20050715Johansen direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
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APPLICATION OFMIDAMERICAN
ENERGY HOLDINGS COMPANY AND
PACIFICORP DBA UTAH POWER &
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LIGHT COMP ANY FOR AN ORDER
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TRANSACTION
) /CASE NO. P AC-O5-
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) Direct Testimony of Judi A. Johansen
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P A CIFI CO RP
CASE NO.PAC-05-
July 2005
Introduction
Please state your name and business address.
My name is Judi Johansen, and my business address is 825 NE Multnomah St
Suite 2000, Portland, OR 97232.
By whom are you employed and in what capacity?
I am employed by PacifiCorp as CEO and President. I also serve on the Board of
Directors of Scottish Power pIc ("ScottishPower
Please summarize your education and business experience.
I have a bachelor s degree in political science from Colorado State University and
a law degree from Northwestern School of Law at Lewis & Clark College in
Portland, Oregon. I have over 15 years experience at an executive level within
the utility industry. Prior to joining PacifiCorp in December 2000, I was the
administrator and chief executive officer for Bonneville Power Administration
(BP A). Within BP A I served a number of different senior roles including vice
president for generation supply with executive oversight of power supply,
scheduling, trading, short -term sales and federal and non-federal projects. In
addition to my roles at BP A, I have held the role of vice president of business
development with Avista Energy, was a partner in the law firm Gordon, Thomas
and Honeywell, and served as staff attorney for the Public Power Council, a trade
association of Northwest consumer-owned electric utilities.
What position will you hold with PacifiCorp after the transaction is closed?
I will be the President of PacifiCorp.
Johansen, Di -
PacifiCorp
Summary of Testimony
What is the purpose of your direct testimony in this proceeding?
The purpose of my testimony is to provide a broad overview of PacifiCorp
business activities, to briefly discuss why ScottishPower is selling PacifiCorp to
MidAmerican Energy Holdings Company ("MEHC") and to explain why
PacifiCorp supports the proposed acquisition by MEHC as serving the public
interest.
Overview
Please describe the nature of Pacifi Corp s business.
PacifiCorp is an integrated, investor-owned public utility providing electric
service to customers in California, Idaho, Oregon, Utah, Washington and
Wyoming. PacifiCorp is a wholly-owned subsidiary of ScottishPower which is
headquartered in Glasgow, Scotland.
Is ScottishPower selling PacifiCorp as a consequence of poor operational
performance?
No. Since the completion of the merger in 1999, and sticking closely to a strategy
of focusing on the core regulatory business, PacifiCorp has steadily improved its
operational performance.
Could you provide some examples of these operational improvements?
Yes. Since the merger we have made steady progress in a number of areas
including customer service, the environment, safety, asset performance, and risk
management.
Johansen, Di - 2
Pacifi Corp
Please describe the customer service improvements.
With respect to customer service, one of the primary standards by which we judge
call center performance is the service measure that deals with answering calls
within a specified number of seconds. We have verified that our targeted
performance of 80 percent of calls answered within 30 seconds remains at the
highest end of service levels provided by other U.S. electric utilities.
Since the 1999 merger, our Customer Guarantee Program has been highly
successful in backing our service to customers with a promise to pay. The
guarantees highlight key areas of day-to-day performance such as restoration of
power, new service connection, investigation of bill or meter problems, providing
notice of planned interruptions and keeping appointments. During 2004/5, with
approximately 3 million opportunities to serve customers annually under our
guarantee program we succeeded 99.9 percent of the time in meeting our
comIhitments.
Our commitment to service was also recognized recently when, for the second
year in a row, we were awarded first place in a TQS survey of large electric
customers.
Please describe the Company s environmental record.
With regard to the environment, and with the support and guidance given to us by
our Environmental Forum, we have:
implemented environmental management systems at our owned plants;
commenced an emissions abatement project at the Huntington #2 plant
that, when fully operational in 2007, will reduce emissions of sulfur
Johansen, Di - 3
PacifiCorp
dioxide by 95 percent, particulate emissions by 80 percent, and emissions
of nitrogen oxide by 40 percent;
signed up over 25 000 customers to purchase renewable power through
our Blue Sky program;
pioneered the use of a carbon adder in resource procurement;
added wind capacity of 108 MW and over 70 MW of DSM; and
developed avian protection measures to reduce bird mortality.
In recognition of these achievements, we have recently won environmental
awards for our pricing programs, public-private partnerships and environmental
reports.
Please describe the Company s record with respect to safety.
We have continued to improve our employee and public safety records.
Underpinning this improvement has been the implementation of numerous new
initiatives including wellness programs, ergonomics training and improved
communications. Regarding public safety, the Associated Electric & Gas
Insurance Services (AEGIS) recently honored PacifiCorp by publicly recognizing
the company as a top tier performer.
Please describe the Company s operational performance.
We have delivered our merger commitment of a 10 percent reduction in System
Average Interruption Frequency Index (SAIFI) and System Average Interruption
Duration Index (SAID!), in some states a year early. This has been achieved
through initiatives such as the centralization of our asset management function
and the introduction of an asset risk and prioritization tool.
Johansen, Di - 4
Pacifi Corp
Although we have seen increased levels of forced outages as our plants
continue to grow older, the overall equivalent availability performance of our
generation fleet remains high when compared to the rest of the sector. In addition
our mining business continues to deliver some of the lowest cost coal in the U.
on a delivered basis.
Please describe the Company s record with respect to risk management.
With respect to risk management, and as part of a ScottishPower group-wide
program, we were one of the early adopters of a much stronger risk management
program. We continue to invest in systems, in particular in our commercial and
trading business, aimed at reducing our risk exposure within the commodity
markets.
Has PacifiCorp s financial performance played a major role in the decision
taken by ScottishPower to sell it to MERC?
Yes. While PacifiCorp s U.S. GAAP Earnings Before Interest and Tax (EBIT)
has shown steady growth since 2000-2001 , a major disappointment for
ScottishPower and its shareholders has been the inability of PacifiCorp to earn its
allowed return on equity. We believe this is due to a combination of two main
Issues:
the negative impact of volatility in our fundamentals, primarily in the
areas of load, hydro and thermal availability; and
an inability to match the growing cost of our capital investment program
with additional revenues generated through either general rate cases or
contributions from load growth.
Johansen, Di - 5
PacifiCorp
Could you please explain the main investment requirements facing
PacifiCorp going forward?
Like many U.S. utilities, in the years ahead, PacifiCorp will face cost pressures
from the substantial new capital investment and forecast increases in operating
costs. These pressures fall within the following general areas:
addition of new generation and transmission to meet PacifiCorp s resource
needs across both the East and West side of the network;
replacement/maintenance of existing generation, transmission and
distribution assets that are reaching points of maturity, or even the end of
their operational lives;
rising commodity costs (including oil, gas, coal and steel) caused by
global shifts in supply and demand;
replacement of low-cost, long~term wheeling and wholesale
purchases/sales contracts;
new environmental capital and operating costs linked to implementation of
clean air, hydro re-licensing and potential CO2 initiatives;
rising pension and benefits costs; and
attracting and retaining key skilled personnel combined with an aging
workforce.
Are these costs solely attributable to system load growth?
No. A significant proportion of these cost increases result either from structural
shifts in the variable cost to serve, (e., rising commodity costs/expiration of
wholesale contracts) or are increases in fixed costs due to both the need to meet
Johansen, Di - 6
PacifiCorp
, 16
our environmental obligations and a requirement to replace a significant
proportion of our transmission and distribution assets that are reaching the end of
their operational lives.
What level of capital expenditure will be needed to fund these issues?
We believe that at least $1 billion of capital expenditure per annum will need to
be invested in PacifiCorp going forward. When combined with the lag associated
with recovering rising operating costs within rates, we anticipate a reduction in
cash availability that will restrict our ability to provide dividend growth, and
adequate shareholder returns, over the short to medium term.
What average state price increases are implied by these cost increases?
We have already shared estimated cost projections with our states through our
Multi State Process. While we cannot fully predict the exact impacts (these
estimates are based on one forecast view of our future fundamental curves), we
believe that PacifiCorp s rates, even taking into account revenue from load
growth, will have to rise annually across all our jurisdictions by over 4 percent for
the foreseeable future.
How will this additional revenue requirement be recovered?
Irrespective of this transaction, PacifiCorp will need to evaluate all options on
how to improve our overall earned regulated returns. General rate cases remain
our current mechanism for recovering prudently incurred costs from customers.
However, we continue to examine other recovery mechanisms successfully
deployed by other companies and their commissions, such as Power Cost
Adjustment Mechanisms (PCAMs) and approaches using Alternative Forms of
Johansen, Di - 7
Pacifi Corp
Regulation (AFOR). Going forward, our intent will be to continue to work with
our key stakeholders to establish appropriate mechanisms that fairly balance risk
between customers and PacifiCorp while helping to provide rate certainty and
allowing us to fund our ongoing performance improvements.
How might these investment issues financially impact PacifiCorp under its
current ownership?
ScottishPower equity is predominately held by UK shareholders who value the
company on the basis of future dividend growth and a predictable, steady growth
in earnings. Although ScottishPower has the capacity to fund PacifiCorp
investment requirement going forward, having a predominately U.K. shareholder
base raises two significant challenges for ScottishPower:
PacifiCorp s investment program will continue to be a significant cash draw
on ScottishPower, reducing its ability to fund other, higher return business
opportunities and grow future dividends to shareholders; and
K. investors, and its principal financial analysts, having experienced the
consequences of the power crisis and the recent revisions to PacifiCorp
earnings outlook, perceive a high level of risk with PacifiCorp.
Why is ScottishPower selling PacifiCorp to MERC?
In November 2004, the ScottishPower Board of Directors commenced a strategic
review of PacifiCorp as a result of its performance and the significant investment
it required in the immediate future. The review concluded that the scale and
timing of the capital investment required in PacifiCorp and the likely profile
returns from that investment meant that shareholders' best interests were served
Johansen, Di - 8
PacifiCorp
by the sale of PacifiCorp to MEHC on the terms and conditions contained in the
sales purchase agreement.
What strategic advantage would MEHC offer PacifiCorp and its customers?
For specifics on the net customer benefits that will result from the transaction
please refer to MEHC witness Abel's testimony. In general terms, however, I
believe MEHC provides advantages that include:
access to significant amounts of new capital that will be required to fund a
sustained investment cycle;
an ability to take a longer term view of the required risk adjusted return than a
typical electric utility equity investor; and
access to, while subject to market conditions, attractively priced debt resulting
from MEHC's relationship with Berkshire Hathaway.
Why is the proposed transaction in the public interest?
There are five key factors that I believe ensure that this transaction serves the
public interest:
ScottishPower has announced its intention to sell PacifiCorp. In contrast
MEHC has communicated a business strategy of owning utility businesses for
the long term. MEHC already owns a vertically integrated U.s. utility and
will support PacifiCorp s investment needs thereby allowing it to continue its
focus on customer service, safety and operational excellence;
MEHC's willingness to invest, coupled with a solid track record in utility
operations, will help PacifiCorp maintain its relative low-cost competitive
position for customers in the face of its significant future investment needs;
Johansen, Di - 9
Pacifi Corp
. MEHC and PacifiCorp have very similar operating philosophies and
characteristics, which facilitates a smooth transition and long-term success
within the MEHC portfolio;
. MEHC fully supports PacifiCorp s strategy of maintaining a local presence
and the development of its business consistent with current policy and
practices; and
MEHC intends to retain PacifiCorp s current management team. This team
when combined with capabilities of MEHC, will be able to continue its track
record of operational improvements.
How have you reached these conclusions?
My conclusions are based upon MEHC's track record of proven success and the
values it has in common with PacifiCorp. MEHC has made considerable
investments at a reasonable cost to maintain and enhance the energy infrastructure
in the United States. Those investments recognize the importance of diverse
sources of electricity including significant renewable resources and expenditures
for energy efficiency. We both value the importance of customer service
evidenced by strong customer satisfaction results. We care deeply about the
safety of our employees through the ongoing safety training that is part of our
culture. We appreciate the responsibilities of regulators, and strive to keep them
informed. We both recognize the importance of respecting the environment in our
decision making process. Accordingly, I believe this transaction presents a
unique opportunity for PacifiCorp and is in the best interest of PacifiCorp
customers and key stakeholders.
Johansen, Di - 10
PacifiCorp
Does this conclude your direct testimony?
Yes.
Johansen Di - 11
PacifiCorp