year 1 or Year �
6
2
' J
4
5
6
7
8 Q:
9
10
I I
12
13
14
15
16
17
18
19
20
Docket U-170970
Shawn M. Collins
111 Support of Settlement Stipulation
Exh. SMC-2T
For Commitment 70, the words "energy efficiency" will be added before
"Advisory Committee" to clarify which committee is intended.
As the language indicates, the modified Commitment allows a "funding
commitment" for a project that exceeds the pro rata amount, with the
understanding that Hydro One is only obligated to provide the "actual funding" in
installments, i.e., on the pro rata schedule. Hydro One is not precluded from
funding on greater than a pro rata basis if it chooses.
Please explain the second way in which Joint Applicants addressed The
Energy Project's funding concerns:
The Joint Applicants also addressed the concern in testimony and discovery
responses. In his September 6 Supplemental Testimony on behalf of Hydro One,
Executive Vice President and Chief Legal Officer James Scarlett addressed how
the Commission can be certain that Hydro One, as Avista's sole shareholder, will
ensure there is funding for the renewables and weatherization commitments.' He
responded by reciting and reaffirming the terms of Commitment 75 as a "firm
commitment to provide the dollar amount specified over the time period specified
and for the time period specified," and stated that "[t[herefore, Hydro One, as
A vista's sole shareholder, ultimately bears the cost of these commitments."? Mr.
Scarlett went on to note that funding could be made available from Avista's
retained earnings to fund the Commitments.'
I His testimony also addresses the other financial commitments in the Settlement.
2 Exh. JDS- IT, at 22:9-10.
3 Id., at 22: 11-20.
7
2
' J
4
5
6
7
8
9
IO
1 I
12
13
14 Q:
15
16 A:
17
18
19
Docket U-1 70970
Shawn M. Collins
ln Support of Settlement Stipulation
Exh. SMC-2T
Christopher Lopez, Senior Vice President of Finance for Hydro One,
addressed this issue in his September 6 Supplemental Testimony. Mr. Lopez
similarly noted that Avista retained earnings would be available to fund the
Commitments and that under this approach "there would be no need for cash to
flow from Hydro One to Avista.":' He further testified that Hydro One "remains
financially healthy" and he does not expect that to change.' In response to TEP
discovery, Mr. Lopez stated that Hydro One was "not aware of any factors that
would limit the amount of Avista's retained earnings for funding the listed
Commitments" and that "if needed, [Hydro One] could make use of its retained
earnings to fund the Stipulated Commitments."' Finally, he stated that any
electric rate reductions required by the Province of Ontario "would not have any
bearing on the ability to meet these Commitments" because the Commitments
were expected to be funded from Avista's retained earnings.7
Does The Energy Project have any concerns regarding Commitment 69
regarding mobile-home replacement?
The general concerns mentioned above apply, however, mobile-home
replacement Commitment 69 currently provides that at least half the funds must
be spent in the first five years and that Avista will begin implementation within 6
months. Because these terms already provide some additional certainty regarding
4 Exh. CFL-6T, at 11: 10-12:6.
' ld., at 12:7-9.
6 Exh. SMC-3 (Hydro One Response to TEP Data Request No. 44 (a) and (b)).
7 Id. (Hydro One Response to TEP Data Request No 44 (d)).
8
2
3 Q:
4
5 A:
6
7
8
9
10
I I
12
13
14
15
16
17
18
19
Docket U-1 70970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
the timing of payments and implementation, TEP did not request modification of
this specific Commitment.
Please explain The Energy Project's concern regarding enforcement and
jurisdictional issues.
As a result of the events in Ontario, TEP wanted to confirm its understanding of
the Commission's ability to enforce the Commitments with respect to Hydro One
and its subsidiaries. Because Hydro One, the parent, is the entity ultimately
responsible for compliance with many of the Commitments in the Settlement
Stipulation, in particular the low-income commitments, the Commission's
authority vis a vis Hydro One is of critical importance.
Upon further review of existing Commitments 30 (Commission
Enforcement of Commitments), Commitment 31 (Submittal to State Court
Jurisdiction for Enforcement of Commission Orders), and Commitment 33
(Commitments Binding), TEP had concerns that the provisions had some
ambiguities or did not clearly include Hydro One Limited or all intermediate
subsidiaries in the chain to Avista. For example, existing Commitment 31
(Submittal to State Court Jurisdiction) does not reference the parent Hydro One
Limited or any entity above Olympus Holding Corp and does not specifically
reference Washington courts."
8 An organizational chart for Hydro One Limited was provided in the April IO Supplemental Testimony of
Christopher Lopez, Exh. CFL-5T at 5 (Illustration No. I).
9
Q:
2
3 A:
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Docket U-170970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
Please explain how The Energy Project's concerns about enforcement and
jurisdiction have been addressed.
The Energy Project reviewed the parallel provisions regarding enforcement and
jurisdiction issues in the Oregon settlement (Oregon Commitments 110-112) and
found them to be clearer than the Washington commitments in addressing these
concerns. The Energy Project consulted with Joint Applicants and was able to
reach agreement to incorporate the concepts from the Oregon Commitments into
the Washington Settlement.
The modified Commitments state as follows, with the changes shown in
legislative format:
Commitment 30 - Commission Enforcement of Commitments
Hydro One and its subsidiaries, including Avista, understand and agree that
the Commission has authority to enforce these commitments in accordance
with their terms. If there is a violation of the terms of these commitments,
then the offending party may, at the discretion of the Commission, have a
period of thirty (30) calendar days to cure such violation. The scope of this
commitment includes the authority of the Commission to compel the
attendance of witnesses from Olympus Holding Corp. and its affiliates,
including Hydro One, with pertinent information on matters affecting
Avista. I lydro One. Olympus Holding Corp. and its subsidiaries waive their
rights to interpose any legal objection they might otherwise have to the
Commission's jurisdiction to require the appearance of any such witnesses.
Commitment 31 - Submittal to State Court Jurisdiction For Enforcement of
Commission Orders
Hydro One. on behalfofitselfand its subsidiaries in the post-close corporate
structure between Hydro One and Avista (as those companies in between
may change over time). and Avista OlyrnJltiS faleldiRg Cerp., en its ewn and
its suesidicll"ies' sehalf, ineltiaing Avisla's, will file with the Commission
prior to closing the Proposed Transaction an affidavit affirming that they i+
will submit to the jurisdiction of the relevant stateWashinlrton courts for
enforcement of the Commission's orders adopting these commitments and
10
2
" J
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21 Q:
22
')" _J
24 A:
25
26
27
28
Docket U-170970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
subsequent orders affecting Avista, and will agree to the application of
Wash.ington law with respect to such matters.
Commitment 33 - Commitments Binding
Hydro One, its subsidiaries in the post-close corporate structure between
Hydro One and Avista (as those companies in between may change over
time) Olym13�15 !,folding Ger13. and its subsidiaries, ineluding and Avista,
acknowledge that the conunitments being made by them are fully binding
eRl-y-upon them and their successors in interest and upon their affiliates­
e,ceept where specifically noted, aAEI tcheir sueeessers iA interest. Hydro One
and Avista are not requesting in this proceeding a determination of the
prudence, just and reasonable 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
ratemaking treatment, or public interest of the investments, expenditures or
actions as they deem appropriate.
If Hydro One or any other entity in the chain of Avista's ownership
determines th.ar Avista or any other entity has failed to comply with an
applicable Commitment, the entity making such determinations shall take
all appropriate actions to achieve compliance with the Commitment.
In addition to the modified Commitments, were there other ways in which
The Energy Project's concerns regarding enforcement and jurisdiction were
addressed?
Yes. Hydro One also addressed these issues in testimony and in response to
discovery. In his September 6 Supplemental Testimony, Mr. Scarlett testified that
under Commitments 30, 31, and 33: "Hydro One, as Avista's sole shareholder,
and/or its subsidiaries, have submitted to the jurisdiction of the Commission and
Washington courts for the enforcement of all of the Stipulated Commitments,
J 1
2
3
4
5
6
7
8
9
IO
I I
12
13
14
15
16
17
18
19
20
21
22
23
24
r _)
Docket U-170970
Shawn M. Collins
In Support of Settlement Stipulation
Exh. SMC-2T
including those that require Hydro One funding.?? Mr. Scarlett went on to state:
[T]fthe merger is consummated, the Province will not have jurisdiction to
modify or nullify the 81 Stipulated Commitments and any conditions
included in the Commission's order approving the merger. Hydro One is
bound by these contractual obligations. Even though the Province is a
shareholder of Hydro One, Hydro One is the entity that bears the full legal
responsibility for the 81 Stipulated Commitments and any commitments
included 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.'?
This statement was reiterated in response to discovery. 11 Mr. Scarlett stated
additionally that "[t]he Province's legislative authority to modify or abrogate
contracts entered into by Hydro One or any of its subsidiaries is limited to those
matters over which it has jurisdiction. The Province has no legislative jurisdiction
outside the Province of Ontario."!'
Regarding Commitment 30, Mr. Scarlett stated in response to discovery
that"[ e Jxcept as otherwise stated in the Commitments themselves ... there are no
limitations on the Commission's authority to enforce the Commitments of the
Settlement Stipulations as against Hydro One Limited, or any Hydro One
subsidiary." 13
Regarding Commitment 31 (Submittal to State Court Jurisdiction), Mr.
Scarlett confirmed in response to discovery that "Hydro One agrees to submit to
the jurisdiction of the Washington courts for enforcement of violations of the
9 Exh. JDS-IT, at 22:21-23:10. ,o Id., at 23: 12-20. (emphasis added).
II Exh. SMC-4 (Hydro One Response to TEP Dara Request No. 40 (e)).
" Id., (Hydro One Response to TEP Dara Request No. 40 (d)).
13 Exh. SMC-5 (Hydro One Response to TEP Data Request No. 42 (a)).
12
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Docket U-170970
Shawn M. Collins
ln Support of Settlement Stipulation
Exh. SMC-2T
Commitments in the Settlement Stipulation, as was agreed to in the Oregon
Settlement Stipulation."!'
In response to discovery, Mr. Scarlett reiterated that the Settlement creates
contractual obligations for Hydro One regarding all 81 Commitments,
additionally describing the documents constituting the contract, the contract
parties, and the remedies available to the Commission." Hydro One's consultant
witness John Reed echoes tbe binding contractual nature of the Settlement,
stating: "[i]n addition to Hydro One and Avista being bound by these
commitments, all corporate entities existing between Hydro One and Avista will
be bound as well, including Olympus Holding Corp and Olympus Equity LLC."16
Mr. Scarlett also stated in response to discovery that the immunity from
civil liability created by the Hydro One Accountability Act in no way limits the
Commission's enforcement authority with respect to any of the Settlement
Commitments."
In summary, modified Commitments 30, 31, and 33, the supplemental
testimony, and the responses to discovery have sufficiently addressed TEP's
concerns regarding enforcement and jurisdiction.
"Exh. SMC-5 (Hydro One Response to TEP Data Request No. 42 (b)).
" Exh. SMC-6 (Hydro One Response to TEP Data Request No. 43 (a)-(c)).
16 Exh.SMC-7 (Hydro One Response to TEP Data Request No. 38), Exh. SMC-8 (Hydro One Response to
TEP Data Request No. 39). In Exh. SMC-8, Mr. Reed states as a non-attorney that in the "speculative
scenario" where the Province would take control of Hydro One, he does not envision "any basis for Hydro
One taking any action that would be inconsistent with the Commitments in the Settlement Stipulation" and
that the Settlement would act as a limitation on any such action.
17 Exh. SMC-9 (Hydro One Response to TEP Data Request No. 41).
13
Q:
2 A:
3
4
5
6
7
8 Q:
9 A:
10
11
12
13
Docket U-1 70970
Shawn M. Collins
ln Support of Settlement Stipulation
Exh. SMC-2T
Are there other modified Commitments that you wish to address?
The Energy Project is aware that Joint Applicants have also agreed to modified
Commitment 2 (executive management), Commitment 3 (Board of Directors),
and a new Commitment 82 regarding the right to reopen the docket, as well as a
modification of the Delegation of Authority. The Energy Project has reviewed
these changes and supports their adoption.
rv. CONCLUSION
Does The Energy Project continue to support approval of the Settlement'!
Yes, on the condition that the modified Commitments discussed in my testimony
are incorporated in the Settlement Stipulation. With this understanding, The Energy
Project believes that the Settlement meets the statutory requirement that the merger
must provide a net benefit to A vista's customers and that it is in the public interest.
The Energy Project recommends that the Settlement, with the modified
14 Commitments discussed, be approved by the Commission.
15 Q: Docs this conclude your testimony?
16 A: Yes.
14
Exh. WMG-2T
Docket U-170970
Witness: Wendy Gerlitz
BEFORE THE WASHINGTON
UTILITIES AND TRANSPORTATION COMMISSION
In the Matter of the Joint Application of
Hydro One Limited and A vista
Corporation for an Order Authorizing
Proposed Transaction
DOCKET U-170970
SUPPLEMENTAL RESPONSE TESTIMONY (AMENDED) OF
Wendy Gerlitz
NW ENERGY COALITION, RENEW ABLE NORTHWEST, AND
NATURAL RESOURCES DEFENSE COUNCIL
Supplemental Response Testimony (Amended) in Support of Settlement
October 4, 2018
1 Q:
Docket U-170970
Supplemental Response Testimony of Wendy Gerlitz
Exhibit WMG-2T
Please state your name and the purpose of this Supplemental Response
2 Testimony.
3 A: My name is Wendy Gerlitz. I am the Policy Director with the NW Energy
4 Coalition (NWEC). On April 10, 2018, I provided testimony in support of the Settlement
5 on behalf ofNWEC, Renewable Northwest (RNW), and the Natural Resources Defense
6 Council (NRDC). In this Supplemental Testimony, I am reiterating our support for the
7 Settlement, with the understanding that the "Updated Terms" filed by the Commission
8 Staff as Exh. CRM-2 to the Testimony of Chris McGuire will be adopted by the
9 Commission.
10
11
12
Q:
A:
Are you satisfied with the commitment of the new leadership of Hydro One
to the proposed transaction?
In his Supplemental Testimony, Mr. Paul M. Dobson, the Acting CEO of Hydro
13 One described Hydro One's commitment (Exh. PMD 1-T, at 3):
14 Q. Does Hydro One remain committed to this merger?
15 A. Yes. We remain committed to the merger and the strategic rationale for the merger
16 remams.
17
18 We also understand that the Hydro One Board has passed a resolution affirming the
19 Settlement. It is important that the new ownership be committed to the transaction and
20 the commitments that the parties have agreed to regarding renewable energy, energy
21 efficiency, and support for low-income customers. These commitments are designed to
22 further the strong statutory and regulatory policies of the State of Washington. We hope
23 that these commitments, and the policies they support, will be reaffirmed at the hearing
24 on October 23.
25
26
Q.
A.
Does this conclude your testimony?
Yes.
Page 1 of 1
Exh. WMG-2T
Docket U-170970
Witness: Wendy Gerlitz
BEFORE THE WASHING TON
UTILITIES AND TRANSPORTATION COMMISSION
In the Matter of the Joint Application of
Hydro One Limited and A vista
Corporation for an Order Authorizing
Proposed Transaction
DOCKET U-170970
SUPPLEMENTAL RESPONSE TESTIMONY OF
Wendy Gerlitz
NW ENERGY COALITION, RENEW ABLE NORTHWEST, AND
NATURAL RESOURCES DEFENSE COUNCIL
Supplemental Response Testimony in Support of Settlement
October 4, 2018
1 Q:
Docket U-170970
Supplemental Response Testimony of Wendy Gerlitz
Exhibit WMG-2T
Please state your name and the purpose of this Supplemental Response
2 Testimony.
3 A: My name is Wendy Gerlitz. I am the Policy Director with the NW Energy
4 Coalition (NWEC). On April 10, 2018, I provided testimony in support of the Settlement
5 on behalf ofNWEC, Renewable Northwest (RNW), and the Natural Resources Defense
6 Council (NRDC). In this Supplemental Testimony, I am reiterating our support for the
7 Settlement, with the understanding that the "Updated Terms" filed by the Commission
8 Staff as Exh. CRM-2 to the Testimony of Chris McGuire will be adopted by the
9 Commission.
10
11
12
Q:
A:
Are you satisfied with the commitment of the new leadership of Hydro One
to the proposed transaction?
In his Supplemental Testimony, Mr. Paul M. Dobson, the Acting CEO of Hydro
13 One described Hydro One's commitment (Exh. PMD 1-T, at 3):
14 Q. Does Hydro One remain committed to this merger?
15 A. Yes. We remain committed to the merger and the strategic rationale for the merger
16 remams.
17
18 Our preference would be that the endorsement of the Settlement be more formal, perhaps
19 by a resolution of the new Board. It is important that the new ownership be committed to
20 the transaction and the commitments that the parties have agreed to regarding renewable
21 energy, energy efficiency, and support for low-income customers. These commitments
22 are designed to further the strong statutory and regulatory policies of the State of
23 Washington, and we would like it to be clear that the new ownership is committed to
24 those policies.
25
26
Q.
A.
Does this conclude your testimony?
Yes.
Page 1 of 1
BEFORE THE WASHING TON
UTILITIES & TRANSPORTATION COMMISSION
In the Matter of the Joint Application of HYDRO ONE LIMITED and AVISTA
CORPORATION For an Order Authorizing Proposed Transaction.
DOCKET U-170970
SUPPLEMENTAL TESTIMONY OF J. RANDALL WOOLRIDGE
ON BEHALF OF
PUBLIC COUNSEL
EXHIBIT JRW-5T
October 4, 2018
SUPPLEMENTAL TESTIMONY OF J. RANDALL WOOLRIDGE
EXHIBIT JRW-5T
DOCKET U-170970
TABLE OF CONTENTS
PAGE
I. INTRODUCTION I SUMMARY 1
IL OVERVIEW OF INITIAL TESTIMONY AND HEARINGS 2
III. THE CHANGES AT HYDRO ONE AND THE POLITICAL RISK PRESENTED BY
THIS TRANSACTION 5
IV. JOINT APPLICANT'S SUPPLEMENTAL TESTIMONY 9
V. ADDITIONAL AGREEMENT OF THE PARTIES REGARDING MERGER
COMMITMENTS NECESSARY FOR NET BENEFITS 13
VI. CONCLUSION 15
Page ii of iii
SUPPLEMENTAL TESTIMONY OF J. RANDALL WOOLRIDGE
EXHIBIT JRW-5T
DOCKET U-170970
EXHIBITS LIST
Exhibit JR W-6
Exhibit JR W- 7
Timeline of Major Events in Avista-Hydro One Merger
Hydro One's Response to Public Counsel Data Request 36
Page iii of iii
1 I.
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
INTRODUCTION I SUMMARY
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Q:
A:
Q:
A:
Please state your full name, address, and occupation.
My name is J. Randall Woolridge, and my business address is 120 Haymaker Circle,
State College, PA 16801. I have previously provided testimony in this proceeding on
behalf of the Public Counsel Unit of the Washington Office of the Attorney General
(Public Counsel). I also participated in the May 22, 2018, Washington Utilities and
Transportation Commission (Commission) hearings in this proceeding in Olympia.
Please summarize your supplemental testimony.
My supplemental testimony provides an updated evaluation of Hydro One's proposed
acquisition of A vista. This updated evaluation is necessary due to the recent
developments at Hydro One in the wake of the Province of Ontario's June elections. The
election of Douglas Ford as Premier of Ontario led to the replacement of the entire board
of directors of Hydro One as well as the retirement of CEO Mayo Schmidt. The
Commission subsequently requested commentary from all parties, extended the period
for the evaluation of the proposed transaction, and provided for supplemental testimony
and hearings.
The Parties have met and conferred regarding additional commitments, or
modifications of commitments, to strengthen the protections for A vista's customers. The
Parties' initial settlement contained a strong set of commitments, and the events in
Ontario presented an opportunity to evaluate whether the protections originally proposed
by the Parties would provide adequate protections. The Parties have taken advantage of
this opportunity and now propose certain additions and modifications to the
commitments, which are discussed more fully in my testimony.
Page 1 of15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Q:
A:
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
The risks associated with the proposed transaction do not reduce to zero, as
demonstrated by the events in Ontario. I conclude that the Parties' settlement, including
the additional and modified commitments discussed below, provide Avista's customers
with the strongest protections against the transaction's risk. I conclude that the
commitments, including the additions and modifications, provide customers with net
benefits, and Public Counsel recommends that the Commission approve the transaction.
How is your testimony organized?
The following is an outline ofmy testimony:
• First, I review my initial testimony in this proceeding, and I discuss the "net benefit"
standard in the state of Washington;
• Second, I provide an overview of my initial testimony and highlight issues discussed
at the May 22nd hearings;
• Third, I discuss developments following the June elections in Ontario, the changes at
Hydro One, and political risks;
• Fourth, I review the supplemental testimonies of the Joint Applicants; and
• Finally, I provide my assessment of the developments and the protections provided in
the Settlement.
18 II. OVERVIEW OF INITIAL TESTIMONY AND HEARINGS
19
20
21
22
Q:
A:
Please discuss Public Counsel's initial testimony in this proceeding.
Exhibit JRW-6 provides a timeline of events in this matter. The Joint Applicants filed
their Application for Merger with the Commission on September 14, 2017. Following
months of discovery and negotiation, the parties filed the Settlement Stipulation and
Page 2 of15
1
2
3
4
5
6
7
8
9
10
11
12 Q:
13 A:
14
15
16
17
18
19
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
Agreement (Settlement) on March 27, 2018. On April 22, 2018, Mr. Corey Dahl and I
filed testimony on behalf of Public Counsel in support of the Settlement.1 Hearings on
the proposed transaction were held on May 22, 2018, in Olympia.
In my testimony, I recommended that the Commission accept the Settlement without
condition. My recommendation was based on the agreed upon terms and 81 commitments
provided in the Settlement Stipulation and Agreement. The Settlement followed five
months of discovery and negotiations between Joint Applicants and the Settling Parties.
The Settlement contained significant additions and improvements to the terms and
commitments the Joint Applicants filed in their initial application. The additions and
improvements to the merger terms led me to conclude that the proposed transaction meets
the "net benefit" standard required by statute in the state of Washington.
Please briefly review Washington's "Net Benefit" standard in utility mergers.
The Revised Code of Washington (RCW) section 80.12.020 requires that the Commission
will approve a public service company's transaction only if it results in a "net benefit" to
ratepayers. It is my understanding that this requires that ratepayers not only be shielded or
compensated for the transactional risk, but also that ratepayers must realize tangible benefits
from the transaction. In my opinion, the merger terms under the Settlement met this
standard by providing "net benefits" to ratepayers relative to, and in consideration of, the
risks associated with the proposed merger.
1 The Parties to this case include Avista and Hydro One as Joint Applicants. The Non-Applicant Parties include
Public Counsel; Staff of the Washington Utilities and Transportation Commission (Staff); Northwest Industrial Gas
Users (NWIGU); Industrial Customers of Northwest Utilities (ICNU); The Energy Project; NW Energy Coalition
(NWEC), Renewable Northwest (RNW), Natural Resources Defense Council (NRDC); Sierra Club; and the
Washington and Northern Idaho District Council of Laborers (WNIDCL).
Page 3 of15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Q:
A:
Q:
A:
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
Please describe your testimony at the Olympia hearings on net benefits.
At the outset of the hearings, Chairman Danner asked me to describe my thoughts on
the definition of the "net benefit" standard and how to apply it. 2 I explained that I
have seen parties in merger cases over the last decade more specifically identify
benefits to customers rather than simply ensuring that customers are not harmed by a
proposed transaction. That trend continued in this case, where the Parties evaluated
the Joint Applicant's proposal and negotiated terms that provide net benefits to
customers. 3 Chairman Danner asked me whether the net benefits standard is a
precise, formulaic analysis or whether it requires more judgment. I noted that
merger analysis over the last decade has become more precise and more detailed
regarding the benefits to customers, and I concluded that the analysis does require
judgment.4 Indeed, a commission's decision on whether a proposed transaction
provides net benefits does involve "a judgment call at the end."5
Is it still your conclusion that there is a net benefit to the Hydro One - A vista
merger?
As I stated at the hearings, it is a judgement call. The original Settlement provided an
expanded and modified set of operating/management, financial, and governance/ring-
fencing commitments. The Settling Parties represent a diverse group of interests and
stakeholders. Each Party, including Public Counsel, concluded that the original Settlement
contained commitments that meet Washington's net benefit standard. Furthermore,
2 Woolridge, TR. 256:20- 259: 16.
3 Woolridge, TR. 257: 14 - 258:25; Settlement Testimony of Corey J. Dahl, Exh. CJD-1 Tat 6-8.
4 Woolridge, TR. 259:1-16.
5 Woolridge, TR. 259:15-16.
Page 4 of15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 Q:
16 A:
17
18
19
20
21
22
23
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
settlements have been announced in other states (Oregon, Alaska, Montana, and Idaho), and
Settlement Commitment No. 81 provides a "Most Favored Nations" clause, which ensures
that relevant additional commitments will be incorporated into the Settlement in
Washington. All of these factors indicated that the original Settlement provided for a
proposed merger that provided net benefits.
However, the recent events in Ontario have tested the original Settlement terms.
The political developments in Ontario and the resulting changes to Hydro One's board and
management highlight the potential transaction risks for Avista's ratepayers. In light of
these events, the Settling Parties have negotiated additional terms and modifications to the
original Settlement. These additional terms and modifications provide further benefits that
are necessary in light of the specific risks to this transaction. Therefore, I believe that the
revised Settlement meets the net benefit standard.
III. THE CHANGES AT HYDRO ONE AND THE POLITICAL RISK
PRESENTED BY THIS TRANSACTION
Please review the changes at Hydro One.
In Ontario's June 7, 2018, election, Douglas Ford was elected Premier and his
Progressive Conservative Party gained a majority of the seats in the Provincial
legislature. As a result, Hydro One entered into negotiations with the new government,
and ultimately, on July 11, 2018, agreed to remove its entire Board of Directors. Hydro
One further agreed that CEO Mayo Schmidt would immediately retire. The new
government eventually introduced and passed the Urgent Priorities Act, 2018, which
enacted the Hydro One Accountability Act, 2018. This Act requires the board of Hydro
One to establish a new compensation framework for the Board of Directors, CEO, and
Page 5 oflS
1
2
3
4
5
6
7
8
9
10
11
12
Q:
A:
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
other executives in consultation with the Province and the other five largest shareholders.
The Hydro One Accountability Act will not apply to A vista if the merger goes through
since the Act specifically excludes subsidiaries incorporated in a jurisdiction outside
Canada. In addition, the Act does not impact Hydro One's contractual commitment to
acquire Avista or its merger settlements with parties in Washington, Oregon, Idaho,
Montana, and Alaska. On August 14, 2018, Hydro One announced its new Board of
Directors, as selected by the Ad Hoc Nominating Committee and named Paul Dobson as
the acting CEO. On September 19, 2018, the new Board of Directors of Hydro One
approved a resolution in support of its acquisition of A vista. 6
Did your initial testimony address the issue of political risks associated with Hydro
One's purchase of Avista?
Yes. I made the following observations:
13
14
15
16
17
18
19
20
21
22
23
24
25
Q:
A:
How can political risks affect the customers of A vista?
If the merger is approved, Avista's customers will be exposed to the
political risks associated with Hydro One. The privatization of Hydro One
was not a popular move by the Province of Ontario at the time the decision
was made. The purpose of the privatization was to raise a total of C$9.0
billion- C$5.0 billion to pay down the debt of the electric sector and C$4.0
billion to build new transit lines. In a poll, 60 percent of Ontarians
disapproved of selling a majority of the company, and only 24 percent
approved. 7 More recent polling has indicated 82 percent of Ontarian's
oppose the privatization of Hydro One. 8 If this trend continues, Avista
customers will face the political risks associated with citizens of the
Province of Ontario who may be unhappy with the privatization of Hydro
One. Furthermore, if the citizens of Ontario are unhappy with the
6 Exh. JRW-7, Hydro One's Response to Public Counsel Data Request 36.
7 Adrian Morrow, Poll Finds Ontarians Unhappy with Hydro One Privatization Plan, THE GLOBE AND MAIL
(Updated May 12, 2018) https://www.theglobeandmail.com/news/national/poll-finds-ontarians-unhappy-with­
hydro-one-privatization-plan/article24 l 83279/.
8 Mike Crawley, How Privatized Power Haunts Ontario Politics, CBC NEWS (Dec. 9, 2017, 6:00 AM ET)
https://www.cbc.ca/news/canada/toronto/ontario-hydro-bills-privatization-l .4439500.
Page 6 of15
1
2
3
4
5
6
7
8
9
10
11
12 Q:
13 A:
14
15
16
17
18
19
20
21
22
23
24
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
privatization of Hydro One, it seems they could be especially unhappy with
Hydro One's move to acquire Avista and the associated risks.
In addition, with the Province of Ontario as a significant and concerned
investor in Hydro One, Avista customers could face political risks
associated with such matters as energy policy in Ontario, as well as fiscal
matters related to deficit financing of energy and infrastructure projects in
Ontario. Given the investment in Hydro One, Avista customers in
Washington may have to deal with energy and financing issues in Ontario.
A shift in political winds among Hydro One's customers could lead to
sudden and perhaps unexpected changes in the management of the parent
company.9
Were political risks also addressed at the Olympia hearings on May 22nd?
Yes. At the May 22nd hearing, the Commissioners posed questions to the Joint
Applicants regarding the political issues facing Hydro One. Mr. Schmidt testified that
the Province of Ontario entered into a governance agreement that governs the interactions
between Ontario and Hydro One. Under the contract, according to Mr. Schmidt, the
Province "is a shareholder and is not a manager of the business."!"
Mr. Schmidt also explained in some detail the positions taken by the three major
parties during the elections in Ontario regarding Hydro One. 11 He offered insight
regarding the Progressive Conservative party, which ultimately won the election. 12
Mr. Schmidt noted that the Province was "not in a position to terminate the CE0."13 On
changing the Board, Mr. Schmidt testified that it would be a "high bar to change the
entire board and yet an even higher bar to bring back another yet fully independent Board
ofDirectors."14
9 Settlement Testimony ofJ. Randall Woolridge, Exh. JRW-lT at 26-27.
10 Schmidt, TR. 310:2-6.
11 Schmidt, TR. 312:23 - 314: 11.
12 Schmidt, TR. 313:23 - 314:6.
13 Schmidt, TR. 314:24-25.
14 Schmidt, TR. 317:6-9.
Page 7 of15
1
2
3
4
5
6
7
8
9
10
11
12
13
14 Q:
15 A:
16
17
18
19
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
Chairman Danner asked, "Is there any scenario under which the Province of
Ontario could undo the privatization of Hydro One or take over basically its - either its
direction, its board of directors, or its management?"15 Hydro One's General Counsel,
Jaime Scarlett responded, "The simple answer is: absent a government passing new
legislation to undo a lot of what's being done, the short answer is no."16 Indeed,
Mr. Scarlett stated that changes to the Board would be difficult and that "[ i]t would have
to be something dramatic."17
Mr. Scarlett also testified as follows: "And the noise - if there is noise in Ontario,
it shouldn't have a big impact down here." The recent elections indeed caused "noise"
and resulted in significant changes to Hydro One's management and corporate
governance. Both Mr. Schmidt and Mr. Scarlett expressed extreme confidence in
Ontario's political developments and their impact on Hydro One, and yet Mr. Schmidt
and the entire Board of Directors were casualties of these developments.
Have there been other developments regarding the political risks in Ontario?
Yes. On September 14, Standard & Poor's (S&P) issued a report titled "Hydro One Ltd.
And Subsidiary Downgraded To 'A-' On Lower Governance Assessment; Ratings Remain
on Credit Watch." 18 S&P lowered its issuer credit ratings on Hydro One and its subsidiary
Hydro One Inc. to 'A-' from 'A'. S&P also lowered the issue-level rating on Hydro One
Inc.'s senior unsecured debt to 'A-'.
15 Chairman Danner, TR. 323:9-13.
16 Scarlett, TR. 323:18-20.
17 Scarlett, TR. 324:25 - 325:6.
18 Standard & Poor's Corporation, HYDRO ONE LTD. AND SUBSIDIARY DOWNGRADED To 'A-' ON LOWER
GOVERNANCE ASSESSMENT; RATINGS REMAIN ON CREDITWATCH (Sept. 13, 2018).
Page 8 of15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23 Q:
24 A:
25
26
27
28
29
30
31
32
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
In its report, S&P noted the following:
The one-notch downgrade reflects our reassessment ofHOL's management
and governance structure, which has weakened following the government
of Ontario's decision to exert its influence on the utility's compensation
structure through legislation, potentially promoting the interests and
priorities of one owner above those of other stakeholders.
Ontario recently passed the Hydro One Accountability Act that allows the
government to issue directives governing HO L's compensation of the board,
CEO, and other executives. In addition, Ontario also amended the Ontario
Energy Board Act (OEBA) to exclude any amount in respect of
compensation paid to HOL's CEO and executives from consumer rates.
Although the financial impact of the compensation dis allowance is minimal,
we think the legislative actions taken reflect a governance deficiency related
to HOL's ownership structure because Ontario is exercising its legislative
authority to lower electricity rates, consistent with the government's election
campaign promises. In our view, the use of this legislative authority to
influence HOL's compensation structure for some executives undermines
the effectiveness of the company's governance structure, and potentially
promotes the interests and priorities of the Ontario government above those
of other stakeholders. We also note that these events followed the recent
resignation of the entire previous board of Hydro One.
IV. JOINT APPLICANT'S SUPPLEMENTAL TESTIMONY
Please review the Joint Applicants testimony on the developments at Hydro One.
The Joint Applicants have provided testimony from six individuals. Those providing
testimony, and the areas they cover, are:
Mr. James D. (Jamie) Scarlett, Executive Vice President and Chief Legal Officer
for Hydro One Limited, discusses: (1) the June 7, 2018, election of Premier Doug Ford
and the Progressive Conservative Party, the July 11, 2018, Letter Agreement and the
resignation of Hydro One's Board and retirement of Hydro One's CEO Mayo Schmidt;
(2) the Hydro One Accountability Act, 2018; (3) the settlement commitments designed to
protect A vista's independence and financial health from Provincial interference; ( 4)
Avista's and Hydro One's proposal to add a new commitment and amend its commitment
Page 9 of15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
regarding Avista's post-merger board in response to the events after the June 7, 2018,
Ontario election; and ( 5) his adoption of Mayo Schmidt's previously filed testimony and
exhibits.
Mr. Christopher F. Lopez, Senior Vice President of Finance for Hydro One
Limited, summarizes: (1) the recent developments in Ontario; (2) reaffirms that Hydro
One is financially healthy and A vista will benefit from having a parent with strong access
to capital markets; (3) reviews the merger commitments relating to Hydro One's financial
support for Avista; (4) confirms that Hydro One stands by these commitments and
continues to provide the benefits associated with having a financially healthy parent
company; and ( 5) explains why the Ontario election, the July 11, 2018, Letter Agreement
between the Province of Ontario and Hydro One and subsequent events have no effect on
these commitments and benefits.
Mr. Thomas Woods, Interim Chair of the Board of Hydro One, introduces Hydro
One's new board of directors, summarizes how Hydro One's new Board was selected,
and describes the timeline and selection process for Hydro One's new CEO;
Mr. Scott Morris, CEO and Chairman of the Board of Avista, reaffirms Avista's
commitment to the Proposed Transaction following the replacement of the Board of
Directors of Hydro One as well as the retirement of Mayo Schmidt, and highlights
specific merger protections that: ( 1) protect A vista from political interference or
influence by the Province of Ontario; (2) preserve A vista's self-governance; and (3)
protect A vista and its customers from harm. He also indicates that the safeguards
included as part in the Proposed Transaction were designed to withstand the test of time
and changes in Hydro One management.
Page 10 of 15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
Mr. Mark T. Thies, Senior Vice President and CFO of Avista: (1) reconfirms the
benefits of the transaction from a financial perspective; (2) highlights the financial
safeguards incorporated into the agreed upon commitments in the Settlement, which were
designed to (a) protect and insulate A vista and its customers from a change in
management at Hydro One and/or changes in the political landscape of the Province of
Ontario, and (b) ensure Avista' s ability to continue as a financially sound, stand-alone
utility; and (3) emphasizes that neither Hydro One, nor the Province, can deprive Avista
of its necessary capital and assets and that Hydro One is obligated to provide sufficient
capital to allow A vista to provide safe, reliable, and cost- effective service.
Mr. John J. Reed, President and Chief Executive Officer of Concentric Energy
Advisors, Inc., provides an assessment of the reasonableness and sufficiency of the
governance, financial integrity and ring-fencing provisions of the Merger Commitments
in light of the political developments in the Province of Ontario, and changes in Hydro
One's executive management and board of directors. He compares the corporate
governance, financial integrity, and ring-fencing provisions negotiated in this transaction
to those provided in 40 utility mergers in the U.S., including 11 transactions involving an
acquisition by a foreign utility (10 of which involve a Canadian acquirer). He concludes
that the negotiated Stipulated Commitments in the Settlement, are "beyond industry
norms", are "more restrictive" and ensure that A vista and its Washington customers are
insulated from risk. In particular, he notes the following:
The governance, bankruptcy and financial ring-fencing and other Stipulated
Commitments, coupled with the Commission's on-going regulatory
oversight of A vista and the laws of the United States in the five states in
which A vista operates (Washington, Oregon, Idaho, Montana, and Alaska)
put parameters around how Avista will be owned and operated post-merger.
Page 11 of 15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Q:
A:
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
As I discussed earlier, the Stipulated Commitments are binding regardless
of any actions the Province might take in the future. The Province has no
ability to directly influence A vista. The Province cannot pass laws that
apply to Avista. Further, even in the speculative scenario where the
Province took control of Hydro One and directed the two Hydro One
executives on Avista's post-merger board to pursue initiatives that would
benefit Hydro One and/or Ontario to the detriment of Avista's financial
resources or service, the remaining seven independent or A vista-designated
directors on A vista's post-merger board could override that direction.19
Please describe Avista and Hydro One's proposal to add a new commitment and
amend a commitment.
On behalf of the Joint Applicants, Mr. Scarlett proposes an additional commitment that
aims at insulating compensation at Avista from outside control:
Avista Employee Compensation: Any decisions regarding Avista employee
compensation shall be made by the A vista Board consistent with the terms
of the Merger Agreement between Hydro One and Avista, and current
market standards and prevailing practices ofrelevant U.S. electric and gas
utility benchmarks. The determination of the level of any compensation
( including equity awards) approved by the A vista 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.i''
He also proposes to amend the Delegation of Authority (Appendix 5 of the Joint
Application) in response to the June 7th developments. (The modifications are in red.)
Shareholder shall have the unfettered right to designate, remove and replace
the Shareholder Designees as directors of the Surviving Corporation 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 clause (ii) hereof to Shareholder
determining, in good faith, that it is not able to appoint an Independent
Director who is a resident of the Pacific Northwest Region in a timely
manner, in which case Shareholder may replace any such director with an
19 Supplemental Testimony of John J. Reed, Exh. JJR-1 T at 24: 10-21.
20 Supplemental Testimony of James D. Scarlett, Exh. JDS-1 Tat 25:22-25 and 26: 1-4.
Page 12 of 15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
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, that this exception to clause (ii)
hereof shall not apply if, at any time a circumstance arises, and during the
pendency of any such circumstance, whereby the Province of Ontario
("Ontario") exercises its rights as a shareholder of Parent, uses legislative
authority or acts in any other manner whatsoever, that results, or would
result, in Ontario appointing nominees to the board of directors of Parent
that constitute, or would constitute a majority of the directors of such
board);21
The objective of the proposed adjustment to the Delegation of Authority is to ensure
the independence of the Avista board in the event that the Province takes some action in
the future to take control of the Hydro One Board. If triggered, this amendment restricts
Hydro One's ability to replace any of its three Independent Directors on the Avista board
with a Hydro One executive.
17 v. ADDITIONAL AGREEMENT OF THE PARTIES REGARDING
18
19
20
21
22
23
24
25
Q:
A:
MERGER COMMITMENTS NECESSARY FOR NET BENEFITS
Please describe what happened after A vista and Hydro One filed supplemental
testimony.
After Avista and Hydro One filed supplemental testimony in this matter, the Settling
Parties entered into discussions regarding the Joint Applicants' proposed governance
changes. These discussions led to modifications to seven of the 81 commitments, a new
commitment, and additional modifications to the Delegation of Authority, which are set
out in Commission Staff witness Mr. Chris McGuire's Exhibit CRM-2.
26 Q: Please summarize the modifications and the new commitment.
21 Scarlett, Exh. JDS-IT at 26:16-34 and 27:1-2.
Page 13 of 15
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
A:
Q:
A:
Q:
A:
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
The agreed-upon modifications include the following:
1. Commitment #2 (Executive Management) is modified such that the decisions to hire,
fire, or replace the CEO of A vista is to be made by the Board of Directors of A vista
and does not require the approval of the Hydro One Board of Directors;
2. Commitment #30 (Enforcement of Commitments) strengthens the role of the
Commission with regards to the Enforcement of Commitments;
3. Commitment #31 (Enforcement of Commitments) provides that courts in the state of
Washington have jurisdiction in the enforcement of commitments;
4. Commitment #33 (Enforcement of Commitments) insures that the Commitments are
binding to any successor organization;
5. Commitments #67 and #70 (Low-Income) are modified to improve the timing and
funding oflow-income commitments.
Please discuss new Commitment #82.
New Commitment #82 permits any party to petition the UTC to reopen the docket for
reconsideration in the event that the Province of Ontario takes action that affects Avista's
operations or its corporate relationship with Hydro One, or that affects Hydro One's
authority or ability to comply with the commitments in the settlement agreement. No party
may object to such a proceeding being commenced.
Please discuss the modifications to the Delegation of Authority.
As noted above, the proposed adjustment to the Delegation of Authority is designed to
ensure the independence of the Avista board in the event that the Province takes some
action in the future to take control of the Hydro One Board. In the agreed-upon
modification to this adjustment, a Province-controlled Hydro One Board is further
Page 14 of 15
1
2
3
4
5
6
7
8
9
10
11
Q:
A:
Docket U-170970
Supplemental Testimony of J. RANDALL WOOLRIDGE
Exhibit JRW-5T
restricted by suspending its ability to appoint an independent director of Avista's Board
with a Hydro One employee or executive, even on an interim basis, under certain
conditions.
What is your conclusion regarding the modifications and additions agreed to by the
Parties?
The modifications to the initial commitments and the Delegation of Authority, and the
addition of the new commitment, are the result of good- faith negotiations between the
Joint Applicants and the Non-Applicant Parties. They provide for Avista's independence
and insure that A vista can continue to provide safe, reliable electric utility service in the
state of Washington, regardless of any changes that may occur to Hydro One due to
political developments in the Province of Ontario.
12 VI. CONCLUSION
13
14
15
16
17
18
19
20
21
22
Q:
A:
What is Public Counsel's recommendation in this matter?
Public Counsel recommends that the Commission approve Settlement and the agreed
additions and modifications to the Commitments within the Settlement. Both the
Settlement and the additions and modifications described above allow the proposed
transaction to result in net benefits to Avista's customers. In particular, the
modifications, and new commitment, reduce the transaction risk associated with
developments at Hydro One and in Ontario, while preserving the financial benefits
associated with the merger. Importantly, the risks of this transaction can never be
completely eliminated, but the Commitments contained in the Settlement and modified
by the Parties provide the strongest protections the Parties could derive.
Page 15 of 15
BEFORE THE WASHINGTON
UTILITIES & TRANSPORTATION COMMISSION
In the Matter of the Joint Application of HYDRO ONE LIMITED and AVISTA
CORPORATION For an Order Authorizing Proposed Transaction.
DOCKET U-170970
J. RANDALL WOOLRIDGE ON BEHALF OF PUBLIC COUNSEL
EXHIBIT JRW-6
Timeline of Major Events in Avista-Hydro One Merger
October 4, 2018
Docket U-170970
Exhibit JR W-6
Page 1 of2
TIMELINE OF MAJOR EVENTS IN A VISTA-HYDRO ONE MERGER
July 19, 2017: Avista and Hydro One announce agreement for acquisition. Olympus
Equity LLC, a subsidiary of Hydro One, will purchase all of A vista's stock to become the
sole shareholder.
September 14, 2017: The Joint Applicants, Avista and Hydro One, file testimony
detailing the transaction, post-merger structure, and initial proposed commitments.
October 20, 2017: Pre-hearing conference held and procedural schedule agreed upon.
Order entered on October 25.
February 6, 2018: First all-party Settlement Conference held in Olympia.
March 16, 2018: All-party Settlement Agreement reached, which includes enhanced
commitments from Joint Applicants.
March 27, 2018: Settlement Stipulation filed with Washington Utilities and
Transportation Commission (WUTC).
April 10, 2018: Parties file joint and individual testimony in support of the Settlement
Agreement.
April 23, 2018- May 3, 2018: Four public comment hearings held in Avista's
Washington service territory.
May 22, 2018: Evidentiary hearing held in Olympia. Witnesses from all parties testified
in support of the Settlement Agreement.
June 7, 2018: Ontario's provincial elections are held and Doug Ford's Progressive
Conservative party gains a majority in the Legislative Assembly on a platform to remove
Hydro One's CEO and Board of Directions, in addition to cutting executive
compensation.
July 11, 2018: Hydro One releases a letter of agreement with Province that outlines a
process to remove all members of the Board of Directors and the retirement of CEO
Mayo Schmidt.
July 12, 2018: The WUTC issues a Notice of Intent to Conduct Additional Process and
seeks comments from Parties about how to conduct the forthcoming proceedings. Parties
agree to investigate the impacts of the Provincial election and subsequent leadership
changes at Hydro One.
August 14, 2018: Hydro One announces new Board of Directors, as selected by the Ad
Hoc Nominating Committee. Paul Dobson is named the acting CEO.
Docket U-170970
Exhibit JR W-6
Page 2 of2
August 15, 2018: The Province of Ontario proclaims the Hydro One Accountability Act
as passed by the Provincial Legislature and it becomes law.
September 6, 2018: The Joint Applicants file Supplemental Testimony to describe the
status of Hydro One's management and introduce modified commitments.
September 17, 2018: Parties convene in Olympia to discuss the status of Hydro One's
management, CEO search, and potential amendments to the Settlement Agreement.
Exh. CRM-lT
Docket U-170970
Witness: Chris R. McGuire
BEFORE THE WASHINGTON
UTILITIES AND TRANSPORTATION COMMISSION
In the Matter of the Joint Application of
Hydro One Limited and A vista
Corporation for an Order Authorizing
Proposed Transaction
DOCKET U-170970
TESTIMONY OF
Chris R. McGuire
STAFF OF
WASHING TON UTILITIES AND
TRANSPORTATION COMMISSION
Commission Staff Consideration of Recent Events in Ontario
October 4, 2018
TABLE OF CONTENTS
I. INTRODUCTION 1
II. SCOPE AND SUMMARY OF TESTIMONY 1
III. STAFF RESPONSE TO THE OUSTER OF HYDRO ONE'S BOARD 3
IV. AMENDMENT TO THE PROPOSED GOVERNANCE
AGREEMENT AND NEW COMMITMENTS 12
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page i
List of Exhibits
Exh. CRM-2 List of Updated Terms of the Settlement
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page ii
1
2
3 Q.
4 A.
5
6
7
8
9 Q.
10 A.
11
12
13
14
15
16 Q.
17 A.
18
19
20
21
22
23
I. INTRODUCTION
Please state your name, current position and business address.
My name is Chris R. McGuire. I am Assistant Director of Energy Regulation in the
Regulatory Services Division of the Washington Utilities and Transportation
Commission (Commission). My business address is the Richard Hemstad Building, 1300
S. Evergreen Park Drive S.W., Olympia, Washington 98504.
Did you submit testimony in this proceeding?
I adopted the testimony and exhibits in support of settlement of Staff witness Mr.
Christopher S. Hancock (Exhibits CSH-1 T to CSH- 7) at the Settlement Hearing held
before the Commission on May 22, 2018. I also testified orally at that hearing.
II. SCOPE AND SUMMARY OF TESTIMONY
What is the scope of your testimony in this proceeding?
In this testimony I discuss Staffs response to the Province of Ontario's intervention with
respect to the board of directors at Hydro One. In particular, I contemplate whether these
recent politically motivated events in Ontario present new risks to Avista and its
ratepayers that the Settlement Stipulation and associated commitments do not adequately
protect against.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 1
1 Q.
2 A.
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18 Q.
19 A.
20
21
22
23
Please summarize your testimony.
Staff concludes that Province of Ontario's intervention with respect to the board of
directors at Hydro One does not present material risks to A vista and its ratepayers. Given
1) protective governance agreements, 2) strong settlement commitments, including ring-
fencing provisions, and 3) Commission jurisdiction over decisions regarding A vista,
A vista and its ratepayers are insulated from actions that the Province of Ontario may
take. This is true even if the Province were to gain majority or complete control of Hydro
One.
The demonstrated willingness of the Province to exercise powers as laid out in
Hydro One's Governance Agreement is an interesting tum of events, but a willingness to
exercise those powers has little impact on Staffs assessment of the proposed transaction.
Nevertheless, over the past several weeks Staff and other parties have engaged the
Applicants in discussions with the goal of strengthening protections in the Settlement
Stipulation. Those discussions resulted in new and revised conditions and a modification
to Clause 2 of the Delegation of Authority. Staff supports these revisions, and remains
fully supportive of the Settlement.
Have you prepared any exhibits in support of your testimony?
Yes. I have included as Exhibit CRM-2 the list of updated terms of the Settlement
Stipulation, including new and revised commitments, and a modification to Clause 2 of
the Delegation of Authority.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page2
1
2
3
4
5 Q.
6
7 A.
8
9
10
11
12
13
14
15
16 Q.
17
18 A.
19
20
21
22
23
III. STAFF RESPONSE TO THE OUSTER OF HYDRO ONE'S BOARD
A. Introduction
Please briefly describe the salient context of the additional process in this
proceeding.
This proceeding concerns the acquisition of Avista Corporation (Avista), an investor-
owned public service company subject to the jurisdiction of the Commission. Through
the acquisition of all of the outstanding common stock of A vista, A vista would become
an indirect, wholly-owned subsidiary of Hydro One Limited (Hydro One). The Province
of Ontario, with its ownership of 47.4 percent of Hydro One's outstanding stock (diluted
to 42.3 percent on closing), is Hydro One's largest shareholder. As is the case with any
major shareholder, the Province of Ontario has certain authorities with respect to Hydro
One's board of directors.
Please briefly describe the circumstances that gave rise to the Commission
reopening the record and conducting additional process in this proceeding.
On July 11, 2018, Hydro One entered into an agreement with the Province of Ontario
whereby the entire board of Hydro One would resign and Hydro One's CEO, Mayo
Schmidt would retire. The Commission found good cause for extending the time for
additional process and deliberation given that the Province of Ontario has shown an
ability and willingness to disrupt the executive management and board of directors at
Hydro One.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 3
1 Q.
2
3 A.
4
5
6
7
8
9
10
11
12
13
14
15 Q.
16
17 A.
18
19
20
21
22
In Staff's view, what is the purpose of additional review of the proposed
acquisition?
Staff sees the purpose of this additional review as twofold:
1. To evaluate whether the removal, itself, of the board should be viewed as
a material concern for this transaction; and
2. To evaluate whether the demonstrated willingness of the Province of
Ontario to interfere in the affairs of Hydro One presents material risks to
A vista and its ratepayers.
Staffs review has necessarily included reevaluating the commitments in the
Settlement Stipulation, particularly as they relate to the threat of Provincial interference,
given that Provincial interference has been shown to be a very real possibility.
B. Removal and Replacement of Hydro One's Board of Directors
Does the removal of Hydro One's board cause Staff to change its view with respect
to the acquisition, or to question its support of the settlement?
No. If parties, including Staff, were to be concerned about the potential consequences of
the Province of Ontario's ability to force resignation of Hydro One's entire board, those
parties would have objected to this ability prior to entering into the settlement. It has been
clear throughout this proceeding that the Province had such authority and yet all parties,
including Staff, entered into settlement.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page4
1 Q.
2
3 A.
4
5
6
7
8
9
10
11
12
13
14
15 Q.
16
17 A.
18
19
20
21
22
23
Please explain what you mean by your statement "it has been clear throughout this
proceeding that the Province had such authority."
The Governance Agreement between Hydro One and Her Majesty the Queen in Right of
Ontario was introduced by the Applicants as part of the record in this proceeding (see
Hydro One Exh. MMS-5). Section 4.7 of that Governance Agreement describes the
procedures the Province must follow if it is to remove the board. That the Province had
the power to effect the removal of the entire board, which it acted on in July, was no new
revelation.
The fact that the Province effected this removal ( albeit without the need to
formally invoke the procedures in Section 4.7 of the Governance Agreement) was
unexpected, however, and spurred Staff to reexamine the relationship between the
Province and Hydro One. Staffs conclusion is that the Province did not exercise power
beyond those powers Staff already understood the Province to possess.
Do the Province's powers with respect to Hydro One's board pose too much risk to
Avista?
No. Although the Province can force the removal of the entire Hydro board, and has, it
only has authority to nominate 40 percent of the board's new directors. The remaining
directors must be independent of Hydro One and the Province.
Moreover, and most significantly, even if the Province legislated additional
authority for itself over Hydro One, whatever power the Province may exercise over
Hydro One or its board of directors does not extend to Avista's board of directors due to
the construction of the A vista board. We are tasked with assessing whether A vista or its
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 5
1
2
3
4
5 Q.
6
7 A.
8
9
10
11
12
13
14 Q.
15
16
17 A.
18
19
20
21
22
23
ratepayers are negatively affected by the Province's limited authority over the Hydro One
board, or by the fact that the board was indeed replaced, and Staffs conclusion is that
they are not.
Does Staff have any reason to believe that the new board is incompetent or may be
unduly influenced by the Province?
No. The new board of directors appears entirely competent to Staff. Further, the process
by which a new board is selected does not allow for the Province to take control of the
board or to have executive authority over the composition of the new board.
Moreover, again, the actions of the Province are with respect to Hydro One's
board and not A vista's board. The Province, effectively, has zero control over A vista's
board of directors.
You assert that Avista's board of directors is entirely shielded from Provincial
influence. Please explain how that is the case given that Hydro One would be the
sole owner of A vista, and the Province is the largest shareholder of Hydro One.
As mentioned above, although the Province may force the resignation of the entire Hydro
One board, the Province may only nominate 40 percent of the new board members. A
single shareholder cannot enact an agenda with a minority of the board votes.
Even if the Province were to control 100 percent of Hydro One's board, and even
if the Province were to attempt to infect A vista's board of directors ( and with the
assumption that the Province were a bad actor or had malicious intent), the governance
documents with respect to Avista's board of directors deprives the Province of an ability
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 6
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17 Q.
18
19
20
21 A.
22
to do harm. Under the proposed arrangement, Hydro One will nominate its own
employees for only two of Avista's nine board members while Avista will nominate four
of the nine. The remaining three must be independent consistent with New York Stock
Exchange guidelines. Further, as discussed in Section IV, below, amendments to the
Delegation of Authority create a failsafe mechanism protecting A vista in the event of a
Provincial takeover of the Hydro One board- if the Province were to gain control of
Hydro One, Hydro One would automatically lose its ability to replace, even temporarily,
any of the independent board members with its own executives or employees.
In short, both Hydro One's and Avista's governance agreements, independently,
provide substantial insulation from Provincial influence on business operations. The
Province would not have any direct control over A vista, and the two governance
agreements in combination protect A vista from the effects of any influence the Province
may be able to exercise over Hydro One.
C. Provincial Meddling, More Generally
In Section Ill(a), above, you mention another purpose of this additional review is to
evaluate whether the demonstrated willingness of the Province of Ontario to
interfere at all in the affairs of Hydro One creates a new, material risk to Avista and
its ratepayers. Please describe what you mean.
To Staff, the most interesting part of the recent Provincial interference is not that the
board was replaced, it's that the Province interfered at all. During discussions between
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 7
1
2
3
4
5
6
7
8
9 Q.
10
11 A.
12
13
14
15
16 Q.
17
18 A.
19
20
21
22
23
the Applicants and the Commissioners at the Settlement Hearing, the likelihood of
Provincial interference was represented by the Applicants as exceedingly remote.
If support for this transaction had rested on taking that representation at face
value, then recent intervention by the Province would have eroded that support.
Therefore, it's important to give parties a chance to revisit their support in light of these
changed circumstances, given that Provincial interference now cannot be represented or
accepted as a non-existent risk.
Does Staff view the risk of Provincial influence on Hydro One as a material risk to
Avista and its ratepayers?
No. Avista and its ratepayers are shielded from the risk of Provincial interference by
numerous layers of protections. Those protections have been solidified through 1) power-
limiting governance agreements, 2) commitments developed and agreed to through this
proceeding, and 3) Commission jurisdiction over Avista's Washington operations.
Please comment on the protections afforded by power-limiting governance
agreements.
I discuss these protections in more detail, above. In summary, Hydro One's Governance
Agreement limits Provincial control of Hydro One's board, while Avista's governance
documents prevent Hydro One control of Avista's board. The combination of the two
governance documents provides substantial protection of A vista's board from Provincial
interference.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 8
1 Q.
2
3 A.
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Please describe how commitments developed and agreed to through this proceeding
protect A vista and its ratepayers from Provincial influence.
First, I should note, the commitments developed through settlement negotiations largely
pertain to the relationship between Avista and Hydro One, and do not specifically
contemplate protection from Provincial influence.
In order for the Province to have any meaningful degree of influence over Hydro
One's relationship with Avista, the Province would need to first gain control of Hydro
One. So, for the sake of considering whether the Settlement Stipulation and agreed-upon
commitments protect A vista and its ratepayers from Provincial influence, let us assume
for the moment that the Province manages to wrest complete control from Hydro One.
The Settlement Stipulation was negotiated, in part, to address the risk associated
with having a single shareholder and, more to the point, the risk that that shareholder
sacrifices Avista's financial and operational health for its own profit. So, in a very real
sense the settlement has already contemplated a bad actor. As a result, it does not matter
whether the Province wrests control from Hydro One. The protections embedded in the
settlement remain very strong regardless of who controls Hydro One, and regardless of
how malevolent that entity is.
Regardless of who owns and controls Hydro One, the settlement establishes
A vista as a functionally independent, ring-fenced company with independent
management and diverse board of directors. Staff remains very confident that the
combination of Avista's diverse board of directors (only two of which would be Hydro
One executives) and commitments established through settlement provide ample
protection from a potential bad actor and promote the ongoing financial integrity of the
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 9
1
2
3
4
5 Q.
6
7 A.
8
9
10
11
12
13
14
15
16
17
18
19 Q.
20 A.
21
22
23
company. The parties negotiated those commitments very thoughtfully and deliberately,
and the recent actions of the Province do not erode Staffs assessment of the strength of
those commitments.
Please briefly summarize the commitments that insulate A vista from potentially
detrimental interference from Hydro One.
The Governance Commitments seek to maintain A vista's current executive management
and ensure a diverse board of directors, with Hydro One's control of the board limited to
two of its own employees. The Business Operations Commitments seek to maintain
A vista's current control of its own operations. The Regulatory Commitments ensure that
Avista and its holding company will comply with all applicable laws and all existing
Commission orders. The Financial Integrity Commitments ensure that earnings cannot
flow upward to the parent company (i.e., the shareholder) unless Avista remains
financially healthy, as demonstrated by a number of objective measures. The Ring-
Fencing commitments ensure that A vista is shielded from financial risks of the parent
company, including bankruptcy, and prohibit A vista from making loans to the parent or
pledging assets to the parent.
Are these Commitments legally enforceable?
Yes. Should the Commission adopt the Settlement Stipulation, the Commission's final
order can be enforced in the Washington courts. As discussed below, the revised
regulatory commitments provide that Hydro One as well as Avista and its direct parent,
are subject to the jurisdiction of Washington courts for purposes of enforcement of the
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 10
1
2
3
4
5 Q.
6
7
8 A.
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Commission's order. In addition, noncompliance with the Commission's order is subject
to administrative penalties at the Commission. Penalties are not recoverable from
ratepayers and must be borne by the shareholders or, in this case, shareholder.
Please explain how Commission jurisdiction over Avista protects the company and
its ratepayers from potentially detrimental actions on the part of the parent
company.
Besides the power-limiting governance agreements discussed above, and besides the
protective provisions of the Settlement Stipulation and commitments discussed above,
decisions regarding A vista's operations in the State of Washington will remain subject to
the Commission's jurisdiction. This means that the Commission will continue to evaluate
the prudence of business decisions, will continue to audit any proposal to increase A vista
rates and will only approve rates that are fair, just, reasonable, and sufficient under
Washington law. Additionally, as discussed in Section IV below, the amendment to
Commitment 31 makes it explicit that Hydro One and its subsidiaries must submit to the
jurisdiction of Washington State for the enforcement of Commission orders.
In short, the Commission provides a legally enforceable line of defense against
action, including by Hydro One, that is counter to the interests of Avista and its
ratepayers.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 11
1
2
3
4 Q.
5
6 A.
7
8
9
10
11
12
13 Q.
14
15 A.
16
17
18
19
20 Q.
21
IV. AMENDMENT TO THE PROPOSED GOVERNANCE
AGREEMENT AND NEW COMMITMENTS
Have the Applicants made any additional commitments in response to recent events
in Ontario?
Yes, in supplemental testimony, the Applicants proposed a modification to the
Delegation of Authority and a new commitment regarding compensation of A vista
employees. In addition, the parties have negotiated new or revised commitments to be
incorporated into the Settlement Stipulation. Attached to my testimony as Exh. CRM-2 is
a document prepared by the Applicants that contains the new provisions to which the
Applicants have agreed.
Can you please discuss the Applicants' proposed revisions to the Delegation of
Authority?
Yes. Hydro One witness Mr. James Scarlett provides proposed language to include in the
Delegation of Authority.1 The purpose of this revision, as Mr. Scarlett describes, is to
protect the independence of the A vista board in the event that the Province takes control
of a majority of the Hydro One board.
Have there been further revisions to the Delegation of Authority language discussed
in Mr. Scarlett's testimony?
1 Scarlett, Exh. JDS-1 T, at 26:29 - 27:2.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 12
1 A.
2
3
4
5 Q.
6
7
8 A.
9
10
11
12
13
14
15
16
17
18
19
20 Q.
21 A.
22
Yes. The parties have negotiated strengthening language that is consistent with the spirit
of the Applicants' proposal to further safeguard the independence of A vista's board of
directors. The new language is contained in Exh. CRM-2.
How do the revisions to the Delegation of Authority in the Applicants' supplemental
testimony together with the subsequently negotiated revisions protect the
independence of Avista's board?
The risk this amendment is attempting to address is as follows: Given the ability of
Hydro One to replace its five designees, and given the ability of Hydro One to replace the
three independent designees with its own executives or employees during a six-month
period in the event suitable independent directors cannot be identified, there is risk that a
bad actor could for a limited amount of time control five of A vista's nine board members.
The revised language restricts Hydro One's designation of directors during this
six-month period to only four of its own executives or employees. This means that at no
time would Hydro One employees or executives hold a majority of seats on the Avista
board. In addition, with this amendment, if the Province were to gain control of Hydro
One, Hydro One would automatically lose its ability to replace, even temporarily, any of
the independent board members with its own executives or employees.
Does Staff support this amendment?
Yes, although Staff believes the risk this amendment aims to protect against is
astronomically small. Including additional protections from a governmental body that has
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 13
1
2
3
4 Q.
5 A.
6
7 Q.
8 A.
9
10
11
12
13
14
15
16
17
18 Q.
19 A.
20
21
shown a willingness to interfere in Hydro One if nothing else provides for peace of mind
given that events previously deemed as unlikely have nevertheless come to pass.
Do any of the parties oppose this amendment?
Not to my knowledge.
Can you please discuss the new commitments that the Applicants have proposed?
Yes. As presented by Hydro One witness Mr. James Scarlett, the Applicants proposed an
additional merger commitment in supplemental testimony. 2 This commitment explicitly
grants Avista's board authority with respect to employee compensation at Avista,
including equity awards.
The purpose of this new commitment is to make it abundantly clear that although
the Province has passed legislation affecting compensation at Hydro One, that new
compensation framework does not extend to Avista. Avista's board of directors has sole
authority over compensation at A vista. This commitment has since been incorporated into
Commitment 2.
Does Staff support this new commitment?
Yes. Staff does not understand the Province or Hydro One to have any authority over
employee compensation at Avista, save for Hydro One's two votes on A vista's board, but
there is no harm in making the authority of A vista's board crystal clear in this matter.
2 Scarlett Testimony, Exh. JDS-IT, 25:22 - 26:4.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-IT
Page 14
1
2
3
4 Q.
5 A.
6
7
8
9
10
11 Q.
12 A.
13
14
15
16
17
18
19
20
21
22
Therefore, Staff supports including this commitment in an amended Settlement
Stipulation.
What other new or revised commitments have the Applicants agreed to?
They have agreed to revise commitments related to executive management (Commitment
2), the board of directors (Commitment 3), regulatory commitments (Commitments 30,
31, and 33), and low income programs (Commitments 67 and 70), and they have agreed
to a new commitment regarding reporting and reassessing the protections (New
Commitment 82).
Please describe the revisions to the regulatory commitments.
The changes incorporate some aspects of regulatory commitments that the Applicants
made in Oregon, in the spirit of the most-favored-nation commitment (Commitment 81)
that the Applicants made in Washington.
Most notably, the amendment to Commitment 31, Submittal to State Court
Jurisdiction for Enforcement of Commission Orders, makes explicit the fact that Hydro
One must submit to the jurisdiction of Washington State. Previously Commitment 31
referred only to Olympus Holding Corp. and it subsidiaries. This amendment is intended
to recognize that Hydro One is responsible for fulfilling certain obligations pursuant to
the Settlement Stipulation and associated commitments, and those obligations are legally
enforceable in the state of Washington.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 15
1 Q.
2 A.
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31 Q.
32 A.
33
34
35
Can you please discuss New Commitment 82?
Yes. This commitment requires Hydro One to report any legislation or other action in
Canada that would affect A vista and sets out the process for a party to petition the
Commission to change the Commission's order in this proceeding. The commitment
reads as follows:
In the event of the enactment or adoption of any legislation, rule, policy, or
directive by government at any level or by any governmental entity or official in
Canada (a "Legislative Action") that affects Avista's operations because of
Avista's corporate relationship with Hydro One, or affects Hydro One's
compliance with any commitment in this stipulation, any of the parties to this
proceeding may petition the Commission at any time for a re-hearing that re­
opens the record in Docket U-170970 to consider whether the Commission should
change its final order, and neither Hydro One nor any of its subsidiaries, including
A vista, will oppose initiation of such a proceeding.
Hydro One will report to the Commission any such Legislative Action in Canada
that, in Hydro One's reasonable judgement, affects Avista's operations because of
Avista's corporate relationship with Hydro One, or affects Hydro One's
compliance with any commitment in this stipulation, as soon as practicable after it
is publicly announced as being effective by the government or governmental
entity or official.
Nothing in this Commitment 82 shall be interpreted to limit the positions or
arguments that Avista or Hydro One may take or advance in any such proceeding,
including the right to argue that a petition presents insufficient grounds or
evidence. Prior to filing a petition with the Commission under this Commitment
82, a party must provide Hydro One and Avista at least 30 days advance written
notice and an opportunity to meet and confer about resolutions other than filing
with the Commission under this commitment. Nothing in this commitment is
intended to restrict the rights of the parties to petition the Commission concerning
its order(s) in this docket, or to limit the authority of the Commission.
What is the purpose of this additional commitment?
The purpose of this commitment is to protect against the risk of governmental actions in
Canada that would affect A vista. First, it ensures that the Commission is notified if a
governmental body in Canada passes legislation or otherwise enacts an agenda that
affects Avista's operations or compromises Hydro One's compliance with the settlement
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 16
1
2
3
4
5
6
7
8
9
10
11 Q.
12 A.
13
14 Q.
15 A.
16
17 Q.
18 A.
19
20 Q.
21 A.
22
23
commitments. Second, the commitment ensures that upon such governmental action, any
party to this proceeding may petition the Commission for a re-hearing that re-opens the
record in Docket U-170970 to consider whether the Commission should change its final
order.
Effectively, this commitment demonstrates an understanding among all settling
parties that the Commission can reconsider its decision on this matter if A vista or its
ratepayers are negatively affected by actions on the part of governmental bodies in
Canada. And it ensures that the Commission and the parties will receive information that
such an action has occurred.
Does Staff support these new and revised commitments?
Yes.
Do any of the other parties oppose these new and revised commitments?
Not to my knowledge.
Does Staff continue to support the settlement and the underlying transaction?
Yes, it does.
Does this conclude your testimony?
Yes.
TESTIMONY OF CHRIS R. MCGUIRE
Docket U-170970
Exh. CRM-lT
Page 17
BEFORE THE WASHINGTON
UTILITIES & TRANSPORTATION COMMISSION
In the Matter of the Joint Application of HYDRO ONE LIMITED and AVISTA
CORPORATION For an Order Authorizing Proposed Transaction.
DOCKET U-170970
J. RANDALL WOOLRIDGE ON BEHALF OF PUBLIC COUNSEL
EXHIBIT JRW-7
Hydro One's Response to Public Counsel Data Request 36
October 4, 2018
Docket U-170970
Exhibit JRW-7
Page 1 of 1
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
Public Counsel
Data Request
PC - 036(Hl)
DATE PREPARED: September 19, 2018
WITNESS: Thomas Woods
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
RE: Supplemental Testimony of Thomas D. Woods, Exh. TDW-lT.
Please respond to the following and provide a detailed explanation:
a. Does the newly approved Hydro One Board of Directors, as presented in Mr. Woods'
Testimony, commit to the Hydro One-Avista merger and all of the Settlement conditions?
b. Does Mr. Woods, in his role as Chair of the Board of Directors, commit to the Hydro One­
Avista merger and all of the Settlement conditions?
RESPONSE:
a. and b.
On September 19, 2018, the Hydro One Board of Directors passed a resolution
acknowledging and affirming, for and on behalf of Hydro One: (i) Hydro One's obligations
under the Merger Agreement and with respect to the merger-related commitments to be
performed by Hydro One and/or its subsidiaries if the Proposed Transaction is consummated
pursuant to the Merger Agreement; and (ii) Hydro One's intention to consummate the
Merger; in each case in accordance with the terms of, and subject to the conditions set out in,
the Merger Agreement and the merger-related commitments.
Page 1 of 1
Exh. CRM-2
Docket U-170970
Witness: Chris R. McGuire
BEFORE THE WASHINGTON
UTILITIES AND TRANSPORTATION COMMISSION
In the Matter of the Joint Application of
Hydro One Limited and Avista
Corporation for an Order Authorizing
Proposed Transaction
DOCKET U-170970
EXHIBIT TO
TESTIMONY OF
Chris R. McGuire
STAFF OF
WASHING TON UTILITIES AND
TRANSPORTATION COMMISSION
List of Updated Terms of the Settlement
October 4, 2018
Exh. CRM-2
Docket U-170970
Page 1 of 5
Docket U-170970 - Avista/ Hydro One Merger - UPDATED TERMS
(Revised October 4, 2018)
Avista and Hydro One believe that the following modifications to certain provisions and the new
Commitment 82 fully resolve the issues discussed in the September 17, 2018 meeting and in
subsequent communications among parties to this docket, and the companies agree to these
modifications and the parties may so represent in their testimony to be filed on October 4, 2018.
MODIFICATIONS TO COMMITMENTS 2 AND 3
2. Executive Management:
Avista will seek to retain all current executive management of Avista, subject to
voluntary retirements that may occur. This commitment will not limit Avista's
ability to determine its organizational structure and select and retain personnel
best able to meet Avista'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 l=lydro One Limited ("l=lydro One")
for any hiring, dismissal or replacement of the CeO); Any decision to hire, dismiss
or replace the Chief Executive Officer of Avista shall be within the discretion of the
Avista Board of Directors, and shall not require any approval of Hydro One or any
of its affiliates (other than Avista), notwithstanding anything to the contrary in the
merger agreement, and its exhibits and attachments, between Hydro One and
Avista.
Avista Employee Compensation: Any decisions regarding Avista employee
compensation shall be made by the Avista Board consistent with the terms of the
Merger Agreement between Hydro One and Avista, and current market standards
and prevailing practices of relevant U.S. electric and gas utility benchmarks. The
determination of the level of any compensation (including equity awards)
approved by the Avista Board with respect to any employee in accordance with
the foregoing shall not be subject to change by Hydro One or the Hydro One
Board.
3. Board of Directors:
After the closing of the Proposed Transaction, Avista's board will consist of nine
(9) members, determined as follows: (i) two (2) directors designated by Hydro One
who are executives of Hydro One or any of its subsidiaries; (ii) three (3) directors
who meet the standards for "independent directors" - under section 303A.02 of
the New York Stock Exchange Listed Company Manual (the "Independent
Directors") and who are residents of the Pacific Northwest region, to be
designated by Hydro One (collectively, the directors designated in clauses (i) and
(ii) hereof, the "Hydro One Designees"), subject to subject to the provisions of
Clause 2 of Exhibit A to the Merger Agreement; (iii) three (3) directors who as of
immediately prior to the closing of the Proposed Transaction1 are members of the
1
501853228 v9
Exh. CRM-2
Docket U-170970
Page 2 of 5
Board of Directors of Avista, including the Chairman of Avista's Board of Directors
(if such person is different from the Chief Executive Officer of Avista); and (iv)
Avista's Chief Executive Officer (collectively, the directors designated in clauses
(iii) and (iv) hereof, the "Avista Designees"). Avista and Hydro One shall consult
with each other prior to the designation of any Independent Directors. The initial
Chairman of Avista's post-closing Board of Directors shall be the Chief Executive
Officer of Avista as of the time immediately prior to closing for a one year term. If
any 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 right to
nominate a replacement director to fill such vacancy, and such person shall
thereafter become an Avista Designee.
The term "Pacific Northwest region" means the Pacific Northwest states in which
Avista serves retail electric or natural gas customers, currently Alaska, Idaho,
Montana, Oregon and Washington;
MODIFICATIONS TO COMMITMENTS 30, 31 and 33 (INCORPORATING CONCEPTS
FROM OREGON COMMITMENTS 110-112)
Commitment 30 - Commission Enforcement of Commitments
Hydro One and its subsidiaries, including Avista, understand and agree that the
Commission has authority to enforce these commitments in accordance with their
terms. If there is a violation of the terms of these commitments, then the
offending party may, at the discretion of the Commission, have a period of thirty
(30) calendar days to cure such violation. The scope of this commitment includes
the authority of the Commission to compel the attendance of witnesses from
Olympus Holding Corp. and its affiliates, including Hydro One, with pertinent
information on matters affecting Avista. Hydro One, Olympus Holding Corp. and
its subsidiaries waive their rights to interpose any legal objection they might
otherwise have to the Commission's jurisdiction to require the appearance of any
such witnesses.
Commitment 31- Submittal to State Court Jurisdiction For Enforcement of Commission
Orders
Hydro One, on behalf of itself and its subsidiaries in the post-close corporate
structure between Hydro One and Avista (as those companies in between may
change over time), and Avista Olympus l=lolding Corp., on its own and its
subsidiaries' behalf, including Avista's, will file with the Commission prior to
closing the Proposed Transaction an affidavit affirming that they +t-will submit to
the jurisdiction of the relevant stateWashington courts for enforcement of the
2
501853228 v9
Exh. CRM-2
Docket U-170970
Page 3 of 5
Commission's orders adopting these commitments and subsequent orders
affecting Avista. and will agree to the application of Washington law with respect
to such matters.
Commitment 33 - Commitments Binding
Hydro One, its subsidiaries in the post-close corporate structure between Hydro
One and Avista (as those companies in between may change over time) Olympus
l=lolding Corp. and its subsidiaries, including and Avista, acknowledge that the
commitments being made by them are M!Y_binding eA+y-upon them and their
successors in interest and upon their affiliates, except where specifically noted,
and their successors in interest. Hydro One and Avista are not requesting in this
proceeding a determination of the prudence, just and reasonable 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 ratemaking treatment, or public interest of the investments,
expenditures or actions as they deem appropriate.
If Hydro One or any other entity in the chain of Avista's ownership determines that
Avista or any other entity has failed to comply with an applicable Commitment,
the entity making such determinations shall take all appropriate actions to achieve
compliance with the Commitment.
MODIFICATION TO COMMITMENTS 67 AND 70 (TIMING OF FUNDING FOR
CERTAIN LOW-INCOME PROGRAMS).
The following language will be added to Commitments 671 and 702• For Commitment 70, add
the words "energy efficiency" before "Advisory Committee".
1 Commitment 67 provides, "Funding for Low-Income Participation in New Renewables: Hydro One will
arrange funding totaling $5,000,000 over a period of up to ten (10) years for the purpose of funding one or
more renewable generation project(s) to benefit Avista's low-income customers. The types of projects that
may be funded include, but are not limited to, on site renewable energy installations such as photovoltaic
equipment, community solar projects, and other renewable energy equipment, in which the benefits will be
directed to Avista's low-income customers. The funds will be paid into a separate account to be managed
and disbursed by Avista at the direction of its Energy Assistance Advisory Group (which includes third-party
advisors such as The Energy Project, Public Counsel, Commission Staff, and low-income agencies as well
as Avista). The Energy Assistance Advisory Group will determine the project selection (which includes
design and implementation). Eligible costs may include project construction, consulting costs, and
reasonable administration costs required for the coordination of renewable energy projects.
2 Commitment 70 provides,
Low Income Weatherization: Avista commits and Hydro One agrees that Avista commits, to
continue Avista's existing weatherization programs, described in Schedules 90 and 190.
3
501853228 v9
Exh. CRM-2
Docket U-170970
Page 4 of 5
Funding will be made available for eligible projects as they are identified and
approved by the Advisory Committee throughout the 10 year timeframe of the
commitments; provided, however, that funding will be made available, at a
minimum, on a pro rata basis over the period (i.e., one-tenth of the total each
year), but need not occur any more frequently than on a pro rata basis over the
10 year period. Funding commitments may be made at any time during the 10
year period.
For example, if no funding is approved by the Advisory Committee until the third
year of the 10-year period, up to ($1.5 million for Commitment 67 I $1.2 million
for Commitment 70) must be made available in the third year. Nothing in this
provision shall be interpreted to preclude payment of funding in installments over
time for large projects that are approved early in the 10-year period. For example,
a $5 million project could be approved in Year 3 (under Commitment 67) with $1.5
million due in Year 3 and $0.5 million per year due each year for the next seven
years, assuming no funding had been made available under Commitment 67 in
Year 1 or Year 2.
NEW COMMITMENT 82
In the event of the enactment or adoption of any legislation, rule, policy, or
directive by government at any level or by any governmental entity or official in
Canada (a "Legislative Action") that affects Avista's operations because of Avista's
corporate relationship with Hydro One, or affects Hydro One's compliance with
any commitment in this stipulation, any of the parties to this proceeding may
petition the Commission at any time for a re-hearing that re-opens the record in
Docket U-170970 to consider whether the Commission should change its final
order, and neither Hydro One nor any of its subsidiaries, including Avista, will
oppose initiation of such a proceeding. Hydro One will report to the Commission
any such Legislative Action in Canada that, in Hydro One's reasonable judgement,
affects Avista's operations because of Avista's corporate relationship with Hydro
One, or affects Hydro One's compliance with any commitment in this stipulation,
as soon as practicable after it is publicly announced as being effective by the
government or governmental entity or official. Nothing in this Commitment 82
shall be interpreted to limit the positions or arguments that Avista or Hydro One
may take or advance in any such proceeding, including the right to argue that a
Hydro One will arrange funding of $4,000,000 over 10 years to fund low income weatherization in
Washington. This funding is over and above existing funding for low-income weatherization.
For both existing funding and the new Hydro One funding, 20 percent of the funds may be used for
"direct" project coordination costs and 10 percent for "indirect" general overhead costs of
administering the weatherization program.
4
501853228 v9
Exh. CRM-2
Docket U-170970
Page 5 of 5
petition presents insufficient grounds or evidence. Prior to filing a petition with
the Commission under this Commitment 82, a party must provide Hydro One and
Avista at least 30 days advance written notice and an opportunity to meet and
confer about resolutions other than filing with the Commission under this
commitment. Nothing in this commitment is intended to restrict the rights of the
parties to petition the Commission concerning its order(s) in this docket, or to limit
the authority of the Commission.
MODIFICATION TO DELEGATION OF AUTHORITY, CLAUSE 2
Shareholder shall have the unfettered right to designate, remove and replace the
Shareholder Designees as directors of the Surviving Corporation 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
clause (ii) hereof to Shareholder determining, in good faith, that it is not able to
appoint an Independent Director who is a resident of the Pacific Northwest Region
in a timely manner, in which case Shareholder may replace any such director with
any person, including an employee or executive of Parent or any of its Subsidiaries!
on an interim basis, not exceeding six months, provided that Shareholder
Designees who are employees or executives of Parent or any of its Subsidiaries
shall in no case constitute a majority of the directors of the Surviving Corporation,
after which time Shareholder shall replace £D.Y_such interim director with an
Independent Director who is a resident of the Pacific Northwest Region)t. If, at
any time a circumstance arises, and during the pendency of any such
circumstance, whereby the Province of Ontario ("Ontario") exercises its rights as
a shareholder of Parent, uses legislative authority or acts in any other manner
whatsoever, that results, or would result, in Ontario appointing nominees to the
board of directors of Parent that constitute, or would constitute a majority of the
directors of such board, then Parent's authority to replace an Independent
Director with an employee or executive on an interim basis is suspended for the
pendency of such circumstance.
5
501853228 v9
Exhibit MMH-2T
Docket U-170970
Witness: Dr. Marc M. Hellman
BEFORE THE
WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION
)
)
) DOCKET U-170970
)
)
)
)
)
)
) ����������-)
RESPONSE TESTIMONY OF DR. MARC M. HELLMAN
ON BEHALF OF THE
ALLIANCE OF WESTERN ENERGY CONSUMERS
October 4, 2018
And
AVISTA CORPORATION
For an Order Authorizing Proposed
Transaction.
In the Matter of the Joint Application of
HYDRO ONE LIMITED ( acting through its
indirect subsidiary, Olympus Equity LLC)
TABLE OF CONTENTS TO THE
SUPPLEMENTAL RESPONSE TESTIMONY OF DR. MARC M. HELLMAN
I. INTRODUCTION AND SUMMARY 1
II. ANALYSIS OF RECENT EVENTS 2
III. CONTINUED SUPPORT FOR MERGER 6
EXHIBITS
Exhibit MMH-3 - Hydro One Responses to A WEC Data Requests 108 and 110
Response Testimony of Dr. Marc M. Hellman Dockets U-170970 Exhibit MHH-2T Page i
1 I. INTRODUCTION AND SUMMARY
2 Q.
3 A.
4
5 Q.
6
7 A.
8 Q.
9 A.
10
11
12
13
14
15
16 Q.
17 A.
18
19 Q.
20 A.
21
22
23
PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
Dr. Marc M. Hellman. My business address is 2760 Eagle Eye Ave. NW, Salem,
Oregon, 97304.
ARE YOU THE SAME WITNESS WHO PREVIOUSLY PROVIDED
TESTIMONY IN THIS DOCKET ON BEHALF OF A WEC?
Yes.
WHAT IS THE PURPOSE OF THIS SUPPLEMENTAL TESTIMONY?
The purpose of this supplemental testimony is to: a) provide analysis and thoughts on the
recent events impacting Hydro One's executive management; and b) express A WEC's
continued support for the settlement terms presented to the Washington Utilities and
Transportation Commission ("Commission") and admitted into evidence at its May 22,
2018, Settlement Hearing, as supplemented through additional commitments the
Applicants have made in their supplemental testimony and through discussions with the
parties in this case.
DID YOU PREPARE ANY EXHIBITS TO YOUR TESTIMONY?
Yes. AWEC Exhibit MMH-3 attached to this testimony contains copies of Hydro One
responses to AWEC Data Requests 108 and 110.
PLEASE SUMMARIZE YOUR TESTIMONY.
AWEC continues to support Hydro One's acquisition of Avista. This support is
contingent upon the Commission's adoption of the commitments contained in the initial
All-Party Settlement, the additional commitment related to Avista employee
compensation the Applicants proposed in their supplemental testimony ( discussed
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T
Page 1
1 below), and the other language provisions the Applicants have agreed to through further
2 discussions with the parties to this case. These other commitments can be found in Staff
3 Exhibit CRM-2.
4
5 Q.
6
7
8 A.
II. ANALYSIS OF RECENT EVENTS
PLEASE DESCRIBE YOUR THOUGHTS ON THE RECENT EVENTS THAT
TRIGGERED FURTHER COMMISSION REVIEW OF HYDRO ONE'S
PROPOSED PURCHASE OF AVISTA.
As noted in the testimony of Hydro One witness James D. Scarlett, Exhibit JDS-IT, a
9 new Premier of Ontario was elected, Doug Ford, whose campaign included a promise to
10 take certain actions affecting Hydro One. As a consequence of Doug Ford's victory in
11 the election, the Hydro One CEO and Board of Directors resigned and have been
12 replaced. The new Board will essentially be confirmed at Hydro One's 2019 annual
13 shareholder meeting. A new acting CEO is in place pending the selection of a permanent
14 CEO.
15 Q.
16
17 A.
ARE THERE OTHER ACTIONS DOUG FORD CAMPAIGNED ON THAT
AFFECT HYDRO ONE AS WELL?
Yes. Doug Ford also campaigned on significantly reducing the salaries of the Hydro One
18 CEO and executives as well as reducing the rates charged to Hydro One customers (at
19 least those residing in Canada.)
20 Q.
21
22 A.
DID THE PROVINCE FOLLOW ITS GOVERNANCE AGREEMENT AND THE
STEPS SPECIFIED THEREIN WHEN IT REMOVED THE ENTIRE BOARD?
Not precisely. The steps are discussed and provided in Exhibit JDS-IT, pages three
23 through five. Pages five through seven explain that an agreement was reached where the
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T Page 2
1
2
3 Q.
4
5 A.
entire Hydro One Board resigned without going through the steps laid out in Section 4.7
of the Governance Agreement.
DID THE PROVINCE'S ACTIONS RAISE ADDITIONAL CONCERNS FOR
AWEC?
To some extent, yes. AWEC always understood that the true "independence" of Hydro
6 One as a new privately-owned company was questionable. However, A WEC may not
7 have fully appreciated the degree of control the Province continues to exert over Hydro
8 One. It appears that the threat of legislation and the ability to take unilateral action to
9 remove the entire Board can cause Hydro One leadership to enter into voluntary
10 agreements to do so, as desired by the Province.
11 Q.
12
13
14 A.
GIVEN THESE RECENT EVENTS, HAS HYDRO ONE PROPOSED
ADDITIONAL COMMITMENTS TO ENSURE A VISTA HAS ADDITIONAL
PROTECTION FROM THE POLITICAL VAGARIES OF THE PROVINCE?
Yes. Exhibit JDS- IT, beginning on page 25, includes a new commitment to ensure that
15 compensation for A vista employees is market-based and set exclusively by the A vista
16 Board. In response to AWEC Data Request 110, attached as Exhibit MMH-3, Hydro
17 One confirmed that this commitment extended to the Avista CEO.
18 Q.
19 A.
20
21
22
23
WHAT PROTECTION DOES THIS NEW COMMITMENT PROVIDE?
Having the ability to offer market compensation provides A vista a greater likelihood to
find the best candidates to fill executive positions. It is possible to find excellent staff at
less than market pay rates, but A vista is much more likely to get more qualified
candidates to consider at market-based rates. This is standard demand and supply
economics. To better ensure that Avista has well-qualified and high-performing
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T
Page 3
1
2
3 Q.
4
5 A.
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
executive management, for the benefit of both its investors and customers, offering
market pay is a key principle.
DID THE APPLICANTS MAKE ANY OTHER PROPOSALS IN RESPONSE TO
THE RECENT EVENTS IN ONTARIO?
Yes. They originally proposed to modify the Delegation of Authority between Hydro
One and A vista with respect to the composition of the A vista Board of Directors.
Specifically, the Delegation of Authority (and Commitment 3 in the Stipulation) provides
that the A vista Board will be composed of nine members, four of which are designated by
Avista, two of which are executives of Hydro One or its subsidiaries, and three of which
are independent directors from the Pacific Northwest. Avista always has the ability to
replace the four Avista directors, but Hydro One has the exclusive ability to replace the
independent directors. Further, Hydro One has the ability to fill the independent
directors' seats with its own executives for a six-month period while it identifies
permanent replacements. This raises the possibility that all three independent directors
could resign or be removed simultaneously and replaced with Hydro One executives,
meaning that such executives would fill five of the nine A vista Board seats. The
Applicants have proposed to eliminate Hydro One's ability to replace the independent
directors with its own executives for this six-month period if Ontario takes some action
that would result in the Province appointing a majority of the Hydro One Board of
Directors.
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T Page 4
1 Q.
2
3 A.
WHAT WAS THE APPLICANTS' RATIONALE FOR PROPOSING THIS
CHANGE TO THE DELEGATION OF AUTHORITY?
Mr. Scarlett testifies that this change "is designed to protect the independence of the
4 A vista board in the event that the Province takes some action in the future to control a
5 majority of the Hydro One Board."li
6 Q.
7
8
9 A.
ARE THE RECENT EVENTS IN ONTARIO AN EXAMPLE OF THE
PROVINCE TAKING AN ACTION TO CONTROL A MAJORITY OF THE
HYDRO ONE BOARD?
Not according to Hydro One. In response to AWEC Data Request 108, a copy of which
10 is included Exhibit MMH-3, Hydro One confirmed that, despite forcing the entire Hydro
11 One Board to resign, Ontario does not control a majority of the new Hydro One board
12 because it is only allowed to nominate 40% of the directors under the Governance
13 Agreement between Ontario and Hydro One. Consequently, the only circumstances in
14 which Hydro One's proposed changes to the Delegation of Authority between it and
15 Avista would come into effect is if Ontario and Hydro One mutually agreed to modify the
16 Governance Agreement or if Ontario unilaterally passed legislation to modify this
1 7 agreement.
18 Q.
19
20
21
22 A.
23
24
1/
WOULD IT BE REASONABLE TO CONCLUDE THAT ONTARIO
CURRENTLY EXERCISES EFFECTIVE CONTROL OVER HYDRO ONE
DESPITE ONLY HAVING THE ABILITY TO NOMINATE 40% OF THE
HYDRO ONE DIRECTORS?
Yes. While the previous Board resigned in lieu of being removed, Section 4.7 of the
Governance Agreement (Exh. MMS-5) continues to give Ontario the unilateral right to
remove the entire Hydro One Board anytime the Province wants. Therefore, it would
Exh. JDS-1 Tat 27:4-6.
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T Page 5
1
2
3
4
5 Q.
6
7 A.
8
9
10
11
12
13 Q.
14
15 A.
16
17
18
19
20
21
22
23
seem that one could reasonably conclude that a majority of Hydro One Directors could
not be installed over Ontario's objections, giving the Province effective control of Hydro
One. I would note, however, that Hydro One's response to AWEC Data Request 108,
subpart c, indicates that it does not agree with this position.
DESPITE THIS DISAGREEMENT, HA VE THE APPLICANTS AGREED TO
ADDRESS THIS CONCERN ANYWAY?
Yes. As shown in Staff Exhibit CRM-2 at page 5, the Applicants have agreed to further
modifications to the Delegation of Authority. These modifications ensure that employees
or executives of Hydro One or its subsidiaries cannot fill a majority of the Avista Board
at any time and under any circumstances. A WEC supports this addition to the Delegation
of Authority because it further insulates A vista from potential interference from Ontario.
III. CONTINUED SUPPORT FOR MERGER
GIVEN THE ADDITIONAL COMMITMENTS THE APPLICANTS HA VE
MADE, DOES A WEC CONTINUE TO SUPPORT THE MERGER?
Yes. While the recent events in Ontario have illuminated the degree of control the
Province continues to exercise over Hydro One, A WEC does not consider these events to
be an intervening circumstance that materially impacts the transaction with respect to
Avista's customers, particularly with the additional commitments the Applicants have
made.
As noted above, at least with respect to A WEC, the possibility that the Hydro One
CEO might change, or that the Province might influence activities at Hydro One, was
anticipated. An owner with forty-percent-plus voting-rights ownership of a company,
even without the rights the Province possesses, has the ability to exercise significant
Response Testimony of Dr. Marc M. Hellman
Docket U-170970
Exhibit MMH-1 T
Page 6
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
influence on a company if the large owner decides to take an active role in company
management or direction. In this instant case, the largest shareholder is a political entity
that is responsive to its voters.
There are risks with all mergers and new ownership. That is the basis for the
ring-fencing, rate credits and all of the other commitments: to address and mitigate risks,
and to provide benefits to Avista's customers, in part, to offset risks that cannot be fully
mitigated. Typically, we do not see the risks come to fruition for several years, if ever,
but that is not the case here, as the risks have been observed even before the transaction is
closed. Yet, even if the Commission determines that the entity with ultimate control over
Avista is Hydro One or is Ontario, the ring-fencing and governance commitments in the
All-Party Settlement are no less effective. For instance, Avista must continue to adhere
to the safety and reliability metrics the Applicants have agreed to (Commitment 15); the
Applicants cannot flow transaction costs through to customers ( Commitment 18); A vista
must maintain separate books and records (Commitment 22) and is prohibited from cross-
subsidizing other affiliates of Hydro One (Commitment 24); and it is prohibited from
reducing the equity level in its capital structure below 44% (Commitment 26). Further,
the Commission continues to have ultimate regulatory authority over A vista. Thus, even
if Ontario attempted to take an action through Hydro One that is against the public
interest and would harm Avista's customers, the Commission continues to have its
statutory authority to protect A vista's customers, including the ability to require remedial
action as needed. In other words, even if one were to conclude that it is really Ontario
that will be Avista's ultimate parent, that does not change the protections in the All-Party
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T
Page 7
1 Settlement, as supplemented through additional discussion with the Applicants, as they
2 relate to Avista and its customers.
3 Q.
4 A.
DOES THAT CONCLUDE YOUR TESTIMONY?
Yes.
Response Testimony of Dr. Marc M. Hellman Docket U-170970 Exhibit MMH-1 T Page 8
Exhibit MMH-3
Docket U-170970
Witness: Dr. Marc M. Hellman
BEFORE THE
WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION
)
)
) DOCKET U-170970
)
)
)
)
)
)
) ����������-)
EXHIBIT MMH-3
HYDRO ONE RESPONSES TO AWEC DATA REQUESTS 108 AND 110
And
AVISTA CORPORATION
For an Order Authorizing Proposed
Transaction.
In the Matter of the Joint Application of
HYDRO ONE LIMITED ( acting through its
indirect subsidiary, Olympus Equity LLC)
Exh. MMH-3
Page 1 of 3
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
AWEC
Data Request
AWEC-108(Hl)
DATE PREPARED: 9/17/2018
WITNESS: James Scarlett
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
Reference the proposed modification to the Delegation of Authority between Avista and Hydro
One, provided at Exh. JDS-1 T, pages 26-27.
a. Is it Hydro One's position that a majority of its new Board of directors was appointed by
Ontario?
b. If the answer to subpart a is "no," please explain how it would be possible for Ontario to
appoint a majority of the Hydro One Board given that Section 4.1.1 (b) of the Governance
Agreement authorizes the Province to nominate only 40% of the directors.
c. If the answer to subpart a is "no," does Hydro One believe that, as a practical matter, a
majority of the Board could be elected over Ontario's objections given that the Province
has the authority under Section 4.7 of the Governance Agreement to remove the entire
Board? Please explain your answer.
RESPONSE:
a. No.
b. Section 4.1.l(b) of the Governance Agreement dated November 5, 2015 (the
"Governance Agreement") between Hydro One and Her Majesty The Queen In Right of
Ontario (the "Province") entitles the Province to nominate the number of director
nominees that is equal to 40% of the number of directors to be elected (rounded to the
nearest whole number). Other than an amendment to the Governance Agreement by
mutual agreement of the parties, circumventing Section 4.1.1 (b) of the Governance
agreement would require legislative action by the Province.
c. Yes, it is possible for a majority of the Board to be elected over Ontario's objections. The
Province is required under the Governance Agreement to vote in favor of all director
nominees of Hydro One. This obligation is subject, however, to the Province's overriding
right to withhold from voting or otherwise seek a shareholder meeting to remove and
replace the entire Board, including in each case its own director nominees but excluding
the CEO and, at the Province's discretion, the Board Chair. Even if the Province were to
remove the entire Board (other than the CEO) pursuant to its rights under section 4.7 of
the Governance Agreement, the Governance Agreement provides that, following the
Province's exercise of this right, the replacement Board is to be nominated by the
Province and an Ad Hoc Nominating Committee comprised of representatives from
Hydro One's five largest minority shareholders ( excluding the Province). The Province
Page 1 of 2
Exh. MMH-3
Page 2 of 3
can nominate 40% of the directors; the Ad Hoc Nominating Committee can nominate
60%. All director nominees must meet the qualifications set forth in Section 4.2 of the
Governance Agreement. We also note that in Section 16 of the July 11, 2018 Letter
Agreement (Exhibit JDS-2 to Mr. Scarlett's Supplemental Testimony filed on September
6, 2018), the Province reaffirmed its commitment to the Governance Agreement.
Page 2 of 2
Exh. MMH-3
Page 3 of 3
HYDRO ONE LIMITED
RESPONSE TO REQUEST FOR INFORMATION
JURISDICTION:
CASE NO.:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
WASHINGTON
U-170970
AWEC
Data Request
AWEC- llO(Hl)
DATE PREPARED: September 24, 2018
WITNESS: James Scarlett
RESPONDER: Adele Pantusa
DEPT: Law
TELEPHONE: [phone]
EMAIL: [e-mail]
Please confirm that the additional commitment regarding A vista employee compensation,
provided at JDS-1 T pages 25-26, applies to Avista's CEO.
RESPONSE:
Confirmed.
The Merger Agreement between Hydro One and Avista included Schedule I titled the
"Delegation of Authority Matters" (the "Delegation of Authority"). The Delegation of Authority
establishes the matters over which Avista's post-merger Board of Directors will have exclusive
authority and those matters over which Olympus Equity ( an indirect subsidiary of Hydro One)
will have authority as Avista's sole shareholder.
In addition to the commitment proposed at pages 25-26 of JDS-1 T, Avista and Hydro One have
amended the Delegation of Authority ( original attached as Appendix 5 to the Joint Application)
between them such that the A vista Board will have the exclusive authority to "maintain or make
changes to director, officer or employee compensation or any aspects thereof, such as amount,
mix, form, timing etc., in each case that are consistent with current market standards and
prevailing practices of relevant U.S. electric and gas utility benchmarks." Please see Schedule I
in A WEC _DR_ 11 O(Hl) Attachment A, which contains the amended versions of Schedules I, II,
and III in the current draft of the revised Delegation of Authority to be adopted by Hydro One
and A vista at closing.
Page 1 of 1