20181114Ehrbar Supplemental Rebuttal.pdf

ON BEIIALF OF AVISTA CORPORATION
DAVID J. MEYER
VICE PRESIDENT AND CH]EF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFEAIRS
P.O. BOX 3121
7477 EAST MISSION AVENUE
SPOKANE, WASHTNGTON 99220-3127
TELEPHoNE: [phone]
EACSIMILE: [phone]
DAVI D . MEYERGAVI STACORP . COM
ON BEHAIE OI' HYDRO ONE LIMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 981014-1158
TELEPHONE: [phone]
FACSIMILE: [phone]
LI Z . THOMASGKLGATES . COM
KARI . VANDERSTOEPGKLGATES . COM
IN THE MATTER OF THE JOINT
APPLICATION OF HYDRO ONE LIMITED
(ACT]NG THROUGH ]TS IND]RECT
SUBSID]ARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACTION
EOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
ldaho Public Utilities
Office of the SecretaryRECEIVED
ocT r { 2018
Boise,ldaho
CASE NO. AVU-E-11_09
CASE NO. AVU_G-17-05
SUPPLEMENTAL
REBUTTAL TESTIMONY
OF
PATRICK D. EHRBAR
BEFORE THE TDAHO PT'BLIC UTILITIES COMMISSION
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I. INTRODUCTION
A. P1ease state your n€rme, business address and
present position with Avista Corporation (\\Avista") ?
A. My name is Patrick D. Ehrbar and my business
address is l-At"i- East Mission Avenue, Spokane, Washington. I
serve as the Director of Regulatory Affairs.
9. Have you previously fiJ.ed testimony in this
proeeeding'?
A. Yes, I filed testimony that accompanied the Joint
Application for approval of the merger (the "Proposed
Transaction") My Lestimony explained, among other things,
the proposed accounting protocol for any affiliate
transactions between Avista and Hydro One Limited ("Hydro
One") following the closing of the transaction.
A. Are you sponsoring any exhibits that accompany
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16 your testimony?
71 A. No, I am not.
1B A. Ms. Carlock on p. 3 of her Direct Testimony
79 e:q>lained severaL ways customers are protected from the
20 transactions between Avista and Hydro One, or events
27 impacting Hydro One, which would cause customer rates to
22 increase. Wtrat were her conclusions?
23 A. Ms. Carl-ock states correctly that. any "customer
24 rate increase must be approved by the Idaho Public Utilities
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Commission (the "Commission") before Avista can increase
rates to Idaho Avista customers. "1 In addi-tion, she states
that Staff wiII scrutinize "any transactions, activities or
allocations to Avista from any affiliated entities. "2 Even
more emphatically, Ms. Carl-ock states :3
Staff wj-ll verify that no cost are included in customer
rate that are not at the lower of the actual cost or
market comparison.Although this is a normal- part of
the Staff audit function it is al-so part of the ring-
fencing provisions and the commitments from Avista and
Hydro One. (emphasis added)
13 Fina1ly, Ms. Carlock goes on to state:a
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The regulatory responsibility of the Commission Staff
and ultimately the Commissioners making the final
decisions for the fdaho Public Utilities Commission
will noL change. Staff will continue to viqe{euEly
review capital investments, ongoing operational- costs,
changes in revenues and the overal-1 operations of
Avista. When unreasonable costs are identified or
operating decisions by management do not support just
and reasonable costs to provide safe and reliabl-e
utility services to customers at reasonable rates,
Staff recommends financial adjustments and changes to
programs during proceedings before the Commission.
This wifl not change depending on the ownership of
Avista. (emphasis added)
29 A. Do you agtree with Ms. Carlock's conclusions?
30 A. Absolutely. As I am sure the Commissioners know,
31 and I can attest to, Commission Staff does a thorough review
32 of Avista's costs and operations in general rate case
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arlock, Di. ,d. p. 3, Il.
d. p. 4, 11.
d. p. 5, 11.
p. 3, 11. 14-16.
23-25.
3-8.
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proceedings.
A. Are there buiJ.t in protections in the Stipulated
Commitments that support the Joint Applicants and Ms.
Carlock' s conclusions?
A. Yes. There are two specific commitments I have
provided below that memorialize the fact that customer rates
will not be affected by this transaction. Eirst, Stipulated
Commitment No. 16 states:
Treatment of Net Cost Savings:
Avista customer rates will not
Hydro One commits that
increase as a resul-t of
the Proposed Transaction. Hydro One will hold Avista
customers harmless from any such rate increase.
Further, any net cost savings that Avista may achieve
as a result of the Proposed Transaction wilI be
reflected in subsequent rate proceedings, as such
savings materiafize. To the extent the savings are
refl-ected j-n base retail rates they will offset the
Rate Credit to customers, up to the offsetable portion
of the Rate Credit. (emphasis added)
Treatment of Transaction Costs:
a. Costs associated with the Proposed Transaction
will- be separateJ-y tracked as non-utilit.y costs with no
charges, either all-ocated or direct, to be recovered
from Avista customers. After the consummation of the
Proposed Transaction, any remaining transaction costs
or other costs of OJ-ympus Holding Corp. or Hydro Onewill not appear on Avista's utility books, i.e. such
costs wilI be recorded as non-utility. Avista shallfurnish the Commission with Sournal entries and
supporting detail showing the nature and amount of all
costs of the Proposed Transaction (including but not
l-imited to management time, BOD time, in-house and
Ehrbar, Supp Reb. 3
Avista Corporation
27 Stipulated Commitment No. 1,1 provides further protections
22 from the incl-usion of costs re]ated to this transaction from
23 being included in customer rates:
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outside counsel time, doy consultants engaged, etc.)
since the Proposed Transaction was first contemplated,
as wel-I as the accounts charged, within 120 days of a
Commission order in this docket.
b. Avista will exclude, and Hydro One agrees Avista
will elqfuqg/ lfqm Avista general rate cases, or any
other method of cost recovery, all costs related to the
Proposed Transaction including but not Iimited to: (i)
all legal work from in-house counsel and outside
counsef; (ii) any financial advisory fees associated
with the Proposed Transacti-on; (iii) the acquisitionpremium; (iv) costs related to M&A consulting and
advice (v) preparation of and materials forpresentations relating to the Proposed Transaction (vi)
any senior executive compensation or any Avista board
of director time tied to a change of control of Avista,'
and (vii) any other costs directly related to the
Proposed Transaction.
c. Technofoqy expenditures and investments related to
software and hardware compatibility issues between
Avista and Hydro One and its affil-iates shall not be
recovered from Idaho ratepayers except to the extent
such costs are offset by savings over ti-me. (emphasis
added)
28 fn the end, Avista and Hydro One have agreed, through the
29 revised set of Stipulated Commj-tments, that customers will
30 be held harm"l-ess f rom the Proposed Transaction. Further,
31 Staff has provided strong support for the fact that it will,
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records in general
compliance.
A. The Avista
thoroughly evaluate Avista's books and
33 rate case proceedings to ensure
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Customer Group (*ACG") j.n its Cormnents
36 fiJ.ed on June 27, 2018, stated that the Joint Applicants
Idaho Code 6!-32831 have not met the statutory criteria under
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1 as it relates to eost increases.s Do you share their view?
A. No, I do not. Idaho Code 61,-328(3b) states that
"the cost of and rates for supplyi-ng service will not be
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increased
parties,
Stipulated
explicitly
by reason of such transaction. " AII of the
with the exception of the ACG, support the
Commitments, which as discussed earl- j-er
state that the cost to customers and their rates
wi-I] not increase as a result of this transaction
A. Did ACG conunent on the lack of a filed "cost
10 al.J.ocation methodolog"y"?6
11 A. Yes, ACG commented that Avista did not file a cost
12 al-Iocation methodology f or the al-Iocation of costs to
13 Avista. As I discuss later j-n my testi-mony, Hydro One will
74 not allocate corporate costs to Avista at this time
15 Instead, costs will be directly assigned to Avista or Hydro
direct16 One. Attached as Exhibit No. J , Schedule 3, to my
1"1 testimony
developed
with the
Testimony
Protocol
is Avista's "Direct Assignment Protocol, "
1B by Avista for the assignment of costs associated
19 Proposed Transaction. As I discussed in my Direct
)i filed in September 2011, the Direct Assignment
27 addresses the accounti-ng for costs both prior to
22 the closing of the
accounting for costs
Transaction, as weIl as the
the closing.
p. 2. (June 27, 201"8).
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Avista Corporation
Proposed
following
s Comments of Avista Customer Group,6 tbid.
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1 9. FoJ.J.owing' the closing of the transaction, how wiJ.J.
2 Avista account for the costs associated with time and
3 e:q>enses incurred by Avista empJ.oyees and Hydro One
4 employees for any services or work between the two
5 companies?
6 A. To the extent Avista employees dedicate time and
7 incur costs rel-ated to the operati-ons of Hydro One, those
B costs will be directly assigned and billed to Hydro One, and
9 woul-d not be borne by Avj-sta/s customers. Likewi-se, should
10 Hydro One employees dedicate time and incur costs associated
11 with Avista's operations, such costs would be directly
1,2 assigned and billed to Avista. If a Hydro One employee's
13 time and costs are related to Avista's regulated utility
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operations,
approval by
retail rates.
to Hydro One
the costs would
the Commission
Avista expects
and from Hydro
the near-term,
subject to review and
to being recovered in
assignment of costs, both
be
prior
such
One, to be relatively smaII,
since Avista wilI continue to1B especially in
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At this
any specific
opportunities
and Hydro One
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standal-one utility.
time, there are nopoint
utility
arrse
1n plans to combine
operations. In the future, however, if
for the consolidation of certai-n Avista
ZJ utility functi-ons, where the util-ities have an
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1 achieve efficiencies, it may be appropriate to develop
direct assiqnment or allocationadditional- or different
protocols.
A. Is Avista currently using the proposed Direct
Assigmment Protocol with other existing affiJ.iate companies
of Avista?
A. Yes. In 20L4 Avista acquired Alaska Energy and
Resources Company (AERC), including Alaska Electric Light
and Power (AEL&P) which provides electric service to
customers in the City and Borough of Juneau, Alaska. We are
using the same Protocol for these companies as we will- use
for the Avista/Hydro One Proposed Transaction.
a. WiJ.l Hydro One allocate corporate costs to Avista,
and if so, would Avista then seek to recover those allocated
costs from customers?
A. No, Hydro One will not allocate corporate costs to
Avista at this time. In the alternative, had that not been
the case, ultimately it is still the Commission, and not
Avista/Hydro One, that woul-d decide if such costs are
appropriate to include in customer rates.
It is important to also distinguish the "all-ocation" of
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22 costs and the "direct assignment" of costs
23 when I testify
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to "allocation" of costs, what I
not be allocating to Avista (and
For example,
mean is that
then Avista
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to its' customers) corporate overhead costs, such as Hydro
One Board of Director costs, Hydro One executive costs,
other Hydro One corporate overheads, etc. Instead, costs may
be "directly assigned" lo Avista in certain circumstances
Eor example, the combined Hydro One and Avista entity may be
able to procure less expensive
two companies currently have in
insurance policies than the
effect today as two
entities. In that example, Hydro
expensive insurance that would
One may procure
cover both Hydro
Avista our share
, separate
such l-ess
One and
of those10 Avista, and directly assign to
L1 to Avista Nat this time".
11 costs, remembering that those costs woul-d be cheaper than
12 the status quo. Of course none of those costs would be
13 included in customer rates until aI1owed to do so by this
14 Commission, with Avista havinq the burden of proof that the
15 costs are reasonable.
l6 A. You state that Hydro One wj-II not allocate costs
What about in the future?
1B A. It is unknown whether there would be a desire for
19 future al-location of Hydro One costs to Avista. However,
20 customers are protected through Stipulated Commitment No.
21 24. Among other things Stipulated Commitment No. 24 states:
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Avist? agrees to provide , and Hydro One agrees Avista
will provide,cost allocation methodologies used to
al-locate to Avista any costs related to Hydro One or
its other affil-iates and subsidiaries, and commits that
there wiII be no cross-subsidization by Avj-sta
customers of unregulated activitles. (emphasis added)
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Avista will not charge to custome qAtqq
or directly assigned by
specificalJ-y authorized for
Commission. (emphasis added)
Hydro
recovery
One except
in rates by
AS
the
Avista wi-l-I bear the burden of proof
rate case that any corporate andaIl-ocation methodoJ-ogy is reasonable
purposes. (emphasis added)
in any general
affiliate cost
for ratemaking
Avista will notify the Corunissio lncorporatestructure that affects Avista's corporate and
affiliate cost allocation methodoloqies. Avista wiII
propose revisions to such cost allocation methodologies
to accommodate such changes. Avista will not take the
position that compliance with this provision
constitutes approval by the Commission of a particular
methodology for corporate and affil-iate costal-Iocation. (emphasis added)
22 Again, while there are no pJ-ans f or cost all-ocations
23 from Hydro One to Avista, shoul-d al-location methodologies be
24 necessary, they would be provided to the Commission, and the
25 burden of proof for cost recovery would be on Avista in a
26 general rate case proceeding.
21 A. Does Cormnission Staff believe that Idaho Code 61-
28 328 wi].L be met?
29 A. Yes. Ms. Carlock states that "I believe Idaho
30 Code S61-328(3) requirements will be met".7 Further, she
31 states that the "stipulated Commitments also assure that the
32 cost of and rates for supplying service will not be
7 Carlock, Di. , p. 4, 11 . 11-12 ,
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2 wholeheartedly.
3 Q. Does this conclude your Supplemental Rebuttal
4 testimony?
5 A. Yes it does.
I Id. p. 4, 11. 16-18
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