20181114Scarlett Rebuttal.pdf

ON BEHALF OF AVISTA CORPORATION
DAVID ,J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL F19fl,ho Public Utilities Commission
REGULATORY & GOVERNMENTAL AFFAIRS
P.O. BOX 3727
741.1 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]L6
FACSIMILE: (509) 49s-8851
DAV]D . MEYER@AVISTACORP . COM
Otfice of the SocretaryRECEIVED
OCI I t' 2018
Boise, ldaho
ON BEHAIJF OF HYDRO ONE I'IMITED
ELIZABETH THOMAS, PARTNER
KARI VANDER STOEP, PARTNER
K&L GATES LLP
925 FOURTH AVENUE, SUITE 29OO
SEATTLE, WA 98L074-1158
TELEPHONE: [phone]
FACSIMILE: [phone]
LI Z . THOMAS@KLGATES . COM
KARI . VANDERSTOEP@KLGATES . COM
BEFORE THE IDAHO PT'BI,IC UTII,ITIES COMMTSSION
IN THE MATTER OF THE JOINT
APPLICATION OF HYDRO ONE LIMITED
(ACTING THROUGH ITS INDIRECT
SUBSIDIARY, OLYMPUS EQUITY LLC)
AND
AVISTA CORPORATION
FOR AN ORDER AUTHORIZING PROPOSED
TRANSACTION
CASE NO. AVU-E-L7-09
CASE NO. AVU-G-17-05
REBUTTAL TESTIMONY
OF
,JAMES D. SCARLETT
FOR HYDRO ONE LIMITED
1
Z
3
4
5
6
7
8
9
I. INTRODUCTION
A. Please state your name, business address and present
position with Hydro One Limited.
A. My name is ,James D . ( "Jamie" ) Scarlett , and my
business address is 483 Bay Street, South Tower, 8th Floor,
Toronto, Ontario M5G 2P5. I am Executive Vice President and
Chief Legal officer for Hydro One Limit.ed ( "Hydro One" )
O. Did you submit pref iled direct, rebutt,al or
supplemental t,estimony in this proceeding?
A. Yes. I submitted supplemental testimony on September
24, 20L8.
a. Are you sponsoring any exhibits that accompany your
testimony?
A. No.
A table of conLents for my testimony is as follows:
Contents
L] ]. ]NTRODUCTION l_
10
1t-
72
13
1-4
t_5
16
t_8
L9
]I
20
2L
NEW SETTLEMENT COMMITMENTS DESIGNED TO ADDRESS
MINORITY SHAREHOLDING IN HYDRO ONE. .
PROVINCE' S
.......2
II]. STAFF'S LIST OF UNADDRESSED RISKS RELATED
TRANSACTION..
TO THE PROPOSED
...... 16
IV.NOTICE REGARDING ONTARIO ELECTION AND IMPACTS OF ELECTION
ON HYDRO ONE GOVERNANCE .....20
24 V. COMPLIANCE WITH IDAHO CODE S 61-327 36
22
a1
25 VI. COMPLTANCE WITH IDAHO CODE S 51-328..AA
Scarlett, Supp. Reb. 1
Hydro One Limited
26
1
z
3
4
5
6
7
I
9
Summary of Testimony
O. P1ease summarize your test,imony.
A. My testimony addresses the new and amended commitments
developed by Hydro One, Avista, and Commission Staff to address
the potential for Provincial influence over Avista's operations
and rates; Hydro One's and Avista's conclusion that the set of
merger commitments developed in this proceeding address all
risks of Provincial influence ident.ified by Commission Staff;
Commission Staff's concerns regarding the notice provided by
Hydro One and Avista regarding the Ont.ario election in,fune 2018
and the impacts on Hydro One's board and management; the facts
relevant to t.he Commission's consideration of whether Idaho Code
S 51 -327 applies to this transaction; and the facts and merger
commitments showing that all- of the requirements in Idaho Code
S 61-328 have been met.
l_0
11
12
13
l4
15
15
II. NEW SETTLEMEIiM COMMITMENTS DESIGNED TO ADDRESS PROVINCE'S
MINORITY SHAREHOIJDING IN HYDRO ONE
\9 O. Commission Staff testified that amendments to
20 Stipulated Commitment Nos. 2 and 3 and a revision to Lhe
2t
17
18
zz
Authority in the Merger Agreement help resolve
the Province will attempt to
the largest
influence the
Delegation of
concerns that
shareholder of
Scarlett, Supp
Hydro
Reb. 2
One Limited
23 policies and actions of Avista aa
l- Avista's sole owner,
on those amendments
Hydro One.1
and revisions
Can you provide more detail
and why they will protect2
3
4
5
6
Avista from influence by the Province?
A. Hydro One and Avista worked with the Commission Staff
and other parties to this proceeding to develop the following
amendments to Stipulated Commitment Nos. 2 and 3 and the
Delegation of Authority to protect Avista from influence by the
Province:
Amended Stipulated Commitment IVo. 2 - ExecuEive Managementz
Avista will seek to retain alI current executive management
of Avista, subject to voluntary retirements that may occur.
This commitment will noL limit Avista's ability Lo
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
f or standard corporate reasons@-*trile. A:ry
decision Lo hi1e, Qlqilrss ol rqplqqqlLhg ql,rq! qx:cl,1ive
Officer of Avista shall be wit.hin the discretion of the
Avista Board of Direct,ors, and shall not
7
I
9
t_0
1- t-
L2
t-3
L4
15
L6
L7
18
t9
20
2t
22
23
24
25
26
27
28
29
30
31
32
33
a
r:equire any
approval of Hydro One Limited ("Hydro One" ) +e:+-eaf+i+i+Sr-
any of its
affiliates (other than avista), notwj-thstanding anythingto the contrary- i, _!!q__**rgSI agrqqlryq4L, ?nd its qxhibils
and at.tachrnents,between Hydro One and AvisLa
Avist.a Employee Compensation: Any decisions regardinq
Avista employee compensation shall be made by the avista
letween sfaro one ana _g4g _qgggnt nlg*e!-_FLAnqerg5,
Board consistent with t.he terms of the Merger Agr:eemenL
and prevaili-nq practices of relevant U.S. electric and gas
ut.llity benchmarks. The determinaLion of the level of any
compensation (includinq equit y awards) approved by the
Avista Board with respect to any employee in accordance
1 AVU-E-L7-09/AvU-c-L7-05 - Direct Testimony of Terri Carlock at pg. z,lines 9-15 (Nov. 6, 2018) ("Carlock Direct Testimony").
Scarl-ett, Supp
Hydro
Reb. 3
One Limited
1
2
with the foregoing shall not be subject to change by H)rdro
One Board.
?
4
5
6
7
t,
9
10
11
1-2
13
1-4
15
16
17
18
79
20
27
aa
z5
24
25
26
27
28
ao
30
31
32
33
34
a Amended StipuTated Commitment No. 3 - Board of Directorsz
After the closing of t.he Proposed Transact.ion, 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 it.s subsidiaries;
(ii) three (3) direct.ors who meet the standards for
"independent directors" - under section 303A.02 of the New
York Stock Exchange Listed Company Manual (the "IndependentDirectors") and who are cj-tizens of tl:e United States and
are and have }:een residents of t.he Pacific Northwest
reg ion f cst": aL least lwa years, to be designated by Hydro
one (collectively, the directors designated in clauses (i)
and (ii) hereof, the "Hydro One Designees"), 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 Transaction are
members of the 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 c]auses (iii) and (iv) hereof, the
"Avista Designees" )Avista and Hydro One shall coqsg&
wit.h each othel!rier_!e*!_Le_ designation of any Indep3lrggn!llii"ectr;rs.- The- Efos.i"g
Board of DirecLors 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 Desi-gnees shall have the sol-e
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 Washingt.onT.
One or the
The Indepen{qnt liqqqqqfq wa}l have no material
relationship with Hydro One and its subsidiaries and
affiliated entit.ies. the Province of Ontario, or AvisLa
35
35
37
38
and it.s subsidiaries and af f iliated ent.ities currenll
wiL.hin the previous 3 years. Former directors of Avista
Scarlett., Supp. Reb - 4
Hydro One Limited
39
40
4l
42
43
1
2
who otherwise meet these qualificat.ions qualify as
any person who is a citizen of
excludinq any employee or execuLive of
is a cLLLZen of the United States ar:d i s and has been
3
4
5
A
7
9
10
11
L2
l-3
L4
t_5
15
L7
18
L9
20
2L
zz
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
4L
42
43
a
Ir:dependent Directors
Amended Del"egation of Authority - Clause 3: S€+e
Shareholder shal1 have the unfettered right to designate,
remove and replace the S€+€' Sharehol-der Designees as
directors of the Surviving Corporation with or \,vithout
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
direeEers (eEher Ehan as an independenE direeEer ef Ehe
and f;:dependent T):,"r*crars who are c " Lj zcirs of Lhe "'Jrt:t.r:;)
States and are and have been residents of the Pacific
Northwest rRegion for al l_qas!- -!\ry___yg1lg, while such
requirement is in effect (subject in the case of cl-ause(ii) hereof to $e}*shareholder determining, in good faith,
that it is not able to appoint a;:
Inii*pendent 1)irec:Lrsr who is a ct';iz*n of the Ur:il-er.l Sl.a-l.es,
and resident af t-he Pacific Northwest rl?egion in a timely
manner, in which case S€+€ Sharehol-der may replace any such
director with an--emp+e.fee
Lhe United States,
Parent or any of its Subsidiaries oiher: _ti::aa-,A"yir*, on an
interim basis, not exceeding six months, after which
time S€ls Shareholder shall replace *]"t:{ such interim
directorwith@d-T\Inr3''e:pexld"er,i:"T)lt.r,:<:|:.'Os:.li}rr:
* resident of the Pacific Northwest Regionf Lqi *!_]g?stiro years) . af , at any time a ci::cumstance*;;:i;,;A-,----ffirr
during t.he pendency of any such circumstance, wherel:y t-he
Province of Ontario (',Ontario,, ) exerci ses its rights aq .ashareholder of Hydro One, uses legislative auLhorit-y or
result, in Ontario appoinl.ing nominees Io t.he boar:d of
directors of }{ydro One that constitute , or: would constil"ule
a majority of the directors of such board, then Hydra One's
authority to replace an Independent Director on an interim
bqgiq is suqpgnde{ for the pendency of such circumstance
ror purposes of this modification to the Delegation of
Authority, the following definiLions, which are set forthin the Delegat,ion sf Authori,ty and Mergier Agireement, wi-LL
aoolv:
'"5n
Scarlett, Supp. Reb. 5
Hydro One Limited
"Independent Director$" means any director of the Survivinq1
2
?
4
5
6
7
6
9
10
11
t2
13
1-4
15
16
1-7
18
T9
20
27
aaZZ
Exchange LisLed Company Manual wit.h respect to Parent andj ts Subsidiarlgs,_ -14c1uding the Surviving Corporation,
<lireci:or" under section 3 03A. 02 of t.he New York $t-ock
i-i-f] t gg qq material rele!ignelrp___rvilh !Cr:gn!, its
,3u1:sidiartes or affiliated entit.ies currently or in the
p:-ior threc yearsl and (iii) if and to t.he extent required
Corporation ryhq (i) meels the standards for "independent
yi !t re-Ep-?-c q .-!9-- g ?pg gLI y;*-9*pp-l"p-r.r - ylto-l19-p_! g__gli!"F __q}-4gry arly applicable staLe
ut-ili.ry regulat.ory aut"hcr:-ty for an i-ndependent director.
t{ct-wit"hstanding anythi::rg to the contrary in this definilion
q"aaLif.icalions as may be required b
rsf "Independent Dil:ector," (a) a direct.cr who also serves
AS an ind.ependent direct.or of _the Survivin g CarprsraLion or.an\/ nf i t s Subsidiaries or the Shareholder and wh<:
otherwise salisfies the criteria set forthr above for an
"fndependent Director, " may stilI be considered
independent vqithi4 the meaning hereof, and (b) former
of fj.cers of the Company or the Surviving CorporaLion, whc:
oLherwise satisfy Lhe criteria set forth above for an
23
24
25
26
irrcrependent within the meani::g hereof
"Pacific Northwest Reqion" means the Pacific Northwest
states in which the Surviving Corporation serves retail
as customers, currently Alaska, Idaho,electric or nalural g
zl
28
29
30
"Parent" shal1 mean Hydro One LimiLed, a corpo:ration
organized under the ]aws of the Province of Ontario.
"Sliareholder'" shall mean Olympus Equit.y LLC, a Delaware
Mon t 4J"r a , _ pfSggl slQ_ I,Ia q,!149qo::
limiteC 1 iability cornpany
3.1
"subsidiaries" when used with respect to any party hereto,shall mean any_*gerporelion, limitet llg!:lily loqp4nyr
interesLs representing mor€
31
33
34
35
36
37
J6
39
any of its Subsidiaries; (ii) three (3) Independent
Di recLctrs who are residents of the Paci-f i-c Northwest
designq!_ry! by Shareholclel ryho are execulives of parent or
Regicn, to be designaLed by Shareholder (the "Shareholder
"shareholder: Designees" shall mean (i) two (2) directors
lrrdependent DirecLor-s" ) . INot.e: f or purposes of t.his
same meanlng qq "Hydro One Designees" in Commit.ment No
modification to the DcA, "shareholder Designees" has the
parLnership, assocj-aLion, Lrust or ot.her entity of which
40
4L
+z
43 securiLies or olher ownershi
Scarl-et.t, Supp. Reb . 6
Hydro One Limit.ed
1
2
3
4
5
5
7
I
9
than 50? of t.he equity and more than 50? of the ordinar:yvoting power (or, in the clse of a limiteIl lqllqqrqllp.more t.han 50? of the general partnership interests) are/
10
Subsidiaries of such part.y
]Qu{\riv}nL Corporation" shal1 meaq 4y1sqq, _Cq11pple!}exr _ 4Washington corporation
a. What other amendments and new commitments were added
by the parties to this proceeding to address the risk of
Provincial influence over Avista if the proposed transaction
(the "Proposed Transaction") is consummated?
A. Hydro One and Avista worked with the Commission Staff
and other parties to this proceeding to develop the following
amendments to Stipulated Commitment No. l- and to create new
Commitment 74 to protect Avista from influence by the Province:
Amended StipuTated Commitment .llo. L - Authority Reserved:
Consistent with and subject to the terms of Exhibits A and
B to the Merger Agreement (referred to as "Delegation ofAuthority" ) contained in Appendix 5 of t.he ,Joint
Application, decision-making authority over commitments 2-
15 below is reserved to the Board of Directors of Avista
Corporation ( "Avista" ) and not to Hydro One. Any change to
the policies stated in commitments 2-L5, p"Lr-rs i,l)
as of such dater qwned T:y such party or one or inore
Subsidiaries of such part.y or by such party and one or more
Commj-ssion Enforcement of Commitments), 37 (Credit
11
L2
13
L4
L5
L6
L7
18
L9
20
2L
22
23
24
25
26
27
28
29
30
31
32
33
34
35
a
Ratinqs Notification), 38 (Rest.rictions on Upward
Dividends and DistributLons), 43 (Independent Directors),49 (No Amendment)
&flg! , 75 (North American Free Trade Agreement), and 76
(Venue for and ResoluLion of f:isputes), requires a two-
thirds (2/3) vote of the Avist.a Board, provided that Avista
must obtain approval for such changes from al-t regulatory
bodies with jurisdiction over the Commitments before such
changes can go int.o ef fect, and provide written not.ice to
74 (Notice and Petition to Amend or
Scarlett, Supp
Hydro
Reb. 7
One Limited
1
z
aII parties to Case No
request for approval:
AVU-E-17-09/AW-G-17-05 of such
a New Commitment 74 - Notice and Petition to Alter or Amend
II any event occurs that would have an effect on Avista's
operations and/or customer rates because of Avista's
corporate relationship wlth Hydro One, or affqqqq_Ey4rq
One's compliance wiLh any commit.ment, in this stipulation(an "Event" ) , any qSing l1qypetition the Commission aL any time to alter or amend the
f inal order in Case Nos. AW-E-17-09 and AVU*G*17*05 and
ne:- including
Avista, wiIl oppose initiation of such a proceeding. Hydro
One or Avista f1]] lqport to t.he Commission any material
Event as soo es of the
Commitment 14, a material event means (i) an event that apropg{ly informed person woll}q reasonab}y conclude would
have a significant effect on Avista's operations or
cuslomers' rates; or (ii) making it more probable than not
1_lia l-Iiance with an
CommitmenL herein. Not.hing j-n this Commitment 74 shal] be
int.erpqglqllg__f imiL thqjositions or arguments t.hat Avista
or Hydro One may take or advance in any such proceeding,petition presents
3
4
5
6
7
B
9
10
11
t2
13
74
15
t6
77
18
79
20
27
22
23
24
25
26
21
28
29
30
31
32
33
One would be out of c
including the right to argue that a
insufficient. grounds or evidence. Prior to filing
in this docket, _ or to limit t.he auqhgrjlty qq l4g
a
pet.ition with t.he Commlssion under t.his Commitment 74, a
party must p{qvidq Hydro One and Avista at l-east 30 days
advance written notice and an opportuniLy to meet and
confer about resolutions other than filing with the
Commission under this commitment xotlf nf in this
commitment is intended to restrict the rights of theparties to petition t,he Commission concerninq its order {s)
Conimission
34 O. Do you ag'ree with
35 risk that the Province will influence Hydro One's selection of
36 its three independent directors for the post-merger Avista
37 board?2
2 Carlock Direct Testimony ac pg. 15, lines 5-9.
Scarlett,Supp. Reb. 8
Hydro One Limited
Commission Staff that there is a
1
2
3
4
5
5
7
I
9
A.
testimony,
Hydro One
November 5, 20L5
Province shall
7, 20L8, Hydro One
Directors that they
merger board if the
Province played no role whatever
Independent Directors :
o Kristianne BTake (Avista
have selected to serve on Avista's
Proposed Transaction is consummated.
IV of my
between
of Ontario dated
states that "The
in the selection of
No. As discussed in more detail in Section
Section 2.L.3 of the Governance Agreement
and Her Majesty the Queen in Right.
(the "Governance Agreement" ) 3
engage in the business and affairs of Hydro
One and the Hydro one Entities as an investor and not as a
manager." The Provj-nce has reaffirmed this obligation in
Section l-5 of the ,Iuly 11, 2018, Letter Agreement (the ".Tu]y
20Lg Letter Agreement") approved by Cabinet and entered into
10 between Hydro One and the Province.a Furthermore, on November
and Avista announced the five Independentl_ l_
L2
l3
L4
15
1,6
18
1"9
20
2L
post -
The
these
L7 on the current Avista Board of Directors as lead director and
selection) : Ms. Blake serves
has been an Avista Director since 2000. She is a long-time
resident of Spokane, Washington, and has a rich history of
involvement in the Spokane community. She has been the
president of the accounting firm of Kristianne Gates B1ake, P.S.
3 The Governance Agreement is Exh. No. 10, Schedule 3 to my supplementaltestimony filed on September 24, 20L8.4 TheJuly 2018 Letter Agreement between Hydro One and Her Majesty The Queenin Right of Ontario was attached as Exh. No. 10, Schedule 1-, to my
supplemental testimony filed on September 24, 20L8.
Scarlett, Supp. Reb. 9
Hydro One Limited
1
z
3
+
5
6
7
6
since 1987 and has an extensive background in public accounting.
She was a Certified Public Accountant for 33 years, and she
worked for l-3 years for an international accounting firm. She
has served for 22 years on various boards of public
and registered investment. companies.
currently serving as board chair f or t.he
Company and the Russell investment Funds.
o Donald Burke (Avista selection):
Ms. Blake
companies
is afso
fnvestmentRussell-
Mr. Burke serves on
9 the current Avista Board of Directors as the chair of the audit
10 committee and has been an Avista Director since 2071. As a
l-1 director, he serves as the Board's designated financial expert.
L2 He also currently serves as an independent director for the
13 Virtus mutual fund complex and Duff & Phelps closed-end funds
14 complex. From 2005 to 201-0, Mr. Burke served as a trusLee for
15 numerous global funds that were advised by BlackRock, Inc. From
16 2006 t.o 2009, he was a managing director of B1ackRock and served
L7 as t.he president and CEO of the B1ackRock U.S. mutual funds.
18 In this ro1e, Mr. Burke was responsible for aII of the
19 accounLing, tax and regulatory reporting requirements for over
20 300 open and closed-end mutual funds. Mr. Burke joined
2l BIackRock in connection with the mergfer with Merrill Lynch
22 Investment Managers ("MLfMr'), taking a Iead role in the
23 integration of the two firms' operating infrastructures. While
24 at MLIM, Mr. Burke was the Head of G1oba1 Operations and Client
Scarl-ett, Supp
Hydro
Reb. l-0
One Limited
1 Services and also served as the Treasurer and Chief Financial
2 of f icer ("CForr) of the MLrM mutual funds.
3
+
5
6
7
I
9
financial experience to the board from
and his role as the treasurer
He brings significant
his years in public
and CFO of numerous
t_0
accounting
mutual funds. He has extensive board experience, having served
on the audit, compliance, governance & nominating, and contract
review committees of various boards. Through his service as an
Avista director, ML. Burke has demonstrated his commitment to
the Pacific Northwest region.
o Christine Gregoire (aydro one seTection) : Ms.
Gregoire is the CEO for ChaIlenge SeattIe, dD organization
comprised of Lg major international companies and non-profits
located in the Seattle region. Previously, she served for two
Lerms as Governor of the State of Washington with a $328 biennial
budget and over 50,000 employees. In her first term as Governor,
she created the Department of Ear1y Learning and led on reforms
to the K-L2 system and investment in higher education. She led
the state in a historical investment in infrastructure,
addressed the water wars in the state, 1ed an historic number
of trade missions, reformed the foster care system to protect
children, and was among the first to lead in health care reform.
During her second term, Ms. Gregoire led the state in major
reforms, management and budgeting to position the state as one
of the mosL f inancially secure to come out of the rrGreat
ScarIett, Supp
Hydro
Reb. 11
One Limited
1l-
1,2
13
L4
15
76
1"7
18
L9
20
21
22
23
24
I
z
3
4
5
6
7
a
9
Recessj-on. " Prior to becoming Governor, she served for three
terms as Washington At.torney General and, prior to becoming
Attorney General, she served four years as the Director of the
State Department of Ecology. She is also a member of the Fred
Hutchinson Cancer Research Cent.er and the Bipartisan Governors'
Counci-I, and she serves on the advisory boards of the William
D. Ruckelshaus Center and the Progressive Coalit.ion for American
.fobs. Ms. Gregoire recently completed her third year as Chair
on the National Export-Import Bank Advisory Board. She is a
graduat.e of Gonzaga University School of Law, and she and her
husband al-so have a home in north Idaho.
. Scott Maw (Hydro One sel-ection): Mr. Maw serves on
the current Avista Board of Directors and has been an Avista
Direct,or since 20L6. He has been executive vice president and
CFO for Starbucks Coffee Company since February 20l-4. He is
responsible for Starbucks' Global Finance organization. Prior
to that, he served as senior vice president. of Corporate Finance
for Starbucks where he was responsible for corporat.e finance,
including accounting, tax, and treasury. Mr. Maw also had
oversight for al-l financial and securi-ties-related regulatory
filings. He joined Starbucks as global controller in 20L7.
Prior to joining Starbucks, Mr. Maw served as CFO of SeaBright
Insurance Company from 2010 to 2011. From 2008 to February 20L0
he served as CFO of the Consumer Banking division of .fPMorgan
Scarl-ett, Supp. Reb . 1,2
Hydro One Limited
10
11
1-2
13
L4
15
t6
L7
18
L9
2n
2T
22
ZJ
24
1 Chase & Co. He is a Seatt1e, Washington, resident with roots in
2 Eastern Washington. He graduated from Deer Park High School,
3 just north of Spokane, and is a graduate of Gonzaga University.
4 . Marc Racicot (Hydro One selection): Mr. Racicot serves
5 on the current Avista Board of Directors and has been an Avista
6 Director since 2009. He served as president and CEO of the
7 American Insurance Associat.ion from August 2005 to February
I 2009. Prior to that, he was a partner at the 1aw firm of
9 Bracewell & Giuliani, LLP from 2001 to 2005. He is a former
10 governor (1993 t.o 2001-) and attorney general (l-989 to l-993) of
11 the state of Montana. Mr. Racicot was nominated by President
12 Bush and unanimously elected to serve as t.he chair of the
l-3 Republican National Committee from 2002 to 2003 prior to
L4 assuming the position of chair of the Bush/Cheney Re-election
15 Committee from 2003 to 2004. He previously served as a director
L6 for Siebel Systems, Allied Capital Corporation, Burlington
L7 Northern Santa Fe Corporation, PIum Creek Timber Company, and
18 The Washington Companies, and he presently serves as a director
L9 for Weyerhaeuser Company and Massachusetts Mutual Life Insurance
20 Company. In addition, throughout his career Mr. Racicot has
2L strongly committed himself to children, education and community
22 issues. He was appointed to the board of The Corporation for
23 National and Community Service by President Clinton, and he has
24 also served on the boards of Carroll Co1lege, .Tobs for America's
ScarIett, Supp
Hydro
Reb. 13
One Limit.ed
1
a
3
4
5
6
7
U
9
Graduat.es, and United Way of Helena, Montana. He is a life-
Iong resident. of Mont.ana and a graduate of Carroll College.
O. P1ease summarize the Stipulated Commitment,s in the
April L3, 20L8 Stipulation that were designed, well before the
Ontario election, to prevent Provincial
First, ds established in the Stipulat.ion filed wit.h
this Commission on April 13, 2078, Avisla will have a nine-
influence over Avista.
A
10 No. 3. Hydro One, not the Province, will sel-ect five of Avista's
11 directors. Three of these five directors must be
member board separate from Hydro One
management and day-to-day operations.
under NYSE rules. Further, pursuant
to Commitment No. 3 described above,
that wilI govern Avista's
See St.ipulated CommiLment.
to t.he recent
independent
amendments72
13 those three directors must
74 be U.S. Citizens and residents of the Pacific Northwest for at.
15 least two years. As a resul-t, Lhe Province will not be able t.o
16 exercise any control over Avista through selection of Avista's
1,7 board.
18 Second, Olympus Equity LLC's three-member board musL
19 include one independent director. See Stipulated Commitment
20 No. 43.
27 Third, Hydro One is required to provide Avista with
22 sufficient. equity to ensure that Avist.a's credit ratings remain
23 investment grade. This ensures that the Province cannoL deprive
Scarlett, Supp. Reb. 74
Hydro One Limited
1 Avista of its capital and assets for the benefit of the Province.
2 See Stipulated Commitment No. 37.
3 Fourth, Avista will be prohibited from issuing dividends
4 if certain financial metrics relating to the equity floor,
5 credit ratings and debt coverage are not met. This prohibition
5 operates to keep retained earnings at the Avista level, where
7 they wiII improve Avista's financial strength. This, too,
I prevents t.he Province from depriving Avista of its capital and
9 assets for the benefit of the Province. See Stipulated
10 Commitment No. 38.
l-1 Fifth, Avista's utility assets can be pledged only for the
L2 benefit of Avista, not Hydro One. Therefore, the Province
13 cannot strip Avista of is capital and assets for the benefit of
t4 the Province. See Stipulated Commitment No. 45 .
15 Lastly, Hydro One and Avista, along with the rest of the
L6 parties to the Stipulation and Settlement, developed t.he
t7 St.ipulation to ensure that Avista could not be negatively
l-8 impacted in any way by any of the politica1 events described
1"9 below. Hydro One is legally obligated to comply with the
20 Stipulation in this Case, the settlements it has reached in
2L Oregon, Washington, Montana, and Alaska, the Regulatory
22 Commission of Alaska's .Tune 4, 20L8, order approving this
23 merger, Lhe Montana Public Service Commission's order approving
24 this merger, and any orders approving this merger issued by this
Scarlett, Supp
Hydro
Reb. l-5
One Limit.ed
1 Commission, the Washington Utilities and Transportation
2 Commission, and the Oregon Public Utility Commission.
3 A11 of the protections described above t.hat have been built
4 into the Stipulation to ensure that Avista will continue as a
5 financially sound, stand-alone utility (e.9. , Avista's
5 independent, board, financial ring-fencing, and capital support)
7 will bind Hydro One regardless of political developments.
8 Furthermore, through the Stipulat.ion in this proceeding and the
9 settlements in Washington and Oregon, Hydro One and Avista have
10 agreed t.hat none of the commit.ments in the settlements can be
l-1 amended without approval from Avista's state regulators. See
12 Stipulated CommitmenL Nos. L, 30, 33, 49.
13
74
15
IIT. STAFF'S I,TST OF I'NADDRESSED RISKS RELATED TO THE PROPOSED
TRANSACTION
15 O. Commission Staff asserts that the Province's ability
17 Eo force the removal of the Hydro One Board, the ret,irement of
18 the CEO, and the passage of the Hydro One AccountabiTity Act
79 demonstrate that there are no bounds to the Province'g ability
20 to influence Hydro One.s Do you agree with those conclusions?
2l A. No. As will- be described in greater detail in Section
22 IV of this testimony, the removal of the Hydro One Board followed
23 all relevanL and material aspects of the provisions in the
Scarlett, Supp
Hydro
Reb. 16
One Limited
s Carlock Direct Testimony at. pgs. 14-15
1
Z
3
+
5
6
7
Governance Agreement and the retirement of Mayo Schmidt removed
uncertainty and was in
addition, the Province,
Agreement, ratified and reaffirmed
Governance Agreement, which remains
the best interests of Hydro One. In
in Section 15 of the ,JuIy 20LB Letter
its commitment to the
in fuI] force and effect.
I
9
As a result, the Governance Agreement remains a check on the
Province's ability to influence Hydro One.
Further, the Province's legislative authorit.y over Hydro
One is limited to matters within the Province's jurisdiction.
This limitation was clear in the Hydro One AccountabiTity Act:
It defined the term "subsidiary" to specificalIy exclude
application of the Act to Hydro One subsidiaries incorporated
in a jurisdiction outside of Canada. This is extremely
important to consider in this proceeding, as the Province's
legislative authority simply does not extend to the operations
and rates of Avista. Rather, the operations and rates of Avista
are strictly within the jurisdiction of the five states in which
Avista operates: Idaho, Washington, Oregon, Montana, and
Alaska.
To the extent that the Province could employ some other
t)pe of
Avista,
action to exercise influence over Hydro One to reach
the previous section of t.his testimony explains how the
23 new commitments negotiated by the parties to this proceeding
well as the Stipulated
Scarlett, Supp. Reb. L7
Hydro One Limited
t-0
t- l-
L2
13
1-4
15
L6
1"7
l-8
t9
20
2L
24 since the Ontario el-ection, ds
1 Commitments in the April 13, 20L8, Stipulation will protect
2 Avista from any direct. influence from the Province.
3 Q. Commission Staff states that "the practieal
4 implications of the North American Free Trade Agreement (NAFTA)
5 and/or its succeEsor, the U.S. Mexico Canada Agreement (USMCA),
6 on Avista and its cust,omera are unknown and unknowable."6 Do
7 you agree with this characterization?
I A. No. The established law and precedent regarding
9 NAFTA, particularly when coupled with the new Commitment 75
10 negotiated by the parties aft.er I filed my Supplemental
1l- Testimony on September 24, 20L8, leave no reasonable doubt that.
12 the Commission's authority wiII be unencumbered by NAFTA and
13 this merger.
L4 Hydro One and Avist,a recognize and affirm in the Stipulated
15 Commitments t,hat NAFTA does not, curtail the authority of the
16 Commission to promulgat.e and enf orce rel-evant rules and
L7 regulations, that Hydro One and Avista explicitly recognize that
18 the Commission's authority over Avista's operations will remain
19 unchanged by the eroposed Transaction, t.hat. the parties will
20 comply with aI1 applicable laws and regul-ations, and that Hydro
2L One and Avist.a recognize the Commission's jurisdiction. See
22 St.ipulated Commitment Nos. 20,2L,23,30, 31, 33, 75, and 75.
6 Carlock Direct TesEimony at pg. 10, Iines 22-25.
Scarlett,Supp. Reb. 18
Hydro One Limited
l_
2
3
4
5
6
7
8
9
A. Can you describe how nevr Commitment No. 75 fully
protects Avista from any potential risk under NAFTA or the
USMCA?
A. First, Hydro One and Avista forego their rights to
bring any claim under NAFTA or similar provisions of the
anticipated successor to NAFTA, the United States Mexico Canada
Agreement (USMCA) Second, Hydro One wiII not support or
voluntarily participate in any claims asserted by a third party.
Thus, Hydro One is barred from att.empting Lo use NAFTA, so the
Commission's jurisdiction over Avista is protect.ed. FinalIy,
Hydro One will indemnify Avist.a from any damages payable by
Avista in respect of any such claim. with this indemnification
provision, in the very unlikely event that a third party somehow
prevails on a NAFTA cl-aim, Avist.a wiII be held harmless:
75. North American Free Trade Agreement (NAFTA):
Hydro One and Avista commit. to forego their rights
to bring any claim under NAFTA, or similar
provision of the United States Mexico Canada
Agreement (USMCA) challenging, or seeking monetary
damages related to, any regulations, l-aws, orders
or actions passed or taken by the State of Idaho orany instrumentality thereof or the government ofthe United States in rel-ation to the production,
transmission or distribution of electric power,
natural gas or other energy sources by Avista. Inthe event that such a claim is brought under NAFTA(or the USMCA) that invol-ves or impacts Avista,Hydro One commits that it wiII not voluntarilyparticipate in, support or otherwise encourage such
action. Hydro One will indemnify Avista from any
damages payable by Avista in respect of any such
claim as determined by a final non-appealabl-ejudicial order.
Scarlett, Supp. Reb. 79
Hydro One Limited
10
11
L2
t-3
L4
l-5
L6
L7
18
L9
20
27
22
z3
24
z>
26
27
28,)o
30
31
32
33
1
z
3
+
5
6
7
I
9
We worked with Staff to develop this set of protections
IV. NOTICE REGARDING O}flTARIO EIJECTION AND IMPACTS OF ELECTION
ON HYDRO ONE GOVERNA}ICE
O. Please summarize guestions that have been raised as
to whether Hydro One and Avista disclosed the potential impacts
of the Ont,ario Election on Hydro One in a Eimely manner and
whether Hydro One and Avista potentiaLLy misled the parties to
this proceeding regarding the relationship between Hydro One
and the Province of Ontario (the "Province").7
A. Commission Staff states: "it may be viewed by some
that the Applicants did not adequately report in a timely manner
and were not entirely forthcoming regarding the independence of
Hydro One from the Province, Hydro One as a campaign issue in
Ontario, and the impact of the e1ection on Hydro One."8
O. Commission Staff states that Hydro One and Avista
should have notified them that Hydro One had become the suJrject
of campaign promises leading up t,o the ,June 7, 2018, election.
Commission Staff also sEates that Hydro One and Avista should
have notified the Commission of the .ruIy LL, 20L8, removal of
Ehe Hydro one Board and CEo before sending theJuly 18, 20L8,
letter to the Commission, Commission Staff and t,he other parties
7 Carlock Direct Testimony at pg
8 Carlock Direct Testimony at pg
Scar1ett, Supp
Hydro
Reb. 20
One Limited
10
l_1
t2
13
L4
15
16
17
18
t9
20
2L
22
10
10
1 to this proceeding describing the events of iluly LL. Do you
2 agree with these criticisms?e
3 A. I do. In hindsight, we should have discussed with
4 the parties to this proceeding the campaign promises being made
5 by t.he Progressive Conservat.ive Party and the New Democratic
6 Party prior to knowing the outcome of the ,June 7, 20LB election.
7 During the lead up to the election, however, Hydro One and
8 Avista simply could not predict the outcome of the efection,
9 and for that reason waited for the election to occur. Although
10 the Progressive Conservative Party did not take office until
l-1 June 29, 201-8, Hydro
L2 and the parties of
One and Avist.a did notify the Commission
the
One on ,June 20,
potent.ial
2018,10 as
impacts of the election on
discussed in greater detail
Commission on the
13
74
15
76
77
18
79
20
2L
Hydro
be1ow,well in advance of any action by the
their,Joint Application.
Further, I also agiree that Hydro One and Avista should have
acted more quickly to notify the Commission and the parties
after Hydro One entered into the ,fu1y 2018 Letter Agreement with
the Province to remove the Hydro One Board and arrange the
retirement of the CEO. Although information like this cannoL
be released prematurely due to t.he impact that it could have on
e Carlock Direct Testimony at pgs . :-2-].3.
10 See AVU-E-tl-Og/eVU-c-17-05, Avista and Hydro One .foint Comments in
Support of Stipulation and Settlement (,fune 20, 2018) (",foint CommenEs")
Scarl-ett, Supp. Reb . 2L
Hydro One Limited
1 stock prices, Hydro One and Avista should have acted more
2 quickly than ,fu1y 18, 20Lg .
3 O. Did Hydro One and Avista fail to disclose the
4 potential impacts of the Ontario elecLion on Hydro One in a
5 timely manner or mislead the parties to this proceeding
6 regarding the relationship between Hydro One and the Province?
7 A. No. fn fact, t.he opposite is t,rue. As the rest of
8 my testimony will explain in greater detail, this proceeding
9 started in September 2017, welI before any of Ontarj-o's
l-O political parties started forming their platforms and
11 campaigning for the 'June 2018 Ontario el-ection.
12 As part of Hydro One's transition from being a Crown
13 Corporat,ion to a public corporation through several public
74 offerings commencing in the faII of 20L5, Hydro One and the
15 Province entered into the Governance Agreement.ll Section 2.1,.3
16 of the Governance Agreement states t.hat "The Province shal1,
77 with respect to its ownership interest in Hydro One, engage in
18 the business and affairs of Hydro One and the Hydro One Entities
79 as an investor and not as a manager." The Governance Agreement
20 also includes explicit provisions that limit the Province's role
2L as Hydro One's Iargest investor, which I wiII describe in more
22 detail below.
11 The covernance Agreement is Exh. No. 10, Schedule 3 to my supplemenLal
testimony fj-led on September 24, 2078.
Scarlett, Supp
Hydro
Reb. 22
One Limited
1
2
3
4
5
6
7
a
9
a. Did former CEO Mayo Schmidt's direct testimony filed
on September L4, 20L7, accurately degcribe the relationship
between Hydro One and the Province?12
A. Yes, Mr. Schmidt's September !4, 2017, direct
testimony accurately described the relationship between Hydro
One and the Province. As Commission Staff noted, Mr. Schmidt's
testimony stated: "Hydro One is now governed by an independent
board, other than myself as CEO, and a governance agreement that
ensures autonomous commercial operations, with the Province of
Ontario as an investor and not a manager."r3 Mr. schmidt al-so
stated: "The Province of Ont.ario is a shareholder and pursuant
to its governance agreement with Hydro One it does not hold or
exercise any managerial oversight over Hydro One."14 On
September L4, 2017, these statements were true, and apart from
the enactment of the Hydro One AccountabiTity Act this summer,
which gives the Province new regulatory oversight over executive
compensation at Hydro One, these statements remain true today.
As noted above, Section 2.L.3 of the Governance Agreement
states that the Province shall act as an investor and not as a
manager of Hydro One. Pursuant to Section 15 of the July 201-8
12 Carlock Direct Testimony at pg. 11.
13 AVU-E-tl-Og/}.vu-c-a7-05 - Direct. Testimony of Mayo Schmidt at pg. 10 (Sept.
14, 2077) ("Schmidt Direct Testimony").
14 Schmidt Direct Testimony at pg. 10.
10
11
t2
13
L4
15
L6
L7
18
L9
20
ScarIett, Supp
Hydro
Reb. 23
One Limited
1 Letter Agreement beLween Hydro One and the Province, ls the
2 Province ratified and reaffirmed its commitment to the
3 Governance Agreement, which remains in full force and effect:
16. Reaffirmation:By entering into this Agreement, the4
5
6
7
8
9
10
11
72
13
74
Province ratifies and reaffirms its obligations under the
Governance Agreement and agrees that, except as
specifically set out in t.his Agreement with respect to the
subject maLter hereof, (i) the execution, delivery and
effect.iveness of this Agreement or any other documenLs
delivered in connection herewith shall not amend, modify
or operate as a waiver or forbearance of any right, power,
obligation, remedy or provision under t.he Governance
Agreement, and (ii) such agreement sha11 continue in full
force and effect.
15 Mr. Schmidt's September 14, 20L7, testimony explaining that
1,6 the Province is an investor in, and not a manager of, Hydro One
t7 did not mislead the Commission or the parties to this
18 proceeding.
19 O. WhaE happened in these proceedings after Mr. Schmidt
20 filed his direcE testimony on september 14, 20L7?
2L A. After Hydro One and Avista submitted their.Toint
22 Application and direct testimony on September a4, 2017, the
23 parties to this proceeding filed motions to intervene, and Hydro
24 One and Avista responded to production requests. On April 4,
25 2018, the parties to t.his proceedingl5 had their first. in-person
26 settlement conference. During that settlement conference, the
1s TheJuly 2018 LeEEer Agreement is Exh. No. 10, Schedule 1 to my supplemenEal
testimony filed on September 24, 201-8.
16 The Avista Customer Group and Idaho Depart.ment of Water Resources were not
granted intervention in t.his proceeding unLil ,Iu1y 19, 20l-8, and ,Ju1y 20,
20]-8, respectively.
ScarleLt, Supp. Reb. 24
Hydro One Limited
1 parties reached an agreement in principle. The parties then
2 engaged in further settlement negotiations by emai1 and phone
3 to reach an aII-party settlement that was filed with the
4 Commission on April 13, 2018.
5 On May 15, 2018, the Commission issued a Notice of Proposed
5 Settlement, Notice of Modified Procedure, Notice of PubIic
7 Hearings, and Notice of Amended Schedule, Order No. 3406L. In
8 t.hat order, the Commission directed Hydro One, Avista, and the
9 other parties to the settl-ement to file comments in support of
l-0 the settlement by,fune 20, 201-8.
L1 O. Please describe the campaign leading up to the ,June
12 7, 20Lg election in Ontario and the election resuIt,s.
13 A. At the same time that Hydro One, Avista, and the other
14 parties to this proceeding were negotiating the settlement
l-5 agreement that was filed with this Commission on April 13, 2018
L6 (t.he "Stipulation"), the campaigns for the ,June 7, 2OtB Ontario
17 election began in earnest. Hydro One became aware of the
18 Progressive Conservative Party's campaign promise to remove
19 Hydro One's CEO during a campaign event on April 10, 2OLg. The
20 campaign promise to remove Hydro One,s CEO and Board of
21, Directors was officially announced on April L2, 201"8.
22 During Apri1, M&y, and ,June, Lhe Progressive Conservative
23 ParLy, the incumbent Liberal Party, and the New Democratic Party
24 were engaged in a hotly contested campaign to win the Ontario
Scarlett., Supp. Reb. 25
Hydro One Limited
I premiership and obtain a majority of t.he seats in the Ontario
2 legislature. During this period, Hydro One was unsure how the
3 campaign would unfold and which party woul-d ultimately prevail
4 on June 7, 20L8. ft was impossible to determine whether any of
5 these parties had an interest in or the ability to fo1low t.hrough
5 on their campaign promises prior to t.he election on ,June 7 ,
7 2078.
I Q. When did Hydro One and AvisEa notify the Commission
9 and the parties to this proceeding that the Ontario elecEion
10 might impact Hydro One?
11 A. Election campaigns in Canada are shorter than in the
12 United States. Starting in June 20L8, Hydro One and Avist.a
13 informed the Commission of the recent political developments as
14 it became cl-ear they may impact Hydro One, weIL before any
15 potent.ial- decision on the merger by the Commission.
L6 On .June 7, 20L8, the Progressive ConservaLive Party, which
L7 made campaign promises to remove Hydro One's CEO and Board of
18 Directors, won the premiership and a majority of the seats in
79 the Ontario legislature. At our next opportunity in this
20 proceeding, Hydro One and Avista described the outcome of the
2L ,June 7 , 20L8, election and the potential risks to Hydro One in
Stipulation and22 our .Tune 20, 20L8, Joint Comments in Support of
Scarl-ett, Supp
Hydro
Reb. 26
One Limited
23 Settlement
1
2
3
4
5
5
7
I
9
O. Do you believe that t,he .fune 20, 20L8, iloint Commentg
in Support of the StipuJ.ation and Settlement were misleading
with respecE t,o how the results of the Ontario election might
impaet Hydro One?17
A. Not at all. The .Tune 20, 2018, .Toint Comments stated
that " [a] lthough Hydro One's largest shareholder is the Province
of Ontario, the Province does not hold or exercise any
managerial oversight over Hydro One. " 18 On ,June 20 , 201"8, the
Governance Agreement remained in full force and effect, and the
new government of the Progressive Conservative Party had not
taken any actions or engaged with Hydro One in any way to explain
if or how it was going to fulfill its campaign promises with
respect to Hydro One.
Commission Staff expressed concern that "in addressing
legitimate concerns of the impact of the Province of Ontario
could exercise over the operations and management of Hydro One,
the Applicants labeled the possibility of dismissing the Board
of Directors and CEO as 'hlpothetical events,' even as such
events were in the processes of actually occurring."\e Again,
at the time Hydro One and Avista submitted their .Toint. Comments
on June 20, 20L8, the new government of the Progressive
Conservative Party had not taken any actions or engaged with
1? Carlock Direct Testimony aE pg
18 Carlock Direct Testimony at pg
1e Carlock Direct Testimony at pg
10
11
L2
13
L4
l-5
76
77
18
L9
20
27
LL, lines 1,4-24 .
11 (citing Joint Comments at pg.
11 (citing .Toint Comments at pg.
2).
18 ) .
Scar1ett, Supp. Reb. 27
Hydro One l,imited
zz
1
2
3
4
5
6
7
o
9
Hydro One in any way to demonstrate whether or how it was going
to fulfill its campaign promises with respect, to Hydro One. On
,fune 20, 20L8, the possibility that the Provj-nce woul-d exercise
its rights pursuant to Sect.ion 4.7 of the Governance Agreement
to remove Hydro One's Board of DirecLors or would try to remove
Hydro One's CEO remained very much unknown and therefore were
"hypoLhetical events. " As noted in my September 24, 201-8,
Supplement.al Testimony, the Progressive Conservative Party was
not sworn in as the new government unt.il ,fune 29, 201-8.
We did our best in the 'June 20, 2018, ,foint CommenLs, just
13 days af ter the June 7 , 201,8, election and before t.he new
government was even sworn in on ,fune 29, 2018, to explain the
possible ways in which t.he new government could impact the
governance and management, of Hydro One, or potentially Avista,
if Lhe new government. decided to fo11ow t.hrough on its campaign
promises:
o First, Hydro one and Avista at.tached a detailed 13-page
report to the ,Joint Comments2o that outlined (i) the hist.ory
of the Province's relationship with Hydro One, (ii) the
Province's role as Hydro one's largest sharehol-der under
the Governance Agreement, including its role in selecting
402 of Hydro One's Board members and its right. to seek
20 see AVU-E-17-09/AW-G-17-05, Exhibit A to the Avist.a and Hydro One ,foinE
CommenLs in Support of Stipulation and Settlement (,fune 20, 2018) .
Scarlett, Supp. Reb. 28
Hydro One Limited
10
11
72
13
a4
15
16
77
18
19
20
27
zz
1
z
3
4
5
6
7
9
2L See ,loint Comments at pgs
22 See ,loint Comments at pgs
its campaign promises
fulfillment of these
15-19.
24-26, 28
campaign promises
Scarlett, Supp. Reb
Hydro One
oo. ZJ
Limited
removal of Hydro One's entire Board of Directors pursuant
to Section 4.7 , (iii) the results of the June 7 , 2078,
Ontario election and a summary of the campaign promises
leading up to the election, (iv) how the new government
could carry out if it chose to do
so, and (v) how
could impact Avista if the merger was approved.
Second, the .-Tune 20 , 20L8, ,Joint Comments carefully
explained how the Stipulated Commitments included in the
April 13, 20L8, Stipulation between the parties to this
proceeding woul-d protect Avista from any negative impact
or influence by the new government if the new government
decided to foIlow through on its campaign promises to
remove the Hydro One Board and CEO.21
Third, the June 20, 20L8, .Toint Comments explained that
(i) Avista was not going to be owned by a foreign government
if the merger was approved, because Hydro One is an
investor-owned utility; and (ii) t.he Committ.ee on Foreign
Investment in the United States already had concluded that
there was no risk to critical infrastrucLure in the United
States as a result of the transactiort.22
10
a
11
72
13
L4
15 a
16
L7
18
L9
20
27
1 The ,Joint Comments' use of the term "hlpot.hetical- event,"
2 when read in context, clearly was noL a dismissal23 by Hydro One
3 and Avista of the possibility that t.hese events could occur.
4 Rather, the Joint Comments made clear what could occur in the
5 wake of the election:
The Province could trigger the provisions in
Article 4.7 of the Governance Agreement to
replace Hydro One's Board or the Province's
new 1eadership coul-d introduce legislation for
the purpose of dismissing Hydro One's CEO or
members of the Board. These are just
possibilities, but even if they were to come
to pass, Hydro One, Avista, and the other
Parties in t.his Case have included governance
and financial ring-fencing in the Stipulat.ion
that wilI protect Avista and its customers and
bolster the prot.ections already provided by
the Governance Agreement [.1 za
6
7
I
9
10
tl_
72
l_3
74
15
15
77
18
79 Moreover, the ,Ioint Comments explained that the possibility of
20 financial or operational changes at Hydro One impacting Avista
27 and it.s service to cusLomers was "a central theme during the
22 settfement negotiations involving aI1 the Parties in this Case"
23 and " [t] he Parties developed St.ipulated Commitments that. ensure
24 Avist.a will remain a financially healthy, standalone utility
25 after t.he merger regardless of any negative financial or
26 operational changes t.hat. could occur at Hydro One, whether the
27 result of the Ontario election or some other event."25 The ,Joint
28 Comments al-so made cl-ear that all of the Stipulated Commitments
23 Carlock Direct Testimony at pg. 11, lines 19-24.
2a ,Joint Comments at pg. 16.
2s .foint Comments at pg. 16.
Scarlett., Supp. Reb. 30
Hydro One Limited
1
z
3
4
5
5
7
I
9
that would protect Avista in
any of the actions discussed
the event that the Province took
regardless of political developments
commitments could be amended without
would be binding
and that
on Hydro One
none of t.he
from Avista's
10
approval
regulators.26
Tn conclusion, the ,June 20, 20L8, Joint Comments were as
clear as possible at that time regarding t.he potential risks to
Hydro One as of then, just thirteen days after a hard-fought
campaign in which the outcome simply was not known in advance
and nine days before the new government was even sworn in.
A. Do you agree with Commigsion Staff's suggestion that
the ilune 20, 2018, iloint Comments' characterization of the risks
11
12
t-3
L4
1,6
L7
to Hydro One
the dismissal
aa "hypothetical events" was not accurate because
of the Hydro One Board of Directors and CEO were
of actually occurrLrtg" ?2715 in the "procegs []
A. No. As I explained, under oath, in my September 24,
201-8, Supplemental Testimony, it was not until July 4, 20L8,
18 that discussions were held between representatives of the Hydro
One Board and the new government of the Progressive Conservative
Party. On ,fuly 5, 201-8, dj-scussions were held between
independent, 1ega1 counse1 to the Hydro One Board and a
representative of the new government, and privileged and
L9
20
2!
zz
26 Joint Comments at pgs. l-B-19.
27 Carlock Direct Testimony at pg. 11.
Scarlett, Supp
Hydro
Reb. 31
One Limited
1 confidential discussions were held among the Hydro One Board
2 Chair, another representative of the Board, and the Board's
3 independent 1ega1 counsel. Subsequently/ representatives of
4 the Hydro One Board, the Board's independent 1ega1 counsel, and
5 representatives of the government held various discussions and
5 meetings from July 6, 2018, t.hrough .Tuly 8, 20L8.
7 These discussions involved representatives from the
8 Cabinet Office as well as representatives of the Ministry of
9 Energy, Northern Development and Mines, the Minist.ry of Finance,
10 and the Attorney General, and they led to Lhe ,JuIy 2018 Letter
l-l- Agreement.2s The .Tu1y 20LB Lett.er Agreement established (i) the
12 process for the orderly replacement of the Hydro One Board in
13 compliance with al-I relevant and material aspects of Section
t4 4.7 of the Governance Agreement and (ii) the process by which
15 Hydro One's CEO Mayo Schmidt would retire.
L5 A11 of this happened after ,June 20, 20L8. On June 20,
L7 Hydro One and Avista simply did not know whether or how the new
18 governmenL would follow through on its campaign promises to
L9 remove the Hydro One Board and CEO. These were hypot.hetical-
20 events on June 20, as neither Hydro One nor Lhe new government
27 had taken any actions to make them real.
ze The.Iuly 2018 Letter Agreement bet.ween Hydro One and Her Majesty The Queenin Right of onLario was attached as Exh. No. 10, Schedule 1-, to my
supplementaf testimony filed on Septernlcer 24, 20]-8.
Scarlett, Supp. Reb. 32
Hydro One Limited
I
2
3
4
5
6
7
I
9
O. When did Hydro One and Avista notify the Commission
and Commiesion Staff of (i) the new goverrunent's decision to
exerciee its rights to remove the Hydro One Board pursuant to
Section 4.7 of the Governance Agreement and (ii) the retirement
of Hydro One's CEO?
A. On July 18, 2078, seven days after the public
announcement by press rel-ease of the JuIy 20LB Letter Agreement
One and Avistabetween Hydro One and the Province, Hydro
submitted a letter to t.he Commission explaining the July 20Lg
Letter Agreement and the next steps in replacing Hydro One's
Board and CEO. Further, this letter to the Commission also
t_0
11
12
13
l4
15
explained that the
AccountabiTity Act
regulatory oversight
One's executives.
new government had introduced L}:e Hydro One
the Provinceon .Tu1y L6 , 20L8, to give
over the compensation structure for Hydro
the [Hydro Onel Board of
Officer (CEO) bowed to
16 O. Do you believe t,hat "a11 of
1"7 Directors and the Chief Execut,ive
18
1,9
20
pressure from the Province
being removed following
process"?29
of Ontario and resigned rather than
the established shareholder voting
2L A. I would not charactetize the events in that. fashion
22 I believe the board members and CEO took steps that they properly
2e Carlock Direct Testimony at pg. 6, lines L2-L6.
Scarlett,supp
Hydro
Reb. 33
One Limit.ed
1 viewed as being
and in
in fundamental- compliance with the Governance
2 Agreement the best interests of Hydro One. Section 4 .7
of the Governance Agreement sets out a process for the Province
One's entire Board, with thet.o call for t.he removal of Hydro
exception of the CEO, and at the Province's sole discretion,
the Chair, which I described in my supplemental testimony filed
3
4
5
6
7 in this dockeL.30 This process has been available to the Province
B since the Governance Agreement was executed on November 5 , 2015.
9 The removal and replacement of the Hydro One Board through
10 the ,Ju1y 2018 Letter Agreement complied with t.he process
11 outl-ined in Sect.ion 4.7 of the Governance Agreement, with just
12 one except.ion. Pursuant to the Province's and Hydro One's
13 authorit.y to amend the Governance Agreement with mutual consent
74 (Section 25 of the Governance Agreement), the ,Iu1y 2018 Letter
15 Agreement dropped the step of convening a shareholders' meeting
15 (Sections 4.7 .4 - 4.7 .7 of t,he Governance Agreement) . The
17 Province and Hydro One complied with all relevant and material
18 aspects of Section 4.7 of the Governance Agreement, but in order
!9 to serve the best interests of the company, the Province and
20 Hydro One agreed to forego the requirement to hold a
2l shareholders' meet,ing, which would have added approximately 50
22 days t.o the Board replacement. process. Hydro One concl-uded it
30 AVU-E-1,7-09/Avv-G-17-05 - Supplemental Testimony of .Tames Scarlett at pgs4-6 (Sept. 24, 2018) ("Scarlett Supplemental Testimony',).
Scarlett, Supp
Hydro
Reb. 34
One Limited
1 was in its best interests to expedite the
and reduce uncertainty,
sufficient number of
particularly since2
3
4
5
6
7
8
9
replacement process
the Province holds a
shares to determine the outcome of a
shareholder vote under Section 4.7 of the Governance Agreement.
served no useful purpose/haveA shareholders' meeting would
but would have been damaging to
10
Hydro One
With respect to former CEO Mayo Schmidt's retiremenL, one
might perceive Mr. Schmidt's retirement as forced by the
Province due to the Progressive Conservative Party's campaign
pledges to remove Mr. Schmidt. One might also take the position
that his retirement was in violation of Section 2.3 of the
Governance Agreement, which gives the Hydro One Board the sole
authority to appoint and terminate the CEO. This situation is
more nuanced than that.
As noted above, the Province has the authority to call for
the removal and replacement of the entire Hydro One Board, with
the exception of the CEO, and at the Province's sole discretion,
the Chair, pursuant to Section 4 .7 of the Governance Agreement.
Furthermore, Section 3.3.2 of the Governance Agreement reguires
that the Hydro One Board annually confirm the continued service
of the CEO through a two-thirds affirmative vote in a Special
Board Resolution at the Annua1 Confirmation Meeting. Rather
than wait to see if the Province might introduce legislation to
terminate his emplolrment, or Hydro One's new Board would either
Scarlett, Supp. Reb. 35
Hydro One Limited
1l-
L2
13
74
15
L6
]-'7
18
79
20
2L
23
24
1
)
remove him immediately or fail to confirm his continued service
pursuant to Section 3.3.2 of the Governance Agreement., Mr.
Schmidt removed uncertainty by retiring.
One can fairly conc1ude that Mr. Schmidt rea1ized he would
not be able to effectively cont.inue as CEO without the support
of Hydro One's single largest shareholder and he retired from
his positions, having determined that it would be in the best
int.erests of all concerned to do so.
V. COMPLIAIVCE WITH IDAIIO CODE S 61--327
O. Please summarize Commission Staff's position on
whether the Proposed Transaction complies with fdaho Code S 5l--
327 .1t
A. Commission St.af f asserts that because Hydro One's
Iargest shareholder is t.he Province, a governmental entity,
"Idaho Code S 51-327 may provide a tota1 bar to the proposed
merger. / 32
O. What does Idaho Code S 61-327 state?
A. Idaho Code S 61-327 provides:
6L-327. Electric utility property Acquisition by
certain public agencies prohibited. No title to or
interest in any public ut.ility (as such term is defined
in chapter 1, titl-e 61, Tdaho Code) property located in
this state which is used in the generaLion,
transmission, distribut.ion or supply of electric power
and energy to the public or any portion thereof, shall
31 Carlock DirecL Testimony at pgs . 2-3.
32 Carlock Di-rect Testimony at pgs . 2-3.
3
4
5
6
7
I
9
10
11
t2
13
74
15
t6
L7
18
a9
zu
2L
aa
23
24
25
26
ScarIett, Supp
Hydro
Reb. 35
One Limited
t_
2
3
A+
5
6
7
8
9
10
11
L2
13
74
15
L6
L7
18
L9
20
2L
22
23
24
z5
26
27
28
29
30
31
32
33
34
35
36
37
38
be transferred or transferable to, or acquired by,
directly or indirectly, by any means or device
whatsoever, any governmenL or municipal corporation,
quasi-municipal corporation, or government.al or
political unit, subdivision or corporation, organized or
existing under t.he laws of any other state i or any
person, firm, association, corporation or organization
acting as trustee, nominee, agent or representative for,
or in concert or arrangement with, any such government
or municipal corporation, quasi-municipal corporation,
or governmental or political- unit, subdivision or
corporation; or any company, association, organization
or corporation, organized or existing under the laws of
this state or any other state, whose issued capital
stock, or other evidence of ownership, membership or
other interest therein, or in the property thereof, is
owned or controlled, directly or indirectly, by any such
government or municipal corporation, quasi-municipal
corporation, or governmental- or political unit,
subdivision or corporation; or any company, association,
organization or corporation, organized under the laws of
any other state, not coming under or within the
definition of an electric public utility or electrical
corporation as contained in chapter L, title 61, Idaho
Code, and subject to the jurisdiction, regulation and
control of the public utilities commission of t.he state
of Idaho under the public utilities l-aw of this state;
provided, nothing herein shall prohibit the transfer of
any such property by a public utility to a cooperative
electrical corporation organized under the faws of
another state, which has among its members mutual
nonprofit or cooperative electrical corporations
organized under t.he laws of the staLe of Idaho and doing
business in this state, Lf such public utility has
obtained authorization from the public utilities
commission of the state of Idaho pursuant to section 5l--
328, Idaho Code.
A. Do you agree with Staff's contention that, Idaho Code
39 S 61-327 could bar to the Proposed Transaction?33
33 Carlock Direct Testimony at pgs. 2-3.
Scarlett., Supp. Reb. 37
Hydro One Limited
1 A. I do not bel-ieve that Idaho Code S 61-327 bars or even
2 applies to the Proposed Transaction. This question has also
3 been addressed by Avista's and Hydro One's expert witness David
4 Leroy, who is sponsoring his independent Iegal opinion in that
5 regard, as well as by AvisLa's Senior Director of Government
5 Rel-ations, ML. Collins Sprague in his supplement.al testimony,
7 toget.her with any argument by counsel for Applicants.
I Q. What facts are relevant to the Commission's assessment
9 of whether the Proposed Transaction is barred by Idaho Code S
10 6L-327?
11 A. A number of facts are rel-evant to determining whether
12 Idaho Code S 51-327 bars or even applies to the Proposed
l-3 Transaction, which I will address in this section of my
74 t.estimony.
15 O. Please describe the nature of t,he Proposed
76 Transaction.
l7 A. It is a merger. An indirect subsidiary of Hydro One
18 will merge with and into Avista. Avista will be the surviving
19 corporation.
20 O. Will Avista Corporation continue to exist aE a
2t distinct legal entity?
22 A. Yes. The same corporation will continue to exist..
23 Avista will have its own board of directors and its own CEO.
24 It will operate as a stand-al-one utility.
Scarlett, Supp. Reb. 38
Hydro One Limit.ed
1 Q. what, will happen to Avista's property and other
2 asEetg?
3 A. None of Avista's property or other assets will change
4 hands. Avist.a wiII continue to own, control, and operate all
5 of the assets it has for the provision of electric and gas
5 service in Idaho and other states in the U.S. Pacific Northwest.
7 Q. ff Hydro One is not acquiring Avista's assets, what
8 is Hydro acquiring?
9 A. Hydro One, through an indirect subsidiary, is
10 essentially buying all the shares of AvisLa's stock from
11 Avista's current shareholders. Thus,
from investors in Avista.
Hydro One is acquiring
It is not buying any of12
13
1-4
property
Avista's
o.
own property.
After the merger is complete, could Hydro One require
transfer any of its utility assets to Hydro One orL5 Avista to
15
l7
18
79
20
2L
22
23
anyone else?
A. No. That is impossible for several reasons.
Stipulated Commitment 46 expressly prohibits any pledge of
Avista's utility assets for the benefit of any entity other than
Avista. And Avista's board retains broad control- over utility
operations. For example, Avista (and not Hydro One) determines
Avista's organizat.ional structure; has sole authority over the
hiring and firing of Avista's CEO and other Avista personnel;
selects its representatives to its board; plans its operations;
Scarlett, Supp
Hydro
Reb. 39
One Limited
24
1 invests in economic development including property
2 acquisitions; funds innovation activities; and negot.iates labor
3 agreements. See Stipulated CommitmenLs 2-I3.
4 Q. Can Hydro One force action by Avista's board?
5 A. No. Only two members of Avista's nine-member board
6 are Hydro One executives or employees. See Stipulated
7 Commitment 3.
I Q. AE a result of the merger, wiLl there be any direct
9 or indirect transfer of title to or an intereet in any type of
10 property t,hat is used by Avista to generate, transmit,
11 distribute or supply electric power?
72 A. No, there wiII be no transfer of property. Avista
13 will retain all of its property. Furt.hermore, fio int.erest in
74 Avista's propert.y will be transferred to, or acquired by, Hydro
15 One as a result of the Proposed Transaction.
16 O. Who wiLl own Avista after the merger has been
77 compleEed?
18 A. The immediat.e owner wiII be Olympus Equity LLC, a
79 Delaware limited liability company. The ultimate owner will be
20 Hydro One because Olympus Equity LLC is a wholly owned indirect
2L subsidiary of Hydro One.
22 A. Is Hydro One a Gowernmental Entity,
z5 "Governmental Entity" means any government
corporation, quasi-municipal corporat,ion, or
assuming that
or municipal
governmental or
Scarlett, Supp
Hydro
Reb. 40
One Limited
24
I political uniE, subdivision or corporation, organized or
2 existing under the laws of any other statei or any perEon, firm,
3 associaEion, corporation or organization acting as t,rustee,
4 nominee, agent or repreaentative for, or in concert or
5 arrangement with, any euch government or municipal corporation,
6 quasi-municipal corporation, or governmental or political unit,
7 subdivision or corporation?
8 A. No. Hydro One is a corporation formed under the laws
9 of Ontario, much as Avista is (and will remain) a corporation
10 formed under the l-aws of Washington.
11 A. Does Hydro one have issued capital stock?
L2 A. Yes. Hydro One has issued capital stock, which is
L3 traded on the Toronto Stock Exchange (TSx).
L4 A. Is Hydro One's capital stock owned or controlled,
15 directJ.y or indirectly, by a Government,al Entity?
15 A. A number of investors, including some investors that
L7 are governmental entities, own some of Hydro One's capital
controls all or even al-8 stock. No single investor owns or
L9
20
2L
22
23
majority of Hydro One's capit.al stock.
controlling interest in Hydro One.
A. Among your invegtors, which
the largesE?
A. The largest is the Province,
approximately 472 of Hydro One's stock.
Thus, no investor has a
Governmental Entity is
which currently owns
After completion of the
Scarlett, Supp. Reb. 41
Hydro One Limited
24
2
-,
4
5
6
7
8
9
1 merger, the Province will own less than 432 of Hydro One's
stock.
O. P1ease describe the role of the Province with respect
to Hydro One.
A. The rol-e of the Provj-nce with respect to Hydro One is
established by t.he Governance Agreement that was entered int.o
in 20L5.34 The Governance Agreement between Hydro One and the
Provj-nce of Ontario is a binding contract that was a pre-
requisite for Hydro one's successful Initial- Public Offering
("IPo") Neither t.he Province nor any other major investor has
any representatives on the Hydro One Board. Instead, wit.h t.he
exception of the CEO, aII directors must be independent of Hydro
One and t.he Province. (Governance Agreement ("GA" ) 4 -2 .2;
4.2.3) . Directors must be high-quaIit.y, reputable, experienced
Ieaders with the requisite skiIls, board experience, time, and
motivation for an operation of Hydro One's size and scope.
Directors are al-so chosen in light of Hydro One's core operating
principles. (GA 4.2.1). DirecLors musL meet the reguiremenLs
of corporate and securities laws and any stock exchange on which
Hydro One securities are Iisted. (GA 4.2.4) .
The Province nominates four of the ten directors (other
t.han the CEO) , while Hydro One's Governance Committ.ee nominates
10
11
L2
13
74
15
16
17
18
79
20
2L
34 Scarlett supplemental Testimony, Exh. No. 10, Schedule 3.
Scarlett, Supp. Reb
Hydro One
4)
Limited
aa
1
z
3
4
5
6
7
I
v
six of t.he ten. (cA 4.1) . The Board itself chooses the CEO,
who serves as the l1th member of the Board. The Province does
have the authority to resignation of al-1, Board members,requlre
stiIl
10
but if it does so, it.can appoint. only forty percent of
the new Board members, and aIl Board members must meet
independence and other qualifications.
The Governance Agreement establishes that the Board is
responsible for the management of or supervising the management
of Hydro One's business and affairs. (GA 2.L.2). The Governance
Agreement states that t,he Province will be involved in Hydro
One as an investor and not as a manager. (GA 2.t.3). Hydro
One neither takes direction nor seeks consent for its operations
from the Province, outside of the defined regulatory and
oversight authority that the government has over the aI1
utilities operating in Ontario. (Ca 2.1.3, 2.2) .
Several provisions in the Governance Agreement limit the
Province' s shareholder rights :
o The Province cannot initiate fundamental changes to
Hydro One described in Part XIV of the Business
Corporations Act (Ontario) (e.9., amendment to
articles, continuance, arrangements, and
amalgamations). (Ca 2.5). The Province may vote its
shares as it sees fit in the event a fundamental-
change is initiated by another shareholder. (cA 2.5).
Scarlett, Supp. Reb. 43
Hydro One Limit.ed
1l-
L2
13
L4
15
t6
L7
18
79
20
2L
22
23
24
1
z
3
4
5
6
o The Province cannot solicit (either on its own or
acting with others) any person to exercise rights as
a shareholder in a manner that the Province would be
prohibited from doing directly. (cA 2.6) .
Does the Province control Hydro One'E stock?
No, it does not. ft current.Iy owns less t.han 50? of
and, upon closing of the
share will be l-ess than 43?
Proposed Transaction, it.s
More than half of Hydro
investors other than the
7
6
9
o.
A.
the stock
ownershi-p
One's stock is
10 Province. The
and will be owned by
Governance Agreement.3s prohibits the
if that woul-d
None of Hydro One's investors owns or control-s
expressly
11 Province from acquiring additional issued shares
72 result in the Province having cont.rol- over more than 45% of any
13 class or series of shares. (ea 2.7) .
1,4 O. Is Hydro One's property owned or conErolled, directly
15 or indirectly, by a Governmental Entity?
76 Hydro One wholly owns and controls all of its
L7
18
79
20
2L
A. No.
own property.
any of Hydro One's property.
ownership interestrepresent an
sharehol-der holds any interest
O. If the merger is eompleted, what
Prowince have with Avista?
The shares that investors own
in the company as a whole. No
in any Hydro One property.
role would the
3s Scarlett Supplemental Testimony, Exh. No. 10, Schedule 3.
ScarIett, Supp
Hydro
Reb. 44
One Limited
22
I A. The Province would have no ownership of or control
2 over Avista. It would receive no revenues from Avista. To the
3 extent Hydro One makes dividends to its invesLors, regardless
4 of the source of Hydro One's funds, the Province and other
5 investors wilI receive dividends proportionate to their
5 ownership interests. The absence of control- is reinforced by
7 the Avista Board structure, where only two of nine board members
8 will be executives or employees of Hydro One, as well as the
9 Hydro One board structure, where no board members may be
10 executives or employees of Lhe Province.
]-L A. Does Hydro one serve as a trustee, nominee, agent or
L2 representative for, or in concert or arrangement with, the
l-3 Province?
14 A. No, Hydro One does not serve in such a role. These
15 are 1egaI concepts that would need to be established by re1evant
16 facts. There is no evidence to suggest that any supporting
77 facts exist.
18 O. Will Hydro One and its affiliates in the chain of
19 ownership between Hydro One and Avista be subject to the
20 jurisdiction, regulation, and control of the Commission under
2L the public
A.
utilities law of this st,at,e?
zz Yes, Hydro One
23 chain wiII be subject to
and its affiliates in the ownership
the Commission's jurisdiction under
the Master List of Commitments. ^See
Scarlett, Supp.
Hydro
Reb. 45
One Limited
24 Idaho l-aw as seL forth in
1
z
3
4
5
6
7
B
9
Stipulated Commitment. Nos. 20 (State Regulatory Aut.hority and
.Turisdiction); 21 (Compliance with Existing Commission Orders);
23 (Audit, Access to and Maint.enance of Books and Records); 30
(Commission EnforcemenL of Commitments); 3l- (Submittal to State
Court ,furisdict.ion for Enforcement of Commission Orders) ; 33
(Commit.ments Binding) ; 74
Amend); and 75 (Venue for
(Notice and Petition to AIter or
and Resolution
10
recognized and affirmed by Commission Staff,
retain regulatory jurisdict.ion over Avista
Transact j-on just as it has in the past..
Proposed TransacLion changes the Commission' s
Avista's rates and quality of service.35
of Disputes). As
the Commission will
after the Proposed
Nothing about. t.he
jurisdiction over1l_
l2
13
1-4 VI. COMPLIA}iICE WITH IDAIIO CODE S 61.328
15 O. Does Commission SEaff conclude that the Proposed
16 Transaction complies with Idaho Code S 51-328?37
l7 A. Yes. Commission Staff concludes that (i)the Proposed
(Idaho Code18 Transaction is consist.ent with the public interest
79 S 61-328(:) (a)),38 (ii) Avista's cost of and rates for supplying
20 service will not be increased by reason of the Proposed
2L Transaction (Idaho Code S 5l--328 (3) (b) ) ,:g and (iii) Hydro One
35 Carlock Direct. Testimony at pg. 5, lines 4-16-
3? Carlock Direct Testimony at pgs. 3-5.
38 Carlock Direct Testimony at pg. 4, lines l:--25
3e Carlock Direct Testimony at pgs. 3-5.
Scarlett, Supp. Reb. 46
Hydro One Limited
4
5
l- has the bona fide int.ent and financial ability to operate and
2 maintain Avista in t.he public service (Idaho Code S 51-
3 328(3) (c)).^o
With respect to Idaho Code S 51-328 (3) (a) , Commission Staff
note that although the public interest requirement is judged
based on a "no harm" standard, the partiesal negotiated
Stipulated Commitments Lo ensure t.hat. Avista's customers will
"receive a net overall financial benefit"42 a step above and
s 51-328 (3 ) (b) ,
6
7
I
9
l-0
1-2 increase rates to
13 that AvisLa's cost
" [a] ny customer rate increase
Commission before Avista can
customers t " 43 thereby ensuring
for supplying service will not
beyond "no harm."
Commission Staff
must be approved
With respect
emphasizes that
by the Idaho
Idaho Avista
of and rates
to Idaho Code
11
L4 be increased by reason of the Proposed Transaction.
15 O. Do you agree wit,h Commission Staff that the Proposed
16 Transaction complies with Idaho Code S 61-328?
17 A. Yes.
18 O. Which of the Stipulated Commitments in Exhibit 10L to
1-9 Terri Carlock's Direct Testimony ensures that the Proposed
a0 Carlock Direct Testimony at pg. 4, lines 1,9-25.
41 As not.ed above, the Avista Customer Group and ldaho Department. of Water
Resources ("IDWR") were not granted intervention in this proceeding until
'Ju1y 19, 20L8, and ,lu1y 20, 20\8, respectively. The Avista Customer Grouphas not joined the Stipulated Settlement. IDWR settled its concerns withthe Proposed Transaction in a separate agreement with Hydro One and Avistathat is attached to the Stipulated Commitments.
a2 Carlock Direct Testimony at pg. 7, lines 20-23.
43 Carlock Direct Testimony at pg. 3, lines 14-15.
Scarlett, Supp. Reb. 47
Hydro One Limited
1 Transaction is consistent with the public interest (fdaho Code
2 s 5L-328 (3) (a) ) ?
3 A. Hydro One, Avista, Commission Staff, Clearwater Paper
4 Corporation ("Clearwater"), Idaho Foresl Group, LLC ("Idaho
5 Forest Group"), Idaho Conservation League ("ICL"), the Community
5 Action Partnership Association of Idaho ("CAPAI"), and the
7 Washingt.on and Northern Idaho District Council of Laborers
I ( "WNIDCL" ) agreed to numerous Stipulated Commitments that ensure
9 that the public interest wilI be served by the Proposed
l-0 Transaction.
11 The following Stipulated Commitments ensure that. Avista's
12 Idaho customers will continue to receive safe and reliable
13 service after the Proposed Transaction is consummated:
L4 o 15 - Safet.y and Reliability Standards and Service
15 Quality Measures: Avist.a is working with Commission
L6 Staff to develop performance standards, customer
77 guarantees, and a report.ing mechanism for its
18 customers in Idaho that are similar to Avista's
19 Service Quality Performance Standards, Customer
20 Guarantees, and a Servj-ce Quality Measure Report Card
21, in Washington.
22 o 28 - Participation in National- and Regional Forums:
23 Avista will continue to participate in national and
Scarlett, Supp. Reb. 48
Hydro One Limited
1_
2
3
4
5
6
regional forums to protect the interest of its
customers.
The following Stipulated Commitments ensure that Avista's
Idaho customers wilI receive benefits after the Proposed
Transaction is consummated:
o 19 - Rate Credits: See Lopez Rebuttal Testimony.
. 58 - Funding for Energy Efficiency, Weatherization,
Conservation, and Low-Income Assistance Programs:
$5.3 million in funding over a 10-year period for
energy efficiency, weatherization, conservation, and
low-income assistance programs under the direction of
the Efficiency, Weatherization, Conservation, and
Low-Income Assistance Committee ("EWCL") .
. 62 - Addressing Other Low-Income Customer Issues:
Avista will continue to work with 1ow-income agencies
to address issues of 1ow-income customers.
o 53 - Fee Free Payment Program: Avista wiII continue
to offer the Fee Free Payment Program to its
residential customers.
The following Stipulated Commitments ensure that several
programs designed to assist Avista's customers will be enhanced
after the Proposed Transaction is consummated:
Scarlett., Supp
Hydro
Reb. 49
One Limited
7
6
9
10
11
L2
13
L4
15
15
T7
18
79
20
2L
22
1 o 67 - Service Rufes for Gas Utilities: Process to
2 review the Commission's Service Rules for Gas
3 Utilities (IDAPA 31.31.01) to determine which
4 provisions should be retained and/or modified.
5 . 58 - Meters: Process to review Avista's meter
5 placement and protection policies and practices.
7 The following Stipulated Commitments ensure benefits to
8 the environment after the Proposed Transaction is consummated:
) c 52 - Renewable Energy Resources: Avista will continue
10 to offer renewable power programs in consultation wit.h
1l- st.akehol-ders.
12 . 55 - Transport Electrificat.ion: Avista will initiate
l-3 a stakeholder process within 50 days of the cl-ose of
14 the Proposed Transact.ion t.o explore opportunities for
15 transport electrification that benefit.s all Idaho
76 customers.
77 o 55 - Greenhouse Gas and Carbon Initiatives: AvisLa
18 will continue to work with interested parties on its
19 Greenhouse Gas and Carbon Initiatives.
20 . 57 - Greenhouse Gas Inventory Report: Avista will
2l report greenhouse gas emissions as required.
Energy Efficiency, Weatherization,22 58 - Funding for
Conservation, and Low-Income Assistance Programs
Scar1ett, Supp
Hydro
Reb. 50
One Limited
23
a
l_
2
3
4
5
6
7
8
9
$5.3 million in funding over a 1-0-year period for
energy efficiency, weatherization, conservation, and
1ow-income assistance programs under the direction of
The EWCL.
The following Stipulated Commitments ensure that. the
communities in which Avist.a operates will receive benefits after
the Proposed Transaction is consummated:
. 11 - Community Contributions: For five (5) years after
the close of the Proposed Transaction, Avista will
maintain a $4 million annual budget for charitable
contributions, and additionally, a $2 million annual
contribution will be made to Avista's charitable
foundation.
. L2 - Community Involvement: AvisLa will maintain its
existing IeveIs of community involvement.
o 59 - Clearwater Paper DSM Assist.ance: Avista wiII
support efforts with Clearwater Paper to qualify
certain projects for DSM funding under Tariff Schedule
90, and a portion of the costs will be considered for
funding under Stipulated Commitment No. 58.
o 50 - Idaho Forest Group (IFG) DSM Assist.ance: Avista
will support efforts with IFG to qualify certain
projects for DSM funding under Tariff Schedule 90,
Scarlett, Supp. Reb. 51
Hydro One Limited
10
11
L2
13
L4
15
76
1"7
18
79
20
2L
22
23
l_
a
3
4
5
6
7
a
a
a
a
a
and a portion of t.he cost.s will be considered for
funding under Stipulated Commitment No. 58.
61 - Community Contributions: Avista will make a $7
million one-t.ime cont,ribution to Avista's charitable
foundation.
54 - Improve Penet.ration of Low-Income Programs: Hydro
One and Avista will continue to work to improve the
penetration rate of low-income programs.
65 - Tribal Communities: Avista wiIl reach out to
tribal communities to encourage part.icipation of
members of such communj-ties in receiving the benefits
of this settlement.
70 - Montana Community Transition Fund: Hydro One wil]
arrange funding of $3 million towards a CoIst.rip
community transition fund.
77 - Colstrip Transmission Planning:
with others to resolve questions
Avista wil-l- work
regarding new
4 retire, and
I
9
10
11
12
13
74
15
76
1-7
t8
79
20
2t
generat ion
work with
determine
ratepayers
and 4.
once Colstrip Units 3 and
Commission Staff and stakeholders to
the transition plan and impacts to Idaho
Colstrip Units 3prior to any closure of
Scarlett., Supp. Reb. 52
Hydro One Limited
22
t-
2
3
4
5
6
7
I
9
. 72 - Contract Labor: Al1 employees, contractors, and
subcontractors of Avista sha11 be paid a fair and
competitive wage.
The Rebutta1 Testimony of Chris Lopez for Hydro One, filed
November 14, 201-8 ("Lopez Rebuttal Testimony"), 1ist.s additional
commitments that ensure the Proposed Transaction is in the
public interest.
O. Besides these Stipulated Comrnitments, what factors
demonstrate that the Proposed Traneaction is consistent with
the public interest (tdaho Code S 5L-328 (3) (a) ) ?
A. Hydro One's strong balance sheet and crediL ratings,
the similarities in the areas served by Hydro One and Avista,
and the two utilities' shared values and culture make Hydro One
an excellent parent company for Avista, which is a relatively
smal1 utility in a time of consolidation in the energy industry.
These factors are detailed in former Hydro One CEO Mayo
Schmidt's direct testimony,aa Christopher Lopez's directas and
supplemental testimony, a5 and Scott Morris' directaT and
supplemental testimony. ag
44 Schmidt Direct Testimony at pgs . 26-29.
4s AVU-E-l-7-09/AW-G-17-05 - nirect Testimony of Christopher F. Lopez at pgs.8-10, L3-l-4, 15-15 (Sept.. 14, 20L7).
45 AVU-E-l-l-os/evu-e-17-05 - Supplemental Testimony of Christopher F. Lopezat SS III-IV (Sept. 24, 201-B) .
4? AvU-E-17-09/AW-c-L?-05 - Direct Testimony of Scott L. Morris at pgs. 1-2-
1-7 (Sept. 14, 20)"7) .
48 AVU-E-17-09/AW-G-I-7-05 - Supplemental Testimony of Scott L. Morris at SII (Sept. 24, 2018) .
10
11
L2
13
74
l-5
L6
L7
1B
t9
Scarlett, Supp
Hydro
Reb. 53
One Limited
1 Q. Which of the Stipulated Commitments in Exhibit 101 to
2 Terri Carlock's Direct Testimony enaurea that Avieta's cost of
3 and rates for supplying service will not be increased by reason
4 of the Propoeed Transaction (ldaho Code S 61-328(3) (b))?
5 A. Please see the Lopez Rebuttal Testimony.
6 Q. Which of the Stipulated Commitments in Exhibit 101 Eo
7 Terri CarLock's Direct Testimony enaures that Hydro One has the
8 bona fide int,ent and financial ability to operate and maintain
9 Avista in the pr:blic service (Idaho Code S 61-328(3) (c))?
10 A. Pl-ease see the Lopez Rebuttal Testimony and the
11 Rebut.tal Testimony of Tom V'Ioods for Hydro One, filed November
12 14, 201-8.
13 A. Does this conclude your rebuttal testimony?
74 A. Yes, it does.
Scarlett, Supp. Reb. 54
Hydro One Limited