ML20154S042

Forwards Testimony of Wa Russell & WR Hughes in Procedings Before FERC Re Indemnity Agreement B-78,per 880526 Request

ML20154S042
Person / Time
Site:	Trojan File:Portland General Electric icon.png
Issue date:	05/27/1988
From:	Nelson R STOEL, RIVES, BOLEY, JONES & GREY
To:	Chan T NRC
References
TAC-68144, NUDOCS 8806080313
Download: ML20154S042 (84)

Text

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nc_- 6P/44 STOEL RlVES BOLEY JONES & GREY ATTotNI1S AT L AW l SUITE 900 t Q 7i Q .j h 1730 M STREFT NW WASHINGTON, D C. 200%-4505 Telerkene t2021955 4555 Telecepter (202) 955-4551 Wnter's Osmt DulNumber (202) 955-4562 May 27, 1988 BY MESSENGER Mr. Terrance Chan U.S. Nuclear Regulatory Commission Room 13E16 11155 Rockville Pike Rockville, MD 20752 Re: In the Matter of the Application of PacifiCorp and PC/UP&L Merging Corp. for Consent to the Transfer of Facility operating License No. NPF-1 and Indemnity Aareement No. B-78 (Troian) ,

Dear Mr. Chan:

In response to your May 26, 1988 request, please find enclosed the testimony of Mr. Whitfield A. Russell and Dr. William R. Hughes in the proceedings before the Federal Energy Regulatory Commission in FERC Docket No. EC88-2-000.

Please let me know if you have any questions.

Sinc ely,

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Robert A. Nelson, J i

RAN:shw Enclosures RAN.789/58806,23

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Q .. .I, Exhibit (UMWA, et al.-1)

UP&L/PP&L Docket No. EC88-2-000 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company )

PacifiCorp .

) Docket No. EC88-2-000 PC/UP&L Merging Corporation )

PREPARED DIRECT TESTIMONY OF WHITFIELD A. RUSSELL On Behalf of ,

- the United Mine Workers of America, International Union; Environmental Action; Salt Lake Citizens Congress;

. salt Lake Area Community Action Program; and Rogue Valley Fair Share February 12, 1988

p t TABLE OF CONTENTS PAGE ISSUES ADDRESSED 11

SUMMARY

iii INTRODUCTION 1 I. TRANSMISSION ACCESS CONDITIONS 4 A. Specific Experience 4 B. Specific Conditions 8 C. Purpose and Scope of the Transmission Conditions 17 D. Condition No. 2 25 E. Condition No. 3 27 F. Condition No. 4 30 G. Condition No. 6 32 H. Condition No. 7 33 t

l II. CONDITIONS RELATING TO DIVERSIFICATION AND INTERAFFILIATE TRANSACTIONS 34 l

A. Interaffiliate Transactions 36 B. Retention of Utility-Related Businesses 38 l

l C. Management's Time Allocation Between Utility and i Nonutility Activities 39 D. Access to Books and Records 40 III. AVAILABILITY OF COORDINATION BENEFITS BY CONTRACT OR POWER l POOL 41 i

l UNITED MINE WORKERS OF AMERICA, INTERNATIONAL UNION; ENVIRONMENTAL ACTION; SALT LAKE CITIZENS CONGRESS; SALT LAKE AREA COMMUNITY ACTION PROGRAM; ROGUE VALLEY FAIR SHARE EXHIBIT LIST UMWA, 31 jlLL.-1 Prepared Direct Testimony of Whitfield A. Russell UMWA, 31 AL.-2 List of Proceedings in Which Whitfield i A. Russell Has Testified i UMWA, 31 EL.-3 Applicant's Response to Requests UMW 1-B-12 and 2-B-7 UMWA, 31 6 -4 Applicant's Response to Request UMW 1-G-1 UMWA, 31 i -5 Applicant's Response to Request UMW 2-G-3 UMWA, 31 i -6 Applicant's Response to Request UMW 1-G-2 UMWA, 31 1 -7 Applicant's Response to Request UIN 2-G-43 I

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O 8 PREPARED DIRECT TESTIMONY OF WHITFIELD A. RUSSELL ISSUES ADDRESSED

1. Proposed Conditions on the Proposed M,erger to Assure Fair Access to PP&L's and UP&L's Combined Transmission System

2. Proposed Conditions on the Proposed Merger to Protect Ratepayers from Abuse of Interaffiliate Relations

3. Challenge to Applicant's Claim that the Alleged Joordination Benefits are not Attainable by Contract

(

l

PREPARED DIRECT TESTIMONY OF WHITFIELD A. RUSSELL

SUMMARY

I. TRANSMISSION ACCESS CONDITIONS Bulk power marketing in the Western Systems Coordinating Council ("WSCC") region is characterized by extremes of open access on the one hand and stifling monopoly on the other. In this context, the merged entity ("PP&L/UP&L") could use its control of transmission, obtained through the merger, to secure unwarranted benefits at the expense of ratepayers and competitors.

The proposed conditions are intended to mitigate anticompetitive and otherwise adverse effects of the proposed merger such as the further balkanization of bulk power markets and the unfair sharing of loop flow burdens. There are nine major conditions:

1. In general, PP&L/UP&L entity shall be obligated to wheel over the Utah portion of its combined transmission system for those nonaffiliated entities who agree to wheel for PP&L/UP&L.

2. PP&L/UP&L shall htve preferential access to that amo' int of capacity sufficient to serva (a) its native load, including reasonable projections in that native load; and (b) each off-system firm obligation existing as of the date j the merger was agreed to, unless such obligation was entered into in anticipation of the merger.

]

3. The remaining existing capacity in i the Utah portion of PP&L/UP&L's combined transmission system shall be allocated among PP&L/UP&L and

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its competitors in proportion to the contract demand reflected in new firm contracts. Until such now contracts are executed, PP&L/UP&L shall be permitted to make short-term firm sales subject to future displacement by the new firm contracts.

4. PPkL/UP&L shall allow its own firm energy schedules to be displace by lower cost nonfirm energy deliveries by nonaffiliated entities.

5. With respect to nonfirm wheeling, nonaffiliated entities shall have access to the Utah portion of the combined system on the basis of price. Two different allocation methods are proposed, for surplus or nonsurplus conditions.

6. PP&L/UP&L's wheeling obligations are limited to (a) those entities with transmission facilities who offer wheeling sirvices on terms at least as favorable as those offered by PP&L/UP&L; and (b) those entities without transmission facilities.

7. Nonaffiliated entities should have a right to participate in expansion of PP&L/UP&L's transmission facilities.

8. PP&L/UP&L shall permit nonaffiliated entities to make investments in control schemes and transmission facilities that increase the transfer capability of the PP&L/UP&L system for the purposes of making additional sales or purchases in competition with PP& L/UP&L.

9. Any Commission approval of the merger should be conditional, pending subsequent Commission approval of transmission tariffs implementing the conditions set forth above.

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II. CONDITIONS RELATING TO DIVERSIFICATION AND INTERAFFILIATE TRANSACTIONS Conditions are proposed in the areas of (a) interaffiliate transactions, (b) retention of utility-related businesses, (c) management's time allocation between utility and nonutility activities; and (d) access to books and records.

III. AVAILABILITY OF COORDINATIoli BENEFITS BY CONTRACT OR POOL Applicants' claim that the alleged coordination benefits can be obtained only through merger is inaccurate. These benefits are attainable through bilateral contract or pooling.

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UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company )

PacifiCorp ) Docket No. EC88-2-000 PC/UP&L Merging Corporation )

PREPARED DIRECT TESTIMONY OF WHITFIELD A. RUSSELL INTRODUCTION 1 Q. Please state your name and address.

2 A. Whitfield A. Russell, Suite 350, 1301 Pennsylvania Avenue, 3 Northwest, Was'hington, D.C. 20004.

l 4 Q. With whom are you associated?

l 5 A. Whitfield Russell Associates, Public Utility Consultants.

6 Q. On whose behalf are you testifying?

7 A. I am appearing on behalf of the United Mine Workers of 8 America, International Union; Environmental Action; Salt 9 Lake Citizens Congress; Salt Lake Area Community Action 10 Program; and Rogue Valley Fair Share.

I i

2 1 Q. What is the purpose of your testimony in this proceeding?

2 A. The purpose of my testimony is to propose conditions upon 3 the merger of PP&L and UP&L and explain the basis for those 4 proposed conditions. I propose conditions in two areas:

5 (1) transmission access, and (2) diversification and 6 interaffiliate transactions. In addition, I challenge 7 PP&L/UP&L's assertion that the claimed coordination benefits 8 are not attainable through power pooling or by contract.

9 Q. Have you testified as an expert in other proceedings lo concerning utility operations?

11 A. Yes. I have presented testimony before Federal and State 12 courts, the Federal Energy Regulatory Commission, the 13 Atomic Energy Commission, and the state utilities 14 commissions of Colorado, the District of Columbia, Idaho, 15 Kansas, Kentucky, Louisiana, Maine, Maryland, Nevada, New 16 Mexico, North Carolina, Oklahoma, South Dakota, Texas, 17 Virginia and West Virginia. Those proceedings are listed in 18 Exhibit (UMWA, et al-2).

19 Q. Please summarize your education.

20 A. In January 1968, I obtained the degree of Bachelor of 21 Science in Electrical Engineering from the University of 22 Maine. In January 1971, I obtained the degree of Master of 23 Science in Electrical Engineering from the University of 24 Maryland. In May 1976, I obtained the degree of Juris 25 Doctor from the Georgetown University Law Center.

26 Q. Please describe your work experience as it relates to

3 1 electric utility systems.

2 A. From September 1968 until until October 1969, I worked 3 part-time for the Federal Power Commission ("FPC") as an 4 electrical engineer.

5 From October 1969 through June 1971, I worked in the System 6 Planning Department of the Potomac Electric Power Company 7 ("PEPCO") in a succession of positions from Junior Engineer 8 to Associate Engineer. My work involved studies of the 9 existing and planned bulk power systems of PEPCO, the PJM 10 Interconnection and the utility systems adjacent to PJM.

11 ,

12 From June 1971 to June 1972, I was again employed by the 13 FPC. I appeared as a technical witness for the FPC on bulk 14 power supply planning in an Atomic Energy Commission 15 proceeding in connection with the licensing of the Midland 16 Power Plant of Consumers Power Company.

17 18 From June 1972 until February 1976, I was employed by the 19 United States Securities and Exchange Commission ("SEC"),

20 first as an engineer and then as Chief Engineer of the SEC's 21 Division of Corporate Regulation. That Division 22 administers the Public Utility Holding Company Act of 1935.

23 My duties required analysis of the effects upon investors 24 and consumers of numerous proposals for mergers, 25 divestitures, sales of assets and securities and other

4 1 jurigdictional transactions.

2 3 Since February of 1976, I have been self-employed as a 4 consultant on electric and gas utility matters to 5 utilities, agencies of State, local and Federal 6 governments, industrial cogenerators, and other entities.

7 Q. Please describe your professional associations and 8 activities.

9 A. I as a member of the Power Engineering Society of the 10 Institute of Electrical and Electronics Engineers; Tau Beta 11 Pi, a sociaty of engineers; Ett Kappa Nu, a society of 12 electrical engineers, the American Bar Association, and the 13 Virginia and District of Columbia Bar Associations.

14 15 From 1979 through 1985, I lectured annually on electric 16 utility system planning and operations at the Regulatory 17 Studies Program sponsored by the National Association of 18 Regulatory Utility Commissioners. I also serve on the ,

19 Research Advisory Committee for the National Regulatory 20 Research Institute.

21 I. TRANSMISSION ACCESS CONDITIONS ,

i 22 A. Soecific Excerience 23 Q. Please describe your experience related to issues of 24 transmission generally, and specifically on issues related 25 to the Pacific Northwest's dealing with the Southwest. l 7- - - --n-..--,...,-r.-- -, --_c, , . . . , - - . , - , , - - - - . , --

5 1 A. I have testified in the following cases:

2 1. Anaheim v. Kleoce, U.S. District Court, Arizona (Civil 3 No.74-542 PHX-WEC), concerning the availability of 4 transmission capacity in the Pacific Southwest.

5 2. In re: Potomac Electric Power Company, Maryland Public 6 Service Commission, concerning the need for proposed 7 500 kV transmission lines in the Washington, D.C. area 8 (Case No. 7004).

9 3. In re Baltimore Gas and Electric Comoany, and Potomac 10 Electric Power Comoany, Maryland Public Service 11 Commission (Case No. 6984), involving the same 12 transmission lines mentioned in the preceding case.

13 4. In re Pacific Gas & Electric Company, FERC Locket 14 No. ER76-532, regarding the proper level of rates to be 15 charged by PGandE to the Central Valley Project for 16 transmission service.

17 5. In re: Pacific Power and Licht Comoany, FERC Docket 18 No. E-7796, regarding the Seven Party Agreement and 19 related matters.

20 6. In re Pacific Gas and Electric Comoany, FERC Docket 21 No. E-7777(II) concerning the provisions of numerous 22 bulk power arrangements governing electric utilities in 23 California.

l 24 7. In re: Potomac Edison comoany, Maryland PSC Case No.

25 7055 concerning the need for a 230 KV transmission line 26 in Montgomery County, Maryland.

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1 8. In re: Idahe Power Comeanv, Idaho PUC Case No.

2 U-1006-158 concerning the value of interruptible 3 industrial loads and Idaho Power Company's entitlement 4 to Federal secondary energy.

5 9. In re: Vircinia Electric and Power Comcapy, Virginia 6 State Corporation Commission Case No. PUE 800006, 7 concerning construction of transmission lines in the 8 Charlottesville, Virginia area.

9 10. Southaastern Fower Administration v. Kentucky Utilities 10 Comoany, FERC Docket No. EL 80-7 concerning SEPA's 11 attempt to obtain a FERC wheeling order under the 12 Public Utility Regulatory Policies Act of 1978.

13 11. In re: Sierra Pacific Power Company, Public Service 14 Commission of Nevada, Docket No.81-105 concerning i 15 construction and transmission planning.

16 12. In re: Delmsrva Power & Licht comoany, Maryland Public 17 Service Commission, Docket No. 7570, concerning 18 transmission loss allocation methodology.

19 13. In re: Nebraska Public Power District, South Dakota 20 Public Utilities Commission, Docket No. F-3371, 21 concerning proposed construction and operation of the 22 500 KV MANDAN Transmission Facility.

1 23 14. In re: Sierra Pacific Power Comeanv, Public Service 24 Commission of Nevada, Docket No.81-660 concerning 25 construction and transmission planning.

1 I 26 15. In re: The Montana Power Comeany and the Confederated l

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7 1 Salish and Kootenai Tribes of the Flathead Reservation, 2 Project Nos. 5-004 and 2776-000 concerning the Tribes' 1 3 intention and ability to sell their output to one or 4 more entities in the Western states, upon obtaining the 5 license to the Kerr Project.

6 16. United States of America Department of Enerav, before 7 the Bonr.eville Power Administration, on behalf of the 8 City of Vernon California, concerning the 1985 9 Proposed Firm Displacement Power Rate.

10 17. In re: City of Anaheim, et al.. v. Sqqthern California 11 Edison, United States District Court for the Central 12 District of California, Docket No. 78-0810, on behalf 13 of five partial requirements wholesale customers of 14 Southern California Edison Company, making claims under 15 Federal antitrust laws for access to the Pacific 16 Northwest-Pacific Southwest Intertie.

17 18. In thc Matter of the Application of Sierra Pacifig 18 Power Comoany for Approval of its 1986-2006 Electric 19 Resource Plan, Docket No.86-701, on behalf of the 20 State of Nevada Attorney General's Office of Advocate 21 for Customers of Public Utilities, concerning efforts 22 of Sierra Pacific Power Company to develop a new 23 interconnection (the SMUD Tie) with the Sacramento 24 Municipal Utility District.

25 19. The Federal Executive Acencies, Comolainant v. Public 26 Service Comoany of Colorado, Case No. 6551 before the

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1 Public Utilities Commission of the State of Colorado, 2 on behalf of the Federal Executive Agencies concerning 3 the feasibility of wheeling federal preference power to 4 the Government's facilities at Rocky Flats, the Lowry 5 Air Force Base, the Rocky Flats Technical Center and 6 the Denver Federal Center.

7 20. Nevada Power Comoany, Docket No.87-750, before the 8 Nevada Public Service Commission, concerning a 345 KV 9 transmission line proposed to connect Nevada Power i

10 Company to Utah Power and Light Company.

11 B. Specific Conditions 12 Q. What conditions do you propose with respect to transmission 13 access, should this Commission approve the merger of 14 PacifiCorp with Utah Power & Light?

15 A. I propose the following nine conditions:

1 16 1. General

Purpose:

The merged entity ("PP&L/UP&L")

17 shall be obligated to wheel over the Utah portion l

18 of its combined transmission system for those l

l 19 nonaffiliated entities who agree to wheel for l

20 PP& L/UP& L. PP&L/UP&L must offer access to its l

l 21 network on a nondiscriminatory basis at published l 22 rates based on cost.

23 2. PP&L/UP&L Preferential Access:  ?@&L/UP&L shall 24 have preferential access to that amount of 25 capacity in its merged transmission system 26 sufficient to serve:

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9 1 a. its native load, including reasonable 2 projections of growth in that native load; 3 and 4 b. each offsystem firm obligation existing as of 5 the date the merger was agreed to, unless 6 such obligation was entered into in 7 anticipation of the merger.

8 3. Firm Wheelino Over PP&L/UP&L System: PP&L/UP&L 9 shall set aside and announce specified portions 10 of its scheduling limits at points of delivery for 11 firm deliveries by wheeling customers, both for 12 imports to and exports from the Utah portion of 13 PP&L/UP&L control area. The total of such 14 portions shall equal the difference between (i) 15 PP&L/UP&L's total transmission capacity, and (ii) l 1

! 16 that amount of capacity to which PP&L/UP&L has 17 preferred access under Condition 2. This 18 difference shall be referred to hereinafter as the l

l l 19 "remaining existing capacity." This remaining 20 existing capacity shall be allocated among 21 PP&L/UP&L and its competitors in accordance with 22 the following procedure:

23 a. Thirty days following the date of final 24 Commission approval of the proposed 25 merger (including all appeals of any 26 Commission decision), PP&L/UP&L and each

10 1 of its competitors shall announce their 2 intent, if such intent exists, to seek 3 incremental (either as to duration or 4 amount) firm offsystem sales or 5 purchases.

6 b. One year following such notice, PP&L/UP&L and 7 its competitors shall announce any-executed 8 contracts for firm capacity and energy which 9 they have negotiated, that would make use of 10 the remaining existing transmission capacity.

11 Each entity announcing an executed contract, 12 including PP&L/UP&L (if it announces a 13 contract), shall be hereinafter referred to 14 as a "qualifying entity."

15 c. Thirty days after such announcement, 16 PP&L/UP&L shall allocate the remaining 17 existing capacity among the qualifying 18 entities. If the transmission capacity 19 required to meet the obligations under such 1 20 executed contracts exceeds the remaining 21 existing capacity, PP&L/UP&L shall allocate l 22 the remaining existing capacity among the l

l 23 qualifying entities in proportion to the l

24 contract demands for which contracts have 1 25 been entered into. If the transmission l 26 capacity required to meet the obligations l

11 1 under such executed contracts is less than 2 the remaining existing capacity, the process 3 described above shall be reinitiated as each 4 succeeding firm wheeling use is announced.

5 d. For the periods during which PP&L/UP&L 6 and its competitors are seeking to 7 become qualifying entities by 8 contracting for incremental sales or 9 purchases, PP&L/UP&L shall be permitted 10 to make short-term firm sales subject to 11 future displacement by the contracts 12 which result from the allocation 13 procedure.

14 e. PP&L/UP&L shall be compensated through 15 wheeling rates to be filed for wheeling firm 16 energy.

17 4. Disolacement of PP&L/UP&L Firm Power With 18 Lower-Cost Nonfirm Power: PP&L/UP&L shall allow l 19 ,

its own firm energy schedules for offsystem sales 20 to be displaced by lower cost nonfirm energy l 21 deliveries by nonaffiliated entities, except 22 insofar as such displacement would cause PP&L/UP&L l 23 generators dedicated to making offsystem firm 1

24 sales to operate below minimum operating levels.

25 The same rule would apply to nonaffiliates in that 26 their firm sales could be displaced by PP&L/UP&L 1

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12 1 and other nonaffiliates. In other words, all firm 2 exports from the PP&L/UP&L system shall be 3 displaceable by lower-cost wheeled energy except 4 when reliability of PP&L/UP&L's own firm sales is 5 endangered. PP&L/UP&L shall be compensated 6 through wheeling rates to be filed for wheeling 7 nonfirm energy. Access by nonaffiliated entities 8 to the PP&L/UP&L network for the purpose of making 9 nonfirm sales shall be dictated by the terms of 10 Condition 5.

11 5. Nonfirm Wheelina for Nonaffiliated Entities: With 12 respect to sales of nonfirm energy, PP&L/UP&L 13 shall allocate the use of its network in the 14 following manner:

15 a. Condition of No Surolus: In the absence of a 16 declaration of surplus by BPA, the Northwest l

17 competitor (including PP&L/UP&L) with the 18 lowest priced nonfirm energy shall have 19 access to the PP&L/UP&L network to the extent I 20 of the competitor's available generating 21 capacity. The Northwest competitor with the 1

22 next lowest priced nonfirm energy shall have 1

l 23 access to the PP&L/UP&L network to the extent I of its available generating capacity, and so 24 25 on. Any access granted by the preceding two 26 sentences shall be reduced by the amount of 1

13 1 access which the Northwest competitor has to 2 Southwest markets through the Pacific 3 Intertie or other alternative facilities.

4 b. Condition of Surolus: PP&L/UP&L shall 5 allocate the use of its network according to 6 the principles underlying the Exportable 7 Agreement (Agreement Executed by the United 8 States of America Department of the Interior 9 by and through the Bonneville Power 10 Administrator and Utilities in the Pacific 11 Northwest (BPA Contract No. 14-03-73155, 12 January 13, 1969)). See Dect. of Water and 13 Power of the City of Los Anceles v.

14 Bonneville Power Administration, 759 F.2d 15 684, 687 (9th Cir. 1985). Specifically, all 16 Northwest sellers that can meet a price set 17 by BPA shall receive a pro rata allocation of 18 capacity in the PP&L/UP&L system based on 19 their declared capacity. Any access so 20 received shall be reduced by the amount of

( 21 access which the Northwest competitor has to 22 Southwest markets through the Pacific 23 Intertie or other alternative facilities.

24 PP&L/UP&L shall be permitted to recover through

25 nonfirm transmission rates the cost of maintaining l

14 1 equipment and staff to perform the allocations.

2 6. Limitation on PP&L/UP&L's Oblication to Wheel for 3 Monaffiliated Entities: PP&L/UP&L shall be 4 obligated to wheel only for (i) those 5 nonaffiliated entities seeking wheeling that have 6 in place rate schedules for wheeling services, and 7 for (ii) nonaffiliated cntities who have no 8 transmission facilities. Such rate schedules 9 must offer wheeling on a basis at least as 10 favorable as that on which PP&L/UP&L renders 11 wheeling services to nonaffiliated entities. In 12 other words, PP&L/UP&L has no obligation to wheel 13 for entities with transmission facilities that do 14 not of fer to wheel for PP&L/UP&L and others.

15 16 For the purposes of this paragraph, if a 17 nonaffiliated entity without transmission 18 facilities is affiliated with an entity owning 19 transmission, the first entity shall be deeme' to 20 own the transmission facilities of the second l 21 entity.

22 7. Particication by Nonaffiliated Entities in 23 Expansion of PP&L/UP&L Transmission Facilities:

24 If PP&L/UP&L intends to increase the capability of 25 any of its interconnections, it shall first give 26 public notice through WSCC or other appropriate

15 1 bodies. Such notice shall state, among other 2 things, the estimated cost, the affected delivery 3 points and the estimated change in scheduling 4 limits at each delivery point. Within a six-5 month notice period, each competing supplier 6 and/or buyer of bulk power which is described in 7 subparts (i) or (ii) of Condition No. 6, and which 8 also has a firm entitlement to "remaining existing 9 capacity" (or is a newly-formed entity), shall 10 have an opportunity to participate in such planned 11 increase by nominating an amount of capacity it 12 wishes to take and pay for on a firm basis, either 13 by ownership or long-term contract. Each 14 competitor shall have the option of participating 15 by (a) acquiring ownership by making an 1 appropriate cash payment or (b) obtaining a long-17 term contract from PP&L/UP&L. In the event 18 nominations exceed the design capacity of the 19 proposed facility, PP&L/UP&L shall have the 20 option of either (a) adding other facilities 21 sufficient to satisfy the total nominations, or

! 22 (b) allocating the limited capacity of the l 23 proposed increase among itself and the competitors l

1 24 in proportion to nominations.

25 Newly-formed entities shall be obligated to pay a i

1

16 1 rate that recovers their proportionate share of 2 the embedded cost.

3 8. Nonaffiliate-Initiated Efforts to Increase 4 Iransfer Cacability: PP&L/UP&L shall permit 5 nonaffiliated entities to make investments in 6 control schemes and transmission facilities that 7 increase the transfer capability of the PP&L/UP&L 8 system for purposes of making additional sales or 9 purchases in competition with PP&L/UP&L. Such 10 nonaffiliated entities shall retain the benefit of 11 those capacity additions subject to assuming the 12 obligations imposed on PP&L/UP&L in these 13 conditions and subject to technical reviews such 14 as those administered by WSCC.

15 9. Mercer Anoroval Conditioned on PP&L/UP&L Filina 16 Transmission Tariffs: Commission approval of the 17 merger shall be conditional, pending subsequent l

! 18 Commission approval of transmission tariffs 19 implementing the conditions set forth above.

20 PP&L/UP&L shall file such tariffs within 60 days 21 of the final Commission order granting such 22 conditional approval, including any appeals l 23 thereof. Such tariffs shall include provisions i

l 24 setting forth the criteria that prospective 25 wheeling customers must include in their tariffs 26 to be eligible for wheeling by PP&L/UP&L.

17 1 C. Purcose and Scoce of the Transmission conditions 2 Q. What problems are your proposed transmission conditions 3 intended to address? -

4 A. Bulk power marketing in the WSCC region is characterized by 5 extremes of open access ca the one hand and stifling 6 monopoly on the other. In addition, the region is so 7 configured that circulating loop flows impose enormous costs 8 on some utilities and enable others to obtain free wheeling.

9 Most of the harm results from an absence of a utility 10 obligation to wheel and from the utility practice of 11 contracting as if power could be routed along a specific 12 path. In fact, every power schedule or delivery alters 13 power flows on every nonradial transmission path of an 14 interconnected network in inverse proportion to the 15 impedance of that path.

16 My conditions are intended to mitigate anticompetitive and 17 otherwise adverse effects of the proposed merger such as the l

l 18 further balkanization of bulk power markets and the unfair 19 sharing of loop flow burdens. Although my conditions are 20 far from the optimal arrangement one could devise, they do 21 prevent PP&L/UP&L from securing an unwarranted benefit from l

r 22 the merger at the expense of its ratepayers and competitors.

23 Q. Please elaborate.

24 A. As I understand marketing arrangements in the WSCC area, 25 they have historically had the following dominant l

1

18 1 attributes which demonstrate that access to UP&L's 2 transmission system is essential for northwest suppliers to 3 compete.

4 1. The Pacific Southwest has relatively high-cost power 5 and the Pacific Northwest has relatively low-cost 6 power. The two regions are linked by the Pacific 7 Northwest-Pacific Southwest Intertie ("Pacific 8 Intertie"). During favorable water conditions, the 9 Intertie is fully loaded with low-cost hydro surplus 10 energy, leaving considerable amounts of low-cost power 11 trapped in the Northwest. With its new access to 12 UP&L's system, PP&L will be able to avoid more spill 13 and market more power, relative to its competitors.

14 2. The Bonneville Power Administration has historically 15 produced 80% of the Northwest's hydro surplus. When 16 Northwest water conditions are favorable, nonfirm 17 energy prices plummet and UP&L buys low-cost Northwest 18 power for resale at Four Corners. Under those 19 conditions, more low-cost hydro power is generally 20 available than can be taken. Under federal law, BPA 21 must sell its power first in the Northwest before 22 selling it directly to Southwest buyers. Nonfederal 23 Northwest buyers, both utilities and BPA's direct 24 service industrial customers, are entitled to that 25 preference. PP&L and UP&L are entitled to that 26 preference with respect to their loads within the

19 1 Northwest region.

2 3 Befcre the merger, all companies with entitlements to 4 BPA power compete to sell this power to UP&L. With the 5 merger, PP&L has preferred access to UP&L's facilities.

6 In other words, the merger will enable PP&L and UP&L to 7 leverage PP&L's access to BPA power.

8 3. BPA controls the northern terminus of the Pacific 9 Intertie and seeks to favor sales of its surplus power.

10 Non-BPA ownership rights in the Intertie are held by 11 PP&L (300 MW) and Portland General Electric Company 12 (700 MW) and wheeling rights are held by Washington 13 Water Power Company (60 MW to Southern California 14 Edison and 112 MW to San Diego Gas & Electric), WAPA, 15 Longview Fiber, Tacoma City Light, and Montana Power 16 Company. During surplus hydro conditions, BPA shares 17 its access to the Intertie and to the Southwest market, 18 and also allows firm energy deliverable under its 19 wheeling contracts to be displaced by surplus. By 20 acquiring UP&L, PP&L will upset this existing Northwest l 21 pattern for sharing sales to the Southwest, l

22 4. UP&L is directly connected to Northwest entities 23 entitled to a regional preference. UP&L controls the 24 northern terminus of several major transmission lines i

l 25 by which power can be transmitted to the Pacific 26 Southwest and the Desert Southwest, such as the Pinto-

20 1 Four Corners line, the WAPA line to Glen Canyon, the 2 proposed tie to Nevada Power and the Mona-Intermountain 3 Power Project ("IPP") interconnection.

4 5. UP&L has been well-known for its refusal to wheel.

5 Instead UP&L prefers to realize substantial profits on 6 brokering low-cost power obtained from sister companies 7 in the Intercompany Pool. For example, UP&L has 8 refused to wheel from the Northwest to Nevada Power 9 over the proposed 345 KV line. Moreover, several 10 Northwest and Southwest utility executives have 11 informed me that UP&L has turned down their requests 12 for wheeling or that it is futile to ask UP&L to wheel.

13 Thirdly, UP&L has described the benefits of its 14 brokering in its annual reports to stockholders.

15 6. UP&L has planned additional connections to the Pacific l

Southwest through Nevada Power Company which planning 16 17 has the effect of bypassing the loop flow bottleneck at 18 Four Corners. This additional connection will also 19 enable PP&L/UP&L to bypass the transmission control l 20 which Southern California Edison enjoys between Four l 21 Corners and the Los Angeles Basin and which Edison uses 22 to suppress the prices of its purchases. Thus, the 23 proposed interconnection to Nevada Power will ena'ble 24 PP&L/UP&L to avoid loop flow cuts imposed at Four 25 Corners and to sell at prices that more nearly reflect 26 the decremental costs of utilities serving the Los l

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21 1 Angeles Basin.

2 7. Additional interconnections are planned from UP&L's 3 service area to the Pacific Southwest. These will 4 produce the same advantages as does PP&L/UP&L's 5 proposed tie to Nevada Power.

6 Q. How did you determine the scope of your proposed wheeling 7 condition.;?

8 A. My goal was to design conditions which impose wheeling 9 obligations on PP&L/UP&L to the minimum extent necessary to 10 prevent the merger from creating or maintaining 11 ancicompetitive conditions or otherwise being inconsistent 12 with the public interest. I am aware that some debate 13 exists as to whether this Commission can order wheeling.

14 However, I have assumed that the Commission has authority to 15 reject the proposed mergar if the resulting transmission 16 monopoly to be gained by PP&L/UP&L is inconsistent with the 17 public interest. Furthermore, I have assumed that since the I

18 Commission may reject the proposed merger on that basis, it 19 may condition the proposed merger on wheeling arrangements 20 necessary to assure the merger's consistency with the public i

21 interest. Without necessarily agreeing with the 22 proposition, I have also assumed that the Commission will 23 not order a greater wheeling obligation than is necessary to 24 assure that the proposed merger is consistent with the l 25 public interest. I therefore have proposed conditions which 1

26 impose no greater obligation than what I deemed necessary to

22 1 prevent the merger from harming the public interest.

2 Q. Is there a prototype for the conditions you have proposed?

3 A. Yes. I have referred to BPA's.

4 Q. Why have you chosen BPA's wheeling service as a proto':ype 5 for your proposed conditions?

6 A. BPA has provided every major competitor in the Northwest 7 with reasonable transmission access to the Southwest market 8 without creating any insuperable technical or operating 9 problems. It is therefore a workable prototype. I do not 10 mean to imply that BPA's policies and practices are without 11 flaw but rather that they are far less anticompetitive than 12 PP&L/UP&L's post-merger policies and practices can be 13 expected to be in the absence of conditions.

14 Moreover, it is important to have some consistency among the 15 owners of major transmission facilities in the west.

16 Inconsistent transmission policies could add to the 17 inequitable sharing of loop flow curtailments and enable 18 PP&L/UP&L to profit unduly from its regional preference, ICP 19 membership and open access to BPA transmission without any i

l 20 offsetting benefit to its competitors or the public l

i 21 interest.

22 In short, treating the Utah transmission and the Pacific 23 Intertie in a roughly equivalent manner would lessen loop l 24 flow curtailments, unfair subsidies and anticompetitive

i l l

23 1 activity.

2 Q. BPA has several wheeling policies. Which ones have you 3 relied on for guidance in proposing your conditions?

4 A. The Exportable Energy Agreement, the Near Term Intertie 5 Access Policy ("NTIAP") and the draft Long Term Intertie 6 Access Policy ("LTIAP").

7 Q. Your conditions vary from BPA's wheeling policies in certain 8 respects. Please explain the major differences, and why you 9 have not followed the BPA policy in each case.

10 A. There are many differences between BPA policies and my 11 conditions for PP&L/UP&L. BPA renders wheeling to all 12 applicants whereas under my conditions PP&L/UP&L would not 13 have to provide wheeling to those entities that refuse to 14 wheel for PP&L/UP&L. BPA does not allow some of its firm 15 energy sales to be displaced by lower cost nonfirm energy 16 whereas my conditions would mandate such displacements. BPA 17 allocates transmission under nonsurplus conditions based on 18 declared surpluses whereas my conditions would allocate 19 based on the market.

20 Q. Would future changes in BPA policy require any changes in 21 your proposed conditions?

22 A. Not necessarily, although I would not rule out the 23 possibility.

24 Q. Do your proposed conditions apply to all portions of the l 25 combined PP&L/UP&L transmission system?

26 A. No. My focus is on access by competitors of PP&L/UP&L 1

l l

24 1 through UP&L facilities to low-cost sources in the 2 Northwest and high-priced markets in the Southwest. For 3 example, my conditions would not affect PP&L's Intertie 4 rights.

5 Q. How would your conditions apply to wheeling which the PPL 6 division performs for the UPL division, and vice versa?

7 A. There would be no need to make such artificial distinctions 8 under my conditions. My conditions treat the merged entity 9 as one. Moreover, competitors would obtain access equal to 10 that obtainable by either division except insofar as one or 11 the other division has planned to use transmission access as 12 a means of serving firm load.

13 Q. Are you proposing specific transmission rates as parc of 14 ycur conditions?

15 A. No. I have focused on general terms of access only.

16 However, I have proposed that the Commission, if it approves 17 the merger, condition its approval on its approval of l

18 ' transmission tariffs to be filed by PP&L/UP&L, implementing 19 my other conditions.

20 Q. How do your proposed conditions treat the problem of loop 21 flows?

22 A. As explained previously, there should be fewer loop flow 23 curtailments under my conditions, but they would be 1 24 administered in accordance with existing loop flow rules as 25 they are changed from time to time.

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l L

25 1 D. Cond.ition No. 2 2 Q. - Your proposed Condition No. 2 provides preferential 3 treatment to off-system firm obligations of PP&L or UP&L 4 existing as of the date the merger was agreed to, but not 5 future off-system obligations of PP&L/UP&L. Please 6 explain.

7 A. The opposite parties of PP&L/UP&L in existing transactions 8 are relying on the continuation of their existing 9 arrangements. It would be inequitable to the opposite 10 parties to unwind or modify such an arrangement unless 11 absolutely necessary. On the other hand, with respect to 12 future, as-yet-unplanned, off-system obligations, there is 13 no such reliance or equitable consideration. PP&L/UP&L 14 should not be able to 'Ise any market power obtained through 15 the merger to make new off-system sales, and then cite such 16 new obligations as reasons to foreclose transmission access 17 by its competitors.

18 Q. You have excluded from the capacity to which PP&L/UPGL 19 would have pre'ferential access capacity attributable to 20 obligations entered into in anticipation of the merger.

21 Please explain.

22 A. There may be contracts which PP&L or UP&L entered into 23 before the date the merger was agreed to, where PP&L's or 24 UP&L's ability to fulfill the contractual obligations was 25 based in part on the benefits offered by the proposed 26 merger. Under these narrow circumstances, it makes sense to

26 1 treat the contract nrt as a preexisting obligation, but as 2 an obligation entered into as a result of market power 3 obtained through the merger.

4 Q. Do have a specific example in mind?

5 A. Yes. A possible example of this problem would be the 6 proposed 140 MW sale from UP&L to Nevada Power. While I am 7 not directly familiar with the facts, it is my understanding 8 that certain parties have alleged that UP&L had assembled a 9 set of nonaffiliated entities to supply the Nevada Power 10 contract, but then discarded these entities in favor of 11 PP&L. It is also my understanding that the Commission has ,

12 withheld approval of the UP&L sale to Nevada Power pending 13 the outcome of this proceeding. See letter from FERC's 14 Director of the Division of Electric Power Application 15 Review (December 17, 1987). If the Commission were to 16 determine that PP&L gained a special advantage over its 17 competitors with respect to UP&L's sale to Nevada Power by 18 means of the proposed merger, then the sale should not be 1

19 treated as a preexisting obligation.

l 20 Q. Why have you permitted PP&L/UP&L to retain capacity in its 21 L?rged transmission system sufficient to serve "reasonable 22 projemtions of growth in that nctive load?"

23 A. My principle was to set aside capacity for PP&L/UP&L to 24 serve, without impairment of service, its preexisting 25 obligations. I regard "reasonable projections of growth" in 26 PP&L/UP&L's native load to be within PP&L/UP&L's

27 1 pre-existing obligations.

2 However, I do not view PP&L/UP&L's pre-existing obligations 3 as including unreasonable load projections. PP&L/UP&L 4 should not be permitted to reserve additional capacity for 5 itself, to the exclusion of its competitors, by making load 6 projections which are not supportable.

7 E. Condition No. 3 8 Q. With respect to those firm off-system sales for which your 9 conditions would allocate transmission capacity among 10 PP&L/UP&L and nonaffiliated entities, why have you 11 described such sales as "incremental (either as to duration 12 or amount)" (Egg Condition No. 3(a))?

13 A. PP&L/UP&L should not be allowed to avoid my proposed 14 conditions by extending the term or increasing the contract 15 demand on an existing contract to the detriment of its 16 competitors. Either change would be equivalent to an 17 unplanned new contract.

18 Q. Under your Condition No. 3(b), concerning allocation of 19 capacity for firm power sales, PP&L/UP&L competitors must 20 make their contracts first, and then receive an allocation.

21 Please explain.

22 A. If prospective sellers were to receive guaranteed 23 transmission allocations without regard to their ability to 24 price and package power, the public would lose the benefits 25 of competition. I see no reason to deprive the public of

1 28 1 those benefits.

2 Q. Why not simply allocate transmission access for firm 3 off-system sales in order of decreasing generating 4 costs, as you do for non-firm off-system sales under your 5 Condition 5(a)?

6 A. In non-firm sales, short-term price is the primary 7 determinative factor. Therefore, it makes sense to grant 8 access to a transmission bottleneck on the basis of price.

9 However, in firm off-system sales, price is not the only 10 significant factor. Term, demand charge, escalation rates, 11 reliability and other attributes can be significant as well.

12 For that reason, I have proposed that contract negotiations 13 take place first. In this manner, buyers and sellers can 14 meet in the marketplace, unrestricted by transmission 15 bottlenecks, and reach the most satisfactory agreements 16 based on all relevant terms and conditions.

17 Q. Isn't it true that under your Condition 3 (a), (b) and (c),

18 parties to a contract for incremental off-system sales will 19 not know, until the end of the one-year contracting period, 20 whether the seller will be allocated sufficient transmission 21 access to comply fully with the contract?

22 A. Yes.

23 Q. Will this uncertainty deter parties from entering into 24 contracts, or alternatively force each buyer to negotiate 25 redundant contracts with competing sellers in order to 26 ensure that some combination of sellers will have sufficient

. a 29 1 transmission access to supply that buyer's needs?

2 A. No. Most points of delivery have specific scheduling 3 limits and the buyers know how much capacity they can 4 receive at each point. Buyers can contract provisionally 5 for power with contract demands potentially greater than 6 their entitlements, secure in the knowledge that the 7 allocation process will scale down their purchases. It is 8 more likely that buyers will contract for an amount no more 9 than they can take delivery of.

10 Q. Why have you provided for a one-year wait before PP&L/UP&L 11 and its competitors announce any executed contracts for firm 12 capacity?

13 A. Parties require' considerable time to negotiate long-term 14 firm contracts. A year can be a relatively brief period for 15 this type of negotiation.

16 Q. Your Condition 3(c) assumes that when the new firm 17 contracts have been announced, the allocation is a simple 18 matter of dividing the available capacity pro rata among the l

l 19 sellers. Is that correct?

20 A. Yes.

21 Q. Won't the specific transactions have load flow impacts that 22 make impossible a simple allocation on a pro rata basis?

23 A. No. If the scheduling limits have been determined properly, l 24 the allocation method should force the executed contracts to l

l 25 be scaled down to the scheduling limit.

26 Q. Why does your Condition No. 3(d) permit PP&L/UP&L alone to l

30 1 make short-term firm sales for the periods during which 2 PP&L/UP&L and its competitors are seeking long-term firm 3 contracts?

4 A. Ideally, nondiscriminatory access to PP&L/UP&L's 5 transmission bottleneck ought to be available from the date 6 the merger is approved. However, negotiations and 7 allocations take time and there is no reason to leave 8 available capacity idle while my proposed allocation process 9 is being implemented for the first time. Therefore, 10 PP&L/UP&L should use UP&L'S capacity for short-term firm 11 sales during this interim period. Of course, such sales 12 would be subject to future displacement by any firm 13 contracts entered into as a result of the allocation 14 procedure.

l 15 16 While PP&L/UP&L would enjoy a privileged position with 37 respect to these short-term firm sales, any abuse of this 18 position would be mitigated by the imposition, effective 19 thirty days after final approval of the merger, of my 20 Condition No. 4. Under Condition No. 4, any PP&L/UP&L firm 21 energy sales would be displaceable by lower cost nonfirm 22 energy deliveries.

23 F. Condition No. 4 24 Q. Why have you proposed that nonaffiliated entities be able l 25 to displace PP&L/UP&L's firm energy with lower cost nonfirm 26 energy?

l

31 1 A. Such a procedure will assure that PP&L/UP&L's 2 interconnections and transmission facilities are filled with 3 the lowest-cost energy available for sale. Tne procedure 4 will also prevent PP&L/UP&L from (i) using its transmission 5 monopoly merely for brokering and (ii) requiring firm power 6 purchasers to take unnecessarily large amounts of firm 7 energy when that energy is not competitive.

8 Q. How does your Condition No. 4 prevent PP&L/UP&L from using 9 its transmission monopoly merely for brokering?

10 A. Competitors with energy that costs less than PP&L/UP&L's 11 energy will be permitted to displace sales by PP&L/UP&L.

12 Thus, there will be no occasion for PP&L/UP&L to buy and 13 resell a competitor's energy.

14 Q. How does your Condition No. 4 prevent PP&L/UP&L from 15 requiring firm power purchasers to take unnecessarily large 16 amounts of firm energy priced at noncompetitive levels?

i j 17 A. Except for minimum outputs of its generating units, 18 PP&L/UP&L must permit displacement of its energy sales by 19 lower-priced energy of its competitors. Thus, PP&L/UP&L

! 20 cannot force sn offsystem buyer of its power to take minimum l

21 quantities of energy.

l 22 Q. What do you mean by "generators dedicated to making 23 off-system firm sales," as that phrase is used in your 24 Condition No. 4?

l 25 A. I mean those generating units that are needed to serve peak 26 demands but which cannot be shut down and restarted on a l

l

32 1 daily basis. As a result of this real-world constraint, 2 PP&L/UP&L must produ:e certain minimum amounts of energy 3 from its generators even if lower cost energy is available 4 from other sources. Fairly objective criteria exist by 5 which one can determine whether PP&L/UP&L is experiencing 6 this minimum load constraint.

7 Q. Wouldn't your Condition No. 4 cause PP&L/UP&L to reduce 8 operating levels of some of its generators to levels below 9 those most efficient.for those generators?

10 A. That is one possible result. But the overall result is 11 still one of maximum efficiency. The effect of my condition 12 Nc. 4 is to deploy the generators of PP&L/UP&L and each 13 competing and prospective seller of nonfirm energy in order 14 of cost. The more costly generators will be used the least.

15 That a more costly generator is not being used at its level 16 of maximum efficiency is beside the point.

17 G. Condition No. 6 18 Q. Why is it necessary for PP&L/UP&L to offer its competitors 19 an option to purchase an ownership share in any transmission l

j 20 addition, as oppposed to entering into a contract?

21 A. There are several reasons. First, an ownership share is 22 what PP&L is acquiring from UP&L. Competitors should be i 23 allowed to obtain the same preferred access. Second, 24 wheeling contracts always have a finite term whereas 25 ownership is for perpetuity. Upon expiration of a wheeling 26 contract, PP&L/UP&L would obtain certain privileges and

33 1 would have an incentive to raise the rate or not to 2 negotiate a contract extension. Ownership prevents a 3 competitor from being subjected to such pressures. Third, 4 there is considerable synergism in transmission systems in 5 that parallelling or reinforcing an existing line creates 6 new capacity at a lower cost and with a higher rell' ability 7 than does constructing an independent line. This benefit a typically goes to the owners of a line and not to the 9 wheeling customers. Fourth, there are only just so nany 10 good transmission corridors. In other words, transmission 11 rights-of-way are a scarce and valuable resource. If a i 12 competitor does not obtain ownership, he may be frozen out 13 of the benefits of owning transmission rights-of-way.

14 H. Condition No. 7 15 Q. Why is it necessary to of fer non-af filiated entities an 16 opportunity to initiate their own efforts to increase 17 transfer capability between their systems and the PP&L/UP&L 18 system?

l l 19 A. As I noted in my response to the prevjous question, the 20 incremental cost of adding capacity to a pre-existing 21 network such as that of UP&L is lower than the cost of 22 building entirely new lines such as the Inland Intertie.

23 Moreover, new control schemes and parallel line construction 24 tend to increase the transfer capabilities of lines over 25 time. In the absence of my Condition No. 7, PP&L alone 26 would reap these benefits solely as a result of the merger,

34 1 and all of PP&L's Northwest competitors would be 2 competitively disadvantaged.

3 Q. To summarize, do your proposed conditions deprive PP&L/UP&L 4 of the benefits of its investment?

5 A. No. My proposed conditions do not deprive PP&L/UP&L of the 6 legitimate benefits to be gained from its investment in 7 transmission facilities. In fact, under my proposal, 8 PP&L/UP&L enjoys several key benefits. To reiterate, these 9 benefits are as follows:

10 1. PP&L/UP&L would enjoy a monopoly over short-term firm 11 sales during the interim periods where PP&L/UP&L and 12 its competitors are seeking long-term firm sales.

13 2. PP&L/UP&L would retain unimpaired rights to its 14 transmission system for the purposes of fulfilling its 15 existing obligations.

16 3. To the extent that the conditions create more 17 transactions than would otherwise be the case, 18 PP&L/UP&L alone would receive the wheeling revenues.

19 Thus, any loss of monopoly profits would be offset at 20 least in part by the increased wheeling revenues from 21 open access.

22 II. CONDITIONS RELATING TO DIVERSIFICATION 23 AND INTERAFFILIATE TRANSACTIONS 24 Q. Have you had any special experience in the area of i 25 diversification and interaffiliate transactions?

h

i 35 1 A. Yes. From 1972-1976, I worked as an engineer, and for most 2 of the period, as Chief Engineer, in the Division of 3 Corporate Regulation at the Securities and Exchange 4 Commission. That division administers the Public Utility 5 Holding Company Act of 1935 which, among other things, 6 seeks to protect consumers from abuses flowing from lack of 7 arm's-length bargaining between affiliates of holding 8 companies. This lack of arm's-length *.argaining can result 9 in excessive charges and misallocation of costs to public 10 utility affiliates. In that position, I had occasion to 11 review numerous proposals involving transactions among 12 affiliates of electric and gas utilities, including 13 diversified companies.

14 In addition, I testified before the Maine Public Utilities 15 Commissic' in Docket No.82-137, concerning Central Maine 16 Power Company's proposal to become a wholly-owned suusidiary 17 of a diversification-oriented holding company. My l

18 testimony, on behalf of the Commission staff, concerned 19 conditions designed to protect customers from 20 diversifiestion-related risks and absence of arm's-length l 21 bargaining among affiliates.

22 Q. What are the general purposes of your conditions with 23 respect to diversification and interaffiliate transactions?

t 24 A. My general purposes are to assure that, as a result of the 25 merger:

i 1

'a

• 36 1 1. PP&L's and UP&L's abilities to continue providing 2 safe, reasonable and adequate service are not i

3 impaired; and 4 2. state regulation is not circumvented.

S Q. Why do you believe conditions are necessary in this regard?

6 A. PacifiCorp is a highly diversified corporation. As Mr.

7 Reed has testified (at 4), during 1986, 48% of PacifiCorp's 8 operating revenues were derived from nonutility activities.

9 In any diversified corporation, there are numerous 10 opportunities for interaffiliate transactions that can be 11 detrimental to ratepayers.

12 Q. What conditions do you recommend to minimize the risks yc 13 have described?

14 A. I recommend conditions in five categories:

! 15 A. Interaffiliate Transactions 16 B. Retention of Utility-Related Businesses 17 C. Management's Time Allocation Between Utility and l

18 Nonutility Activities l

19 D. Access to Books ar.d Records, 20 My recommended conditions are set forth below.

21 A. Interaffiliate Transactions l

l 22 Q. What conditions do you propose with respect to i

37 1 interaffiliate transactions?

2 A. I propose three conditions, as follows:

3 1. FERC and each state commission must retain the 4 right to determine the reasonableness of all 5 transactions or arrangements between affiliates.

6 2. All assets should be transferred from the utility 7 divisions not at book value but at fair market 8 value.

9 3. No transfer of any utility property to any other i

10 division or subsidiary of PacifiCorp without prior 11 state commission approval.

12 Q. Why have you proposed these conditions?

13 A. The first condition should be self-explanatory. With 14 respect to the second condition, transfer of appreciated 15 assets from the utility divisions to any other division or 16 subsidiary of Pacificorp at book value would deprive the 17 utility division of appreciation in its investment and could 18 deprive it of profits and/or potentially lead to an l

l 19 unregulated subsidiary providing goods and services to the l

l 20 utility at a cost higher than the utility itself could 21 provide the goods or services. With respect to the third 22 condition, transfers at less than market value amount to a 23 disguiseo dividend. If the transaction had been in the 24 form of a sale tc a third party at fair market value, the l 25 cash proceeds would have been available for use as a l

38 1 dividend.

2 B. Etiention of Utility-Related Businesses 3 Q. What conditions do you propose with respect to retention of 4 utility-related businesses?

5 A. I propose the following condition:

6 Any business currently owned or controlled, in 7 part, directly or indirectly, by PacifiCorp, UP&L, 8 or any subsidiary, division or affiliate thereof, 9 which business is necessary to the operation of 10 the utility divisions, and any which is reasonably 11 incidental, or economically necessary or 12 appropriate to the operations of the integrated 13 utility system, must remain a business of the

< 14 utility.

15 Q. Why do you bel'ieve this condition is necessary in this case?

16 A. Earned rates of return on closely associated business, in i

17 excess of those allowed on utility rate base, should benefit 18 ratepayers and not simply holding company shareholders, when 19 those high returns result in part from the guaranteed market 20 the utility provides or other advantages derived from its 21 monopoly status.

39 1 C. Management's Time Allocation Between Utility and Nonutility 2 Activities 3 Q. What conditions do you propose teith respect to time 4 allocation between utility and nonutility activities?

5 A. I propose the following condition:

6 PP&L/UP&L must keep, for each executive at the 7 level of vice-president and above which has 8 responsibility for both utility had non-utility 9 activities, detailed records of allocations of 10 management time and all direct and indirect 11 expenses of management, and provide a summary of 12 such records to this Commission and each state 13 regulatory Commission annually.

14 Q. Why do you believe this condition is necessary in this case?

15 A. There is always a risk that utility management's attention 16 may be diverted by the inevitable crises associated with 17 nonutility venturas. The simple way to minimize the problem 28 of diverted attention is to minimize the overlap between 19 management of utility and nonutility operations. Therefore, 20 regulators need some way of tracking how management uses its 21 time. And that is the purpose of my proposed condition.

22 The problem is illustrated by PP&L's response to UMWA, g1 23 alt's DR1B12 and DR2B7. In those requests, UMWA, at als

l 40 l 1 asked for a time breakdown for upper management with 2 responsibilities in utility and nonutility areas. PP&L 3 stated that it does not keep a manager-specific brea)Jown of 4 utility vs. nonutility time expenditures for its top 5 management. PP&L, in its response, attempted to avoid the 6 issue by claiming it used a three-factor formula to allocate 7 management costs among its affiliates, but that is besides 8 the point. The issue is does PP&L have any system for 9 tracking and evaluating each of its top managers' devotion 10 of time to utility vs. nonutility activities. The answer 11 which comes through clearly from the data response, is "no."

12 I have attached copies of these two responses as Exhibit 13 UMWA, at 1 -3.

14 I have not proposed any specific guidelines for management 15 time allocation. I would suggest the Commission leave open 16 the possibility of imposing such guidelines, pending its 17 review of actual time expenditures as provided b'f PP&L/UP&L.

18 19 D. Access to Books and Records 20 Q. What conditions do you propose with respect to access to 21 books and records?

22 A. I propose the following two conditions:

23 1. FERC and each state commission should have access 24 not only to books of Pacificorp and its

41 1 affiliates, but to books of any joint venturers 2 with Pacificorp or its affiliates.

3 2. PacifiCorp must provide this Commission, and each 4 state commission in whose state PacifiCorp does 5 business, within 90 days after close of each 6 fiscal year, detailed statement of projected 7 capital budget of each affiliate in the system for 8 the current year and the next two years, including 9 estimated financing requirements and construction 10 plans, and sources of capital for the current 11 year.

12 Q. Why do you believe these conditions are necessary in this 13 case?

14 A. With respect to the first condition, absent access to the 15 books of joint venturers of Pacificorp and its affiliates, 16 regulators face the risk of not getting the full picture 17 when they examine interaffiliate transactions. The second 18 condition provides early warning of cash needs which may 19 equire iricreased dividends from the utility or cause 20 declining financial indicators.

21 III. AVAILABILITY OF COORDINATION BENEFITS 22 BY CONTRACT OR POWER POOL 23 Q. Do you have specific experience in power pooling and 24 coordination agreements?

25 A. Yes. I have wo;ked on powe' pooling matters for over

42 1 20 years through publications, testimony, teaching and 2 public speaking.

3 Q. Are you familiar with PP&L/UP&L's claim that the 4 coordination benefits they claim will result from the 5 proposed merger are not attainable by contract or by power 6 pool?

7 A. Yes. In response to Data Request G-1 of the First Set of 8 Data Requests of UMWA, at alt (DRIG1), Mr. Steinberg stated 9 that the claimed benefits from the merger were not 10 attainable by contract. He stated that any attempt to 11 achieve them by contract would require "protracted 12 negotiations," and would result in less flexibility than 13 would the merger. And, in response to Data Request G-3 of 14 the Second Set of Data Requests of UMWA, 11 Alt (DR2G3), Mr.

I 15 Steinberg states that absent the merger, the packaging of 16 power sales anticipated for the post-merger era could not be 17 accomplished by contract. I have attached copies of these 18 two reponses as Exhibits UMWA, 31 Alt-4 and UMWA, 21 Alt-5, 19 respectively.

l 20 Q. What is your evaluation of Mr. Steinberg's statements?

21 A. His claim is at odds with power pooling and coordination 22 practices throughout the country.

23 In short, there has been extensive and successful national 24 experience achieving by contract precisely those 25 coordination benefits FP&L/UP&L claims cannot be achieved by f

l

43 1 contract. Therefore, I believe PP&L/UP&L bears the burden 2 of demonstrating support for Mr. Steinberg's statements.

3 Certainly nothing in PP&L/UP&L's testimony or exhibits 4 contains such support.

5 Mr. Steinberg's positien is particularly questionable given 6 UP&L's and PP&L's past and current participation in 7 coordination agreements. For example, in his response to 8 UMWA, at 112 DRIG2, Mr. Steinberg states that PP&L has 9 achieved diver;ity benefits, in the form of seasonal 10 exchanges, through PP&L's wholesale sales contract with 11 Southern California Edison, and that reduced reserve 12 requirements have been achieved by PP&L since the early 13 1960's through coordinated operation with other Northwest 14 utilities. I have attached a copy of this response as 15 Exhibit UMWA, 31 A12-6. Mr. Steinberg also states in his 16 response to UMWA, 31 al2 DR2G43 that PP&L has had 17 "considerable experience" in coordinating unit commitment 18 through its involvement in five jointly-owned thermal 19 projects with various other owners. He also states there 20 that those projects, along with the Mid-columbia Projects 21 have involved coordination of dispatching. I have attached 22 a copy of this reponse as UMWA, 11 alz-7.

23 Q. If the Commission were to accept PP&L/UP&L's assertion that 24 the claimed coordination benefits are not obtainable through 25 power pooling or contract, but are obtainable only through

44 1 merger, what effect might that have on power pooling in the 2 nation?

3 A. More consolidations and acquisitions of utilities will 4 probably result, with the loss of diversity in ownership and 5 competitive pressure on prices. It is well-recognized that 6 competition does more for ratepayers and efficiency than 7 does price regulation. Accordingly, those benefits that are 8 achievable through pooling and coordination should be 9 disregarded in measuring whether the merger, on balance, is 10 consistent with the public interest.

11 Q. Does this conclude your testimony?

12 A. Yes.

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1 Exhibit (UMWA, et al.-2).

• Docket No. EC88-2-000 Page 1 of 6 Proceedings in Which ,

Whitfield A. Russell Has Testified ,

1. Anaheim v. Kleone, U.S. District Court, Arizona (Civil No.74-542 PHX-WEC), concerning the availability of transmission capacity in the Pacific Southwest. ,

2. In re: Potomac Electric Power Comoany, Maryland Public Service commission, concerning the need for proposed 500 kV transmission lines in the Washington, D.C. area (Case No.

7004).

3. In re: Baltimore Gas and Electric Comoany, and Potomac Electric Power comoany, Maryland Public Service Commission (Case No. 6984), involving the same transmission lines mentioned in the preceding case, ,

4. Perry v. The City of Monroe. Louisiana (State of Louisiana, Parish of Ouachita, Fourth District Court; Nos. 111145, 111146, 111147 filed August 16, 1977) regarding the ,

necessity of Monroe's disposing of its municipal utility system.

5. In re: Potomac Electric Power Comoany, District of Columbia

. Public Service Commission, in Case No. 685, concerning the t

system planning of the Potomac Electric Power Company and 1

the PJM Pool. -

l

6. In re: Generic Hearinas on Rate Structure, the Colorado l Public Utilities Commission (Case No. 5693), regarding the engineering aspects of marginal cost pricing and power pooling in Colorado.

7. In re: Pacific Gas and Electric Comoanv, FERC Docket No.

ER76-532, regarding the proper level of rates to be charged ,

by PG&E to the Central Valley Project for transmission service.

t

8. In re: Pacific Power and Licht Comoany, FERC Docket No. i E-7796, regarding the Seven Party Agreement and related matters.

9. In re: Pacific Gas and Electric Comoany, FERC Docket No. -

E-7777(II) concerning the provisions of numerous bulk power arrangements governing electric utilities in California.

I em- - -. re- ,%-,-. , , _ , - , , , ,

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Exhibit (UMWA, et al.-2)  !

Docket No. EC88-2-000 '

Page 2 of 6

10. In re: Potomac Edison Comoany, Maryland PSC Case No. 7055 concerning the need for a 230 KV transmission line in Montgomery County, Maryland.

11. In re: Delmarva Power and Licht Comoany, Maryland PSC Case Nos. 7239F, 7239G, 7239H, 7239 I, 7239J, 7239K, 7239L, 7239M and 7239N concerning fuel rate adjustments.

12. In re: Baltimore Gas and Electric Comoany, Maryland PSC Case Nos. 7238G, 7238H, 7238 I, 7238J, 7238L and combined dockets 7238P, Q, R and S concerning fuel rates.

13. In re: Potomac Electric Power Company, Maryland PSC Case Nos. 7240A, 7240B, 7240C, 7240D, 7240E, 7240F and 7240G concerning fuel rate adjustments.

14. In re: Florida Power & Licht comoany, FERC Docket No.

E-9574, concerning system planning for the City of Vero Beach, Florida. FP&L has withdrawn its application to acquire the Vero Beach system.

15. In re: Oklahoma Gas and Electric Comt .y , FERC Docket No.

ER77-465 concerning rates for energy banking and transmission services rendered to the Western Farmers Electric Cooperative.

16. In re: Idaho Power Comoany, Idaho PUC Case No. U-1006-158 concerning the value of interruptible industrial loads and Idaho Power Company's entitlement to Federal secondary energy.

17. In re: Potomac _ Electric Power Comoany, District of Columbia PSC Case No. 737 concerning the Company's construction program.

18. In re Vircinia Electric and Power Comoany, Virginia State Corporation Commission Case No. PUE 800006, concerning construction of transmission lines in the Charlottesville, Virginia area.

19. In re: Pacific Gas and Electric Comoany, FERC Project Nos.

2735, and 1988 concerning the Helms Project, a pumped storage generating unit.

20. Southeastern Power Administration v. Kentucky Utilities Comoany, FERC Docket No. EL 80-7 concerning SEPA's attempt to obtain a FFRC wheeling order under the Public Utility Regulatory Policies Act of 1978.

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I l

Exhibit (UMWA, et al.-2)  !

Docket No. EC88-2-000 Page 3 of 6 '

21. In re: Sierra Pacific Power Comeanv, Public Service Commission of Nevada, Docket No.81-105 concerning construction and transmission planning.

22. In re: Vircinia Electric and Power Comeanv, North Carolina Utilities Commission, Docket No. E-22, Sub 257, concerning L production cost simulation and normalized fuel adjustment -

clause formula. ,

23. In ret the Investiaation of the Cacital Excansion For Electric Generation, New Mexico Public Service Commission Case No. 1577, concerning construction programs of the .

Public Service Company of New Mexico and El Paso Electric i Company.

. 24. In re: Potomac Edison Commanv, Maryland Public Service Commission, Case Nos. 7241A, 7241B, 7241C and 7241D concerning fuel rate adjustments and productivity of ,

generating units. l

25. In re: Potomac Edison comoany, Maryland Public Service Commission, Case No. 7528 concerning the method of calculating Potomac Edison's fuel rate.

26. In re: Delmarva Power & Licht comeanv, Maryland Public Service Commission, Docket No. 7570, concerning transmission l loss allocation methodology.

l

27. In re: Nebraska Public Power District, South Dakota Public Utilities Commission, Docket No. F-3371, concerning proposed construction and operation of the 500 KV MANDAN Transmission Facility.

l

! 28. In re: Sierra Pacific Power comoany, Public Service

, Commission of Nevada, Docket No.81-660 concerning '

l construction and transmission planning.

29. In re Kentucky Utilities Comeanv, FERC Docket Nos.

, ER-81-341-000 and ER81-267-000 concerning construction l planning, and the market for short term power.

30. In re: Kentucky Power Comeany et al., Kentucky Public Service Commission Case No. 8566 concerning cogeneration and avoided Oosts.

31. In re: Accalachian Power Comeany, West Virginia PSC Case No. 82-162-42T concerning the wholesale market and short-term power sales.

P I

Exhibit (UMWA, et al.-2)

Docket No. EC88-2-000 Page 4 of 6

32. In re: Central Maine Power Comoany, Maine PUC Docket No.82-137 concerning the application of Central Maine Power Company to reorganize in the form of a holding company.

33. In re: Houston Lichtina & Power Comoany, Texas PUC Docket No. 4712, concerning rates to be paid to cogenerators and small power producers.

34. In re: Dow Chemical Comoany, Docket Nos. 4802, 5050, and 5062, before the Public Utility Commission of Texas concerning rates for interruptible service.

35. In re: Nevada Power Comoany, Docket No.83-707 before the Nevada Public Service Commission concerning the Reid Gardner No. 4 Participation Agreement.

36. Dow Chemical Comoany vs. Houston Lichtina & Power Comoany, No. 79-F-2620, The District Court of Brazoria County, Texas, 149th Judicial District regarding the custom and usage of contract terms in the electric utility industry.

Live direct testimony in a jury trial. No transcript available.

37. In re The Montana Power Comoany and the Confederated Salish and Kootenai Tribes of the Flathead Reservation, Project Nos. 5-004 and 2776-000 concerning the Tribes' intention and ability to sell their output to one or more entities in the Western states, upon obtaining the license to the Kerr Project.

38. In re: the Dow Chemical Comoany vs. Gulf States Utilities comoarjy, before the Louisiana Public Service Commission, Docket No. U-16038, concerning cogeneration and small power production.

l

39. In re: Petition of the Dow Chemical Comoany, before the Texas Public Utilities Commission, Docket No. 5651, for an l order compelling Houston Lighting & Power Company to comply l with the Commission order concerning cogent, ration and small power production.

40. In re; oklahoma Gas and Electric comeanv, Oklahoma Corporation Commission, Cause No. 29017 concerning priority for recognition of capacity costs to Qualifying Facilities.

41. In re: Kansas City Power & Licht Comoany of Kansas City, Missouri, before the Missouri Public Service Commission, l

Case Nos. ER-85-128 and EO-85-185 regarding rate design and allocation of production-related costs for the Company's

Exhibit (UMWA, et al.-2)

Docket No. EC88-2-000 Page 5 of 6 Wolf Creek Generating Station on behalf of the United States Department of Energy.

42. In re: Kansas City Power and Licht Comoany, before the State Corporation Commission of the state of Kansas, Docket Nos. 142,099-U and 120,924-U concerning operating problems caused by excess capacity, mitigation measures and regulatory requirements, on behalf of Johnson County Joint Inte rvenors .

43. In re: Duke Power Comoany, before the North Carolina Utilities Commission, Docket No. E-7, Sub 391, concerning the Company's use of an Extended Cold Shutdown program to mitigate its excess capacity situation resulting from the Catawba Units, on behalf of the Department of Justice for the State of North Carolina.

44. Sierra Pacific Power Comoany, before the Public Service Commission of the State of Nevada, Docket No.85-430, on behalf of the State of Nevada Attorney General's Office of Advocate for Customers of Public Utilities, concerning the effects upon retail rates of' placing Valmy Unit No. 2 in service.

45. United States of America DeDartment of Enercy, before the Bonneville Power Administration, on behalf of the City of Vernon, California, co.,cerning the 1985 Proposed Firm Displacement Power Rate.

46. In re: City of Anaheim, et al., v. Southern California Edison, United States District Court for the Central District of California, Docket No. 78-0810, on behalf of five partial requirements wholesale customers of Southern t California Edi' son Company, making claims under Federal

( antitrust laws for access to the Pacific Northwest-Pacific Southwest Intertie.

$7. In the Matter of the Application of Sierra Pacific Power Comeany for Approval of its 1986-2006 Electric Resource Plan, Docket No.86-701, on behalf of the State of Nevada Attorney General's Office of Advocate for Customers of Public Utilities, concerning efforts of Sierra Pacific Power Company to develop a new interconnection (the SKUD Tie) with the Sacramento Municipal Utility District.

48. The Federal Executive Acencies. Comolainant v. Publig Service Comoany of Colorado, Case No. 6551 before the Public Utilities Commission of the State of Colorado, on behalf of the Federal Executive Agencies concerning the feasibility of

Exhibit (UMWA, et al.-2)

Docket No. EC88-2-000 Page 6 of 6 wheeling federal preference power to the Government's facilities at Rocky Flats, the Lowry Air Force Base, the Rocky Flats Technical Center and the Denver Federal Center.

49. Commonwealth Edison comoany, Docket Nos. 87-0043, 87-0044 and 87-0057 Consolidated, before the State of Illinois, Illinois commerce Commission, on behalf of Intervenor, Citizen's Utility Board of Illinois, concerning Edison's proposal to form a generating subsidiary.

50. Nevada Power comoany, Docket No.87-750, before the Nevada Public Service Commission, concerning a 345 KV transmission line proposed to connect Nevada Power Company to Utah Power and Light company.

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• O Exhibit (UMWA, et al.-3)

Docket No. EC88-2-000

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PACIF2C POWER & LIGHT COMPAFI Federal Energy Regulatory Commission United Mine Workers, et al - First Data Request Dated December 28, 1937 The following response has been prepared under my supervision and the response is true and accurate to the best of my knowledge, information, and belief formed after a reasonable inquiry.

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J.8T. Watson, Controller Recuest W 1-B-12:

For each executive listed in the response to the preceding question, please provide

a. Narrative description of all responsibilities;

b. Narrative description of how the executive's compensation is calculated;

c. For each of the last five years, a breakdown of the executive's time between utility and non-utility activities; and

d. A narrative description of any recordkeeping procedure used in the last five years to track a breakdown of the executive's time between utility and non-utility activities.

Response W 1-B-12:

a. Pacificorp officers listed in Attachment m 1-B-11 are responsible for the senior management of the entire corporate operations including electric and subsidiary operations. The electric officers listed in Attachment M 1-B-11 are mainly responsible for electric operations but also have responsibility over the operations of some subsidiaries.

b. Executive compensation is determined on the basis of various analyses which provide salary levels for comparable responsibility levels in the industry. These analyses include such factors as the size of the Company and the location in determining the comparable salary levels. Pacific employs a cogensation consulting firm to analyze the various compensation data and provide recommendations for competitive salary levels,

c. The Company does not keep a detailed breakdown of executives' time between utility and nonutility activities for individual executives however, the company does charge all corporate department expenses including executive salaries to subsidiaries through the use of a formula. This formula is described in Section VI of the 1986 affiliated interest report provided as Attachment UMW 1-B-1A.

d. Please refer to Response M 1-B-12c.

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PACIFIC POWER & LIGHT COMPANY Federal Energy Regulatory Commission United Mine Workers of America, et al.'s Second Data Request Dated January 15, 1988 The following response has been prepared under my supervision and the response is true and accurate to the best of my knowledge, information, and belief formed af ter a reasonable inquiry.

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J. I. Watson, Controller Recuest UMW 2-B-7:

B(12) Follow-Up: (a) Is it a fair interpretation of your answer to Parts (c) and (d) that Pacificorp has no idea what portion of each specific executive's time is spent on non-utility as opposed to utility matters? (b) If not, then for each executive for which PacifiCorp has some idea of the breakdown, please state what the breakdown is and provide the basis for your statement.

Response UMW 2-B-7:

a. PacifiCorp does have an idea what portion of corporate executives' time is electric versus non-utility. While the Company's executives do not keep detailed timesheets, they are charged with the stewardship role of overall operations. The allocation to the subsidiaries of executive's salaries as

well as all corporate operating expenses is based on a three factor formula consisting of operating expenses, number of employees and assets as recorded by Electric Operations, and the various subsidiaries. We believe this reasonably reflects the stewardship role of the officers.

This allocation is in section VI of the Annual Affiliated Interest report the company provided to the Public Utility Commission of Oregon. A copy of this report was provided as Attachment UMW 1-B-1A.

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Docket No. EC88-2-000 i

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FEDERAL ENERGY REGULATORY COMMISSION FIRST DATA REQUEST OF UNITED MINE WORKERS OF AMERICA, ENVIRONMENTAL ACTION, SALT LAKE CITIZENS CONGRESS, AND SALT LAKE AREA COMMUNITY ACTION PROGRAM TO APPLICANTS UTAH POWER & LIGHT COMPANY, PACIFICORP AND PC/UP&L MERGING CORPORATION DOCKET NO. EC88-2-000 f r

The following response has been prepared under my supervision, and the response is true and accurate, to the best of my know- F ledge, information, and belief formed after a reasonable 'nquiry.

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%d Dennis P. Steinber Director, Power Plannin , PP&L G. IDENTIFICATION OF MERGER BENEFITS UMW 1-G-1: For each of the following benefits which Applicants claim will result from the merger (See Prefiled Testimony of David F. Bolender before the Utah Public Service Commission at 12) (hereinafter cited as "Bolender UPSC Testimony"), please explain why they are not attainable by contract (including, but not limited to, a "tighter" Intercompany Pool or new pooling and coordination agreement s) :

1

! a. Increased access to wholesale markets j

b. Enhanced ability to take advantage of low-cost power supplies

c. Diversity benefits

! d. Integrated economic dispatch

e. Reduced system reserve requirements and improved reliability due to expanded i transmission interconnections.

l RESPONSE: The companies believe that operation and planning of the generating and transmission resources of the merged company as a single utility is the only i

realistic way to achieve the potential efficien-

! cies and savings described in the "Bolender UPSC Testimony."

If the two companies were to attempt to achieve the end results of the merger through contracts

FEDERAL ENERGY REGULATORY COMMISSION FIRST DATA REQUEST OF UNITED MINE WORKERS OF AMERICA, EINIRONMENTAL ACTION, SALT LAKE CITIZENS CONGRESS, AND SALT LAKE AREA COMMUNITY ACTION PROGRAM TO APPLICANTS UTAH POWER & LIGHT COMPANY, PACIFICORP AND PC/UP&L MERGING CORPORATION DOCKET NO. EC88-2-000 between themselves or among other utilities through pooling arrangements, the negotiations would not only be protracted but also achieve fewer benefits than those available through the merger. A prolonged negotiation of contracts and pooling arrangements would not result in a contract with the same degree of flexibility and benefits as can be obtained through operation as a single utility.

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Exhibit (UMWA, et al.-5) l Docket No. EC88-2-000

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FEDERAL ENERGY REGUIATORY COMMISSION SECOND DATA REQUEST OF UNITED MINE WORXERS OF AMERICA, ENVIRONMENTAL ACTION, SALT LAKE CITIZENS CONGRESS, AND SALT LAKE AREA COMMUNITY ACTION PROGRAM TO APPLICANTS UTAH POWER & LIGHT COMPANY, PACIFICORP AND PC/UP&L MERGING CORPORATION DOCKET NO. EC83-2-000 The following response has been prepared under my supervision, and the response is true and ac rate, to the be of my know-ledge, information, and belief ' rmec af te* a a'sonageinquiry.

hu/ b dp Dennis P. Stei g rg Director, Power PMnning, PP&L UW 2-G-3: Boucher at 37: Is it the Companies' view that absent a merger, the "packaging of power sales" could not be accomplished by UP&L and PP&L by contract?

RESPONSE: Yes.

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Exhibit (UMWA, et al.-6)

Docket No. EC88-2-000 1

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FEDERAL ENERGY REGULATORY COMMISSION FIRST DATA REQUEST OF UNITED MINE WORKERS OF AMERICA, ENVIRONMENTAL ACTION, SALT LAKE CITIZENS CONGRESS, AND SALT LAKE AREA COMMUNITY ACTION PROGRAM TO APPLICANTS U!AH POWER & LIGHT COMPANY, ,

PACIFICORP AND PC/UP&L MERGING CORPORATION '

DOCKET NO. EC88-2-000 1

The following response has been prepared under my supervision, and the response is true and accurate, to the best of my know- 2 ledge, information, and belief formed after a reasonable nquiry.

^2 Y ,2L Dennis P. Steinber Director, Power Plannin , PP&L UMW 1-G-2: For each of the benefits listed in #-- (sic),

please explain uhat ef f ort s Applicants have made in the past 5 years to obtain them, and what the outcome of these efforts has been.

RESPONSE: Efforts to reduce costs to the customer through the achievement of the above benefits other than through merger have been ongoing for more than just the past five years. The efforts are continuous and will obviously continue even after a merger of the two companies. A complete listing of the activities is impossible. PP&L has made continuous efforts to reduce costs to its customers through increased wholesale sales, off-system purchases when economically feasible, and access to lower-cost energy through the Bonneville Power Administration system when available.

Diversity benefits in the form of seasonal exchanges are incorporated in PP&L's wholesale sales contract with the Southern California Edison Company. Reduced reserve requirements have been achieved by PP&L since the early 1960's through coordinated operation with other Northwest utilities. Benefits associated with the merger are in addition to these cited above.

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Exhibit - (UMifA , et al.-7) l Docket No. EC88-2-000 ,

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FEDERAL ENERGY REGULATORY COMMISSION SECOND DATA REQUEST OF UNITED MINE WORKERS OF AMERICA, ENVIRONMENTAL ACTION, SALT LAKE CITIZENS ".o WPISS, AND SALT LAKE AREh COMMUNITY ACTION PF TO APPLICANTS UTAH POWER & LIGHT COMPAh PACIFICORP AND PC/UP&L MERGING CORPORATIOh .,

DOCKET NO. FC88-2-000 The following response hus been prepared under my supervision, and the response is true and accurate, to the Lest of my know-ledge, information, and belief rmed after a sona 1e inquiry.

huu /1ms I d e n r(i s P . S'f. e i , g Director, Powar P .ning, PP&L t

UMW 2-G-43: Boucher at P. 20, 1. 12: Describe PP&L's ability to adapt both joint unit commitment and dispatch methods.

RESPONSE: PP&L expects no significant problems in adopting both joint unit commitment and dispatch methods, as described in testimony, after the merger. PP&L already has considerable experience in coordina-tion of unit commitment through its involvement in I five jointly-owned thermal projects with various other owners. Coordination of dispatching is also involved for those projects, as well as at the Mid-Columbia Projects, and also between PP&L's current Eastern and Western control areas.

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UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company )

Pacificorp ) Docket No. EC 88-2-000 PC/UP&L Merging Corporation )

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l AFFIDAVIT OF ,

WHITFIELD A. RUSSELL Whitfield A. Russell, on oath, deposes and states that the foregoing Testimony and Exhibits, on behalf of the United Mine Workers of America, International Union; Environmental Action; Salt Lake Citizens Congress; Salt Lake Area Community Action Program; and Rogue Valley Fair Share, were prepared by him or at his direction and under his supervision, and that if asked the questions therein, he would give the answers as shown, and that the facts stated therein are true to the best of his knowledge, information and belief. ,e s I

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x Whj.tfield A. Russell Subscribed and sworn to before me this lith cay of February, 3988 x4 MM Notary Public

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SUMMARY

OF TESTIMONY OF DR. WILLIAM R. HUGHES l 1

I. Qualifications and Scoce of Testimony Dr. Hughes is an economist, whose assignment was to address the economic impact of the proposed merger, particu-larly on competition and economic efficiency, and to address the merger conditions proposed by Idaho Power Company and Montana Power Company.

II. Introduction to Antitrust Concepts Used in this Analysis An economic analysis of a merger should focus on the future and compare the relevant markets as they would likely develop with and without the merger. Under Section 1 of the Sherman Act and Section 7 of the Clayton Act, mergers are viewed as combinations of economic power, and thus are l

l subject to stricter scrutiny than applies to activities of a l

l single firm. The pertinent inquiry is whether the effect of the merger may be to harm competition or efficiency.

Application of this standard requires definition of markets and measurement of market power.

The principal competition issue in this case concerns the impact of the merger on the ability of power producers in the resource-rich Northwest to reach consuming markets in California, Southern Nevada, and the Desert R E C EIV E D cm. P : P g15eCREY Ey --

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l Southwest, respectively. Therefore, the critical markets are i

the transmission markets that link these areas. The merger has both horizontal and vertical aspects. The horizontal impact results from a firm that holds a substantial entitle-ment in the western transmission corridor between the Northwest and California combining with the firm that con-trols the eastern transmission corridor linking these two area. The vertical impact results from combining under common ownership one of the major power producers in the Northwest and the strategically _ocated UP&L transmission system.

It is important to assess the effects of the merger both upstream and downstream of the relavant transmission markets. Market power in a transmission market can be used to distort efficiency in upstream power production areas as well as reduce the choices available to purchasers in the downstream consuming areas. In assessing these effects, it is important to take into account regulation, and to assess whether the merger is likely to result in circumvention of regulation that would otherwise prevent, or at least amelior-ate, effects in these upstream and downstream areas.

l III. Definition of Relevant Markets and Measurement of Market Power l

The relevant product markets in this case are bulk electricity and transmission. Transmission is a discrete market, rather than a part of the general bulk power market, 1

1

, because it l's purchased and sold in the industry as a separate product and is a distinct stage of electricity supply. Indeed, the competitive issues of the merger concern transmission. Within the bulk electricity market, it is important to make distinctions between firm and nonfirm sales and between short-term and long-term transactions. Within the WSCC, there are many more potential buyers and sellers for short term, nonfirm transactions than for long-term firm transactions.

The relevant geographical markets for transmission are determined by identifying bulk electricity selling and purchasing areas and focusing on the transmission that is necessary for moving power and energy between these areas.

The transmission markets relevant to analysis of this merger are (1) Northwest to California, (2) Northwest to Southern Nevada, and (3) Northwest to Desert Southwest. The latter two markets will be controlled completely by the merged l company, and the merged company will have substantial market l power in the Northwest to California transmission market.

l Although it is possible that the merged company's market power in these markets will be diminished by the construction I of new transmission facilities, the barriers to entry are 1

j substantial and, in any event, the lead time for permitting and construction of such facilities is substantial: five l years or more.

i l

Unless the exercise of that market power is con-strained with appropriate transmission conditions, the merger will impair competition and economic efficiency in the relevant production and buying areas for bulk power and energy. The production area affected is the Northwest, where the most efficient ' ~:urces of power will be supplanted by the facilities owned by the merged firm. The buying areas affected are those in California, Southern Nevada, and the Desert Southwest, where the choices available for purchasers of bulk electricity will decrease and prices will rise.

IV. Effect of the Mercer on Comoetition If approved, the merger will combine the generating facilities of PP&L, a major seller of bulk power and energy, with the ownership of UP&L's transmission system. As a result, transmission from the Northwest to Southern Nevada and the Desert Southwest will be effectively controlled by the merged company. The merged company will also have a strategic position in transmission from the Northwest to California, the. principal buying area for bulk electricity in the Western System Coordinating Cauncil. There are two corridors that account for nearly all of the transfer capac-ity out of the Northwest. PP&L and UP&L control the eastern corridor and BPA, Portland General Electric, and PP&L control the western corridor. Use of the BPA-controlled portion of that corridor is severely limited by BPA's Intertie Access

Policy, which allocates Intertie capacity to power entities i 1

in the Northwest and which imposes uncertainties and penal- l l

ties that discourage potential users of BPA Intertie capacity I from making long term firm commitments. As a result, poten-tial sellers of bulk pcwer and energy in the Northwest cannot rely only on the western corridor (through the Pacific Intertie) to reach buyers in California. The ability of Northwest sellers to compete for sales to California pur-chases depends primarily on their ability to gain access to the eastern corridor controlled by the merged company.

Moreover, without such access, sales to the Desert Southwest and Nevad e impossible.

There are strong indications that, once the merger is consummated, PP&L will give preference to bulk power and energy sales combining PP&L generating resources with UP&L transmission, including incremental extensions of its system such as the line now planned to southern Nevada. If it is free to do so, PP&L is very likely to utilize all or most of its transfer capacity (in excess of native system use) to

, facilitate it's own bulk electricity sales. This would have l

the effect of shutting off the eastern corridor to competing sellers of bulk electricity in the Northwest, substantially limiting the participation of these sellers in bulk electri-city sales to California and shutting off their bulk electri-city sales to Nevada and the Southwest.

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If the merger is approved unconditionally, and the merged company gives preference to its own bulk power and energy sales, the result will be to reduce the competitive choices available to buyers in southern Nevada, the Desert Southwest, and California. In the case of firm intermediate to long term transactions, where buyers select from' complex alternatives on the basis of price and nonprice consid-erations, each buyer has only a small number of alternatives available. If alternatives from sellers in the Northwest other than the merged company are substantially constrained, then buyers will have to select from a much thinner menu than otherwise, and they will pay higher prices.

The restriction of bulk electricity offerings to buyers in California, Southern Nevada, and the Southwest caused by the merger also would lead in all likelihood to economic inefficiency. The Northwest includes very low cost producers of nonfirm surplus or ec;7omy energy, such as Idaho Power Company, Montana Power Company, and Washington Water Power Company. It includes winter peaking cystems with the potential to engage in diversity exchanges with summer peaking systems. It includes systems with firm capacity and associated energy a'rallable for sales for from a few years to 20 years: some of these systems have low operating costs, will not have to add capacity for a substantial period, and have the ability to expand system capscity at low cost when the need arises. Consequently, these systems can efficiently 2

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i offer firm capacity and energy at very low prices. In a l free, workably competitive market, it is likely that some of the offerings of the lower cost producers in the Northwest would be purchased by buyers in California, Southern Nevada, and the Desert Southwest. This will not happen if the merged company uses its transfer capacity to favor its own electri-city sales. As a result, generating and transmission resources in WSCC will be less efficiently allocat?d, and the cost of electricity will be higher than otherwise to rate-payers of both buyers and sellers.

Unconditioned approval of the merger also would reduce the effectiveness of this Commission's regulation.

Absent the merger, the transmission service provided by UP&L would be identifiable, and the charges imposed by UP&L subject to Commission regulation. This would be true, whether UP&L offers transmission service ggr gg or provides the service under the guise of purchasing at one border while i

selling at the other. After the merger, when the UP&L l division of the. merged company provides transmission service 1

l to accommodate a sale to California of bulk electricity i

produced by PP&L, this transmission service will be an internal transaction not subject to FERC review. While FERC 1

will regulate the total price of power and energy sold by the 1

merged company into consuming areas, that regulation will not I provide an effective surrogate for a competitive market, because the market clearing price in the Northwest is likely, 1

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for some years, to be below the fully distributed cost ceiling observed by the FERC. Thus, in actuality, the additional charge received by the merged company as a result of its control of transmission may greatly exceed a just and l

reasonable charge for transmission.

V. Remedy f The negative impact of the merger on competition and economic efficiency can be alleviated by conditioning the merger. The competitive imbalance caused by the merger can be reduced by allocating a block of transfer capacity, to be available on a first-come, first-served basis to any compe-titor of PP&L which succeeds in contracting to sell bulk electricity to buyers at the southern and southwestern outlet points of the UP&L transmission system. As long as a conser-vative amount of transmission capacity is allocated for this purpose, the merged company will have sufficient capacity of its own to engage in bulk power transactions, and, over time, the merged company has the ability to expand the capacity of the UP&L transmission system. Both the PP&L division of merged company and its competitors may have a larger quantity of bulk power available for sale than the transminsion capacity available to them, but a well-thought-out allocation of capacity would allow the most efficient sales to occur.

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Dr. Hughes recommends that the merger be approved only subject to a condition that can ameliorate the anticom-petitive potential of the merger. The condition does not provide for "open access", but is ncrrowly drawn to put PP&L and its competitors on a somewhat equal footing in gaining access through Utah to Southwest markets.

The merged company's stated transmission policy, whic is described in the testimony, of Mr. Topham, is far short of adequate to eliminate adverse effects of the merger on competition. First, it only provides transmission to PP&L's competitors after PP&L's appetite for transmission has been sated. Second, it leaves great discretion to the merged company, whose incentive is to discourage competing sellers.

VI. Differences With Dr. Landon Some principal differences between Dr. Hughes' analysis and that of Dr. Landon are:

1. Dr. Landon lumps transmission with all other bulk power services as a single product inarket. Dr. Hughes

, treats transmission as a separate product and emphasizes that transmission is the product that is central to any meaningful analysis cf the effects of the proposed merger on coiape tition .

4 . 2. Dr. Landon largely ignores the vertical effects of the merger. Dr. Hughes' analysis emphasizes that these effects are extremely important and have an adverse impact on competition.

3. Dr. Landon assumes that the merger will have no impact on prices paid by purchasers of bulk power and energy in Southwest markets, because the bulk sales by the merged company constitute a relatively small percentage of total firm and nonfirm bulk electricity sales into those markets. This disregards (a) the merged company's ability to foreclose PP&L's Northwest competitors from access to these markets, and (b) the fact that purchasers seeking, on the margin, to buy long term increments of firm power face a limited number of choices, the preponderance of which may consist of suppliers in the Northwest.

4. Dr. Landon apparently thinks that it is appropriate for the merged company to use its control over transmission to capture for itself, without restraint by Commission regulation, the full margin between the incre-mental generating costs of Northwest suppliers, such as Idaho Power Lnd Montana Power, and market-clearing prices for power and energy delivered to Desert Southwest markets. Dr. Hughes believes that this would distort economic efficiency and be inconsistent with the Commission's regulatory policies.

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5. Dr. Landon states that it is legitimate and appropriate for a utility to receive large markups because it owns a key transmission corridor. Dr. Hughes disagrees, pointing out that the "rents" referred to by Dr. Landon are in fact returns to market power over transmission.

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