20181114Lopez Rebuttal.pdf

ldaho Public Utilities Commission
oN BEHAT,F oF AvrsrA coRpoRATroN on,t*tf,.,P,i1,Bt.o
DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3727
741-1- EAST MISSION AVENUE
SPOKANE, WASHfNGTON 99220-3727
TELEPHONE : [phone]L6
FACSIMILE: [phone]-
DAVID . MEYER@AVI STACORP . COM
OCT I Ir 2018
Boise, ldaho
ON BEHALF OF HYDRO ONE LIMITED
ELIZABETH THOMAS, PARTNER
KAR] VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 98IOL4-1158
TELEPHoNE: [phone]
FACSIMILE: [phone]
LIZ . THOMAS@KLGATES. COM
KARI . VANDERSTOEP@KLGATES . COM
BEFORE THE IDAHO PI'BLIC UTII,ITIES COMMISSION
IN THE MATTER OF THE JOINT
APPL]CATION OF HYDRO ONE LIMITED
(ACTING THROUGH ITS INDIRECT
SUBS]D]ARY, OLYMPUS EQU]TY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZ]NG PROPOSED
TRANSACTTON
CASE NO
CASE NO
AVU-E -1-7 - 09
AVU-G-17-05
REBUTTAL TESTIMONY
OF
CHRISTOPHER F. LOPEZ
FOR HYDRO ONE LIMITED
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I. INTRODUCTION
O. Please state your name, business address and
present posit,ion with Hydro One Limited.
A. My name is Christopher F. Lopez, and my business
address is 483 Bay Street, South Tower, 8th Floor, Toronto,
Ontario M5c 2P5. On September 6, 20LB I was appointed as
Acting Chief Financial Officer ( "CFo" ) for Hydro One Limited
( "Hydro One" ) . Prior to September 6 , 2018 I was Senior Vice
President of Finance for Hydro One. l
O. Have you fiLed direct, rebuttal, or eupplemental
testimony in this proceeding?
A. Yes. I filed direct testimony on September 74, 2077
and supplemental testimony on September 24, 2078.
O. Are you sponsoring any exhibits that accompany your
testimony?
A. No.
A table of contents for my testimony is as foll-ows:
]NTRODUCTION
NEW SETTLEMENT COMMfTMENTS DESIGNED TO ADDRESS
PROVINCE'S MINORITY SHAREHOLDING IN HYDRO ONE.
COMPLIANCE WITH IDAHO CODE S 51-328..
1 See AVU-E-1-7-09, AVU-G-l-7-05, Supplemental ReporL
Management Changes (Sep. '7, 201-B) .
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on Hydro One
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Lopez, Supp. Reb. 1
Hydro One l,imited
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Summary of Testimony
O. Please summarize your testimony.
A. I will discuss how we worked with IPUC Staff and
other part.ies to modify certain Stipulated Commitments and
add others to resolve concerns that. the Province as a minority
sharehol-der in Hydro One might somehow undermine Avista's
financial inLegrity; and how the Proposed Transaction meets
the standards of Idaho Code S 61-328.
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II. NEW SETTIJEMEIiIT COMMITMENTS DESTGNED TO ADDRESS
PROVINCE'S MINORITY SHAREHOLDING IN HYDRO ONE
L2 O. IPUC Staff testified that amendments to Stipulated
13 Commitment No. 38 help resolve concerns that the Province
L4 will attempt to undermine Avista's financial integrity by
15 demanding dividends from Avista.2 Can you provide more detail
16 on Lhose amendments and why they will protect Avista?
L7 A. The amendments provide additional protection to
l-8 Avista in two ways.
19 First., Stipulated Commitment No. 38 establishes a 44vo
20 minimum equity ratio for purposes of al-Iowing dividends. As
2L agreed to in April, the 44% floor for purposes of dividends
22 in Stipulat.ed Commitment No. 38 would have been automatically
23 adjusted downward if Avista's equity ratio for ratemaking
2 AVU-E-].7-09/AvU-c-17-05 - Direct Testimony of Terri Carlock at pg. 7(Nov. 6, 2018) ("Carlock Direct Testi-mony") .
Lopez, Supp. Reb. 2
Hydro One Limited
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purposes were set below 44?. As amended, the commitment no
Ionger provides for an automatic adjustment. Instead, t.he
Parties have agreed that if Avista's equity ratio for
ratemaking purposes is set below 442, the Commission should
consider whether any adjustment should be made to the minimum
equity ratio for dividend purposes. This provides additional
protection to Avista by giving the Commission a opportunity
to review the proper minimum equity ratio for dividend
purposes if there is a proposal to drop the equity layer for
ratemaking purposes to 44%.
Second, ds amended, Stipulat.ed Commitment No. 38 now
conlains a new subparagraph d. This prohibits the comingling
of Avista cash f1ows with cash flows at Hydro One and its
other affiliates prior to Avista's issuance of dividends. It.
al-so requires that Avista's accounts and subaccounts be kept
separately from accounts of the other entities.
O. Did Hydro One, Avista, IPUC Staff, and other
parties to this proceeding develop further amendmentE to the
Stipulated Commitments to address concerns of Provincial
influence that could harm Avista?
A. Yes. These other amendments are detailed in the
Rebuttal Testimony
filed November 1-4,
of ,fames Scarlett for Hydro One Limited,
2078 ( "Scarlett Rebuttal Testimony" )
Lopez, Supp. Reb. 3
Hydro One Limited
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ITI. COMPIJIAI{CE WITH IDAIIO CODE S 61'328
O. Does IPUC Staff conclude that the Proposed
Transaction complies with Idaho Code
A. Yes; IPUC Staff
Transaction is consistent
Code S 51 -328 (3 ) (a) ) , 4 (ii )
supplying service wiIl not
Proposed Transaction (Idaho
Carlock Direct Testimony at pgs.
Carlock Direct Test.imony at pgs.
CarLock Direct Testimony at pgs.
Carlock Direct TesLimony at pgs.
s 61 -328?3
that (i) the Proposed
public interest (Idaho
cost of and rates for
concludes
with the
Avista's
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be increased by reason of the
Code S 5l- -328 (3) (b) ) , s and (iii)
Hydro One has the bona fide intent and financial abilit.y to
operate and maintain Avista in the public service (Idaho Code
S 61-328(3) (c) ).6
O. Do you agJree with IPUC St,af f thaE Ehe Proposed
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13 Transaction complies with Idaho Code S 51 -328?
74 A. Yes
15 O. Which of the Stipulated Commitments in Exhibit LOL
15 to Terri Carlock's Direct Testimony ensures that the Proposed
77 Transaction is consistenL
Code S 6l--328 (3) (a) ) ?
A. Hydro One, Avista,
Corporation ("Clearwater"),
with the public interest (Idaho
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IPUC Staf f , and Cl-earwater Paper
Idaho Forest Group, LLC (Idaho
27 Forest Group) , Idaho Conservation League ( "fCL" ) , the
lines 71,-25
lines L9-25
Lopez, Supp. Reb. 4
Hydro One Limited
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Community Action Partnership Association of ldaho ( "CAPAI" )
and the Washington and Northern Idaho District Council of
Laborers ( "WNIDCL" ) agreed to numerous Stipulated Commitments
that ensure that t.he public interest will be served by the
Proposed Transaction.T They falI into several groups.
Financial Intggrr-ly. As noted by IPUC Staf f , e the
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fo1 lowing
integrity
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7 Revised Exhibit A to First Amendment to Stipulation and Settfement
(sponsored by Staff Wj-tness Carlock as Exhibit 101) .I Carlock Direct Testimony at pg. 9.
Lopez, Supp. Reb. 5
Hydro One Limit.ed
Stipulated Commitments protect Avista's financial
after the Proposed Transaction is consummated:
34 - Capital Structure Support: Hydro One will
provide equity support designed to allow Avista
access to debt financing on reasonabl-e terms.
35 - Utility-Leve1 Debt and Preferred Stock: To
prot.ect Avista's financial integrity, Avista will
maintain separate debt to support its utility
operati-ons.
36 - Continued Credit Ratings: Avista wiII continue
to be rated by at least one credit rating agency.
37 - Credit Ratings Notification: Avista wiII
notify t.he Commission in the event of a ratings
downgrade to non-investment grade status.
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. 38 - Restrictions on Upwards Dividends and
Distributions: Avista is prohibited from making
upwards distributions of dividends under certain
circumst.ances that could be indicators of financial
weakness.
o 39 - Pension Funding: Avista will maintain a sound
pension funding policy.
o 40 - SEC Reporting Requirements: Avista will comply
with applicable SEC report.ing requirements.
o 4l - Compliance with the Sarbanes-Ox]ey Act: Avista
will comply with applicable requiremenLs of t.he
Sarbanes-Oxley Act.
Protection against Bankruptcy.As noted by IPUC Staff, e
the following Stipulated Commitments establish ring-fencing
to protect Avist.a from bankruptcy in the event, of financial
distress at entitles above Avista in the corporate chain:
. 42 - Golden Share: Avista's entry into volunt.ary
bankruptcy would require the affirmative vote of
the holder of the Golden Share.
o 43 - Independent Directors: Avista's entry into
voluntary bankruptcy or the inclusion of Avista in
bankruptcy proceedings would require the consent of
Lopez, Supp. Reb. 5
Hydro One Limit.ed
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e Carlock Direct Testimony at pg. 9
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a two-thirds majority of all of its directors,
including the affirmative vote of at least one of
its Independent Directors.
44 - Non-Consolidation Opinion: Avista and Hydro
One wiIl provide the Commission with a non-
consolidation opinion to confirm that with these
ring-fencing measures, a bankruptcy court would not
order t.he substantive consolidation of the assets
and liabilities of Avista with its parent
companies.
45 - Olympus Equity LLC: Avista's immediate parent,
Olympus Equity LLC, wilI be a debt-free and
bankruptcy-remote special purpose entity.
46 - Restrict.ion on Pledge of Utility Assets:
Avista's utility assets can be pledged only for the
benefit of Avista, not Hydro One. Thus, the Hydro
One cannot strip Avista of its capital and assets
f or t.he benef it of the Canadian interests.
47 - Hol-d Harmless; Not.ice to Lenders; Restrict.ion
on Acquisition and lispositions: Hydro One wiII
hold Avista harmless for Hydro One's business risks
and wiII notify lenders of the ring-fencing
requirements.
Lopez, Supp. Reb. 1
Hydro One Limit.ed
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48 - olympus Holding Corp. and Olympus Equity LLC
Sub-entities: AvisLa's immediate parent, Olympus
Equity LLC, wilI limit its activities to Avista,
and Olympus Holding Corp. wilI limit its activit.ies
t.o Olympus Equit.y LLC.
49 - No Amendment: None of the commitments may be
amended wit.hout prior Commission approval.
50 - No Inter Company Debt: Avista will obtain
Commission approval before entering into any inter-
company debt transactions with Olympus Holding
Corp., Hydro One, or any of their subsidiaries or
affiliates.
51 - No Inter Company Lending: Prohibits Avista
from lending money to Olympus Ho1ding Corp., Hydro
One, or any
prior
of their subsidiaries or affiliates
wit.hout Commi-ssion approval.
Staff al-so notes that theRequlatory Commitments. IPUC
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18 Regulatory Stipulated Commitment Nos. 20 - 33 constitute part
19 of the overall financial protections.l0 I agree.
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Lopez, Supp. Reb. I
Hydro One Limited
10 Carlock Direct Testimony at pg. 9
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O. Besides these Stipulated CommiEments, what other
factors demonstrate that the Proposed Transaction is
consistent with the public interest (Idaho Code S 61"-
328(3) (a))a
A. The Proposed Transaction is consistent with the
public interest in many ways. Avista's Idaho customers will
receive $l-5.8 million rate credits and a number of financial
protections that do not exist today, such as the restrictions
on dividends in Stipulated CommitmenL No. 38. Avista
customers can expecL benefits as a resu1t of the financial
and business stability associated with being owned by a larger
uti1it.y. Avist.ars customers wilI benefit from the backing of
another, larger utility with a strong balance sheet, a credit
rating higher than Avista's, and a customer base somewhaL
simil-ar to Avista' s.
Furthermore, t.he broader public in Idaho will benefit
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approximately $5.3 million for
weatherization, conservation, and
energy
Iow- income
funding of
ef f iciency,
assistance
charit.ableprograms (No. 58);
contributions (Nos.
local staffing (No.
11 and 6L) , community
10),
involvement (No.
1-2), and economic development. (NO. 13); efforts to improve
the penetration of l-ow income programs (No. 6a) ; and outreach
to tribal communit.ies (No. 65) .
Lopez, Supp. Reb. 9
Hydro One Limited
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O. Which of the Stipulated Commitments ensure that
Avista's cost, of and rates for supplying serwice will not be
increased by reason of the Proposed Transaction (Idaho Code
s 5l--328 (3) (b))?
A. Severaf of t.he Stipulated Commitments function in
tandem Lo ensure that. the Proposed Transaction will not result
in any increase to Avista's cost of and rates for supplying
service. These incl-ude:
o L6 - Treatment of Net Cost Savings: Hydro One
commits that Avista customer rates will not
increase as a result of the Proposed Transacti-on.
Hydro One wiII also hold Avista customers
harmless from any such rate increase. Any net
cosL savings attributed to the Proposed
TransacLion wiII be reflected in subsequent rate
proceedings.
o 7'7 - Treatment of Transaction Costs: Costs
associated with the Proposed Transaction cannot
be recovered from Avista customers.
o 18 - Travel Expenses: Limits AvisLa's corporaLe
travel expenses recoverabl-e in rates.
o !9 - Rat.e Credit s : A Rate Credit. totaling
approximately $15.8 million will flow to Avista's
Lopez, Supp. Reb. 10
Hydro One LimiLed
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1 retail customers in Idaho in the first five (5)
2 years after the merger closes.
3 . 24 - Avista's customers will- not cross-subsidize
4 unregulated activities. Hydro One costs will not
5 be al-Iocated or charged to Avj-sta's ratepayers
6 absent specific Commission authorization.
'7 . 25 - Avista will not advocate for a cost of debt
8 or equity that is higher than what Avista's cost
9 of debt or equity capital would have been absent
10 Hydro one's ownership.
l-1 o 50 and 51 - There will be no inter-company debt
12 or l-ending with out Commission approval.
l-3 . 66 - Sources of Funds for Hydro One Commitments:
L4 Hydro one's funding commitments are not
L5 contingent and are not rate-recoverabl-e.
16 O. Besides Ehese Stipulated Commitments, what other
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18 supplying serwice will not be increaged by reason of the
19 Proposed Transaction (Idaho Code S 6L-328 (3) (b) ) ?
20 A. The Commission will have ample opportunity in
27 Avista's next Idaho general rate case and all subsequent rate
22 cases to review aII costs that make up the revenue regui-rement
23 and assure itself that Avista and Hydro One have lived up to
24 their commj-tments that are designed to ensure Avista, s cosL
Lopez, Supp. Reb. 11
Hydro One Limited
1 of service and rates wiII not increase by reason of the
2 Proposed Transaction. The Commission, nol Avista, nor Hydro
3 One, sets rates for Idaho customers. Those rates are developed
4 based on a Lhorough and substantial evidentiary record of
5 expert written and oral t.estimony, exhibits, and work papers
6 that include det.ailed accounting and cost allocation records,
7 which document Avista's cost to provide service to Avista's
I Idaho customers.
9 Q. Which of the Stipulated Commitments in Exhibit 101
10 to Terri Carlock's Direct Testimony ensures that Hydro One
11 has the bona fide intent and financial ability to operate and
72 maintain Avista in t,he public service (tdaho Code S 5L-
13 328 (3) (c) ) ?
L4 A. A number of the commitment.s relating to financial
15 integrity, as well- as other evidence of record, demonstrate
L6 that Hydro One has the bona fide int,ent and financial- ability
L7 to operate and maintain Avista in the public service. The
18 relevanL Stipulated Commitments incl-ude:
19 o The many commitments that impose specific financial-
20 burdens on Hydro One, such as Stipulated Commitment
21- Nos. 11 and 51 (charitable contributions) ; 1,9 (rate
22 credits); 70 (Montana Community Transition Fund)
Lopez, Supp. Reb. L2
Hydro One Limited
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a 34 - Capital
provide equit.y
access to debt
Structure Support: Hydro One will
support designed to allow Avista
financing on reasonabfe Lerms.
4 . 66 - Sources of Funds for Hydro one Commitments:
5 Hydro One's funding for specific commitments is not
6 contingent on Hydro One's ability to arrange
7 funding, but is a firm commitment to provide the
8 dollar amount specified.
9 Q. Besides these StipuJ.ated Commitments, what, other
10 factors demonstrate that Hydro One has the bona fide intent,
11 and financial ability to operate and maintain Avista in the
L2 public service (Idaho Code S 5L-328(3) (c))?
13 A. Hydro One's financial ability to operate and
1-4 maintain Avista is demonstrated by its strong credit rating,
l-5 which is higher than Avista's; its size; its ready access to
L6 capital on reasonable terms and conditions; and t.he fact that
l7 convertible debentures are already in place as an e1ement of
18 financing for the transaction. This is detailed in my prior
L9 testimony in Section III of my supplemental testimony filed
20 September 24, 201-8 .
2L Hydro One's bona fide intent to operate and maintain
22 Avista is demonstrated by the effort that Hydro One has
23 invested in this transaction and the work we have already
24 done to identify areas where we can achieve efficiencies and
Lopez, Supp. Reb. 13
Hydro One Limited
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implement best practices. See Direct Testimony of ,
Schmidt at pg. 28 (Sept. 14, 20L7).
O. Does this conclude your rebuttal tesEimony?
A. Yes it does.
Mayo M
Lopez, Supp. Reb. 14
Hydro one Limited