20180627Comments.pdf

Norman M. Semanko, ISB #4761
PARSONS BEHLE & LATIMER
800 West Main Street, Suite 1300
Boise, Idaho 83702
Telephone: [phone]
Facsimile: 208.562.4901
NSemanko@parsonsbehle. com
[e-mail]
IN THE MATTER OF THE JOTNT
APPLICATION OF HYDRO ONE LIMITED
AND AVISTIA CORPORATION FOR
APPROVAL OF MERGER AGREEMENT
RECEIVED
20lS JUH 2? Pl{ l:55
.:,. r.
Attomeys for Avista Customer Group
BEFORE THE IDAHO PUBLIC UTILITY COMMISSION
CASE NOS. AVU-E-I7-09
AVU-G-17-05
COMMENTS OF
AVISTA CUSTOMER GROUP
COMES NOW, Avista Customer Group, (hereinafter "ACG"), through the undersigned
counsel of record, pursuant to the Commission's Order No. 34061 (May 16,2018), and hereby
submits these comments concerning the Application submitted in this matter by Avista Corporation
and Hydro One Limited. For the reasons set forth below, ACG requests that the Commission deny
the Application.
1. Avista Customer Group.
ACG is an unincorporated nonprofit association, composed of utility ratepayers, taxpayers
and concemed citizens, including electrical and natural gas utility service customers of the Co-
Applicant, Avista Corporation. ACG members stand to be impacted by potential cost or rate
increases resulting from the proposed merger of Avista Corporation with Hydro One Limited. It is
these increases that ACG seeks to avoid and which form the basis for denying the Application.
COMMENTS OF AVISTA CUSTOMER GROUP - Page I
2. Statutory Criteria for Review of Application.
Before authorizing the transaction, the public utilities commission shall find: (a) That the
transaction is consistent with the public interest; (b) That the cost of and rates for supplying
service will not be increased by reason of such transaction; and (c) That the applicant for
such acquisition or transfer has the bona fide intent and financial ability to operate and
maintain said property in the public service. The applicant shall bear the burden of showing
that standards listed above have been satisfied.
r.c. $ 6l-328(3).
3. Overview of Comments
Numerous written comments, as well as those provided orally at the public hearings,
including those by individual ACG members, have raised concerns regarding the proposed merger's
consistency with the public interest, as well as the intent and financial ability of the applicant. Those
comments will not be repeated here, but are nonetheless important to the Commission's review,
deliberations and ultimate decision regarding the proposed merger.
In these somments, ACG focuses on the second of the criteria in the statute: "That the cost
of and rates for supplying service will not be increased by reason of such transaction". The Co-
Applicants bear the burden of showing that this standard has been meet. As discussed below, they
have failed to do so. In fact, they have refused to provide the Commission with information that is
necessary in making this determination, most notably the cost allocation methodology for the
allocation of costs to Avista and, ultimately, its customers. Instead, they offer to provide the
relevant cost information only during the next general rate case, long after the merger transaction
has already been approved. That is too late. And it is inadequate to satisfy the burden that they
cany in this proceeding.
As further discussed below, this is nothing new for Hydro One, which recently refused to
supply cost information to the Ontario Energy Board (hereinafter "OEB"), in connection with
Hydro One's proposed acquisition of Orillia Power Distribution Corporation. That acquisition
COMMENTS OF AVISTA CUSTOMER GROUP -Page2
proposal was denied by OEB in April of this year, due to Hydro One's failure to establish that there
would be no harm to Orillia Power ratepayers arising from the proposed transaction. The OEB
decision (currently being appealed by Hydro One), attached hereto as Exhibit A, was further
informed by recent experiences involving other Hydro One acquisitions - which resulted in
significant proposed rate increases for the customers of those acquired companies. Similar concerns
now exist for Avista ratepayers as a result of the Application.
This should be contrasted with ScottishPower's acquisition of PacifiCorp nearly twenty
years ago, a proposal that was approved by the Commission on a 2-l vote. A copy of that order is
attached hereto as Exhibit B. As described further below, the Co-Applicants in that matter
submitted the necessary cost allocation information during the process, making it available to the
Commission, and thereby helping to satisfy the burden of showing that there would be no increase
in costs or rates to PacifiCorp customers in the future, as a result of the transaction. Again, Hydro
One and Avista have failed to do the same in this matter. That failure is fatal to the Application.
4. The Information Provided by the Co-Applicants is Insufficient to Demonstrate that Cqsts
and Rates Will Not Increase. thereby Requiring that the Application be Denied.
Along with the merger Application, Hydro One submitted the Direct Testimony of
Christopher Lopez, Hydro One Senior Vice President of Finance, on September 14, 2017. From
page I 7 of that testimony is the following about cost allocations:
"Q: Does Hydro One make any commitment with respect to how corporate costs will be
allocated?
A: Yes. Commitment23 provides that Avista will file cost allocation methodologies used to
allocate to Avista any cost related to Olympus Holding Corp. or its other subsidiaries and that
Avista will bear the burden of proof in any general rate case that any corporate or affiliate cost
allocation methodology it proposes is reasonable for ratemaking purposes."
COMMENTS OF AVISTA CUSTOMER GROUP - Page 3
The Direct Testimony of Patick Ehrbar, Avista Director of Rates, State and Federal
Regulation Department, was also submitted with the Application. Pages 12-13 set forth the
following testimony:
"The cost-allocation methodology provided pursuant to this commitment will be a generic
methodology that does not require Commission approval prior to it being proposed for specific
application in a general rate case or other proceeding affecting rates."
Finally, Exhibit A to the proposed Stipulation, at page l0 (Commitment 24) provides:
The cost-allocation methodology provided pursuant to this commitment will be a generic
methodology and does not require Commission approval prior to it being proposed fbr
specific application in a general rate case or other proceeding affecting rates. Avista will
bear the burden of proof in any general rate case that any corporate and affiliate cost
allocation methodology is reasonable for ratemaking purposes. Neither Avista nor Hydro
One or its affiliates and subsidiaries will contest the Commission's authority to disallow, for
retail ratemaking purposes in a general rate case, unreasonable, or misallocated costs from
or to Avista or Hydro One or its other affiliates and subsidiaries.
This is not a general rate case. The burden imposed on the Co-Applicants exists now, in
this proceeding, pursuant to I.C.$ 6l-328(3). The question is not whether the cost allocation
methodology is reasonable for ratemaking purposes. Rather, the question is whether the proposed
transaction - the merger - will result in an increase in costs or rates for Avista and its customers.
As the OEB aptly stated in its decision regarding Hydro One's proposed acquisition of
Orillia Power (attached hereto as Exhibit A and hereinafter referred to as "OEB Order"), the
"primary concern is that there is a reasonable expectation that underlying cost structures for the
acquired utility are no higher than they would have been had the consolidation not occuned." OEB
Order at 12, Also applicable here, the OEB stated: "While the rate implications to all customers
will be considered, for an acquisition, the primary consideration will be the expected impact on
customers of the acquired'fiility". Id.
In this matter, the primary consideration is the impact on customers of Avista. This is
especially pertinent given the Direct Testimony of Mayo Schmidt, President and CEO of Hydro One
COMMENTS OF AVISTA CUSTOMER GROUP -Page 4
(at pages 26-29), explaining that "the reasons for Hydro One's proposed acquisition of Avista"
include: "Together, with nearly two million customers, they can spread some of these costs over a
larger base" and "over a broader customer base. . .The markets that we are entering have expanding
economies and positive and growing customer demographics".
It is simply not possible for the Commission to determine the expected impact on Avista
customers without the required cost allocation information. The failure to provide this information
falls at the feet of the Co-Applicants and, absent the information being provided, cannot be cured
with a condition, another commitment, or lengthy explanations. This shortcoming is dispositive.
In the Orillia Power matter, "OEB ordered Hydro One to file further material, in the form
of evidence or submissions on its expectations of the overall cost structures following the deferred
rebasing period and the impact on Orillia Power customers. No new evidence was filed." OEB
Order at 10. Instead, "Hydro One submitted that at the time of rebasing, Hydro One will adhere to
the cost allocation and rate design principles, in place at such future time, ensuring that the costs
allocated to Orillia Power customers fairly and accurately reflect the new lower cost structure to
serve all customers." Id. at l0-l l.
In light of Hydro One's failure to submit the required cost information, OEB concluded that
Hydro One had failed to make the case that the underlying cost structures would be no greater than
they would have been absent the acquisition. "ln the absence of information to address that OEB
concern, the OEB cannot reach the conclusion that there will be no harm." Id. at 13.
This is the same posture that the Hydro One-Avista merger proposal is in. The Co-
Applicants have failed to satisfy their burden to demonstrate that costs or rates will not increase due
to the transaction. This requires that the Application be denied, pursuant to I.C. $ 6l-328(3).
COMMENTS OF AVISTA CUSTOMER GROUP - Page 5
Importantly, the OEB's conclusions were reached despite the fact that Hydro One submitted
that Orillia Power's customers would immediately benefit from a promised l% reduction in rates
during years 1 through 5 after the transaction. Id. at 8. Of course, the same kind of immediate
benefits, in the form of rate credits, are being offered to Avista customers by Hydro One in this
matter. The OEB stated that it "will not consider temporary rate decreases proposed by applicants,
and other such temporary provisions, to be demonstrative of 'no harm' as they are not supported
by, or reflective of the underlying cost structures of the entities involved and may not be sustainable
or beneficial in the long term." Id. at I l. The same is true in this matter.
Also "informative" to the OEB decision was "[t]he experience of the three acquired utilities
in Hydro One's current distribution rates case":
In the [acquisition] proceedings in which Hydro One acquired these utilities, Hydro One
pointed to savings that would be realized through the acquisition. Although these savings
may well have occurred, they do not appear to have resulted in overall cost structures (and
therefore rates) for customers of the acquired utilities that are no higher than they would
have been, once the deferral period ended and their rates were adjusted to account for Hydro
One's overall costs to serve them. Material filed in the Hydro One current distribution rates
case shows that some rate classes are expected to experience significant and material
increases, While the OEB has not approved these requested rates, this panel takes notice of
the proposed rate increases which Hydro One states are reflective of the costs to service the
acquired customers, and are inclusive of the "savings" that Hydro One states were realized.
Id. at 12-13.
The same kind of "benefits of scale" highlighted so prominently by Hydro One in this
proceeding were also emphasized by Hydro One in the Orillia Power matter. However, just as in
the Orillia Power matter, these uncertain, future o'savings" pale in comparison to the unanswered
questions regarding the overall cost structures (and therefore rates) for customers of the acquired
utilities. It is the Co-Applicants' responsibility to fill this void, which they have failed to do.
Recognizing "that it is not certain that Orillia Power customers' experiences would be the
same" as the other three utilities acquired by Hydro One, "the OEB provided Hydro One the
COMMENTS OF AVISTA CUSTOMER GROUP - Page 6
opportunity to file further evidence on what it expects the overall cost structure to be following the
deferral period and to explain the impact on Orillia's customers. Hydro One did not file further
evidence." Id. at13. In response, the OEB stated that it "is of the viewthat it would have been
reasonable to see a forecast of costs to service Orillia customers beyond the ten year period and an
explanation of the general methodology of how costs would be allocated to Orillia ratepayers after
the deferral period." 1d.
While similarly recognizing "that it is not certain" that Avista customers' "experiences
would be the same" as the other utilities acquired by Hydro One, a "forecast of costs to service"
Avista customers and "an explanation of the general methodology of how costs would be allocated"
to Avista customers are equally "reasonable" in this matter. Without this information, the
Commission cannot determine whether costs (and therefore rates) will increase and must therefore
deny the Application.
The Commission's own experience with the past acquisition of PacifiCorp by ScottishPower
nearly twenty years ago further demonstrates the critical role of cost allocation information in
making the decision required under the statute, particularly when a smaller utility is being acquired
by a larger one.
Condition No.34 of the Commission's Order No. 28213, attached hereto as Exhibit B,
recognized that during the Application proceedings, "ScottishPower/PacifiCorp provided the
Commission and other jurisdictional state rate regulators a proposed methodology for the allocation
of corporate and affrliate investments, expenses and overheads" and "scheduled a
conference/meeting with state and other interested regulators to discuss the proposed corporate and
affiliate cost allocation methodology" with "[flurther conferences/meetings. . .scheduled as needed
to discuss the cost allocation issue." Order No. 28213 (Exhibit B) at 14.
COMMENTS OF AVISTA CUSTOMER GROUP -Page7
These efforts ultimately allowed the Commission to make the critical finding that
"PacifiCorp will be assigned a fixed sum of corporate costs that is less than it currently incurs." 1d.
at 25. This is consistent with the OEB's requirement "that underlying cost structures for the
acquired utility are no higher than they would have been had the consolidation not occurred." OEB
Order at 12.
No such showing has been made by the Co-Applicants in this case. As a result, the Hydro
One-Avista merger Application must be denied.
DATED this 27th day of June 2018.
P BEHLE & LATIMER
By:
M.S
COMMENTS OF AVISTA CUSTOMER GROUP - Page 8
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing document was served on the
following on this 27th day of June, 2018 by the following method:
Larry A. Crowley, Director
The Energy Strategies, Inc.
5549 S Cliff s Edge Ave.
Boise, Idaho 83716
[e-mail]
Peter J. Richardson
Richardson, Adams, PLLC
515 N 27th Street
Boise, Idaho 83702
peter@richardsonadams. com
Benjamin J. Otto
Idaho Conservation League
710 N. 6th Street
Boise, Idaho 83702
botto @ idahoconservation. org
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates, LLP
925 4th Ave., Ste. 2900
Seattle, WA 98104-l158
liz.thomas@kl gates.com
kari. vanderstoep@kl gates. com
j scarlett@hydroone. com
Ronald Williams
Williams Bradbury, PC
P.O. Box 388
Boise, Idaho 83701
ron@wi I I iamsbradbury. com
David J. Meyer, Esq.
Vice President and Chief Counsel of
Regulatory and Government Affairs
Avista Corporation
14l I East Mission Ave.
Spokane, Washington 99220
david.mever@avistacorp. com
av i stado ckets (D,avi staco rp. c om
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COMMENTS OF AVISTA CUSTOMER GROUP - Page 9
Linda M. Gervais
Senior Manager, Regulatory Policy
Regulatory Affairs
P.O. Box 3727 MSC-27
Spokane, Washington 99220
Linda. gervais@avistacorp. com
Brandon Karpen
Deputy Attorney General
Idaho Public Utilities Commission
472W Washington
Boise, Idaho 83702
Brandon.karpen@puc. idaho. gov
Patrick Ehrbar
Avista Corporation
l4l1 East Mission Ave.
Spokane, Washington 99220
Patrick. ehrbar@avistacorp. com
Washington and Idaho Northem District
Counsel ofLabors
Danielle Franco-Malone
Schwerin Campbell Barnard Iglitzin
Lavitt LLP
l8 W Mercer Street, Ste. 400
Seattle, Washington 98 1 19-397 |
[e-mail]
Dr. Dawn Reading
6070 Hill Road
Boise, Idaho 83703
dreadin g@mindsprin g. com
Brady M. Purdy
Attorney at Law
2019 N. l Tth Street
Boise, ID 83702
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COMMENTS OF AVISTA CUSTOMER GROUP - Page 10
deanj [e-mail]
caro l. hauen@ clearwaterpaper. com
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i ohn j acobs@clearwaterpaper. com
david. wren@clearwaterpaper. com
nathan. smith@clearwaterpaper. com
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M.
COMMENTS oF AVISTA CUSTOMER GROUP - Page 11 4812-6375-7420v2
Exhibit A
Ontario Energy Board
Gommission de I'6nergie de l'Ontario
Ontario
DECISION AND ORDER
E8-201 6-0276
HYDRO ONE INC.
ORILLIA POWER DISTRIBUTION CORPORATION
Application for approval to purchase Orillia Power Distribution
Corporation
BEFORE: Ken Quesnelle
Presiding Member and Vice-Chair
Christine Long
Member and Vice-Chair
Cathy Spoel
Member
April 12,2018
-.L-
1
2
3
3.1
3.2
4
4.1
4.2
5
6
TABLE OF CONTENTS
INTRODUCTION AND SUMMARY...... .........1
OEB POLICY ON RATE.MAKING ASSOCIATED WITH CONSOLIDATION. T
DECISION ON THE ISSUES 8
APPLICATION OF THE NO HARM TEST 8
OTHER APPROVAL REQUESTS 18
CONCLUSION 20
ORDER 21
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Corporation
1 INTRODUCTION AND SUMMARY
This is the Decision of the Ontario Energy Board (OEB) regarding an application filed by
Hydro One lnc. (Hydro One).
On September 27,2016, Hydro One filed an application requesting the OEB's approval
to acquire all of the shares of Orillia Power Distribution Corporation (Orillia Power).
As part of the proposed share acquisition, Hydro One and Orillia Power requested
approval for several related proposals, including: (a) a one percent reduction in Orillia
Power's residential and general service customers base distribution rates for the first
five years of the proposed ten yeardeferred rebasing period, from the closing of the
transaction; (b) transfer of Orillia Power's rate order to Hydro One; (c) transfer of Orillia
Power's distribution system to Hydro One; (d) cancellation of Orillia Power's electricity
distributor licence; and (e) amendment of Hydro One's electricity distributor licence. The
OEB assigned the application file number EB-2016-0276.
Section 86 of the Ontario Energy Board Act, 19981(the Act) requires that the OEB
review applications for a merger, acquisition of shares, divestiture or amalgamation that
result in a change of ownership or control of an electricity transmitter or distributor and
approve applications which are in the public interest.
ln accordance with its ordinary practice, the OEB has applied the no harm test in
assessing this application. The OEB denies Hydro One's application to acquire the
shares of Orillia Power as the OEB is not satisfied that the no harm test has been
met. Consequently, the related approval requests made as partof the share acquisition
application are also denied.
1 S.O. 1998, c.15 Schedule B
Decision and Order
April 12,2018
1
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Corporation
2 THE APPLICATION
Hydro One filed an application under section 86(2Xb) of the Act for approval to acquire
all of the shares of Orillia Power (MAAD application).
As part of the proposed share acquisition, Hydro One and Orillia Power requested the
OEB's approval for related transactions/proposa ls :
lnclusion of a rate rider in Orillia Power's 2016 OEB approved rate schedule,
under section 78 of the Act, to give effect to a 1% reduction in base electricity
distribution rates for residential and general service customers until2022
a
a
a
a
a
Transfer of Orillia Power's rate order to Hydro One, under section 18 of the Act
Transfer of Orillia Power's distribution system to Hydro One, under section
86(1Xa) of the Act
Cancellation of Orillia Power's electricity distribution licence, under section 77(5)
of the Act
Amendment of Hydro One's electricity distribution licence, under section 74 of
the Act
A proposed Earnings Sharing Mechanism(ESM) which would guarantee a
sharing of $3.4 million of overearnings with Orillia Power customers
Use of an lncremental Capital Module during the selected ten year deferred
rebasing period
Continued tracking of costs to the deferral and variance accounts currently
approved by the OEB for Orillia Power and disposition of their balances at a
future date
a
a
a
a
a
Use of United States Generally Accepted Accounting Principles for Orillia Power
financial reporting
Application of Hydro One's Specific Service Charges to Orillia Power's customers
A new deferral and variance regulatory account for ESM cost trackinga
Decision and Order
A,pril 12,2018
2
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Co
Process
The OEB issued a Notice of Application and Hearing on November 7,2016, inviting
intervention and comment.
The OEB approved the intervention requests of School Energy Coalition (SEC), the
Vulnerable Energy Consumers Coalition (VECC), the Consumers Council of Canada
(CCC), and Mr. Frank Kehoe. The OEB also determined that these intervenors are
eligible to apply for an award of costs in this proceeding under the OEB's Practice
Direction on Cost Awards.
The OEB provided for interrogatories and submissions on the application.
ln the submissions filed, some intervenors raised concerns related to Hydro One's rate
proposals and revenue requirements for previously acquired utilities (Norfolk,
Haldimand, and Woodstock) contained in Hydro One's concurrent distribution rate
application2, filed on March 31,2017. These intervenors submitted that the customers of
these former utilities are expected to experience significant rate increases once the
deferral period expires, and it is not therefore the case that these customers
experienced "no harm". Although the distribution rates application did not include Orillia
Power (because the deferral period would not end until after the term of that
application), intervenors were concerned that if the current application is approved a
similar fate would befall Orillia Power's customers once its deferral period ended. OEB
staff observed that the proposed rates suggest large distribution rate increases for some
customers of these acquired utilities once the deferred rebasing period elapses.
ln its reply argument, Hydro One submitted that there is a reasonable expectation,
based on underlying cost structures, that the costs to serve acquired Orillia Power
customers following the consolidation will be no higher than they othenarise would have
been.
Having reviewed the evidence and the submissions of parties, the OEB issued
Procedural Order No. 6, on July 27,2017, in which it determined that the hearing of the
MAAD application would be adjourned until the OEB rendered its decision on Hydro
One's rate application. The OEB found that Hydro One should defend its cost allocation
, Eg-20r7-0049
Decision and Order
April 12,2018
3
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution ration
proposal in the distribution rate application prior to the OEB determining if the Orillia
Power acquisition is likely to cause harm to any of its current customers.
Hydro One and Orillia Power each filed a Notice of Motion requesting a review and
variance of Procedural Order No. 6. ln a decision3 lMotions Decision), issued on
January 4,2018, the OEB granted the motions and referred the matter back to the OEB
panel on the MAAD application for re-consideration.
ln Procedural Order No. 7 issued on February 5,2018, the OEB determined that it
would re-open the record of the MAAD application. The OEB ordered Hydro One to file
further material, in the form of evidence or submissions on its expectations of the overall
cost structures following the deferred rebasing period and the impact on Orillia Power
customers.
Submissions were filed by Hydro One and Orillia Power on February 15,2018
3 EB-2017-0320
Decision and Order
April 12,2018
4
3 REGULATORY PRINCIPLES
3.1 The No Harm Test
The OEB applies the no harm test in its assessment of consolidation applicationsa,as
described in The Handbook to Electricity Distributor and Transmitter Consolidations
(Handbook) issued by the OEB on January 19,2016.
The OEB considers whether the no harm test is satisfied based on an assessment of
the cumulative effect of the transaction on the attainment of its statutory objectives. lf
the proposed transaction has a positive or neutral effect on the attainment of these
objectives, the OEB will approve the application.
The statutory objectives to be considered are those set out in section 1 of the Act:
1. To protect the interests of consumers with respect to prices and the adequacy,
reliability and quality of electricity service.
1.1 To promote the education of consumers.
2 To promote economic efficiency and cost effectiveness in the generation,
transmission, distribution, sale and demand management of electricity and to
facilitate the maintenance of a financially viable electricity industry.
3 To promote electricity conservation and demand management in a manner
consistent with the policies of the Government of Ontario.
4 To facilitate the implementation of a smart grid in Ontario.
5 To promote the use and generation of electricity from renewable energy sources
in a manner consistent with the policies of the Government of Ontario, including
the timely expansion or reinforcement of transmission systems and distribution
systems to accommodate the connection of renewable energy generation
facilities.
While the OEB has broad statutory objectives, in applying the no harm test, the OEB
has focused on the objectives that are of most direct relevance to the impact of the
proposed transaction; namely, price, reliability and quality of electricity service to
4 The OEB adopted the no harm test in a combined proceeding (RP-2005-0018/EB-2005-0234/EB-2005-0254/ES-7005-0257) as the relevant test
for determining applications for leave to acquire shares or amalgamate under section 86 of the Act and it has been subsequently applied in
applications for consolidation.
Decision and Order
April 12,2018
5
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Corporation
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Corporation
customers, and the cost effectiveness, economic efficiency and financial viability of the
consolidating utilities.
The OEB considers this an appropriate approach, given the OEB's performance-based
regulatory framework, the Renewed Regulatory Framework for Electricity Distributors
(RRFE)5, which was set up to ensure that regulated distribution companies operate
efficiently, cost effectively and deliver outcomes that provide value for money for
customers. One of these outcomes is operational effectiveness, which requires
continuous improvement in productivity and cost performance by distributors and that
utilities deliver on system reliability and quality objectives.
Ongoing performance improvement and performance monitoring are underlying
principles of the RRFE. The OEB has established performance standards to be met by
distributors, ongoing reporting to the OEB by distributors, and ongoing monitoring of
distributor achievement against these standards by the OEB. These metrics are used by
the OEB to assess a distributor's services, such as frequency of power outages,
financial performance and costs per customer.
The OEB assesses applications for consolidation within the context of the RRFE. The
OEB is informed by the metrics that are used to evaluate a distributor's performance in
assessing a proposed consolidation transaction. All of these measures are in place to
ensure that distributors meet expectations regardless of their corporate structure or
ownership.
s Report ofthe Board: Renewed Regulatory Framework for Electricity Distributors: A Performance-Based Approach
Decision and Order
April 12,2018
6
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Co ration
3.2 OEB Policy on Rate-Making Associated with Consolidation
To encourage consolidations in the electricity sector, the OEB has put in place policies
on rate-making that provide consolidating distributors with an opportunity to offset
transaction costs with savings achieved as a result of the consolidation.
The OEB's 2015 Reporto permits consolidating distributors to defer rebasing for up to
ten years from the closing of the transaction. The extent of the deferred rebasing period
is at the option of the distributor and no supporting evidence is required to justify the
selection of the deferred rebasing period. Consolidating entities, must, however, select
a definitive timeframe for the deferred rebasing period.
The 2015 Report sets out the rate-setting mechanisms during the deferred rebasing
period, requiring consolidating entities that propose to defer rebasing beyond five years
to implement an ESM for the period beyond five years to protect customers and ensure
that they share in increased benefits from consolidation.
The Handbook clarifies that rate-setting following a consolidation will not be addressed
in an application for approval of a consolidation transaction unless there is a rate
proposal that is an integral aspect of the consolidation, e.g. a temporary rate reduction.
Rate-setting for a consolidated entity will be addressed in a separate rate application, in
accordance with the rate setting policies established by the OEB.
5EB-2014-0138ReportoftheBoardonRate-makingAssociatedwithDistributorConsolidation,March 26,2015
Decision and Order
April 12,2018
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Hydro One lnc.
Orillia Power Distribution Corporation
4 DECISION ON THE ISSUES
4.1 Application of the No Harm Test
Price, Gost Effectiveness and Economic Efficiency
Hydro One submitted that Orillia Power's customers will benefit from the proposed
transaction through a: (i) reduction of 1o/o in the base distribution delivery rates for Orillia
Power's residential and general service customers in years 1 to 5; (ii) rate increase of
less than inflation in years 6 to 10 (inflation less a productivity stretch factor); and (iii)
$3.4 million being paid to Orillia Power customers, a result of the guaranteed ESM.7
Hydro One provided a forecast ten year cost structure analysis, that compared overall
expected savings based on Orillia Power, remaining as a stand-alone distribution utility
(status quo) to having Orillia Power integrated with Hydro One's existing operations.
Hydro One projected that the consolidation would result in overall ongoing operating,
maintenance and administration (OM&A) cost savings of approximately $3.9 million per
year and reductions in capital expenditures of approximately $0.6 million per year. Cost
savings are anticipated from elimination of redundant administrative and processing
functions in the following areas: financial, regulatory, legal, executive and governance,
human resources, and information technology; as well as economies of scale from a
larger customer base such that costs for processing systems like billing, customer care,
human resources and financial are spread over a larger group of customers.s
Hydro One asserted that geographic contiguity (Hydro One's existing service area being
situated immediately adjacent to Orillia Power's service area) allows for economies of
scale to be realized at the field or operational level through more efficient scheduling of
operational and maintenance work and dispatching of crews over a larger service area.
Hydro One also asserted that more efficient utilization of work equipment (e.9. trucks
and other tools), leads to lower capital replacement needs over time and more rational
and efficient planning and development of the distribution system.e
ln the submissions filed, parties questioned Hydro One's submissions
7 Application, Exh Al17/SL, p.4
6 Application, Exh A/TUS1, pages 2, 11-13
s Application, Exh A/T1IS1, p.10
Decision and Order
April 12, 2018
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Orillia Power Distribution Corporation
SEC argued that approval for the proposed transaction should be denied, stating that
the no harm test will not be met in this case. SEC submitted that Hydro One has shown
no credible evidence that it will be able to generate any savings by acquiring Orillia
Power and that there will be cost increases for Orillia's customers after the deferral
period.10 SEC argued that there were no cost savings for the customers of Norfolk,
Haldimand and Woodstock, noting the rates proposed for customers of these previously
acquired utilities rise significantly afterthe end of the deferral period as shown in Hydro
One's distribution rate application. SEC submitted that the rates of Orillia's customers
are likely to rise in a similar manner.
CCC submitted that Hydro One has provided no evidence in this proceeding to support
the argument that the transaction meets the no harm test. CCC referenced Hydro One's
distribution rate application, stating that Hydro One has proposed a new rate class for
Norfolk, Haldimand and Woodstock that has the rates of the customers in those areas
rising significantly, CCC submitted that Hydro One has provided no guarantee that
when the deferral period ends, the rates for Orillia Power's customers will reflect the
costs to serve these customers. CCC submitted that unless Hydro One can convince
the OEB that the benefits of this transaction (a 1o/o rate reduction, a rate freeze and up-
front ESM savings) to Orillia Power's customers outweigh the expected rate increases
at the end of the deferral period, the transaction should not be approved.ll
VECC submitted that it accepts that the application meets the no harm test with respect
to price although the benefits to Orillia Power customers are not as significant as
claimed. VECC argued that the no harm test with respect to price can only be satisfied if
the rates eventually charged to former Orillia Power customers are reflective of Hydro
One's cost to serve them and submitted that the OEB should set out this expectation as
it has done with other consolidation applications filed by Hydro One.12
OEB staff submitted that the evidence provided by Hydro One supports the claim that
the proposed transaction can reasonably be expected to result in overall cost savings
and operational efficiencies but that these operational and cost efficiencies may not
necessarily translate to lower distribution rates for customers of the acquired entity after
the deferred rebasing period has ended. OEB staff observed that the rates proposed for
previously acquired utilities in Hydro One's distribution rate application suggest large
10 SEC Submissions, p. 4,6
" cLc 5ubmtssrons/ p.3
12 VECC Submissions
Decision and Order
April 12, 2018
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Orillia Power Distribution Corporation
distribution rate increases for some customers of these acquired utilities once the
deferred rebasing period elapses. 13
Hydro One responded to VECC's submissions stating that it is Hydro One's intention to
apply rates to Orillia Power's customers that reflect the cost of serving those customers
at that time.
ln response to SEC's assertions, Hydro One stated that it has provided evidence that
the proposed transaction results in the lowering of cost structures to operate the existing
Orillia Power service territory. ln its reply submissions, Hydro One provided a cost
structure analysis for the period 2015-2022 reflecting that the cost structures of Norfolk,
Haldimand and Woodstock are lower than they would have been absent the
consolidation transactions. Hydro One argued that the evidence provided in its
distribution rate application shows that costs have declined consistent with the
projections made in the consolidation application for each of the three previously
acquired distributors. Hydro One submitted that there is a reasonable expectation,
based on underlying cost structures, that the costs to serve acquired Orillia Power
customers following the consolidation will be no higher than they othenruise would have
been. 1a
Orillia Power argued that the evidence filed in this case supports a finding that
efficiencies will be gained and lower costs will be realised as a result of the proposed
acquisition and that any reference to Hydro One's rate application is irrelevant to the
issues before the OEB in this application. Orillia Power submitted that this acquisition is
an illustration of the types of ratepayer benefits envisioned by the Ontario Distribution
Sector Review Panel in its report on the benefits of distributor company consolidations.
ln Procedural Order No. 7, the OEB ordered Hydro One to file further material, in the
form of evidence or submissions on its expectations of the overall cost structures
following the deferred rebasing period and the impact on Orillia Power customers.
No new evidence was filed. Submissions were filed by Hydro One and Orillia Power.
Hydro One submitted that, based on the projected Hydro One cost savings forecast for
the 10 year period following the transaction, Hydro One can definitively state that the
overall cost structures to serve the Orillia area will be lower following the deferred
rebasing period in comparison to the status quo. Hydro One submitted that at the time
of rebasing, Hydro One will adhere to the cost allocation and rate design principles, in
13 OEB Staff Submissions, p.7
14 Hydro One Final Argument, May 5, 2017 pages 2-5
Decision and Order
April 12,2018
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Orillia Power Distribution Corporation
place at such time in the future, ensuring that the costs allocated to Orillia Power
customers fairly and accurately reflect the new lower cost structure to serve all
customers.l5 Orillia Power supported the submissions of Hydro One.
OEB Findings
ln reviewing a proposed transaction, the OEB examines the long term effect of the
consolidation on customers.
The Handbook clarified the OEB's expectations with respect to price
"A simple comparison of current rates between consolidating distributors does
not revealthe potentialfor lower cost service delivery. These entities may have
dissimilar service territories, each with a different customer mix resulting in
differing rate class structure characteristics. For these reasons, the OEB will
assess the underlying cost structures of the consolidating utilities. As
distribution rates are based on a distributor's current and projected costs, it is
important for the OEB to consider the impact of a transaction on the cost
structure of consolidating entities both now and in the future, particularly if
there appear to be significant differences in the size or demographics of
consolidating distributors. A key expectation of the RRFE is continuous
improvement in productivity and cost performance by distributors. The OEB's
review of underlying cost structures supports the OEB's role in regulating price
for the protection of consumers.
Consistent with recent decisions,16 the OEB will not consider temporary rate
decreases proposed by applicants, and other such temporary provisions, to
be demonstrative of "no harm" as they are not supported by, or reflective of
the underlying cost structures of the entities involved and may not be
sustainable or beneficial in the long term. ln reviewing a transaction the OEB
must consider the long term effect of the consolidation on customers and the
financial sustainability of the sector.
To demonstrate "no harm", applicants must show that there is a reasonable
expectation based on underlying cost structures that the costs to serve
15 Hydro One Cost Structure Submissions, February 15, 2018, pages 2,6
s EB-2013-0196/EB-2013-0187/EB-2013-0198
E8-20t4-0244
Decision and Order
April'12,2018
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Orillia Power Distribution Corporation
acquired customers following a consolidation will be no higher than they
othenryise would have been. While the rate implications to all customers will
be considered, for an acquisition, the primary consideration will be the
expected impact on customers of the acquired utility". tz
One of the key considerations in the no harm test is protecting customers with respect
to the prices they pay for electricity service. Although the Handbook states that "rate
setting" following a consolidation will not be considered as part of a section 86
application, that does not mean the OEB will not consider the costs that acquired
customers will have to pay following an acquisition (both in the short term and the long
term). lndeed the Handbook is clear that the underlying cost structures and the rate
implications of those cost structures will be a key consideration.
As stated in the Handbook and confirmed in decisions made on previous Hydro One
acquisitionsls, the OEB does not consider temporary rate decreases to be on their own
demonstrative of no harm as they are not supported by, or reflective of the underlying
cost structures of the entities involved and may not be sustainable or beneficial in the
long term.
The OEB's primary concern is that there is a reasonable expectation that underlying
cost structures for the acquired utility are no higher than they would have been had the
consolidation not occurred. Although the OEB accepts that the acquisition will lead to
some savings on account of eliminating redundancies, that does not necessarily mean
that Hydro One's overall cost structure to serve Orillia's customers will be no higher
than Orillia's underlying cost structure would have been absent the proposed
acquisition.
The experience of the three acquired utilities in Hydro One's current distribution rates
case is informative. ln the MAADs proceedings in which Hydro One acquired these
utilities, Hydro One pointed to savings that would be realized through the acquisition.
Although these savings may well have occurred, they do not appear to have resulted in
overall cost structures (and therefore rates) for customers of the acquired utilities that
are no higher than they would have been, once the deferral period ended and their rates
were adjusted to account for Hydro One's overall costs to serve them. Material filed in
the Hydro One current distribution rates case shows that some rate classes are
17 Handbook, pages 6-7
18 EB-2013-0195/EB-2013-0187/EB-2013-0198
EB-2074-0244
EB-2014-021 3
Decision and Order
April 12,2018
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Orillia Power Distribution Corporation
expected to experience significant and material increases.le While the OEB has not
approved these requested rates, this panel takes notice of the proposed rate increases
which Hydro One states are reflective of the costs to service the acquired customers,
and are inclusive of the "savings" that Hydro One states were realized.
The OEB recognizes that Orillia was not part of Hydro One's distribution rates filing, and
that it is not certain that its customers' experiences would be the same. Because of this
uncertainty, the OEB provided Hydro One the opportunity to file further evidence on
what it expects the overall cost structure to be following the deferral period and to
explain the impact on Orillia's customers. Hydro One did not file further evidence. Hydro
One's submissions simply restated its expectation that based on the projected Hydro
One cost savings forecast for the 10 year period following the transaction, the overall
cost structures to serve the Orillia area will be lower following the deferred rebasing
period in comparison to the status quo. The OEB is of the view that it would have been
reasonable to see a forecast of costs to service Orillia customers beyond the ten year
period and an explanation of the general methodology of how costs would be allocated
to Orillia ratepayers after the deferral period. Hydro One takes the position that this
information is not known. The OEB recognizes that any forecast of cost structures and
cost allocation 10 years out would include various assumptions and could not be
expected to be 100% accurate. However, the OEB has highlighted its concern and its
need to better understand the implications of how Orillia customers will be impacted by
the consolidation beyond the ten year period. ln the absence of information to address
that OEB concern, the OEB cannot reach the conclusion that there will be no harm.
As discussed above, the OEB is not satisfied that a list of forecast cost savings from the
acquisition automatically results in overall cost structures for the customers of the
acquired utility that are no higher than they would be without the consolidation. Hydro
One has failed to make the case that the OEB can be assured that the underlying cost
structures would be no greater than they would have been absent the acquisition.
The OEB is therefore not satisfied that the no harm test has been met, and on this basis
the application is denied.
le Hydro One Final Argument, Attachment 1
Decision and Order
April 12, 2018
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Orillia Power Distribution Co ration
Reliability and Quality of Electricity Service
Hydro One submitted that it will endeavour to maintain or improve reliability and quality
of electricity service for all of its customers.
Hydro One provided a comparison of reliability statistics from 2013-2015 claiming that
Hydro One customers in the vicinity of the City of Orillia experienced a level of service in
terms of duration and frequency of interruptions comparable to the level experienced by
Orillia Power customers. Hydro One submitted that it anticipates that reliability will
improve with the combination of pre-existing Hydro One and former Orillia Power
resources optimized for the broader Orillia atea.20
Hydro One also provided a comparison of Hydro One's and Orillia Power's performance
on various dimensions of service quality.2l
Hydro One's interrogatory responses indicated that of the fifteen Orillia Power direct
staff positions, nine positions will be absorbed by Hydro One while six positions will be
eliminated. Hydro One submitted that the associated work will be picked up by other
(more centralized) units in Hydro One.22
Hydro One indicated that it intends to construct a new operations centre within the City
of Orillia to consolidate operations between Hydro One's pre-existing Orillia operating
centre and Orillia Power's operating centre. Hydro One submitted that Orillia Power's
current facility is undersized with no expansion potential and is not ideally located to
serve the expanded service area, The current Hydro One operations centre is
considered too small and inflexible to meet the operating needs of the company.
Hydro One stated that the need for a new operations centre would still exist if this
transaction was not contemplated. Hydro One argued that consolidation of the operation
centres will not impact service quality or reliability and will be more operationally and
cost efficient.23
VECC submitted that Hydro One's evidence does not clearly demonstrate that the no
harm will be satisfied. VECC submitted that the SAIDI and SAIFI statistics are
inconclusive as to whether Hydro One's reliability performance is better or worse.
20 Application, Exh A/12/57/p.7
21 Application, Exh l/T3lS17 c)
" OEB Staff lR 8 and VECC lR 12
23 OEB Staff lR 5 e)
Decision and Order
April 12,2018
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Ontario Energy Board EB-20't6-0276
Hydro One lnc.
Orillia Power Distribution Corporation
VECC expressed concerns with Hydro One's anticipated reductions in direct staff
positions and how it would impact reliability. VECC submitted that there is no evidence
that, based on Hydro One's spending plans, reliability for former Orillia Power
customers will improve in the future or even that current levels of reliability will be
maintained for former Orillia Power customers.
VECC submitted that the comparison of the service quality metrics demonstrates that
Orillia Power's current performance exceeds Hydro One's in almost every category
suggesting that service quality for Orillia Power's customers could decline as a result of
the application.2a
CCC asserted that Hydro One has filed no compelling evidence that Orillia Power's
reliability will be maintained or improved as a result of the transaction. CCC submitted
that Orillia Power's service quality metrics are generally better than Hydro One25
indicating that Orillia Power's customers will have a lower quality of service under Hydro
One ownership.
OEB staff submitted that, based on the evidence provided, Hydro One can reasonably
be expected to maintain the service quality and reliability standards currently provided
by Orillia Power.
OEB staff submitted that with respect to Hydro One's proposed construction of a new
operations centre, the OEB should, in making its decision, specifically note that it is not
approving the construction of this operation centre as part of this proceeding as the
OEB will review whether this is a prudent expenditure in a future rate application. OEB
staff also submitted that the OEB examine the cosUbenefit of the new operations centre
and whether other options were explored in the future rate application.
ln reply submissions, Hydro One submitted that the differences in the SAIDI and SAIFI
results can likely be attributed to differences in geography and asset characteristics. For
instance, Hydro One's local service territory is still more rural relative to the Orillia
Power's service territory, and approximately 30% of Orillia Power's service territory is
served by an underground distribution system. Hydro One reasserted that despite these
differences, its reliability results were relatively similar to Orillia Power for both SAIDI
and SAlFl.
24 VECC Submissions
25 Application, Exh l/r3/517
Decision and Order
April12,2018
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EB-2016-0276
Hydro One lnc.
Orillia Power Distribution C n
Hydro One argued that Orillia Power customers' reliability levels are protected through
the OEB's codes and licence requirements. With respect to the service quality metrics
comparison, Hydro One submitted that its results are relatively similar to those of Orillia
Power for the majority of the measures and that for the two measures for which Hydro
One's results are below Orillia Power's (telephone accessibility and telephone call
abandon rates), Hydro One's results are still compliant with the OEB-prescribed
standards.
Hydro One reaffirmed that it will maintain Orillia Power's existing reliability and quality of
service levels as it will have to continue to have regional operations in the Orillia area,
consisting of both existing Orillia Power staff and Hydro One staff.
OEB Findings
The Handbook sets out that in considering the impact of a proposed transaction on the
quality and reliability of electricity service, and whether the no harm test has been met,
the OEB will be informed by the metrics provided by the distributor in its annual
reporting to the OEB and published in its annual scorecard. The Handbook also sets out
that utilities are expected to deliver continuous improvement for both reliability and
service quality performance to benefit customers following a consolidation and will be
monitored for the consolidated entity under the same established requirements.26
The OEB is satisfied based on the evidence before it, that it can be reasonably
expected that Orillia Power's quality and reliability of service would be maintained
following a consolidation. The fact that the consolidated entity is required to report on
reliability and quality of service metrics in its annual filings confirms to the OEB that any
reduction in service quallty would become apparent and would be addressed therefore
reducing any risk of harm.
Financial Viability
Hydro One has agreed to purchase the shares of Orillia Power at a price of $41.3
million, consisting of a cash payment of approximately $26.4 million and the assumption
25 Handbook, p. 7
Decision and Order
April 12, 2018
16
Ontario Energy Board
Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Corporation
of short and long term debt of approximately $14.9 million. The 2015 net book value of
Orillia Power's assets is $22.5 million.
Hydro One submitted that the premium paid will not be recovered through rates and will
not impact any future revenue requirement. Hydro One also stated that the proposed
transaction will not have a material impact on Hydro One's financial position as the price
is less than 1% of Hydro One's net fixed assets.
Hydro One submitted that it expects to incur incremental transaction costs of
approximately $3 million for legal, advisory and tax costs for the completion of the
transaction and costs associated with the necessary regulatory approvals. ln addition,
Hydro One expects to incur $5 to $6 million in integration costs, which includes up-front
costs to transfer the customers into Hydro One's customer and outage management
systems. Hydro One confirmed that all of these costs will be financed through
productivity gains associated with the transaction and will not be recovered through
rates
OEB staff submitted that the applicants' evidence demonstrates that no adverse impact
on the applicants'financial viability is anticipated.
OEB Findings
The Handbook sets out that the impact of a proposed transaction on the acquiring
utility's financial viability for an acquisition, or on the financial viability of the
consolidated entity in the case of a merger will be assessed.
The OEB's primary considerations in this regard are:
The effect of the purchase price, including any premium paid above the historic
(book) value of the assets involved
The financing of incremental costs (transaction and integration costs) to
implement the consolidation transaction
The OEB does not find that there will be an adverse impact on Hydro One's financial
viability as a result of its proposals for financing the proposed acquisition transaction
a
a
17Decision and Order
April 12,2018
Ontario Energy Board
a
EB-2016-0276
Hydro One lnc.
nOrillia Power Distribution
4.2 Other Approval Requests
As part of the proposed share acquisition, Hydro One and Orillia Power requested
the OEB's approval for related transactions/proposals:
lnclusion of a rate rider in Orillia Power's 2016 OEB approved rate
schedule, under section 78 of the Act, to give effect to a 1% reduction in
base electricity distribution rates for residential and general service
customers unlil2022
a
a
a
a
a
a
a
a
a
a
Transfer of Orillia Power's rate order to Hydro One, under section 18 of
the Act
Transfer of Orillia Power's distribution system to Hydro One, under section
86(1Xa) of the Act
Cancellation of Orillia Power's electricity distribution licence, under section
77(5) of the Act
Amendment of Hydro One's electricity distribution licence, under section
74 of the Act
Proposed ESM which guarantees a sharing of $3.4 million of overearnings
with Orillia Power customers
Use of an lncremental Capital Module during the selected ten year
deferred rebasing period
Continued tracking of costs to the deferral and variance accounts currently
approved by the OEB for Orillia Power and disposition of their balances at
a future date
Use of United States Generally Accepted Accounting Principles for Orillia
Power financial reporting
Application of Hydro One's Specific Service Charges to Orillia Power's
customers
A new regulatory account for ESM cost tracking
Decision and Order
April 12, 2018
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Orillia Power Distribution Corporation
OEB Findings
As the OEB is denying Hydro One's application for the proposed share acquisition
transaction, the requests set out above, which are applicable only in the event that the
proposed transaction were to be approved are also denied.
Decision and Order
April 12,2018
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Ontario Energy Board EB-2016-0276
Hydro One lnc.
Orillia Power Distribution Corporation
5 CONCLUSION
The OEB denies Hydro One's application to acquire the shares of Orillia Power as the
OEB is not satisfied that the no harm test has been met. Consequently, the additional
related approval requests made as part of the application are also denied.
The OEB finds that the applicants bear the onus of satisfying the OEB that there will be
no harm.
ln reviewing a proposed consolidation transaction, the OEB examines both the short
term and the long term effect of the consolidation on customers.
The OEB has determined that it is reasonable to expect that the underlying cost
structures to serve acquired customers following a proposed consolidation will be no
higher than they othenvise would have been.
It is the OEB's expectation that future rates paid by the acquired customers will be
based on the same cost structures used to project the future cost savings in support of
this application.
Hydro One has not demonstrated that it is reasonable to expect that the underlying cost
structures to serve the customers of Orillia Power will be no higher than they otherwise
would have been, nor that they will underpin future rates paid by these customers.
Decision and Order
April 12, 2018
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Ontario Energy Board EB-2016-0276
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Orillia Power Distribution Corporation
6 ORDER
THE ONTARIO ENERGY BOARD ORDERS THAT:
1. The application filed by Hydro One lnc. to acquire all of the issued and outstanding
shares of Orillia Power Distribution Corporation is denied. All related approval
requests made as part of the application are also denied.
2. The applicants shall pay the OEB's costs of and incidental to, this proceeding
immediately upon receipt of the OEB's invoice.
DATED at Toronto April 12,2018
ONTARIO ENERGY BOARD
Original Signed By
Kirsten Walli
Board Secretary
Decision and Order
April 12, 2018
21
Exhibit B
Office of the Secretary
Service Date
November 15, 1999
BEFORE THE IDAHO PUBLIC UTILITIBS COMMISSION
IN THE MATTER OF THE JOINT APPLICA-
TION AND PETITION OF PACIFICORP AND
SCOTTISH POWER PLC FOR A DECLARA-
TORY ORDER OR ORDER APPROVING
PROPOSED TRANSACTION AND AN ORDER
APPROVING THE ISSUANCE OF PACIFICORP
COMMON STOCK.
TABLB OF CONTENTS
I. SYNOPSIS
II BACKGROLTND
A.
B
C.
III. FINDINGS OF FACT AND CONCLUSIONS OF LAW ..
A.
B
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CASE NO. PAC-E-99-I
ORDER NO. 28213
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Public Comment..Joint Anolicants...
Commis'sion Staff
SolutiaIrrisators ..
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b. Joint Aoolicants...c. Commislion Staff2. BPA credits................3. Water Riohts4. Foreign dwnership ....5. IrricaTion Concerns....
ContraEt Rates of Solutia.
Conclusion
Securities Issuance...........
Intervenor Funding
R...............
DISSENTING OPINION OF COMMISSIONER DENNIS S. HANSEN .
ORDER NO. 28213
The
l.
2.
2.
J.
l.
4. Post
Bona
E.as a Result
Post
1.
2.
I
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE JOINT APPLICA-
TION AND PETITION OF PACIFICORP AND
SCOTTISH POWER PLC FOR A DECLARA-
TORY ORDER OR ORDER APPROVING
PROPOSED TRANSACTION AND AN ORDER
APPROVING THE ISSUANCE OF PACIFICORP
COMMON STOCK.
CASE NO. PAC-E-99-1
ORDER NO. 28213
I. SYNOPSIS
On December 31, 1998, PacifiCorp and Scottish Power plc (ScottishPower)
(hereinafter referred to either individually or collectively as "Joint Applicants"), filed a Joint
Application and Petition for Declaratory Order with this Commission seeking authority to
execute a stock transaction that would result in the merger of PacifiCorp and ScottishPower. We
hereby approve the Joint Application for merger approval subject to the numerous terms and
conditions set forth herein. Many of the conditions contained in this Order resulted from
testimony provided by numerous citizens who participated in four separate public hearings. We
further deny the Motion to Dismiss the Joint Application filed by the Idaho Irrigation Pumpers
Association (Irrigators) and award that group intervenor funding in the amount of $9,846.97.
II. BACKGROUND
A. The Application
PacifiCorp is a public utility providing retail electric service to approximately 53,000
customers in southeastern Idaho through its operating division, Utah Power & Light (UP&L),
pursuant to Certificates of Public Convenience and Necessity issued by this Commission.
PacifiCorp is subject to the Commission's jurisdiction under ldaho Code $ 61-101 , et seq. (the
"Public Utilities Law"). PacifiCorp also provides electric service in the states of Oregon,
Washington, Utah, Wyoming and California.l PacifiCorp's ldaho service territory constitutes
I PacifiCorp is currently in the process of sellirrg its Califbrnia service territory. The Joint
Applicants have also sought nrerger approval fi'orn the state regulatory comrnissiorrs of Oregon, Utah,
Washington and Wyorning as well as the Federal E,nergy Regulatory Commission and the Securities arrd
Exchange Commission.
)
)
)
)
)
)
)
)
ORDER NO.28213 I
less than 4oh of that Company's total customer base. ScottishPower is a public limited company
(plc) with its principal business office at Glasgow, Scotland and prior to this merger was not
subject to this Commission's jurisdiction. ScottishPower is a multi-utility with approximately 5
million customers in Scotland, England and Wales providing electric, gas, telecommunications
and water services in the United Kingdom.
The Joint Applicants state that on December 6,1998, they entered into an agreement
and plan of purchase transactiorVmerger ("merger agreement") pursuant to which an indirect,
wholly-owned subsidiary of ScottishPower (Merger Sub) will merge with and into PacifiCorp,
with PacifiCorp continuing in existence as the surviving corporation.
The Application further states that Article II of the merger agreement provides for the
outstanding common shares of PacifiCorp to be converted into the right to receive, at the option
of the holders of such shares, either newly issued ordinary shares of ScottishPower or newly
issued ordinary shares of ScottishPower represented by American Depository Shares of
ScottishPower and evidenced by American Depository Receipts. Each PacifiCorp share will be
exchanged tax-free for 0.58 American Depository Receipts or 232 ordinary shares of
ScottishPower. Article II further describes a mechanism providing for the cash payment by
ScottishPower of fractional shares of PacifiCorp. As of the closing of the merger transaction, the
outstanding shares of Merger Sub will be cancelled and PacifiCorp will issue to an entity
indirectly and wholly-owned by ScottishPower an equal number of shares with the same rights,
powers and privileges as the cancelled Merger Sub common stock. As a result of this merger,
the Joint Applicants state, PacifiCorp will become a wholly-owned subsidiary of ScottishPower.
The Joint Applicants argue that, unlike the PacifiCorplUtah Power & Light merger, this
proposed transaction does not involve a consolidation of two operating utility systems. Afterthe
close of the transaction. PacifiCorp will continue to exist on a stand-alone basis and to provide
service to Idaho customers subject to the jurisdiction of the Commission.
The Joint Applicants state that ScottishPower has no other operations in the United
States and, according to the Application, it has no intention to consolidate any of PacifiCorp's
existing business operations with any of its own. The U.S. headquarters of ScottishPowerwill be
located in Portland. Oregon, along with the headquarters of PacifiCorp which are curently
located there. With the exception of the previously proposed sale of PacifiCorp's Centralia
2ORDER NO. 282 r3
generating station2, ScottishPower states that it does not anticipate any additional sales of the
physical assets that currently support PacifiCorp's regulated utility business. In any event, as we
note below, any future sales of generation, transmission or distribution assets by PacifiCorp must
first be authorized by this Commission.3
PacifiCorp will continue to maintain its own long and short-term debt, unless there
are benefits to be gained from the use of other forms of capital. As long as it is subject to
traditional cost of service regulation, PacifiCorp will continue to propose for ratemaking
purposes that its capital structure and return on common equity be based on those of comparable
electric utilities. To effectuate the merger, the Joint Applicants state that PacifiCorp will issue
shares of common stock to a partnership comprised of subsidiaries of ScottishPower or to a
holding company owned by the partnership. These shares will constitute the only outstanding
shares of common stock of PacifiCorp. All other shares of common stock of PacifiCorp will, at
that time, be either cancelled or converted. PacifiCorp's common stock will no longer be rated
because it will not be publicly traded.
In their Application, the Joint Applicants included a Petition for a Declaratory Order
from the Commission arguing that the Commission has jurisdiction over the merger solely by
virtue of ldaho Code $ 6l-901 et seq. (the "securities issuance" statutes) and not under ldaho
Code $ 6l-328 (pertaining to the sale, transfer or assignment of electric utility property), or any
other laws. The Joint Applicants later withdrew this Petition in a letter dated January 26, 1999 in
which Counsel for the Joint Applicants stated that their respective clients "consent that the
transaction may be reviewed under lldaho Code $ 6l-328] as well as [the Commission's]
securities issuance statutes." Pursuant to the Commission's Procedural Rule 67 (IDAPA
31.01.01 .067), the Petition for a Declaratory Order was withdrawn. Absent our assertion of
jurisdiction pursuant to $ 61-328, our ability to condition this merger to protect PacifiCorp's
Idaho ratepayers would have been significantly diminished.
2 Currently pending before this Cornrnission in Case No. PAC-E-99-2
3 lduho Code g 6\-328.
JORDER NO. 28213
B. Procedural Background
1. Technical Hearing
On February 18, 1999, the Commission convened a Prehearing Conference in this
matter for the purpose of issue identification and scheduling. Following the conclusion of the
Prehearing Conference, the Commission issued Order No. 27939 directing all parties actively
participating in the case to address the following issues or areas (with a reference, in parentheses,
to where the issue is discussed in this Order):
(1) Irrigation concerns (Section III.F.5)
(2) Continued eligibility to participate in the BPA residential exchange
program (Section III.F.2)
(3) Eligibility to participate in the BPA subscription process (Section III.F.2)
(4) Assurances that ScottishPower will not sell electric assets, reduce the
work force, or adversely affect water rights (Section III.D.1)
(5) Concrete evidence to support the Applicants' claims of efficiencies to be
achieved as a result of the merger (Sections III.E and III.F.1)
(6) Quality of service (Section III.F.1)
(7) Reliability (Section IILF.I)
Order No. 27939 also established a schedule for conducting discovery and for the
prefiling of testimony. In addition, the Commission scheduled a technical hearing that was
conducted in Boise on July 13-15, 1999. The following parties appeared at the hearing through
their respective counsel:
PacifiCorp John M. Eriksson/Mary S. Hobson
Stoel Rives
ScottishPower Dean J. Miller
McDevitt & Miller
.lames Van Nostrand
Perkins Coie
Commission Staff Brad M. Purdy
Deputy Attorney General
4ORDER NO.28213
Public Power Council Peter J. Richardson
Davis Wright Tremaine
Solutia Randall C. Budge
Racine, Olson, Nye, Budge & Bailey
Idaho Irrigation Pumpers Assoc W. Marcus Nye
Racine, Olson, Nye, Budge & Bailey
J.R. Simplot Company R. Scott Pasley
Idaho Consumer-Owned Utilities Assoc. Conley Ward
Givens Pursley LLP
Over the course of three days, the Commission heard testimony and received evidence from
sixteen expert witnesses and reviewed numerous exhibits resulting in six volumes and nearly one
thousand pages of hearing transcript.
2. Public Hearings
In recognition of the importance of this case, and the degree of public interest
expressed, the Commission and its Staff traveled throughout southeastern Idaho conducting four
separate hearings where it heard the testimony of hundreds of members of the public. The
Commission conducted hearings in this case in Rexburg, Pocatello, Grace and Preston, Idaho.
Over the course of several days, on two separate trips involving more than 1,000 miles of travel
the Commission listened to hundreds of people, ranging from senior citizens to farmers, business
owners and large industrial interests, testify about the proposed merger. In addition, the
Commission received a considerable number of written comments through the mail from
members of the public. Nearly all those who commented oppose the merger for a variety of
reasons. Given the number of people who testified and commented, and the broad scope of their
testimonies and comments, it is not possible for us to enumerate every concern or thought
expressed. Therefore, we have summarized the general nature of the public testimony and
comments and separated them into distinct categories. The evidence received during both the
technical and public hearings is summarized and discussed throughout the "Findings of Fact and
Conclusions of Law" section of this Order. The valuable input received from members of the
public is largely responsible lbr many of the numerous merger approval conditions imposed by
5ORDI:R NO.28213
this Order. Thanks to public input, therefore, PacifiCorp's Idaho customers can expect to enjoy
lower rates and improved service.
C. Post Hearing Procedure
Following the conclusion of the technical hearing, as well as the public hearings in
Rexburg and Pocatello, ScottishPower filed with the Commission a Notice of Merger Credit
Commitment as well as a Notice of Irrigator Service Commitments.
1. Notice of Merger Credit Commitment
The Joint Applicants reached a settlement agreement with the Staff of the Oregon
Public Service Commission in the merger proceeding pending in that state and, pursuant to the
"most favored nation" proposal made in this state (discussed below), ScottishPower offered a
rate credit as a condition of merger approval. Pursuant to that offer, ScottishPower and
PacifiCorp shall provide guaranteed merger-related cost of service reductions for four years
through an annual merger credit on customers'bills. The amount of the credit shall be $1.6
million per year for the years 2000,2001,2002, and 2003. The total credit in years 2000 through
2003 will be $6.4 million. The merger credit is discussed in greater detail in Merger Approval
Condition No. 3 as well as Section III.B of this Order.
2. Notice of Irrigator Service Commitments
On August 27, 1999, ScottishPower filed a Notice of Irrigator Service Commitments
of Scottish Power plc and PacifiCorp. In that Notice, the Joint Applicants propose numerous
recommendations that target the irrigation customers of southeastern Idaho in an attempt to
improve service to those customers. The irrigator service commitments are discussed in greater
detail in Merger Approval Condition Nos. l4-18 as well as Section III.F.5 of this Order.
3. Post Hearing Briefs
Pursuant to a Commission Scheduling Order, the parties to the technical proceeding
were provided the opportunity to submit post-hearing briefs in this case. Briefs were submitted
by the .Ioint Applicants, the Inigators, the Public Power Council and Solutia and summarized the
positions taken by those parlies during the technical hearing.
4. Post Hearing Motions
On August 30,1999, Solutia filed a motion pursuant to Rule 56 of the Commission's
Procedural Rules (IDAPA 31.01.01) and Rule 37(a) of the ldaho Rules of Civil Procedure for an
6ORDER NO. 28213
Order compelling a response from the Joint Applicants to a supplemental data request submitted
to them by Solutia on August 18, 1999. On the same date, Solutia also filed a motion to reopen
the technical proceeding in this case for the purpose of introducing new testimony and re-cross-
examining witnesses. Similarly, on September 13, 1999, the Irrigators filed a motion to reopen
the technical proceeding in this case. On September 27, 1999, the Commission issued Order
Nos.28158 and 28165 denying the motions of Solutia and the Irrigators, respectively, to reopen
the technical proceedings. In addition, Order No. 28158 denied Solutia's Motion to Compel
Response to Production requests. The rationale for the Commission's Orders is set forth therein
and will not be repeated here.
III. FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. Irrigators' Motion to Dismiss
At the commencement of the technical hearing, Counsel for the Irrigators made a
verbal motion to dismiss the Application in this case. The basis for the Irrigators' motion was
that it is "the intent of the Application to increase" the Irrigators'rates. Tr. p.41. Moreover,
Counsel for the Irrigators argued that "[o]ne cannot pay a billion dollar premium for an
enterprise and not expect to have some impact on rates." 1d The motion further contended that
the Joint Applicants have failed to demonstrate that rates will not increase as a result of the
merger. The Commission issued a ruling from the bench that it needed to hear the evidence to
know whether or not the criteria of ldaho Code $ 6l-328 had been satisfied. Tr. pp. 48-49.
We find:
As indicated below, we find that the Joint Applicants have satisfied their burden of
proof that the mergerwill not cause rates fbr PacifiCorp's customers to increase. Consequently,
the verbal motion to dismiss the Application made by the Irrigators is hereby denied.
B. Conditions of Merger Approval
The conditions of merger approval that we hereby impose are considerable in quantity
and scope and, therefore, we have listed them separately in this section of the Order fbr clarity
and ease of reference. Most of the following conditions will be discussed in greater detail later
in this Order.
ORDER NO. 282I3 7
RATES
Rates will not increase as a result of the merger.
At a minimum, ScottishPower shall not seek a general rate increase
for its Idaho service territory effective prior to January 7,2002.
ScottishPower and PacifiCorp shall provide guaranteed merger
related cost-of-service reductions for four years through an annual
merger credit. The amount of the credit shall be $1.6 million per
year for the years 2000, 2001, 2002 and 2003. The total credit in
years 2000-2003 will be $6.4 million. The merger credit shall be
allocated among PacifiCorp's retail tariff customers on the basis of a
percentage of the customer bill, exclusive of taxes. At the end of
each year, the aggregate amount of the credit allocated in that year
shall be calculated. These calculations shall be available for audit by
the Commission Staff. In the event the merger credit does not equal
$1.6 million in any of the first three years, the excess or shortfall
shall be applied to the amount due in the following year.
For each of the years 2002 and 2003, ScottishPower and PacifiCorp
may reduce or offset the $1.6 million merger credit to the extent that
cost reductions related to the merger are reflected in rates.
The dates set forth in this Condition assume that the merger
transaction closes in 1999. If closing is delayed, ScottishPower and
PacifiCorp may adjust the dates so that the merger credit begins as
soon as practicable but not later than 30 days after the closing date.
In the event that restructuring of the electricity business occurs in
Idaho prior to the end of the four years for payments of the merger
credit, the Commission shall determine at that time how the
outstanding merger credit shall be paid.
Any other terms required to implement this merger credit shall be
included in the merger credit tariff for approval by the Commission.a
No later than six months after the closing date of the merger,
ScottishPower and PacifiCorp shall provide, in the form of an
infonnational filing, a merger transition plan to the Commission. The
plan shall include anticipated time lines, actions necessary to
inrplement the merger and realize the proposed benefits (including
2
3
4.
8ORDER NO. 28213
a Notice of Merger Credit Commitment filed August 20, 1999
expected cost savings), and the estimated associated capital
expenditures and expenses and anticipated workforce changes.s
QUALITY OF SERVICE
ScottishPower shall include in its transition plan what it intends to do
regarding work force issues and the maintenance of adequate service
in Idaho. In this regard, the Commission notes that it considers
"adequate service" as the bare minimum necessary for compliance
with $ 6l-302. We expect that the Company, through the application
of the many merger approval conditions imposed by this Order, as
well as the Company's diligent efforts, shall begin addressing the
customer service problems that PacifiCorp's customers are currently
experiencing.
Within a reasonable time after closing, ScottishPower/PacifiCorp
shall implement the Performance Review Committee procedures
described in Exhibit 226.6 This process shall be in addition to, and
not in derogation of, any other remedy or power of the Commission.T
S cottishPower/Pacifi Corp shall implement the Network Performance
Standards, Service Performance Standards and Customer Guarantees
described in the direct testimony of Bob Moir and Exhibit 208.
Within a reasonable time after closing PacifiCorp shall file for
approval a tariff describing the Non-Performance Payments to
customers associated with the Customer Guarantees described in the
Direct Testimony of Bob Moir.8
PacifiCorp will fund expenditures required to implement the service
standard commitments from efficiency savings and redirected
internal funding.e
5 Tr. p. 595
6 This Exhibit was offered during tlre technical hearing by ScottishPower witness Maclaren in
response to Staff witness Sterling's proposal to impose penalties in the event PacifiCorp's network
perfonnance falls below baseline levels.
7 Tr. p. 419--424
t Tr. p. 390--391
e Tr. p. 640
5
6_
7
8
9
9ORDER NO. 28213
10. In the event ScottishPower/PacifiCorp become obligated to pay
penalties under the network performance standards, the disposition
of such funds shall be determined by the Commission at the time
penalties are assessed fScottishPower/PacifiCorp agree to accept the
Commission's decision in this regard].10
I 1. The proposed network performance standards, customer service
performance standards, and customer guarantees will be reviewed
after two years of experience with these standards to see if any
modifications may need to be made to better maintain or improve
network reliability, network safety, and customer satisfaction. In
this regard, no later than July I ,2002, PacifiCorp/ScottishPower will
file with the Commission and all intervenors in this Docket a report
detailing the companies' experience with the established standards
and any proposed changes thereto. Pending any changes resulting
from this report, the existing service standards and customer
guarantees would remain in place.ll
12. In addition to their network and customer service performance
standards, PacifiCorp/ScottishPower agree to comply with any
service standards adopted by the Commission. The penalties
associated with the PacifiCorp/ScottishPower network and customer
service performance standards will not apply to any service
standards adopted by the Commission. The provisions of this
paragraph will not affect any penalties adopted by the Commission
as part ofany rules.
13. PacifiCorp/ScottishPower will provide an annual report to the
Commission, for five years following close of the merger, showing
the reliability of the system on a statewide basis. This report shall
include SAIDI, SAIFI and MAIFI data for the previous year, in
addition to identification of the five worst circuits based on CPI data.
The first such report shall be filed on or before September 1,2001.
14. ScottishPower/PacifiCorp will make available prior to the next
irrigation season a dedicated Irrigation Specialist in the Idaho service
territory. This Specialist will be available at the local Utah Power
offices in Rexburg and Shelley for consultation appointments. The
lo Tr. p. 430
Il Conditions ll, l2 and 13 are adapted from the Wyoming Stipulatiorr, Exhibit No. 108, as
explained by Mr. MacRitchie, Tr. p. 603-635
ORDER NO.282r3 l0
effectiveness of this service will be reviewed at the end of the 2001
irrigation season.l2
15. ScottishPower/PacifiCorp will extend the Irrigator's HOTLINE
facility in the Wasatch Business Center to 7 days a week, from 7:00
a.m. to 7:00 p.m. The expansion to this successful, customized
service will provide greater availability for responding to Irrigator
issues.
16. ScottishPower/PacifiCorp will publish the Irrigator HOTLINE
telephone number in the public telephone directory along with the
other Utah Power numbers.
17. ScottishPower/PacifiCorp will work with the Irrigators to better
identifr, on a geographical basis, the location of each electricity
service location. This geographical description should be used when
the Irrigator is unable to provide either the Site Identification
Number (Meter Number) or the Account Number. (The meter
number or account number will remain the preferred terms of
reference for site identification.) This proposal will enable the
Business Center and the customer to more effectively communicate
and locate the service location in question, particularly during an
outage. The Irrigators and the Company will continue to ensure
these descriptive locations are updated as required.
18. ScottishPower/PacifiCorp will review in conjunction with the
Irrigators the account format to identify improvements that can be
made to improve clarity.
WATER RIGHTS
19. ScottishPower and PacifiCorp shall insure that future operations of
the Bear River/Bear Lake system will continue in a manner
consistent with its historic operation and within the constraints of
irrigation water delivery, drought management, the Bear River
Compact, the 1995 Bear Lake Settlement Agreement and the multi-
state Agreement Regarding the Bear River System executed on
October 5. 1999 by ScottishPower and PacifiCorp.r3
l2 Conditions l4-18 are contained in the Notice of Irrigator Service Commitments of Scottish
Power plc and PacifiCorp, filed August2l,1999.
13 Tr. p.490
ORDER NO. 28213 ll
20. ScottishPower and PacifiCorp shall abide by the terms of the
Memorandum of Agreement Regarding Ashton-St. Anthony Projects
executed by the Companies on October 22,1999.
2t
REGULATION OF PACIFICORP AND SCOTTISHPOWER
To assign costs to PacifiCorp and amounts subject to allocation or
direct charges, the Commission or its agents may audit the records of
ScottishPower which are the basis for charges to PacifiCorp.
ScottishPower will cooperate fully with such Commission audits.l4
22. ScottishPower and PacifiCorp will provide the Commission access
to all books of account, as well as all documents, data and records of
their affiliated interests, which pertain to any transactions between
PacifiCorp and its affiliated interests.
23. PacifiCorp will maintain its own accounting system, separate from
ScottishPower's accounting system. All PacifiCorp financial books
and records will be kept in Portland, Oregon, and will continue to be
available to the Commission upon request at PacifiCorp's offices in
Portland, Salt Lake City, Utah, and elsewhere in accordance with
current practice.
24. ScottishPower and PacifiCorp will exclude all costs of the
transaction from Pacifi Corp's utility accounts.
25. PacifiCorp will maintain separate debt, and if outstanding, preferred
stock ratings.
26. ScottishPower and PacifiCorp will provide the Commission with
unrestricted access to all written information provided to common
stock, bond, or bond rating analysts, which directly or indirectly
pertains to PacifiCorp.
27. ScottishPower and PacifiCorp agree to comply with all existing
Commission statutes and regulations regarding afliliated interest
transactions, including timely filing of applications and reports.
28. ScottishPower will not subsidize its activities by allocating to or
directly charging PacifiCorp expenses rlot authorized by the
Commission to be so allocated or directly charged.
ra Conditiorrs 2l-28 and 38 are contained in the Direct Testirlorrv of Robert Green/Craham
Morris, Tr. pp. 531-532.
OITDEII. NO. 282I3 12
29. The Commission shall have the right to inspect the relevant records
of PacifiCorp's holding company, parent affiliate or subsidiaries that
engage directly in any transaction with the regulated utility which
then result in expenses being incurred, allocated or otherwise
attributed to the regulated services of PacifiCorp.
30. On a quarterly basis appropriate senior representatives of
ScottishPower/PacifiCorp shall meet with the Commission and its
staff to discuss any matters of concern to Idaho.l5
31. In addition to compliance with ldaho Code $ 6l-901 et seq., for
three years following the closing date of the merger,
PacifiCorp/ScottishPower will report to the Commission, as soon as
practicable prior to issuance, each debt or equity issuance made by
PacifiCorp or ScottishPower in excess of $75 million and having a
term greater than one year. This report shall include the amounts,
terms and conditions of the issuance, to the extent known, and the
anticipated impact, if any, on the capital structure of PacifiCorp and
ScottishPower.
32 Despite the alternative corporate structures shown in the PacifiCorp
and ScottishPower proxy statements, PacifiCorp and ScottishPower
shall advocate before the Securities and Exchange Commission,
shareholders, and other jurisdictions, a corporate structure that
contains a holding company as a parent and does not include a new
separate entity to provide corporate services, as proposed in the
Amended and Restated Merger Agreement. PacifiCorp and
ScottishPower agree to keep the Commission Staff informed and
consult with the Commission Staff regarding any recommendations
by jurisdictional regulatory bodies to include a separate entity to
provide corporate services in the post-merger corporate structure. If
a change in the proposed corporate structure as reflected in the
Amended and Restated Merger Agreement, including the current
PacifiCorp corporate structure, (i) is rnandated in a merger-related
proceedings by a jurisdictional regulatory body other than Idaho or
shareholders or (ii) becomes advisable in the future,
PacifiCorp/ScottishPower shall so advise the Commission and the
Staff in writing, within 30 days. along with the perceived or
anticipated associated changes to allocations or other matters that
may be required by the changed corporate structure.
PacifiCorp/ScottisliPower and tlie Comntission and its Staff will
support before the Secr:rities and Exchange Corrrmission and other
appropriate regulatory ar-rthorities PacifiCorp's state divisional
15 Tr. p. 8l
ORDER NO. 28213 13
operation and interjurisdictional allocation of costs as currently
agreed upon.
33. Any diversified holding and investments (e.9., non-utility business or
foreign utilities) of ScottishPower and PacifiCorp shall be held in a
separate company other than PacifiCorp, the entity for utility
operations. Provisions shall be provided for each of these diversified
activities to fully separate accounting functions and to provide full
cost allocations. This condition shall not prohibit the holding of
diversified businesses and investments by affiliates of PacifiCorp,
such as PacifiCorp Group Holdings Company.
34. On June 18, 1999, ScottishPower/PacifiCorp provided the
Commission and other jurisdictional state rate regulators a proposed
methodology for the allocation of corporate and affiliate
investments, expenses, and overheads and a statement of where each
of the ScottishPower principal corporate departments will sit in the
corporate structure. This document would constitute a draft of what
is to be filed regarding cost allocations with the Securities and
Exchange Commission. On October 29, 1999, PacifiCorp/
ScottishPower scheduled a conference/meeting with state and other
interested regulators to discuss the proposed corporate and affiliate
cost allocation methodology. Further conferences/meetings will be
scheduled as needed to discuss the cost allocation issue.
35. No later than 90 days after the closing date of the merger,
ScottishPower/PacifiCorp shall file its proposed corporate and
affiliate cost allocation methodology with the Securities and
Exchange Commission, OFFER, and OFWAT.
36. Within 30 days of receiving all state, federal, and foreign regulatory
approvals of the final corporate and affiliate cost allocation
methodology, a written document setting forth the final corporate
and affiliate cost methodology shall be submitted to the Commission
and the Staff as a compliance filing related to this merger
application. On an on-going basis, the Commission shall also be
notifred of anticipated or mandated changes to the corporate and
alllliate cost allocation methodologies.
37. PacifiCorp/ScottishPower shall not subsidize its non-regulated
businesses with its regulated businesses.
38. PacifiCorp/ScottishPower shall not assert in any future Idaho
proceeding that the provisions of the Public Utility Holding
Corrrpany Act of 1935 or the related Ohio Power v. FERC case
preempt the Commission's jurisdiction over affiliated interest
ORDEII. NO.28213 t4
transactions and will explicitly waive any such defense in those
proceedings.
39. On an annual basis on or before July I't of each year, PacifiCorp
shall file an affiliate transactions repoft which includes the
following: an organizational chart showing the parent company and
all subsidiaries; a narrative description of each affiliate with which
PacifiCorp does business; the revenue for each affiliated entity with
which PacifiCorp does business: a report of transactions between
each affiliate and PacifiCorp; and a description of any intercompany
loans. Additionally, PacifiCorp/ScottishPower shall not asseft in any
Idaho proceeding preemption by a United Kingdom or other foreign
regulator over cost allocations or affiliate interest transactions.
40. PacifiCorp/ScottishPower shall notify the Commission subsequent to
ScottishPower's board approval and as soon as practicable following
any public announcement of any acquisition of a regulated or
nonregulated business representing 5o/o or more of the market
c apitalization o f S c otti shP ower.
41. On an annual basis on or before July 1't in the year following closing
of the merger and for five years thereafter, PacifiCorp shall provide
the Commission with a report detailing the utility's proportionate
share of the holding company's (i) total assets; (ii) total operating
revenues; (iii) operating and maintenance expense; and (iv) number
of employees.
42. In the event the Public Utility Holding Company Act of 1935 is
repealed, PacifiCorp/ScottishPower shall, within 60 days of the date
of the repeal, discuss with the Commission and the Commission
Staff how cost allocation and affiliate transaction commitments
contained in this Order need to be modified in light of that
circumstance.
43. Nothing in these conditions shall preclude the Commission from
participating in related proceedings before the Federal Energy
Regulatory Commission or the United States Securities and
Exchange Commission. I 6
l6Conditiors32-43 areadaptedfrorntheWyorningStipulation,Exhibit l0S.asexplainedbyMr
MacRitchie, Tr. pp. 603-635
ORDER NO.28213 15
INVESTMENT IN RENEWABLE RESOURCES
44. In any future rate proceeding filed with the Commission,
PacifiCorp/ScottishPower shall make a showing that any additions of
renewable resources to the rate base or the revenue requirement first
appearing in that rate proceeding are prudent investments.
ADDITIONAL CONDITIONS
45. Pursuant to ldaho Code $ 6l-624, the Commission, after notice and
opportunity for hearing, may amend its final order to include as an
additional condition to the final order any system-wide benefit that
may be ordered by another regulatory commission with jurisdiction
to approve the transaction. Excluded from "system wide benefits"
are commitments or benefits that are unique to a particular
jurisdiction and situations where, through negotiation in a particular
jurisdiction, certain elements of the package may be enhanced while
others are reduced to produce a total package that accommodates the
unique requirements of that jurisdiction.lT
ENFORCEMENT
46- In the event that PacifiCorp/ScottishPower do not comply with the
above conditions, the Commission may make, to the extent permitted
by Idaho law and regulatory practice, appropriate ratemaking
adjustments to give full effect to these conditions. The Commission
may exercise its authority to make, for retail ratemaking purposes,
adjustments for inappropriate allocations of costs from nonregulated
business to PacifiCorp.
We find:
We hereby adopt all of the foregoing Conditions of Merger Approval.
C. Statutory Standards Governing the Merger
There were many references throurghout this case by the parties and members of the
public, to the statutory standards by which we are bound in our decision whether to approve the
proposed merger. We find that, in sonre instances, those statutes and standards were
misinterpreted, misconstrued, and even misquoted. Thus. we set them forth below as they appear
in the Idaho Code and render what we believe to be an appropriate interpretation of their general
meaning. First,ldaho Code $ 61-328 provides:
r7 Tr. p. 621.Exhibit220
ORDER NO. 28213 16
6l-328. Electric utilities - Sale of property to be approved by
commission. - No electric public utility or electrical corporation as
defined in chapter l, title 61, Idaho Code, owning, controlling or operating
any property located in this state which is used in the generation,
transmission, distribution or supply of electric power and energy to the
public or any portion thereof, shall sell, assign or transfer, directly or
indirectly, in any manner whatsoever, any such property or interest
therein, or the operation, management or control thereof, or any certificate
of convenience and necessity or franchise covering the same, except when
authorized to do so by order of the public utilities commission of the state
of Idaho. Such authorization and order shall be issued only following
public notice and hearing, upon verified application of the parties setting
forth such facts as the commission shall prescribe or require, and if the
commission shall find that the public interest will not be adversely
affected. that the cost of and rates for supplying service will not be
increased by reason of such transaction. and that the applicant for such
acquisition or transfer has the bona fide intent and financial ability to
operate and maintain said property in the public service: provided, that no
such order or authorization shall be issued or granted to any applicant or
party coming within the prohibitions set forth in this act. The commission
shall have power to issue said authorization and order as prayed for. or to
refuse to issue the same. or to issue such authorization and order with
respect only to a part of the property invelved- and may attach to its
authorization and order such terms and conditions as in its judgment the
public convenience and necessity maLrequire. (Emphasis added.)
In summary, $ 61-328 provides that the merger "shall" be approved so long as the
Joint Applicants have convinced us that (l) the merger will not adversely affect the public
interest; (2) the merger will not cause PacifiCorp's costs and rates to increase, and: (3) the Joint
Applicants have the bona fide intent and financial ability operate the PacifiCorp system in the
public service.ls
ts ldaho ('orlc $ 6l-328 also provides that no merger authorizatiorr shall be granted to "any
applicant or party conring within the prohibitions set forth in this Act." Section 61-321 prolribits the
acqLrisition of public Lrtility property by any governrnent or municipal corporation. quasi-rnunicipal
corporatior.r, or govenrnlental or political unit, subdivision or corporation existing under the lar'vs olany
other state or alty representative olthe foregoing. The Joint Applicarrts are privately-owned corporations
that do not fall r'vithin the pararneters of $ 6l-327 nor, cor-lsequently, this particular prolribitiorr of $ 6l-
328.
ORDER NO. 282 r3 17
Because the foregoing statute pertains to the sale or transfer of ownership interest in
electric facilities located in Idaho, it applies to the merger in this case. In addition to our
jurisdiction under $ 6l-328, this Commission also has jurisdiction over the merger pursuant to
the "securities issuance" statutes found in Title 61, Chapter 9 of the ldaho Code which require
Commission approval of the issuance of "instruments of security" [including common stock].
Section 6l-902 also adopts the term "public interest" and refers generally to the other provisions
of Title 61. That statute provides:
6l-902. Petition for authorify - Notice and hearing. - Order
Refund. - Such public utility shall, by written petition, filed with the
commission and setting forth the pertinent facts involved, make
application to the commission for an order authorizing the proposed issue,
assumption or guarantee of securities, and the application of the proceeds
therefrom for the purpose specified in such application. The commission
shall, after such hearing and upon such notice as the commission may
prescribe, enter its written order approving the petition and authorizing the
proposed securities transactions, unless the commission, for good cause
shown, shall find: That such transactions are inconsistent with the proper
performance by applicant by service as a public utility; or that the purpose
or purposes thereof are not permitted by this act.
We will provide a more definitive interpretation of these statutes and their standards
later in this Order. Initially, however, we wish to clear up some misconceptions that certain
parties apparently entertain regarding the general nature of the statutory standards guiding our
decision in this case. First, Idqho Code $ 6l-328 does not require a finding that PacifiCorp's
rates will decrease as a result of the merger. In fact, the statute mandates that rates not increase
because of the merger. The distinction is significant. In any event. as explained below, the
merger proposed in this case will result in rates for PacifiCorp customers that are lower as a
direct result of the merger. Second, $ 61-328 does not require that the public interest be
enhanced by the merger. Rather, this standard mandates that the public interest not be adversely
aflfected. Again, this is an important distinction. Finally, the evidence must establish that the
.loint Applicants in this case have the bona fide intent and flnancial ability to operate and
maintain the PacifiCorp system in the public interest.
The securities issuance statutes are more general in nature than $ 6l-328. Idaho Code
r\ 61-902 simply requires that the proposed securities issuance is not inconsistent with the public
interest and that it is not unnecessary or inappropriate lbr or inconsistent with the proper
ORDER NO. 28213 l8
performance by the Joint Applicants of service as a public utility and that it is not prohibited
generally by Title 61. Because we find that the merger proposed by PacifiCorp and
ScottishPower, when subject to the conditions imposed by this Order, does not violate the three
part test contained in $ 6l -328, we necessarily find that the standards for approval of a securities
issuance contained in $ 6l-902 have been satisfied as well.
In issuing this Order, we note that the Idaho Public Utilities Commission is a creature
of statute. It has only those powers granted to it by statute. lfton Energy, Inc. v. Idaho Power
Co., 111 Idaho 925,729 P.2d 400 (1986). We are guided by the enabling statutes contained
within Title 61 and, to some extent, Title 62 of the Idaho Code. Id. We were urged repeatedly
throughout this proceeding by various parties and members of the public to abandon the statutory
mandates governing this merger and to adopt criteria that are inconsistent with and contrary to
the Idaho Code. Notwithstanding the sentiments of the public and parties, and regardless of how
the laws of other states are fashioned, we are legally bound to follow the letter of the law in
Idaho and to adhere to the standards set forth in the aforementioned statutes. We note that the
areas of concern we enumerated in Order No. 27939 issued following the prehearing conference
all fall within one of the three criteria contained in $ 61-328. We find that all of those areas of
concem have been adequately addressed by this Order.
We wish to emphasize the importance of the participation of the parties to this
proceeding and of the input provided by members of the general public. The testimony we heard
during the course of four separate public hearings was at times passionate, but always motivated
by genuine concern of those affected by our decision in this case. The comments articulated by
the public are the basis for many of the 46 merger approval conditions we impose in this case.
We firmly believe that those conditions will lead to significantly improved service at reasonable
rates for PacifiCorp's Idaho customers.
In the following sections of this Order, we discuss the statutory standards of Idaho
Code $61-328 in reverse order to reflect the degree of emphasis that was given them by the
parties to this proceeding and by members of the public.
D. Bona fide Intent and Financial Ability
This particular standard, and the related issues that were raised, are arguably the least
contentious in this case. While some parties cluestioned the intent and ability of ScottishPower to
implement the proposed customer service and system perfonnance improvements. and to achieve
ORDER NO. 2U213 l9
the targeted cost savings, there was relatively little doubt expressed that PacifiCorp and
ScottishPower have the intent and financial ability to continue operating as a public utility
following the merger.
1. Bona fide Intent
The fact that the Joint Applicants have the bona fide intent to operate the PacifiCorp
system is evident by, among other things, the fact that the merger will have minimal effect on the
location of PacifiCorp's management, its headquarters, its books and records and its personnel.
It is further evident by the considerable service and reliability improvements to which
ScottishPower has committed.le ScottishPower executive director and board of directors
member Richardson testified that PaciflCorp would be an indirect, wholly-owned subsidiary of
ScottishPower and would operate on a stand-alone basis headquartered in Portland, Oregon,
"with operations in substantially the same structure as they are today." Tr. p. 63. Richardson
further recognized that "the Commission will continue to exercise precisely the same degree of
regulatory oversight over PacifiCorp as it does today." Tr. p. 63. Richardson argues that because
of the more accurate performance measurements and reporting of results proposed by
ScottishPower, the merger "should actually increase this Commission's ability to monitor
PacifiCorp's performance." Tr. p. 63.
ScottishPower's predecessors have been supplying electricity to the central belt and
the south of Scotland for over 100 years. Tr. p. 59. The Company is now a leading multi-utility
business in the U.K. with approximately 5 million customers. It has considerable experience in
the acquisition of other utilities and has had notable success in implementing improvements to
those utilities it has acquired. Tr. pp. 60-61.
Richardson pointed out that with respect to the management of PacifiCorp,
Scottishl)ower intends to utilize the same approach it adopted in the acquisition of other utilities
in the U.K. I'le testifled that "there will be very few imports of U.K. personnel into PacifiCorp."
Tr. p. 71. Current PacifiCorp employees have been and will continue to be a key strength of the
organization. Richardson contends. 1d Decisions regarding the operation of PacifiCorp will be
l') Discussed in Sectiorr IIl.F. I belolv
OItDtrl{ NO.28213 20
made in the U.S. Richardson testified that appropriate decision making authority will be
delegated to managerial staff so that decisions can be made locally. Tr. p.71.
ScottishPower also presented the testimony of Robert Green who was employed by
the Company at the time his direct testimony was filed but subsequently took a position with
another business. His testimony was sponsored at the technical hearing by Graham Morris.
Green was tentatively slated to be appointed as the chief financial officer of PacifiCorp. Morris
is the head of finance at ScottishPower's subsidiary Manweb. Green/Morris note that following
the merger, there will be some elimination of overlapping corporate functions although it is
anticipated that relatively few ScottishPower personnel will relocate to the U.S. For the most
part, corporate functions will continue to be undertaken by the current staff. Tr. p. 522.
As discussed later in this Order, ScottishPower has agreed to a package of customer
service and performance reliability standards as further evidence of the merged utility's intent to
continue operation in the public interest. See, generally,lestimony of Bob Moir, Tr. pp. 378-
404.
ScottishPower has also committed to contributing $5 million to the PacifiCorp
Foundation following the conclusion of the merger. ScottishPower also commits to maintaining
the level of PacifiCorp's other community-related involvement both in terms of monetary and in-
kind contributions along with other community efforts. Tr. pp. 67-68. ScottishPower has
committed to honoring all existing labor contracts. Tr. p.72.
We find:
There is some overlap between this particular standard and the other two contained in
ldaho Code $ 61-328. To some extent, therefore, we reference our findings of fact and
conclusions of law made in later sections of this Order. To summarize. however. we find ample
evidence that the merged utility has the bona fide intent to continue the operation of the
PacifiCorp system in the public service. First, the merger will have relatively little eff-ect on the
existing personnel of PacifiCorp. Operational decision making will continue to be made at the
local level. For all intents and purposes, the merged utility will continLle to operate as it always
has. albeit with considerable improvement in customer service and performance levels.
Corporate nlanagement will continue to be located in the Paciflc Northw'est as will books and
records.
oRDtiR NO. 28213 21
Second, ScottishPower's commitment to invest in the PacifiCorp Foundation and its
commitments to become highly involved in the local community is further evidence of its bona
fide intent to operate in the public service. Third, this Commission will continue to exercise the
same degree of regulatory oversight of PacifiCorp that it always has. So long as PacifiCorp
continues to operate as a public utility in the state of Idaho and, assuming there are no legislative
changes diminishing or eliminating this Commission's regulatory authority, we will continue to
have the power to "supervise and regulate...and to do all things necessary" with respect to the
activities of PacifiCorp. Idaho Code $ 6l -501 . In fact, ScottishPower's commitment to establish
customer service and performance level baselines and to more accurately and frequently monitor
its results and report those results to this Commission, as discussed below, will enhance our
ability to regulate PacifiCorp.
We also note that the merged utility will continue to be subject to ldaho Code $ 61-
328; the same statute governing our review of this merger. That statute applies to the sale,
assignment and transfer of generation, transmission, distribution or supply property located in
this state. Such transactions are prohibited without the prior consent of this Commission.
Finally, concems were expressed during the public hearings, and the issue was raised
by this Commission during the prehearing conference, regarding the possibility that
ScottishPower might, following merger approval, attempt to reduce its work force in Idaho as a
cost savings measure. We acknowledge this to be a fairly typical aftereffect of business mergers
in today's competitive world. While it certainly could be considered micro-management and
outside of this Commission's authority to require ScottishPower to maintain its existing staff, the
possibility of any reduction in the Company's Idaho-based work force concerns us. Specifically,
we are concerned about the effect that work fbrce reduction might have on PacifiCorp's ability to
maintain adequate service as mandatedby ldaho Code $ 61-302 which provides:
6l-302. Maintenance of adequate service. - Every public utility shall
furnish, provide and maintain such service. instrumentalities, equipment
and facilities as shall prornotc the safety. health comfoft and convenience
of its patrons, employees and the public. and as shall be in all respects
adequate, efficient, just and reasonable.
Based on concerns raised during the public hearings in this case, the Commission
directed its Staff to begin an informal investigation into the quality of service currently being
provided by PacifiCorp. That investigation is still ongoing. Additionally, ScottishPower
ORDER NO.28213 22
responded to the public's concerns when it filed a commitment to add an "irrigation specialist" to
its Idaho workforce. Because of the importance of this issue, we hereby impose, as an additional
condition of the merger (Merger Approval Condition No. 5), that ScottishPower include in its
transition plan an indication of any significant action it intends to take regarding its work force
and the maintenance of adequate service in Idaho. We note that we consider "adequate service"
as the bare minimum necessary for compliance with $ 6l-302.
We also note that some parties to the technical proceeding criticized ScottishPower
for its failure to have completed its merger transition plan prior to seeking regulatory approval.
We find that it would be nearly impossible for ScottishPower to file its transition plan prior to
obtaining regulatory approval in all states because the Company could not know all the
conditions to which it will ultimately be subjected. The transition plan will need to take those
conditions into account. We have the ability to shape the transition plan by imposing the
conditions contained herein and ensuring that the Joint Applicants understand the concerns and
requirements of PacifiCorp's Idaho customers.
2. Financial Ability
According to ScottishPower witnesses Green/Morris, ScottishPower is among the 20
largest investor-owned electric utilities in the world. Tr. p. 534. ScottishPower's bond rating as
of December 1998 was Aa3 by Moody's and A+ by Standard and Poor's. .Irl. ScottishPower
intends to strengthen the capital structure of PacifiCorp by proposing an actual capital structure
equivalent to that of comparable A rated electric utilities in the U.S. with a common equity ratio
for PacifiCorp no less than 47Yo. Tr. p.525.
Staff witness Carlock testified that she is satisfied that the Joint Applicants have the
financial ability to continue operating PacifiCorp's system in the public interest based upon her
review of financial statements, due diligence reports, disclosure letters, board meeting minutes,
numerous production requests in this case and meetings with Company representatives. T.. p.
879.
We find:
One of the primary reasons given by PacifiCorp, througli the testin.rony of its
executive vice president and chief operating officer Richard O'Brien for its decision to rnerge
with ScottishPower was the latter's strong financial position. Tr.p. 246. ln fact. there was little
if any concern expressed during this proceeding by anyone regarding ScottishPower's financial
ORDER NO.28213 23
position and that Company's financial ability to continue to operate the PacifiCorp system in the
public interest. We find, therefore, that the Joint Applicants have satisfied their burden of proof
that the merged PacifiCorp will have the financial ability to operate its system in the public
service.
E. Rates Will Not Increase as a Result of the Merger
1. Public Comment
A considerable number of those who testified at the public hearings expressed
dissatisfaction with the rates they currently pay to PacifiCorp. There is a commonly held
perception among PacifiCorp's Idaho customers that they pay considerably higher rates than
comparable Idaho Power customers and PacifiCorp customers in other states. Some customers
also compared their rates to those paid by customers of nearby municipal and cooperative
utilities not regulated by this Commission. Many customers expressed a desire that Idaho Power
purchase PacifiCorp's southeastern Idaho system under the assumption that their rates would
decrease if that were to occur. Some of PacifiCorp's Idaho customers believe that, if the merger
is approved, they will be subject to rate increases by a foreign corporation whose sole motive is
to siphon as much revenue as possible from PacifiCorp and its customers.
2. Joint Applicants
The Joint Applicants did not initially propose a rate reduction as a condition of the
merger. Rather, the Company simply argued that rates would not increase as a result of the
merger and, therefore, the statutory requiremenLs of ldaho Code $ 6l-328 would be satisfied.
The Joint Applicants did argue, however, that cost savings attributable to the merger would
ultimately result in rates lower than they otherwise would be. Nonetheless, there was no firm
commitment offered as to when those cost savings would be reflected in rates. For example,
PacifiCorp's O'Brien testified that the merger "will result in significant efficiencies and cost
savings by the end of the five-year period" discussed by witness MacRitchie. Tr.p. 253. In the
normal course, O'Brien concluded, cost savings will be realized in lower rates through a cost of
service rate setting process resulting in "prices lower than they would be without the
transaction." Tr. p.253. O'Brien testified that he did not believe a rate reduction was necessary
as a condition of merger approval. He posited that the expectation that the merger will result in
better and more reliable service is "more than enough to constitute positive net benefits to
custonrers." Tr. p. 254.
ORDER NO. 28213 24
ScottishPower witnesses Green/Morris testified that "[t]here will be some reduction
in overlapping corporate functions." Tr. p. 522. Green/Morris testified that ScottishPower will
reduce corporate costs and overheads, where possible, by streamlining support functions and
selectively eliminating redundant activities. They testified that ScottishPower will achieve
efficiencies in operational costs by an amount greater than could be achieved by PacifiCorp.
Moreover, ScottishPower proposes to increase overall system performance and to enhance
customer service, that will, over the long-term, produce efficiencies and lower costs.
Tr. p.523.
Green/Morris further testified that because of the merger, "the cost of PacifiCorp's
borrowings can be expected to be lower after the transaction." Tr. p.524. This is because, given
ScottishPower's financial strength, PacifiCorp should be viewed by risk analysts as being less
risky for debt acquisition purposes. 1d
GreerVMorris contend that PacifiCorp will bear lower corporate costs than is
currently the case. PacifiCorp will be assigned a fixed sum of corporate costs that is less than it
currently incurs. In fact, by the end of the third year following the merger, ScottishPower
expects to achieve approximately $15 million of annual savings in corporate costs which, when
offset by $5 million of associated cost increases, will produce a net reduction of $10 million
annually in corporate costs. ScottishPower originally committed to reflecting this reduction in
PacifiCorp's results of operation and, thus, in rates. Tr. p.526.20 ScottishPower further commits
to providing an analysis of its proposed allocation of corporate costs within three months of
completion of the merger transaction. The Company will file this analysis and proposed
allocation with each of the five state commissions fiom which ScottishPower is seeking merger
approval. Tr. p. 527.
20 This cornrnitrnent was later superseded by ScottishPower's lnerger rate credit proposal (Merger
Approval Condition No. 3).
ORDER NO. 282 r3 25
Green/Morris do not anticipate that a material number of affiliate transactions
involving PacifiCorp and other subsidiaries of ScottishPower will take place. For instance,
Scottish Telecom, a ScottishPower subsidiary, which operates solely within the UK, has no plans
to operate within the U.S. The same holds true with respect to the other electric and/or regulated
operations of the other affiliates and subsidiaries of ScottishPower. The other main affiliates
within the ScottishPower group are Southern Water, which supplies water and waste water
services to customers in the southeast of England, and ManWeb, which provides electricity
service to customers in northwest England and north Wales. Given the geographic separation
between these affiliates and PacifiCorp, there will be very few, if any, transactions between
them. Tr. p. 528.
For any transactions that do occur between PacifiCorp and other ScottishPower
affiliates, the Company proposes to price any goods and services at market rates. In the case of
cost allocations which become affiliated interest activities only because of the structure of the
transaction, ScottishPower proposes that an at-cost-basis be used. Tr. p. 528.
Regarding access to books and records, Green/Morris state that the books, records,
documents, and other information relating to PacifiCorp will be located in Portland, Oregon and
will continue to be available to the Commission upon request at PacifiCorp's offices in Portland,
Salt Lake City, Utah and elsewhere. Moreover, the Commission will have reasonable access to
the books, records, documents and other information of ScottishPower and its affiliates which
pertain to transactions between PacifiCorp and all ScottishPower's affiliated interests. Tr. p.
s30.
ScottishPower will utilize accounting policies and procedures consistent with its
historical operation, will use the Federal Energy Regulatory Commission's system of accounts.
and will further comply with the Idaho Commission's accounting rules. Tr. p. 530. The costs
incurred by ScottishPower to consummate the merger (referred to as "transaction costs") will be
borne by ScottishPower's shareholders and not PacifiCorp's ratepayers. Tr. p. 534.
Durirrg the technical hearing, ScottishPower introduced Exhibit No. 220 which
contains what became known as the "most favored nation" provision. Essentially, this provision
constitutes ScottishPower's comrnitment that any "system benefits" agreed to or imposed in
otherstates will apply in Idaho. The effect of this is to ensure that PacifiCorp's Idaho customers
receive at least as lavorable treatment as the Company's customers in other states.
ORDI]R NO. 282I3 26
Following the conclusion of the technical hearing, ScottishPower filed its Notice of
Merger Credit Commitment. In that proposal, ScottishPower and PacifiCorp commit to
guaranteed merger-related cost of service reductions for four years through an annual merger
credit. The amount of the credit shall be $1.6 million per year for the years 2000,2001,2002,
and 2003. The total credit in years 2000 through 2003 will be $6.4 million. The merger credit
shall be allocated among PacifiCorp's retail tariff customers on the basis of the percentage of the
customer bill, exclusive of taxes. At the end of each year, the aggregate amount of the credit
allocated in that year shall be calculated. These calculations shall be available for audit by the
Commission Staff. In the event the merger credit does not equal $1.6 million in any of the first
three years, the excess or shortfall shall be applied to the amount due in the following year.
For each of the years 2002 and 2003, ScottishPower and PacifiCorp may reduce or
offset the $1.6 million merger credit to the extent that cost reductions related to the merger are
reflected in rates. The dates set forth in the credit commitment assume that the credit transaction
closes in 1999. If the closing is delayed, ScottishPower and PacifiCorp may adjust the dates so
that the merger credit begins as soon as practicable but not later than 30 days after the closing
date.
In the event that restructuring of the electricity business occurs in Idaho prior to the
end of the four years for payments of the merger credit, the Commission shall determine at that
time how the outstanding merger credit shall be paid. Any other terms required to implement the
merger credit shall be included in the merger credit tariff for approval by the Commission.
In its merger credit commitment, ScottishPower notes that the amount of the credit
offered in Idaho is calculated based on the same percentage of tariff revenues as used in other
state jurisdictions where a merger credit is being offered. Idaho customers are therefore
receiving the same relative benefit as has been offered in other states consistent with the most
favored nation provision.
The proposed merger credit supercedes the Joint Applicants' previons commitment to
reflect in PacifiCorp's cost of service, commencing in year three fbllowing the closing of the
merger, Idaho's allocated share of $10 million in corporate cost savings. or approximately
$450,000 per year. The merger credit commitment. ScottishPower contends, gives Idaho
customers an immediate, guaranteed rate benefit of $6.4 million over fbur years compared to the
ORDER NO. 282I3 27
previous commitment under which customers would receive rate benefits only in future rate
cases after the third year.
3. Commission Staff
Staff believes that the cost of and rates for PacifiCorp's service will not increase due
to the merger itself. This is because the costs incurred to transact the merger through closing will
be booked "below the line" and customers will not pay these costs. Tr. p. 875. Attached to
Carlock's testimony as Exhibit No. l0l are production request responses from ScottishPower
assuring that merger costs and penalties paid if standards are not met will be recorded below the
line and not paid by customers. Tr. p. 875.
Operating efficiencies resulting from improvements implemented by ScottishPower
will be reflected in the Company's actual costs. ScottishPower originally guaranteed operating
efficiencies of at least $10 million annually on a system basis. If the minimum $10 million
annual reduction is not achieved by the end of the third year, an amount equal to the difference
between the $10 million and efficiencies actually achieved must be moved below the line to be
absorbed by shareholders. Tr. pp.875-876.21
Annual report of efficiencies achieved must be provided to the Commission Staff to
verify the savings along with an annual commission basis earnings report. ScottishPower has
committed to provide these reports in a format similar to that currently used by the Company in
the UK. The actual report format can be modified for additional information following the
merger if the Commission so desires. Tr. p. 876.
Moreover, Staff will audit the annual commission basis earnings report and file an
audit report with the Commission. fhe results of this report can be used to determine if the
efficiencies have been achieved. If not. the procedure and actual adjusting entries can then be
determined. Staff believes that this guarantee and annual review process provide assurance that
rates will not increase as a result of the merger. Tr. p. 876.
2t This cost savings guarantee was eventually superseded by the rnerger rate credit proposed by
the Cornparry. (Merger Approval Condition No. 3)
ORDER NO.28213 28
Staff is convinced that ScottishPower can achieve the efficiencies it has targeted
based upon Staffls review of the Company's due diligence reports, disclosure letters, board
meeting minutes, annual reports and statements of regulatory accounts, shareholder circulars,
proxy statements and the production request responses in this case which reflect areas where
efficiencies may be achieved. Staff believes that cost reductions or elimination of duplicate
functions should occur in the areas of investor relations, shareholder services, corporate finance,
corporate communications, legal services, corporate strategy, human resources and information
technology. Tr. p. 878.
4. Solutia
Solutia, which operates an elemental phosphorous plant near the city of Soda Springs
and is a special contract customer of PacifiCorp, presented the testimony of Richard Anderson.
Anderson testified that "the Applicants' filing fails to show that PacifiCorp ratepayers will
gamer economic benefits resulting from proposed actions of ScottishPower." Tr. p. 682. He
concludes that the merger violates the criteria of ldaho Code $ 6l-328 because it "may have an
adverse effect on the economic well-being of ratepayers by increasing economic risk of
ratepayers without providing concomitant benefits of equal value." Tr. p.682.
Anderson contends that the estimated $10 million in cost savings that ScottishPower
expects to achieve in reductions and corporate overhead is insignificant considering the size of
the two companies. Tr. p. 687. He further questions the accuracy of the estimated $60 million in
performance improvement benefits that ScottishPower expects to achieve. T.. p. 688. Anderson
disputes that ScottishPower will be able to implement the cost reductions at PacifiCorp that it
achieved at ManWeb because the two utilities are significantly different. Anderson characterizes
the potential fbr cost savings at PacifiCorp as "highly uncertain." Tr. p.696.
Anderson concludes that, if the Commission were to approve the merger. it should
insist on the fbllowing conditions:
I . ScottishPower should be willing to back up its claim of cost savings
through a commitment to price stability or price reduction over the
course offlve years.
ScottishPower should be required to insulate the acquired conrpanies
fiom the parent corporation.
2
ORDITI{ NO.282l-i 29
ScottishPower should be required to separate financing to ensure that
investments are properly made for each of the acquired companies.
ScottishPower should be required to establish "arms length
transactions" criteria between the group companies ("also known as
"ring fencing").
ScottishPower should be required to meet strict conditions before
distributing dividends from Pacifi Co.p.
Tr.pp. 125-726.
5. Irrigators
The Irrigators' witness Yankel argues that Idaho law requires that in order to gain
approval for the merger, "the Commission must make a positive finding that the Applicants have
demonstrated that the transaction/merger will not lead to increased costs or rates." He further
states that "although the Idaho standard does not require a rate reduction, the second standard
calls for a positive finding that rates will not increase-both now and in the future as a result of
the merger." Tr. p.772. Yankel concludes that the Applicants "have not provided any evidence
that rates will not go up in the future as a result of the merger." Tr. p.772.
Yankel spends a considerable amount of his testimony discussing his perception that
the rates of eastern Idaho's investor-owned electric utility electric customers are significantly
higher than rates paid by similar customers located elsewhere in the state of Idaho. Tr. pp. 77 5-
778. Yankel also contends that PacifiCorp's Idaho customers pay higher rates than their
PacifiCorp counterparts in Utah. Yankel argues that ScottishPower has made no commitment
"that rates will not go up because of the expenses and investments that are being proposed by the
Applicants as a part of this merger." Tr. p. 789.
Yankel alleges that ScottishPower will seek to recover the bid premium it will pay to
PacifiCorp as a result of the merger fiom ratepayers if it cannot be offset by cost savings.
Yankel argues that the motivation fbr the merger is simply financial and that "ScottishPower
hopes to extract hundreds of millions of dollars per year out of PaciliCorp" without adjusting
rates downward. Tr. p.793. According to Yankel. ScottishPower will first make considerable
capital investment following the merger in order to achieve cost savings. This, he contends, will
cause rates to increase. Tt. pp. 795-797.
aJ
4.
5
ORDER NO. 282r 3 30
We find:
It appears that, to some extent, the Irrigators and Solutia are operating under the
misconception that Idaho law requires that PacifiCorp's rates must decrease as a condition of
merger approval. As we stated earlier, this is an inaccurate interpretation of the clear letter of the
law. PacifiCorp simply has the burden to establish that rates will not increase because of the
merger. We find that: (l) even absent the commitment by the Joint Applicants, rates will not
increase because of the merger, (Merger Approval Condition No. l), and; (2) absent the
proposed rate credit (Merger Approval Condition No. 3), the standard in ldaho Code $ 61-328
pertaining to rates has been satisfied. ScottishPower and PacifiCorp enumerated a variety of
means by which the Companies intend to reduce costs and, therefore, rates. This was
corroborated by the Commission Staff. While a general fear of rate increases was expressed,
there was no verifiable, quantifiable evidence presented that rates would go up due to the merger.
Solutia and the Irrigators questioned the magnitude and timing of the estimated cost savings.
This does not constitute a showing that rates will increase. We find that the Joint Applicants met
their initial burden of proof and were never successfully refuted.
Regardless, any doubt that might arguably have existed regarding this issue was
definitively put to rest by the filing of the Joint Applicants' Notice of Merger Credit
Commitment. As a final and irrefutable measure to ensure that rates will not increase as a result
of the merger, we hereby impose the additional condition (Merger Approval Condition No. 2)
that following the merger, PacifiCorp shall not seek a general rate increase effective prior to
January 1,2002. This literally guarantees that PacifiCorp's customers will see an immediate rate
reduction lasting at least 2 years through the combination of the merger rate credit and the
moratorium on general rate increases imposed herein.22 This rate reduction would not have
occurred absent the merger.
There are other aspects of this issue, however, that warrant discussion. Legitimate
concerns were expressed by Solutia. and others, regarding the need for ensuring that rates do not
increase because of the merger. that PaciflCorp's customers not be required to pay fbr the merger
22 Tlre rate credit rvill be applied lbr fbLrr years. Our Order irnposes the additional condition of a
rate rnoratoriurn fbr approxinrately two years. PacifiCorp is entitled to seek a rate increase to be effective
in year three if it can prclve tlrat its revenue requirenrertt is deficient.
ORDER NO. 282 r3 3l
transaction costs and that PacifiCorp essentially be insulated from the activities of
ScottishPower's other subsidiaries. In addition to all of the commitments made by ScottishPower
regarding the reporling of cost savings and the continued use of existing allocations,
ScottishPower has agreed to provide this Commission access to the books and records of all its
affiliates to the extent necessary to review any transactions between PacifiCorp and its affiliated
interests. (Merger Approval Conditions Nos. 26 and 33). Furthermore, in Merger Approval
Condition No. 24, ScottishPower agrees that none of the merger transaction costs will be
allocated to PacifiCorp's accounts. This condition, combined with our audit authority pursuant to
Title 6l of the Idaho Code, will ensure that PacifiCorp's customers will not pay for the costs of
the merger. Thus, we find that the majority of the merger approval conditions proposed by
Solutia witness Anderson are imposed by this Order.
Finally, we find that the concems expressed by members of the public and discussed
extensively by the Irrigators' witness Yankel regarding the perceived rate disparity between
PacifiCorp's Idaho irrigation customers and those in other states fall outside the scope of this
proceeding. It is well-settled that this Commission sets rates for electric utilities that allow the
utility to recover its reasonable operating expenses as well as a reasonable return on its rate base
within the state. Because the operating expenses and rate base of PacifiCorp differ from those of
other utilities, including Idaho Power, its rates also differ. See, The Attorney General's Report
on Electric Utilitie.s Restructuring (January 11, 1999) at pp. l6-19.
Regardless, we find the generally held perception that PacifiCorp irrigation customers
pay considerably higher rates than customers on other systems is not corroborated by the record
in this case. For example, in his direct testimony, Irrigator witness Yankel presented calculations
which he contended show that a hypothetical 200 horsepower PacifiCorp irrigation customer
pays 26-89% higher rates in the Company's Idaho territory than in Utah. Tr.p.776. On cross-
exanrination. however. PacifiCorp introduced Exhibit No. 229 for the same hypothetical
irrigation customer showing that in ldaho. that irrigator pays 8.3% less than his Utah counterpart,
when comparable rate schedules are used and BPA rate credits are taken into consideration. The
discrepancy is explained by the fact that Yankel's calculations were based on rate schedules, not
bills. and did not take into accoLlnt how many customers take service under the various
PacifiCorp irrigator rate options nor did he take into account the BPA credit not available in
lJtalr. Tr. pp. 821-827.
ORDER NO. 282I3 )'
We further find the suggestion that a purchase of PacifiCorp's system by the Idaho
Power Company would lower the rates of PacifiCorp's Idaho customers is incorrect. Idaho law
prohibits the approval of a purchase that would increase the rates of the purchaser's customers.
Regardless, nothing in ldaho Code $ 6l-328, or any other statute, would allow this Commission
to impose a condition that Idaho Power purchase the Idaho service territory of PacifiCorp. The
Commission does not broker merger deals. It merely reviews them once utilities agree to merger
terms and file a case before us. For the Commission to do otherwise would be meddlesome and
outside of its jurisdiction. The Idaho Supreme Court has ruled that this Commission has no
jurisdiction to take away a utility's freedom of contract so long as the contract is not inimical to
the public interest. Afton Energy, supra.
F. Public Interest
The term "public interest" as it appears in ldaho Code $ 6l-328, is not specifically
defined anywhere in that statute nor anywhere in Title 6l of the Idaho Code. Moreover, we find
no definitive definition of the term in any Idaho Supreme Courl opinion interpreting $ 6l-328.
The Idaho Supreme Court has ruled that the term "public interest" (as used in relation to a motor
carrier statute) "is not susceptible of precise definition." Browning Freight Lines, Inc. v. Wood,
99 Idaho 174, 180,579 P.2d 120, 126 (1918). The Court ruled that "[i]n general, where the
Commission is required to consider the 'public interest,' it must look to 'the interest of the
public, their needs and necessities and location and, in fact, all the surrounding facts and
circumstances...to the end that the people be adequately served." ld.p. 180 (citing Application
of Bermensolo, 82 Idaho 254, 352 P.2d 240 ( 1 960). The Idaho Supreme Court has also found
that state administrative agencies are "clothed with power" to construe the law "as a necessary
precedent to administrative action." J.R. Simplot Co. v. lcluho Stute Tqx Commission,820P.2d
12061211,120 Idaho 849,854 (1991). Consequently, we are lefi to interpret this term.
Because $ 61-328 applies to a wide variety of situations in which an electric utility
divests itself of ownership interest in its facilities. we ftnd that. as the Supreme Court noted, a
precise deflnition of the term "public interest" is r.rot possible. In fact. the term should
necessarily be left somewhat undefined to allow fbr the accomnrodation of different factual
circumstances. In this case. there was a wide range of issues raised and concerns expressed that
pertain to the "public interest" standard. We considered thenr all in reaching our decision. In
ORDEII NO. 28213 JJ
this section of the Order, we discuss the public interest as it will be affected by the merger and,
in doing so, divide the term into categories below.
Throughout these proceedings, a great deal of attention has been given to the weight
that should be placed on public testimony. Specifically, the debate has focused on how public
testimony should be factored into the Commission's decision related to the statutory test of what
is adverse to the public interest. While the Joint Applicants and some of the parties to this case
are clearly at opposite ends of the spectrum on this issue, it is ultimately left to the Commission
to make this determination. Understanding how the Commission perceives the "public interest"
is the appropriate place to begin.
It is this Commission's opinion that public opposition is not necessarily equal to the
public interest. To illustrate this point, one need only look at the sentiment and tenor of the
public testimony that is presented when the Commission undertakes a general rate case. Public
hearings in rate cases seldom bring out individuals who support a rate increase. Instead, the
opposite occurs. Ratepayers almost unanimously testify against a proposed increase of any
amount. For this Commission to decide the issues in this or any other case based only on
popular opinion would be a gross abrogation of our powers and duties prescribed in Title 61,
Chapter 5 of the Idaho Code and would render our functions as a Commission meaningless. In
assessing the public interest, we must also consider the legal rights of the Joint Applicants, to
have their Application considered by this Commission in good faith, with objectivity and free
from emotional rhetoric. With this said, it is important to note that all Commission decisions
must be "in the public interest." As a result, it becomes clear in instances of rate cases that the
public interest may not be equal to public sentiment. This does not mean that testimony obtained
during the public hearing process should be disregarded. To the contrary, the Commission
believes that the public testimony in this case was extremely valuable as referenced throughout
this document and can be credited with helping the Commission craft an Order that pronrises
considerable benefits and opportunities fbr PacifrCorp's Idaho customers.
1. Service Quality
a. Public Comment
One of the most common bases fbr opposition to the merger relates to the quality of
service received by PacifiCorp cLlstomers. In this regard, numerous customers expressed
dissatisfaction over the reliability of the power supply and customer service they currently and
ORDER NO. 28213 34
historically have received from PacihCorp. Many testified that following the merger of UP&L
into PacifiCorp, service quality in southeastern Idaho diminished. For example, service calls that
were historically placed to UP&L offices in Idaho were eventually routed to Salt Lake City, Utah
or Portland, Oregon to a PacifiCorp representative who often lacked the ability to pinpoint the
customer's location and understand, let alone remedy, his or her service problem. These
complaints were expressed most often by farmers who typically take delivery of electric service
at numerous points, in rural areas without addresses, and whose needs and concems can be
unique. Many of those who testified at the public hearings believe that a similar degradation in
service quality will occur if PacifiCorp is allowed to merge with ScottishPower.
Some customers complained about the number and duration of power outages they
experience. Perhaps most of the complaints dealt with the lack of PacifiCorp presence in
southeastern Idaho and the difficulty customers experience in achieving satisfactory solutions to
their service and billing problems. There was mention of long wait times by customers who call
into Pacifi Corp's Business Centers.
b. Joint Appliconts
One of the primary benefits of the merger according to the Joint Applicants relates to
the improvements that will be made to PacifiCorp's levels of performance and customer service.
PacifiCorp executive O'Brien characterized the package of commitments and standards proposed
by ScottishPower as "the most comprehensive offered by any investor-owned U.S. utility." Tr.
p.252. O'Brien contends that absent ScottishPower's involvement, PacifiCorp "simply could
not commit to achieving improvements this substantial or this broad on this shorl a time schedule
nor could it do it as economically." Id. ScottishPower executive Richardson testified that the
improvements in customer service will be achieved through the introduction of an
"unprecedented package ofservice standards." Tr. p.63.
ScottishPower witness Moir provided greater detail regarding the improvements that
will be made to PacifiCorp's operations. First, ScottishPower ol}-ers the following performance
standards:
System Availability. By 2005, PacifiCorp will undertake to reduce
the underlying system-average interruptiorr duration index (SAIDI)
by 10%.
ORI)l:lt NO. 2821 3 35
L
3
4
2. System Reliability. By 2005, PacifiCorp will undertake to reduce
the underlying system-average interruption frequency index (SAIFI)
by l0%.
Momentary Intemrptions. By 2005, PacifiCorp will undertake to
reduce the underlying momentary average interruption frequency
index (MAIFI) by 5%.
Worst Performing Circuits. The five worst performing circuits in
each state will be selected annually on the basis of the circuit
performance indicator (CPI) and corrective measures will be taken
within two years of implementation of the performance targets to
reduce the CPI by 20%.
Supply Restoration. For power outages because of a fault or damage
on PacifiCorp's system, the Company will restore supplies on
average to 80% of customers within three hours.
6. Telephone Service Levels. Within 120 days after completion of the
transaction, 80yo of calls to PacifiCorp's business centers will be
answered within 30 seconds. The long-term goal will be to move to
a service level of 80% within l0 seconds.
1. Commission Complaint Resolution. PacifrCorp will investigate and
provide a response to all complaints referred by the Commission
within three working days. Complaints related to service
disconnection will be responded to within four business hours.
Ninety percent of complaints ref-erred to PacifiCorp by the
Commission will be resolved within 30 days. These standards will
be implemented within 90 days of completing the transaction. Tr. p.
380.
ScottishPower offers the following customer guarantees:
l. Restoring the Customer Supply. If the customer loses electricity
supply because of a fault in PaciflCorp's system, the Company will
attempt to restore the customer's supply within 24 hours.
Appointments. PacifiCorp will honor all mutually agreed
appointments with the customer. whether over the phone or in
writing. Beginning in the year 2001. the Company will offer the
customer a morning appointment, between 8:00 a.m. and 1:00 p.m.
or an afternoon appointment. between l2:00 noon and 5:00 p.m.
3. Switchitg on the Cuslomer's Power. Upon cr"rstomer request.
PacifiCorp will activate the po\vcr supply within 24 hourrs provided
5
2
36ORDER NO.28213
that no construction is required and that all government requirements
are met.
Estimates for Providine a New Supply. PacifiCorp will call the
customer back within two business days of the customer's initial call
and schedule a mutually agreed appointment with an estimator. If
changes to the Company's network are necessary, PacifiCorp will
provide a written estimate to the customer within l5 business days of
the customer's initial meeting with the estimator. If no changes are
necessary, PacifiCorp will provide an estimate within five business
days of the initial meeting.
Response to Bill Inquiry. If the customer has a question regarding
their electric bill, PacifiCorp will investigate and respond to the
customer's inquiry within l5 business days.
Problems with the Customer's Meter. If the customer suspects there
is a problem with their meter, PacifiCorp will investigate and report
back to the customer within 15 business days.
Planned Interruptions. If it is necessary for PacifiCorp to turn the
customers' power supply off for planned maintenance work or
testing, the Company will provide the customer at least two days'
notice.
8. Power Quality Compla . Whenever a customer notifies
PacifiCorp regarding a problem with the quality of electric supply,
the Company will either initiate an investigation within seven days
or explain the problem in writing within five business days.
Moir testified that if the Company fails to meet the foregoing customer guarantees,
then ScottishPower will make payments to the affected customers as set forth in Exhibit 208
offered by the Company. Tr. p. 382. Exhibit No. 208 clarifies the performance standards and
customer guarantees offered by ScottishPower and PacifiCorp. It explains that extreme events
will be excluded fl'orn reliability indices, circuit performance indices, and supply restoration
times. In addition. it outlines the circumstances under which customer guarantees will not apply.
Moir believes that the perflorn.rance standards listed earlier are designed to reduce the fiequency
and duration of outages to PacillCorp's retail customers. These standards are designed to be
achieved within the five-year time period fbllowing the transaction, or by 2005. Tr. p. 382.
Thus. PacifiCorp cornmits to redr"rcing SAIDI and SAIFI by 10% and MAIFI by 5%
from an accurate base line fbr PacifiCorp's system. These reductions will be achieved by 2005
4
5
6
1
ORDER NO.282I3 )l
or five years following the completion of the merger transaction. The SAIDI, SAIFI and MAIFI
indices will be calculated separately for each state jurisdiction providing comparable
improvements in reliability for all states. Tr. p. 383. ScottishPower recognizes that base line
data established may change from PacifiCorp's current historical outage data because of
uncertainty regarding the accuracy of the historical performance of PacifiCorp to date.
ScottishPower commits to implement new monitoring and reporting information systems for the
PacifiCorp system that will improve the accuracy of outage data. Tr. p. 383.
ScottishPower has committed to annually improve the five worst performing circuits
on the Company's system by 20% which, Moir contends, will address the immediate problems
experienced by those groups of customers that suffer the poorest quality of supply. Tr. p. 384.
Moir concludes that the aforementioned improvements to PacifiCorp's performance levels will
significantly benefit customers who value reliability and service quality and for whom outages
can result in considerable economic loss, threat to personal safety and well-being and
inconvenience. Tr. p. 385.
As a show of faith for its commitment, PacifiCorp has proposed financial penalties to
be paid by the Company in the event that it does not achieve the five performance standards
relating to the Company's network (SAIDI, SAIFI, MAIFI, five worst performing circuits and
restoration of power) within the five-year period following approval of the merger transaction.
For each of the standards not achieved in any jurisdiction at the end of the five-year period,
ScottishPowerwill payafinancialpenaltyequalto$1 foreverycustomerinsuchjurisdiction. In
the event that ScottishPower fails to meet its performance standards relating to the network in all
jurisdictions, this would equate to a total penalty of $7 million. Tr. pp. 385-386.
Regarding response time to customer telephone calls, ScottishPower proposes that
within 120 days after completion of the merger, 80% of the calls to PacifiCorp's business centers
will be answered within 30 seconds. This target will be increased to 80% in 20 seconds by
January 1. 2001 and 80% in 10 seconds by January 1, 2002. ScottishPower notes that
PacifiCorp's current average speed of answer in the business centers is over 3 minLltes and.
therefbre, the standards proposed constitute a significant improvement. By reducing the average
speed ol answer and implernenting best practices from ScottishPower's call center operations,
PacifiCorp will be able to make it easier fbr customers to reach the right person to answer their
qLrestions accordirrg to Moir. Tr. p. 387.
ORDER NO. 28213 38
ScottishPower notes that, currently, it takes an average of five business days for
PacifiCorp to investigate and respond to non-disconnect complaints filed by customers with state
regulatory commissions. ScottishPower proposes to reduce this to an average of three business
days within 90 days of completion of the merger. Tr. p. 387. ScottishPower also proposes to
reduce the length of time necessary to investigate and respond to disconnect complaints. The
Company commits to reducing this by 50% from the current average of eight business hours to
an average of four within 90 days of completion of the merger. Currently, PacifiCorp closes
860/o of all complaints within 30 days. ScottishPower proposes to increase this percentage to
90% within 30 days of completion of the merger and to 95%by 2001. Tr.pp.387-388. Moir
believes that customers will benefit by having their complaints responded to and resolved in a
more expeditious manner helping to reduce customer confusion, uncertainty and anxiety. Tr. p.
3 88.
Regarding the proposed customer guarantees, Moir contends that PacifiCorp
customers will have better, quicker and more reliable interaction with the Company. Responding
quickly to complaints about power quality or billing inquiries reduces customer frustration and
leads to improved customer/company relations. The efficient resolution of meter problems
produces significant benefits by reducing customer debt exposure. Providing sufficient notice to
customers when their service must be shut off for maintenance or testing shows consideration on
the part of the Company. Tr. p. 389.
Associated with each of ScottishPower's proposed customer guarantees is a time
period within which PacifiCorp will respond. Failure to do so will result in a payment of $50 to
a residential customer and $ 1 00 to an industrial or commercial customer. Tr. p. 3 89. PacifiCorp
intends to track changes in customer service internally on a quarterly basis so that improvements
or problems can be identified quickly. T.. pp. 391-392.
ScottishPower intends to achieve its planned improvements through direct capital
investments, training, and changing PacifiCorp's corporate philosophy to emphasize customer
satisfaction as the Company's top priority. Tr. p. 392. ScottishPower will spend approximately
$55 million during the five-year implementation period to implement the proposed service
starrdards package. Id. These expenditures are in addition to the funding fbr which PacifiCorp
had already planned without the transaction. Of this $55 million. approximately $30 million will
be capital investment for new infrastructure. The remaining $25 million will cover the costs of
ORDER NO.28213 39
additional maintenance, payments lbr customer guarantee failures, employees and training. ILl.
These investments and related process changes will allow PacifiCorp to more accurately measure
system performance and instigate directed improvements in electric service and customer
interaction. 1d.
ScottishPower has already developed a fault reporting and customer monitoring
system called "Prosper" that it intends to implement at PacifiCorp. Prosper acts as a data base
for network information that will allow PacifiCorp to more accurately measure circuit
performance and target investment at the worst performing circuits. This program cost
ScottishPower $2 million to develop and implement in the UK. Following the merger,
PacifiCorp will gain access to this proprietary technology at a marginal cost. Tr. p. 393.
Moreover, ScottishPower will train employees in how to satisfy customers. 1d.
ScottishPower has committed to provide information to both customers and the
Commission on whether ScottishPower has achieved its objectives regarding system
performance and customer service. The Company will provide annual reports to both customers
and the Commission. First, ScottishPower will issue a report to the customer by June 30 of each
year regarding its record in improving performance standards and how well it has performed
against its customer guarantees. Each report will contain an overview of ScottishPower's
standards, targets and guarantees and describe the performance results for that year. Tr. p.397 .
ScottishPower will also provide an annual report to the Commission by May 31 of
each year offering a reporting plan that will discuss implementation of ScottishPower's programs
and procedures for providing improved performance. The report will provide a general summary
of how PacifiCorp perfbrmed according to the standards, targets and guarantees. The reporl will:
1. provide perlormance repons for each standard, target or guarantee;
2. identify excluded exceptions;
aJ explain any historical and anticipated trends and events that affected
or will aflect the measure in the future;
describe any technological advancements in data collection that will
signilicantly change any performance indicator;
5. discuss any pliase-in ofnew standards, targets or guarantees;
4
ORDER NO. 282I3 40
6 include the name and telephone numbers of contacts at PacifiCorp to
whom inquiries should be addressed.
Tr. p. 398
Moreover, if the Company is not meeting a standard, target or guarantee, the report
will:
I . provide an analysis of relevant patterns and trends;
2. describe the cause or causes of the unacceptable performance;
3. describe the corrective measures undertaken by the Company;
4. set a target date for completion of the corrective measures, and;
5. provide details of any penalty payments due.
Tr.pp. 388-399.
In addition, ScottishPower recently submitted the processes it uses for customer
service standards for International Standards Organization (lSO) 9002 accreditation. ISO
accreditation requires internal and external audits across all businesses and Company standards.
Likewise, ScottishPower will seek ISO 9002 or ANSI accreditation for PacifiCorp's program to
offer customer guarantees.
c. Commission Staff
Staff witness Sterling believes that the network performance standards proposed by
ScottishPower "offer a means of ensuring the service will not deteriorate as a result of the
merger." Tr. p. 938. The goal of efficient, low-cost utility service cannot be achieved by
sacrificing reliability and customer service, Sterling contends. Performance standards offer a
means of protecting customers by holding utilities to measurable levels of performance. T.. p.
93 8.
According to Sterling, the purpose of the network perfbrmance standards proposed by
ScottishPower is to help ensure that the frequency and duration of both long-ternr and short-term
outages experienced by PacifiCorp customers is minimized. Tr. p. 939. Sterling notes that while
the Idaho Commission requires electric utilities to provide "reliable service" there are no specific
reliability criteria that electric utilities operating in Idaho are required to meet. The Idaho Code
is not specific with regard to reliability. He notes that although nrost utilities collect data related
oRI)t-.R NO. 28213 41
to the reliability of their systems, there exists no common basis for assessing or reporting system
reliability for utilities operating in Idaho. Tr. pp. 941-942. Currently, PacifiCorp does have
reliability "targets" that it tries to meet in Idaho even though there are no specific requirements
of the Commission. It is impossible, however, to compare the reliability of PacifiCorp's Idaho
system to other states, Sterling contends, because ofdifferences in how outage data are collected
and reported. Tr. p.947.
Sterling believes that the Company's five-year planning horizon for improving its
performance standards (SAIDI, SAIFI, MAIFI and five worst performing circuits) is reasonable
given the lack of accurate historical data regarding the PacifiCorp system and the need to
establish a new base line. Tr. p. 948. Sterling believes that establishing a new base line is
valuable to the Company's Idaho customers because it will provide a fair yard stick with which
to measure future performance; something that did not exist prior to the merger. Tr. p.949.
Because SAIDI, SAIFI, MAIFI are averages based on the entire PacifiCorp system in
Idaho, the use of system averages can hide problems experienced by individual circuits. In
recognition, of this fact, ScottishPower has proposed to calculate a circuit performance indicator
(CPD for each circuit. This will permit a mathematical comparison and allow ranking between
distribution circuits to enable the Company to pinpoint problem areas within its Idaho service
territory. T.. pp. 950-951.
ScottishPower has proposed a penalty of $1 per customer for each reliability standard
it fails to meet. In ldaho, this means a penalty of $53,000 for each measure not met or a
combined total of $265,000 if none of the flve reliability measures are met. Sterling believes
that, by itself, the amount of the penalty is not significant when compared to the Company's
annual revenues but is significant compared to penalties historically assessed by the Commission
against utilities in ldaho. He concludes that if the Company were actually required to pay a
penalty this large, it would certainly draw the attention of customers and shareholders alike and
would reflect poorly on the Company. Consecluently. Sterling believes that the amount of the
proposed penalty does provide sufficient incentive to meet reliability standards. Tr. pp. 953-954.
Sterling believes that the penalties proposed by ScottishPower are sufficient if
reliability targets are not achieved but. in addition. originally proposed that the Company should
be subject to additional penalties if reliability drops below base line levels. He proposed that
those additional penalties be computed using the same methodology used by ScottishPower in
ORDER NO.28213 42
estimating the benefits of reducing SAIDI and MAIFI. Tr. p. 954. During cross-examination,
however, Sterling acknowledged that ScottishPower's proposal to establish a performance
review process satisfied Sterling's concerns regarding reliability and was an acceptable
alternative to his proposed penalties. Sterling believes that any penalties paid by ScottishPower
should not be placed in the PacifiCorp foundation but, rather, recommends that the Commission
withhold judgment on how such funds should be distributed until any penalties are assessed. Tr.
p. 955.
Exhibit 226 contains ScottishPower's performance review process proposal.23 This
process provides for a fast regulatory response in the unlikely event that reliability declines to
unacceptable levels, assures that problems are quickly remedied and provides a mechanism for
determining cost responsibility for remediation measures. As proposed by ScottishPower, a
performance review committee would be created to establish baselines for system performance,
to evaluate declines or improvements in performance, and to agree on remediation measures
when needed.
Sterling believes that the $55 million capital investment ScottishPower intends to
make in order to improve performance is reasonable so long as no additional funds over and
above those planned to come from existing PacifiCorp budgets are needed. The proposed
expenditures could only affect customers' rates if PacifiCorp sought and received approval in a
future rate case from this Commission to recover the investments through rate increases.
Sterling concludes that if the funds needed to achieve the proposed improvements cannot
ultimately be obtained through savings, efficiencies, and redirection of existing budgeted funds,
then the Commission should give careful scrutiny to any Company request to recover these
investments through higher rates. Tr. p.957.
Whether the reliability improvements ScottishPower hopes to achieve are worth $60
million or not is not critical to Sterling's opinion. What he considers important is that the
improvements have a value to Idaho customers at least equal to the amount invested to achieve
them and that they are not achieved at the expense of deficiencies in other areas. T..p. 958. He
notes that whether the Cornmission approves the merger or not, it still has the authority to set
standards fbr acceptable service and to review the prudence of Company investments. The
ORDI:R NO.28213 43
Commission has as much ability to demand quality of service and ability to review prudence
afler the merger as it does now. Tr. pp. 958-959.
Staff proposes that it be involved in the establishment of reliability base lines used to
judge the Company's future performance and that those base lines be ultimately subject to
Commission approval. Tr. p. 960. Sterling believes that the reporting process performance
proposed by ScottishPower is reasonable. He proposes, however, that annual meetings be
planned between the Company and the Commission Staff to review the Company's progress
during the previous year, to review the suitability of the performance measures selected and the
methods used to calculate and measure them, to review the ability of the Company to collect and
report data, to analyze the development of accurate base lines and the integration of old
performance data with new data and to analyze whether the data fairly and accurately represent
the performance of the electric network. Tr.pp. 961-962.
Staff witness Beverly Barker testified that with regard to performance standards, there
are two offered; one relates to the average speed of answering calls to PacifiCorp's business
centers and the other to the amount of time to respond to and resolve complaints referred by the
Commission. Barker notes that the standards proposed by ScottishPower would "represent a
significant improvement over PacifiCorp's past performance." Tr. p. 989.
She also notes that the Commission's Consumer Assistance Division has not been
satisfied with PacifiCorp's historical responsiveness to Commission referred complaints. It took
an average of l6 calendar days to resolve Utah Power complaints in 1998. This compares to an
average of six days for U S WEST and four days for Idaho Power; both of which had
significantly more complaints than Utah Power. Thus, if PacifiCorp were to meet the target
proposed by ScottishPower, it would represent a "significant improvement in perfbrmance." Tr.
p.990.
ScottishPower has proposed several exceptions to its commitment to restore power
within 24 hours including: outages resulting from wide spread darrage to the transmission or
distribution system; strikes, safety concerns; customer agreenlents to remain without power; or
problems existing with the customer's facility. Barker recommends a shorter maximum time
lrame for the restoration of service since the circumstances most likely to cause lengthy delays
23 Merger Approval Condition No. 6.
ORDER NO. 28213 44
are excluded from the guarantee. Tr. p.997. Barker recommends that the Commission explicitly
state its expectation that in the event of a Company caused outage, PacifiCorp will restore
service as soon as possible.
Barker concludes that the customer service standards and guarantees proposed by
ScottishPower are an important first step. They will establish a base line for measuring
performance and improving service to PacifiCorp customers over time. Tr. pp. 1007-1008.
We find:
We find that, at least with respect to PacifiCorp's Idaho customers, the merger will
usher in a new era of electric utility service that is more customer-oriented. There is a widely
held perception that following the merger of Utah Power & Light into PacifiCo.p, customer
service in southeastem Idaho began deteriorating. The evidence presented in this case convinces
us that the opposite result will occur as a result of this merger. The number and degree of
commitments proposed by ScottishPower, which we adopt herein, to improve service quality are
extensive. In summary, ScottishPower commits to: (1) reduce system intemrptions; (2) address
the system's five worstperforming circuits; (3) restore supply faster inthe event of outages; (4)
reduce customer wait times on calls to PacifiCorp's service centers; (5) reduce the turnaround
time on service and billing inquiries; (6) expand the time that Company personnel are available
to respond to customer inquiries; (7) establish system performance baselines to aid in future
assessment of performance; (8) establish and improve Company reporting of perfornance,
including failures to achieve targeted standards, and; (9) impose penalties in the event the
Company fails to achieve certain standards.
ScottishPower's proposal to subject itself to penalties in the event it fails to achieve
these standards is further evidence that the proposed improvements to service quality are not
illusory. ScottishPowerproposes to'oraise the bar" in terms of measuring and monitoring service
quality and reporting to this Commission. Thus. we view this merger as a valuable opportunity
to achieve considerable improvements in the areas of system perfbrmance and customer service
that might not have occured as efficiently or quickly without the financial strength and
experience of ScottishPower.
We find it significant that although the Irrigators and Solutia questioned the value of
the proposed performance and cllstomer service improvements. and whether they could be
achieved, there was simply no evidence presented that. with respect to service quality, the public
ORDER NO. 28213 45
interest would be adversely affected by the merger. Again, that is the standard to which we are
bound. The overwhelming weight of evidence presented in this case convinces us that service
quality will not decline as a result of the merger.
We defer judgment on the distribution of any service quality penalties until if and
when they are imposed.
2. BPA credits
Mr. O'Meara and Ms. Hansen presented their testimony on behalf of the Public
Power Council together as a panel. The subject of their testimony was PacifiCorp's continued
eligibility for residential exchange benefits from BPA. They express concem whether that
eligibility would continue following the merger under the Pacific Northwest Electric Power
Planning and Conservation Act (Northwest Power Act). While they did not go so far as to state
that PacifiCorp would be ineligible for residential exchange credits following the merger,
O'Meara and Hansen stated that it "remains unclear." Tr. p. 650. Pursuant to the Northwest
Power Act, only Pacific Northwest electric utilities have filed for and received residential
exchange benefits from BPA. Those utilities have always directly served residential and small
farm consumers to whom the exchange benefits are directed. They acknowledge that PacifiCorp
has qualified in the past for exchange benehts for both its Idaho service territory and in other
states. Tr. p. 651. They contend that, following the merger, the decision whether PacifiCorp
would continue to qualify as a Pacific Northwest utility would rest with BPA, FERC and, if
challenged, ultimately the federal courts. Tr. pp. 651-652. O'Meara and Hansen also contend
that the merger may have the effect of changing PacifiCorp's average system cost, which would
affect the amount of residential exchange benefits to which it is entitled. Tr. pp. 652-656.
In rebuttal. PacifiCorp witness Brattebo challenged the assertion that the merger will
have any effect on PacifiCorp's eligibility for BPA credits. Brattebo testified that BPA's
Residential Exchange Progranr will continue after 2001. Tr. p.348. Given the continuing dispute
with investor-owned utilities over BPA's reduction of exchange benefits, however. BPA also
intends to offer "subscription" pow.er to those utilities to serve a portion of their residential and
small farm loads. 'l'his sr-rbscription power would be offered as a rneans of settling tlie investor-
owned utilities' rights under the Residential Exchange Program fbr five to tw'enty years; the
"Subscription Settlernent." Tr. p. 348-349.
ORDER NO. 282I3 46
According to Brattebo, PacifiCorp will continue to participate in the Residential
Exchange Program or the Subscription Settlement if the merger is approved. Tr. p. 348. Brattebo
testified that the merger will not affect PacifiCorp's status as a "northwest utility" nor its
eligibility for benefits under the Residential Exchange Program. Tr. p. 349. Brattebo notes that
the relevant consideration for BPA in determining whether a utility is eligible for participation in
the exchange program is whether it provides state-regulated retail service to residential and small
farm customers within the Pacific Northwest. Tr. p. 350. For example, BPA recognized Pacific
Power & Light Company as an eligible utility even though it was a Maine corporation when the
initial contracts were executed. Id. Moreover, Utah Power & Light was a Utah corporation
located in that state but BPA considered it eligible because it served customers who were located
within the PacifiCorp Northwest region. 1d. Brattebo further contends that the merger will not
change PacifiCorp's average system cost (ASC) nor the ASC methodology. Tr. p. 354. The
amount of exchange benefits PacifiCorp's Idaho customers are entitled to has been settled
through June 30, 2001 he notes.
Staff witness Sterling also weighed in on the BPA issue. Staff investigated whether
the merger would affect PacifiCorp's eligibility for residential exchange credits from the BPA.
Staff believes that the determination of PacifiCorp's continued eligibility is a legal one that rests
outside the scope of the Commission's authority. Nonetheless, Staff notes that BPA has
continued to negotiate residential exchange rights with PacifiCorp even knowing that the latter
intends to merge with ScottishPower. Tr. p.972.
We find:
We appreciate the importance of this issue and the input provided by the Public
Power Council. Nonetheless, we find that there was simply no credible evidence presented that
the merger will render PacifiCorp ineligible for continued participation in the BPA exchange
program. To the contrary, the BPA itself confirmed that PacifiCorp will continue to remain
eligible afier the merger. Exhibit No. 2 introduced during the technical hearing is a letter fiom
BPA regarding the exchange program, in response to an inquiry frorn PacifiCorp. in which BPA
concluded that "the pending merger would not affect PacifiCorp's eligibility to parlicipate in the
Residential Exchange Program or PacifiCorp's ability to negotiate a settlement of its rights under
that progranl." Tr. pp.356-57 .
ORDER NO. 282 r3 47
In any event, we note that it is very unlikely that PacifiCorp will continue in the BPA
residential exchange program after 2001 regardless of the merger. In cross-examination by
Commissioner Smith, PacifiCorp witness Brattebo testified as follows:
a. Thank you. It's my understanding that the exchange credit program
is to be kind of replaced by something we are calling subscription. Is
that your understanding?
A. That's the proposal the Bonneville administrator has made, yes.
a. And so if in these discussions PacifiCorp, as Utah Power and Light's
service territory, is able to walk away with a subscription amount
that is equal to today's exchange, can we hold customers harmless
from effects of whatever happens to the average system cost or the
exchange program or the 7(b)(2) test?
A. If we enter into an agreement to settle our exchange rights under a
subscription process, the issue of 7(b)(2) goes away. As far as will
the new program actually be equal to the current exchange benefits?
a. How do you see that working? I guess my real question is do you
see the Utah division of PacifiCorp receiving any exchange credits if
the 7(b)(2) test is applied?
A. It would be total speculation, but I would guess there would be some
benefits. However, though, there is another mechanism in the
regional account that's called o'in lieu."
a In lieu, yes
And Bonneville has indicated that it will use the in lieu provision to
eliminate all beneflts under the traditional exchange program.
a. So what do yoLr think is the likelihood of continuing in the
residential exchange program after 2001 regardless of whether there
is a merger or not?
A. I would say the likelihood is very low
Tr.pp. 370-371
ORDER NO.282r3 48
A
3. Water Rights
This is an imporlant issue that was emphasized in the public hearings by Senators
Noh and Lee and Representative Linford and other members of the Idaho Legislature. There was
concem expressed regarding the effect that the merger might have on the water rights currently
held by PacifiCorp in Idaho and the effect that would have on the water rights of Idaho irrigators;
primarily those operating in or near the Bear River system.
PacifiCorp presented the testimony of Mr. Carly Burton who is a consultant
employed by the Company for, among other reasons, the purpose of addressing water rights
issues in this proceeding. He was employed by PacifiCorp for twenty-five years as a manager of
water supplies and water rights for Utah Power & Light's 23 hydro projects. He has extensive
experience with the Bear River system and with PacifiCorp's water rights for its Idaho hydro
facilities. PacifiCorp currently has five "run of the river" hydro facilities located on the Bear
River downstream from Bear Lake. Tr. p. 490. Mr. Burton was also employed to prepare an
operating plan for the Bear River system "in a manner consistent with its historical operation and
within the constraints of irrigation water delivery, drought management, the Bear River
Compact, the 1995 Bear Lake Settlement Agreement, flood control and other concerns." Id. As
discussed below, this plan ultimately became the subject of a cooperative agreement between
ScottishPower, PacifiCorp, and the states of Idaho, Wyoming and Utah. Burton notes that "[a]ll
of the obligations of PacifiCorp to deliver water to Idaho irrigators are, if not perpetual, very
long term." Tr. p. 491 . Burton argues that the merger of PacifiCorp and ScottishPower could
not cause a change in the relationship between PacifiCorp and junior appropriators of water on
the Bear River system. Tr. p. 492. He concludes that the merger will not adversely affect Idaho
irrigators' water rights. ,Ir/.
Staff witness Sterling also addressed the water rights issue and believes that the
nlerger will have essentially no effect on the rights currently held by PacifiCorp and, therefore.
the rights of other users in the state. Sterling investigated whether the merger would have any
effect on the water rights held by PacifiCorp in Idaho (including their seniority relative to water
rights held by others in the state) and the operation of the Company's hydro facilities located on
the Bear River and the upper Snake River. Most of PacifiCorp's water rights are associated with
their plants on the Bear River: Grace, Oneida, Cove, and Soda. The Company also has water
ORDER NO. 282r3 49
rights attendant to its hydro facilities on the upper Snake River including the Ashton and St.
Anthony plants on the Henry's Fork of the Snake River. Tr. p. 965.
The Company holds a series of water rights on the Bear River that stem from licenses,
permits or statutory claims. PacifiCorp also holds decreed water rights to divert water from the
Bear River for storage and Bear Lake. The general nature of the decreed rights allows the
Company to operate, manage and release water from storage for power generation, irrigation and
other beneficial uses. At the time of the decree, irrigators on the Bear River agreed to
subordinate their irrigation rights in exchange for contractual rights with PacifiCorp (and its
predecessor companies) for Bear Lake storage water. Most of those contracts are perpetual or
very long-term and can only be terminated by mutual agreement of the parties. In addition, most
of those irrigators use PacifiCorp's water to supplement existing rights, some of which are senior
to PacifiCorp's rights.
Staff believes that PacifiCorp's water rights constitute property located in Idaho used
in the generation of electric power and, consequently, neither PacifiCorp nor ScottishPower can
sell or transfer those water rights without approval from the Commission pursuant to ldaho Code
$ 6l-328. Tr.p. 967. ln addition, Staff notes that in 1985, the Idaho Legislature enacted ldaho
Code $ 6l-502B, which requires that "the gain upon sale of a public utility's water right used for
the generation of electricity shall accrue to the benefit of the ratepayers." Tr. p. 967. Finally,
Idaho Code $ 6l-539 specifically precludes the authority of the Commission in instances where
the failure or refusal of an electric company to protect its hydro power water rights from loss or
depletion to certain junior appropriative rights is involved . Tr. p. 967 .
Based upon the foregoing, it is Stafls opinion that the water rights of PacifiCorp, or
any other water right holder in Idaho, will not be adversely affected by the merger. Any
statutory license, pennit or claim related to the use of water would still be held by PacifiCorp or
simply transf'erred to the succeeding entity with all of the same rights. conditions. limitations and
responsibilities as prior to the merger. ScottishPower could only receive those rights that
PacifiCorp holds and no more. Similarly, with decreed water rights. the sale. lease or transf'er of
a water right transfers no more legal interests in the water right than the original owner holds. In
the case of contracts related to water rights, ScottishPower would be a successor ir-r interest and
the legal status of the contracts would not change because of the merger. Tr. p.968.
ORDITR NO. 28213 50
We find:
Not only are PacifiCorp's hydro plants subject to sale or transfer approval pursuant to
Idaho Code $ 61-328, but so are the water rights associated with those facilities because they are
used in the generation of electric power and are considered real property. Therefore, before
PacifiCorp or ScottishPower can sell or transfer water rights or the control thereof, they must
request approval from this Commission pursuant to ldaho Code $ 6l-328. In addition, in 1985
the Idaho Legislature enacted ldaho Code $ 61-5028 which requires "the gain upon sale of a
public utility's water right used for the generation of electricity shall accrue to the benefit of the
ratepayers."
Subsequent to the technical hearing, ScottishPower and PacifiCorp entered into two
separate agreements pertaining to water rights associated with all of PacifiCorp's hydro facilities
located in Idaho. The first such agreement, executed on October 5, 1999, pertains to the
Company's Bear River/Bear Lake facilities and water rights. The parties to the agreement
include ScottishPower, PacifiCo.p, the State of Idaho (through the Department of Water
Resources), the State of Utah (through the Division of Water Resources) and the State of
Wyoming (through the State Engineer). The five page agreement, which we have reviewed and
hereby take official notice of pursuant to Rule 263 of the Commission's Rules of Procedure
(IDAPA 31.01.01 .263), was executed in recognition of concerns expressed regarding
PacifiCorp's water rights and the effect the proposed merger might have on them. Paragraph
"B" of the "Recitals" section of the Agreement states:
The Parties recognize the need to assure the public utility commissions of
the states of Idaho, Utah, and Wyoming. and the other public officials and
water users of the three States that PacifiCorp's merger with
ScottishPower will not affect the operation of the Bear River System or
PacifiCorp's ownership or exercise of its Bear River water rights.
The Parties further agree that:
a. PacifiCorp's water rights are constrained by the historic practice of
not making a delivery call fbr hydropower generation; and
Bear Lake is operated. consistent with long-standing historic practice
and applicable laws. primarily as a storage reservoir to satisfy
contracts for existing irrigation uses and flood control needs in the
three States, with the use ol water lor hydropower generation being
incidental to the other purposes fbr which the water is being
released.
ORDER NO. 282I3 5l
b
The Parties also agree to "jointly negotiate an enforceable Bear River System Operations
Agreement consistent with the [foregoing provisions]."
On October 22, 1999, ScottishPower and PacifiCorp executed a "Memorandum of
Agreement Regarding Ashton-St. Anthony Projects" with the State of Idaho through the
Department of Water Resources. Pursuant to Procedural Rule 263,we hereby take official notice
of this agreement as well. Like the Bear River Agreement, the Ashton-St. Anthony
Memorandum recognizes the public need for stability of water rights. To that end, the
Memorandum provides that "the water rights presently owned by PacifiCorp on the North Fork
(Henry's Fork) of the Snake River must continue to be used consistent with historical practices."
In furtherance of this, PacifiCorp and ScottishPower agree that their water rights on the Snake
River are constrained by a Contract executed September 28, 1935 between the U.S. Bureau of
Reclamation, Fremont-Madison Irrigation District, City of Idaho Falls, and Utah Power and
Light Company. PacifiCorp and ScottishPower further agree that PacifiCorp's rights to the use
of water for power generation are incidental to the rights to the use of water for other purposes,
except for junior water rights for hydropower generation.
One need not look far for evidence of the importance that water has to southern
Idahoans. This issue, had it not been successfully resolved by the Joint Applicants, could well
have been a stumbling block in satisfying the public interest criterion of ldaho Code $61-328.
As it is, the Joint Applicants have done a commendable job of ensuring that the status quo
regarding water rights will be maintained and the public interest preserved.
The undisputed evidence presented in this case establishes that the merger will not
affect the legal status of the water rights currently held by PacifiCorp. ScottishPower will
assume ownership of those rights (by virtue of its ownership of PacifiCorp) subject to all the
limitations, conditions, and relative priorities that they now possess. Furthermore. we are legally
prohibited fiom taking any action involving an electric utility's failure to protect its water riglits
fronr.ir"rnior appropriators. Icluho L'ode $ 61-539. Thus, we find that the state agencies charged
with the responsibility to oversee water rights have adequately protected the interests of the
people of this state. 'fhe Agreements entered into recently by the Joint Applicants ensure that the
public interest. as it pertains to water rights, will not be adversely affected because of the nlcrger.
ORDER NO. 282r 3 52
4. Foreign Ownership
The vast majority of those who opposed the merger did so on the basis that
ScottishPower is a corporation whose management, offices and/or shareholders are located
primarily in a foreign country. The comments made in this regard were often passionate and
ranged from general uneasiness to explicit distrust and outrage at the concept of a corporation
from a foreign country acquiring an ownership interest in what is perceived as a U.S., or even an
Idaho, "resource." In some cases members of the public seemed to equate ScottishPower with a
governmental agency of a foreign country. Some of the comments, however, more specifically
identified a perceived lack of trust in the ability of ScottishPower's management to understand
the needs and concerns of rural Idahoans. Those who commented feared that PacifiCorp would
be operated and managed by personnel either living in Scotland or who are from Scotland and
who will fail to comprehend or appreciate the electricity needs of, for example, an Idaho potato
farmer located on a rural route miles from the nearest city. Many members of the public feared
that, in the event they had reason to contact the Company, it would be necessary to call Glasgow,
Scotland. Others feared an inability on the part of this Commission to regulate a foreign
corporation. Some customers feared that Idaho would lose its relative representation on
PacifiCorp's board of directors.
This aspect of the Joint Applicants' filing engendered more controversy and enflamed
more passion than any other. The issue of foreign ownership was raised primarily during the
public hearings. None of the parties to the technical proceeding contend that the Application
should be denied simply by virtue of the fact that ScottishPower is a foreign entity. There were
concerns expressed, however, particularly by the Irrigators, regarding the ability of
ScottishPower personnel from outside this region to fully comprehend and appreciate the specific
needs of ldahoans. As discussed more fully below, we find that we are legally prohibited from
denying the merger simply because ScottishPower is not an "Anrerican" company. But because
the issue is clearly so important to PacifiCorp's Idaho customers. we discuss its various aspects.
We find:
With the increased globalization of economies and cultures. the concept of an
"American" company is becoming more obscure. Today's increasingly competitive markets
require businesses to search far and wide fbr materials. labor. and business opportunities. Large
businesses whose stock is publicly traded in this country are ofien owned. at least in part. by
ORDER NO. 28213 53
foreign interests. Similarly, U.S. corporations and individuals often engage in the acquisition of
or partnership with foreign businesses. In short, corporate mergers make the news almost daily.
It was often expressed during the public hearings in this case that the "country" of
Scotland should not be allowed to take over an "American" corporation. In fact, ScottishPower
no more constitutes the Scottish government than PacifiCorp constitutes the government of the
United States. PacifiCorp is an Oregon corporation whose stock is publicly traded and owned by
people living throughout the country, and the world. Not one of PacifiCorp's current members
of the board of directors lives in Idaho.2a
Both ScottishPower and PacifiCorp are investor-owned businesses engaging in
precisely the type of economic posturing that many large businesses must consider as an option
to remain competitive in today's marketplace. It just so happens that they operate in an industry
that is governmentally regulated. We find that the denial of the merger in this case simply by
virtue of the fact that ScottishPower is incorporated in another country would put this
Commission on very tenuous legal footing. The constitutional and statutory structure under
which this Commission functions and pursuant to which we must review this merger does not
allow such a ruling.
Indeed, the founding document of this country potentially prohibits such
discrimination. Article I, $ 8 of the United States Constitution, known as the "Commerce
Clause," vests in the United States Congress the power "to regulate commerce with foreign
nations, and among the several states." The fundamental principle embodied in the General
Agreement on Trade in Services (GATS - a component of the General Agreement on Tariffs and
Trade (GATT)) is that foreign countries who are signatories to the agreement will have "most
favored nation" status in their dealings with the United States. This means that the United States
is not permitted to discriminate against service providers who are citizens of other states or
foreign countries. Thus. if any state has a law on its books giving favored treatment to its own
citizens, that law will be pre-empted by the GATS treaty.
Regardless of the legal aspects discussed above. we find that the nature of the nlerger
transaction itself has been somewhat misperceived. This merger is essentially what is known as
24 Pursuant to Rule 263 ol the Conrnrissior.r's Procedural Rules. we take official notice of this
fact, which can be found through a revierv of PacifiCorp's 1998 FERC Form l (pages 105-105.2).
ORDER NO. 282r3 54
a "stock swap." Following the conclusion of the transaction, as proposed by the Joint
Applicants, the former owners of PacifiCo{p, many of whom are U.S. citizens and some, no
doubt, who aren't, will be given the opportunity to become owners in ScottishPower. Thus,
ScottishPower will be owned by shareholders located in Scotland, the United States, and in many
other parts of the world as well. Furthermore, as noted in other sections of this Order, PacifiCorp
will continue to operate on a stand-alone basis, with primarily the same personnel, following the
merger. Because of the conditions imposed by this Commission, the ratepayers should notice
improved service quality with, at a minimum, a temporary rate reduction. Irrigators in particular
should be better served with the addition of an irrigation specialist to PacifiCorp's personnel.
So long as this Commission has regulatory oversight of electric utilities, we will
exercise our jurisdiction to ensure that PacifiCorp provides reasonable service at fair rates. In
light of the foregoing, we find that the public interest will not be adversely affected by the
merger simply because ScottishPower is a foreign based company.
5. Irrigation Concerns
This issue was raised by the Commission during the prehearing conference. In its
Notice of Irrigator Service Commitments, the Joint Applicants propose the following conditions
to address the concerns ofsoutheastern Idaho irrigators:
ScottishPower/PacifiCorp will make available prior to the next
irrigation season a dedicated irrigation specialist in the Idaho service
territory. This specialist will be available at the local Utah Power
Offices in Rexburg and Shelley for consultation appointments. The
effectiveness of this service will be reviewed at the end of the 2001
irrigation season.
ScottishPower/PacifiCorp will extend the Irrigators HOTLINE
facility in the Wasatch Business Center to seven days a week from
7:00 a.m. to 7:00 p.m.
ScottishPower/PacifiCorp will publish the Irrigator HOT[.INE
telephone number in the public telephone directory along with the
other Utah Power numbers.
ScottishPower/PacillCorp will work with the irrigators to better
identify, on a geographical basis. the location of each electricity
sr,rpply point. This geographical description should be used when the
irrigator is unable to provide either the site identification number
(rneter number) or the account nurnber. (The rneter number or the
ORDtrl{ NO.28213 ))
2
J
4
1
account number will remain the preferred terms of reference for site
identification.) This proposal, the Joint Applicants contend, will
enable the business center and the customer to more effectively
communicate and locate the supply point in question, parlicularly
during an outage. The irrigators and the Company will continue to
ensure these descriptive locations are updated as required.
5. ScottishPower/PacifiCorp will review in conjunction with the
irrigators, the account format to identify improvements that can be
made to improve clarity.
The Joint Applicants contend that these irrigator service commitments respond to
comments received during the public hearings held in Rexburg and Pocatello, Idaho on July 27
and28, 1999, and are in addition to the service quality and reliability commitments set forth in
the Company's direct testimony.
We find:
The addition of an irrigation specialist to southeastem Idaho is an appropriate first
step for PacifiCorp to take toward addressing the generally held belief that the Company is
failing to adequately address the needs of its customers. This should provide PacifiCorp
customers with access to someone living in the area and specially trained to address their specific
needs. Also, the Company's commitment to develop a means to better locate customers' service
locations will aid in reducing response time in the event of outages.
The service quality monitoring reports to which ScottishPower has committed itself
will enable the Commission and its Staff to track the progress of the Company in improving its
overall service quality for all customers. In addition, we direct the Commission Staff to file a
report with the Commission within 30 days of this Order containing the results of Staff s
informal investigation into the quality of service being provided by PacifiCorp. We find that the
many conditions imposed by this Order will ensure that the pLrblic interest, in the form of
irrigation corlcerns, will not be adversely affected.
G. Contract Rates of Solutia
Throughout this proceeding, Solutia has drawn attention to its special contract with
PaciliCorp and the rates contained therein. Solutia's contract expires on December 31,2001.
Although Solutia's contract still has over two years remaining. it has atternpted to use this
proceeding as a fbrum to extend the contract and renegotiate its rates.
For example. in its post-hearing brief. Solutia stated:
ORDER NO 28213 56
Solutia's opposition to the merger is based mainly on two fundamental
concerns. First, that Solutia has been unsuccessful and has made no
progress with applicants in negotiating an extension of its Special Contract
despite numerous attempts....
We find:
This issue is completely outside the scope of this proceeding. The renewal of
Solutia's contract is in no way relevant to the approval of the merger. Even if it were, we find
that it is premature to consider a contract that still has two years remaining. We also question the
appropriateness of Solutia's opposition to the merger as a form of leveraging to obtain a
favorable re-negotiation of its contract. Finally, the level at which we set Solutia's rates will
have an effect on the rates of PacifiCorp's other customers. It would be wholly inappropriate for
us to allow Solutia to turn this proceeding into a contract renegotiation without soliciting and
reviewing the full effect that a contract renegotiation would have on other customers' rates and
without allowing other customer classes the opportunity to comment.
H. Conclusion
The statutory criteria governing our review of the merger do not allow for caprice or
subjectivity. While public sentiment has been used to impose significant merger conditions, it
cannot be used as a surrogate for the clear letter of the law. In this case, that law (Idaho Code $
61-328) provides that the merger "shall" be authorized unless the Joint Applicants have failed to
satisfy the three criteria discussed throughout this Order. The Joint Applicants carried the
burden of proof in demonstrating that the merger would not adversely affect the public interest,
would not result in an increase in rates to existing PacifiCorp ratepayers and that they have the
bona fide intent and financial ability to continue operating the system in the public interest.
We find above that not only have the .loint Applicants satisfied the statutory criteria
of ldoho Code $ 61-528, but they have gone a step beyond. The criterion of bona fide intent and
financial ability was relatively unchallenged in this case. PacifiCorp's Idaho customers should
have little concern that as long as this Commission has regulatory oversight, we will continue to
"do all things necessary" to ensure that the .loint Applicants continue to provide service as a
public utility. There was absolutely no evidence presented during this case that their ability to do
so will be impaired by this merger.
The Joint Applicants had the burden to prove that PacifiCorp's rates will not increase
as a result of this merger. The evidence initially presented established that the merger would
ORDER NO.28213 57
result in significant cost savings that would ultimately result in lower overall rates. The Joint
Applicants backed this commitment up through a guaranteed reduction in operating expenses.
This alone satisfies the requirements of $ 6l-328. The Joint Applicants put to rest any lingering
doubts, however, when they committed to a merger rate credit that, when combined with the
additional rate moratorium that we impose, will guarantee that rates will be reduced at least for
two years. After that PacifiCorp's Idaho ratepayers will receive two more years of rate credit.
Their rates will go up only if PacifiCorp requests and is authorized by this Commission to
increase its rates in an amount exceeding the rate credit. This would not have occurred absent
the merger.
Finally, there was ample evidence presented in this case that the public interest will
be enhanced by this merger. That is, of course, not the standard by which we are required to
review the transaction. The Joint Applicants were simply required to prove that the merger
would not adversely affect the public interest. Again, they exceeded their statutory burden by,
among other things, committing to an extensive set of service quality standards. They also
resolved any doubts that might have existed regarding the effect of the merger on Idaho water
rights. The Joint Applicants addressed the specific needs of southeastern Idaho irrigators. In
short, they refuted any doubts that the merger will adversely affect the public interest.
The requirements of ldaho Code $ 61-328 have been fully satisfied. We also find
that, based on the evidence discussed throughout this Order, the merger, pursuant to lclaho Code
$ 6l-902: (1) is not inconsistent with the public interest; (2) is not unnecessary, inappropriate or
inconsistent with the proper performance by the Joint Applicants in service as a public utility,
and; (3) is not prohibited by Title 6l of the Idaho Code. The merger of ScottishPower and
PacifiCorp is approved subject to the Conditions of Merger Approval set forth in section III.B of
this Order.
I. Securities Issuance
Regarding PacifiCorp's securities issuance request, we make the fbllowing frndings
of fact and conclusions of law:
1. lJpon completion of the transaction generally as described in the
Anrended and Restated Agreement and Plan of Merger. dated as ol'
Decernber 6. 1998 and amended as of Jantary 29.1999 and February
9. 1999. and amended and restated as of February 23. 1999 ("Merger
Agreernent"). PacifiCorp will become an indirect. wholly owned
ORDER NO. t8l l.l 58
subsidiary of a new holding company named Scottish Power plc and
an affiliate of the existing electric utility, Scottish Power UK plc.
Pursuant to the Merger Agreement, and for the purpose of
effectuating the merger of PacifiCorp and ScottishPower, all of the
outstanding shares of common stock of PacifiCorp will be cancelled
and converted, and PacifiCorp will issue new common stock to an
entity wholly-owned by Scottish Power plc, which stock shall
constitute the only outstanding common stock of PacifiCorp.
3. PacifiCorp has paid the fees required by ldaho Code g 61-905
4.PacifiCorp is an electrical corporation within the definition of ldaho
Code $ 6l-119 and is a public utility within the definition of ldaho
Code $ 6l-129.
This Commission has jurisdiction over this matter pursuant to the
provisions of ldaho Code $$ 61-328 and 6l -901 et seq.
The purpose for the proposed issuance of common stock is a lawful
purpose under the public utility law of the State of Idaho and is
consistent with the public interest.
We find:
Based on the foregoing, the Application for a securities issuance to effectuate this merger
is approved.
J. Intervenor Funding
On September 13, 1999, the Irrigators filed an Application for Intervenor Funding in
this case pursuant to ldaho Code $ 61-6174 and Rules l6l-165 of the Commission's Rules of
Procedure, IDAPA 31.01.01.
In their Application, the Irrigators claimed the fbllowing costs and fbes:
2
5
6
Legal Fees (Mark Nye - 246 hours @ $150/ hr.)
Travel, meals, and lodging. postage. fax. photocopies
and miscellaneous expenses
Expert Fees (Tony Yankel - 396 hrs @ $ 100/hr.)
Travel, meals, lodging, postage. photocopies and
miscellaneous expense
Total
$36.900
$834.51
$39.600
$1362.46
s78.696.97
ORDER NO.28213 59
According to their Application, the Irrigators note that, contrary to the position taken
by the Commission Staff, they opposed the merger. The Irrigators also note that they addressed
the disparity in irrigation rates in eastern ldaho; an issue they contend that was raised by the
Commission and that no other party addressed. The Inigators argue that the time spent by their
attorney and expert witness in preparing the Inigator's case is reasonable given the nature of this
case. The Irrigators furlher allege that the costs incumed by them in parlicipating in the case
constitute a significant financial hardship for their organization which is a non-profit corporation
relying on voluntary member dues and contributions.
We find:
We find that the Irrigators' Application in this case was timely filed and satisfies all
of the other "procedural" requirements set forth in Rules 161-165 of the Commission's Rules of
Procedure. Rule 161 of the Commission's Rules of Procedure states:
161. Cases in which intervenors may apply for funding (Rule 161). In
any case involving regulated electric, gas, water or telephone utilities
with gross Idaho intrastate annual revenues exceeding $1,500,000,
intervenors may apply for intervenor funding (emphasis added).
Rule 165 of the Commission's Rules of Procedure contains the following
"substantive" requirements: (a) the Irrigators' involvement in this case must have materially
contributed to the Commission's final decision, (b) the costs of intervention awarded are
reasonable in amount, (c) the costs of intervention are a significant hardship for the Irrigators, (d)
the recommendations of the Irrigators differed materially from the testimony and exhibits of
Commission Staff, and; (e) the Irrigators addressed issues of concern to the general body of
ratepayers.
To the extent that the Irrigators scrutinized the cost savings estimates predicted by the
Joint Applicants, questioned the efiect that the merger will have on the public interest and
offered insight into the specific concerns of PacifiCorp's Idaho irrigation customers, their
parlicipation in this case n')aterially contributed to our decision and was of benefit to the general
body of PacifiCorp's ratepayers. Their recommendations certainly differed, on the whole, from
those of the Commission StafL We flnd, however, that the costs and expenses incurred by the
Irrigators are excessive givcn the relatively limited scope of their testimony and parlicipation in
this case. The Irrigators primarily locused on what they believe to be a disparity between the
rates of PacifiCorp's Idaho irrigation customers and customers in other states or served by other
ORDER NO. 28213 60
utilities. We noted earlier that this issue is completely irrelevant to this merger. Moreover, the
Irrigators were misleading in their comparison of Idaho PacifiCorp irrigation rates with those of
Utah. Consequently, we do not find it appropriate to award the Irrigators the full $25,000
available intervenors pursuant to ldaho Code $ 6l-6174 and Rule 165 of the Commission's
Procedural Rules. Instead, we allow them the full recovery of their out of pocket expenses
totaling $2,196.97. We further allow them recovery of l0%o of their attorney's and expert
witness fees which results in $7,650 that, when combined with out of pocket expenses, results in
a total intervenor funding award of $9,846.97.
ORDER
IT IS HEREBY ORDERED that the Application of PacifiCorp and ScottishPower
for approval of a merger transaction and approval of securities issuance is approved subject to
the terms and conditions set forth herein.
IT IS FURTHER ORDERED that the Idaho Irrigation Pumpers Association is
awarded intervenor funding in the amount of $9,846.97.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues
finally decided by this Order) or in interlocutory Orders previously issued in this Case No. PAC-
E-99-l may petition for reconsideration within twenty-one (21) days of the service date of this
Order with regard to any matter decided in this order or in interlocutory Orders previously issued
in this Case No. PAC-E-99-1. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See ldaho Code $ 61-
626.
OI{DIrl{ NO.28213 61
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day ofJune 201 8.
Commissioner Hansen Dissent Attached
DENNIS S. HANSEN, PRESIDENT
MARSHA FI. SMITH. COMMISSIONER
PAUL KJELLANDER. COMMISSIONER
ATTEST:
Myma J. Walters
Commission Secretary
ORDER NO. 282I3 62
DISSENTING OPINION
OF
COMMISSIONER DENNIS S. HANSEN
I must respectfully dissent from the majority opinion in this Order. I believe the record in
this case does not support approval of the merger between PacifiCorp and Scottish Power, plc
("Applicants").
PacifiCorp and ScottishPower have failed to prove the merger is not adverse to the public
interest, based in part on ldaho Code $ 61-328, as well as public and written testimony. Idaho
law requires the Commission to make several findings based on the facts as established in the
Commission record before it can approve an electric company merger. More precisely, the
Commission must consider and find that "the public interest will not be adversely affected, that
the cost of and rates for supplying service will not be increased . . . and that the applicant . . . has
the bona fide intent and financial ability to operate and maintain . . . [the] property in the public
service. . ." Idaho Code $ 6l-328. While the majority finds that approving the merger is in the
public interest, after carefully considering the record, I find that the factual record does not
clearly establish that the "public interest will not be adversely affected" and further find that the
Applicants have not met their burden.
According to the Idaho Supreme Court, "public interest" cannot be perfectly defined.
Bermensolo v. Tennyson Transfer & Storoge Co.,82 Idaho 254,258,352P.2d240,242 (1960);
see also Browning Freight Lines, Inc. v. Wood,99 Idaho 174, 180,579 P.2d 120,126 (1978). In
general, however, where the Commission is required to consider the "public interest," it must
look to "the interest of the public, their needs and necessities and location and, in fact, all the
surrounding facts and circumstances to the end that the people be adequately served." Malone v.
Van Etten,67 Idaho 294,301, 178 P.2d 382, 385 (1947). In past cases, the Idaho Supreme
Courl has affirmed Commission decisions concerning public interest where the Commission lras
weighed such factors as the existence of competition, community growth and public need.
Bermensolo., 82 Idaho at 258- 352 P.2d at 242. What constitutes public need for services
depends on the locality involved and the particular circumstances of each case. Id. In other
words, the Commission must decide u'hat lacts it will consider when determining whether a
merger is not adverse to the public interest - not the Applicants. Moreover, the burden is on the
ORDER NO. 282 r 3 63
Applicants, in this case PacifiCorp and ScottishPower, to demonstrate that the public interest is
not adversely impacted by the merger.
At the prehearing conference held on February 18, 1999, the Commission identified
several factors as being relevant to the Commission's consideration what impact the merger
would have on the public interest. In particular, I requested PacifiCorp and ScottishPower to
document the effects the proposed merger would have on irrigation rates, the future BPA
exchange credit and the subscription eligibility in southeastern Idaho. Tr.p. 19. I requested the
parties to present "concrete" evidence establishing their claim that rates would be lower than
they would be without this transaction and demonstrating how the projected claimed efficiencies
would be achieved. Id. In addition, I questioned PacifiCorp's and ScottishPower's assertion that
in creating those efficiencies additional generation assets would not be sold and that the current
workforce would not be reduced. I asked them to present evidence supporting their claims. Id.
Finally, I requested the parties to discuss whether the Commission would have future authority to
approve or disapprove any sale of plant facility or associated water rights. Tr. p. l8-19.
In addition, during the prehearing conference, other factors were included. The chair
opened up for discussion the issues the parties thought should be addressed in this case. For
example, Mr. Budge, representing Solutia, said, "we think that you've outlined issues that we
see." Tr. p.22,lines 7-8. He went on to say, "Solutia does have a concern that the management
change and what authority may be moved from Portland, in this case, Glasgow, might have on
that relationship." kJ..,Tr.p.23,lines l3-16. No one objected to including these issues as part of
the case at that time,
First, I believe it fundamental that the Commission consider public opinion and concern.
I respectfully disagree with the majority's decision that the Applicants met their burden of proof
to show that the merger was not adverse to the public interest. I find that the Applicants failed to
adeqr"rately respond or answer the many concerns the public voiced concerning the merger at the
numerous public hearings.
The fbur public hearings generated record parlicipation. estimated at over 1.000 people.
Communities were represented by county commissioners. nrayors. city councilnren, local
chambers ol conrnrerce. the Idaho Farm Bureau, local legislators. newspapers. farmers. ranchers.
irrigators and water users, customers, and concerned individuals. Over 100 people testified
during the hearings. many bringing signed petitions which strongly opposed the nrerger. Only
ORDER NO. 28213 64
five individuals who testified supported the merger. Approximately 261letters were received by
the Commission. Close to 99oh were against the merger. These people felt the merger was
extremely adverse to the public interest and voiced several concerns.
Second, the Applicants failed to provide "concrete" evidence of where and how the
claimed efficiencies in the merged operation would bring about savings to the customers in
Idaho. These claimed efficiencies are important to mitigating the projected merger costs in order
to assure customers rates will not increase - one of the findings this Commission must make
before a merger can be approved.
Third, ScottishPower did not provide adequate evidence to support their claim that rates
will be lower than those rates would be without the merger. While the Commission does not
need to find that rates will decrease as a result of the merger, the Commission must find that the
merger will not cause them to increase. ScottishPower refused to guarantee they would not
lncrease
Fourth, the Applicants failed to provide sufficient proof that the merged company will
maintain an adequate workforce in southeastern Idaho to provide quality service to customers.
Fifth, the evidence in the record does not support a finding that ScottishPower has the
required experience and expertise to maintain electrical properties in southeastem Idaho. In fact,
the evidence seems to indicate ScottishPower does not have the necessary experience or
sensitivity to adequately serve the Idaho rural agricultural customer.
Sixth, the record does not contain sufficient proof that management and other major
decisions affecting Idaho would be transferred from management located in Scotland to a locally
influenced and accessible management in Idaho.
I will now discuss these six reasons for dissent in more detail.
I believe that while public opinion may not be the only factor upon which the
Commission may rest its decision, the Commission must carefully consider public opinion and
concerns and determine whether those concerns are adequately answered by the Applicants in
the record. Once these concerns are raised. the burden is on the Applicants to answer them and
demonstrate that the merger will not be adverse to the public interest. Public hearings are some
of the best ways to determine the public interest where the public can freely express those
opinions. The Commission should not ignore the overwhelming majority of PacifiCorp
ratepayers or disregard more than 1.000 southern ldaho ratepayers who believe the merger will
ORDER NO.28213 65
be adverse to them. In many cases the public identified those same issues earlier identified at the
pre-hearing conference - the lack of evidence supporting the creation of claimed efficiencies or
lower rates, maintenance of quality of service, existence of sufficient expertise for ScottishPower
or ScottishPower responsiveness to Idaho customer needs. The Applicants did not adequately
respond to the public's concerns that the merger would adversely impact them.
1. The Applicants failed to provide concrete evidence of where and how the merged
company would create efficiencies in its operation of the merged company that would protect
customers against future rate increases related to the merger.
With respect to whether the merger will create the efficiencies and cost improvements
claimed by the Applicants, several witnesses identified problems associated with those
assertions. For example, Frank Priestly, President of the Idaho Farm Bureau Federation,
representing approximately 50,000 family members, testified:
ScottishPower cites as examples of its management efficiencies and skills, but yet
it has said that the Company ofTers an executive severance package of $20 million
to PacifiCorp executives, $50,000 cash to PacifiCorp board members, l5 million
in employee bonuses and retention packages, and $1 a share for PacifiCorp
shareholders as a bonus for voting for the merger and increasing PacifiCorp's
unsecured debt by $5 billion.
Tr.p. 1609-1610. I agree with Mr. Priestly that "Somehow this doesn't equate to either
frugality or demonstration of management skills and efficiency on the part of ScottishPower."
Id.
Public witness Pallante testified at the Pocatello public hearing that:
PacifiCorp and ScottishPower have repeatedly been asked to provide specifics of
the efficiencies and cost improvements to be gained by the merger and have failed
to provide these. They have testified that !rcy have not yg! undertaken such
not until six months after the merger is approved. As a ratepayer,
I cannot accept blind promises that I will somehow be better off. If there are
efficiencies to be gained by cornbining two companies on two sides of the
Atlantic. why won't the Cornpanies step up to their obligation and provide the
necessary details? Furtherrnore, why are they not confident enough to provide
guarantees to the public that rates will go down. or at a minimum, not increase?
Tr. p. 1225-1226.
I agree with Mr. Pallante. It is not sufficient to merely assure the Commission that such
efficiencies will occur. The burden is on the two companies to support that assertion with real
ORDER NO. 282 r3 66
studies and will
evidence. The Applicants do not even know what efficiencies will occur, nor can they quantify
the savings. A study will be done 6 months after the merger. While I agree with the majority
that it is not necessary to demonstrate that rates will decrease, it is necessary to show that the
merger will not cause grate increase in the future and I believe that the "efficiencies" claimed by
the Applicants to be created by this merger are necessary to produce such rate stability. The
reason these claimed cost savings are important is that they act as an offset to the costs of the
merger and mitigate any possible rate increases. See Richardson testimony at Tr. p. 17l-172.25 I
agree with the public witnesses that the record does not support such a finding. Moreover, I do
not believe that imposing conditions on the merged company can adequately address these
concerns.
I am most concerned about the apparent inability of ScottishPower to identify the areas or
quantify the amounts of expected cost cutting and savings - these remain speculative and
uncertain. ScottishPower did not identify potential cost savings above the projected $10 million
in performance efficiency (5450,000 Idaho's Share). Moreover, the claimed cost savings and
benefits to be derived from this proposed merger have not been studied or quantified and remain
speculative and uncertain.
ScottishPower's witnesses repeatedly testified that no studies to either establish the
existence of the claimed future efficiencies orto quantify those efficiencies have been completed
and would not be completed until approximately six months after the merger was finalized. See
.for examplc Tr. pp. 146-147; Tr. p. 150-155; Tr. pp. 169-172; Tr. p. 290-291 Tr. p. 595.
Mr. Richardson testified in the hearings on behalf of the Applicants and in response to
cross-examination as follows :
The Company does not intend to identify specifically the cost savings until
you have the transition plan developed. Is that true?
Other than the 10 million to which we have committed.
Other than the 10 million?
That's correct.
Other than the l0 million?
That's comect.
And that plan won't be developed for approximately six months?
2s Ilichardson: "We have a genuine wislr to focus on costs, and our hope is that that locus orr
costs willarneliorate and perhaps irt tinre even reduce rates. I think I've said that already. "
a
A.
a
A.
a.
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a.
OR.l)lrl{ NO.28213 67
A.
Tr. p. 151.
That plan will be presented to the Commission six months after approval,
yes.
ScottishPower witness MacRitchie testified in his rebuttal testimony in response to a
question regarding the when the Commission would learn about future cost savings:
No later than six months after the closing date of the merger, ScottishPower and
PacifiCorp will provide the merger transition plan to the Commission. This plan
will include anticipated time lines, actions necessary to implement the merger and
realize the proposed benefits (including expected costs savings), and the estimated
associated capital expenditures and expenses and anticipated workforce changes.
Tr. p. 595.
Until the plan is developed, MacRitchie testified he had no idea what those costs would
be or what the expected savings would be. Tr. p.602-603. Moreover, he indicates that he would
view those costs as recoverable. Id. Based on this kind of testimony, I hnd that the record is not
sufficiently complete to allow me to find that rates will not increase as a result of the merger as I
am required to do by Idaho law. In essence I believe that the Commission is being requested to
approve this merger before the essential information regarding the impact the merger will have
on ratepayers is known - even to the Applicants. The Applicants are required to meet the burden
of proof before approval is given. It makes no sense to meet the burden six months after
approval. Once the merger is approved it cannot be undone if that future study demonstrates no
cost savings or efficiencies inuring to the benefit of the ratepayers and a resulting rate increase.
See -for example Tr. p. 619. I agree with public witness, Pallante, "l cannot accept blind promises
that [customers] will somehow be better off." Sec Tr. p.1225.
2. ScottishPower did not provide adequate evidence to support their claim that rates
will be lower than they would otherwise be without the merger or that the merger will not cause
rates to increase.
I find that the evidence in the record does not support a finding that "the cost of and rates
for supplying service will not be increased by reason o1'' the proposed merger. This is a
pre-condition to finding that the merger should be approved. lduho C'ode $ 61-328. Moreover, I
am not convinced that freezing rates for a period of time as zr pre-condition to approval addresses
this problem. I note that PacifiCorp recently agreed to reliain fiom requesting any type of rate
oRDEIt NO. 28213 6ti
increase before January 2002, in response to a previous Staff audit. Therefore, any rate freeze
for that period of time clearly is not related to the merger.
In addition, I am concerned that the Applicants specifically testified they would not
guarantee ratepayers rates will decrease, stay the same or will not increase as a result of the
merger. There was no evidence presented to address what PacifiCorp rates may be in the future
after PacifiCorp's rate freeze. Therefore, I cannot determine that ScottishPower's rates would be
lower or the same as without the merger. This claim is only speculative.
Furthermore, I am puzzled by news articles that seem to contradict testimony in this case.
For example, according to an article in the Salt Lake City's Deseret News dated November 4,
1999, "ScottishPower chief executive Ian Robinson said PacifiCorp customers will face sharp
price increases after the merger closes."26 In the same article, Alan Richardson, the
ScottishPower official who will be the merged company's CEO, also is quoted as saying "these
price increases are 'nothing new' and do not change the oft-repeated promise that rates will be
lower under Scottish Power than they would be without the merger." This apparent
contradiction illustrates my concern. While throughout this case, the Applicants have repeatedly
stated rates will not increase, indeed will be lower, as a result of the merger, they also refuse to
"guarantee" rates will not increase.
Mr. O'Brien, Vice President and Chief Operating Officer for PacifiCorp, testified on
cross-examination as follows:
Q: And would it also be true that the - PacifiCorp is making no commitment
to freeze rates at existing levels at this time?
A: That is true.
a And also true that the Company is not making commitment at this time to
cap rates at any particular level if it chooses to file a rate increase in the
future?
A: That is true.
Tr. p.284.
ScottishPower witness Richardson testified similarly:
a And is it a fact that ScottishPower makes no commitment or guarantee to
the ratepayers that the savings that you anticipate to be generated fiom
26 AlthoLrgh this news article is not parl of the Cornmission record, pursuant to Comrnission Rule
263, I take official rrotice of this afiicle. IDAPA 31.01.01.263.
ORDER NO. 28213 69
these particular transaction benefits will exceed the cost of the particular
benefits?
That is true, but our experience as utility managers is that these are just the
sort of investments that do deliver the economies.
So what you're basically saying, Mr. Richardson: That even though
you've made no specific study or analysis to quantify the benefits, as a
utility manager, based on your experience, you're quite confident that
those benefits will be achieved?
I am very confident.
You are very confident. And despite the fact that you're very confident
that you'll receive the benefits, would it be accurate to say that you're not
sufficiently confident to protect the ratepayers by providing any kind of a
rate freeze or cap?
No, I don't think that is appropriate.
Okay, it's not appropriate, meaning you are willing to provide a rate freeze
or cap?
No, what I say is that our commitment to costs and cost reductions will be
reflected in the transition plan and in the annual filings that follow, and
there will be opportunities going forward in rate cases to take advantage of
those cost reductions in moderating or in time perhaps even reducing rates.
Tr. p. 147.
Numerous public witnesses also expressed concern that rates would increase, questioning
the "assurances" being made by the Applicants - assurances that I do not believe can be met
simply by conditioning the approval on a rate freeze for a specific amount of time. For example,
Mr. Pallante testified regarding several new programs proposed by ScottishPower and
appropriately suggested that the proposed programs and spending seem to indicate a need for
future rate increases. He said:
The proposed merger has promised new programs and services that no one has
asked for as an enticement to elicit support. Unfofiunately, most of the cost of
these programs will be borne by the ratepayers. That sounds like a cost increase
to me, wliich will eventually lead to a rate increase. Idaho Code has a standard as
part of the approval process that there be no cost increase or rate increase as a
result of tlie merger. That is not the end of my cost concems. ScottisliPower has
proposed spending 135 million on new programs; however. the ratepayers will
only have to pay for 120 million of this. There are approxirrately $240 million of
acquisition and transition costs which will also be passed on the ratepayers,
inclr-rding $20 million of severance packages for 26 highly-compensated managers
of PacifiCorp. I would suggest that all these costs be borne by the share owners.
not the ratepayers.
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ORDER NO. 282I3 70
Tr. p. 1226-27. I agree. I do not believe that the companies can make the proposed expenditures
without causing future rate increases.
Public witness Chad Christensen of Soda Springs expressed concern that the Applicants
would not guarantee that rates would not increase: "It appears to me that the customer is being
ignored." Tr.pp. 1437-1438. Preston Mayor Jay Heusser testified:
I read comments that no dramatic rate increase was planned, but small increases
may be needed in the future. I believe we're already paying two or three cents
more, especially more than Idaho Power, that probably should be serving our
area. I have a great concern. I do not see where our local farmers or irrigators
have a firm rate or commitment. I believe our local farmers are stressed
with the current prices there are now for all costs, and that they cannot handle any
rate increase as the economy goes now.
Tr. p. 1554. These are only a representative sample of the public witnesses.
Evaluating the potential impact this merger may have on rates is critical. Farmers are
especially vulnerable. Mr. Priestly wrote to the Commission on behalf of Idaho Farm Bureau
Federation: "One only needs to look at the deep well pumping area around Arco, Id. for a
demonstration of the effects of increased electric rates on viability of deep well pumpers. Most
of those farms have permanently closed operations." Idaho Farm Bureau Federation Letter dated
August 4, 1999. I believe that the Applicants should be required to provide data and
explanations before - not after - the merger.
3. The record does not support a finding that the quality of service will not suffer as a
result of the merger.
Essential to making a determination that the merger is not adverse to the public interest is
a finding that reliability and quality of service to the customers will not diminish as a result of
the merger. There are a number of factors to be considered in determining the potential impact
the merger will have on service - the size and location of the workforce, where customer
concems are handled, the sensitivity of the merged company to the unique problems faced by its
customers and plans to meet those concerns. The Commission should carefully consider these
factors, because once a decision is made to approve a merger. the Commission may be left with
customer complaints.
Senator Noh, Chairman of the Idaho Senate Resources and Environment Comrnittee,
testified at length before the Commission at the public hearing in Pocatello on July 28, 1999. He
suggested that "[r]eliability of service and delivery of this rnost critical of commodities will
ORDER NO. 28213 l1
likely be adversely affected by the merger." Tr. p. I 198. Senator Noh examined ScottishPower's
actual experience and based on that history, expressed a lack of confidence in ScottishPower's
competence to deliver electrical service to a rural Idaho irrigation environment at low cost.
Tr. p. I199.
Among other things Senator Noh noted:
. the imporlance of constant delivery of power to the irrigated desert
environment will not be fully understood by a Scottish culture drenched in rain.
This has already been illustrated with instructive clarity by the focus of Scottish
executives upon the great benefits of a $50 rebate for failure to restore power in
24 hours. The readiness of Scottish Power leaders to speak of the intemational
consolidation of electrical utilities as being no different than the consolidation of
any other commodity or service is further evidence that they do not comprehend
the unique importance of electricity in rural, anid [sic] America.
Tr.pp. 1199-1200.
Like Senator Noh, I also have reservations about ScottishPower's ability to adapt to
providing power to Idaho's rural communities or to respond to the irrigator needs.
Public witnesses articulated exactly how inadequately ScottishPower's proposed policy
for addressing outages would affect them.
Public witness Eulalie Langford testified: "l have been told that ScottishPower will
guarantee that if my power goes off, they will pay me $50. Does this mean that if my power
goes off at five p.m. on Friday, that rather than pay overtime for a service manager to restore my
power on the weekend, that I will receive a check for $50 and have to wait until Monday
morning for my power to be restored? This is not in my best interest, nor is it in the interest of
my community." Tr. p. 1386.
I agree with Ms. Langford. Twenty-four (24) hours for an irrigator to be without power
may ruin a crop and destroy an economy. Public witness Raybould testified: "If I lose power for
24 hours. it cor-rld cost many thousands of dollars in loss of quality to a potato crop. . . . do they
just plain not urrderstand the cument level of service we enjoy in Eastern Idaho here now."
T..p. lll5.
Understanding the special needs presented by agricultural customers, highly dependent
on predictable and reliable power. is essential lbr any power company seeking to serve eastern
Idaho. Proposed actions like these add to the perception that ScottishPower is ignorant about the
very custorners they intend to serve. When farmers examined the proposed merger, they "found
OI{l)l:l{ NO. 2ti2l3 72
few positives and have some very deep concerns that such a merger is not in the public's best
interest and certainly not in the farmers' best interest." Idaho Farm Bureau Federation Letter
dated Augusl4,1999.
The Commission record calls into question ScottishPower's experience and expertise in
responding to rural agricultural community customer needs in arid Idaho. Such proposed
policies demonstrate an extraordinary lack of understanding for the Idaho agricultural
communities it will be serving. As public witness Burgoyne stated: "this is a company in a
country where they do not even understand, need, or practice the concept of irrigation. God
takes care of their irrigation. They get rainfall every day." Tr. p. 1571.
Service quality and service responsiveness was also mentioned by several witnesses,
echoing concerns I raised at the pre-hearing conference.
Ms. Langford testified as to her experience with PacifiCorp when management was
moved to Portland, Oregon:
When the management of my electric utility company moved from Salt Lake
City, Utah, to Portland, Oregon, the quality of service was poorer rather than
better. Bigger is not better. We received much better service from a small
company than from a large one. I am convinced that if this proposed merger takes
place, my electric utility service will be worse than it is now.
Tr. p. 1386.
Senator Lee summarized many of the public witnesses' concerns about service
responsiveness:
Then we had the PacifiCorp merger, and as I've indicated, there was a tremendous
reduction -- cost-saving reduction -- but there was a loss of a lot of familiarity
with personnel. We began to have to communicate with Salt Lake and with
Portland, and it was difficult sometimes to get response, not so much on the
service but on other aspects of it. And, now, with this particular proposed
merger, we're wondering, how can there be more -- more of the same thing on top
ol what's already been done? We think they're right to the bare bones. And I've
even heard comrnents. Are we going to have to go to Glasgow now to get our
power bills resolved? Because that's what's happened with their moving
personnel out of and closing down some of these local district offices in ldaho.
T.. p. 1080.
I agree that these are legitimate concerns. Even though the record indicates that
ScottishPower plans to operate out of Portland, instead of Glasgow, Scotland. they also testif red
ORDER NO. 28213 -at-)
that the many management positions in Portland would be filled with Scottish management
people. So to determine where the decisions will be made, Portland or Scotland, it doesn't make
much difference if ScottishPower management is making the decisions with their European
background, knowledge, and influence -- it is not where management sleeps at night, it is the
experience that counts. ScottishPower has not demonstrated to me that it is sensitive to the
unique service requirements and concerns of this rural agricultural community located in an arid
area.
Moreover, I am concerned over the dramatic change ScottishPower's management will
face running a United States utility. In the United States, utilities are regulated and in this case,
PacifiCorp is regulated by several states and the federal govemment. ScottishPower
management has no experience with United States regulated utilities with the size and diversity
of PacifiCorp. It has only a limited history and experience (since 1991) as a private utility in the
United Kingdom. It does not understand inigation requirements or arid areas.
Finally, I am concerned about ScottishPower's stated intent to use PacifiCorp as a
platform to expand into other electric and gas businesses in the United States. See Richardson
testimony Tr.p. 108. To me, this means that the management will not be appropriately focused
on providing service to its Idaho customers but rather on future economic markets.
SUMMARY
As Governor Kempthorne said in his statement to the Commission, "The State of Idaho
and Idaho PacifiCorp customers and ratepayers have legitimate concerns over the proposed
merger offer of ScottishPower. Idaho customers must be treated fairly and consider their
concerns, and rely heavily on their suggestions." I share those concerns with Governor
Kempthorne. While I agree with the ma.iority that the Commission does not simply rely on
publicly expressed sentiment in making a decision, it should carefully weigh that sentiment and
those concerns against the facts presented by the Applicants. Representative Geddes reminded
us at the Pocatello hearing that the Commission placed sigrrificant weight on public opinion
when deciding whether to expand telephone access in Soutliem ldaho and, as he said, "it's wise
to listen to the public you represent." T..p. 1263. -l-he public has made it perfectly clear that
they feel this proposed merger is adverse to their interests. The Franklin County Commissioners
summarized that sentiment when they wrote " we think you got the feeling of the people we
represent in Franklin County. Almost 100% of the people in Franklin County are against the
ORDER NO.28213 74
takeover of PacifiCorp by ScottishPower." Franklin County Commissioners Letter dated
September 8, 1999. A letter received from The ldaho Enterprise reporter Bonnie Bott where she
says "Never before in allthe time I have worked at this job, have I ever witnessed an issue where
public sentiment is all one-sided until now. Virtually everyone I talk to are opposed to the Idaho
service area being part of PacifiCorp/ScottishPower."
I believe that the public expression given in testimony should be a key factor in
determining whether this merger is adverse. The Applicants have the burden of proof to
establish that this adversity does not exist, which I believe they have failed to do. In this case, I
do not believe that the Applicants have met their burden in responding to nearly unanimous
public sentiment and concerns regarding the impact of the merger on rates and service quality.
Therefore, I respectfully dissent.
COMMISSIONER DENNIS S. HANSEN
ORDER NO.282t:i 75