20181114Reed Rebuttal.pdf

ON BEHAI,F OF AVISTA CORPORATION
DAVTD .J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3727
141]. EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHoNE: [phone]L6
FACSIMILE: [phone]
DAVID . MEYER@AV] STACORP . COM
ON BEHAIJF OF HYDRO ONE IJIMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 98L074-1158
TELEPHONE: [phone]
FACSIMILE: [phone]
LIZ . THOMAS@KLGATES . COM
KARI . VANDERSTOEP@KLGATES . COM
IN THE MATTER OF THE .]OINT
APPLICATION OF HYDRO ONE LIMITED
(ACTING THROUGH ]TS IND]RECT
SUBSfDIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATTON
FOR AN ORDER AUTHORTZING PROPOSED
TRANSACTION
ldaho Public Utilities
Otfice of the SecretaryRECEIVED
OCT I t' 2018
Boise,ldaho
CASE NO. AVU-E-17-09
CASE NO. AVU-G.17-05
REBUTTAL TESTIMONY
OF
,JOHN ,J. REED
BEFORE THE IDAHO PI'BIJIC UTII'ITIES COMMISSION
FOR CONCENTRIC ENERGY ADVTSORS
ON BEHALF OF HYDRO ONE L]MITED
AND AVTSTA CORPORATION
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I.IMTRODUCTION
A. P1ease state your name and business address.
A. My name is ,fohn J. Reed. I am President and Chief
Executive Officer of Concentric Energy Advisors, Inc.
("Concentric") and CE Capital Advisors, Inc. ("CE Capital"),
which has its headquarters at 293 Boston Post Road West, Suite
500, Marlborough, Massachusetts 0L752.
A. On whose behalf are you submitting this testimony?
A. I am testifying on behalf of Hydro One Limit.ed ("Hydro
one" ) and Avista Corporation ( "Avista" ) .
O. Are you sponsoring any exhibits that accompany your
Rebut,ta1 Testimony?
A. NO.
A table of contents for my testimony is as follows:
DESCRIPTION PAGE NUMBER
I. INTRODUCTION .......1
II. RESPONSE TO STAFF WITNESS CARLOCK ......2
O. What ig the purpose of your testimony?
A. The purpose of my Rebuttal Testimony is to respond to
the Direct Testimony of Terri Carlock, the Idaho Public Utilities
Commission, Utilities Division Administrator, as it pertains to
the ability of the Province of Ontario ( "Province" ) to impact
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I Avista and
integrity
Commitments
Testimony?
Idaho's
public
Idaho
the sufficiency
and ring-fencing
statutory
interest,
standard for
protects and
cusLomers, and assures
of the governance, financial-
provisions of the Stipulated
mergers because it is in the
provides benefits to Avista's
that raLes will not go up as a
certainly agree wit.h her overall
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II.RESPONSE TO STAFF WITNESS CARLOCK
O. What is your owerall responae to Ms. Carlock's Direct
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A. Ms. Carlock has concluded that. the transaction meets
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13 conclusion.
74 However, she al-so states that risks from the transaction
cannot. be complet.ely eliminated, that utility ownership where
the parent company is partially-owned by a foreign g'overnment is
very different from being owned by an investor-owned utility3,
that she is concerned that there is no apparenL limit on the
Province's auLhorit.y over Hydro One, and that. the new government
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1 AVU-E-1-7-09/AVU-G-1-7-05 Stipulation and Settlement (Apri1 13, 2018)(("SLipulated SettlemenE") The Stipulated Settlement. includes 73 merger
commitments (each, a "stipulated Commi-tment," co11ectiveIy, the "stipufated
Commitments" )2 AVU-E-1,7-09/AvlJ-G-1,7-05 - Direct Testimony of Terri Carlock aL pg. 4 (Nov.
6, 2018) ("Carlock Direct Testimony")3 Carlock Direct Testimony at pg. 13.
Reed, Supp. Reb. 2
Concentric
I of Ontario has spoken in favor of a 12? reduction in the cost of
2 power to Ontario consumers.a She does note that, even with these
3 concerns, "Commitments including ring-fencing provisions have
4 been agreed to in the Stipulated Settlement by most Idaho parties
5 that. I believe will provide financial benefits that likely will
5 not occur absent the merger while protecting customers from
7 negative operational, structural or financial harm."s
8 My review of the recent events involving the new government
9 of Ontario and Hydro One, and of the ring-fencing and governance
l-0 commiLments offered as part of t.he proposed transacLion, l-eads
l-L me to conclude that Ms. Carlock's remaining concerns have been
L2 effectively and fully addressed by the transaction's proposed
l-3 commitments.
1,4 O. What evidence ig there to support your conclusion that
15 these risks have been effect,ively and fully addressed by the
16 transaction'e proposed commitments?
17 A. As I stated in my Supplemental- Testimony filed on
l-8 September 24, 20L8, in t.his proceeding, the proposed ring-
L9 fencing and governance commitments in this transaction represent
20 robust, state-of-the-art provisions that will very effect.ively
27 protect Avista and its customers. The experience gained over
22 the last four months provides very compelling evidence regarding
a Carlock Direct Testimony at pg. l-4s Carlock Direct Testimony aL pg. 8.
Reed, Supp. Reb. 3
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l- t.he ef fectiveness of these provisions.
2 As the record in this case shows, after the election in
3 Ontario, and the government's actions that led t.o the resignation
4 of the Hydro One board and retirement of the CEO, Standard and
5 Poor's ("S&P") downgraded Hydro One one notch to A-, based on
6 S&P's negative assessment of "governance" issues for Hydro One.6
7 Nonetheless, Avist.a's credit rating was not, downgraded and it
8 has remained on Credit Watch with posit.ive implications. That
9 striking differential in outlook reflects, among other things,
10 the strength and effectiveness of the ring fencing and governance
11 provisions that have been proposed in this transaction. rt also
12 reflects t.he fact that notwithstanding the one notch downgrade
13 for Hydro One, Avista and Hydro One have retained very strong
L4 credit profiles.
15 These events, and S&P's reaction to them, have essentially
15 represented a "Lest drive" of the transaction's commitments.
L7 This outcome should provide the Commission with a very high 1evel
l-8 of confidence that events such as those that. have arisen for
l-9 Hydro One will not l-ead to negative consequences for Avista, and
20 that the transaction will continue to provide benefits for
2l Avista's cust.omers in Idaho.
6 S&P Global Ratingsoirect, Hydro one Ltd. and Subsidiary Downgraded to
'A-' on Lower Governance Assessment; Ratings Remain on CreditWaLch, SepEember
13, 2018 .
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O. Please address Ms. CarLock's concerns that "there does
not appear to be a limit on the Province of Ontario's authority
over Hydro Oie,"7 and that a foreign company owning an American
utility is very different from being owned by a foreign company
whoge controlling shareholder is a foreign government,.s
A. The fact. that Hydro One is the parent company of a
Canadian utility, and that it has the Province as a minority
owner, does not suggest that Hydro One's ownership of Avista
would create any special- or new cl-ass of issues af fecting whet.her
t.his transaction is in the public interest. As an investor-
owned public utility, Avista already operates in five different
states, and is subject to the political and regulatory actions
of five different state governments, and the U.S. federal
government, in both its gas distribution and el-ectric service
operations. I doubt that anyone would suggest that these six
governments aII agree on every policy issue facing Avista. Yet,
Avista operates quite effect.ively to meet cusLomer needs and
governmental policies in each jurisdiction.
In evaluating this transaction, I believe the Commission
should distinguish between the influence and authority that t.he
Province could have on Ontario ratepayers versus the influence
and authorit.y that the Province could have on Avista and its
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Direct TesEimony at pgDirect Testimony at pg
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1 ratepayers. While it, is possible that legislation created by
2 the Province coul-d pressure Hydro one t,o decrease rates in
3 Ontario, with the Stipulated Commitments in place in ldaho this
4 would not have any effect on Avista or Avista's customers. In
5 fact, because of the St.ipulated Commitments put in place that
5 create clear separation between Avista and Hydro One, Avista's
7 customers in Idaho would be protected from political or
8 regulatory actions in Ontario, in a number of significant ways
9 that they are not currently protected from political or
10 regulatory actions arising in Washington, Oregon or Alaska.
11 With regard to the issue of ownership by a parent company
L2 that is partially-owned by a foreign government, I can only add
13 that this j-ssue has been raised, and rejected, in transactions
14 involving energy infrast.ructure assets that go far beyond
15 el-ectric or gas dist.ribution assets, including ownership of
16 nuclear power plants and LNG facilities in the U.S. When one
77 considers that the Nuclear Regulat.ory Commission saw no problem
18 with Electricit6 de France (which is fuI]y controlled by the
19 government of France) owning 49.9 percent of five nuclear
20 reactors in the U.S., and planning to build more, et that. cDF
2L Suez (now Engie, which also had significant. government
import facilit.y l-ocated
it becomes difficult to
22 ownership) was permit.ted to own an LNG
23 virtually in the heart of Bost.on, MA,
partial ownership
Reed,
of Hydro One by
Supp. Reb. 6
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the government of
Hydro One, Avista
Ultimately,these concerns come down to the question of
for Avista's customers in
the conclusion of S&P in
Ontario represents an unacceptable risk to
or Avista's customers.
whether the transaction creates risks
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Idaho. In considering that question,
evaluating the out1ook for the financial strength of Avista and
Hydro one is quite compelling. S&P's CreditWatch positive
listing for Avista refl-ects the increased potential for higher
ratings on Avista when the transaction closes. More notable is
S&P's conclusion that, even after fully reflecting the recent
actions of the Ontario government, Hydro One faces Iess business
risk (considering the respective regulatory and political
environments) than Avista does from its regulators. Coming from
a business whose job it is to assess risk, that conclusion should
assure the Commission that this transaction does not carry
incremental risk for Avista's customers in Idaho.
Simply put, the Stipulated Commitments fu11y protect the
public interest in Idaho as wel-l as interests of Avista's Idaho
customers even if something extraordinary happens in ontario.
O. Does anything in Ms. Carlock's testimony detract from
or limit her conclugion, or your conclusion, that the Proposed
Transaction is in the public interest?
A. No . I f uIly concur with Ms . Carl-ock' s ultimate
24 conclusion that the Proposed Transaction is in
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1 interest and that Avj-sta's customers are weII protected by the
Stipulat.ed Commitments .
O. Does this conclude your testimony?
A. Yes, it does.
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