ML20197E493
| ML20197E493 | |
| Person / Time | |
|---|---|
| Site: | Trojan File:Portland General Electric icon.png |
| Issue date: | 06/01/1988 |
| From: | Nelson R STOEL, RIVES, BOLEY, JONES & GREY |
| To: | Chan T NRC |
| References | |
| TAC-68144, NUDOCS 8806090095 | |
| Download: ML20197E493 (205) | |
Text
, r- no. ci44 STOEL RIVES BOLEY ;
JONES & GREY !
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St2tTE 900 1730 M STRE ET NW 3'
WASillNGTO.N, D.C.20036-4505 Telepirent (202) 955-4 555 \
Telecopuer i202) 955-4551 Wrrter's Darr(f Dul Namtvr (202) 955-4562 June 1, 1988 Mr. Terrance Chan U.S. Nuclear Regulatory Commission Room No. 13E16 11555 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 (Troiani
Dear Mr. Chan:
You inquired concerning the confidential nature of the exhibits of Dr. William R. Hughes. With the exception of certain material set forth in Exhibit No. WRH-9, all material is no longer covered by a protective order in the FERC proceedings in Docket No. EC88-2-OOO. A revised copy of the testimony and exhibits of Dr. Hughes which excludes the material still covered by the protective order is attached.
Please let me know if you have any other questions.
Sincerely,
/ -
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Robert A. Nelson, Jr - -
RAN:sh'i Enclosures cc: Arnold H. Quint, Esq.
0 0b 8806090095 G80601 1 PDB ADOCK 05000344 A pf DCD RAN.792/$8806.23
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SUMMARY
OF TESTIMONY OF DR. WILLIAM R. HUGHES I. Qualifications and Scooe 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 i
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 subject to stricter scrutiny than applies to activities of a 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 l producers in the resource-rich Northwest to reach consuming markets in California, Southern Nevada, and the Desert RECEIVED WGP P{ipg1SOCREY sy _.
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Southwest, respectively. Therefore, the critical markets are 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 ene of the major power producers in the Northwest and the strategically located UP&L transmission system.
It is important to assess the effects of the merger
- both upstream and downstream of the relevant 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 censuming 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 woul. therwise prevent, or at least amelior-ate, effects in these upstream and downstream areas.
III. Definition of Relevant Markets and Measurement of Market Power 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,
- because it is purchased and sold in the industry as a separate product and is a distinct stage of electricity supnly. 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 i power in the Northwest to California transmission market.
Although it is possible that the merged company's market power in these markets will be diminished by the construction of new transmission facilities, the barriers to entry are substantial and, in any event, the lead time for permitting and construction of such facilities is substantial: five years or more.
l Unless the exercise of that market power is con-l strained with appropriate transmission conditions, the merger will impair competition and economic efficiency in the ,
-l relevant production and buying areas for bulk power and 1
energy. The production area affected is the Northwest, where the most efficient sources 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 l
the merged company. The merged company will also have a l strategic position in transmission from the Northwest to California, the principal buying area for bulk electricity in the Western System Coordinating Council. 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 i
Policy, which allocates Intertie capacity to power entities in the Northwest and which imposes uncertainties and penal-ties that discourage potential users of BPA Intertie capacity from making long term firm commitments. As a result, poten-tial sellers of bulk power 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 Nevada are impossible.
There are strong indications that, once the merger is consummated, PP&L will give preference to bulk power and enr-rgy sales combining PP&L generating resoarces 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 the effect of shutting off the eastern corridor to competing sellers of bulk electricity in the Northwest, substantially i 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 so'uthern 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 l producers of nonfirm surplus or economy energy, such as Idaho Power Company, Montana Power Company, and Washington Water Power Company. It includes winter peaking systems with the potential to engage in diversity exchanges with summer peaking systems. It includes systems with firm capacity and associated energy available 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 capacity at low cost when the need arises. Consequently, these systems can efficiently l l
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,, offer firm capacity and energy at very low prices. In a free, workably competitive market, it is likely that some of the offerings of the lower cost producers in the Northwest would be purchased by buyere 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 allocated, 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 ggt gg or provides the service under the guise of purchasing at one border while selling at the other. After the merger, when the UP&L division of the.mersad company provides transmission service to accommodate a sale to California of bulk electricity produced by PP&L, this transmission service will be an internal transaction not subject to FERC review. While FERC will regulate the total price of power and energy sold by the merged company into consuming areas, that regulation will not provide an effective surrogate for a competitive market, because the market clearing price in the Northwest is likely,
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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 reasonable charge for transmission.
V. Remedy The negative impact of the merger on competition and economic efficiency can be alleviated by conditioning the 4
merger. The competitive imbalance caused by the merger can.kne 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 l
electricity to buyers at the southern and southwestern outlet points of the UP&L transmission system. As long as a conser-i vative amount of transmission capacity is allocated for this l
purpose, the merged company will have sufficient capacity of j 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 competitcrs may have a larger quantity of bulk power available for sale than the transmission capacity available to them, but a well-thought-out allocation a
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 narrowly 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, which 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 market. Dr. Hughes
, treats transmission as a separate product and emphasizes that ,
transmission is the product that is central to any meaningful j analysis of the effects of the proposed merger on l
competition.
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- 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 <
t 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 l 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 and 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,
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pointing out that the "rents" referred to by Dr. Landon are in fact returns to market power over transmission.
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F.ES l l 1 From 1960 through 1969, I taught. economics as an l 2( instructor at Earvard, as Ass'stant Professor at 3 ii Wesleyan University, and r,s Associate Professor at 4 Boston college. My teaching emphasised ooonesion of S-regulated industries, industrial organisation, and , 6 price theory. \ 7 In 1989, 1 joined Charles River Associates, 4 8 ) consulting firm with which I worked for 18 years, 9 serving as Vice President from 1970 through Sep*, ember 10 1987, when I joined Putnam Bayes 6 Bartlett. My 11 i l consulting work at Charles River Associates was 12 ; concentrated in the areas of electric utility 13 ; l economics, antitrust problems of electric utilities and 14 other industries, natural gas utilities, and fuels 15 markets. A number of my projects et Charles River 16 Associates concerned the problems of the electric power 17 industry in the West. Examples of these projects 18 include several projects involving transmission access 19 issues, two assessments of bulk power and energy 20 purchasing opportunities for a California electric 21 - utility, participation as an expert in the Colstrip 3 22 and 4 coal contract arbitration, directing development 23 i of the demand, rate, and supply-demand balancing models ' 24 and forecasts for the WNP d and 5 (WPPSS) Isdependent
, 25 Assessment and the.uorthwest power Planning Council, 26 and other projects for utilities in the Northwest and 27 california.
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1 From 1942 to 1964, while on leave from Wesleyan 2ll University, I worked as a staff economist for the 3 lli1 Federal Power Cosaission as a principal aanber of the 4 National Power survey staff, i
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6 Q. Are you a seaber of any professional associations? l 7 A. I an a member o'f the American Economic Association and 8 also a member and past President of the International 9 Association of Energy Economists. 10 11 lQ. Eave you previously testified before this Commission 1 l 12 l and other forums? 13 '. A. Yes. I have testified before this Commission on four 14
; occasions. I have also testified as an expert before 15 l various state cosaissions, the Postal Rate commission, i
16 : 4 l the Interstate Commerce Commission, two contract 17 l arbitration tribunals, and federal district courts. 18 l 19 0 l What conclusion have you reached oncerning the ! 20 economic effects of the merger between Utah Power 4 21 Light Company (UP4L) and Pacific Power a Light Company 22 (PPaL)? 23 A. : I have concluded that absent an appropriate condition, 24 the merger will have an adverse effect en oospetition 25 for bulk power sales to purchasers in California, 26 Southern Nevada, and the Desert Southwest. In 27 28
. 6u a 62 acin m. Wid N F.6 N I 11 addition, because it will competitively disadvantage j 2j some power producers: it will lead to inefficient use 3, and development of resources in the Northwest. 4! 5 Q. Now have you organised your testimony? 6 A. My testimony is divided into six major parts: 7 o section I is this introductory section and 8 presents my brief conclusions and the structure of 9 sy testimony. 10 e section II presents tha basic antitrust economics 11 framework for my analysis of the merger including: 12 j - i the' types of economic issues raised by 13 i i aergers in contrast to other types of firm 14 behaviors 15 - the reasons for using a market-based analysis 16 : l and the markets I found to be relevant to - 17 l analysing the impact of this merger on 18 l competitions and 19 - the analysis I used to evaluate the impact of 20 the merger on competition and the way 21 regulation affects that impact. 22 ' 23 o Section III presents the economic and factual 24 basis for the discussion of markets and market 25 power given in section II. i 26 27 28 D
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(- -S- i t 1.d o i! Section IV presents, in more detail, the economic i 2 :, and factual basis for the conclusions presented in l i i 34 l I Section II that the merger will adversely affect 4 ocapetition and will cause a loss of economic , 5 efficiency. s' o section 7 disoveses proposed remedies to 7 ameliorate the antiocapetitive effects identified 8 in IV. There 2 present criteria for judging the 9 1 propriety and effectiveness of a remedy and 10 suggest a merger condition that are consistent , 11 with these criteria. I will also show that the ! 12 , transmission policy presented by Applicants' ' 13 witness Topham is not consistent with these i 14 : criteria. I 15 o Sectica VI is my examination of the testimony of ' 16
, l Applicants' witness Dr. John I,andon.
17 II. Reonomic AmatYafs or m arna _ Q. What is the proper method to evaluate the competitive impact of a merger? A. To evaluate the effect of a merger on competition from the standpoint of economic analysis, it is necessary to compare the competitive situation that will prevail in 24 the relevant markets after the merger with the competi-25 tive situation that would salst in those markets were the merger not to ooour. The decisive issue is whether sospetitior. in the markets affected by the merger is likely to be less of a force after the merger than it 4 .
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- 1 I would have been otherwise. An important part of the l i, 2h analysis is to examine the impact of the merger on '
3 oconoale efficiency. Unless a merger is analysed in 4l terms of prospective competitive impacts, the proper' 5 l questions will not be addressed. 6 : i 7 Q. Why is this mode of analysis essential? e A. This mode of analysis is built en the fundamentals of i 9 : economic analysis and it also follows the wording of 10 j the antitrust laws in Section 7 of the Clayton Act and 11 Section 1 of the Sherman Act. Encouraging ocapetition ! 12 i
. and economic efficiency are also recognised as public t
13 < interest considerations under the Federal
- Power Act. 1 14 l In economics, the issue is whether the merger will i 15 -
impair competition in any relevant market and thereby ' 16 bring about a less efficient allocation of resources 17 than would otherwise occur. The antitrust law, like it economics, necessitates a comparative analysis of what 19 would happen in the relevant markets in the future both-20
; with and without the merger.
21 22 Q. To what extent is the behavior of the merging firas and 23 the'sospetitive conditions in the relevant markets in 24 l the past important to this inquiry? 25 A. The past is relevant insofar as it la a prologue for 4 26 the future. Bowever, this merger sannot be validly 27 1 examined by assuming that, if it does not take place, 28 l 4
! ,Tu ..'s[te:n b: h D: F.9 9 i j I l i 1 nothing will change in the future. k l For example, in the i 2I l past, UP&L has succeeded in using its control over 3jl transmission from Utah southward to engage in 4] simultaneous purchases and sales. In offect, UP&L has 5J aarkups that only a monopolist can obtain for providing 6 its transmission servios. In light of the growing 7 value and duration of these brokering transactions, 8 without a merger, the FERC reasonably can be expected I ' to assert its jurisdiction and require UP&L to charge 10 only a just end reasonable rate for such transmission, 11 With the merger, the merged company has the potential 12 for avoiding this regulation through vertical 13 integration. Thus, the future in this case should not 14 j be viewed as a simple reflection of the past. 15 ', - 16 l Q. Are mergers evaluated differently from an economic 17 l standpoint than single firm conduct? 18 A. Yes. Both in economics and in antitrust policy, 19 , mergers are luportant events because they involve a 20 permanent "oonbination" between two firms. Competition 21 between the merging firms is eliminated. Markets l j 22 beoose more ooneentrated and assess to them may be 23 foreclosed in whole or in part to'oompetitors of the
- 24 serged firm. The antitrust laws recognise this special 25 osapetitive significanoe of mergers by giving them 26 oloser scrutiny than the conduct of a single tira
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, operating independently.
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1!l , 11 For all of these reasons, economists recognise 2 !! ii l' that while mergers can foster efficiencies for the ' 3q o merged firm, they also een create opportunities for 4' competitive abuse. 5 l The probability of ocapetitive . problems increases dramatically where the merger 6 enhances the merged firm's ability to emploit market 7 power or avoid regulation. 8l 9 Q. Now do you apply these principles in this testimony? 10 A. To apply these fundamental principles here requires an 11 identification of the markets relevant to this merger, 12 j and an examination of how those markets are likely to 13 operate in the future. Ultimately the Consission must , 14 determine whether, absent some remedial conditions, the 15
- combination of PP&L and UPsb will result in a lessening 16 l
of the competition that would otherwise have arisen in 17 l the markets affected by that combination. 18 < 19 Markets And Their time in Analvain of casatitlen. Q. How do you use markets in your analysis of this merger? A. 21 A market is the arena in which buyers and sellers of a product compete. Because my testimony esamines the offacts of the proposed merger on competition, I must define the relevant arena of oompetitions that is, the products or services that are subject to the oospeti-tive impacts at issue, the geographic areas in which this competition takes place, and the time period 28 pertinent to the oospetition of interest. Thus, the
, tu - n gei n ed.u m ss oc F . A A 'M i.
li ik market has three dimensions: the relsvant product, the Il 2 relevant geographic area, and the relevant time period. - 3..l'} Market definition is an analytical tool used as a 4 starting point for analysis. Whatever the market ' 5 categories used, they should never be allowed to 6 obscure the underlying competitive effects that are the 7
' ultimate focus of analysis.
8 9 Q. What criteria do you apply in defining markets? ' 10 A. ) The main criteria in market definition are relevance I 11 l and substitutability. These two criteria are applied 12 l both to the products to be included in the market and I 13 l to the geographic area covered by the market. 14 15 Q. Please describe the relevance criterion. 16 A. A market should not be defined in the abstract, but 17 should apply directly to the ocepetitive issues under is investigation. For example, if the issue is "does IBM 19 have a monopoly of computer terminal equipment?", then 20 market definition should start with IBM's computer 21 terminals and add the potentially ocepeting products i 22 and services that can substitute for them. The
- 23 reference point is the product for which IBM is alleged 24 to have market power. Information about IBM's type-25 i writers and their substitutes is not Laportant for
- 26 defining the computer terminal market. similarly, the 27 28 l
l
. m . n se:z: s:u w e DC P aE* l - lo - I 1 geographic markets would be built starting with the 2 geographic areas in which IBM's computer terminals are 1 1 3g sold. 1 4 The 3roposed merger will combine the facilities.of l i 5 ,, UP&L and M&L. Each company has transmission ( 6 facilities and each ocapany makes sales of bulk 3 1 electricity. This case centers on issues of control of l 8 i the combined transalssion of UP&L and FP&L by the l 9 serged company, tha esercises of that control to deny 10 access to transmission to other entities that compete l 11 with the merging entities to sell bulk electricity, and 12 i* the impact of the exercise of control over transmission i 13 ; ! to distort competition and adversely affect economic 14
, efficiency in the production and sale of bulk 15 electricity. Thus, I need to define two sets of 16 markets to understand the competitive effects of the 17 l proposed merger. First, I deffne the markets relevant 18 to evaluating the merged company's control over 19 transmission to test whether that control exists and 20 whether it will be increased by the merger, second, I 21 define the markets for sale of bulk electricity. Once 22 I have defined the transmission markets on the one hand 23 and the bulk electricity markets on the other, I can 24 assess the lapact of the astger on oompetition and 25 j economic efficiency in each market.
26 27 28 4
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7 u a s ivis % 61x; ~ ~ ~ p,nm 1 h Q. I! Please describe the substitution criterion. 2 j A. Competition is a process of substitutions buyers ! 2 I substitute among the offerings of competing sellers. 4 The arena of competition should include produets the I 5 are close substitutes to the reference product and 6 exclude other products which are not. 7 Where buyers view the offerings of two different 8 sellers as close substitutes, these offerings are 9 etfactively in the same product market. On the supply 10 side, if a company not presently offering the relevant 11 product could easily and at little oost change its 12 ; operations or equipment to produce it, that company 13
. should be viewed as a ocapetitor in the product market.
14 Substitution also operates among locations. For 15 locations within a defined area to be in the same 16 i market, the product must be freely transportable within 17 the market area. In this way, sale of a product at one 18 location is a good substitute for sale in another 19 location within a geographic market area. This freedom 20 of transportation is essential for the market to be 21 l viewed as a osapetitive arena in which buyers or 22 ' sellers can toapete effectively throughout the market. 23 My testimony in this caso deals with market areas in 24 which such freedom of transportation eennot be assumed. 25 Lack of free transportability limits eenpetition by 26 limiting the number of geuroes (eellers) of substitute 27 28 4 l'
. ri.h u :e:re o ms, 9e F M'M
, ',l i 1 products available to any buyer. The buyer can chose 2 ',i 11 only those product offerings it can access from a 3 h seller, given the limited transportation. 4,l . 5 Q. You stated earlier that market definition has a time 6 dimension. 7 What is the time dimension of a market? A. Substitution requires time. The longer the time 8 period, the greater .are the opportunities for substi-tution. Over a long period, new competitors can enter, 10 and old ones can change their offerings. Thus, a 11 i market must be defined in terms of the substitution UL that can occur within a relevant time period.
- .3 14 i Q.
Now does the time dimension of the market apply in this 15 i case? 16 A. A merger, once consummated, is a very long term event 17 unlikely to be undone. Its effects will be lasting. 18 Thus, it is necessary to assess the sospetitive conse-19 quences of the merger over a lo'ng horison. 20 At the same time, short ters tapacts must also be 21 esamined. For example, it takes a long time -- at 22 least five years and probably longer -- for new ! 23 transmission projects to be oompleted. During that 1 24 interval, users of transmission are dependent on \ , 25 existing trarsaission capacity and so a market 26 oonsisting only of presently existing capacity is 21 relevant to the next five years or so. Moreover, the l 28 r
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i 2 serged company is positioned, during the five year , 2 ll , Period, to influence the future by demanding long term 3 ll contracts that tie up a large share of the market well 4 l beyond the initial five year period, and incidentally 5 make it more difficult for potential entrants to the' 6 market to establish the "need" for a large new capacity
?
increment that is prerequisite to obtaining environ-3 mental permits. The task of earpending a transmission 9 system that is in place is generally easier than that 10 of permitting and constructing new long distance lines. 11 In brief, it is appropriate to examine the 12 : competitive impacts of the merger both within a near l 13 , term time irame in which there is little change in 14 existing transmission capacity and separately in the 15 longer term when there may be different competitive 16 impacts of the merger. 17
; 13 Q. What are the products or services of your relevant 19 l markets?
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1 j A. I focus on two basic product marketet the bulk l 2h electricity market and the transmission market. 31! 4 'l Q. Please define bulk electrielty. 5 A. Bulk electricity consists of the wide range of 6, marketable services producible from generating 7 capacity, including the availability of generating 8 capacity itself, and offered the electricity for sale i 9 by one power system to another. This market also 10 l contains two important product submarkets. These are 11 firm and nonfirm bulk electricity. Firm bulk 12 , electricity mainly involves the sale of firm capacity 13 i l or energy in large contracts ranging from a few years 14 j to 20 years. Monfirm hulk electricity is largely short 15 term energy, mainly sold as economy or surplus energy. 16 l 17 Q. Why do you treat transmission as a "product?"
; 18 A. To move bulk electricity from the point of generation 19 to the point of consumption, transmission is essential.
20 I treat transmission as a market by itself, rather than 21 ' as part of a general bulk electricity market, because 22 of relevance. Transmission is a distinct stage of pro-23 duction, producing services that are often marketed ) 24 separately from electricity. Wheeling under contracts 25 or published tariffs le a normal method of marketing 26 i transmission in the Western Systems Coordinating ) l 27 Council (WBCC). It is particularly laportant to 28 i
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[ ; ! 1 I l analyse transmission as a separate market in this case, ; 21 i p because the sospetitive problems at issue arise from 1 3' - the merged company's control over liatted tranasission. ! 4 Aeoess to transmission as an unbundled wheeling service 5-cannot be analysed using a market definition that makes 4 no distinction.between energy or power and 7 transmission. 8 9 Analvala of The Effaehm Of A Marner 0 4 This merger involves combining ocapanies with both transmission and bulk electricity sales. Does this , affect your analysis? l g j'A. Yes it does. In economic terna it means the merger has both "horisontal" and "vertical" effects on l competition. l 16 Q. g Mill you explain what'you mean by "horisontal" effects of the merger? A. Borisontal combinations are made among osapetitors within a given product market. For esemple, increased concentration in ownership of transmission facilities from the Northwest to Califerala is a horisontal effect g of the merger.
- 24
- 9. Will you orplain what you mean by "vertical effects" of 25 the merger?
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l, s c 11; A. I, Vertical combinations are made up of entities operating 2 jj at different stages in the process of production and 3 distribution. For example, a merger between a 4 ll manufacturer and a retailer of the same product is 5l! vertical. This merger ceabines a major Northwest 6 seller of bulk electricity (PP4LL with an owner (UP4L) 7 of an essential transmission facil,ity. Consequently, 8 the merger has a vertical dimension. The vertical 9 i effects of this merger on eenpetition for bulk 10 electricity production and sales are substantial and 11 i will be discussed in detail in Section IV of this l 12 }; testimony. ~ 13 l Markata salacted 14 ,; 15 l9 Eave you defined markets relevant to examining the effects of this merger? A. Yet. i 17 Because of the vertical aspect of this merger, I have defined two sets of product markets to be examined: transmission markets and bulk electricity markets. 20 21 Q. What transmission markets are relevant to examination of this merger? A. The relevant transmission product is long distanee transmission servios. There are four Laportant i 26 ge graphic markets for this products the Northwest, 27 3 i 28 l 4 l l
.rn y *EE 10:n C m 5d D F.19 9 N
1 q califernis, Southern Nevada, and the Desert Southwest 2] (Arisona - New Mexice). The connections between these geographic areas form three markets: 3[i 4-I Northwest to California 5 :' Northwest to Southern Nevada 6, Northwest to Desert frouthwest 7 3 Q. Why did you chose these markets? 9 A. These markets connect the Northwest, which is the 10 producing area in which 774L and its main ocapetitors 11 produce and sell bulk electricity, and the buying areas 12 . that are primary destination of all power exported from , 13 the Northwest. The transmissier. alternatives within t { 14 ! each defined market are all those paths potentially 15 !
. i available from the Northwest by which bulk electricity 16 can be exported to each of the three buying areas.
17 l These buying areas are the primary destinations for all 13 bulk electrielty exports from the Northwest. l 19 20 Q. Why did you chose the Northwest as a producing area? ! 21 A. The issues involving sospetition in this ease center 22 around the merged etapeny's position with respect to 23 transmission of bulk electricity. Consequently, a i 24 relevant market.aust include the marged eaapany and any
- , 25 eenpeting souroes of transmission that would be 4
- 26 relevant alternatives for oostpanies seeking to sell 27 3
their electricity in buying areas reachable by the i 28 I
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1-merged company's transmission. I selected the i 2 1 i Northwest because it includes the merged company and 3 g all the power systems that might demand the trans-4 mission services of the merged company. I define the 5-Northwest identically with the, Northwest subregion of 6. WSCC, as defined by the North American Electric 7
. Reliability Council (NERC).
8 9 Q. What buying areas'have you used in your analysis? 10 A. I have used three separate buying areas. These areas 11 ares California, Southern Nevada, and the Desert 12 l Southwest. These areas are eospatible with regions 13 , 4 defined by NERC. That is, the Desert Southwest is ( 14 - identical with the Arisone = New Mexico subregion of 15
! NBCC.
California and southern Nevada together also 16 comprise a NBCC subarea. 17 l California is the largest buying area for bulk 18 electricity in the United States and is the destination 19 of most of its bulk electricity esported from the 20 Northwest. Southern Nevada, a market enclave, is a 21 small but rapidly growing buying area that will be i 22 practically reachable only via the merged company. The 23 Desert Southwest because of its costs, eseess capacity 24 ! and transmission assess buys from the Berthwest and 25 l . sells to California. Each of these areas is distinct 26 l from both a transmission and market danand standpoint. I . 27 The buying areas are economically distinct benause bulk ! 28 j d ) .___.
m .. m w x u w sc ' - ~~- ^ ^ f.iW , , [ electricity purchasers in each area are limited to the i g ' 2I amount of electricity from the Northwest that can reach ' 3 them through access to a particular transmission lI 4 corridor or pair of corridors. The buying areas are 5' the geographic areas in which distinct sets of buyers 6 anek transmission from the low cost generating regions 7 of the Northwest. They are also the destination for I transnission on the merged entitles' transmission 9 : facilities. 10 11 i Q. What bulk electricity markets did you define for l l 12 analysing this merger? l { ' 13 : A. Sulk electricity competition occurs over a broad l 14 l geographical area, though competition is channeled and 15 limited by the uneven accessibility of transmission. I 16 l use, as a broad market context, the Wscc, recognising 17 that the buying areas, particularly California, account 18 I for most of the bulk electricity purchases in WBCC. 19 These buying areas also correspond to areas identified 20 by the Applicants as distinct and growing sources of 21 demand for bulk electricity. 22 23 Q. Eave you defined any product "submarkets" within the i 24 bulk electricity product market or the transmission 25 market? 26 4 ) 27 { 25 0 1
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l L L, i 1 A. I have identified firm and nonfirm hulk electricity as ; 2 submarkets. Fira and nonfirm submarkets are also i 3f observable within the markets for transmission service. 4I Fira and nonfira electricity are distinet servlees 5{ because they are not freely substitutable. Fira 6 electricity is typically transacted in large contracts 1 for firm capacity and energy with a duration of several 8 years to 20 years or more. Nonfira electricity is 9 mainly economy or surplus energy sold day to day or for 10 other very short periods. Fira and nonfira electricity 11 l also are very diffarent from the standpoint of ease of 12 . transmission access. The competitive consequences of 13 ! I the merger are different for each product and 14 submarket. l 15 , 16 u manament er market paver _ 17 <Q. i Eow did you analyse the markets you have defined to I 19 ; reach your conclusion that an unconditioned merger ! 19 would have adverse effects on oospetition? j 20 A. I used the defined markets in two ways. First, I
- l 21 1 esamined the transmission markets to assess the '
22 Applisants' market power after the merger. Market 23 power is the ability of a firm to behave differently 24 from a firm in a sospetitive market. It is usually
- 25 described as the ability to set non-oempetitive priees.
26 Monopoly power is an outreme oase of market power.
- 27
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p r3 s.: i! g ji i' 1! ! Second, I used the defined markets to organise my 2P g II analysis of the effects of the merger on osapetition { 3[ and economic efficiency in the bulk electricity market. 4 ! 5 Q. What are the results of your assessment of the 6 l Applicants' market power? i 7 A. I find that the merged company will have market power ' 8 over transmission from the Northwest to each of the 9 , buying areas. I 10 ! t l i 11 { Q. What impacts on competition did you analyse? ! 12 ,A. Because the merger has both horisontal and vertical 13 aspects, I analysed both horisontal and vertical 14 impacts. 1 The primary focus is the vertical integration ! 15 'i of PP&L as a producer of bulk electricity with UP&L's 16 control over a key transmission oorridor. I analysed 4 17 i l the impact of this integration on PP&L's osapetitors 18 for bulk electricity sales and on purchasers of bulk 19 l: electricity in the buying areas. It is oustomary to l 20 refer to effects on producing areas as "upstream" and 21 effects on the buying areas as "downstream." If not 22 conditioned, the proposed merger will have adverse 23 ( effects on efficiency and competition both upstream and 24 downstream. j 25 f 26 Q. What negative effects will the merger have on 27 "upstream" production areas't ', 28 j - ) [
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0 l 1 A. If the targed entity gives PP&L resources preferential l 2 access to UP&L's transmission system, low oost PP&L 3l competitors will be prevented from asking economically 4 efficient sales to the buying areas. It le likely that 5l these competitors will sell less electricity than if 6 they all had access to buyers via the transmission 7' system and thus were able to ocepete. 8 In a workably competitive nonfirm market, onc 9 would expect the sales to be made to the lowest oost 10 producer, and in the firm market to the one with the 11 i most cost-effective offering. In the Northwest, that i 12 producer is most likely to be a utility with 13 . substantial hydroelectric generation and/or low cost 14 f coal-fired generation from minescuth plants in the 15 Powder River Basin. After looking at the relative 16 levels of oosts of Northwest utilities, I have 17 l i concluded that if the merged company gives preference 18 to bulk electricity from PP4L there will be an adverse 19 effect on economic efficiency. 20 21 Q.
, What effects on economic effiolency will result if the 22 served company uses PP&L generation in lieu of 23 purchasing the lowest oost power available?
24 A. If low oost producers have materially reduced sales of 25 bulk electricity as a result of denial of access to 26 necessary transmission, then they will produoe fewer 27 units of power than they would have otherwise. As a 28 i I
. vn 2.: *ss go:n su, we- M P. M 1h result, electricity will be more expensively produced i
2' than if ocapetition were present. In addition, their 3l incentive to develop further low cost capacity is 4 weakened because of ths lack of a market for their bulk 5 electricity. 6 7 Q. Can you describe the ad'earse effects of this merger on 3 the "downstream" buying areasi 9 A. Yes. As a result of the merger, buyers will have lo access to fewer and higher cost sellers than if the 11 merged company did not exclude competitors from its 12 transmission. Prices of bulk electricity are likely to 13 , l be higher, and the variety of "packages" of long term 14 , I firm eleccricity available to buyers will be reduced. 15
' Fira power contracts are tailored to individual buyer 16 needs. The merger will, if not conditioned, limit the 17 ability of buyers to find sources that meet their needs is l at a good y 'ce.
Overall, ratepayers in the buying 19 areas will pay more for electricity. 20 21 Q. What is the relevance of market power to regulation by 22 FuC7 23 A. A central purpose of public utility regulation is to 24 prevent a firm from emploiting market power at the 25 esponse of the public. That is why the Federal power 26 Act provides for just and reasonable rates in bulk 27 electricity transactions. This ease raises the i 2e
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ii l lf question of whether the merged ocapany will have an i 2l opportunity to exercise its market power without 3' regulatory restraint. 4 5 Q. Now can regulated firms emploit sa:ket power? 6 A. A regulated, vertically integrated firm having market 7 power in one aspect of its business may sert to avoid 8 regulatory scrutiny by packaging its product in one 9 bundle so as to hide the non, competitive price inherent 10 in one of the components of that bundle. A classic 11 l competitive issue in merger cases occurs where the 12 merged firm seeks to evade regulation and thereby 13 exploit its market power more fully than regulation 14 would allow. 15 16 l Q. Does UP&L have market power without the merger? 17 A. Yes. - 18 19 Q. Now has UP&L esercised its market power? 20 A. UP&L has exercised its market power by purchasing 21 nonfirm bulk electricity from low cost producers in the 22 Northwest and simultaneously selling comparable amounts 23 of nonfira bulk electricity to buyers in the Four 24 Corners area at auch higher prises -- often close to 25 double the purchase prios. 26 27 28 1
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1 g Q. Would this practice be likely to continus successfully 2[ in the absence of the merger? li 3 A. l I doubt that it would continue to be successful. 4 UF4L's practice of estracting what are in effect 5 sonopoly prices for transmission has not been adver-6 tised, but by now I as reasonably sure FERC is aware of 7 it. In other cases FERC has limited markups (adders) e on nonfira electricity by electric utilities which buy 9 from others and resell, and wheeling charges have also 10 been limited to rates FERC deemed just and reasonable. 11 UFaL's ability to make unregulated profits from its 12
;, transmission market power was substantially at risk 13 before the merger.
14 15 Q. Why do you attribute anticompetitive impacts of the use l 16 i of that market power to the merger? l 17 A. Without the merger, UFaL's ability to profit from its ! l 18 market power over transmission would be very limited, 19 particularly with respect to transmission of firm bulk 20 . electricity. The merger provides the integrated fira 21 with an opportunity to avoid FERC regulation of its 22 transmission profits. pFAL's business plans, discussed 23 in my testimony, indicate that pPaL intends to emploit 2 d ,, its strategic transmission advantages by marketing 650 25 MW of firs elestricity.by 1992. In addition, Up4L has 26 turned to PPaL as its partner in a 140 set sale to 27 Mevada Power company (NPC) after the merger. Prior to 28 l 1
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h ! il 1,i l l' the merger UP&L was engaged in negotiations with two j 2! competitors of PP&L with whom UP&L had drafted a final 3 memorandum of agreement. 4 5 Q. Why do you think that the merged company will make this 6 preference? ' 7 A. As I exp1'in. in my testimony, the merged company can 8 include the profits from its transmission market power 9 in the overall hulk electricity price. As a practical 10 matter, regulatory scrutiny of bulk electricity trans-11 l actions of a vertically integrated company is unable to 12 identify the profits on transmission that are implicit 13 l in the price of the bulk electricity. I 14 j UP&L has historically been able to exploit its 15 l market power over transmission through Utah. UF4L's 16 ! i ability to exploit this market has existed in 17 circumstances in which UP&L "brokereda nonfirm sales of 18 short duration. As I have noted, it is unrealistic to 19 assume that this situation will continue because of the 20 increasing likelihood of FERC detection and review. 21 Should FERC togulation of these prises commence, the 22 pries of transmission for sales of power in the down-23 stream consuming market will be reduced, stimulating 24 competition in the production markets in the Northwest, 25 and potentially lowering bulk electricity prises and 26 retail customer rates in the eensuming areas. Aa 2 27 discuss in section IV of my tes.timony, there are strong 28
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F.2 4 i l If indications that the merged company will avoid FERC I 2 scrutiny by bundling UP&L transmission with 776L-35 generated bulk electricity. 4 III. MARKET DEFINITION 5
- 0. Will you please present the detailed analysis upon 6
1 ' which you based your conclusions regarding markets e r61evant to this merger? A. Certainly. i 9 I will address transmission markets first l and electricity markets second. l I 1 11 Transminalen Marksta 12 Q. Briefly, what transportation markets did you find?
! A.
13 I found three primary corridors of transmission 14 service. They are Northwest to California, Northwest 15 to southern Nevada, and Northwest to the Desert 16 Southwest. - 17 A transmission market is fundamentally a ; 18 I transportation market. Consequently, concepts used in 19 analysing transportation markets in other industries l
'O are useful in defining transmission markets. For ;
21 esample, the Department of Justice has used an analysis l 22 i that emphasises origin and destination areas as tools l 23 for defining oil pipeline markets (see F,xhibit _ . 24 (WRI-2)) and has applied a similar analysis in 25 reviewing rail mergers. 26 27 28 i:
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3, g .3 , q li 1 Q. Is your analysis dependent on a close fit between oil 2 (I pipelines or rail and transmission service? 3 'IlA. No. Each industry has unique characteristics. 4 Bowever, as a framework for analysing osapetitive 5 effects on transmission markets and o,n electricity 6 markets "upstream" and "downstream" of the trans-7~ mission, the origin-destination approach is applicable. 8 8 Q. What origin area did you define in your analysis, and 10 how did you define it? 11 A. The Northwest is the origin area in my analysis. This 12 is the area from which there is a demand for transmis-13 I sion of bulk electricity to distant buyers. This area 14 l is the Northwest Power Pool subregion of the WSCC. 15 This is the area in which PP&L is located and where the 16 competitors concerned about the merger are also 17 l located. It is sino the largest electricity exporting 18 j region in W8CC. In 1986, this region exported about l' twice as much bulk power and energy than all other WSCC 20 subregions combined, as shown in Exhibit .,, (WAI-3). 21
~
22 g, please describe some characteristics of power 23 production in this area. 24 A. The Northwest's position as the largest esporting 25 region in WSCC is based on its ozoeptional power 26 resources. ( See Exhibi t ,,,,,,,, (WRI-4 ) ) . This region is 27 endowed with substantial low cost hydro and coal-fired 28
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l \ l 1 generating capacity, based on its water resourdes and 2l the low cost coal from the Powder Rivar coal bar.in. In j 3 1 general, its generating easts, defined in either 4 economic or accounting terms, are the lowest of any 5 ;.. region in WBCC. In addition, the region ourrently has 6' sufficientactualandschedcledcapacitytomeetits 7l loads until the late 1990's. Some systems have surplus ! O capacity available for sale for ten or more years. For 9 example, Montana Power Company ("Montana Power") 10 expects to sell 105 MW of firm capacity and associated 11 energy in a 20 to 23 year contract with the Los Angeles 12 Department of Water and Power. Witness Miller has
. 13 testified that Montana Power has at least an a Hitional
'14 200 MW of firs electricity available for sale in long 15 term contracts. Idaho Power Company ("Idaho Power")
16 witness Crowley has testified that Idaho Power has at 17 least 200 MW of firm electricity to sell over ten 18 years. 19 This combination of low cost resources and a large l 20 ourrent surplus of ospacity and energy available for 21 export makes the Northwest a natural exporting region 22 to the higher cost areas of WBCC. Within the . 23 Northwest, the potential'es11ers vary in how much 24 sepaciay and energy they have available for orport, 25 what aia of types le available (firm, nonfirm, 26 diversity enchange, autplus, etc.), and the sellers' 27 generating costs, which set a floor to prises. 20 h
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What destination areas did you define in your analysis? 2 ', A . i I have identified as relevant three bulk electricity 3g buying areas. Transmission lines of the merged company 4' form parts of key paths that reach the buying areas. 5 These areas are Ca:lifornia, Southern Nevada, and the 6 Desert Southwest. These are areas of substantial 7 demand for bulk electricity imported over high voltage, 8 long distance transmission lines. They alco rare 9 compatible to regions designated by WSCC. The Desert 10 Southwest is the Arisona-New Mexico subregion of WSCC, 11 end California and Southern Nevada together make up the 12 California-Southern Nevada subregion of Wscc. 13 Collectively, the three buying areas accounted for over 14 96 percent of the bulk electricity exports of the 15 . Northwest in 1946. 16 : I 17 Q. Describe the California destination or purchasing area. 18 A. California is by far the largest importing region for 19 bulk electricity in NSCC, and it is similarly the 20 largest region of demand for bulk electricity from the 21 Northwest. Exhibit _ (WAN-3) indicates that the 22 California-Southern Nevada subregion of WSCC aseounted 23 for 86 percent of the oombined gross interregional bulk 24 energy imports of all WBCC regions in 1986 and over 90 . 25 percent of the total esports of the Northwest. 26 21 28 l r
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~ ~ ~ ~ ~ ' ~ ~ ~ ~ ~ ~ ~ ~ ' ~ F . n 44 . 1 p ll 1 Q. Where do California bulk electri=ity imports originate? , 2 l A. California is a heavy not importer of bulk electricity 3l from the Northwest and the Desert Southwest. The i 4h Northwest accounted for 70 percent of total California S g electricity imports in 1686. Exhibit _ (WRE-5) 6i details the bulk energy trade of the California-7 Southern Nevada region with other regions. 8 9llQ. Why is California a heavy not importer of bulk 10 electricity? 11 A. There are good reasons why California is a heavy not 12 j importer. These reasons also apply to the future. 13 Electric utilities in California will look outside the 14 state for auch of the incremental bulk electricity they 15 will need in the 1990's. 16 The California generating six relies heavily on 17 oil. gas steam-electric units. Over the range of oil 18 and gas prices prevailing since 1974, it has been 19 economic for California electric utilities to purchase 20 hydro, ooal-fired surplus, or economy energy to back 21 out at least some of their gas or oil-fired generation. 22 ' In addition, excess capacity and energy from the 23 Northwest and Southwest has been available at prises 24 below the oost of espansion in California, and some 25 California utilities have been using imports as a 26 substitute for constructing new generating capacity. 27 28 I
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l 'j Q. What is your view of the prospects for bulk electricity 2l imports over the next 10 to 15 years? 3hA. I expect California to continue as a heavy met 4 importing region and for both fira and nonfirm imports 5 to grow. In that respect, 2 am in agreement with the 6 assessment of Applicant's witness Dr. Landon. 7! Environmental restrictions and the lack of a nearby 8 coal supply make California a natural region to import 8 from the Northwest and the Desert southwest, where 10 electricity can be produced at a lower cost. In 11 addition, California load growth is oatching up to 12 ; capacity, so that California utilities expect to add 13 - new power sources in the early to mid-1990's. The l 14 Worthwest and the Southwest have capacity and energy 15 ! available for sale. The lowest oost resources are in I 16 i I the Northwest. 17 j 18 lQ. You mentioned that utilities in California aske 19 purchases from the Desert Southwest as well. Now does 1 20 that influence your analysis? 21 'A . Utilities n the Desert Southwest sell about 40 percent 22 as auch energy to California as utilities in the 23 Northwest. Utilities in the two regions ocapete for 24 California purchases. ' Buyers in california select 25 _ their purchased electrielty from among the sooessible 26 alternatives in both regions. The significanoe of 27 i 28
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.i i 2 ', tion of transmission s.arkets but in the recognition of 3 the broad geographic reach of bulk electricity markets, dl 5 Q. The W8CC treats California and Southern Nevada 6 together. Why do you separate them?
7 A. ,1 treat southern Nevada as a distinct buying area from , 8 California, because the long distance transmission 9 options from the Northwest to Nevada are more limited 10 than the options to California. Because the 11 transmission options from the Northwest to Nevada are 12 l more limited, buyers' purchasing options are more 13 , lie.ited as well. 14 15 Q. Describe Southern Nevada as a buying area. 16 A. Southern Nevada is the load area of the southern 17 l 4 quarter of Nevada, centering on Las Vegas and se - 18 primarily by NPC. 19 The appropriate sine of the area is indicated by 20 NPC's 1986 peak load of 1661 MW. Because of the 21 transmission considerations outlined by witness Durick, 22 Nevada is a distinctly different buying area from 23 California. To reach the Southern Nevada buying area 24 from the Northwest, the efficient routes will go 25 thro'4gh Utah. To transmit from, say, Montana to 26 Southern Nevada via the Pacific Intertie and California 27 would be difficult and costly at best. The Up6L-owned i 28
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.s 1 Sigurd line extension to Nevada will be the main path ,
2 from the Northwest to the growing Las Vegas area l 3, market. The only other path is via Four Corners from 4' Utah. 5: 6 Q. Does Southern Nevada import bulk electricity? 7 A. Yes. NPC has recently agreed to Laport 140 MW of bulk 8 power from UP&L and PP&L. Mistorically, NPC has 9 provided for its own loads, but the cost of new 10 capacity now exceeds its cost of purchasing existing 11 j capacity and associated energy. NPC's recent ocemit-12 ment to purchase 140 MW of capacity and associated 13 energy from the merging companies indicates the l 14 willingness of NPC to purchase from distant sources via l I 15 . long distance transmission. A line is being built from i 15 .I figurd, Utah. NFC has two large coal-fired plants in 11 P Mevada in the planning stage Marry Allen and White 18 Fine. NPC has been willing to purchase capacity while 19 deferring these plants. 20 21 Q. Is there osapetition for Southern Nevada purchases? 22 A. Yes. Montana Power, Idaho power, Deseret, and 23 potentially other Northwest power systems are all 24 sospetitors with the Applicants for the Southern Nevada 25 buying area if they can gain access to a transmission 26 path to NPC. Witness Miller of Montana power has 27 described Montana Power's experience with UP&L and PP&L l 28 j h
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l j. h ! 1 in competing for the NFC contract. This testimony , 1 2h indicates that UF4L used its control over transmission l 3 i after the merger to select PP&L rather than its 4 apparent previous choices, Montana power and Washington 5 Water Power Company (WWP), to provide bulk electricity 6 supply in this buying area. 7 s Q. Describe the Desert Southwest buying area. 9 A. The Desert Southwest, as I use the term, consists of 10 the Arisona-New Mexico subregion of NSCC. This area 11 ; includes the area aroun.1 El Paso, Texas, as well as 12 Arisona and New Mexico. l-13 As Exhibit _ (NRM-6) indicates, the Desert l 14 Southwest is a significant not importer of nonfira 15 energy from the Northwest and a significant not
.' 16 exporter of firm and nonfira electricity to California, I
17 although the Desert Southwest is only about 40 percent l 18 as large as tne Northwest in that respect. At present, 19 electric utilities in the Desert Southwest have a 20 considerable generating capacity surplus. Even with 1 the relatively high annual rate of load growth (3.4 21 1 22 percent) that the utilities espect through the sida 23 1990's, it will take years before new capacity will be 24 needed. Thus, the Desert Southwest is unlikely to make l 1 25 new importing osamitments for bate load espacity and 26 associated energy for the next few years. Bowever, 27 there may be opportunities for transactions to take 28 0
i ll 1 advantage of load diversity between winter peaking 2J aystems in the Northwest and the summer peaking systems 3 of thit Desert Southver,t, as well as opportunities for 4 other nonfirm purchases. 5- Energy sales from UF6L to the Desert Southwest 6 (often made simultaneously with purchases by UF&L from 7 low cost producers in the Northwest) have been I significant. For the most part these transactions . 9 occur because the incremental operating costs of 10 Northwest coal-fired or hydro energy available for s61e 11 are often (with due allowance for line losses) lower 12 than the incremental operating oosts of the power 13 systems in the Desert Southwest. Because of the low 14 prices of coal in the interior Northwest and the hydro l 15 i resources available in the Northwest that pattern will 16 { continue. 17 In addition, a variety of other firm and nonfirm 18 transactions are likely to occurs for example, sales 19 of replacement oapacity and energy associated with 20 maintenance scheduling, or storage transactices to 21 substituto Northwest hydro for sto w electric 0 pinning j 22 reserves in the Desert Southwest. l 23 24 Q. Please summarise the transmission paths available to 25 osapetitors of UP&L and pF6L in the Northwest to the 26 primary buyers of import power. 27 24 n
. GI : .: 'Ei 10: :3 KW MSH D F.6 I! 37 -
1 A. All viable transmission paths from the Northwest are in 2 l two corridors: a western corridor reaching Californis a 3 'i through the Pacific Intertie and an eastern corridor l I 4 through Utah to the Desert Southwest, to California via 5- the Desert Southwest, and to Nevada. Witness Durick 6 discusses the specific routes in his testimony. 7 8 0. What is the position of PP&L and Sonneville Power Administration ("BPA") as potential providers of 9l 10 l transmission in the western corridor? 11 A. Use of the western corridor to reach California
. 12 ' requires permission of BPA or PP&L to reach the Pacific 13 Intertie and permission of BPA, portland General 14 i
Electric (PGE), or PP&L to use it. The BPA-controlled l' 15 transfer capacity on the Pacific Intertie is allocated 16 according to SPA's Intertie access policy. A new long 17 / term policy is presently in draft. Witness Miller 18 discusses the prospects for access on SPA's port!,on of l 19 the Intertie. The important features of the policy 20 from the standpoint of market oospetition are that it 21 restricts access, it is uncertain and risky, and it ' 22 provides a power system with only limited ability to 23 forecast aseess. senause of this uncertainty and 24 limited soness a power company with substantial bulk 25 electricity to sell must depend on the eastern corridor 26 to sell auch of its product. I I. 28
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I 33 l d 1 ll Q. What is the availability of transmission to Northwest 2 competito:s of PP&L and UP&L in the eastern corridor? 3 A. All of the viable paths through the eastern corridor 4 , require access to the UP&L or PP&L systems, as witness 5 Durick has testified. 6 7 Q. Assume that the merged company will esclude all 8 competitors from use of its lines for sales of bulk 9 electricity to California buyers. Will competitors in 10' the Northwest be able to compete effectively by using 11 l their SPA transmission service allocations over the I 12 western corridor? 13 A. The EPA allocations allow some competition, but 14 utilities such as Idaho Power and Montana '#ower, with 15 large p antities of bulk electricity available to sell, 16 would still, after utilising their SPA allocations, l 17 have no way of getting their marketable electricity to 18 California. , 1 19 20 Q. Can you euamarise the alternative paths from ths 21 Northwest to Southern Nevada potsntially available to 22 the Northwest ocapetitors of UP&L and PP&L? l 23 A. As witness Durick has testified, the two realistic l 24 paths are (1) the extension of the UP&L systea from 25 Sigurd, and (2) a circuitous route via UP&L to Four 26 Corners and through Arisona. , 27 20 ! l I
!! i 1 ~ Q. Do competitors of UP&L have any effective alternatives 2 to using the UP&L system?
3 A. No. If companies in the Northwest want to sell power 4 and energy in Southern Nevada, they must gain access to 5 the UP&L system. 6 7 Q. Finally, are there any viable paths from the Northwest I to the Desert Southwest that could be used by Northwest 9 competitors of UP&L sad FF6L and bypass the merged 10 company? 11 A. No. As witness Durick has described, all of the viable 12 I paths with available capacity from the Northwest to the 13 Desert Southwest require access to UP&L or the PP&L 14
) Nyoming system.
15 l l l 16 Q. You have described the' control of the merged company 17 over transmission corridors in terms of existing 18 transmission capacity. In your opinion, een competi-19 tors of the marged ocapany avoid t'he need for access to 20 the merged system by participating in new transmission 21 gevelopment? 22 A. In my opinion, sospetitors of the merged company will 23 be unable to reduce their need for assess to the merged 24 soapany's transmission for at least five years because 25 of the lead time for long distance transmission 26 projects. Over a longer period of time, sospetitors of 27 the merged osapany may be able to construct such 28 l
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i i projects, thereby altigating their need for access to 1f 2 the merged company's Utah corridor lines. Bowever, l 3 DP&L's strategic location and control over the existing 4 transmission in the oorridor gives it a spoeial 5' advantage in increasing the capacity of the corridor. 6 This point is recognised in PP&L's sewar suppiv 7 muninaan plan (see Exhibit ,,,,,,,,(WRE-7)) and in a pre- ! l 8 serger appraisal by PP&L of the UPAL acquisition. (See j 9 Exhibit (WRE-8)). In addition, Pacificorp's August 10 19s7 acaulaition Annivals af test stresses the 11 advantages of Utah as a strategic jumping off point for 12 interregional transmission and bulk electricity sales. 13 (see Exhibit _ (WRI-9). UP&L also has a "home state 14 advantage" not available to out-of-state utilities 15 attempting to build a line through Utah. 'Thus, I 16 I expect the need for access to the merged company's 17 transmission on the Utah corridor to persist. 18 19 Q. Will new transmission relieve the problem of access to 20 california by competitors of the merged company? j 21 A. Potentially, but not for at least five years. The 22 realistic ability to build transmission to bypass the 23 serged company's system is problematio at best. While 24 Applicant witness Tucker has discussed a number of 25 additional transmission projest's on the drawing board, 26 few of these are close to concrete development. 27 Permitting has not begun and long lead times would be 28 0
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k.ac j [ f il 1 j; required. To build an economic project over this distance would require firm, long tera power contracts l 2]' 3 for large blocks of power. ll The largest project under oonsideration is the 4 5 2200 MW Inland Intertie. I believe it is questionable
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6 whether there is as yet sufficient exoess capacity and 7 energy in the Inland Northw*st alone to support a e project of the sies of the Inland Intertie. In 9 addition, the project requires a large number of 10 sponsors to succeed, whleh adds to the oceplexity and 11 deley. Demand met through contracts involving the j 12 sigurd line will diminish the probability that this i
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i 13 ; ambitious project will be ocupleted in the foreseeable 14 ! future, other more practical lines like the Idaho i 15 ! project discussed in Mr. Crowley's testimony are not
. {
16 yet under construction. 17 The construction of new transmission to 18 bypass the UP&L system will not provide economic alter- , 1 19 natives to use of the present UP&L/PP&L transmission 20 systems over the next five years. The large ospital 21 : expenditures, political and environmental aspects of 22 the permitting processes, and long distanoes to be 23 spanned make such projoets difficult and the oonpletion 24 dates uncertain. Further, absent an aseess condition, 25 the merged company has significant advantages both in 26 expanding its present system to meet demand in the near 27 28
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l , , FCi af 'EE 10 *15 4 W A5H DC F.11 II i.. I' 1 term and in using its sole ownership of transmission to 2 lock in a significant portion of long ters, firm sales 3 contracts in the emerging southwest. 4 5 nuik timetrielev markata 6 Q. What are the bulk electricity markets you have used in 7
- analysing the merger?
8 A. The relevant product is "bulk electricity," defined as 9 the full range of marketable services producible from 10 generating capacity, including the availability of 11 generating capacity itself, and the electricity offered 12 for sale by one power system to another. 13 ! 1 14 {Q. Why do you include all of the services in this wide 15 range as a single "product?" 16 A. A market, the arena in which buyers and sellers 17 sempete, is ge*ined in terms of products or geographic 18 areas which are close enough substitutes for one 19 another so that they can be in oospetition. The 20 product may also include semplementary components if it , 21 is economically effleient to market then together, $ust 22 as the parts of an automobile are sold in an assembled 23 package. The natural osaplementarity of espacity, 24 power, and energy indicate that it is legitimate to 25 treet them as a single product, electrielty. 26 27 28
. . rtr 2.: s; so: c stia m sa 9c F,1Z i l' , l' l l li; Electricity is marketed in a great variety of !
2 forms: for example, as economy or surplus energy, as l 3 l firm or nonfirm short term block sales of energy or 1 4 capacity, as unit or system long ters fira power, as 5' seasonal capacity exchanges, and in a variety of other 6 ways. As products of generating capacity, bulk 7- electricity offerings are substitutable from a supply 8 standpoint, and they are to a degree substitutes from a 9 demand (buyer's) standpoint. Buyers and potential 10 l buying utilities assemble their power supply from 11 available sources, including their own generation and l 12 { bulk electricity, and purchases of various kinds. 13 14 Q. Are there relevant product submarkets? 15 A. Yes. For purposes of analysis in this sase, it is 16 ! important to make a distinction between firm and i 17 nonfirm transactions, particularly the longer term fira 18 transactions for a year or more versus the typical 19 nonfirm transaction of less than six weeks. The 20 nonfirm market has many more sellers and more buyers 21 than the fira market. That is because a seller need 22 not have esset,s sapacity to selle nor foresee a 23 - capacity deficit to buy. Moreover, nonfira 24 transmission is more assessible to buyers of
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25 transmission, because all transmission not firmly 26 eosunitted can be marketed as nonfira (interruptible)
, 27 28 l
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l 1,!; transmission. In contrast, a long term firm i 2 transaction requires a firm earmark of the transmission 3 for years ou a time. 4'
$: Q. Eow does the definition of geographic market as applied 6 to a manufacturing industry compare to the definition 7 of geographic markets for bulk electricity in this 8 case?
9 A. In defining a geographic market for any product, the 10 ease with which the product can be transported 11 throughout the market is the relevant criterion. For 12 , sellers (or buyers) from every area of the market to be 13 i in competition, there must be transportation throughout 14 the market at a cost that does not prohibit trade. 15 Most commodities and manufactured goods can be freely l 16 i transported using public highways or waterways, private l'1 carriage, and ocemen carrier transportation. Acouss to 18 transportation in these markets is not an issue; for 19 any legitimately defined market, it can be assumed that 20 the product is freely transportable within the market. 21 Transportation of electric power in the United 22 States diffets from the transportation for goods or 23 commodities in that there is no well-developed network 24 of freely accessible highways, railroads, waterways, or 25 Transatssion networks have been other facilities. 26 built up from systems originally constructed to serve 27 local area loads. Throughout most of the WSCC, local 28
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7- 'IE acidi KM WM DC F.14 i i i systems still exercise local control. Getting a 2 transmission path from one area to apother over lines 3 owned by a different utility is often difficult or 4 infeasible. Buyers and sellers who would like to trade 5 and would willingly pay the oost of transmission are 6 sometimes prevented from dealing because transmission 7 is not available. 8 For this reason I have used both the transmission 9 destination areas,-or "buying aress and the entire 10 Wsec as relevant geographic areas in analysing the 11 merger. Of these, WSCC is a broad geographic market 12 e and the buying areas are points of focus within the 13 market that together account for 96 percent of market 14 purchases. i 15 i l 16 Q. Iow did the W3CC enter-into your analysis? 17 A. The W8CC is the overlying market area,within whleh the j 18 main bulk electricity ocapetition occurs. Because of 19 the obstacles to transmission access by many power 20 systems within WSCC, this area forms at best a very 21 imperfect bulk electricity market that does not 22 strictly meet the geographical substitution eriterion 23 for market area definition. Iowever, because relevant 24 ocopetition is not esclusively eenfined to any one 25 subarea within it, it is neesssary to koop the overall 26 27 l i 28 i
. e t.: .- t- 20 :: H.W W45m M p.15 7
l N 1y area in sind while also recognising the limitations to 2" competition within WSCC because of the transmission i 3 access problem. 4 The sospetition that occurs within WBCC frequently 5 involves sellers from m t areas in WSCC. In that 6 sense, the NSCC region is ai broad market area for 7 electricity. Bowever, it is a mistake to conclude that 8 the W8CC region closely fits the concept of a ooherent 9 geographic market for bulk electricity, because the 30 l product cannot move freely within it. Because of the 11 l uneven transmission access which characterises the 1 12 ; Unitsd States and, in particular, the western United 13 states, no defined area in WsCC fits the market 14 definition concept well. 15 16 Q. Why did you also focus on the three sp9eific areas for 17 your transmission markets? 18 A. While it is important to recognise the broad geographic 19 reach of bulk electricity osapetition in the West, 20 which involves most areas in WSCC, it is equally 21 important to focus on the impact of control aver 22 transmission, particularly as it affects the ability of 23 utilities and other power entities to gain soossa to 24 key corridors that link potential buyers and sellers. 25 Indeed, the competition issue in this ease sonoerns 26 oontrol over transmission joetween the Northwest and the 27 main buying areas described. "Mark'et shares" of 28 -
FG 14 'Ei 10:49 K.W Wr.cw 00 F.16 I! l l'l l li 1l transmission or bulk electricity sales over a broad 2i region such as the entire wscc are not revealing with 3 ll' respect to whether the merger creates or exacerbates a 4 competitive problem. 5 IV. ErrEcts or TEE MEMES ON coEPETITION Q. Will the merged oospany have substantial market power in any of the three transmission markets you have identified? 9 A. Yes. It will have substantial market power in the Northwest-to-California transmission market and a i 11 , l dominant position in the other two transmission i 12 i markets. 13
- l 14 l Q. Will the merger lead to greater market power in these l 15 '
4
. three transmission markets than UP&L and PP&L had prior i 16 to the merger? l A. It is necessary to answer the question separately for each transmission market.
19 For the Northwest-to-California market, the answer
, is yes. Prior to the merger, the two companies owned key portions of alternative paths and were therefore at least potential competitors. The horisontal effect of combining the two companies' transmission is inoroaned market power.
With respect to the Northwest-to-Southern market, UF6L controlled the only path pre-merger, sentrols the same path post-aerger, and is building the line fros l
. . FEE a.: 'E! AO:49 M'.4 WAS.i D F.17 l h - 4e -
1 Sigurd that is the only additional path planned. Thus 2I UP&L will continue in a position of dominance.after the 3 merger. I 4 With respect to the Northwest-Desert Southwest 5 market, UP&L was already dominant before the merger. 6 The merger enhances that dominant market power position 7 ,
. by a modest increment, by combining the Utah and 8 Colorado paths to Four Corners. Bowever, since the 9 Utah paths are by far the more important, 076L already 10 had nearly as auch market power in the Northwest-to-11 southwest transmission market as the merged company.
12 ! 13 lQ. Now do you expect the merged company to use this market i 14 power? l 15 jA. The merger will provide the merged oompany with an 16 opportunity to exploit its transmission market power by 17 oonbining the generating resouroes of PF&L with UP&L's 18 strategically located transmission resourses. ! 19 There are strong indications that once the merger 20 is consummated, PP&L will give preference to bulk 21 electrielty sales sembining FFaL generating resourees 22 with UP&L transmission, including incremental eston-23 sions of its system such as the line now planned to 24 Southern nevada. If it le free to do so, PP4L is very 25 likely to utilise all or most of its transfer espacity 26 (in excess of native system use) with its own bulk 27 electricity sales. This would have the effect of I 28 i 1
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l i i i shutting off the eastern corridor of transmission to 2i competing sellers of bulk electricity in the Northwest, 3 substantially limiting the participation of these 4 sellers in bulk electricity sales to california and 5 shutting off their bulk electricity sales to Nevada and 6 the Desert southwest. 7 8 Q. You have stated that the horisontal impact of the 9; serger will be to create a merged company with market 10 power in transmission to California that is, greater 11 ; than the market power in that market of the two 12 l individual companies pre-merger. Is that market power 13 ! substantial? 14 A. It is very substantial. Effectively, the merged I 15 ; company and BPA control virtus11y all transfer capacity 16 likely to be available, though not all of the capacity 17 ! sontrolled by EPA is sub$6ct to SPA access policy. The i 18 remaining Intertie capacity, owned by PGE, is largely l 19 utilised by PGE's asisting users, as witness Durick has 20 described. BPA approval is required for p0E's use of 21 its Intertie entitlement for selling nonfirm rights to 22 oth;;s. The oespotitive significanoe of the merged 23 company is strongly conditioned by the market role of 24 BPA as a scuros of transmission for buyers er sellers 25 of bulk electricity. SPA is not a scenercial 26 sospetitor offering a vigorous ocapetitive alternative 27 to the merged company. Instead, SPA is a government 20 J
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i agency with a specific statutory role that makes 1l 2' allocations of its Intertie transmission capacity based 3 on its understanding of that role. In effect, RFA 4 should be treated as an esogenous factor or "given* 5 that provides capacity but will act limit the merged 6 company's esercise of market power as much as a commer-7 cially activated transmission rival would limit it, t 9 Q. You have discussed the horisontal impact of the merger. 10 Are there vertical effects on ocepetition? 11
! A. Yes. The merger will reduce competition and cause 12 ,- econor.ic inefficiency in the bulk electricity market.
13 As a result, the merger will increase the cost of 14 electricity generated in the Northwest. In addition l 15 retail ratopsyers will pay more for electricity in the 16 l buying areas of California, in the Desert tauthwest, ' I 17 and in Southern Nevada, as well as in the service areas it of competitors of the merged company in the Northwest. 19 ! 20 Q. What is the basis for your statement that the merged 21 company will show a preference for PP&L bulk electri-22 sity resources and deny secess to its transmission by 23 ocapeting sellers of bulk electricity in the Northwest? 24 A. Th6 behavior of the two merging companies, Pp4L's 25 strategic planning documents, and economie reasoning 26 based on the facts of the situation, all lead me to 27 conclude that the merger will lead to a otrong pre-28
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' E3 10:Ea H&W M SH DC P.20 i
I f ! l. 1- forence for merged company bulk electricity sales over j 2 use of UP&L's transmission to wheel bulk power and 3 energy for competitors. 4 - 5 Q. What behavior of the merging companies has sontributed 6 to your conclusion? ' 7 A. Prior to the merger, UP&L purchased ooonomy surplus ! 8 energy from Idaho Power and Montana Power and in effect 9 resold it'at Four Corners at a much higher price - 10 ' often nearly double the purchase price. Although 11 ; traditionally it had not wheeled, tE6L had begun to 12 j show receptiveness to wheeling or transmission-oriented 13 l transactions. It participated in plans fo'r the WINUM i ' 14 pool (among WWP, Idaho Power, WPC, UP&L, and Montana 15 i Power) for cooperative orporting af Northwest 16 electricity, and it had r'eached (or at least was close 17 l to reaching) agreements on two contracts involving i 18 ; wheeling or joint marketing. I 19 i As witness Crowley describes, Washington City, 20 Utah had contracted with UP&L for wheeling from a 21 generating sourse, but when Washington City asked UP&L 22 for affirmation of its wheeling oommitment so that it 23 oculd purchase from Idaho Power, UP&L turned Washington 24 City down. In doing so UP&L stated that as a result of 25 the serger ita transfor sapacity fron the Werth would 26 1 27 28 E
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[{ . be utilised because the dispatch of the merged company iff 2 and nonfirm bulk electricity sales would load the lines 3 from Idaho to Washington City. 4 Witness Miller has described Montana Power's 5 experience with UP&L concerning a oooperative sale of 6 NW by a combination of WWP, Montana Power, and UP&L. 7 With a memorandum of agreement, Montana Power had 8 reason to expect a contract would be signed. After the 9 merger, PP&L became the only co-supplier with UP&L. 10 l These two experiences, and the end of efforts to 11 l establish the WINUM pool, all indicate to se that there 12 has been a shift of objectives for the use of UP&L l 13 transmission since the merger. 14 I 15 .Q. What strategic planning studies, plans, or reports 16 indicate to you that the merged company is likely to l 17 deny access to competitors? l 1B !A. There are several. An Analvain of the Whelasale 19 l Elaetrieltv Market in the wantern tinited staten, an 20 internal PP&L study dated October 1987. (Eshibit _ 21 , (WRI-10)): Power sunniv anainaan Plan a PP&L internal 22 study prepared for annual evaluation meeting dated 23 October 1987. (Eshibit _ (WRX-7)); Pacificorp l 34 Aneuialtian analvala af Utah Dawar and Liaht, an
. 25 internal PP&L study prepared for PP&L Board of 26 Directors, dated August 1987. (Bahibit _ (WRE-9)):
27 28 J i
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I I The Wholesale Market Study (Exhibit _ (WRE-10)) is l 2i particularly clear, as is indicated by the following . l 3 excerpt: 4 Assess and ownership of existing transmission are important elements in the determination of 5 market access control. The utility that controls transmission pathways to the relevant market area 6 controls the supply of wholesale power that can flow into that area. Since supply is only one-7 half of the determination of market price, demand being the other, the controlling utility is in a 8 position to influence, but not determine, market price. This control is regularly exercised by the 9 owners of transmission facilities to keep other competitors from entering the market. 10 l Ownership yields benefits similar to access, 11 I but the rights associated with ownership are more i secure. In addition to the above mentioned 11 , benefits of suppi control, transmission owners are allowed to co lect rents (wheeling charges) on 13
- l their asset if its use is granted to a thire-j party.
p New construction opens pathwa a into new, or 15 existing, market areas. The chang ng competitive nature of the electric utility any ronment will 16 : lead to the construction of strategic transmission
! facilities - facilities that are committed to a 17 ; specific strategic purpose, not simply serving i native load.
18 1 The other PP&L sources I han listed all emphasise I the strategic transmission advantage the merger will provide pF6L. The Business Plan notes that PP&L expects to successfully increase its market share by improving transmission sooess through the UP&L aerger and strategic transmission investment. It reports a target of 650 MW of firm wholesale sales by 1992, over and above PP&L's surrently signed contracts. In Aeeuisitlen Analvain af Iftah Power and Llaht, PP&L
, indicates that the merger providos a strategic nl
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; - s4 - I 1 f combination of UF6L transmission with FF4L generating
,1 2 resources and also puts the merged soapany in a 3 position to exploit low cost power sources in~ Idaho, 4 Montana, and Washington.
5 6 Q. What economic reasoning contributed to your conclusion 7 that the merged oonpany would exercise a preference for 8 bulk electricity transactions using pF&L generation? 9 A. For a regulated public utility like the merged ocepany, 10 subject to F DC regulation of bulk electricity trans- l l 11 l actions, it is likely to be more profitable to be l l 12 ; vertically integrated and use its own generation than 13 J to sell unbundled transmission and have the margins ! l 14 [i limited by Fuc regulation. When the markup for i 15 transmission services is bundled with electricity, y 16 i particularly firm electricity, marketed at rates 17 $ustified on the basis of the fully allocated cost of 18 transmission and generation combined, it is virtually 19 impossible for FERC to detect the profits from trans-20 mission. Thus, a seller can realise the revenues from 21 transmission that its market power would allow absent 22 regulation. 23 076L's praction of siruttaneous buying and selling 24 nonfirm energy has been very profitable in the past 25 providing da lasia markups for an esoess of conventional 26 wheeling charges buying in 1985 in the Northwest at an 27 average of 9.5 mills and selling at Four Corners at 28 o
. ' .' rti .: et ge:54 sm m oc p,a
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,i l l 'l 19 mills. This practice, hard to detect initially, has 2 run the risk of detection by FEnc and subsequent 3 regulation of the implicit markups. The merger 4 provides a way around this risk. The practice of 5 reselling at a high markup is very diffioult to 4 accomplish in the firm bulk electriciti market in large 7 long tera contracts where close regulatory scrutiny of I each. transaction is more likely, and where the buyer's 9 i interest in the quality of the contract leads him to ,
10 , insist on dealing directly with the producer. 11 I Furthermore, there is evidence that prior to the 12 , merger, UP&L actively discussed allowing some of the 13 Northwest utilities fir:a access through its system. A l 14 Montana Power memorandun dated April 21, 1987, stated: 15 I "Utah's (transmission) planner would like to discuss i 16 . trading firm transmission capacity through Montana's l 17 system for firm transmission through Utah's system." l 18 ; Exhibit _ (WRR-13). A contemporaneous PP&L internal 1 19 memorandum of a meeting with UP&L indientes a similar 20 trads but there the terms were an "asset purchase" for 21 ' firm transmission necess to 'new' markets." Exhibit 22 _ (WRI-15). 23 Second, prior to the merger Otah had extensive 24 discussions with WWP, Idaho Power, NPc, and Montana i 25 Power concerning a power pooling arrangement usually 26 referred to among the parties as WINUN. This project 27 woula have created an economically dispatched pool ; 28
wmm u. - m.- . i ! - ss - s l ' l 1 l throughout the Inland Northwest. It would have j 2, achieved the same types of benefits of seasonal and 3[ operational ooordination as the merger aseks, but those 4 gains (estimated by UP&L at hundreds of millions of 5 dollars (see Exhibit (WRI-14)) would have been 6 achieved for a far greater group of utilities. 7 Further, the larger five firm group had the potential 8 for joint sales to California with which they espected 9 to support building significant additional tranasission 10; into non-Inland Northwest markets. 21 11 Third, a PP&L internal memorandum of a seating on 12 March 23, 1987, states that UP&L "expressed a concern 13 that deregulation will put a ' claim' on their unused i , 14 d transmission unless put to firm use." Exhibit _ l 15' (WRR-15). I 16 p Each of these documents indicates that UP6L was 17 moving toward firm sales from a variety of Northwest 18 l suppliers. Those transactions will now be limited to 19 - PP&L's sales. I 20 21 Q. Dr. John Landon has testified for the Applicant that economic theory predicts that a newly integrated company "will buy irom the lowest oost supplier at one end of the transmission system and, when advantageous,
- sell to those willing to pay the most at the other end of the transmission system. That is now what OP&L has the ability and incentive to do." Do you agree?
i 4
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i
- s7 - l 1 A. No, I do not agree. Ths "economic theory" to which
~
2 Dr. Landon refers is a conditional theorem which 3 applies only to a specific set of assumptions. Namely, 4 it assumes a company which is free to maximise its 5 profits without inviting the FERC to intervene and 6 require lower prices or take other actions. In other 7 words, Dr. Landon is using a theory designed for 8 unregulated companies. The theory is not relevant to 9 the behavior of the merged company, a public utility 10 regulated by the FERC and by state commissions. 11 12 Q. Will the preference of the merged company for bulk 13 electricity from PP&L adversely affect ocapetition 14 among sellers of bulk electricity? 15 ,A. Yes. Bulk electricity from PP&L for sale to the buying 16 l areas in preference over the offerings of competing l 17 g sellers will result in a substantial adverse effect on il competition. 19 20 Q. What are the upstream vertical effects of the merger en l 21 ocapetition in bulk electricity? 22 A. Competing sellers to PP&L of bulk' electricity in the , 23 Worthwest will sell less hulk electricity and PP&L will 24 u sell more. There will typically be fewer sellers in
. 25 the market. Where pp4L's offerings have higher costs 26 or are less oost-effective than the offerings of l
27 excluded ocepetitors, there will be a loss of economic 28 l
s es < , ( -u-l l 1 efficiency. Generation in the Northwest will not be 2 .l produced at minimum cost for the region, and efficient 3 I development of new powsr sources by electric utilities 4 in the Northwest may be discouraged. 5 Ratepayers of oospeting Northwest utilities other 6 than the merged oespany would pay higher rates as a 7 result of the merger because of the inability of t, heir e utilities to make bulk electricity sales. Revenues 9 from a utility's bulk power electricity sales are 10 generally treated wholly or partially as a reduction in 11 the revenue requirements for non-bulk customers. Loss 12 of bulk energy sales will raise the revenue 13 requirement. 14'; I 15 l Q. What will be the impact of the merger on incentives to 16 produce electricity or develop new generating 17 resources? 18 A. By discouraging nonfirm and firm sales by sospetitors 19 to the merged ocepany, the merger will result in less I 20 production by relatively efficient generating resourses 21 , and more production from less efficisat resources. The 22 ocapanies other than pp4L with good potential hydro or 23 steam-electric sites would have to plan en the basis of 24 less espected revenue from system soonomy or surplus 25 sales (as a result of the merger) in the event of 26 adding the prospective facility. Thus, the effect of 27 28
)
1
m . _ v.ea ; I - s9 - l 1 the merger will be to increase the oworall cost of 2 generating in the Northwest to produce bulk electricity 3 for sale to other regions. 4 5 Q. What are the downstream vertical effects of the merger 6 .sn competition in bulk electricity? 7 A. Buyers in California, Southern Nevada, and thw Desert 8 southwest will have to choose between fewer sellers, 9 particularly in the firm bulk electricity market. In 10 fact, buyers in Nevada and the Desert Southwest will 11 potentially have access to only one source of bulk 12 . electricity from the Northwest, which is the 60minant 13 supplying region of nonfirm energy to the Desert l 14 Southwest. As a result of the higher costs and I 15 ; lessened competition incurred upstream, buyers will pay
,' 16 i moro for their bulk electricity.
I 17 I 18 j Q. Do these upstream and downstream effects operate in 19 both nonfirm and firm bulk electricity markets? 20 A. Yes. 21 Effeets On MenFirm aulk timetrielty Markata l 22 Q. Iow are oospetition and economie efficiency in the market for nonfirm bulk electricity transactions affected by the merger? 36 27 28 f.
^
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. ~ . - m % m g- -' F,n {
i: I ll l l 1 l A. I can best describe the effects of the merger on 2 competition in the nonfirm bulk electricity market by l 3 discussing economy and surplus energy, which account i 4 for most nonfira electricity sales and a large portion 5 of total bulk electrielty sales in the WSCC region. 6 If the merged company discriminates in favor of j 7 FP&L economy energy sales, some of the lowest oost I 8 sellers would be able to esport only a portion of their 8 available energy. As a result, the marginal cost of 10 energy generated and sold as economy energy would be 11 higher than if these sellers were able to compete. In 12 , effect, the market supply curve would be shifted to the i 13 left by the substitution of higher cost PP&L economy or 14 surplus sales for lower cost energy sales by PP&L 15 competitors. There would still be competition, but the 16 market price would Le higher because of the exclusion 17 l of sales by low cost sellers from the market. This 18 ! effect is a real economic cost, a form of waste saused 19 by the substitution of less efficient for more 20 efficient resources. 21 22 Q. Esplain what is meant by "oost* in your previous 23 answer.
- 24 A. The oost relevant to economic efficiency or ecosomy 25 energy sales is economie oosts the, cost incurred as a 26 oonsequence of the transaction.
Because an soonomy or 27 surplus transaction involves utilisation of surplus 28 P e
m - u wr <e esa e M IR F.30 i - si - I capacity, no sapital outlays are incurred. Conse-l 2 quently, the relevant economic cost is the marginal or 3- incremental cost of short term operation. "Low cost" 4 seans "low marginal oost." Prices of ooonomy and 4 surplus energy are determined with refereneo to 1 6 marginal or incremental operating cost. For a sale ' 7 from stena-electric generation, it is mainly marginal 8 fuel cost, plus allowance for incremental operating and l 9 maintenance cost,'plus wheeling cost and allowance for 10 , line losses. Surplus hydro has near sero marginal 11 cost. Rydro surplus energy is generally priced to meet 12 ', a competitive price, which is approximately the 13 marginal cost of the marginal steam-electric unit in 14 the market. 15 : 16 lQ. Iow does the concept of low marginal cost relate to the 17 economic efficiency of the market for nonfirm 18 electricity? 19 A. In an econoalcally efficient market for economy and 20 I surplus energy, the generation (energy) with the lowest 21 marginal'oosts is sold to the exclusion of the poten- l 22 tial generation which has higher marginal sosts. 23 goonomic inefficiency occurs when some sellers which 24 are ozoluded can offer energy at lower marginal costs 25 than the marginal ooets of some of the energy being H sold. 27 28 f I
~ ~
7 rn .: Es aense saw wass x P.3: i I 1 , l Q. Would there be a less of economic effielency as a 2 j result of the merger? 3 A. Yes. The merger would likely razult in the sale of 4 l some economy or surplus energy by PP&L eith higher 5 marginal costs than energy from seapeting sellers in I the Northwest. 7 8 Q. What is the basis for your sonalusion?' 8 A. I base this conclusion en (1) esamination of the 10 generating resources and operating eests of these 11 I companies relative to PP&L and other esepetitors, and 12 ,; (2) a comparison of BPA Intertie nonfira allocations of 13 l these companies with available hydro surpluses and 14 f unused steam-electric espacity of Idaho Power and 15
; Nontana Power throughout the year.
l 16 17
' O. Describe your esamination of generating resources and l'
! operating costs for Idaho Power and Montana Power in l' eenparison with these of PP&L.
20 A. My essaination of operating ooets and resources of 21 these utilities leads as to eenelude that all three are 22
- very low east relative to sellers in the Southwest and 23 that Idaho Power and Montana Power een be espeeted in 24 many instanoes to have lever marginal generating costo 25 than PPaL would have if transfer espasity from the 24 perthwest through Utah were fully utilised with bulk 27 electrielty sales.
2B i 1
- 46 . *e: T@Tse Ng,;c2MR g- - p,7; I f i
1 1 4 Q. Please describe the factual basis for this senelusion. 2 A. In appraising the likely marginal oost positions of the merged eenpany and two leading Northwest osapetitors, I j 3 ll 4 l l examined two kinds of information. First, I drew upon l 5 background information with respect to seasonal and j
'i year to year demand for soonomy energy as well as the 7
availability of hydro generation. Second, I esamined
' the generating six and operating eests of the four
' companies and others reporting to FERC and developed a ,
reasonable range of marginal sosts under different 11 assumptions of load levels and water availability. ; 12 This information was suffielent for me to determine 13 whether the sempetitors are low cost relative to PP&L. 14 i i U What is your conclusion eenpany by company?
! Q.
16 Onder most A. yirst, let me describe Montana Power. 17 I states of the market, the marginal generating unit for it
. Montant Powet's own lead, plus a substantial margin for i
U esport, is either one of the Celstrip units or Corette. l 20 All eurtently have marginal operating oosts of around 8 21 mills at the plant (6 7 milla for fuel). This is a 22 very sempetittee oest essept where there is a large 23
- hydro surplus that would back osal-fired units out of 24 the market. Seeend, I will deserike Idahe power.
25 Idaho Power's competitive position depends en the state ] 26 of the market. In the spring when water gesels are 27
- high, Idahe power een eften generate its requirement I 28
i j. l l li ! l 1 with hydro and have some left over to soll. Over auch l 2 of the year, Idaho Power's hydro generation is 3 p suffielently large so that the marginal generating 4h source is likely to be Jim Bridger, of whiah 2daho 5" Power has a 878 MW share. Jim Bridger in resent y urs ; 6 has had fuel oosts of II to 13 mills per RWE. Overall 7 marginal cost at the plant is likely to be in the 14 to 8 15 mill range. 8 PF&L pre-merger has had fairly low marginal costs 10 because of its hydro resourses and its large block of 11 j coal-fired sapacity in low to moderate sost plants. 12 l For 774L pre-serger alone, the marginal fuel oost at , 13 the plant might range from those of Bridger to those of ! 14l' centralia at the plant, depending on the plant. 2 15 l: estimate a total marginal operating cost of around 14 i l 18 to 17 mills. Given the imperfection of the data l-17 available to me, I would put pFAL pre-serger elese to le Idaho Power under Oese states of the market, and 2daho II Power below PP&L when water conditions permit sale of 20 surplus hydre, er when PP&L had to use Centralia. 21 ,, pegg.nerger, UP&L and PPate will be dispatened as a 22 single system. The post-serger marginal operating cost
- 22 or u. =rg.d .em,any i.' sta.ly . w .t .a. .f wat's 84
- at-rir.d . nits . .h .f a. tia.. t .f ais 25 espasity has had marginal operating eests of around 16 H to 17 mille per kilevatt hour la recent years. l 27 l
i as i 4 d
,, - - - - - ,-nn-, , - - - - - - , - _ , - - - - - - - - - - - - - - , , ~ , - _ _ - -- - - - - - - - - . _ - - - - - - - - - - ~ - - - - - - - - - . - , - -
vvT 'trrww a com tx p, p I k - dl - l \ \ l 1h Actual costs will vary over time with changes in 2 thermal efficioney of units, fuel prise changes, loeds, 3 and water conditions. Nonetheless, my senparison of 4 elementary cost information leads se to be sentident 5 that PP&L's sempetitors will have a marginal sont edge on the merged eospany much of the time. This taplies 7 that in a sempetitive, effielent ecomesy energy market, 8 the merged company would be transmitting energy from its oespotitors such of the time. 10 11
. Q. Are the merged company's marginal operating costs 12 likely to be below market prices of economy energy in 3
i the buying regians? 14 A. Yes. Marginal tests in the Desert Southwest California 15
.- are auch higher than the merged osapany's (pre-trade). .
II Average prices of economy energy sales by UP&L at Pour 1 Cornero were in the 23-30 mill per Rwh range in 1985 18 before falling to around it mills in 1986, a year of l' unusually low eil and gas prices. 20 ' 21 9 Bow do SPA Intertie eenfirm alleeations compare with 22 available hydro surpluses and unused steaa-electric 23 sapacity of Idaho power and Montana power throughout 24 the year? A. Available hydro surpluses and unused steam-electric I 6 espacity vary greatly aeoording to water senditions, 27 sessenal and weekly lead variations, and other factors. l 20 l
. a q s:. m e M u # 54 DC F.E g f - ss - l
!: I h
1 BFA nonfirm Intertie allocations under the long term 1 Intertie access policy are still in draf t fers and 3h subject to change. Under the draft policy, nonfirm 4 Intertie alloestions are based on hydro espasity. The 5b allocations for Idaho Power'and Montana Power are auch 8 less than the levels of nonfirm sales ever the Intertie 7 actually achieved by these eenpanies in rooent years. 8 Thus, if ~JPA's nonfira Intertie allocations in the
' future are similar to the alleeations in the present 10 l draft policy, the Northwest competitors of the merged 11 company will have substantial p antities of potential 12
- nonfirm sales that could be sold only through the Utah 13 paths.
14 i l In addition to the p antity just described, Idaho 15 Power and Montana Power historisally have sold nonfire l' energy to DP&L. The amount of emeluded nonfira 17 l electricity from osapetitors will laclude this pantity it as well as reduced pantities using the SPA latertie 19 allocations. 20 21 Q. Row would the oespotitive effects you have discussed 22 affect the local sustaaers of osapetitors of PP&L? 23 A. In every state but Montana, the local sustomers' rates 24 would be higher as a result of the offsets of hha 25
,,,,,, ,, ,,,,,gggg,,g, ,,,gg,, ,,g,,, g ,,,g,,,g
" electrie utilities flow through to sustaaers all or 27 most of the margins they make en fire and nonfire bulk 38 j
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-. . = _ - - , - - _ . _ . _ - . _ . . -. . - - _ - - - - . - _ -.-
TEi ; : 'El 11:C1 HEW t. ASH M P.36 g
. . s7 t
l l electrLeity sales. That is, met revenue from these 2 sales is subtracted free the revenue requirement to be 3 recovered from ratepayers. Inability of the utility to d make economically effielent sales would cesult in lost 5 not revenues based on buyers' decremental and es11ers' 6 marginal sosts. In Montana, because of the special 7 unregulated status of Celstrip 4, described by witness e Miller in his testimony, Montana Power's local sustomer 8 l rates are independent of whether Celstrip 4 electricity 10 is sold. Bowever, Montana Power has other resourses it 11 p will seek to market enee all Celstrip 4 electricity has 12 been sold. 13 i 14 Q. Would the merger cause an increase in the market price 15 of etenemy energy? 16 A. Yes, during some phases of the market. The market 17 elearing prise varies esasenally and asserding to water l' senditions, oil prises, and lead fluetuations. During l' part of the year, the market clearing prise esaurs
# eloss to the marginal oest of esal-fired generation in 21 the Northwest. By discriminating against eespositors'
- = .sene.y ..ergy and es,ori.g ,,u..s, the ,ged -ny 23 esuld influence the market pries en these essasions.
24 Decause the marginal oest of higher gest salts esuld 25 i appre,minate the market clearing pries, the offeet of 36 I 21 28 1 t
. gs -
f ll 1 the merger would be to raise economy energy prises in ! 2 California, Southern Nevada, and the Desert Southwest. 3 4 I What effect would evenemy energy prise increases have
,Q.
5' on electric ratepayers in Califeraia, Southern Nevada, 6 and the Desert Southwest? 7 'A. Eigher economy energy prises would increase the most of 8 I electric servloe, thereby raising revenue requirements I 8 j and rates. 10 i Effneta en Fire nuik timetrieltv markats 1 11 .Q. Will the merger adversely affect eenpetition in the 12 market for firm bulk electricity? _ l 13 Yes. l A. The effect will be particularly strong for 14 competition in intermediate and long ters firm bulk 15 electricity. Most of the orpenditures made by buyers i 16 l en firm transactions are concentrated in latermediate 17 to long term transactions. 18 ; 19 Q. Please describe the transactions severed by inter-
, 20 mediate.and long ters firm bulk electrielty.
21 A. Intermediate sad long torn bulk electrielty contreets 22 range fres 1 or 2 yeara' duration to 20 years or more. 23 Secause onpacity is lavelved, firm energy is generally
- 24 a higher value'use of tranasission than acafira energy.
1 ' l 25 Because of the long ters nature of the contreets, the 24 great variety of buyer needs, and the feet that both 27 espacity and energy are involved, the packaging and 28 l
~ ~ ~ ~ ~
~ ru : 3 5 nic:M a ms.fo r F.35
; l Y ,
f i. l 1h pricing are often soaplex. The lifetime oost of the 2 contract to the purchaser tends to be hight ever $100 3 million is not unusuti fs,r a single sentract. Buyers 4. purchase en the basis of their assessment of lifetime 5 sost, eash flow, rate impacts, tLains of availability, reliability,. transmission availability, and other I 7
' facters. Offerings of s'e11ers are heterogeneous. As a I
result of this heterogeneity and the large suas of
' money involved, buyers shop estensively to find sources 10 that match their needs.
l , Il Q. Why is the value of firm intermediate to long ters bulk 12 i l electricity sales.per kilowatt generally larger than 13 the value of menfira energy sales? 14
- A. Both capacity and energy are being sold. Whereas O nonfira energy sales are to displace higher oost energy I'
with lower cost energy, intermediate and long term fira 17 sales usus11y are to displace new espacity additions l' q plus their essestated energy. In addition, firmness is l U ' a valuable attribute, and the seller incurs costs of 20 providing suffielent reliability to assure the 21 necessary degree of firmness. 22 ' 23 Q. What are the sharacterieties of a low cost seller of 24 g,g,,,,gg,g,g,g,,,g,,,gg,, ,,,,,,, 25
- a. ,hrse .harset.risti.e ere ,erti.e.t. .. so. .est .e11er 26 ' , has low operating eests. aquelly important, a low cost
' 27 seller has the ability to sell tira bulk electricity 1 28 . l
G lj NE 11881 DSW WC68 DC P.39 : i l
!i l 2; for the requisite period without having to add new 2' capacity, at least for most of the period. Relatively I
' low costs of system expansion enee new espasity is 4 :! needed is the third pertinent ehraeteristle.
5; 8 I. Q What is the significanoe of the duration of eseems 7 espacity? - 8 A. As long as espacity is in espess of systes needs, new 8 espacity need not be added. A firm sale incurs an 10 opportunity sost because it must earmark the marketed 11
, capacity so that it sannot be used to meet future 12 l loads. For a utility such as Montana Power, which can 13 offer firm bulk electricity for ten years or more 14 without adding new espacity, this opportunity sost is l
15 ;
,,,y g,,, .
16 17 Q. Are oospetitors of PP&L well positioned to provide low 18 sost intermediate and long term fira bulk enestricity? l' i A. Yes. Some of PP&L's eenpetitors have large eseems 20
,,,,,ggy.,,g,gg,, g,g ,,g, g,, ,,,,,gg,, ,,,g, ,g 21
.: eseess espacity, and low eests of future espaaston. l 22 Witness Miller has described Montana power's 23 situation. In Celstrip, Montana Power is effering a 24 resourse with estremely low operating meets (about 8 25 mills per Rwh) from a system with' sufficient sensed 26 especity to effer 105 MW for long ters seemitments. As 27 20 I
i
- - - re-._.---.---,v-.---.--w----- . - . _ _ ~
-,y 7 c
- 71 I
1,!;'- i witness Miller discusses, Montana Power also has the 2 ability to expand espacity through incremental changes 3! to the system.
' j, i Witness Crowley has described Idaho power's 5
situation. Idaho Power aan sell system power and !
energy at very low prises because of its low system 7
operating costs and its low opportunity sosts 6f using 8 available espacity. Idaho power projoets that it will
' have firm surplus espacity available for at least il 10 years and nonfira energy availabis well beyond that 11 period.
12 !. 13 Q. Does an individual buyer in California or other buying 14 areas have access to a large number of potential 15 sellers of intermediate and long ters bulk electricity 16 which can meet its needs? 17 A. Not as a rule. The exact number varies according to 18 the location and transatssion resourses of the buyer l i l' and the uniqueness of its needs. In general, there are 20
. not many potential sellers trea which to shoose.. Only 21 these utilities with ospected eseess onpacity over the 22 desired period of purchase have the ability to osapete, 23 and some of these sellers may not be neoessible to a 24 given California buyer because the needed transmission j 25 .
any not be available. 4 26 27 28 I
v 68 . VF EJ4T Pbw cOS#FT9's F.41 g ; I I ! 1 C. Approximately how many effective alternatives is a { 2 buyer likely to have? I 3]A. Judging frca ey emperience in eenducting surveys and 4 assessments of the firm hulk electricity market ever ' 5 ., the past four years, only about a desen or so vendors 6I are likely to be in the market at a given time effering 7 " fira electricity of a needed type ( m , baseload) and 8 available with a start date and duration elese enough l
' to a given buyer's needs to be a sandidate that a buyer 10 can consider at all. Of these se11 era, more than half !
l 11 will be rendered infeasible because a transmission path ! 12 can not be obtained, and more will be olisinated ; 13 l because insufficient capacity is available er because 14 et other knockout factors. j 15 In brief, in today's market, a typical California 16 utility will be fortunate to eenfront as many as four 17 viable alternative sources of intermediate to long term l 18 firm bulk electricity, and most are likely to have no l 19 ! more than three free which to shoose. 20 21 Is there an ongoing trend of destine in the aanber of Q. 22 alternative sourses of gva11able intermediate to long 23 tera firm hulk electricity? . I 24 A. Yes. The oldespread escoas espeelty of the 1ste 1970's 25- and 1980's led to a buyer's market. This esadition, 24 erested to a large estent by lead foreansting errors, 27 bas decreased as lead foreensts have been reduced and as l i
- - , - - , , - ,, --.----,---__,._,_,,-.-,.n__.,n,., .,,,,w,.-.,,_,-,,,,
p g.,n---,
i 3l! planned espacity has been deferred or senselled. ! 2
/ Currently, there is very little new sapacity under 3
construction in Wscc. In the 1990's, as leads satch up 4 with existing espacity, fewer alternative seuroes of 5 long term bulk electrielty are likely to be available 4 than at present. I have observed the beginning of this 7 trend in a declining ausber of identified alternatives 8 in the market over the past few years. 9 10 C. What is the oospetitive significance of the small i 11 ' number of intermediate and long ters firm alternatives 12 l available to buyers in California? 13 A. Excluding even one er two low oost sellers from 14 1 eospetition will redues the viable choices available to 15 sospetitors by a substantial fraction. In some 14 instanoes, the best oheises may be eliminated, but in l 17 any event the ability of buyers to megettate for good 10 prises and teras depends en the presones of viable 19 eenpeting alternatives. to 21 ' O. . What is the significanoe to sempetition of the fast
- 33 that buyer meets and seller offarings of intermediate
) 23 to long ters bulk power and energy are heterogeneous? 34 A. The presenee of four er iive sellers of a standard semmodity or product would give the buyer fear er five 34 \ ' satistastery alternatives free which to shoose. For a j i 27 l J long term fira power and energy deal the buyer sust 28 I l
- I
_ _ . _ - . ~ _ ___. ll ; lI I ! 2 assess how each different aaller een meet that buyer's
! unittue needs. Consequently, the number of viable 3l I cotapetitive alternatives is auch smaller.
4k . { 5,l 6 l Q. Will the merger result in a less of ooenemie effielency - in the intermediate to long ters firm hulk electrielty l 7 market?
' A. Yes.
There will be a less of economic efficiency in two respects: 10 fewer sheless and smelusion of low east l
,,gg,,,, 1 i
11 , 12
- 0. Iow de fewer cho' ices laply a loss of economic
- 13 )
officiency? 14 A. Discrimination by the merged company in favor of FF4L 15 , i l resources will limit the number end variety of choices i 16 l available to the buyer in a market where the poten-11 tially available choices are few to begin with. Too il few shoices implies that buyers will have to seiset l' offerings.that do not match their needs. por example, 20 the start date may be too early, leading to an unwanted 21 burden of espaelty sharges, or the buyer any have to 12 give up features ( , shaping options) that would 23 have been available from an emeluded eenpetitor. In i 24 , additten, too few buyers implies less sempetitlen: 25 sellers do not eenpete as vigorously Ja pggee, and they H do not feel compelled to effer the p ality features 27 that buyers want. 28 i l 1 e
rn N *u n ice EE uc-s gc
, P.44
~
i; i i.i I hQ. New will the esclusion of low cost sellers cause a less I of economic effleiency? ' 3 ll A. The esclusion of low cost sellers implies a weste of 4' resourses. The oost of generation will be increased, 5 espansion of low eest systems will be disseuraged, and I espansion of higher cont systems will be sneeuraged. Moreover, the esclusion of low eest sellers implies 8 l that price sempetition will be reduced and prises will be too high. 10 , Q. Now can you identify a low cost seller of long ters firm bulk electricity? 13 i I A. A low cost seller is characterised by low operating cost, ample espacity availability, and ability to j espand capacity through low seat increments to the 6 j ,y,g,,, , 11
' l Q. Are there any eespotitors of PP&L who have long term bulk electrisity to sell to low eest producers?
O A. Yes. Montana power and Idaho power are low eest 21 producers of firm bulk electricity. I believe there 22 I are others in the Merthwest. 23 24 j 9 What are the indications that Idaho power and Montana 25 power are low cost producers? 26
- )
28 1 l J
- _ mm,m a a , s, , % ,,, g,,,..
4 l; ! , I b l 1 A. Montana Power has extremely low operating costs of its 2 available espacity for long ters tale, which senststs
- 3) of the low cost celstrip and cerette seal-fired plants.
4 Nontana Power's relevant economie operatteg eests are . 5) among the lowest in the United States for seal-fired I i generation. In addition, as viteess Miller has j 7 discussed in his testimony, Montana Power has substan-8 tial unused sapacity and the ability to espand its
' espacity incrementally. In the longer ters, Montana 0
l Power's territory has low eest seal resourses and ample 11 water for power plant sites. - s 12 i , Idaho Power also has very low operating eests. i The incremental oest of Idaho power's unused sapacity i U i is based on a als of hydro and moderate oest osal-fired U i l espacity. Idaho Power has substantial eseess espacity N
$ available for sale, as witness Crowley has testified.
i 2 17
" 9 Do these eospetitors have lower economie seats of firm l'
electricity for sale than the merged eenpany? to
- A. Idaho power and Montana power may well have lower 21 econeale oests for firs elestrielty than the merged i 22 senpany, and other eenpetikers may ales have lever 23 easts. That is particularly likely to be tree if PP&L 24 makes more sales, so that its eseems espasity beoenes 15 less than at present. Af ter the aserted eenpany has 26
!
- made its economic distwish, the eseess sapseity for
- 21 -
i 28 i e I
_ _ . . _ _ . . Br
; 7
'l = 77 -
1 3 ll' determining relevant operating eests will have a large 2 seaponent of UP&L units with higher operating eests then these of Idahe Power and Montana power. 4 trhatever PP&L's relevant oosts, the best test of i etenemic eests in the intermediate to long term firm areas is a sempetitive market, in which buyers een shoose among the efferings of all eenpetiaq eellers. ll i Q. New would the scenamie efficioney effects you have 1 0 discussed for firm bulk electricity affect the l eustomers of electrie utilities in the Berthwest? ! A. As in the case of esenemy energy, the sustomara of the excluded eospetitors would experience increased rates as a result of the merger. I 15 : l 1' O. Rew would the econente efficiency effects you have discussed for fits bulk electricity affect ratepayers U downstream in California, Southern Nevada, and the u Desert southwest? 20
, . The downstream effects on firm hulk energy are eisilar 21 qualitatively to the tapsets of higher economy energy 22 prises. Eigher prises and, in the ease of fira deals, i
23 mismatches of quality, will ineresse the oests of 24 eteetrie utilities la the three buying a'rese sad lead ; 25 to higher rates. 26 ! 21 ' 20 i
rn 3.: >st suc7 su mm De P 47 I 1 0 3 I h Bowever, in the oase of bulk fira electricity, 2I there should be a auch larger quantitative impact. The 3 price increases in firm bulk electricity, the seeing 4l sellers' market of the 1990's, could be quite large and 5!l the lapact on individual buying utilities could be very 1stge. 7
, v. REMED11s
, O. In your opinion,'do the competitive problems arising go from the u rger laply that the merger should not be 1
gy i allowed? I 12 A. No. If a condition is imposed to mitigate the 13 l 802P'titive problem, the merger may well be in the I y public interest. In other words the merger need not be 15 I rejected on ocepetitive grounds. 16 17 I Q. In your opinion, san a merger sendition remedy or 18 mitigate the competitive probles arising from the l i g, merger? 20 A. Yes, it san. . 1 21 1 l 22 Q. What is the objective of such a merger senditten? 23 A. A good merger condition should simulate the results of 24 a workably competitive market in a situation where free 25 stapetition is act feasible because of the merged 26 ocapany's sentrol over transalesion. The sempetitive 27 problem in this case is that the merged eenpany, absent 28 i
; = 79 - !
1 ' 2 a condition, will use its control over transmission l access to produce inefficient market results that 4 differ from those of a workably osapetitive market. In other words, the merged company can osabine its market ' 5' 6 power in one market to achieve profits in another. 7 To slaulate the results of workably competitive market a merger soudition should create an environment . j 8 in which buyers can make the most ooonomically efficient choices among osapeting sourees of supply. Consequently, the merged ocupany should act discriminate in allocating transmission among different 13
;~ sources of bulk electricity. These sources include the least oost source of economy and surplus energy, the I most oost-effective sc"rees of intermediate and long term firm power according to each buyer's appraisal, and whatever other transactions are most highly valued l by the buyer.
19 Q. Given the merged company's position of controlling all viable paths, can a workably eespotitive market for
. transmission in the eastern oorridor be erested?
A. No. 23 s 24 0 Bave you considered an approach to merger senditions utilising bidding for i:ransmission or bulk electricity? A. Yes. 27 20 i
.e 6- - s . . o u m. . m y, p,e jj - to =
i Q. What is your conclusion with respect to bidding for 2 L transmission? 3 A. The merged company, as both a bidder and the owner of d ll transmission, is in a position to win overy bidding competition, because of both the cost and revenue of 8 its "hids" are internalised. The merged company will 7 make its decision to use the transmission based on the e profitabilities of using it itself or collecting I wheeling revenue. Because it could profit from its 10 market power in the first instance, it.will "hid" 11 l enough to win whenever it wants to. Other bidders for 1 l transmission, lacking market power, would bid less. In 13 their case, the bid is a cost they sust. occur. To the 14 sergen company, the effect of its bid is limited to l 1 I paying to itself the cost of the line. Any part of the l' bid higher than that oost is an internal accounting 17 matter, not to be confused with the actual opportunity 18 cost of using the line. l 19 i 20
,0 What are your conclusions with respect to bidding for 21 bulk electricity?
22 A. Ridding for bulk electricity is an oventually promising 23 approach for nonfirm bulk ele'A fielty, but ! do not 24 think it will work for firs e' estrielty contracts. A 25 bidding system for soonomy onergy would tavolve price 26 bids to a control ovaluation. The lowest prices, down 27 to a market-elearing point, would obtain some 28
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1 1 designated capacity on the Utah corridor available for 3 ,l nonfirm sales. This could be oiganised la much the O same way as a power broker or power pool handles economy. As a practical matter, freedom of buyers to i select sources.would agoonplish the same end, provided
, the transmission allocation for nonfirs energy is I pooled.
An economy bidding scheme could not resolve the
! problem of how to allocate tranasission sapacity among the many different types of bulk electricity transactions: diversity eachanges, storage services, 13 88 ntenance capacity and energy, long ters firm 14 baseload capacity and energy quasi-fira ' unit" sepacity I
and energy, sentracts that call for ' shaping" the delivered energy, and.so on. Though bidding systems 17 l have been devised and hitplemented for qualifying { 18 ,: facilities subject to the public Utility Regulatory l Policy Act, the estremes of heterogeneity among firm bulk electricity transactions present diffleulties of l bid evaluation that are an order of angnitude more diffleult than qualifying facility bidding. In addition, different seller bids apply to different I 24 yers, e ten located hundreds of alles from one another. Bidding to evaluate, say, a sophistimated espacity, energy, and shaping package with especity 27 exchange options at an average of 40 mills per Rwh to 28 begin in 1989, and a no-frills baseload sale at 32 d
- - - -~
e tyl .- '@t lasy;^Cba e v,. P.51 t 1 . , , . i E i ' 1 i mills to begin in 1993 strikes se as unworkable, It is 2' also likely to pose an unreasonable burden en the 3 ' evaluating utility. 4 With some esperimentation, a bidding approach 5 might be feasible for soonomy eaergy, because seller offerings in each bour er smaller time interval are 7 near-homogeneous, so that buyer decisions oan be based 8 on a spot price pertaining to a preciso period of
' transmission use. Fira contracts would esse up at 10 different times for different. buyers, sever different 11 sesles, duration.:: seasons, and packaging. After 12 examining bidding systems for electricity as a means of 13 f oospeting for access, I concluded that esperimentation l'
with such bidding approaches for economy onergy makes 15 l sense, but such a bidding systen eennot be relied on at If present to solve the problem of dealgning oonditions to 17 mitigate the adverse effects on ocepetition of the i ti
! n.t...t -rger.
19 20 0 Given that oompetitive solutions are not feasible, what 21
, alternatives remain?
22 A. The remaining approach is an alleeative solution. 23 while not in itself osapetitive, it een open op trans-24 alssion to more sempetitive r.holoos. An altoestive 25
,eae.y - st be 3.dge by it. t.sult., be. 1 .Ar it 26 sones to achieving the effiolent results of a workably 27
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rti s. Ei a t: ae sw mss Dc p, g l: , p 33 . i l C. What criteria should be used to evaluate how well a 2 proposed merger condition will meet the objective of I 3j achieving the efficiency results of a workably 4 competitive market? 5 A. To achieve the objectives of economic effielency and of 6 permitting buyers to make a choice among all competing 7 alternatives, the merger condition should (1) apply on 8 a non-discriminatory basis to potential ocapetitors of
' the merged company in the Northwest which do not have 10 transmission of their own, (2) make actual access to 11
; the UP&L oorridor by any competitor contingent upon 12 buyer selection of that competitor's offerings in 13 i
{ competition with other potential sellers, (3) provide 14 l enough capacity to eenpetitors of the merged company to 15 l ensure efficient transactions, but not so much as to 16 l force inefficient transactions, (4) reserve sufficient l 17 transmission to protect the merged oonpany's ability to 18 provide efficient and reliable servloe to retail and it wholesale requirements customers as well as meet its
,, obligations under esisting firm oontracts, (5) be clear 21 and unambiguous so as to feel 11 tate practical imple-i 22 sentation and effective regulatory review, (5) provide 23 adequate ineentives for asw transmission, and 24 (7) assure that the restrictions on PFAL will act 25.
outlast the probles. 26 - 27 28 i i l _ _ _ _ _ -._ _ . _ _ . _ _..___.____.
- e. . c o . cy o, %7- -
I Q. What condition to the merger do you reconnend? 2 l A. I recommend the proposed condition set forth in Rahibit 3 'i ,(WRE-11). 4 5 Q. Please summarise the proposed condition. 6 A. The. condition states that the merged company will 7
' permit any utility with access to the northern and of 8
UP&L's system to enter into bulk elestricity sales for
' resale with any willing purchasers that have made 10 arrangements to aooept delivery of power and energy at 11 l any of UpaL's existing or future california, Desert 12 southwest, or southern Nevada interconnections, not to 13 i exceed a total of 300 m in any hour, to be eligible 14 for access to the 300 m, each seller must have entered 15 into a binding esntract. Any utility with an ownership l'
interest in transmission between the sorthwest and the 17 southwest which would permit that utility feasibly to 18 osaplete a particular transaction, will not be eligible 19 for access to the 300 m alloostion for any such 20 transaction. Ceapetitors will be granted sooess on a 21 first-oose-first-served basis asesyt that new fira 22 esanitments will have priority ever eenfira 23 ooemitments. to prevent soneentration of use of the 24 300 M in one or two large sentracts, a limit of 100 W 25 is placed on individual transactions. If the merged 24 ocupany enlarses UP4L's morthweat'to southwest 27 transmission sapeoity, the commission retains the power 28
.m 7 s. m u w. m sa a pz
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li 1j to increase the 300 MW allocation, but only by up to 33 2 percent of.the amount of not espacity. Finally, the f condition provides for the right of the merged company 3l 4 to terminste the condition if new competitive circum-5J atances, such as the construction by competitors of new
' transmission paths, eliminates the need for the 7
condition. l 8 I Q. Does the proposed merger ocadition soupare favorably 10 with other allocation systems with respect to the l 11 criteria you have outlined? 12 : A. Yes. I believe it meets the criteria better than any 13 l' practically available alternative. 14 U Q. Your first r.riterion is that the condition should apply 16 without discrimination to potential Northwest oospeti- , 17 tors of the merged company which da act own a trans-18 mission path between the Northwest and the relevant M purehasers in Southern Nevada, Californis, or the to Desert. Southwest. Why is that important? 21 A. . This eriterion assures that buyers win have a number 22 et alternatives so that they can asks the most 23 oconomically efficient selection. Nesting this 24 eriterion also provides for equity emong potential 25 sellers by providing non-discrim'inatory assess to o
, 26 portion of UP W s long distance transuission for all 27 power entities with a ocepleted contract for sale of 28
, , . . . - . - - _ . . . - .,_,._._,,,_n..,,, , , , , , , , ,, . - ., , , ~ ,
M . 0@. 11817 C WASH LO P,3 l' !! 1 bulk electricity through Utah at one of UP&L's 2 interconnection points with the Desert Southwest and 3 g southern Nevada. 4 ii 5 Q Does the proposed condition meet that eriterien? 6 I. A. Yes. 1 . 8 Q. Your second criterion it that the merger condition 8 should make actual access to the UP&L oorridor by any 10 competitor contingent upon buyer selection of its l 11 offerings in competition with other potential sellers, 12 I as evidenced by a contractual commitment. What is the 13 l ! purpose of the criterion? 14 l A. This criterion provides a kind of market test in that 15 each seller must be selected among ocapeting alter-I 16 i natives. Only the es11ers which successfully negotiate 17 electricity transactions can obtain sooess. In this 18 sense, the sellers which obtain sooess are { 19 I sospetitive?y selected. 20 21 Q. Does the proposed condition meet your second criterion? 22 A. Yes. Only sellers which osaplete transactions with 23 buyers at one of the intersonnections between UP&L and 24 California, the Southwest, or Southern Nevada will be 25 eligible for access to the UP&L oorri4or. 26 l 21 28 1 I
m o n .; e m u - - - - - p,, l [ l' 1 "! Q. Your third criterion is that the condition should 2 l provide enough capacity to ocepetitors of the merged l 3 ll oompany to assure efficient transactions, but not so 4' auch as to force inefficient transactions. Please 5 explain this criterion. 6 A. ' In a free ocapetitive market, the shares of individual 7 ooapetitors result from the free choice of buyers on a the basis of prios and quality. Because of the merged 9 company's sentrol-over transmission, a free market 10 solution is not feasible, but it is feasible to improve 11 upon the performance that would result with uncondi-12 l tional approval of the merger. By allocating an amount 13 to osapetitors that assures buyers sooess to efficient 14 l offerings of sellers, while retaining an allocation to 15 . l FFAL of sufficient espacity to preserve an opportunity 16 forbuyerstopurchaseitsefficientofferings,a 17 condition should approximate the effiolenoy of a free 18 market as closely as possible. 19 1 20 9 Does the proposed condition meet that eritsrion? 21 1 A. The proposed condition meets this oritorion as well as 1 22 it can practioally be met. 23 24 Q. Now have you determined that the 300 set alloostion 25 asets your oriterion of alloosting only the 36 economically efficient amount? 27 28
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F. 1 A. The amount of demand by low cost osapetitors of the 3 merged capacity for transmission through Stah is very l large -- undoubtedly far in ozoess of 300 apt. For 4 example, witnesses Miller of Montana Power and Crowley l of Idaho Power have testified that they are currently seeking to market over 300 m of firs saposity alone, 7 and hundreds of let of nonfirs power will undoubtedly also be available from just these two systems. When thesuppliesofothermajorsystemssuchsoWWFare added, it can be seen that the allocation of 300 Inf is l unlikely to be excessive relative to the quantity of g low cost bulk electricity available for sale by leading g competitors of the merged oospany. PPaL's Business Plan (3xhibit (WRI-7)) g projects that the merger will produce, in the next few 16ll years, 650 MW of increased bulk electricity intertie sales into the Southwest markets. If this is 18 realistic, then, even with the osadition, the merged g ; I sempany should retain suffielent UP&L trancaission to be able to ocepete for at least 350 set of these sales. g 1 And, of sourse, the merged company is in an aseellent P081 tion to 18eresse transmission oapacity as its needs 23 g dictate. 25
- 8 8 Pr 8B Or Priority of fira p los of over 26
"'"fI'" "'*" "hL' 1"A'"Y 27 A. Yes.
i A 19% P.6
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I ! i 1 l 1 0 Please explain the rationale for the provision. ; 2 A. As I have testified in Section IV, tira sales are l
' generally a much more valuable use of transalssion tt.an 4
nonfirm sales because they usually provide for 5 I disp 1soament of espacity as well as energy and because s i firmness has value to the buyer and imposes oosts on i i 1 the seller. 8 9 Q. Your fourth criterion is that the merged ocepany's 10 l ocasitzent to efficient and reliable oustomer service 11 and its existing contractual ocasitaents should be 12 l protected. Please explain how the eriterion relates to 13 economic efficiency. 14 1 A. An electric utility's commitment to reliable service to 15 i l its retail and wholesale ' requirements oustomers has l
- l 16
! very high value both in its public interest standing l 17 l before regulators and in the market as reflected in customer willingness to pay. As the uses of transmis-1, aion of highest value, these ocasitsents are the most to economically effielent use of that transmission.
21 Existing bulk electrielty contracts also receive 22 priority in the economio officioney batting order, 23 because the value of any bulk electricity transaction 24 depends on the understanding that the esatractual 25 coenitsent involved will be bonered. 26 27 28 f
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l 1 0 I! Q. Does the proposed condition meet the criterion? 2 , A. Yes. Based on Mr. Durick's testimony and FPsL's own 3 j projection of the merged company's sepacity to transmit 4
! power to wholesale customers in the three buying areas, 5
it seems clear that an allocation of 300 IWf will not , 6 impair the merged oonpany's ability to use its own j 7 l generation to serve its requirements oustomers reliably and efficiently. Furthermore, I as advised that in 9 response to Data Request IP/MP 36, UP6L stated there 10 are ao contractual commitments of transmission espacity 11 Southbound on the UFsL system that pre-exist the 12 l merger. 13 14 Q. Your fifth criterion is that the condition be clear, unambiguous, and administrable. Why is that criterion 15 , 16 important? 17 A. It is important to have clear guidelines so that buyers 18 and sellers aan act with confidence under the rules to 19 which they are subject to and so that the merged 20 oospany and its ocepetitors do not get tangled up in 21 disputes rather than eensentrating on the business of 22 In
- producing and selling electricity efficiently.
23 addition, the FERC must be able to administer the 24 condition within its established framework of opera-25 tion, without frequent bearings or requests for 26 decisions. 27 ,
. 28 1
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', Q. Does the proposed condition meet the criterion of 2 i ,i clarity and administrability? ,
3 A. Yes, it does. The amount of alloestion.te oespotitors, 4l the first-come-first-served rule, the requirement of 5l completed contracts, and the priority to firm service 6 are all definite and elear. Overall, there are likely 7 to be few ambiguities calling for fut,ure interpretation 8 of the conditions by affected electric utilities or by 9 FERC. 10 11 Q. Your sixth criterion concerns incentives for new trans-it l! aission. Please explain that criterion. 13 A. It appears that the ocabined demands for transmission 14 in the UP&L eorridor by the merged ocepany and its 15 eespetitors are likely to esseed the available transfer espacity. Unless the merged company and its sospeti-17 tors can gain from increasing the transfer espacity, 18 the capacity will continue below the economically i 19 efficient level, and assess by sempetitors of the 30 merged. company e111 only be feasible through allesa-21
, tien. The most important ineentives of eencern are l 22 those of the merged company because of its strategic l 23 position in sentrol of the corridor. Because it aan 34 expand transfer sapacity inerstantally by modifying its 35 system, it is in a good position to add new espacity in 26 31 28 .
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" materially less time and eften at less cost than a major new line would take. The extension fres sigurd 3
to Nevada is an example of such incrosental es' tension, 4 The Business Plan of PP&L (Ruhibit (WRX-7)) and other internal reports indicate that the merged company has set a bulk electricity marketing target of about 650 MW, and it is also clear that it intends most of this bulk electricity will have to be delivered through the UP&L system, because available cacess g l Pacific Intertie capacity Sannot be espected with confidence. Evidently, PPsL aspects either that the j UP&L transfer capacity is ample already, .or it espects l to expand its transfer capacity incrementally. Absent an incentive to expand transmission beyond its needs, the merged ocupany is esite likely to add just enough oapacity to meet the needs of its own system. The required allocation of up to one-third of any added espacity to eespotitors should drive the merged oospany to build more transmission -- to build
. enough for itself as well as for others who have'been able to contract their own lines.
g Competitors are met as able to add espasity through Utah. The lines proposed and announced as possibilities thus far are high-capacity, multi-utility projects. Some of these are realistic prospects, and the merger conditions should not disoeurage good, new projects. 1* --c _-- - . - - - , _ . , , . - , r--.. . . . . , - _,.-..,--,.,_,n.., .-... .,. .. _..._._... ~._ . --... ,--__. . . - _ . _ , . _ , _ - - - .
n p l l l What incentives are present under the proposed merger ! l Q. 3 condition? 3 A. Under the proposed merger condition, the merged oonpany 4 has an increased incentive to espand so that it een add ! 5 espacity for its own use. Note that the alleestion of 4 300 MW to competitors can increase by no more than 33 percent of the amount of any espansion. This, in my 8 opinion, provides ample incentives for the merged 1 9 company to increase capacity: while not rewarding the 10 serged company for underbuilding future espacity. l l 11 Competitors sentemplating new transmission lines 12 now have a strong incentive to obtain much more than 13 300 MW. The opportunity to sempete for part of the 300 , 14 MW, or the incrossed allocation if the merged company 15 ( expands its transfer capacity to the buying areas, 16 ' should reduce thsir access probles, but it will not 17 I resolve their long-tera need. Rather, it will Duy them 18 time to build their own lines where it is cost effee-19 tive to do so, but I doubt that utilities now seriously 20 interested in new transmission will abandon those plans , l 21 , because of the proposed condition. l 22 l Q. Your final eriterien is that the senditions should be 24 phased out if the eenpetitive environment changes in
- the future so that the tenditions are se lenger needed 26 27 28
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1, '! i l 1 to avoid the oospetitive problem arising from the . 2l.I Does the proposed condition meet this l merger. 3li criterion? 4 A. Yes, it does. The condition provides that at any time 5 after the merger has been in effect for five years, the 6 serged oospany any petition for a FERC review of the 7 oospetitive situation so that the condition any be 8 modified or terminated. 9 10 Q. What is the significanoe of the five-year period before 11 allowing the serged company to petition for FERC 12 review? 13 A. It is likely to take at least five years for 14 l 3 competitorn to oceplete a major transmission link to 15 I reach buyers in california, Southern Nevada, and the 16 Southwest. 17 l 10 Q. Why does the proposed oondition give priority to firm over nonfirm transactions? 20 A. It is necessary to provide clear guidelines in terms of 21 * $ immediate short term, aonfire use and looger ters fits 22 use. Because of the different product content of 23 monfira versus firm product offerings and because the 24 firm contrast duration is usually many times.as long as 25 the sonfirm contrast period, the issue of priority 24 sannot be made on prios. Bowever, it is a reasonable 27 rule of thumb to assoaiste firmness with the value of 28 s
. - - , . . , . - . - . - - . . , , , - - . - _ . - - . - - . - . , - . . - _ - - - , - - _ _ . . . _ _ . - - - _ - , - . - - ~ ~ - - -
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. 1 il '
the use, because most intermediate to long term bulk 4 l electricity is used by the buyer not only to displace V: energy but also to defer capacity additions. There may l 4 be exceptions in individual situations, but in the 5 main, intermediate to long term firm transactions are 6 likely to have higher value than nonfire transactions, with the emosption of emergency assistanoe, which
' receives priority under the proposed condition.
9 As a practical matter, 2 do not espect firm hulk 10 electricity transactions to clais all of the available 11 j transmission capacity in the Utah corridor, because 12
! only a limited amount of firm capacity is likely to be i
13 l offered, and buyers will not select all that is j 14 offered. Access to trar,saission sapacity south of Utah 15 l 1s much easier to obtain on a nonfirm than on a firm 16 basis, and that factor will limit the capacity that can l 17 be earmarked to fita power and energy sales. Il l 19 Q. In his testimony for the merging eenpanies, witness 20 Veri Tophas has presented a new transmission service 21 policy for the transaleston facilities of the UP&L and 22 pFAL divisions of the merged soapany. Are you faallist 23 with that policy? 24 A. I have read Mr. Tepham's description of the policy on 25 pages 19-22 of his testimony. 26 27 28 l
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!i j - es -
1
, Q. What are the essential features of that policy as it applies to access from outside the integrated service area of the merged oospany? .
A. As I understand Mr. Tophan's description of the policy, 5 c i the merged osapany would grant transmission service 6
,from inter..onnections with others from outside the integrated servios area provided that the servios would not impair reliability or "deprive, without osapensa-ting benefits, the (UP&L) Division's customers of the economic benefits associated with the Division's use of the facilities." ('topham testimony, pages 20-21) . It is clear, from this testimony and from the data request response referenced below, that the merged ocapany considers its een wholesale sales to the Southwest as a "use of the facilities" that would take priority over transmission service. Indeed, the Applicant's have l stated that under the new sooess policy, before granting access it will consider "the extent to which the requested servios will sause the merged company to forego present af, pamanahiy annanted wholesale sales opportunities." Eshibit _ (WRE-13) (emphasis added).
24 Q. Would this proposed traftsaission policy, if adopted as a sondition'of approval of the merger, alleviate the need for the oonditions that you have receemended. A. No. 20
E . g7 - l 1
,O. Why is this policy not a solution?
A. First, and of fundamental importance, under the proposed policy transmission service would be made avallable to the meree6 senpany's soepetiters only 5 after PP&L had fully utilised the UP&L system for its 6 ewn sales to Southwest markets. Only the transmission 7 espacity that is lef t ever would be available to any of the PP&L's sospetitors. This.would be essentially 9 useisse for long-term firm transactions, wh.leh require 10 planning ooordination among the seller, the trans-mitter, and the purchasing utility. The pending 12 transsetion between PP&L/UP&L and Nevada power Company 13 is illustrative. Nevada Power, the purebser, proposes 14 to ennstruct a new high voltage line to interconnect 15 with UP&L, and the line is being financed and son-16 structed on the basis of a long ters fira power sales 17 eentract. Claarly, the utility with priority to use 18 the intervening transmission system has tremendous 19 - advantage in negotiating such transactions; a purchaser 20 is unlikely to invest resourses in soordinated planning 21 and lengthy negotiations with a seller whose ability to obtain tranasission is problematisal at best. Indeed, 23 even where a seller such as slantana power succeeds in 24 negotiating such a transaction, PP&L is positioned to take the deal away from it at the last soment, as the 26 27 20 l s
.-...,__.--.--,--,.,,,..._-,._,.wi..,-,-r. -m,_-,-y . .e-
I-j; a li II ' evadence indicates actually happened with the Nevada 2 ,l Power transaction as soon as UP&L and pF4L agreed to 3
', merge.
4 Most of the anticompetitive effects etsseeisted 5l with the proposed merger result fros 774L's obtaining 6 preferential assess to the UF4L transmission system. A 7 transmission policy that merely addresses how the e leftovers will be apportioned after FFAL's appetite has 9 been sated does not effectively address those soneerns. 10 11 , ' O. Do you perceive other probless with the merged 12 I company's proposed transmission policy? 13 A. Yes, the proposed policy provides the merged ocupany 14 1 with broad, subjective discretion. For example, the 15 i
! policy suggests that the merged eospany would forego 16 its own use of transmission for 'eospeting benefits."
17 Rowever, the merged eenpany would be the sole judge of 18 the value of economic benefits foregone. It appears 19 that the serged aespany would not provide transmission 20 servios at all unless it were confident that the rates 21 were high enough to sever its judgment of the value of 22 business opportunities foregone. 23 24 9 In your opinion, would the new polier provide a solution to the competitive problem arising from the 26 serger? 27 A. No. 28
7--._------_---- i ! i 2, Q. Please state the basis for your answer. A. In practice, the operation of the policy critically depends on the merged company's unilateral judgment of the value of business opportunities fotogene. If opportunity oosts were marrowly construed to include
,only true ooonamic posts, then the policy sould allo-sate the company's transmission resources efficiently.
Bowever, the business opportunity value of the trans-mission is likely to excesd true soonomic oosts because of the strategic considerations I have discussed i earlier in my testimony and which are reflected in the I merging company's strategic planning doousents in particular, the value of avciding osapetition or protecting pretits arising free market power over transmission. In short, the merged company is likely to define its opportunity costs to deny access unenever denial suits its business objectives. Perhaps the most telling indication of this is PPAL's internal plans and analyses of the benefits of the serger. 'Fhese doouments project very large increases in pFAL/UPAL's revenues from wholesale sales, but no significant increase in transmission servios revenue. It is olear that the merging osepanies, in their own planning, do set espect to provide any material amount of transmission servloe following the margar. 20 l'
l' - 100 - li I 1
!9 You have already testified that UP&L has been 3
extracting high da 3 313 margins in nonfira energy l based on its market power of transmission through Utah. )
! Now then does the merger create shanges warranting I
S reseJy in this proceeding? l
. A. The evidence sited in this testimony that the WP6L was 7
beginning to respond to market and regulatory forces to e allow greater aooess to its systes for tira j 9 transactions and was talking with a variety of Northwest sellers to make fira paskages of power. 11 After the merger proposal, the door to UP&L's l transmission path is was slammed shut. 13 14 i Q. Mr. Topham, at page 23 of his testimony' refers to some 15 proposals by intervenors in this proceeding as amount-16 ing to an "open assess" requirement. Does this 17 eritieles apply to the conditions that you have it recommendet?
' A. No. The condition that I have roonamended provides limited transmission rights, which are designed to 21
,' saintain a reasonably equal footing between FF6L and other Worthwest utilities who are sempeting to sell 23 bulk power and energy to Southwest sensuming areas. As 24 such, they are feeused marrowly upon ame11erattag the !
25 restrictive impaat of the merger en osapetition for 26 bulk and energy sales between these reglena. ' 27 38 p
f e i li a 101 - l'j 1! Mr. Topham has testified that "tals a general pro-2;j9g position, the suggested conditions (of intervenors) are 3 I j unacceptable. Do you care to comment? A. To the extent that the merger is justified by effi-5 . elencies, that is by producing the same amount of 6 electricity with fewer of soelety's resourses, the conditions that 3 have recommended should not interfere s with the achievenant of those efficiencies. Indeed, 9 the merged company should have no diffleulty selling large quantities of bulk power and energy into j southwest markets, provided only that is able to 12 ; compete on the merits of its efferings. The conditions 13 j i should do nothing more than prevent pp6L from obtaining 14 a competitiva advantage over osapeting sellers based on 15 j market power rather than efficient performance. If the 16 ability to increase profits by restrieting sospetition is essential to the feasibility of this merger, then 18
. the merger is not in the public interest.
20 VI. REspount to um. rannon's enaTimony 21 Q. Eave you' read the testimony filed on behalf of the 22 Applicants by Dr. John Landon? 23 A. Yes, 1 have. 24 ; j 25 Q. Did he sonduct an analysis of the sempetitive tapacts ( 26 of the merger in the bulk power or electrietty area. 27 A. Yes. 25 r ,
- &*3 - 1 ll
{ 1 Q. What is his central conclusion from that analysis? 2' A. Be concludes that the merger will act have any adverse 3 effect on competition in bulk power markets. 4 . Sl ' O. Does he define markets? 6 A. Yes. Ils product market in the bulk electricity is 7
"bulk power." "Bulk power" in his product market i e
consists of electrielty and transmission bundled 9 together. Ils four geographic markets for bulk power are the four WSCC subregions. 11 12 0 Is Dr. Landon's bulk power product market relevant to 13 the many oospetition issues raised by the merger. A. No. The competition issues in the merger are to a 15 large estent vertical and sonoern the sempetitive 16 effects of control over transmission. ' Bulk power" 17 sight be a relevant product market for analysing the offeet of a purely borisontal seasure on oespotition among utilities who generally provide their own transmission. Bowever, what is mainly at issue in the 21 proposed merger is sooess to transmission paths by utilities with no transmission to distaat markets 23 aseessed by those paths. to analyse this versioal 24 1 s issus, it is essential to analyse transmission and 25 electrielty as distinct produet markets. 27, 28
- nos - l 1
Q. Are his geographic markets relevant to this case? A. Mscc subregional data is helpful information, but
,ll simply adopting the four subregions as markets focuses 4
on the wrong market areas for analysing both the transmission and bulk electricity issues. The markets are overly narrow in the sense that the main flow of relevant bulk electricity trade in WSCC is inter-regional rather than within each WSCC subregion. The issue of assess by competitors in bulk electrielty markets is primarily inggregional, yet Dr. Landon hse chosen to focus on markets that are ingzaregional. 13 Q. What is your opinion of Dr. London's analysis of the effects of the merger en bulk power market seneen-trations, using the Eerfindahl-Birschman Index discussed in the Department of Justice alarger Guidelines? 18 A. That enalysis addresses a horisontal eensentration question in bulk power that, la ay opinion, is met an issue of eeneera. The horisestal area where there is a problem is the transmission area, but his horisontal analysis uses electraetty asasures. 24
<0 Are vertical l'esues addressed in the Department of Justice merger guidelines etted by Dr. &anden?
27 20
- 104 -
l l l l
- 1) A.
, Yes. These guidelines state that a vertical merger 21 h involving a regulated firm can have antiosopetitive 3"
effects of the type discussed in Section IT of my 4 testimony. Dr. Landon, however, discusses saly the 5 horisontal portion of the guidelines. 6 7 Q. ses Dr. Landon used his defined markets to analyse the 8 vertical issues in this ease? 9 A. Eis market definitions are used only for the horisontal 10 concentration analysis 2 have described. Eis product 11 definition masks the vertical issue, which he does. net 12 treat with any analysis using his market concepts. 13 14 Q. Does Dr. Landen oossent on vertical integration? 15
,A. Yes. Es stated that the merged eespany's incentives to 16 purchase low eest energy would be the same as UP&L's 17 pre-serger incentivas.
18 19 Q. Do you agrate? 30 A. No, 2 40 Act agree. I have testified that Dr. Landen 21 - relies on a theory that assumes me public att11ty 22 < regulation. He presents no other basis for his een- l 33 l olusion. I have testified estensively to the evidence l 34 that the merged firm has a strong imeentive and 25 epportunity te profit by escluttag sempetitors from secess to its transmission. PP4L's own plama'ing 31
.etudies and PP6L's post-marger behavier reveal the 38 e . , . . . - - . - . _ _ _ - - - . . - - -_n__.,-.. , , . _ - , _ - . _ , . - _ - - . - , , _ . __-.._ __.---
l 1: 1 - los - 1 1 motivation to prefer PP6L bulk electricity ever that of \ 3
; ocepetitors. My own analysis of the effect of regu-3 f lation on the merged esapany's motivation to esclude 4l oospetitors from accese is sensistent with the observed 5
behavior and planning studies of pF4L. Dr. Landen has 6 not addresse6 any of these indications that the merged 7 . soapany will be strongly activated to reduos purchases e from competitors below tlc pre-eargin level. 9 10 Q. At page 35 of his direct testimony, Dr. Landen has 11 i stated that the combined utility will est be in a 12 i
! position to charge higher priees for Northwest energy 13 I than UP&L san do pre-merger. Do you agree?
A. No. The only support Dr. Landen gives for his state-15 sent is that UpaL, itself, will control the same 16 l transmission post-sergei. Re has rejected the possi-17 bility that the merged esapany would have an ineentive 18 to emelues eenpetitors from assess, because he has 19 relied en the econouis theory of an maregulated firm. 30 secause.be does not believe the merged eenpany has any 31 season to $1seriminate in favor of ptaL bulk eles-22 tricity, he has set testified to the market remities-23 tions of such discriminatten. In my testiseny I have 24 analysed these market ramifications and escaluded that market prises of bulk electricity, partiestarly for 27 38
,1
;; - los -
I II firm intermediate and long term contracts, will 2k 1 3 ,' increase. That is, the prises charged by the merged
, l,I company and other sellers are likely to rise.
1 5 'j i Dr. Landon has measured pF4L and UP&L shares of trans- l 6 lQ. l mission (transfer sapacity) between the Northwest and 7 other W8CC subregions. What is the releva.nas and accuracy'of those sensurements for analysis of eenpeti-tion issues. A. The acasurements presented by Dr. 7< N an are not an indicator of the merged esapany's sentrol over trans-p mission paths from the Morehwest to destinations in g other regions. Witness Durisk has sesessed in his I testimony the possible.routse out of the Northwest and I the market positions of the merged soepany. Se points l out, sorrectly, that the shares presented by Dr. Landon understate the positten of total transfer espacity that will require permission of the merged eenpany for 20 access, because control of transfer espacity within an area san block secess to the transfer peint. g , More basically, eccess to a transmission path is a
,3 matter of finding a route not already committed to prior use. Witness Durick's realistie line-by-line assessment prodgees a far more soeurate picture of the actual transalsalon market positien of the merged 27 28 i
li l lj - 107 - 1,lI company than Dr. London's share calculattens made 2] 3 without elose emanination of the alternatives faced by 4 buyers and sellers in trying to seguire a viable path. 5 I s 0 Dr. Landor, has stated that it is appropriate.for W4L y and the merged eenpany to receive "rents" from buying a nonfire electricity new and selling at auch higher
, market prices. Be states that UP&L ratepayers deserve ,
10 these rents as a reward for the risks they have borne 33 as a result of UP&L's investment in transmission. Do 12 9 you agree? I 33 A. No. I do not agree with either proposition. I shall 14 discuss each in turn. Whether it is appropriate for j 15 M6L to sharge large rents for its transmission @ nds en whether the inoese in question is a true rent -- 16 j 17 1.e., a market elearing prise for a naturally soaree 18 resource -- er whether the tasone is derived from g, market power, where any searsity involved is subject to the sentrol of the fire estrasting the ineone. It is 20 21
. ?lest to se that market power se the main enroe of 22 UP&L's tents. They are sonopoly profits, not rents as 23 this ters has traditionally been seed in ecomente 24 "h*Y' 25 Dr. Landon's proposition senserning risk-bearing as is a rule of thumb'ef his own invention. It has little l
27 to do with economies. The returns from spaL's nonfira l electrielty market activities derive from a strong 24 i ,
\ 1 1
. I
- 108 -
t I 1 position of market power.' Customers of the generating 2 l entities who have sold nonfira energy to WP&L at auch 3 .i 1ess than the market prios also took investeent risk 4l for large outlays on generattag capseity. Se a 5 888petitive market, needed risky investments in 6 generatien would be made and the say1'left wheellag 7 ,, sharge would include only sosts, instuding suffielent 8 return to risky espital. It would not inelade monopoly y pretit. go 11 Q. Does that eenclude your testimony? 12 A. Yes, it does. 33 14 15 c , 16 17 il 19 20 21 13 34 25 Si 21 t 28 I
, ~,
UNITED STATES OF AMERICA SEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & L11ght Company ) Facificorp ) Docket No. RC88-2-000 PC/UP&L Merging Corp. ) CONFIDENTIAL EXHIBITS ACC0KPANYING , PREFILED TESTIMONY ) OF 1 WILLIAM R. RUCNES l l ON BEHALF OF l MONTANA POWER COMPANY
' AND l IDAHO POWER COMPANY i
February 12, 1988 4
____m_ _ _ _ - _ . _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ __ William R. Hughes Exhibit No. ~~~~ (WRH-1) Profiled Direct Testimony of William R. Eughes Exhibit No. (WRH-2) Department of Justice Preliminary Analysis of Competition in the oil Pipline Industry. Dated May 1984. Exhibit No. (WRH-3) Net Imports of 3ulk Electricity Trade by W5CC subregions, 1986 Exhibit No. (WRH-4) Northwest Interregional Bulk Electrucity Trade by WBCC ) Subregnons, 1986 Exhibit No. (WRH-5) Californ_la Int'erremional l Bulk Electr:, city Trade by W3CC subreg:,cns, 1986 Exhibit No. (WRH-6) Artsona-New Mexico Interregional
- Buhk Electricity Trade Exhibit No. (WRH-7) Pacific Power and Light'a Power Supply Business Plan. 1 Dated October 1987.
Exhibit No. ~~~~ (WRH-8) Pacific Power & Light Pramorger Appraisal of Utah Power & Light DatedWholesale April 27,@1987.portunities. Exhibit No. (WRH-9) Pacificorp's Accuisition Analysis of Utan Power 6 nisht. Dated August 12, l
. ,917 . l Exhibit No. (WRH-10) Pacific Power & Light Company Wholesale Power Market Study l
-An Analysis of the wholesale l Electricity Market in the !
Western United states. Dated October 1987. Exhibit No. _ (WRH-11) Prooosed Transmission Condition Exhibit No. (WRH-12) Applicants' (PP&L) Response ' to Second Joint Data Request Number 65 of Nucer Steel and Amax Magnesium Corporation.
, a p gg 2-Exhibit No. (WRH-13) Montana Power Company Memorandum
.l Dated April 21, 1987 Regarding !
Discussions with UP&L Transmission Planner on April 14, 1987. Exhibit No. (WRM-14) UP&L Outline of the Benefits of Participation in WINUl!. Exhibit No. (WRH-15) Pacific Power & Light Internal Memorandum Dated March 26, 1987 Regarding March 23, 1987 Meeting with Utah Power
& Light.
e i .
, , W. tdE)
COMPETITION IN THE CIL PIPELINE INDUSTRY: 1 A PRELIMINARY REPORT l 1 Antitrust Division Departnent of Justice May 1984 l l l l ISAN0 POWER /n0NTANA POWER I EKHlklT NO. WRH-2 FERC DOCKET NO. EC84-1-000 WITNEll: William R. Hughes
- - - - - - , , . . ...---..-n. - - - - - - - - --n
FEB 84 '8811:31 HILW L46H DC P.30 I
- I
- 22. ASSESS 2WG THE DEGREE OF P2PELINE MARKET POWER AND THE RATIONALE FOR FIPELINE REGULATION j
In order to assess the degree to which a particular pipeline possesses market power, it is necessary first to define its relevant origin and destination markets and to examine the structure of competition in them. As with the current regulatory regime, we take these markets as we find them, even though they may have been shaped by that regime. The basic principles used by the Department to delineate market boundaries (both product and geographic) are set forth in detail in its Mercer Guidolines. M/ Applying these principles to oil pipelines, the relevant markets can be determined by considering, with respect to each in a series of groups of products and geographic areas of increasing size, whether a significant price increase would be profitable for a hypothetical monopolist of those products in that area. M / The smallest group of products and geographic area in which a significant price increase would be profitable M/ 2 Trade Reg. Rep. (CCH), par. 4501-05. M/ For origin sackets, the relevant test is whether a
-[gnificant s price decrease is profitable for a hypothetical monopsonist in the area.
6
MG &N MEETING OCTOBER,1987
)
l I
i i
ISAM0 POWER / MONTANA POWER EINillT N0. tAtM 7
) FERC DOCKET #0. IC44-2-000 l Wl111ttle William R. Hugh s j
- 00NFIDENTIAL ,
1 -
=~
pg ===== l 4 i l
v1RTWJ'M:FTgThty Otw m Lc; P.42
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CONFIDENTIAL l SUBJECT TO PROTECTIVE ORDER POWER SUPPLY BUSINESS PLAN l Wa ; l l 1 2 DGCUTfvE
SUMMARY
I 3 SUSINESS FURPOSE 4 i 00.41 5 CU1ULEST MA300r75 11 FUTURE MARXITS 15 14NG TERM GROWTH F11LATEGY II
. OPERAT1NO M 19 ORGAN!ZAT10N 20 CRmCALR25X3 ANDPROB2MS
' 21 FINANCIALPLAN l APPRO ACH TO THE EVOLVING F0WIR SUPPLY ) M l AND POWER DISTRBUt10N RELA 110N5t@ j , 1 1
'AFFENDIX -
PROFORMAFINANCIALSTATEMENTS 23 l I AND ASSUMPTIONS j . I 2 1 l l L- ._ _ . _ _ , _ _ _ _ _ _ _ _ . _
CONFIDENTIAL umuus PS mama l SUBJECT TO PROTECTWE ORDER PowWsuPP ygyg EXECUTTYE5UMMARY De feedee of the Power Supply bustaan is a prodds bulk
- servlees alarge l esaurs. ElesvWty l alearicity diaributes and special lerp neers ensk as lad assial and by maam of esorneloal arte and unaD seale plans,and purobasedfrom
, is stammsdos Mees,andis provided l producers. h is delivered to customers over high es ibe basis of insmanneous demand (M requirements), askeduns (Arm salas),er as avenable (spot). Cunutly, Power Supp Distribudoe and sales e eqbsr y's martes dissibutors (usiihies ers both for primar0y)PnD short arm bulk power Requiremens said mies primarUy on the spot market and iona biosks e(power sold en a essetet hans. The most danificant change la the eveMag filmionship between Power 5 and Duribuson hu been on invaductice of a femal vensfafprice fe Power Suppl; s servleu. In the fatws, Power Supply expecs e aerodass both wies and servios prodslons of saes a Distibudon, esasition m iens than M requiremmes servios e much like other w wissale customers. A Paci8e Poww Diselbution la possibit, on tbs needs of DiseGanien and Dissibution's shart from 1005 is bis, but itis ahernadvss. This means that some decreans la saported that ibe ausfer prices in the above furones wiB aDow Ptrwar 5 mvenin Dissibuton's slectricity requirement with 11tC4 or ao market short sh 1992.
- %s jwimar/ market for 36olesale sales is Ca11tarnia and Southere Nevada. Assuming the merger and su &W rsasaluice imprwoesats art suesessfully som pissed Power Supply's arget is an addinoot! (& MW of Arm wholesale nanes by 1992, over sad a avs curteady signed sonricu.
31gnl8sant changa are underway le the electric power lyladmity which wCJ open new marksu for the power supply business. Dess changes wiD tan a differsat approach a market siructurs. Given them factors and the changes in market access ils the Utah merger provid.n, Power Supply wiu rwise its most recent markedag plan. A Power Supply seity is na evolutionary concept that needs serious considertSon before ma)er corporna resruesiring is sonietglated. k is not clear at this tkne what the best roladonship is borwona the Power Supply and Disribution funcians of Pacine perwer.
?
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COMRDENTIAL m ps m SUBJECT TO PROTECTIVE ORDER pp.=sappiysui.euran Oseber.1987 l l - l BU5 NESS PURPOSE l bulk o' # # envions
'!% feedon of the Power Supply business is a sad sousneuldesamm. EleceWrymisrge elsonicity esributors and speciallarp seers see as is by means of www*al . age and und.seale generndas plass, sad peruhued from producers. k h dahmud e cuammeri over kish vahags sananladen llam, en en basis W innanmaeoes demand (te requirassen), sevance scheduns (are anos),
avsihbis (spa). eleonicity thus the Poeur Supply Tbs FMplbene8s that ennemers sein tom seanent % besiaen are high ralhtery and bish quality, momed a Power Supply's key compettive edysatages include tu sesses a velous ele sooross, is ancity e dalivw large blocks of eleasichy a everse necedoes, sad ha shilky and package power salm in onnenes that enhance oesmeer Sositsity. Power Supply controh its prontatsity by managing a cont (' males ot hey succe e produciag electrietty at ooses lower than marks prises and winstenssion facilines e sahdag neceu a uleet cumeeers ord suppliers, through sersargic tavesen ornoencialarringemens
- emetently scheduling, dispanhing, sad sachanging resources yfrom curretty, and Iw the forweable funn, earniam saa in apwed = eena Power ful utremeemsalese es1 Hag large volutass of sleesicity la full or asety ldes, ce Srm mies to otherudliddes art Distribunce and in block osernet sales se other mil and are expected toimprove currently comparsbla e margias ce saks e PactSc power over the long term.
P Pap 3
l CONFIDENTIAL. usuut PS aunut l SUBJECT TO PROTECTIVE ORDER rewwsupplyseinenrien Osder,1987 l
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ooru
- 1. Incream Pull Requiremenu Power Revenues trea 8718 eDos is 1988 m $777 musonin1992. I
- 2. Orow Purital Raquiremsas Esvesnes e asseunt sur 235 of ami svenons by 1992. I
- 3. Malatain connant sunsfer price o Power DissGuion our the Svs year parted.
- 4. Achievs sa over 11 mean ce naass o( 50 buls poins above weigtned average aDowed renen.
1 I
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CONFIDENTIAL. MENE P8 munut PowwSupplyBalmenPhn
'M' 7 TO PROTECTIVE ORDER Oseber,1987 CURRENT h J A 4 C w n st! d e Distibu6cn andass eaqbst e f +p y's martes diaribuers (enlities toqbaretbrprimarcy) abort 4sra tok pud Raquirteses sold sales prisaarily as abs spre morta and g arm blocks e(power said en a sensen These markses can be summarised la ibis endias 9mn: i 1
l 70MRElPPLYMARXET5 I PACmcPoma MEIRW50lAALE54135 DISTRBUTION I I shanTanspos Lang. Term caract For these currsat mutets the following discussion of esch wS1 help enablish Power Supply's cesspective posidon. Fug Require-,e Sales to Padne Power DistrGnahm 1bsreladonshi betweenPower8 and Power Disdbudon is long manding but evolving. Power 5 y has hisericall fullre servios are a of earvices,quirements servios e Power Disributi each with anacciand cosa. Power earvices Bundled mestherin laanmansousload include sapacity and energy, shaped a seasonal and howty eenvol, at stardard INutosney, aD dispeched e each t of in whansysr amounts and volage are required. Power Supply has assmed utry and quality of sardos by mainmining ePmting femre aquusesna margias of and hinning rsservsa, and has provided long arm reliabiliry by ue ym M Whlis PedAc Poww DisWbudoni revesen have a an avwage annual rus o' mon than 124 sinos 1980, ensegy sales have grown a saly y above 1.2% over Its name period. So* taeressing prious sad lower so Wanos and growth (number of
- rani! ousumers grew at 3.4% svernas ensual ram fa L9% enly sem stess 1900)esavihand e abs depresand markst. This slow pewth la sales volems u espessed a easteen, aggssdag that Power Supply wCI be locidag for new amtsu e arideve in powik goals la ftase years, Pressady, Power Supply has ao ammpedari ersedyases Thus are two somoss of ver r mal indirest publispower soeversions Imana-L=, new fbrianden, or ledase al twintias). gamenesa er i' segmerulos by large ladmetal seasoners. This sospeddvs presses saa he asesud a hatus in to futes,s. SPA meteting lasreens to preseen ist PUD fannsdom, k addhion, over the loesurn tponer may eseli e sell so DiarGusion a tair eens tsooms mars compendvs Power suppl 's avoided cons, SPA la e foruddabis teagsder phen tu very low east et poner tem adsdag resowess.
This east advanage will likely be readnad as long as the Pederal syssem is surplus, perhaps through 0
. _ _ _ ___ _ - . _ _ _ . . _ . _ . _ _ ~ . . _
g g ,,, go x p', CONFIDENTIAL SUDJECT TO PROTECTIVE ORDIR - PS = = peww supply satamiPian Onober,1987 ihe ins 1990's. here is, however a liahad amount of feders! renowsee hat adsht be sold fbr IOU servios, so it b unlikely that a lage tec6an of ibe Power DiarQu6aa market could be served by BPA. hdependent power musliers art a new treed with unprovem rock moords. Most art primarQy pro. net developers Mih Wale et ausoessful operanas expertones. De is men manne matineisey seald rampespertones yif t asetet sendi6ons a aibar werepara ofibe favorsble soumry, hers. As long are onepedag with imbeded cost resourses, ) ladspendent producers wiD Ekaly sepswt no signL8 cent inenase la markst abers. Even when 1 provide a j avoided costs begin to tsSect the need for new retources, these seap*odets can lumlad rang of power supply servlees, with less relisboity and 4apa *7 tan in the i avuem servies. Accorillagly, Power Supply especa ocupediles but act a alp *-* - l b Wpoww suppued by ' -+ la the more disant funro, Power Dissibution een ad11:e demand dde aceM6ss as a competinve alternative to some e,f Power Supply's , g anlas from now. margin ! customers e hilh. margin customers. l l Mr4 eim e Me The moet ignificant charip in ibe evolving roladeaddp between Power Supply and :hsrtbunon hu been ibe introduction of a fannal ransfer prios for Power Supply's memost. Embodied in 64 curnat usaufer price an several important concepu:
. the roaster price is based on fbied, variabis, and reasmissies compooses e e e fixed component covers Power supply's budgetd Exod ooeu and resen on common r4tity lus Srm wholesale svenuss as appbed to budytod remD sales e the verttble component b based ee an avertse of budgeted inerseenal and doentnenal resource prices, Wludirig secondary purthues and sajes, u applied to budgend rouU sales
. (wwtal sales over and above Dber(budee's badgetad sales wS1 be #ced at the budpted My sales riae The able below shows the esdmated viaster prices for 1987 drough 1992, bued on the scently soap 1med Fyer plan.
FORzcArt or MANsrut Pax 2 coMPONons M l sedyt sales imminnen! 1987 33.50 17J5 1988 31.38 19.$6 1999 31,48
- 20.15 1990 31.66 2245 1991 31.11 24.00 1992 31J2 28.11 Page 6 l
m m wa w g g-- ---- _ e.4e
. . l 00VIDENTIM SUBJECT TO PROTECTIVE OCIR Es[O The ransfw prices shown above, wide not purely serist based, we wry essyeddvs with comparsWe Srm services evenaWe la the wholesah nortet. The lamensamt ennes mm h, of sowse, equal e Supply's forseast W eales prises. Taken gegaher, the Sked and vertaWe compocants coupers favoreW t wkb SPA's of NR asas over the ama tve .
These reladonaMpt betwese the Power supply sansfer pelos and mortes prises me in es ymphinnow. mills /kwh 40 1987 ille 1989 1990 199_1 , 1999
- E TP 4 useeted 5 sPANR Rate seine E TP . Ineremental B Nonfirm Market The transfer price concepts described above reprocent 6e coerset wrangoesnt, na de feture, Power Supply szpecs e esgotam not pries and servise provistees of sies a DlWbudon, enach Eke othe wholesale enstomers. A phased stamiden to less than fall requirsasan servies a Pacine Power Distribudon is poedWe, depennag ce the needs of Dieribuien end Due(buden's themadves. The deafh of any such transition wul ased a be part s(emy servios negadasions.
Because ibers is airsedy a clear endsnandby : ef te needs of Pomer DiMbelon, tese ofemering em Power l admin nudonawps ser es men part wal emedans a es fuen. As 5 enesomer is aniGnad, the Pmmideas of the Power heelnesswGleunblish own relancashipwl6bisPower soeurport such hat problemsla y aseds rt and addreiend. this appromen kk egemed tat Power Supply wGl omedans a provide Poww Disetoden feuorsouty M regeenmees I servtoa. ad
- ah m mad h Based on te essesanset ef tis mortet k b esposend tot te sale of eleceirtry to PactSc Poww >iesibutosi wl3 remain a about the esas inel as tressesty provided over the nem Svs years. This means that sees decnase la mutet sham Deus 1006 is poselbis, but
. h is aspected that es sonster prises in te above forssam wC) aDow Power 8 mresin Dlseritiunon's electicity requiremsat with linie or no mortet absrs erosien 1992.
Paat 7 1 _ , , , _ _ a.-,, ,.n__-
(@) M "(:12) lit 41 CCM WASH DC P.49 M" NFiDENTit,1. SQlECT TO PROTICME CMR P worSuppiy3.ine rt. m PS m Cumber.1987 he fouewing fenset of sales e Diss9pudon ewer tw ass: Sve years b based m ihe assumpden that Power Supply 301 provids Power Discreedon with 1005 Wits eleceictry needs everins 1988 92 period: I IXPEC3D SA123 TO PACIFIC POWER DISMIBUTION Assumed 5 of Vehens Revemos Madas (OWN) S 0 e ons) IM8 100% 21.346 091 IM9 100% 31,863 684 1p90 100% 32,333 707 1991 100% 23 M6 727 1992 100% 23.728 1004 Wbdesak Sales SMe huit De pru' nary market for wholesak sales is CnHfamia ad Soutbarn Nevada. Although imperu e 2 market have been la the range of 4000 5000 MWa ihmughout t%c 1980's,is alas has basa lumind by rusmission espab0ities and h poestially a large as 10,000 hfWa in the future without transmission senseninta. The current taasmission symem 6ansteins the poesniial for new firm saks e an sedmated 120M700 MW over the nest Sve years. Six major customers dominam e market.- 0 Southem Californla Edisse 0 Ped 6c Ons and meseic 4 Las AngelesDeperunentof WaaerandPower 9 SanDiopQasandElectric 4 8esresumeMunicipalUIchyDistict e NevadaPoweronapany l This uselet dona!!y been s esplassumet market, with pechoesrs avoidlag the operadag sessa of esponsive amis. A powing sagasal of this asnot is .
,_ king turu Arm purchaans that nuew to ad sensessdag asw m l
New markst apparamidos are is areas he are basinulag assaulhis to Power l 8 ly benenes ofin ransmisalon sysism, yin the Mounda and Mwas amas. ! E addi6 ens a tw ransoission symam, markse la Yeau and are a potsdal over the longerisrm. Past 8. 1 i
p.se I CONFIDENTIAI ' S'JBJECT 10 PROTECTIVE ORM amma PS -m Poww Sepply Business Plan Onshw 1987 l In toad, abeas kmg.asrm oppomaddes and earnet markats as possetinDy as larps as 20,000 MW. Queman As aceed alevs, major cuanmers are Isrge elsevictry dhaemors for sardai nquasmenn servio strher spot esta in sharense a lease.ere maswant manu. Whm is sanctivs e these cusacesri is am only gergodtive prios but the Asah0hy thes Power 1 can o6sr in eccones al arms . timing, sabGity,es.Pimer y me alsoremin in some auss,with tbs op6ca e me mies for daliwry a casamers.if abat markst offers higher esern. Wholesale cusemars toad a huy la abs spot landet as to basis of speamd veiable or produciles cost hours a weeks is advanos, but tend m essenssa forlossur term purchusa well V. advance of need. This lead time is driven by es sad sensawdos thne of. mates det long ure pwehams avoid. Por saample,la toesnt anles to California Edison and Sacramene Murdetpal Utility Dlseir. dalfysry beglas about two years he closlag of15e oneeset and runs for 20 30 years, uncke, h amt Tmna The smal media slas e(inarset a Power sur dy is expanding hasauw of unprimng viasmusion assou ahnraadves, and bueuse uGees in Iw CaXlamia market need to replace oldet pnersting ospecity. CaEferida currently has about 2J00 MW of e0 and fitud generuice u laan 35 years okL la tbs asst ten years. another 8,300 MW of sepacity reach mDemons. The CaHtomia nonArm m!as marks hu changed substandaDy over 6e last 10 years. As tbs Eluserslice below indicasst, paarulon ham ou and has been redened Dom about 80% of requiremsnu m 30% or less since 1979. Tall hu been replaced by increues in imports, suelear, and gemherma! . Pure imports increased hem about 3% of requitumenn in 1779 to more than 30% 1982 throush 1985. Even wish the decEne in gas prions in 1986, this genersdon wu reduced u more autfeer and Jaecherina) soms mi leports the dacesued in 1986 primaruy due to the inertues in suelear geothertaal, and improved h produCdon.CetDpared D the year. The rWDent ou and gas prios esp has tied a t efftCl oflowertal th4 prios itRperiad Boo $re PW9 huts, sal.Atht eserfma. Press to spenny Leae Sadofonte@eAN IEvAhh POWER AfmA 13 6,e g e < . ................ 1977 190s ...... ... . . 1....... . . . . . . . . li ... ; . =
" ma'
'10.90O l 3e,3ge<....... ...x :.-- :.... .. .
j t ' a.tti
; ee,eee< .. .. . ... . . .. . - i
< > a,944 l 4 3,3 3 3 < = . .... r = r r ,= = .: r- - .
\
80.000i sa ..*..**1 , 3,g g e owM e, - J e ente um Mppe tot lassar tag topm she. Osw
; seers amen summ I,
Page 9
^*
CONFIDENTIAL slum PS new SW~ SECT TO PROTECTIVE Oca pow., suppiy s d.,a Pan Oseber,1987 As noted earlier, the meal Califorth4eathern Nevada market is_ expeced a grow e about 10400 MW, as compamd wit 40045000 MW rangs daos 1980. A Cahfornia sarta sedy is currently being prepared a confirm the das of this market, and a help idendty estors that wdl la09enos te needs of customers in ilds markss. Wh Unlike tbs PaclSc Power DisrQation martse, the wholesale martes are highly invs. Venially every other supply sowasis a make salu. Cenefaly es oceisBP tot other Nanhwest and weststinties have surplu most resourass igniscant @bsmatially below asw conswoosion. wit oosts su Power Supply's wHeiive advarnages irminde:
- with respect to SPA mort Saxibillry la terms, betar long term assursacs of supply and mars stable pricing.
- with respect e others competitors, besar traanwdastaa acosas, and a larger and more diverse resourts pool fme widch a make anles, unka thm wi w While the whoisaals omrketis especed a powover the next sen years, u discussac abce,increadag Power 's market share wS! aao be an importans growth factor over the asst Svs year:,. Power ly aspects a sucesssfully incrosse its market shart as the irsad towartis Ices term firm sales ass,and by Q43 transmisdon accus throuah the Utah merger and sesagic transmission inwesases. Assunning the marger and 1ste Power Su ly's urget is an its usaciated additional 650 MWtransmisden of firm w L.,han urs secousfallysales cwisntlyby 1992,over contracts and Page 10
. CONFIDENTIAL. usuut P8 unum
.m.,,.10 PROTECTlVE ORDER S..., powersupplysat= urian Center,1987 FUMLE MMOGTS l
wtsch wClopen tww Signmcant change are nadwwsy la the elecek, power supply in abs coming yeen martsu for the power supply businen. 3pecific changes that sen la teclude
- Expansico of markst accou e cuber mWor power seppuers
- Newir4.y kr.:powersuppuerswClbecomemarsandve
- Dereguladoe et some aspects delecek nGry operadoes wG asse'
- Co;t ocopediveneu of new MWu wW leeresse in Ibs long surm
. Ucry industy consoBdsden through mergers and sequisidens Thess changes wCJ necessitam a d!Nerent yy, A e marks sewcars. Oiven dass factors and the changes in market acces that tbs Utah merger provides, power supply wW reWas in most ruosat marketing plan.
Based on these key simis, and tzpsrience la smallig sales a dats, ptmer Supply expecu in market structure e evolve such that the following market youpings wW ocendans the focus of l futurs marketing effers: j
- Expansion of oppemmitim to es11 m large a3ectricity dissibutors
- Dtfrersatiadon of services sold a large sleevicity dissibuurs e lacrsue in Isrp alectrkity user sales, y indusidal and lary commercial sala above 3000 kwinvo%g bypen oflocal tors e Brokerage involving purchasing and ressuing power at a meted up price g
. semialind serviou soid e upseme meta niches The ohnt n2asomos such a sewer, orteen supplymartea. Asen markst segments are there wm be a asede setagthen medsdag i so that each vs market segment eners elaarly produes and services, 8cively W M M d W - .. /
/
Pap 11
. y ,, m ,
. x g,33 00NRDENTIAL m pg m LT.20T 10 PROTECTIVE ORDIR rimrsupplyniusinenrian Omober,1987 IUMtEPOMR5UPPLYMARIN5 I
ImpeEsaiskyUses ticksrege lage Escencity Dietari
* * 'h**
n id. an- neew omnes a hahs *Imdhghs .haskle epesehim
- Pig a hamsues a godse e gedes Agamme Imf M l, gig,g,
. orhet . amer Cupsey = Veher
> Imr r a hom7 e his Au ss a eCashey i
epetW e 389mers
- husi
.lagem Cseau laryrDesrtdtyDiarthmes Tbs larp eleceicity $seibutor mutet wm be composed of two primary espnens:
- Cort customers with nearly fW1 requirements comreou such as PtolSc Power Diaribudon
- Panial isquiremsnu casamers souposed of olber usi Lw in to Nortmen, CtWornia, Racides, and Southwsa levolvtag various seediaations of servious set innh is long urm sentroom.
Over te next Sve years, the ears sessmer mortet is espeamd e enadame e esselbuw between 755 and SSE o( Power 8vpply's tevesess. Mrstlag a leag Mas pensaksien As dort SalesMM seems neartDy additional sepecity out is edtof ed a more dirtet stomados of to s( Power Suppys vanandalen synes and h@g dhedy tom is plasu wtl be purand. Price coupeddvenen wG runnin a necessary sonedce fbr morts Earpr sattet shart and ptias premiums saa be obtained by prosodag Peww Sepply's ty and Pay n
- . m _ . ._ , _ m 00'G!DENTIAL rR0TECT,NE ORDER m PS m L. . ., a .,.0
. PDwwSupplyBasinomPlan Oseba,1937 mspensivsesas e customas' needs, reliabuhy of supply and longasem sabGky of prios.
Zargemeetservers 1 ben en two primmy targas in dds seekst:
- krge indussial users charssierhed by aseds for ocednoous induerkt energy of 5 MW or yester where high quality power supply daMvered ovsr Sp kv eraboveis seeded.
. hrge commaxial sears requiring condanous power espply such as am5eal centers or asadauous commerchl headas and/or stiing, such as refHgeradon warehocess.
Making sa'n a thew cuacesers wGl requhe a non medvs sales eSort compared e lege sleenWry disribuers. Sinos these cussonen are most ehen served by a large disrikaar now, sales so M market will have a he made la an aniance with a dissenaer, he salsa effort wG be largely in response e opportunides creand by alemadvs eastgy servios companies promoting ladopendant power supply. Sening wul involve splhtias pro 6ts with large esele diseGutors (sad la some esses the users abemselves) most Hksly by a con @mden conuset where Poner $spoly 'Dypasses" tbs distriker (i.e., local wheeling charges are waived) and the distributor es!1s mPower supply a contreet to provids savice e the cunemer, , Chen the nascent sessa of this market segment, k is sapested that selos wD)be Enhed for the asst ftw years. While there is long4erm pomatial for adedonal la thh nurket ser:nent, tu possatial in the near are is limhed Wy the reas of dereguhiary weeds. UnbundXng and , sure spacinc ser%ces will play en important role la serving these amtsu. Whus the sales and Snancial prtdecdons contained in thh plan do not assume any sales in tids martst in the oest Sve yean, Power Supply will pursue sales when and if an oppermrdry arises, i Bmkange wspown sup voluss market with sevesen! !aemetencia asuldag temleendon sad -~ ofply businen h aMass as wellas Saad losaden ofpower ly YetdeUiIgeMlosy stiquitoos, eenkdag thu it is earmialy somesasun soch Es asutan amas. 1 tee 6 market inamoisocios erees opportmides a broker Dem one pleos e another. His business may test be abarnetadasd by ,kis les saimport/ export beiness when theoughput is das prinetpal managensat er seamanity where is made on wyins sad anning eenvies ser spoi demand sad nr iban demand. As poww y wie as samber of soones avaDabis for new sepplieri g with sysume6sa a w of soms type wCl emergs. Dreimrage -espostaDy for - steh"soidawd. w veryproemble. ont dw nut Sve yeen, the trokerage ugment of Power 8' apply's tosinen wn! oentiam e ocetrQas between 35 and 5% of revenues. Sales escur in thb matet through acdve participadon in dispashlag sad operating withia the page is
_% P.55
~
CONFIDENT!Al. sp.r^v'i
. TC PROT:^v1iVE v". T.'.N.,,,,,,,,,,N,,,M iy i,,,, m Oseber,1987 wtD be made e ocordinand WSCC syssum. b is en metal dat bmkarsp ar.d tradag iA pushing ktoward u of partletpadon la mot ifying abs way WLCC synse like a commodify enchaop.
As a commodify anshans model becomes more the seas, Ptrwer Supply teksenp will l itasif u a skinM buyer and amet aussts ist whom the Sitikssess business acts u agent. getonat faes and inadvs fans for anseedlag especadens wlU be charged chess u , principal soures of revooves. l l j S Page 14
wu'w wa a n x - P SUBJEC. i CONFIDENTIAL TO PROTEC.m,t.
- m ors-.R t,,,,,,,P8,,,mu i,,,, pi ,
Osaber,1987 LONG TDiMGROWT'HffRATEGY
%e evolution of the Power supply matkats will open ties for powib ofcompanies wtm identify and manage crideal sensess feners. Deas famars e Tanaalision soness ,
. Hydmaleeiric storage B
- keroved winsmission line sepacityMflaiency
* %*Jty and ski!! in product and servios packaglag. lechuling bundling, sabundling. and
- is bundling
- Law east power supply, primarUy owned but mined with purchased
. SensitMry e esseact needs and willingness a flealbly package
%eu key success facers have implications for how a grow the business. Then are depiend in the following marix.
Growth 8treessia Aapdre Bue# hensee Sec Devsiop campsehenas Aems Transmision Acous V V HydrosioMchorage V V "g .d Transminion V
=
Capedty sein nas V IAW Cast Power V V V V 8spfly CusanerSeehMty V What the above ab6s shows is ibat few key otrons are esaded:
- Sveissic sequisiilens oflow east resources sed mortet assess
- Disposition et high oost ensospendvs sneeredee .
. seimsic invessosou ihm enhanos viasmission aseen and improve generados pmductivtry
. Developmeni of new mim and mortming itch,lactedias new makes Page 15
CONFIDENTIAL pg ammigs SU2 JECT TO Pi10T!.0TL,, C3,.,.: s.,piy s i Pian Oseber,19g7 hr.:==.= and A=niehha In seus of investment dds anans inst etasmiedoe invesansnu over the asst Svs years wiD be of major dgnincanos. Idendnandse of key stasmission invesanent oondacted. priorides wn! depend on Unh/Pacthe power synam integrsdos soul Fwther, sanity acquisidoes should be $scused on with surnedve esasudasion asass that enhance acosas to new mortats. A sustegy of y 3 dises arpses with Pacine Power Distribudon is ietsaded wherein Diaribution aska of dissibudes assets and Power Supply takes ocenol of plans and smanniaak asses. Enample e Giry targes inclads: SiansFactne NevadaPower Idaho Power WashlagionWaarPower A***t Na* f an Ordy limlied possadal adas te assa sahs. As esamtandon of sotal oost(fixed and vartau)of anch of supply's generados resourses indissans that they are compstitiw with current taarist term Hra sales. 'De below eemperes 1986 bus bar coeu (actual and adjusta rices for longity ch.'aa) and for M sapac 1992 bus heraests with prices of ths Southern Californh Edison sak over the 1988 92 The only generados swrently snoompetidvs is Coheip, but score than half of PastSc's 140 abareis ennendy being sold constemaDy a Black Hills a besar than full oest, Over ilms,martet prises een be exposed so si, sh Celstrip cosu. la the current market, howtwr, Colartp asers sould not be sold at book va us, as evidenced by Monmas Power's and Puhuc Servios New Maajoo's laabuity to esD ibeir most expensive assou.
- CURRENT AND PROJECTED BUS BAR COSTS ---
7e g..... CChlPARED WITH MARKET PRICES ......... E
- u. TnE .............................................. ...
30,00 ............................................. 992
- 199 40,00
. t --- i .
80,00 2 , ............. ....... ... .... . 90.00 a . 10,00 , . . . 0,00 a De w Jehrtion Wyedek Amtinger Cergets cetop ' E ises A g usoe 5 1ses aon w 51sesmannaw es notassone 4 Pass 16
- _ _ CONFIDENTIAL g pg g - -
SUBJECT TO PROTECTIVE DE.R re Seppiysaias Ptin Oseber,1987 h should be seed ibat snenral insmelandes ses not ene8ned a 6e WSCC pid. As ibe power budness changes is encan, eq genanides osa be expeced e amery in esbar pens eithe U w insmeiency een be espioited a ans of erwen! ways. Speci8 esmogies a he l puraoed by Power Supply ist fuers powth imelads:
- Acquidag porossages in plaats and inassdssion la other pani of k US, much as Easum -
UGry Associans h~as does
- Asquidna acepaniesin the whonssals Servios of New Mezies CINCO, see, poner and brokerage busin
- BuildiIng samtier 100 El0 MW plans and detecidas lary elsevistry users tem other Amributor pids which ers facing eastp smely shanages or widek are auside abs W3CC pid whors mich acticas would act be estf4seresive Addideaal invmansat should be fbcused on exisdag ,2 -M-z sins e achieve two resuhs:
* !acromed operating f!ssibility by reducias ownership diversity et saisting power supply
- lacrumd producevity by laprovias plant especiry droush pestase et newer, hisher etsessney arma,etc.
1 l e Page 17
CONFIDENT!A!. m PS m SUBJECT TO PROTECi!VE OLyg ppiygxg ornimMGpuN Key operadng issues asociing Power topply ers: l
- Sowgias,of fteource esquiddons
. R ake VS. =. b Jl , Z ^^
. sow ^Hy-=d son)$
OsziMliflr a
. o w M rsk p f.Ad coBoel
- Man fy
.. aL'.".'s aon i
Sourcing will become a critical managram.nt issue as compedtion inansines. While valw cus may be tsaliable over ihns, tlw facu of life is a surpits slaastion send a seguire a push w lower cosa. his means "maks vs. buy" undeofis tGl be arttical with purchased power coal and other fuel casu weighed agains seth oiber and activity managed a set oost down. Certainly productivi improvement wul be erblos! m iower costs sed increased pro 6tatility. Four he areas bort include ofBdency of maintaining ligh plaat avaSaldlfty, ad fuel cosa,ud es prodanive weYstans. seen operadas swimsim an se focus Power supply's 195 t Center OperatingPlan. la additionto the aedons described above, channes in b asset base are also poential means of emrallFMdtyingrovemens. Par complex ownership structwas can imrease enevol over asses. his would tequirs outpermers in some cases, seuing cet to partners in other esses, and ressucaring asest ala e Bezibuity in ablility a package power supply, since packa isa r to sossessla his business.De Centralis plant, in par 6cular, is mers mal ;e ownership ecasidsstions. Its long. arm fuel escaladen outlook makes it a for seuing out a permers,with the possiblity of continuin e operam the plant as a fee. based servios. lawer oost sources of power would need e be laisp ers and ., lace. Such asset norustwing andvttles indican its ne Power Supply of a Ptices feastion. In order to muimla sowsin Sozibuity, new esassdssion asses w21 he asossaary %1: wn! requirs transmission en sid11s andinvesament. Page la
CONHDENTIAL SUBJICT TO PROTECT lVE v OR".a " N,,,,iy 3,,,, ,,, Omdar,1987 l OftGANIZA'110N ' AU aldus es curandy in sadamesarch m/ mergers and acquishions.puent Tisaamission with 6e exampdosanof some uma planaias, sepoon Am 16en, wul also be required. Mannc seen s can hs otnained Omas asfof 7.iuific Power. Thess skills wGl Isave Power genernUy asif4af5cient, whh oessat overbead suppen services tom General Omos suf5cient mestarm. Tbs required organlaadan is musstad below. P E ENT
, , e .
l l e Y 9 e Page 19
y C@8 118 4 HW W DC P.61 CONFIDENilAl. g SEICT TO PROTECTIVE pew, supply seinen pian Comber,1937 GTr!CALIUSKSANDPit0BLEMS Severn! key issues een afect the profitabuity W 6e Power y bodases,and in corporate smaus is reladon a the sevent PadSc Power business. He meet of these are regulsory issees, ness ers disenssed in ibe sec6cn on the evoMag Power Supply Power Diselbudon selationship,ld supply abou become.as theos art sloesly linked a the basic issus W what type of co Besides tbs to uncerulaties, mher risks and prthless requirs risk inanessment artagies. he sesagies below fouow eewest torisk apposchesinchale et reducing 6e of a arisial.comingent aimed at the advets of a specias sad fisk sproeding er o management, at troedeein the base of martsu and suppuu,ibersby reduci and posatta) managanem sesapes e: inchla the relative magninids c(problems. Specific Disribuden market eeneset6ca, trough continued amoeomic magnolen a puhuc power conversion. Prevsadvs strusty for public power soeversions is e c6er stabis, low Jower seen e Dhtribudon, as reflected in the Transfer Pries. Coetlagem settegies aclude relying mors heavily on Arm wholesale sales, or shedding generados asesta. Punr wholesale market conditions don't materiallas. Contingeet sesegy is e acquire asw resources e serve new wholesale only wit clear ased.
- Long run mehnical eteolesosace of osmrmi sueloe genersden. Contlapnt yramgy is evoid major aptalinvesumatin new ,sesagthen zekering and power integranon serv 6ces segment of iness, is no offsetive strategy e pment the technical advances that would telesse esmrt) seulee genertson e a secondary tol by mainminin a ureeg g.e,the risks saa he man
. a sis couid be - of Qm_x by Unforsaan snmh in Diset* don demand. Condasent is seguire sosi efheave new resourses, if evallabis, or if ass, oneereiss oogenernelon, skie orare sale I Wthdrswn! opdoes.
Peres as)eas wiedrawil Wna antalag whoissak mis. Manaamment armassy is a tramien wheimak mortes and sevenues seographionny end imielmsemany. Umh merger is not sposesfdy compleend. Coettagenet setagy is to obtala southwest Berl* access through altamulve is, by 36eeting through Umh orsense termership or acqwsidos e(Sierts , and senarvo6co of new esasadasion, gic s
~
00!mDENTm!. gang pg agung
$U32CT TO PROTEC1WE pownsappiyswimmerian ORXR Onober,!M7 FINAMCIALPLAN
?iaancial sammems we developed for a mand alone power apply punt oser adag ibe fenowing major asangeiens:
. Transfer prios is set using the sans esthodology a surready is e5 set.
. Osnara! of5ee oosts and ospial are aDoessed based on ibe famida developed by the pront centeribiak mak.
. Outside sales and direct eoes are based en Power Supply's 1938 Operadag Plan, spdaad a moest lowe ospial spending ta 1988 and 1959.
. Eximing dets is bend at the holdlag ocupany 1sysl and is act aDocated w tio prent osmers.
. Power Supply ooniinues a supply 100% ot Disnibution's aquiremam j A mors complets est of um ;'ess is lacluded with tbs Saascial messesnu h tbs e this plan. Highlighu of ibe Power 3vpply Saancial prWecdons are shown in Ibs able .
.12tL .1281. .199Q. .199L .1291. l Transfer Prios (mD13) 32.38 31.44 31.66 31.11 31J2 ERTr($influons) 224 215 221 223 237 Netincome (3 miluons) 144 142 149 155 171 Afsf Tax Remun on Assets 7.4% 6.7% 6.5% 6.3% 6J%
Cuh Flow ($ ad1Hons) Annual 65 64 93 153 175
.Cuauhdvs 65 149 343 395 $70 prises shown above nosatibe fan of Sna wholesale puhganduadoesla Diselbudoe avanen, essoreng a ** msnm nasear pria ameadology, ne missest prie renes a nera en equity at Ibs holding sempany level as per the eenat 5 year pina (tonese 14.85 and 15.5%).
k abound be soud em su nsen a esa meenn ilmed eben is set enedy mapenbie e Peelne Power's overen nors, er aDowed nurn, a remit of severs! as@ end la 8ermuladas the pro forma ensolal sussenes, in ,the setimens impsesincome saaes on income befarv taurvet utpense, sinos 3estais held a to inval. Consequently, abs return on asset insasurt listed above should be viewed as as k of year a year performanos nsher than somaliseurs s ibs carpersa level, i page 21
CONFIDENTi.$,l. l SUBJECT TO PROTECliVE 00.kusuus Power Supply Business Plan PS sum Octotur,1987 i l APPROAOI TO T1E EVOLVING POWDL SUPPLY.DirmIBUDON RI1ATIONEIUP A Power Supply mity is an evoladoney soscept de aseds serions ocasiderados befon major rescucturtag is oceangland, k is not olew at this due what du best stadenship is between Power Supply and Diselbution fusedens o(PastSc PWwer. A roast of alarnadvs stuctas and amagemann as ocacehsble and abould be saamined as part of an effort e defia the future Power Supply and Power Diselbudon seddes. De absenadvosinclude: knernal alemadveraccoAunda Wh o(pro 6t sensersy concepts (am% incendves, ma PERC jurisdicdoa with allocadoe of asses and for wholesale PactScorp dba Power Supp operadry Power Supply as a under a. beiding company separadon of aseen ownership Any mod 1Sc6 don of the current corports svuswa is driwe by, and should be analysed by, severs! intemhed objecives, tacluding 1 Weal company pr@5y of5cionet allocanon af risources a markta drough valid pelos ignals wildveness in the evolving markaplace Analysis muu the recognias serious re story constrainu e many resernenning thernadves. Sun jurin6cton approvalis for the more radical alernadves m ad w abovs, p dhset secools over and, h very unlikely e the exent that man aa==ia*=a would be shing u nWoe cocnpoesnu of reall rises, even if wholesale power oosts were res and by PERC. Furthermort, the Pubbe Usuities Holding incorpersed 047 ooneoued by Pactfloerp, by
%'ineymasaltadeinersnasin e an orderof Act (PUHCA) affeedvely penludes regulatory burden and oversight m inuity opersions.
Aside from rs consernirus, any reaructring arust recognise the need e insgrsts Umh Power's raamaissiee synes into an of5cisat Power Sepply operaden. k1m 9eGowing seps m assessary a edtses the issues raised above:
- ADow the Pront Osoter and 1hnsfer Prios ocacepts e operass. We seed a ses how wet! the surrent raaste prios works, what me in dettbacks, and how segonadons betwena Pomer Sopply and the destudos pro 61 seemn een adapt the vansfa price and eerviaammeseva.
- Umh Pour synes inegrados sua h the hisham Poww $spply priertry. in a6r e eliver en poundaltonessof dumuyr. .
- De above two sets should be aDomed about two yws'for Atde same glas, study of alternadvs regulasary smagemann een be .
Page 22
00tFIDENTIM SL'S) 0T TO PROTEClitE 0'.CiaE, Cenob , J APPINDEX Ppto FollMA FINANCIAL FTATIMINTE AND 6 O e 0 0 0 6 Page 23 I
~'~""Wmeq p,,
l
. ~ ,7 " 6" " " C (;.,;,,,.,,ne...
' @- @@ ~
git itti 'to P;10TECTSE C..(
* *1 Me amt simillical
!E9E IfiftErt :-- - - - - --
j
- .... . . ..... - . i...... . . - . . - . - . - ,
H .e f8Il l Ip ? Mill ' s n y totale 144 !?9 $F IllIT I t.lar M r Bestle 27 !? l tt',i't'.= g#mi, c ., i et 41 v9 7.1! I l t.ia n n ui .e... ! m m m m mul hpe.6es 18Eillimal ! !
.Nr6tej! ! 140 If R:i'c.%.e,bteeth4.te "'"
l 4 M!? mi .2 3:a totalEl.rtrictests !
= 4H 436 4tt 467 !
I i E 5t b b b! t l eF8 ting 88)SelH l Il4 I l $IIl
+rbuss a d2 43 I I i e ieti,ri.u I
99.' M m .r # d. 00.F.t.lliti.8 ; - tote i.,. .. i ne a m m mi l 31f ! Ill til 21 III 231! ur tup (m8'14vitrl : 4 4 L 1- 3: I
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.kree,g orn Re:tiedl.e
' it!M i nl ,e u l
mi 1.nFiri'r'.'!!uii ! i d el .i mi I spFif I M71 Wit 36N ff71 Mi NF : wl I 'l' 1 { l i ;D o , airtg a kher tStI v5 stets peset ! e b o h o h 4 0 b 357 ! tann'."a1 i m, m um er m. ml:iI IF s 1861 ll1m i I taunts 1 2 et,'ltl M t :
'Ir obt tett hart here LIWilities t l !
t*Tys Lidilitin
$l I 1 el t t
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oi J'@,gM L Ift"tihM!!N" i
. LM ig is m is a s si mu umurm i m m m n. m al ka, t "i."'Y"ita i m, a w I S M,i , i u.mun n.t!i =i =tiin wii i. 15 4 7 i
mn ,,a SUGJ,ECT ---. Th. UQ7CCTiVgga --
=
man mialePai 1991 1901 19M IMt ne.I.M..Imme.IM2 n nnnuneensuunaninnuoununynnosummannummenem=ww d 149 H3 uumu M i e klitant Cod I LB 171 I 1C 1H 3 i 148 3 lev tts W C4th e 4 3 l atlet 64 WE 4 19 I: OF D' i tL9tti InPgieWandAmtitatip i l
?g
? i N N '.i't 3 it: I
$$ 119 W M4 56 tetal leef tel t ?>
I ? If* l 17 ) ' o b 9 6f $dth t ' ' i t t f I
% teF levestesats t l 8,i !,
ett leH teetts i ll it f18084% 8 j,1 e 18 W C4 9 teril64 i IR T Ital 94 'M 19tt) 9(C4th let C48 fiss a art tading Anab i neemsessuuns eenamenes an u sa s eu u u n u n u n n n n un n u e i n u n u n m un manaenummu ne ( A ttLaflph W 58 +ctin IE W ill CAPila. . .:
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i 4 14 ktsentsAccesvoleIII $4 hhF CWfMt I 3 3< I tt 3; 34 0 h tk!18! N 8 0 1 kleemts Futtle fit i 4 4 1 0 kteetts Pop Is!It (i e 9 40 40 40 k'rpt Portip (pletra hit t 7 44 40 31 93 lH 116 a '4 Dine
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l CONFIDENTIAL. SUBJECT TO PROTECTIVE ORDE.1 l Attachment ! Power Supply Financial Plan Ase g tions Pricing assumptions: ; i 1988 _1989 1990 - 1991 1992 1 fransfer Price To R 44 31 49 N. e St. fi St.S t Distributten Ceepany (mills)* Res.fira Sales Prices ee 18.30 20.25 22.68 26.09 28.22
- Based on surrest transfer prate taarsased far asPested saflation.
** Sased en DRI forecast of Southern Califerais gas prises.
Esisting debt held at headquarters levels sad not allocated to profit
'senters.
Fized assets divided herveen Distribution and Power Supply based on sa analysis of the 1986 y!RC 1 filing. Distributten a 331 et assets Power Supply a 652 of assets Profit Centers bolin with sere cash'and 1005 equity financial. Incremental tax rate a 371. Seek life of assets a 20 years. fax life of assets = 13 years. Payment terms for sales to distribution a M days. short-tern borrowing and investment rate = 6.58. taternal astounts ressivable a 6.4I of revesse. Other surrest assets e 29.91 of sense 11 dated S-year plan other setete. Assevate payable e $.72 et asternal purahases. Othat everest liability a 44.7I of .seamolidated $= year plan other turrent liabilities. 0013/CAAl
I April 27, 1987 l Utah Power & Licht j Wholesale oneertunitian -
- Have met with UP&L several times over the last three to four months to determine potential wholesale opportunities.
I
- Discussions have focused on ,
. Transmission access for Pacific to Southwest and for Utah to Northwest.
. Need for generating asset sale by Utah.
. summer-winter diversity between Pacific and Utah. Utah need for summer peaking capacity.
. Existing and new market access potential.
. Possible joint long term sales to California and Nevada.
. Pacific-Utah interconnection capability.
- Last meeting on April 15 included Lynn Rasband and resulted in
~
very favorable response to proceed with discussions along lines of joint long term sales to California and Nevada.
- Rasband indicated that no final decisions can be made until new CEO is on board, but he will "shop" the concepts through senior management. ,
- Wyoming Exxon load is still a staff issue.
- Rasband to get back to us in two weeks with more specific response after consulting senior management.
- Likely Scenario
. Pacific line up 300-500 MW long term firm market in i southern California with IPP evners. Sufficient to justify IPP second circuit and espanded D.C. terminal espability. .
l (Estimate 1990 completion).
. Possibly initiate sale in 1987-88 over Northwest D.C.
Intertie with SPA PD sale and espand sale in 1990 over IPP transmission.
. Utah participation in sale at negotiated level say 30-504 starting in 1990.
Price sale at melded resource rate of pacific's and Utah's resources. IpAno POWtt/nonTANA POWER CONFIDENTIAL SUBJECT TO PROTECYlVE 0'* FERC DOCKET NO. EC WITNttle -William A. Hughes
P Lt 86~'B8 11:58 H&W WASH DC P,78 Pacific would back up sale for 20-25 years if Utah withdraws after L/R balance. Transmission access would continue for term of sale. i
- Part of total package could include Pacific participation in new transmission interconnection to Nevada power Company and share of sale to Nevada Powez Company.
Part of total package could incluNe 100-200 MW aale of generating asset to Pacific and assignment of existing , sierra Pacific sale to Pacific (75 Mtt).
- A related development is a meeting on A;;ril 21 with UAMPS and two Deseret G & T board members over ye saible sale of all or a part of the Bonanza power plant and tra1smission system. i i
Ployd E. Eammerquist { FER:rs cc Boucher, Lockhart, Sickels File: UP&L feh5/43 f O e 9 CONFIDENTIAL SUBJECT TO PROTECTIVE ORD
s
, FEB 14 '88 11:58 H&W LASH DC po e
Presemed et rnetting"tre Wesrd + _ , 0 0lmkT5 on y I4 IW7 f SWP0ftle
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,l IBAM0 PMP/MoelTANA POWER EXhlBlY 110 nflH 9 FERC DOCKET NO. ECBS-2-C00 g ,
WITNttl Wililam R. Hughes g I COh"/IDENTIAL o i}, Q "" 4 . J E : o Jmi 3 4
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3-4, I. 3 I These documents contain sensitive nonpublic inforsatit,n and should met be y ' duplicated or transferred to others. Moreover, these documents should not be 3 esed or relisil uptn for purposes of any investment desisten er the purchese er sale of any escorities of either soupany. Any such use way rossit in liability under applicable securitics levs. These docents do not putyort to effer soeurities for sale er to solicit any effers for the perchase of auch se curt '.ie s . rse forces. . cent.ined herei h . heen ,re,er.d be.ed w,o. . art.1. assasptions and estimates of outersal sad internal fact 2rs which Pacif1Cery Ac and Utah Power & Light Company believe to be reasonable. Bewever, so
'eaurance can be given as to the ultimate securacy of the forecaste since they te dependent ta part upon factere ever which the companies have no sentrol.
g O s.
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I ^ n.-:q w inusumus- . Comparison of Utah Power & Light Company and Pacific Power & Light Company j eandIJghtOsampany PacificPbwer andIJghtCounpany 8 Sumatism Generatinformaation g u gemisedin 191F, e Organisedin 1910 " adqueveesedin8mklakeCity, Utah e Headquarteredin Portland,Oueton 3 marmees and mous electric energy in Utah, e 4,080 ensplayees seheast Idaho and Southwestern Wyoming j 89- ; 's x OperatingStatistics 8 e Castammers Na sofRevenue
- Number SofResense Residenti41 ~5E85f 32 6 30 Coenniercial 132A38 26
) Osammercial 45,299 25 Industrial 3,717 28 i Industrial 8,223 32 Misc.Other 1.924 14 M3=r Other IJt39 - _13 Theal ess,ris cos e 4 thest sis. ass loos e Power 8usely E ! suerSussb' Installed . 4,087 M W ," \ l ImotnHed 3,1s2MW Coni . we gy. l Coal 92% Hydro 21% .o u ) Hydse7s - Historical Peak: 4,388MW (Winter.1983) m4 Geotherusal1% :: o - -
$o MImanrical Peak: 2,484MW Sununer,1984) ~
r3 i i M3 e at
. ;:i -
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! U M m orp F eel 9
G O O ~: '1 . a, UTAH POWER AND PACIFICORP Y f.28 - Jsasse 1,1987 to Auguet 10. 1987 ...
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l 0 2: i g W8 f.ee - hM h 9.04 ~ p>D 1.02 - I { 1- PACIFICORP Q O 2 j d.98 - Q l JUN f 87 i. . ] 1 JUN 20 87 JtTL 20 87 - l Page 2 4 . _ _ _ _ _ _ . _ _ _ . _ _ _ _
e W Utah Power & Light Company O Financial Statistics (i
.a e GnancialStatistka (12assetheended6/30/87)
"I
. woi Ae s.sswlu
- Total Book Equity: $1.07 billion $r e OperatingRevasse:$982mnillion 3
- i.
bessee Extreesdinary Items: $127.4 semillion $2.21 pershare f" Feel _^ 1' _ ;" L::f :t i 43.7 maijilion Earninds aflerExtnsordinaryiteme (0.76 perslenre) ,-- iWillion S E45 per share -
- Cesunnomsharesoutstanding: 68,649.744 ee,
- Stock Price Cassperiosa .
e 5 Ef30fB7 7/24/97 Peeifiairp 35.875 UP&L 23.875 ; h 35.375 24.000 SrIntn7 35.250 26.750 t 582
- Dividendedeclared: 32.32perskere '
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2 S Pacirc,ep . s ._, Page 3
w s O M Utah Power & Light Company ' 4 Benefits ofMerger 4 , 9,
! e s.
! Both-r 7 "2andIIneltsuman==eswouldbenefitfreen theoperatingetEckrck oftheesembinedcompanies
- 'nnetwo d
- The are connplernentary: Utah has a summer peak and Pacific has a winter peak r,
Consolidation e(operations and economics ofmente derived fro n merger
- z. ,
slumreholders '- J - Combinaties will postpone eestly resource additions for both companies I .:' ] e l
; Utah has expertise nignificant esal p in mining properties that could benefit froen NERCO*s coal managemen r 3
'I l
- Utah has menuclearplantempsome .
T'
; e .
j Utah has benefit Utah weekt suf5sredIbounBreen naamagessent ourmanagement experienceproblems and style in the Inst few years and has been without a pres . 4
- Pacifle count bring added espaldNty in econosnic develeposent activities, including Pacific's Far East
! e A merge
,,,ves the stabiBty ofearnings and cashnow for both cornpa nies .
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Utah Power & Light Compan'y Savings from Combined Operations , c; 7, ,
.;p (Douarsin Millions) [';
-19.88 19 9-
--.8. 1990
-. 1991
' ~ ~ ~ ~
'"c.w.- BesseGem .f.
r Reduce enestrimeties- .
$292 mailNous 3 8 13 19 -
, MeaegesmentefHelesacies 45 61 61 Si issemesed wholesalesales l Termelante DIUP& ESPP II 29 57 53 h H I (2) (5) , Conibirndsysteenofrhes 21 (6) ,(10) L' o8 - _22 22
-- 24
- 1 :2:
TotalBeanents 78 115 3 147 147 O o ! Benefits tocastssoers -< i {221 .L54J L85) [83J E> i TotalBenentsbeforeTer $66 $61 i Tax
$62 $64 9 Gt) L231 (231 g4l O NetBenefits $35 538 $39 .340 $
g l I n 4 1 ., ! $ PacifiCorp Page5 ,
m . Utah Power & Light. Company W . SummaryofEconomics r,,,1 Seenmaaryerit._ __S E ik 5-Yea _r Qashflow PresentValue & (Dotters in Millions) .'." Beglenisog" .. ^_ - :.4 "' ' Cash Infesien $(3,207.5) . Terneinal Valse fl58.3 1 2f>8JJ E' Net n_. tValue @10.0%
$2341 E
CapitalStructure e m Utah PAL M Pacificers ComWeed Connnem 46.2% 42.6% s MQ 2 43.9% PMerred Ptr 3 M 2.0% 6.4% Debt 4.8% S "CF 62.8% 51.0% E ; _2 51.9 % --e > I00.9 % 100.0% a 100.0 % m . O
.aur O
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$ PacifiCorp .
c' . Page8 l \
2 2 & Pacific Power & Light Company , Power . Supply Benfits of time
. Merged Power Systems .
m
.. , r~ . . .
.~ .,
a, firm and nonfirm access to caisting and new whoicsale power markets - H ghcIps us retain future market share , g8 2
- Enhances the ability through expanded interconnections W$
to take greater advantage of low cost power supplies SE
" :2 from third parties a, m
o
. Reduces peak capacity requirements through system diversity
- 5 g.
= Reduces system operating costs through integrated g economic dispatch and unit commitment n!
$ll
. Improves system reliability through greaterreserve sharing { g(
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( L D . Pacific Power & Light Company 790 il 600 - l :- l 500- 1990 Seasonal e rat i sorma Capacity Diversity ,i. . 400 - . i 2
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w w Pacific Power & Light Company W Power Supply Savings from Combined Operations (Millions of Dollars) 1988 1989 1990 1991 4 Increased Sales / Combined Efficiencies 32.0 51.0 79.0 77.0 g i 1" IrwM Profit Margin Additional Nonfirm Sales 6.4 7.0 7.5 7.9 5 2.0 5.2 ) Additional Firm Sales 6.4 3.8 U8 i I BPA Wheeling Revenue 13.6 2.3 24.4 2.5 48.1 2.8 59,0 3.4 gs c)M Unit Commitment and Dispatch 4.7 5.4 I PowerPlant Maintenance I.5 2.0 6.3 2.5 7.0 N$' Other 2.5 4.5 5.7 2.5 5M ! TOTAL 6.0 33.0 51.0 79.3 89.6 4 l 9 I Power Plassning 1: August 1987
Pacific Power & Light Company 4 i
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Access to Potential j
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{ Utah To Area Pacific 600 Arizona - [i] 1,000 Idaho 1,500+ ! 337 Montana 300 E 180 Sierra 440 200 5 WAPA UC 200 bs WAPA LM 400 .,> s,
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_ _ _7 - v.a CONFIDENTIAL. SUBJECT TO PROTEC Pacifi: Power & Light Company. Wholesala power Werket Atudy An Analysis of the Wholesale Electricity Market n the i Western United States For Bill Robertson Dave Oertain Clyde Do,: tor Jim Abrahamson 10AMO POWER / MONTANA POWER Ottie Nabors IXNillT NO. WlW-10 FtAt DOCEET NO. ECll-2-000 october 1987 withiss W1111am R. Hveha5 CONFIDBf71AL Rec'd by Hameerqvist 1C/22/87 copied fort Boucher, sickeln, Steinberg
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./ YU VI*I. Market constrainta and Variables Transmissient Transmission lines that interconnect with california utilities are the pathways to the wholesale market.
The transmission issue can be divided into three basic issuasi access, ownership, and construction. Access and ovnership of existing transmission are important elements in the determination of market access control. The utility that controls transmission pathways to the relevant market area controls the supply of wholesale power that can flow into that area. Since supply is only one-hsit of the determination of marktt price, demand being the other, the controlling utility is in a position to influence, but not deter =ine, market price. 1 This control is regularly exercised by the ownara of transtission f acilities te keep other competitors tre: entering the market. Ovnership yields benefits similar to access, but the rights associated with ovnership are more secure. In addition to the above sentioned benefits of supply control, transmission owners are allowed to ecliect rents (whealing charges) on their esse its use is gra,nted to a third-party. New construction opens pathways into new, or existing, market areas. The changing competitiva nature of the electric utility environmen* Will ' lead to the cent.truction of strategic transalesion f acilities - facilities that are osumitted to a specific strategic purpose, not simply serving native load.
- 38 ~
I l l - l i rr; i .: 3 ,: m .:.: 6: u _C IDAMO POWER /659ANA P0wER EXHillT NO. WRH-ll FERC DOCKET N0. ECB8-2 000 PROPOSED TRANSMISSION CONDITION - WITNE$5: Willlem R. Hughet 1. The nerged company will permit any utility with access to the northern end of UP&L's system to enter into bulk power sales for resale with any willing purchasera that have made arrangements to accept delivery of capacity and energy at one or more of UP&L's existing or future Southwest cient Interconnections and will make available suffi-firm transfer capability on its system to permit such sales to take place in quantities up to but not to exceed a total of 300 Mw at any time; provided, however, that if, at any time, additional capacity in the UP&L transmission that systen is not used by the merged company, capacity shall be available for economy salas for resale by other utilities that enter into such transactions fer delivery at one er more of UP&L's existing or future Southwest Interconnections. 2. The S .'thwest Intercennections on UP&L'a system shall include the Mona Substation, the Four Corners Substation, the Glen Canyen substation, and any future interconnections between UP&L and utilities in New Mexico, Arizona, Nevada or Ca.'ifornia; previded, however, that the merged company anall net be required to make available hereunder more than 50% of the firm transfer capability at any such future Southwest Interconnection. 3. The fire transfer capability provided in Paragraphs 1 and 2 ab:ve shall be available solely to a qualifying utility that or binding letter shallof have entered intent whichinto a written permits it tocontract sell a quantity of bulk power sales for resala (including economy or spot energy sales) for delivery at one of UP&L's Southwest Interconnections and where provision has been made to deliver the contracted-for power from the applicable Southwest Interconnection to the systen of the buyer. Nothing in these merger conditions is intended to affect in any way the merged company's right to enter into transactions at UP&L's southwest Intercon-nections utilizing transmission capacity other than that required to be made available to others hereunder.
- 4. The rights provided to other utilities hereunder shall not be available for ary transaction where the neller has an ownership intsreat in operating transmission facili-ties that provide an econceically and electrically feasible alternative transmission path to the purchasing utility with when the contrart er other appropriate arrangement has been r.ade in ateerdance with Paragraph 3 herein.
4
- - , , - - - - - - - - - - , , ,---,--------.,---r-
i l l 5. Any transactions made pursuant shall be processed and accepted by the merged companyte these m in a timely fashion consistent with the requirements of the transacting lished for this purpose. parties and procedurea shall be estab-auch the until transactionslimit of transactions on a first-come-first-served basisThe merged co hereunder is reached; , provided, however, that firm sale for resale transactions will that be granted priority over nonfirm transactions except this priority of firm transactions over nonfirm transactions shall not be applied to interrupt or curtail anythese to previously merger consummated conditions. transactions made pursuant Firm transactions shall be defined as those in which the power to be provide whe.. actionidentified is available. generating capacity committed to a trans-sna11 not exceed a period Nonfirm of six transactions months. hereunder 6. No individual transaction under these merger conditions shall be permitted to er.ceed 1C0 Mw unless the transacting parties in the event agree te curtail the transaction to this level the aggregate level of permitted transactions is exceeded hereunder. by all of the transactions then taking place 7. Within Commissien, sixty days after the merger is approved by the the merged company shall file with FERC a proposed schedule cf rates, terms, and conditions appli-cable to transacticna hereunder,' which schedule shall be effective, sub3act to refund, no mera than sixty days thereafter. hereunder all other fir shall have a firmness equal to or greater thanSue transactions cf the sales merged for resale company. and transmission sarvice shall have the right, The mergsd company for a change in these schedules pursuant to Section 205at any time, to u of the Federal Power Act and the Conmission'a regulations i thereunder and af~fected parties shal; have the right ! of the Federal Power Act and to seek relief from theto opl ' Commission under Section 206 of the Federal Power Act. 8. At any time after the merger has been in effect for five years, the merged company shall have the right to petition the Commission based upon a showing to terminate thati or modify these merger conditions
, (1) the Cor.-issien firstin the affected markets have changed significa i
considered the merger or (2) other
utilities market have failed access to avail provided themselves hereunder of effect with the the wholesale that transnission facilities usable by the merged company have in thesebeen idled; provided, merger conditionshowever, shall notthat any such changes interruption or termination of any previously executedresult in curtailment, transactions entered into in reliance on these merger conditions.
- 9. If, at any time after entry of the TERC order approving the merger, the aegregate firm transfer capability of the UP4L system to deliver power and energy from the Northern Southwest and of UP&L's system to UP&L's existing or future Interconnection is increased, the Commission.
upen interest a ahowing by an interested party that the public ! considerations underlying adoption of thess merger Mw lim!: conditions so require, shall increase the 300 provided thatestablished by Paragraph 1 of these merger conditions, such ad$uatment shall not be greater than 33% system. UF&L of suer increase in the transfer capability of the
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. 10AHO POVER/ MONTANA P0t
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EXHillT N00 WRH-12 FERC DOCKET N0. EC88-2 000 WITNES$1 Williers R. Hughes FrBERAL DrrRcy 12avuTORY 00MMf EEfON
.:roINT DATA R26tme? 07 MUeon siirt AND AMAY MidWERItfM commonATION TO APPLf MWS tFTAM PC/=tu & LYSMT CGiii ANY, PACIFICORP AND PC/UP&L idirdfMC COR.70 RAT 10N DOCKXT No. BC88-2-000 ertTfricAttow The following response has been prepared under my su-pervision, my knowledge, and the response is true and accurate, to the best of inquiry. inforattion and belief d after a_rpaonable Rsaney aK % ~
Vice Presi and Assistant to the President, PP&L laeuant No. Mueer/Anar 2 83 Refer to paget 19-20 of Mr. Tophan's direct testimony. suming that the requested service would not impair the Divi- As= sion's electric feellities nor its ability to rander service to its existing custcaers, state whether the Applicants would be hypothetical examplestwilling to provide transmission servios under the (a) Wholesais Utsh Power's forretail resale customer service ('W')and territory Le located requesta within transmission access over Utah power lines to an inde-
' Pendent power producer er generation facility not owned by Utah Power and located within Utah Power's retail service territory.
(b)
*w' isand ritory located requests within Uta' Power's transmission retailover access se Wice Utah ter-Power lines to an independent power producer or generation facility not owned by Vtah Power and lo-cated outside Utah Power's service territory with which Utah Power is currently interconnected.
' (c) *W' ritoryisand locatedrequests within Utah Power's transmission access retail over service Utah ter-Power lines te a utility se Wing an adjaoant retail
eervice territory and with which Utah Power la cur-rently interconnec*.ed. (d)
*w* is located within PacifiCorp's retail service ter-ritory and requests transmission tooses over lines owned by the merged companies to a generation source or sources owned, before the proposed merger, by Utah Power and located within Utah power's retail service territory.
(a) *W* is located within Utah Power's service territory and requesta transmission access over lines evnet by the marged companies from a generation source or sources owned, before the proposed merger, by Pacificorp. (f) *w' is located within the combined Utah power and pacificorp retail service territories and requests transmission access over lines evned by the merged companies to an independent power producer or genera-tion source not owned by the merged companies, with which the merged companies are interconnected, and which generation sources are located outside the com-bined Utah Power and Pacificorp service territories. (g) *W* is located within the combined Utah Power and PacifiCorp retail service territories and requests transnistion access over lines evned by the served , companies companies are to an adjacent utility with which the merge 6 interconnected. (h) Any (a) through other set of circumstances, not listed in subparts merget compan(g) of this under which request,ies wouldthebe willing to pro sien access. i auen3mmental Raanonaat A request to provide transmission services across or between analysis referred
- integrated to by service areas
- will require the case-by-case Kr. Tophan. It is not possible to specifically respond to any hypothetical question that does not provide the information necessary to perfors that analyasis.
The following factors are significant to the case-by-case analysis contemplated by Mr. Topham: i (1) The duration of the requested eervice. __m -- _ .
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(2) Whether order to provide new facilities would have the requested to be servios eenstructed ever its in proposed duration. (3) ne extent to which the requested servios will cause the merged company to forego present or reasonably ex-pected wholesale sales opportunities. (4) Whether services. other parties desire the same transsission (5) Whether utilities permit the terms of transmission the requested echtracts with other service. (6) Whether the intentions of the party requesting service are lawful (for example would there be a violation of laws related to certificated areas). (7) Whether restored. transmission losses vill be adequately (4) Whether service will and re te what extent providing the requested merged company. quire the generating reserves of the (9) he degree of firmness of the requested service. (10) na service priority of the requested service. (11) ne system impacts of the requested service. (12) To the extent the requested service involves the con-trol arena of another utility whether that other utility will cooperate in prov,iding the service. (13) ingWhether utility. the party requesting the service is a schedul- l (14) Whether the party requesting the service has other reasonable opportunities transmicsion paths. available to it through other (15) Current laws and regulations as they apply to the marged cespany and its competitors. (14) Whether the proposed rate for the roguested service is reasonably compensatory in regard to factors 1, 3, 3 4, 7, 8, 9,
- 10 and 11.
l
~
I 2f an analysis of these rectors indicates that the re-quested service can bs provided and that doing so is in the best interestswill service of be theprovided. customers of the merged osapany, the requested question as follows: Applicants respond to the specific subparts of your (a) If *We and the Independent power pr within an ' integrated service area,*oducer are located supplemental Response to Nuoor/Anax 3-83as defined in will be provided as a matter of course. ,Ifthe service not, an analysis performed. using the above-described criteria will be (b) The service will be provided if att analysis using the criteria listed above indicates that the requested service can be provided and that doing so is in the best interests of the customers of the merged soapany. (c) See response to (b), above. (C) This question appears to erroneously assume that the two divisions of the served osapany will separately offer generation from particular units for sale. In fact, the orpactation is that there will be a single ganaration and transmission systas and that the merged company single entity. will enter into wholesale agreements as a as opposed the usuti practice. to sales from particular units, would beIt is also a
- unit sale' were made by the merged cespany, theNotwith power would be transmitted to the point designated by the buyer if an analysis using the criteria listed above indicated that it was possible and in the best interests of the merged company's sustomers.
(a) See response to (d), above. (f) See response to (b), above. (g) See response to (b), above. 1 i (h) 4 Under any set of circumstances where an analysis based a upon the criteria set forth above indicated that i providing the service would be feasible and in the best interests of the merged company's oustomers, the j
. requested service would be effered. Applicants are not able to speculate as to the range of possible cir-cumstances.
4 I
rtl ;J 'u 11: .e {..,IM u P: F.17 FEBrRA?. twrndY 11StflA?0kY COMWT ASION 3D1MT DATA EtStTERT OF NLfcon B'FitTg AND AMAY MAawtaltnt eenm0RATIoM To AppucANts trTAw min a usw ru -ANY. DACIFIOORD AND Dc/tJDAL MRaatWe centg _ DOCKET No. 2C48-2-000 L*TitTIFIcATION The following response has been prepared under my su-pervision, my knowledge, and the information response and is belief true and escurate, to the best of inquiry. ed aftav - a'sonable
/ '
a Pr d Assistant to the President, pF&L Raeru a n t Ne . Mueer/A.mer 2-6(i Request No. 65 (a) Referring to sach of ti.e hypothetical examples 1 sted in through (g), if your answer is negative, state whether the Applicants would be willing to provide the re-quested transmission servics on a case-by-case basis. Buen1maantal Maanenaat No circumstance is currently envigioned under which the merged company will decline to provide transmission services for tal Response to Nueor/Anax 3-45.another utility independent of the crit 4 i I i i a l l _ _ . _ _ - _ . _ _ , _ . _ _ . _ _ . , _ _ _ ___--____.-_w
7' 10AHO POWER / MONTANA Powtg ggy,gp3,;)gg EXHl81T NO. WRM-1) FERC DOCKET NO. (C88 2. coo
- E*' ' '
WITNE55: William A. Hughes T P 09. : PH Beatles DATE: April 21, 1987 CC : HG Van N0y Da Gregg W kr Cromer RE Dis:ussion with UPL Transmission Planner - April 14, 1987. 1 Utah is desirous of looking at increasing the A!!ps line er the Jeffersen line capacity to allow them to de mere basiness with us and the Washington Water Power company. Th s ;. re::gn :e that increastng the AMPS line capacity weald give ther expanded capa:ity te SPA at Not Springs wh::h nay n:t de too usefull to them. \ 2. We ::nsidered the probler.s related to converting the N
- AMPS i;ns to 345 kV, replacing the Jefferson lina with \ !
a 345 kV line, and replacing the Jefferson line with a 230 kV lar,e. ! I ,
- n. On review of the AMPS line, eenversion is not practical. l
- h. Repla:in; the 161 kV with either a 230 kV or 345 kV requ:res a rebuild, new easements, and satisfyin; DNA: s: ting procedures. l Utan doesn't evn the 161 kV fror, the Montana state line to Goshen. (Idaho has ownership and Utah leases.)
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- d. 345 kV establishes a new voltage at our and with added cost for transformation and a negat:ve affect on stability f rom the series reactance of the trans-fromers.
l
- e. Replacing either the 230 kV line or the 161 kV line requires providing service for the subs currently connected to these lines, t i
- 3. Probably the rest reasonable option is to replace the I s
161 kV line (not necessarily on the sans right-et-way), lo:Fing it through existing 230 kV subs and providing i
* = ~ - - -
/
/ Mene - 2.abese April 21, 1967 Page 2 swit:nable shunt capa:itors (and possibly reactors) increase the transfer capability to at least 700 MW. to Thisexists. now would provide at least 350 MW more capacity then the new transfer capacity might have to be existing AMPS members and the new line, g shared amon there may be other AMPS meeting. contract problems requiring a contract committee 4. To reach a TC of 700 MW at (or recre) vill no doubt require and perhaps northern Utah area.least addational shunt cooperati S. Sveh a development would af fect Montine's ability to use the V.PS line for access to the Ir. land Intertie. 6. Utah will not ba in a position to firn up any agreements until a new to Utah's CEO is in office plar.ner.) (when and who is now unknown 7. Utth would like to discuss trading firm transmission capa:aty through their syste:t thrcugh M:ntana's ayate::. f:r firm transmission capacity 4. Utah does not rule out including Idah party deal but considars it more in because difficult some sortofof their belle! that Idah: Power was behind the legislative caneuver
'give' at to to Idaho.
"take
- the Rexhu:g Division away from Utah and 9.
Appe.rently LADWP has been taiking to Utah about partici-pating d-: lineinright-et-way a 500 ky, a-c line proposed for the existing 2PP frort Spe:aiation has it that LADWP new recognises theAr IPPIFF to McCullo able 1600 MW capability without some a c line additions
. Su:h a line could certainly be part of an Inland Intertie systam frort Dessert Southwest may oppose it.the point of view of the Northwest thoug 10.
The Utah planner stated sney were a little surprised to have not heard frcrt sin:e Nevada said they Nevada were on Montana's (??) recent offer interested. PHB/bs/1 6 Qpf
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- 7. . .; _ _
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, 10AH0POWgR/N0Nhl.APOWER EXHIBIT N0. WRH-14 Benefits of Participation FgRC 00CKg7 N0. EC88-2-000 in VINUH WITNg$$
1 Willlem R. Hughes J: N! D!!8 AT CY!NC I IO Preliminary ton, Nevada, studies Utah andconducted Montar '" *:P&l, indicate that Washing-neighborhood of $80 million in 6 achieve savings in tne tillion in 1989 4109 million in1967, 19908878111 million in 1988. 89A cnd $125 million in 1992 through joint dispatching. million in 1991
- In orcer to verify the anticipated savings aantioned above, the five companies completed no later thenagree to conduct a definitive study to be 11/30/87. All five companies will cooperate resource, operation and load information.providing necessary in conducting the study by Should the joint dispatca study indicate that substantial benefits five could be achievec through joint dispatching of the ayateas, the five companies agree to enter into a pooling for jointagreement dispatching or form a C&T Company which would provide by 3/31/88.
- 2. JOIN 7 CAF ACITY PL ANNING Prelitinary studies conducted by UP&L indicate that the s e a s or,a1 and hourly diversity between the five soapanies (coincider.tal peaks of the five companies sa compared to the sur of the non-coincidental of each of the soapanies) represent e app oxiastely 930,peaka MW.
As a result of the seasonal , and hourly diversity, it appears that by entering into a i poolist defer the agreesent or forming a O&T the five companies oculd cenatruction ing capacity. and/or purchase of a$ditional generat-In orde* to e,u a n t i f y the ahvings which would result from joint capacity planning, the five companies acree to prepare a joict loada and resource forecast by 8/31/87. All five companies will cooperate in preparing the joint lenda and resource forecsat
'i n f o rma t io n .
by providing necessary resource and load S ho u ld the joint loads and resource substantial benefits could be achieved through forecastjoint
. indicate espacity that planning, the five soapanies agree to enter into a pooling agreemant cap. or formby city planning a C&T company which would provide for joint 3/31/88.
- 3. JOINT 7t&NSHIS$10F ptAWWING. OVWERSHIP AN)_0PIRAff0N
- 3 r.
order to justify increasing the transfer capability _.. between VP4L's ayatet and Mead to 800 MV, tha five companies will segotiate agreements with MFC and southern California utilities for the sale of espacity and associated energy. 00EDDH!E iqil b,w .Ld3 '
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with the joint dispatening stucy and the i p r e p a 's t i e r. of a joint loads ar.c resource forecast, the five c o r.pa u e s agree to evaluate the existing transmission system of each ofbottienecks. potential the five companies and identify existing and 11/30/87 All studies will be cespleted by Thebenefits the five com p e r. arising i e firm from s agree to enter and non into an agreemen fira (i.e. surplus or econouy) transactions, will be allocated to the utilities folle providing 3 transmission service on an equatsble basis, sa i I l E. FIRW ant NON-F Pw (! I. SURPLU$ OP E00NCVY: TRANSACT!0NS ny tacreasing the availability of lov incremental cost espacity and energy through joint dispatching, joint capacity planning and joint transmission planning, ownership and operatior.. W2NUM's should enhance the five companies ability t onos.WINU to m ak e both ffra and M utilities . non-firm capacity ann /or energy salsa Therefore, should the five companica enter into a pooling agreement or form a G&'t Company which would provide for joint dispatching, capacity p2sening and transmission brokerage office planning, should be ownership and operation, a WINUM established. should assume r e s po ns ib ili ty The brokerage office capacity and energy by 3/30/88.for marketing fire and non-firm
- The five companies agree to enter into an agreement ;vhere by the benefits arising from fire and non-fira (i.e. surplus or econosy) transactions,,will providing transsission service as provided be allocated to the utilities above.
5. In order to proceed i r. a timely menner, the five companies will an sign agreeagreementto commit to these principles by 7/27/87 and espousing these principles by 8/t5/87. CONFIDEhTIM PRfliLEGFD
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1 03/26/87 March 23,1987 Meeting with Utah Power & Light Company Attendance Floyd Rammerquist Brian Sickels Russ Pack Carol Hunter Discusalen Toeies
- 1. Loads and Resource IDAHO POWER / MONTANA POVER <
- EXHISIT NO. hkM-15
- Expect L/R balance in early 1990's -
- Growth in 1-2% range - FIRC DOCKET N0. EC88-1-000
- Current 200-250 MW surplus -
Only 100-150 MW S/W diversity - WITMtss: Willian R. h ohes i 2 Needs. Concerns, and Desires CONFIDENTIAL ;
- Project net'
- Desire firm - Sr sumner capacity in early 1990's -
Reviewint 'need" for an asset sale =:ess to PNW utilities Prorcsed kW NPCocost). test, book sale was 100 MW of Runter 93 $ $1350 per Expressed concern about capability - limited PPL/DFL interconnection PPL/IPCo litigation.
- Limited 230 kV capability.
Expressed concern that dereguistion will put a "cla im" on l
- their unused transmission unless Expressed concern over the "new" put to firm use aggressive and demanding - IPCo. -- Much more
. Rave been "demanding" accass to IPP -
- Downplayed 8.E. Idaho load area concerns -
would et 41 -like support of ' Preference' battle with WAPA Uncertain what changes a new Cro will have - 3 Ma rk e tinc 345 kV line by 1989 -Are in process of renewing their deal with NP New sale -deal probably a long term sale rather than asset
- Recent UPSC order favored UPL -
No (wenear term agree) - deals in Arizona (Regional Surplus)and- New Mexico are apparent
. CONRDENTIAL SUBJECT TO PROTECE.2 ; .
03/26/87 Califorr.ia access through NPCo looks viable -- Needs NPCc
- transmission investment -
IPP access to California needs D.C. valve group investment and second line - InsteadSome feeling that second IPP circuit may be A.C. of D.C.
- Recent D.C. problems -- Impact on Utah and WSCC -
They do D23 appear concerned about their retail rate
- 4. Pacific competitiveness with either publics or Idaho -
*/ould consider asset purchase in conjunction with firm
- transmission access to "new" markets -
Would consider selective transmission investment
- associated with market access -
Eave capabilit NW utilities. y to provide ' displacement
- access to other Would conside: long term power supply arrangement
- associated with asset purchase Cou'.o expand interconnection capability with UPL -
Bridger switching stations.
- Through Idaho at Geshen, Kinport, Borah.
> Would be willing to explore joint wholesale sale arrangements if legally viable - pr 5. follow De Set tentative date to meet.again on April 8 to discuss
- possible "fits" in more detail -
Utah felt they would include V.P. Rasband at next
. meeting.
Floyd E. Bamnerquist FEHibre cc Boucher, Lockhart, alckels Pilot IPC Disk: rza5/25 CONFIDENTIAL SUBJECT TO PROTEC1."..E ." ___ _ _ _ - _ _ _ - - - - - _ - - - - - - - ' ' ' '}}