ML20153F763
| ML20153F763 | |
| Person / Time | |
|---|---|
| Site: | Trojan File:Portland General Electric icon.png |
| Issue date: | 01/08/1988 |
| From: | Colby O UTAH POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML20153F598 | List: |
| References | |
| NUDOCS 8805110040 | |
| Download: ML20153F763 (27) | |
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- Exhibit B UNITED STATES OF AMERICA BEFORE THE :
' NUCLEAR REGULATORY COMMISSION !
IN THE MATTER OF THE ) EXHIBIT B to Facility APPLICATION OF PACIFICORP ) Operating License No. NPF-1 FOR CONSENT TO THE TRANSFER ) Indemnity Agreement No. B-78 OF LICENSES )
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t PREFILED TESTIMONY OF ORRIN T. COLBY, JR.
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8805110040 880509 PDR l T ADOCK 05000344 i DCD i
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'l EXMIBIT NO. 5 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company )
PacifiCorp ) Docket No. EC88-2-000 PC/UP&L Merging Corp. )
PREFILED TESTIMONY OF ORRIN T. COLBY, JR.
ON BEHALF OF UTAH POWER & LIGHT COMPANY
> PACIFICORP PC/UP&L MERGING CORP.
t January 8, 1988 i
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SUMMARY
OF TESTIMONY OF ;
ORRIN T. COLBY, JR.
- ISSUES ADDRESSED :
- 1. Introduction of the Joint Application for Authorization for a Merger filed with this Commission in this Docket.
- 2. Comparison of operating costs with and without the merger.
- 3. Impact of the merger on wholesale rates.
- 4. Effect of the merger on the Bonneville Power Administration.
- 5. Effect of the merger on meaningful regulation by state i commissions.
- 6. Whether there is any possibility of misallocation of costs.
7< Whether there is increased potential' for diversion of funds from operating purposes.
- 8. Eff.ect on prudence reviews.
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CONTENT AND CONCLUSIONS Joint ADD 1(cation for Authorization f The Joint Application to the Commission for approval of the merger is identified as Exhibit No. 7. The Agreement and Plan of Reorganization and Merger and Amendment dated August 12, 1987, setting forth the terms and conditions of the merger, is included !
as Exhibit L.
Comparison of Operating Costs with and Without the Mercer The Applicants have compared the projected costs oi their i
separate electric operations for the period 1988 through 1992 to the costs once the merger occurs. Joint savings from reduced operating expenses increase from $17 million in 1988 to some $80 million in 1992. Applicants' financial status of electric !
utility operations with resulting impacts upon various financial indicators are shown, including general rate impacts.
1 Imoact on Wholesale Rates Because of UP&L's wholesale fuel adjustment clause, the power supply benefits resulting from savings in the areas et fuel and purchased power vill automatically be reflected in bil4ings i
to UP&L's wholesale customers.
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Effect on Bonneville Power Administration The Bonneville Power Administration (BPA) Exchange Program Agreement provides for a comparison of a utility's Average System Cost (ASC) for production and transmission related costs to similar costs of BPA. Compensation for the difference is '
provided to the utility to be passed on to its qualifying residential and small farm customers.
The merger savings will reduce the Applicants' ASC, resulting in a reduced compensation payment by BPA. UPL/PP&L customers remain virtually unaffected.
, Meaninciul State Reculation After the merger, 39 percent of PacifiCorp's electric customers vill reside in the State of Utah and 33 percent will reside in the State of Oregon. The regulatory commission in each of those states has a long history of dealing with utilities that serve in several states. Prior to the merger PacifiCorp already operates in six states and UP&L operates in three states. Thus
< all seven states and FERC have had a long history of dealing with multiple jurisdictions in regulating UP&L and PP&L prior to the [
merger. The merger will have no effect on meaningful regulation. !
Nothing vill diminish the state regulatory authority granted by l law. Numerous other utilities operate in more than one jurisdiction. The merged utility vill not be dominant in the !
i vestern part of the United States. [
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i No Potential Misallocation of Costs l m
r The merger does not create any potential _for misallocation i
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of costs by reason of PPL's diversification. The incidence of l
diversified investor-owned utilities is high and growing. .The i
commissions. regulating PP&L and UP&L are dealing with utility ;
diversification today and satisfy themselves that adequate j separation is maintained between regulated and non-regulated [
activities, i Utilities, diversified or not, safeguard against f
misallocation through internal controls and other means. The
! audit trail created by accounting and information systems permits i !
audits ay scorcs of external auditors. In UP&L's case, at least l I
30 groups perform audits. The chance of any misallocation of !
costs or funds is remote. ;
No Diversion of Funds from Ooeratino Purooses f I
l Strict accountability pursuant to the FERC Uniform System of I
! Accounts is required for revenues and expenditures related to :
1 electric operations. A diversified company, with electrical ;
systems costing many billions of dollars, cannot possibly have i
any incentive to neglect that investment, i safeguards to prevent a diversified utility from improving !
i net earnings in the near-term by neglecting the long-run I
integrity of its electrical system are already in place. The l I
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issue has been faced by numerous regulatory _ commissions on an on- l
, going basis. . Industry standards, opportunity for participation ;
in the surplus sales market and customer expectations all l enforced by regulatory authority, discourage a utility from f neglecting the physical condition of its system. Self-interest as a result of the bulk of a utility's income being derived from ;
utility operations also dictates that utility business not be t neglected.
No Imoairment of Prvdence Reviews l 1
Regulatory commissions deal with multi-state company f f
i operations in conducting prudence reviews. No change in any l l
authority to conduct such reviews will result from the merger. i Nothing in this merger vill affect these reviews or increase.
their complexity. j
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1 QUESTION 2 Please state your name.
3 ANSWER 4 Orrin T. Colby, Jr.
5 QUESTION 6 What is your business address?
7 ANSWER 8 My business address is Utah Power & Light 9 Company, 1407 West North Temple Street, Salt Lake City, 10 Utah, 11 QUESTION 12 What is your position and background with Utah 6
13 Power & Light Company?
14 ANSWER 15 I am Controller and Chief Accounting Officer of 16 Utah Power & Light Company (UP&L). I joined UP&L in 1966 17 and have held various accounting and supervisory positions 18 since. In addition to these responsibilities, I am 19 responsible for budgets and forecasts, internal controls, 20 revenue requirements, average system cost calculations, 21 certain employee benefit matters, and r.umerous other 22 assignments.
23 QUESTION 24 What is your educational background?
25 ANSWER 26 I have both a bachelor's and a master's degree in
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) 1 Accounting from Brigham Young University. Additionally, I
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2 have attended various educational, professional, and j 3 industry seminars. F 4 QUESTION {
5 Are you a member of any professional associations !
6 or organizations? j 7 ANSWER l 8 Yes. I am a member of the American Institute of f I i 9 Certified Public Accountants. American Institute of I 10 Certified Public Accountants Tax Division, Utah Association 11 of Certified Public Accountants, Accounting Research
- 12 Association, Insurance Accounting and Systems Association, 3
International Foundation of Employee Benefit Plans, 13 1 ,
14 Accounting Research Committee of Edison Electric Institute ;
15 (EEI), Vice Chairman of Chief Accounting Officers Committee P
- 16 of EEI, Member and Past Chairman of the Guidance Committee !
i 17 of the Accounting and Finance Section of the Northwest ,
18 Electric Light and Power Association, Chairman of the 19 Accounting Principles Committee of the Northwest Electric 20 Light and Power Association and member of Board of [
21 Directors and Treasurer o? . Utah Health Cost Management i
22 Foundation.
i 23 QUESTION 4
24 Are you a licensed Certified Public Accountant? j
! 25 ANSWER l 1
l 26 Yes, I am a certified Public Accountant licensed [
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1 1 in the State of Utah. l 2 QUESTION ,
3 Have you previously testified before the Federal y 4 Energy Regulatory Comission (FERC) and also before state E 5 regulatory commissions?
6 ANSWER 7 Yes. I have testified before this Commission on j 8 several occasions as well as before the Utah, Idaho, ;
9 Wyoming, and Arizona public utility regulatory commissions. ;
10 QUESTION 11 Please indicate the general topics you will be 12 presenting in your tettimony, ;
13 ANSWER !
14 I will introduce the exhibits included in the 15 Application For Authorization For Merger filed with this 16 Commission on October 5, 1987. I will also address the l 17 following issues specified by the Commission in its order j 18 of December 10, 1987 under the headings entitled "Effect on !
i 19 Rates" and "Effectiveness of Regulations" Operating costs 20 before and after the merger, effect on Bonneville Power 21 Administration, meaningful regulation by state commissions, '
22 potential for misallocation of costs, potential for i t
23 diversion of funds from operating purposes, and potential 24 impairment of prudence reviews. (
25 QUESTION 26 Do you have any exhibits that will be presented f
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6 1 with your testimony?
2 ANSWER, 3 Yes. I have two exhibits. The first, Exhibit 4 No. 5, consists of seven schedules. Schedule 1 is a copy 5 of the joint proxy statement and prospectus, Securities and 6 Exchange Commission (SEC) Fom S 4, related to the merger.
7 I will identify the remaining schedules later in my 8 testimony. The second, Exhibit No. 7, is a copy of the
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9 Joint Application For Authorization For A Merger filed with 10 this Commission in accordance with its regulations under 11 CFR 18 Part 33. ,
12 Q?ESTION ;
13 Are you familiar with the Attachments and 14 Exhibits which constitute a part of the Application, i
15 Exhibit No. 77 ;
16 ANSWER .
17 Yes.
18 QUESTION :
i 19 What is the source of the information contained 20 in the attachments and exhibits? ,
j l 21 ANSWER l 22 PacifiCorp and Utah Power corporate books and 23 records.
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- 0. T. Colby, Jr. 5-i 1 QUESTION 2 Would you please briefly describe Exhibit No. 77 3 ANSWER l
4 Yes. Item (a) shows the name and address of the ,
5 principal business offices of Utah Power, PacifiCorp, and !
6 PC/UP&L Merging Corp.
7 Item (b) shows the states under which the 8 Applicants are incorporated, the respective dates of :
9 incorporation, and the states in which the Applicants are 10 domesticated.
! 11 Item (c) shows the names and addresses of persons t
12 authorized to receive notice.
, 13 Item (d) is a List of Officers and Directors for 14 the Applicants as they existed at the time of the filing.
i 15 Item (e) is a description of the general 16 character of the business of the Applicants and territories i
17 s e rved. L
- 18 Item (f) is a statement describing facilities 19 owned or operated for generation, transmission, and 20 distribution of electric energy in interstate commerce or 21 the sale of electric energy at wholesale in interstate 22 commerce, t 23 Item (g) is a list of Applicant's Licensed 24 Hydroelectric Projects. j 25 Item (h) contains a description of all capital !
26 stock outstanding, including common and preferred stock at h
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1 July 31, 1987 for PacifiCorp Maine and Utah Power, a 2 listing of the dividends paid, and the rates thereof, for 3 Utah Power and PacifiCorp Maine capital stock for the 4 preceding five calendar years, and a description of securities proposed to be issued upon conversion of Utah 5
6 Power and PacifiCorp Maine capital stock to PacifiCorp 7 Oregon capital stock, including amounts, shares outstanding 8 and other data pertaining to the conversion of shares.
9 Item (i) consists of a listing of each class and 10 series of the long-term debt of PacifiCorp and Utah Power 11 as of July 31, 1987, including a brief description of each 12 class and series and the amount authorized and outstanding, b
13 and a listing of debt obligations to be assumed by 14 PacifiCorp Oregon, 15 Item (j) is a description of the proposed 16 transaction and a statement as to consideration.
17 Item (k) is a description of the facilities to be 18 merged.
19 Item (1) contains a statement of the Original 20 Cost of Facilities of Utah Power and Pacific Power as of 21 December 31, 1986, 22 Item (m) is a statement of the effect of the 23 transaction upon existing contracts.
24 Item (n) shows tne names and addresses of counsel 25 who have passed upon the legality of the merger.
26 Item (o) describes other Federal and State
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1 regulatory bodies where the Applicants have filed 2 application for approval of the proposed merger.
3 Item (p) is a~ statement describing how the 4 proposed merger is consistent with the public interest.
5 Item (q) is a listing of city / county franchises 6 held by Utah Power and Pacific Power.
7 Item (r) is a form of notice suitable for 8 publication in the Federal Register which briefly ,
9 summarizes the facts contained in the Application so as to 10 acquaint the public with its scope and purpose.
11 Exhibit A contains copies of Articles of 12 Incorporation or Utah Power and PacifiCorp Maine.
4 Exhibit B contains corporate by-laws and related 13 14 cmendments for Utah Power, PacifiCorp Maine, and PC/UP&L 15 Merging Corp. (which becomes PacifiCorp Oregon following 16 the merger).
17 Exhibit C contains resolutions of the BeTrd of .
18 Directors authorizing the merger from Utah Power, ,
19 PacifiCorp Maine, and PC/UP&L Merging Corp.
20 Exhibit D contains a brief description of the 21 various mortgages, Trust Deeds and indentures of Utah Power 22 and PacifiCorp Maine. ,
23 Exhibit E contains signed copies of opinion of 24 counsel in respect to legality of the proposed transaction.
I 25 Exhibit F contains a listing of Intercorporate l 26 Relationships pertaining to members of the Board of ,
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1 Directors of Utah Power and a statement by PacifiCorp 2 addressing the measure of control or ownership of 3 PacifiCorp by any public utility, bank, trust company, or 4 company supplying electric equipment. It also contains a 5 statement concerning the directors and officers of PC/UP&L 6 Merging Corp.
7 Exhibit G contains consolidated balance sheets 8 and supporting plant schedules at June 30, 1987 for 9 PacifiCorp (and the major segments contained therein, i.e. ,
10 electric), Utah Power and proformed, or aggregated, to 11 reflect the merged statement of financial position as if 12 the merger had occurred at June 30, 1987. See also the 13 balance sheet and related financial statements in the 14 prospectus , i.e. , SEC Form S-4, Exhibit No. 6 Schedule 1.
15 Exhibit H contains contingent liabilities for 16 Utah Power and PacifiCorp as of July 1987.
17 Exhibit I contains Statements of Ir.come for the 18 12 monch period ending June 30, 1987 for PacifiCorp Maine 19 (and the major segments related thereto), Jtah Power and 20 proformed, or aggregated, as if the merger had been in l 21 effect during the entire 12 month period ending June 1987 22 See also the Income Statement and the related financial 23 statements in the prospectus, i.e., SEC Form S-4 Exhibit
- 24 No. 6 Schedule 1.
l 25 Exhibit J contains a statement of Retained 26 Earnings for the 12 months ended June 30, 1987 for l
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1 PacifiCorp Maine and Utah Power proformed, or aggregated, 2 to reflect the merged corporation as if it had been in 3 effect for the 12 months ended June 1987.
4 Exhibit K contains a copy of each application 5 filed with state regulatory bodies in connection with this 6 proposed transaction.
7 Exhibit L is a copy of the Agreement and Plan of 8 Reorganization and Merger and Amendment dated August 12, 9 1987, which sets forth terms and conditions of the merger.
10 Exhibit M is a general map of the service areas 11 of Utah Power and Pacific Power.
12 OPERATING COSTS BEFORE AND AFTER MERGER QUESTION Mr. Colby, moving now to certain areas addressed 15 by this Commission in its December 10, 1987 order under the 16 heading "Effect on Rates," how do operating costs of both 17 companies following the merger compare to the present costs 18 of each company?
19 ANSWER 20 Total operating expenses will decrease once the 21 merger occurs compared to costs without the merger. Joint 22 savings reduce operating expenses an estimated $17 million 23 in 1988 (assuming the merger were in effect June 1, 198G),
24 increasing to some $80 million in 1992. Such cost 25 reductions are the result of operating expense savings 26 reflected in Mr. Reed's Exhibit No. 4 Schedule 3 as they l
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10 - o 1 impact utility operations.
2 QUESTION 3 Do the Applicants prepare forecasts of electric
- 4. operations in the normal course of business?
5 ANSWER 6 Yes. Typically the companies prepare a one year 7 operating budget and a five year financial forecast.
8 QUESTION 9 Have the Applicants prepared such budget and 10 forecasts for 1988 to 19927 11 , ANSWER 12 Yes. Schedule No. 2 of Exhibit No. 6 is the b
13 recently completed five-year forecast of electric utility 14 operations for UP&L, Pacific Power and the merged company.
15 The UP&L forecast as well as the merged ferecast (utilizing 16 the benefits calculated by Mr. Read) were prepared under my 17 supervision and direction. The Pacific Power forecast was 18 prepared under 1:he supervision of Mr. Reed, and he will be 19 prepared to address details related thereto. The schedule 20 shows effects on revenue, expense, cash flow, return and 21 other relevant utility operating forecast information. The 22 separate company forecasts were prepared recognizing the 23 probability of the merger. We used the forecast for this 24 purpose rather than p):oforming onto actual historical 25 financial data. We did this because actual 1987 results do 26 not reflect the full annualized effect of the cost
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1 1 reduction efforts undertaken by Utah Power in 1987. The 2 projection cures this deficiency. If the post-merger 3 numbers were to be compared with actual 1987 results, the 4 benefits from the merger would appear to be greater than 5 those shown on Schedule 2 of Exhibit No. 6.
6 QUESTION 7 You indicate the forecast is for electric 8 operations. Please explain what you mean.
9 ANSWER 10 As indicated, we have prepared the forecast to Il reflect only the regulated electric utility operations. ..
12 Non-utility operations are not included because the impact i 13 of the merger on the electric operations of the companies 14 is the relevant consideration in this cace.
15 QUESTION 16 In the 5-year forecast, have you attempted to 17 allocate any merger benefits between the two companies?
. 18 ANSWER 19 No.
20 WHOLESALE FUEL ADJUSTMENT CLAUSE 21 QUESTION 22 Since Utah Power has a wholesale fuel adjustment 23 clause in place, will certain of the merger benefits 24 automatically flow through to the wholesale customers under 25 this mechanism?
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m O. T. Colby, Jr. 1 ANSWER 2 Yes. A portion of the benefits expected from the 3 merger are power supply benefits which consist of savings 4 expected in the areas of fuel and purchased power. As 5 these savings are realized, the lower costs will 6 automatically be reflected in the billings of Utah Power's 7 wholesale customers on a one-month lagged basis, as at 8 present. Schedule 3 of Exhibit No. 6, which was prepared 9 under my supervision and direction, illustrates the 10 reduction in power costs which could flow through the Fuel 11 Adjustment Clause to Utah Power wholesale customers for 12 each $1 million of merger-related power cost savings in the l
13 Utah Division. We have reduced UP&L's budgeted fuel costs 14 by $1 million and then calculated a new, lower fuel 15 adjustment clause rate. The difference between the 16 budgeted adjustment clause rate and the new rate ic then 17 applied to the forecast kwh for firm wholesale customers.
l 18 This illustrates that the merger-related fuel savings 19 anticipated to be automatically realized by Utah Power's I
20 wholesale customers for each $1 million of fuel savings 21 realized by UP&L is estimated to be some .06 mills per kwh.
22 For Sierra Pacific Power Company, this benefit could be l 23 some $36,000 annually for each $1 million in Utah Division 24 power cost savings. For Nevada Power Company, this benefit 25 could be expected to be some $15,000 in 1990 and 26 approximately $25,000 thereafter for each $1 million in l
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1 Utah Division power cost savings, on an annual basis.
2 QUESTION 3 Are these benefits in addition to the merger 4 savings shown in Mr. Reed's Exhibit No. 4 Schedule 37 5 ANSWER 6 No. All merger-related benefits are included in 7 Mr. Reed's Exhibit No. 4 Schedule 3, including benefits 8 which would flow through the fuel adjustment clause to UP&L 9 wholesale customers.
10 EFFECT ON BONNEVILLE POWER ADMINISTRATION 11 QUESTION 12 Please describe the Bonneville Power 13 Administration (BPA) Exchange Program Agreement.
14 ANSWER 15 The Exchange Agreement was a part of the Pacific 16 Northwest Electric Power Planning and Conservation Act of 17 1980 and provides for a "paper" financial transaction as 18 follows: a) the exchanging utility calculates its Average 19 System Cost (ASC) for production and transmission related 20 costs, b) the utility ASC is then compared with the 21 appropriate BPA rate, c) the utility is compensated for l
22 the related cost difference which it must pass on to its l
23 qualifying residential and small farm customers. BPA 24 passes on the costs resulting from the program to its 25 customers.
26 The reduced production and transmission costs
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I resulting from the merger will benefit BPA customers. If 2 we assume that the combined UP&L/PP&L ASC credit decreases 3 by $100, then the exchange compensation will be 4 correspondingly reduced. UP&L/PP&L customers will remain 5 revenue neutral because their cost of power purchased from 6 UP&L/PP&L will decrease $100, offset by the lesser BPA 7 credit of $100. BPA customers in turn benefit by the $100 8 reduced credit.
9 QUESTION 10 What amount of benefits are customers of the two 11 companies presently receiving under the Bonneville 12 Residential Purchase and Sale Agreement (RPSA)?
13 ANSWER 14 In 1986, Utah Power residential and small farm .
15 customers received $23 million in the Idaho jurisdiction 16 Pacific Power residential and small farm customers received 17 $58 million in Idaho, Montana, Washington, and Oregon.
18 QUESTION 19 Will the merger reduce average production and 20 transmission costs for the merged company?
21 ANSWER 22 Yes. Production costs will be reduced. As 23 described by Mr. Steinberg and Mr. Reed, a sizeable portion 24 of the merger benefits consist of power supply benefits.
25 QUESTION 26 Will these merger benefito lower the payments
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l 1 Bonneville makes to'the two companies under the RPSA?
2 ANSWER 3 Yes. Lower _ production costs will ultimately 4 result in lower Average System Cost for the companies' I
5 qualifying jurisdictions, which will contribute to reducing i
6 the disparity in company /productionand transmiscion costs as compared
, 7 to Bonneville's own costs. As that disparity decreases, 8 RPSA benefits to Utah Power and Pacific Power would also 9 decrease. Such a decrease in benefits would not increase -
10 the applicable cost to customers because the reduction in 11 benefits would result in both lower retail rates and a 12 lower exchange credit.
13 QUESTION 14 Will Bonneville's control over the companies' 15 Average System Cost methodology, which is the basis for the 16 RPSA, be diminished under the merger?
17 ANSWER [
Calculation of Average System Cost (ASC) is 18 No.
, 19 prescribed by Bonneville, which also has authority to 20 review and appropriately adjust ASC filings submitted by 21 participating utilities. The merger in no way diminishes !
22 Bonneville's statutory authority over Average System Cost
- 23 determination. Also, given the magnitude of benefits the 24 companies will continue to receive through the Bonneville 25 Residential Purchase and Sale Agreement, it is evident that 26 Bonneville's interest and influence will not be diminished.
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1 MEANINGFUL REGULATION BY STATE COMMISSIONS 2 QUESTION 3 Will meaningful regulation of the merged company 4 by state commissions be impaired because of a proliferation 5 of jurisdictions?
6 ANSWER 7 No. Subsequent to the merger, 39 percent of 8 PacifiCorp's electric customers will reside in the State of 9 Utah and 33 percent will reside in the State of Oregon. In 10 other words, following the merger, the greatest 11 concentration of the new company's business will occur in 12 these two jurisdictions. Each of those states has a long 13 history of regulating utilities operating in more than one 14 jurisdiction. Together, the Utah and Oregon commissions 15 will have authority over more than 70% of total electric 16 operations. Also, since Pacific Power already operates in 17 six of the state jurisdictions, the merger adds only one 18 additional jurisdiction to PacifiCorp's current operacions.
19 The additional jurisdiction is the Utah jurisdiction and, 20 as described above, as the largest jurisdiction it will 21 constitute a significant portion of the new total. As the 22 Commission is aware, between the two companies all seven 23 states presently regulate the electric operations involved.
24 Seen in this light, the merger will not have any adverse l
25 impact on meaningful regulation. Schedule 4 of Exhibit No.
, 26 6, which was prepared under my supervision and direction, l
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1 shows the percent of total customers in each jurisdiction 2 for UP&L, Pacific Power and the merged company. Both 3 companies have been, nd will continue to be, attentive to 4 the needs of all their jurisdictions.
5 QUESTION 6 Is the authority of state commissions diminished 7 in any other way under the merger?
8 ANSWER 9 No. Unlike certain business combinations and/or 10 mergers, this merger will allow each state commission to 11 continue to have all the authority over the Applicants they 12 presently have. The authority given the state commissions 13 is granted by law and that authority is broad enough to 14 encompass the entire business of public utilities. Many 15 investor-owned electric utilities in the country are 16 multi-jurisdictional, including both of the Applicants in 17 this proceeding. Multi-jurisdictional operations are 18 common practice. Schedule 5 of Exhibit No. 6, which was 19 prepared under my supervision and direction, contains a 20 listing of multi-jurisdictional investor-owned electric 21 utilities in the country, including the relative proportion 22 of customers in each jurisdiction. It shows that many 23 investor-owned utilities in this country are 24 multi-jurisdictional utilities, so the merger will not 25 create new precedent in this regard. Moreover the list 26 does not include holding companies, many of which operate
B O. T. Colby, Jr. 1 in numerous jurisdictions. For example, the operating 2 subsidiaries of American Electric Power Company operate in 3 seven states.
4 Schedule 6 o f Exhibit No. 6, which was prepared 5 under my direction and supervision, shows a ranking of 6 investor-owned utilities by kwh sales, number of customers, 7 and system capability, including the proposed new merged 8 company. It demonstrates that the merged company is far 9 from being the largest electric utility in the country.
10 Also it should be noted that two of the largest utilities 11 in the country under each criterion operate in the Western 12 States Coordinating Council Region. The operating i
13 subsidiaries of holding companies are not combined in this 14 schedule. Tables I and III of this schedule include the 15 Bonneville (BPA) and Western Area (WAPA) power marketing 16 administrations. They show, for example, that the combined 17 system capability of the Applicants, when merged, is less 18 than that reported for Western Area Power Administration 19 (WAPA) and less than half that reported for Bonneville 20 Power Administration. It also shows that the combined 21 kilowatthour sales of the Applicants in 1986 is less than 22 that of WAPA and approximately half that of Bonneville 23 Power Administration in 1986. Therefore, the size of the 24 merged company does not dominate even within its own 25 region.
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1 QUESTION 2 What do you conclude from this exhibit?
3 ANSWER 4 I conclude that the merged company does not 5 create an entity such that regulatory control is 6 effectively diminished.
7 NO POTENTIAL MISALLOCATION OF COSTS 8 QUESTION 9 Because of certain non-regulated activities by 10 subsidiaries of PacifiCorp, will there be greater potential 11 for misallocation of costs under the merger?
12 ANSWER 13 No. Appropriate safeguards have been put in 14 place. A significant number of investor-owned electric 15 utilities in this country also engage in non-regulated 16 enterprise, including both Applicants in this proceeding.
17 Grouping of regulated and non-regulated business activities 18 within a single company is a common occurrence. It should 19 be noted that as a result of the merger, the unregulated 20 activities of PacifiCorp will constitute a smaller portica 21 of its business than before. Industry statistical 22 information available from Edison Electric Institute (EEI) 23 shows that the incidence of non-regulated diversified 24 business by investor-owned electric utilities is 25 widespread.
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1 QUESTION 2 Does the fact that the new company will have both 3 regulated and non-regulated activities create an 4 obstruction to utility regulation?
5 ANSWER 6 No. The merger will not cause this situation.
7 The Applicants' commissions are dealing with it at present.
8 They satisfy themselves that adequate separation is 9 maintained between the regulated and non-regulated 10 activities. This type of commission oversight, as well as 11 the merged company's obligation to comply with all 12 applicable regulations, will in no way be diminished by the 13 ~ merger.
14 QUESTION 15 How does a diversified utility safeguard against 16 misallocation of costs?
17 ANSWER 18 It is accomplished primarily through its 19 information and accounting systems. Such systems create an 20 all-purpose audit trail and have the capability to generate 21 reports to meet any reasonable need for information. These 22 systems are used for internal cost managemera as well as to 23 Provide data required for external audits and regulation.
24 QUESTION 25 Can such systems safeguard against misallocation 26 of costs?
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1 ANSWER 2 Yes. There are numerous internal controls built 3 into such systems such as electronic data processing 4 programmed edits, program change controls, data security 5 controls, and file access controls, as well as periodic 6 review by independent staff and intecnal auditors.
7 QUESTION 8 Can a regulatory commission ind> pendently verify 9 that a regulated company's information and accounting 10 systems are reliable?
11 ANSWER 12 Yes. Public utilities are routinely audited by 13 numerous regulatory auditors. Public service commissions 14 have staff auditors who also audit the procedures of the 15 utility as representatives of the commission. Of course, 16 the FERC audit staff reviews both of these companies 17 routinely.
18 QUESTION 19 Do other parties routinely perform financial or 20 operational audits or review records of UP&L7 21 ANSWER 22 Schedule 7 of Exhibit No. 6, which was prepared 23 under my supervision and direction, consists of a list of 24 parties that routinely perform financial and/or operational 25 audits or review records of UP&L. This example is typical 26 of the experience of Pacificorp and most utilities. It
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I shows that both financial and operational aspects of the 2 company are scrutinized by many groups. The audit trail 3 and internal control safeguards coupled with the numerous 4 audits and other reviews make the chance for misallocation 5 or diversion of funds very remote. Also, as Controller and 6 Chief Accounting Officer, I have the responsibility to 7 insure adequate internal controls and proper reporting.
8 DIVERSION OF FUNDS FROM OPERATING PURPOSES 9 QUESTION 10 Does the merger increase the potential for 11 diversion of funds away from operating purposes?
12 ANSWER l
13 No. Strict accountability pursuant to the FERC 14 Uniform System of Accounts is required for revenues and 15 expenditures related to electric operations. Such accounts 16 are subject to review by the Office of the Chief Accountant 17 of this Commission. The merger does not change these 18 te.quirements.
19 QUESTION 20 Will a diversified company choose to forego l 21 long-term investments in its electric system in order to 22 improve the financial performance of its non-regulated j 23 operations?
24 ANSWER 25 No. Both companies are committing electrical l 26 systems costing multi-billions of dollars to this merger.
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O. T. Colby, Jr. ,
1 A diversified utility should have no greater-incentive to 2 neglect its utility system than a nnn-diversified utility.
3 Whether diversified or not, all utilities must exercise 4 -judgment as to the proper balance between the need for 5 long-term system maintenance and improvements versus 6 immediate earnings improvement.
7 QUESTION 8 Are there safeguards to prevent a diversified 9 utility from improving net earnings in the near-term by 10 neglecting the long-run integrity of its electrical system? .
11 ANSWER 12 Yes. This is not an issue unique to the 13 Applicants in this proceeding. Given the widespread 14 incidence of diversified utilities in this country, 15 companies and regulators have crossed this bridge many 16 times prior to this proceeding and are dealing with this 17 issue on an on-going basis. Industry standards, opportunity 18 for participation in the surplus sales market, and customer d
1,9 expectations all disceurage a utility from neglecting the 20 physical condition of its system. Moreover, where the bulk 21 of the company's income is derived from utility operations, 22 enlightened self-interest dictates that the utility 23 business not be neglected. This and the fact that FERC and 24 the seven state commissions have full authority via 25 regulatory oversight ensure that a utility does not allow 26 deterioration to occur.
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- 0. T. Colby, Jr. 1 NO IMPAIRMENT OF PRUDENCE REVIEWS 2 QUESTION 3 Does the merger curtail or impair the rights of 4 any commission relative to prudence reviews?
5 ANSWER 6 No. Each commission will continue to have all 7 the authority to pursue reviews of all aspects of utility 8 operation as provided by state statute and Federal 9 regulation. Every commission has authority and is capable 10 of conducting such reviews without concern of multi-state 11 company operations. The complexity of those reviews will 12 not change as a result of the merger.
' 13 QUESTION 14 Does this conclude your direct testimony?
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15 ANSWER 16 Yes.
, 17 18 19 20 21 22 23
!24 25 26
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UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company )
PacifiCorp ) Docket No. EC88-2-000 PC/UP&L Merging Corp. )
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COUNTY OF SALT LAKE )
Orrin T. Celby, Jr., being first duly sworn, deposes and says: thr.t he has read and is familiar with the contents of the foregoing Testimony of Orrin T. Colby, Jr.;
that if asked the questions contained in said Testimony, the answers and response berete would be an shown in said Testimony; that the facts contained in said answers are true to the best of his knowledge, information and belief; and that he adopts these answers as his own.
lv Af Orrin T. , Jrd ~~
d SUBSCRIBED AND SWORN to before me this 5 day of January, 1988.
bl4b 1ptaryPublip My Commission Expires Residing at:
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