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									     Before the Public Service Commission of Utah

A PPLICAT ION OF P ACIFI C ORP FOR         Docket No. 04-035-30
  AND N ECESSIT Y A UTHORIZING                 DPU Exhibit 2.0
         P OWER P ROJECT

                          Direct Testimony


                           Wayne Oliver

                            On Behalf of

                    Division of Public Utilities

                          September 27, 2004

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Table of Contents

Introduction ................................................................................................. 1

Scope of Testimony ...................................................................................... 2

Summary of Testimony ................................................................................. 3

PacifiCorp’s 2003 -A RFP ............................................................................ 10

Bid Evaluation and Selection Process…….…………………………………………15

Quantitative Evaluation and Final Selection …….. ..……………………………..20

Conclusions and Recommendations .............................................................. 30

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List of Attachments

Exhibit           Title

DPU Exhibit 2.1   Resume of Wayne Oliver

DPU Exhibit 2.2   Economic Evaluation of Bids

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 1             Certificate of Convenience and Necessity
 2                         Lake Side Power Project
 3                           Docket No. 04-035-30

 5   Introduction

 7   Q:   Please state your name, occupation and business address.
 8   A:   M y name is Wayne Oliver.          I am Principal and Founder of Merr imack
 9        Energy Group, Inc. (Merrimack Energy), 727 Lafayette Road, Seabrook,
10        New Hampshire 03079.

11   Q:   On whose behalf are you testifying?
12   A:   I am testifying on behalf of the Utah Division of Public Utilities.

13   Q:   Please summarize your educational and professio nal experience.
14   A:   I have over 25 years of experience in the energy field. During that time, I
15        have held senior level positions as an economist and consultant with
16        government agencies and private sector firms. I was formerl y a Founder
17        and Senior Officer of Reed Consulting Group, Inc. I also served for a
18        short time as a Director with Navigant Consulting, Inc. after the
19        acquisition of Reed Consulting Group by Metzler & Associates in 1997
20        and the subsequent formation of Navigant to integrate a number of the
21        consulting firms acquired by Metzler & Associates. I have also been an
22        Assistant   Professor   in   the   Economics   Department   at   Northeastern
23        Universit y and an Adjunct Professor in the Finance Department at Babson
24        College, where I taught courses in Risk Management and Futures and
25        Options. I have an MA in Economics and completed all course work
26        toward a Ph.D in Economics. My resume is attached as DPU Exhibit 2.1.

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 1   Q:        Please describe your experience with competitive bidding programs
 2            and power procurement processes?

 3    A:      I have served as project manager for over 20 competitive bidding
 4            assignments on behalf of electric utilities, other power buyers and public
 5            sector organizations representing a range of different technologies,
 6            project structures and bidder t ypes. In tha t process I have reviewed and
 7            evaluated hundreds of power suppl y proposals in the US and Canada. I
 8            have assisted clients in the design and development of competitive
 9            bidding programs, the associated RFPs for both power supply and DSM
10            options,    and   power      con tract     negotiations.        I    have     also   served       as
11            Independent Evaluator or Observer on a number of RFP processes. In
12            addition, I have provided technical assistance to utilities in evaluating
13            bids in the areas of fuel suppl y, critical path assessment, credit and
14            financial issues, and the commercial terms of power suppl y contracts. I
15            have also worked with power generators in submitting power suppl y
16            proposals, conducting market assessments and due diligence for power
17            project acquisition.


19   Scope of Testimony

21   Q:       What is the purpose of your testimony in these proceedings?
22   A:       I have been asked by the Utah Department of Public Utilities to evaluate
23            the application of PacifiCorp for a Certificate of Convenience and
24            Necessit y Authorizing Construction of the Lake Side Power Project,
25            including the supporting testimony and documentation, to assess whether
26            the RFP evaluation and selection process led to the selection of the best
27            alternative   under    the     competitive            bidding       process   undertaken          by
28            PacifiCorp. My review and evaluation reflects the approaches undertaken

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 1            by other utilities in implementing competitive bidding processes and the
 2            consistency of the PacifiCorp process with regard to “industry standards”.
 3            I also provide a series of recommendations regarding potential revisions
 4            to the competitive bidding process for future solicitations.

 5            The testimony filed by PacifiCorp’s witnesses in this case identify the
 6            factors that had the most important influence on the Company’s decision.
 7            These include: (1) the abilit y of the bidder to m eet the June 2007 in -
 8            service date requirement, (2) the economics of the bids relative to the
 9            Next Best Alternative, and (3) the risk factors of most importance
10            including CO2 liabilit y and inferred debt. My testimony will address each
11            of these factors.

12            The competitive bidding process utilized by PacifiCorp has two major
13            phases: (1) solicitation of bids to meet the requirements outlined in the
14            RFP and evaluation and selection of the bids received; and (2) contract
15            negotiations with the preferred bidders. The two phases need to be
16            coordinated and balanced since there is a possibilit y that the lower cost
17            option(s) selected in Phase I may contain significant risk or shift undue
18            risk to the utilit y and its customers during the negotiation phase of the
19            process. My testimony will largel y address the Phase I activities, focusing
20            largel y on the bid evaluation and selection process. Mr. Selgrade’s
21            testimony will address the proposed contracts and the contract negotiation
22            process, in particular, whether the contract str uctures and negotiation
23            process resulted in arrangements that presented equivalent or different
24            risks of project delay or failure to PacifiCorp.

25   Summary of Testimony

27   Q:       Please summarize the major conclusions of your testimony?

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 1   A:       Based on m y investigati on with regards to the competitive bidding and
 2            RFP process followed by PacifiCorp, the evaluation of the bids received
 3            under the 2003 -A RFP for baseload resources, the application of the risk
 4            factors in bid evaluation, and assessment of the contract negoti ation
 5            process followed by PacifiCorp, I conclude that the selection of the
 6            preferred resource was a reasonable decision given the parameters of the
 7            process. While the selection of the preferred resource is a reasonable
 8            outcome given the competitive bidding process undertaken by PacifiCorp,
 9            I believe there are a number of aspects of the process that can be
10            improved for future solicitations to ensure the potential benefits from
11            competitive bidding can be full y realized.


13   Q:       How is your testimony organized?

14   A:       M y testimony is presented in five sections. The first section describes
15            recent industry standards regarding the use of competitive bidding
16            processes for soliciting and selecting power suppl y options and the
17            characteristics of successful competitive biddin g programs. The second
18            section summarizes the competitive bidding process undertaken by
19            PacifiCorp, including the important parameters of the process outlined in
20            the 2003-A RFP. The parameters of the RFP are important because they
21            guide the bidder in its p roposal development. The third section addresses
22            the bid evaluation and selection process undertaken by PacifiCorp,
23            including the methodology used and basis for selecting the short -listed
24            bidders and the final evaluation, selection, and negotiation process with
25            the preferred bidder. The fourth section discusses the quantitative basis
26            and justification of the selection of the preferred bid. The fifth section
27            presents m y conclusions and recommendations        associated with the
28            assessment of the PacifiCorp 2003 -A RFP process for power suppl y
29            resources.

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 2   Characteristics of Competitive Bidding Programs

 4   Q:       In your experience, what are the characteristics of an effective
 5            competitive bidding program?

 6   A:       Based on m y experience with competitive bidding processes and
 7            observations regarding the success factors associated with such processes,
 8            an effective competitive bidding process should be designed to achieve
 9            the following objectives:

10                        1. The solicitation process should be fair and equitable, consistent,
11                           comprehensive and unb iased to all bidders

12                        2. The solicitation process should ensure that competitive benefits
13                           for utilit y customers result from the process

14                        3. The solicitation process should be designed to encourage broad
15                           participation from potential bidders

16                        4. The Request for Proposal documents (i.e. RFP, Response
17                           Package or Bid Form, and Model Power Contract) should
18                           describe the bidding guidelines, the bidding requirements to
19                           guide bidders in preparing and submitting their proposals, the
20                           bid evaluation and selection criteria, and the risk factors
21                           important to the utility issuing the RFP. The RFP documents
22                           should effectivel y inform the bidder how they can compete in the
23                           process.

24                        5. The solicitation process should include thorough, consistent, and
25                           accurate information on which to evaluate b ids, a consistent and

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 1                           equitable evaluation process, documentation of decisions, and
 2                           guidelines for undertaking the solicitation process.

 3                        6. The solicitation process should ensure that the power contracts
 4                           are designed to provide a reasonable balance between th e
 5                           objectives of the counter -parties, seeking to minimize risk to
 6                           utilit y customers and shareholders while ensuring that projects
 7                           can reasonabl y be financed.

 8                        7. The solicitation process should incorporate the unique aspects of
 9                           the utilit y system and the prefer ences and requirements of the
10                           utilit y and its customers.

11   Q:       Please describe some of the recent issues or trends associated with
12            competitive bidding programs?

13   A:       Over the past few years the competitive bidding programs instituted by
14            utilities have evolved w ith changes in the power market. Certainl y, the
15            most significant change over the past few years is the emphasis on credit
16            assurance and credit qualit y of the counter -part y. Credit quality of the
17            counter-part y is now one of the most important evaluation cri teria used by
18            utilities to evaluate and select bids and has important ramifications for
19            contract structure and contract negotiations. For example, the level of
20            collateral or securit y required of a bidder has generall y been increasing
21            and terms are more str ingent. These issues are particularl y important in
22            cases where a utilit y requires firm physical power and has limited access
23            to other power markets. Utilities and other power purchasers are
24            concerned about counter -part y default and are requiring more restr ictive
25            contract covenants to protect the customers and shareholders in case of
26            counter-part y default or bankruptcy. The recent spate of credit
27            downgrades for a number of power generators and the bankruptcy filings
28            of a few companies have heightened the con cern of the power buyer.
29            Since many of these power generators are involved in merchant power

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 1            markets with uncertain revenue streams and associated uncertain financial
 2            prospects, many power purchasers in the industry are focused on assessing
 3            counter-part y financial risk.

 4            Another recent trend is that price -related criteria have become the
 5            predominant final selection criteria since the independent power
 6            generation industry is reasonabl y mature and the success factors for
 7            project development are well known. Al so, integrated system anal ysis is
 8            more the norm for assessing and evaluating the final portfolio of bids.
 9            This allows the utility to attempt to optimize its portfolio based on the
10            established evaluation criteria and to hedge its risk through an array of
11            different contract structures and options. Utilities are still seeking
12            flexibilit y in the power procurement process and in making resource
13            commitments. This includes requesting and encouraging bids for short and
14            long-term resource options and a variet y of pr oject/contract t ypes and bid
15            sizes. Also, flexibility involves contract provisions designed to more
16            closel y match suppl y with requirements. Over the past few years, utilit y
17            self-build options have become more competitive due to the change in the
18            capital structure of independent power generators (i.e. more equit y in
19            projects is generall y required by financial institutions) relative to the
20            utilit y, the higher cost of borrowing for independents with lower credit
21            ratings, cost and access to transmission for ind ependent generators, and
22            an increase in tolling arrangements in which the utilit y assumes fuel risk.
23            Finall y, accounting rules and financial rating agencies are focusing more
24            attention on the implication of treating fixed purchased power obligations
25            as debt. The attendant implications of recent FASB Accounting initiatives
26            and the consensus of the United States Emerging Issues Task Force
27            (EITF) on EIFT issue 01 -8 “Determining Whether an Arrangement
28            Contains a Lease” are beginning to get more attention in the resource
29            selection process.

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 1   Q:       Please describe any other factors that have guided your assessment of
 2            PacifiCorp’s selection of the preferred bid?

 3   A:       As noted, in its RFP document and the testimony of its witnesses,
 4            PacifiCorp states a need for baseload po wer suppl y by June 2007. In the
 5            Currant Creek case, that significant requirement for new power supplies
 6            by PacifiCorp was affirmed, with concern of a capacit y deficiency in the
 7            summer of 2005 cited by both the Company and Committee witnesses. The
 8            Public Service Commission recognized the considerable need for power in
 9            Utah in the Currant Creek Decision (In the Matter of the Application of
10            PacifiCorp for a Certificate of Convenience and Necessit y Authorizing
11            Construction of the Currant Creek Power Project, Do cket NO. 03 -035-29,
12            Report and Order):

13                         Although neither the Division nor the Committee relies upon
14                         or refutes this anal ysis of resource need, it too shows
15                         capacit y deficiency. This deficiency is expected to be 1,049
16                         megawatts in summer 2005 and increases t o over 1,900
17                         megawatts in 2009….

18                         We find the magnitude of deficiency considerable, and as the
19                         Division testifies, we realize this is not new. The Company’s
20                         reliance on the wholesale market for meeting this need since
21                         the time it filed its IRP “RAMPP -5” in 1997, has placed the
22                         Company and its customers at considerable risk of the high
23                         cost of purchases or reduced reliabilit y. (Page 12)

24            The date on which a proposed project needs to be commercially available
25            to provide power is very important in competitive bi dding programs,
26            affecting the schedule for undertaking the bid evaluation process as well
27            as the contract negotiation process. A firm date for power requirements is
28            particularl y important if the utilit y requires firm physical power and does
29            not possess the ability to replace the power through short -term market

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 1            purchases. Based on the Decision in the Currant Creek case and the
 2            estimated requirements for new power resources in Utah, I have assumed
 3            in m y assessment that the selected bid needs to be commerciall y available
 4            by June 2007, and the activities and decisions undertaken by PacifiCorp
 5            are based on this constraint.

 6            I am also guided by the conclusions reached by Navigant Consulting as
 7            the Outside Evaluator. As the Outside Evaluator, Navigant was involved
 8            in the entire process and issued several reports on various aspects of the
 9            process. The objectivit y and credibilit y of any outside or independent
10            evaluator is at stake in these processes and as a result their opinions and
11            conclusions are important considera tions. My objective was not to
12            replicate Navigant’s assessment but to determine if the Company’s
13            selection was a reasonable decision given the information available to it
14            at the time it made its decisions.

15   Q:       What conclusions did Navigant reach with regard to the bidding
16            process?

17   A:       Navigant’s conclusions are included in the Public Version of Navigant
18            Consulting’s Final Report on PacifiCorp’s RFP 2003 -A dated September
19            8, 2004. Navigant concludes:

20                         PacifiCorp executed a fair and consistent process throughout
21                         the RFP to identify the most cost effective resources for
22                         meeting its projected suppl y needs.

23                         From an operational and design perspective, the RFP process
24                         developed and implemented by PacifiCorp functions as
25                         expected. It resulted in over 100 offers from th e market a few
26                         of which were economicall y competitive with the Company’s
27                         own internal benchmark options. It satisfied the primary
28                         criteria NCI looked for in the process: equal opportunit y,

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 1                              anal ytical objectivity, reasonableness and consistency.
 2                              Having met these, NCI unequivocall y supports the RFP
 3                              process as having been managed in an effective manner with
 4                              results that are full y supportable. (page 48)

 5   PacifiCorp’s 2003-A RFP

 7   Q:       Please summarize the key parameters of the 2003 -A RFP considered in
 8            your assessment of the RFP process?
 9   A:       The 2003-A RFP contained information to guide bidders in the submission
10            of their proposals and outlined the requirements of the purchaser. The
11            directions/requirements contained in the RFP document are important
12            because they ident ify the information bidders can assess in deciding
13            whether and how to submit a proposal. The following requirements are
14            among the most important factors in PacifiCorp’s competitive bidding
15            process as described in the RFP:

16                 1. PacifiCorp solicited bids for “up to” the following amounts of
17                        power: (1) 570 MW of baseload power; (2) 200 MW of peaking
18                        power: and (3) 225 MW of superpeak power for delivery into the
19                        East control area.

20                 2. A schedule outlining the steps of the process and the timing for
21                        each step in terms of dates for bid submission, announcement of the
22                        short-list and completion of definitive agreements was included.

23                 3. Adequate credit assurances may be required from a respondent.

24                 4. Bidder/product eligibilit y options were identified. In general, bids
25                        were welcomed for a variet y of pricing options and project
26                        structures including physical tolling agreements, call options, put

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 1                        options, virtual tolling arrangements, sales of an existing asset, and
 2                        construction and lease or sale of an asset.

 3                 5. Bidders were directed to i ncorporate costs associated with meeting
 4                        future air qualit y requirements in their bids. Bidders were informed
 5                        that cost assumptions consistent with the IRP base case assumptions
 6                        would be incorporated.

 7                 6. Bid terms for baseload and peaking resources would be f or up to 20
 8                        years.

 9                 7. The bid evaluation and selection process was outlined, including the
10                        short-list and negotiation process, with bidders informed that
11                        PacifiCorp intended to pursue definitive agreements with entities
12                        that provide PacifiCorp with the best c ost/risk balance, including
13                        resource characteristics, evaluated resource cost, and credit risk
14                        factors.

15                 8. The price and non-price criteria to be used in the evaluation process
16                        were identified along with the established weights for each criteria.
17                        For both the environmental factors and the dispatch criteria tables
18                        were provided identifying how the points would be awarded.

19                 9. For the price evaluation, the total evaluated cost of the proposal
20                        would be compared to PacifiCorp’s Next Best Alternative (NBA)
21                        for a resource with similar characteristics. The methodology to
22                        award points for the price component was also identified in the
23                        RFP.

24                 10.The post-bid negotiation process was also described. PacifiCorp
25                        indicated that it intended to negotiate both price and non -price
26                        factors during post -bid negotiations. In this section of the RFP,

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 1                        PacifiCorp     also     identified         several     conditions   that    guided       its
 2                        negotiation process:

 3                           a. Any factor that impacted the total cost of a resource would be
 4                                 included in the economic and risk evaluation.

 5                           b. The economic evaluation would be updated until such time as
 6                                 both parties execute a definitive agreement

 7                           c. The Company reserves the right to negotiate onl y with those
 8                                 entities who propose transactions that PacifiCorp believes in
 9                                 its sole discretion to have a rea sonable likelihood of being
10                                 executed

11                 11.PacifiCorp retained the services of an Outside Evaluator (Navigant
12                        Consulting) to ensure that the evaluation process is undertaken in a
13                        fair and unbiased manner.

14   Q:       Did the RFP document meet the criteria you identified for an effective
15            competitive bidding process?

16   A:       In general, the RFP document was consistent with the requirements for an
17            effective RFP. The RFP identified the evaluation and selection process,
18            the evaluation criteria, and the requirements of PacifiCorp an d the bidder.
19            The RFP also contained Appendix A, which listed the information
20            required        of     bidders.     In    addition,           PacifiCorp   identified    issues      of
21            importance and the rights it reserved during the negotiation process.

22            The decision to retain an Outside Evaluat or should also ensure the process
23            was undertaken in a fair and unbiased manner.

24            Also, as illustrated in the testimony of both Mr. Tallman and Mr. Furman,
25            the response of bidders to the RFP was significant, indicating broad

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 1            participation from bidders and the opportunit y to achieve competitive
 2            benefits for the customers.

 3             There were two issues however, that could have led to more complete
 4            bids or different product structures. First, PacifiCorp requested bids for
 5            no more than 20 years. However, due to the na ture of the Next Best
 6            Alternative, bids were initiall y compared against a 35 -year resource.
 7            Bidders were not made aware of such a comparison at the time they
 8            submitted their bids and could onl y speculate given the knowledge the y
 9            would be compared to the NB A. PacifiCorp did allow bidders to offer
10            comparable term options during the negotiation phase, after selection of
11            the short-list.

12            Second, the inclusion of a model power purchase agreement or Tolling
13            agreement could have provided valuable information to bi dders regarding
14            the risk sharing provisions of importance to PacifiCorp. Knowledge of
15            such a risk profile could have led bidders to propose a different structure
16            or decide whether and how to bid and could have served to facilitate
17            negotiations.

18   Q:       Do      you   b elieve   failure     to    include      the   model   contract     or    the
19            requirement that bidders submit proposals based on a different term
20            than the NBA could have biased the results of the bid evaluation and
21            selection process?

22   A:       It is not possible to determine definitively if these issues biased the final
23            evaluation of bids and one can onl y speculate how bidders may have
24            responded. However, I would not expect that the structure of the RFP
25            undul y biased the results of the evaluation and selection process,
26            especiall y since fin al short-listed bidders did have the opportunit y to
27            revise their bid term and were aware of the risk sharing requirements of
28            PacifiCorp through the negotiation process. However, if bidders were
29            aware they would be compared against a 35 -year resource they m ay have

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 1            offered creative options such as an option for PacifiCorp to buy the plant
 2            after the 20 -year contract term or could have structured their pricing
 3            differentl y. The issue of the comparison of bids with different terms is a
 4            common issue in many RFP pr ocesses, since utilities are generall y
 5            encouraging a range of resource/contract options and bidders are offering
 6            a variet y of product terms and structures.

 7   Q:       Are the non -price criteria included in PacifiCorp’s RFP consistent
 8            with the non-price criteria us ed in other utility processes?

 9   A:       PacifiCorp includes onl y two non -price criteria in the screening phase of
10            its evaluation process: dispatchabilit y and environmental attributes. Most
11            utilit y RFP processes generall y contain a much broader number and array
12            of non-price criteria, particularl y for the procurement of long -term
13            resources from new units. Non -price factors have been used to distinguish
14            proposals on the basis of the development feasibilit y of the project (i.e.
15            site control, environmental permitting status, financial capabilit y of the
16            sponsor, bidder experience, critical path schedule, etc.); operational
17            viabilit y (i.e. O&M plan, debt service coverage, acceptance of contract
18            terms, fuel contract provisions, etc,); reliabilit y of the proposal (financia l
19            support, contract securit y, credit assurance, etc.), flexibilit y offered (i.e.
20            delay option, expansion option, bid size, etc.); operational qualit y (i.e.
21            dispatchabilit y, scheduling flexibilit y, ramp rates, black start capabilit y,
22            etc.); and environmenta l impact. The use of broader non -price criteria can
23            often lead the purchaser to more clearl y distinguish between bidders and
24            can sometimes identify risks with the bid prior to contract negotiations.
25            PacifiCorp’s selection of the non -price criteria reflects the criteria of
26            most importance to PacifiCorp for screening purposes. Some of the other
27            criteria I listed are utilized by PacifiCorp in the final evaluation and
28            negotiations process. This application should still allow PacifiCorp to
29            distinguish effectivel y between bids.

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 2   Q:       PacifiCorp’s RFP identifies the importance of credit assurances in
 3            evaluating and selecting the counter -party from the bidding process.
 4            Is this typical of RFPs in the industry today?

 5   A:       Credit assurance is now one of the most important criteria in evaluating
 6            the bids submitted and in selecting the preferred options. Utilities have
 7            been conducting thorough credit assessments of bidders as part of their
 8            non-price evaluation and contract negotiations due to the lower credit
 9            qualit y of many independent power generators. Also, utilities are
10            generall y requiring higher levels of securit y and collateral from bidders
11            due to the concern over possible bidder default or bankruptcy. Likewise,
12            contract provisions reflect such risk. Utilities that need physicall y firm
13            power within a certain timeframe or have a system with limited outside
14            access are requiring greater credit assurance from counter -parties.


16   Bid Evaluation and Selection Process

18   Q:       Please describe the bid evaluation and selection process un dertaken by
19            PacifiCorp for the baseload RFP?
20   A:       PacifiCorp followed a multi -step process in the bid evaluation and
21            selection process. Once the bids were received, PacifiCorp conducted an
22            initial price and non -price assessment of all the bids. Mr. Tallman refers
23            to this step as the screening process (page 6 of his direct testimony). Bids
24            were then ranked according to their total scores for price and non -price
25            criteria. Both Mr. Furman and Mr. Tallman indicate in their testimony that
26            twent y of the offers we re short-listed for initial consideration. These
27            offers were provided from nine individual counterparties, thus illustrating
28            the presence of a competitive process.

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 2            All the bids selected for the preliminary short -list “beat” (provided net
 3            benefits) the in itial Next Best Alternative (NBA) used for the price
 4            screen. PacifiCorp (through Navigant Consulting) then initiated the
 5            validation process by contacting short -listed bidders to clarify their
 6            proposals and further understand the details of the bids. The te rms and
 7            conditions offered by bidders were clarified and the economics were
 8            revised based on the clarifications provided by the bidders. One of the key
 9            issues at this stage of the process was whether bidders had included
10            carbon dioxide (CO2) liabilit y cost s in their bid prices. For those bids that
11            did not include this liabilit y, PacifiCorp imputed the cost based on the
12            assumption developed in its Integrated Resource Plan.

13            During the bid evaluation process, PacifiCorp revised the NBA to
14            represent an expansio n of Currant Creek once this project was selected in
15            the peaker phase of the evaluation. Based on the revised NBA, onl y three
16            bids (with multiple offers) beat the NBA. These bids were number 213,
17            493, and 922.

18            During the preliminary negotiation stage, one bid (922) was eliminated.
19            PacifiCorp then began negotiations with one of the two remaining bids
20            initiall y and subsequentl y with both bids.

21   Q:       How would you characterize PacifiCorp’s competitive bidding or RFP
22            process?

23   A:       PacifiCorp’s competitive bidding or RFP process can be characterized as a
24            “competitive negotiations” process. Under this approach, the utilit y uses
25            an RFP to solicit bids and evaluates the bids based on the pre -established
26            criteria. The evaluation process results in the selection of a sh ort-list of
27            bids. Once the short -list is identified, the utilit y negotiates with short -
28            listed bidders to effectivel y “weed out” the bids and select the preferred

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 1            bid(s) from those that offer the highest value. This process is generall y an
 2            iterative process , whereby the utilit y ensures a competitive process is
 3            maintained until final contract execution.

 4   Q:       Is the competitive negotiation process an effective approach for
 5            resource selection and contracting?

 6   A:       While this approach can result in significant valu e-added benefits to the
 7            utilit y through the negotiation process, it is generall y a time consuming
 8            process that requires constant evaluation and revisions to price, contract
 9            provisions and commercial conditions. It is no surprise that negotiations
10            have        exceeded   the   schedule          outlined   in   PacifiCorp’s   RFP       (i.e.
11            approximatel y 6 weeks for negotiations allotted after selection of the
12            short-list).

13   Q:       Are there other approaches used in the power industry for evaluating
14            and selecting proposals from among those rece ived?

15   A:       There have been a number of methodologies used by utilities to evaluate
16            and select bids. Some of the more common include:

17                            1. Price-Driven approach whereby a price -screen is used for
18                               a first cut screen or anal ysis. Non -price evaluation is
19                               undertaken for the remaining bids. Price and non -price
20                               scores are combined and bids are ranked for the purposes
21                               of selecting a short -list. The final contract awards or
22                               negotiations are based on the overall price evaluation
23                               based on the bid(s) that has the lowest syste m cost.

24                            2. Combination price and non -price approach whereby bids
25                               are evaluated based on a price and non -price anal ysis for
26                               each bid. The price and non -price scores are combined and

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 1                            the bid(s) with the highest score is selected for contract
 2                            negotiations first.

 3                         3. Portfolio evaluation whereby a price screen and non -price
 4                            anal ysis is undertaken on all bids. Bids are ranked on the
 5                            basis of total points and a short -list is selected. The short -
 6                            listed bidders are then included in portfolios and evaluated
 7                            to determine th e preferred portfolio of resources based on
 8                            the lowest system cost. Contracts are then negotiated with
 9                            the preferred bidders.

10            The third approach is the most common in the industry today as utilities
11            have attempted to select a portfolio of resource options                to meet
12            requirements and pursue contract negotiations with the selected options
13            first, with back -up projects identified if contract negotiations fail or the
14            bidder elects to terminate its project.

15   Q:       Is it common practice that a low cost resource (selecte d in the first
16            phase of the process) may not be the project that is awarded a
17            contract at the end of the process or may fail to reach commercial
18            operation even after a contract is awarded?

19   A:       While cost minimization is generall y an objective of the utilit y in
20            undertaking a competitive bidding program, there are a number of
21            instances in which the low cost bid(s) may not ultimatel y be the resource
22            that completes a contract with the utility or goes into service. Projects
23            may fail or change their status for a n umber of reasons. In the current
24            environment where access to credit is such an important factor, a bidder
25            may not know the terms and conditions of debt until the contracts
26            underl ying the transaction are subject to detailed due diligence by the
27            lender. As a result, the bid evaluation and selection process needs to be
28            full y integrated with the negotiation process. In many cases, utilities

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 1            either maintain a back -up list of bids or negotiate with multiple bidders to
 2            hedge the risk of project failure.

 3            For exampl e, there have been cases in competitive bidding programs
 4            where the utilit y selects the lowest cost option but during the negotiation
 5            process the bidder decides to terminate negotiations either because the
 6            market has changed against the bidder or the bidder and its financial
 7            advisors realize the bid price was too low and the project cannot meet its
 8            financial covenants. Also, in recent RFPs bidders may seek to negotiate
 9            more favorable terms due to the more stringent credit requirements
10            imposed by utilities. In many cases, a utilit y will decide to terminate the
11            contract negotiations if it appears that the parties cannot resolve
12            differences. In some cases, bidders may seek to extend the contract
13            negotiation process as long as possible to gain leverage if the uti lit y
14            needs resources in the near term for reliabilit y purposes. Finall y, it is
15            possible that a bid may be the lowest cost individuall y but may not fit into
16            a portfolio of other resources economicall y. Thus, the counter -part y for a
17            power contract may not ac tuall y be the lowest cost individual bid.

18   Q:       Please describe how the initial short -listed bids were selected by
19            PacifiCorp?

20   A:       PacifiCorp combined the price and non -price scores for each bid and
21            ranked the bids based on the scores. It is m y understanding t hat many of
22            the bids had the same or similar non -price scores since most offers were
23            for gas-fired combined cycle projects. Thus, the level of dispatchabilit y
24            (based on technology) and environmental impacts (based on fuel t ype)
25            were the same or similar for many proposals. As a result, price became
26            the distinguishing characteristic even during the screening phase, which is
27            not consistent with PacifiCorp’s original scoring and evaluation process.

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 1   Q:       Please describe the modeling methodology used by PacifiCor p in
 2            undertaking the pricing analysis during the screening phase of the
 3            evaluation.

 4   A:       PacifiCorp developed a detailed spreadsheet model with the capabilit y of
 5            conducting anal ysis of a number of bid options consistent with the t ypes
 6            of products/alternative s solicited in the RFP, including power purchase
 7            agreements,      turnkey         arrangements,             call   and   put   options,        etc.
 8            Conceptuall y, the model compares the bid pricing components of a
 9            specific bid with the potential revenues the project could achieve if it sold
10            the power into the market at projected market prices on a monthl y basis.
11            In effect, the net present value of the revenue stream over the project term
12            is compared to the net present value of the cost streams over the same
13            term. The base model includes the cost proposed by the bidders including
14            capacit y   costs,     fixed     O&M,          variable     O&M,    fuel   costs,   and      adds
15            transmission costs, if applicable. The calculated difference between costs
16            and revenues is then divided by the real levelized contract capacit y to
17            estimate a Present Value Revenue Requirements (PVRR)$/MW -month for
18            each bid.

19            In the initial screening phase of the evaluation, it is m y understanding
20            that the economics of each bid were compared to PacifiCorp’s forward
21            curve.

22   Q:       Is this modeling methodology consist ent with industry standards?

23   A:       The modeling methodology is consistent with other models used in the
24            industry for conducting price -screening anal ysis of bids. Since the power
25            market has become more liquid, the value of power to the utilit y can be
26            estimated by the Company’s projection of market price at various delivery
27            points. Models that calculate the value of a bid based on the difference
28            between the cost and revenue streams of the bid are becoming more
29            common      in   the    industry         for     price     screening    purposes.    However,

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 1            PacifiCorp has used the model for both price screening and final bid
 2            selection. While such a model is consistent and reasonable for comparing
 3            the         pricing   of   like -proposals          (baseload   options   with       similar
 4            characteristics), they are not effective fo r developing a resource portfolio
 5            from the bids received.


 7   Q:       What other approaches are used by utilities for price screening
 8            purposes?

 9   A:       A common methodology used by utilities for price screening purposes is a
10            real levelized cost anal ysis that evaluates the cost components of the bid
11            based on the estimated dispatch of the unit. The real levelized cost is that
12            cost (in $/Mwh), which if escalated by inflation, results in the same net
13            present value as the proposed cost stream for the project. As with the
14            methodology used by PacifiCorp, this methodology is effective for
15            screening bids onl y and is most effective for screening similar t ypes of
16            bids (i.e. combined cycles vs combined cycles).


18   Q:       You indicated previousl y that PacifiCorp eventually reduced the
19            number of bidders it negotiated with to two bidders. How did
20            PacifiCorp reduce the number of bidders for negotiations down to
21            two?

22   A:       It is m y understanding that PacifiCorp sought clarification from bidders
23            whose proposals were included on the initial short -list. PacifiCorp
24            conducted additional anal ysis to reflect the changing value of each bid
25            through the evaluation and selection process. This included adding a CO2
26            liabilit y value to any bid which PacifiCorp learned did not include such a

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 1            cost in its bid price. After this process and based on revisions to the NBA,
 2            three bids remained.

 3            Bidder 922 was subsequentl y eliminated from negotiations. While this
 4            bidder had the lowest cost during the screening phase, during cl arification
 5            and negotiations, PacifiCorp determined that the bid did not include CO2
 6            liabilit y costs. In addition, PacifiCorp commissioned a study by an
 7            independent engineering firm, Black & Veatch, to assess whether the
 8            project could be constructed on tim e to meet a June 2007 in -service date.
 9            The study identified significant risks associated with completion of the
10            project. The combination of these two factors along with concerns over
11            the credit assurances by the bidder led PacifiCorp to pursue negotiations
12            with the other two remaining bidders. In this case, PacifiCorp supported
13            and         documented   its    decision         to    eliminate   this   bid   from       further
14            negotiations even though it was originally ranked highl y in the screening
15            phase due to the undue risk associated with p roject completion.


17   Q:       Besides the direct costs proposed by bidders and the projected
18            revenues from the output of the project, were any other risk factors
19            considered in the price evaluation of the final two bidders?

20   A:       At this stage, one of the bids rema ining was for a turnkey project and the
21            other was for a tolling services agreement. Both bids offered 35 year
22            terms and were evaluated over this term. As Mr. Tallman testified (page
23            14), the Company applied a cost associated with the direct debt due to the
24            impact of the tolling services agreement for bid 213 on the Company’s
25            capital structure. Mr. Tallman also describes the methodology used by the
26            Company to estimate the cost and classifies the methodology as being
27            conservative. Effectivel y, this methodolog y imputes cost to bid 213 based
28            on the classification of the bid as a capital lease arrangement. Bid 493 is
29            not subject to such a “cost” since the project is a turnkey arrangement,

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 1            which will be owned and operated by PacifiCorp after construction.
 2            PacifiCorp’s methodology is an attempt to put the bids on a level playing
 3            field by recognizing the impacts of the capital lease in its analysis.

 4   Q:       How was this adjustment applied in the economic evaluation of bid
 5            213?

 6   A:       Bid 213 is for a long-term tolling service arrangement in which
 7            PacifiCorp is obligated to make long -term fixed cost paym ents to the
 8            project for the option to convert fuel to electricit y. PacifiCorp was
 9            informall y advised by its external auditors that the proper accounting
10            treatment for the Bid 21 3 tolling agreement was to recognize the net
11            present value of the minimum fixed payments under the agreement (net of
12            executory costs such as taxes, insurance and the like) as “direct debt”
13            which would be placed on their balance sheet for book purposes.
14            Similarl y, rating agencies treat long -term fixed obligations, such as
15            purchased power arrangements, capital and operating leases, and other
16            fixed contracts as “inferred debt” in assessing the utilit y’s capital
17            structure (i.e. debt/equit y ratio) and financial ratios for establishing the
18            credit ratings for the utilit y. To address this issue, PacifiCorp developed a
19            methodology to calculate the cost of rebalancing its capital structure to
20            account for the inclusion of this “direct or inferred debt”.

21   Q:       Is it common practice for utilities to include this direct or inferred
22            debt (“debt equivalence”) into the cost of evaluating resource options?

23   A:       While this is certainl y an emerging issue in the utilit y business due to
24            new FASB accounting initiatives and the consensu s reached by the
25            Emerging Issues Task Force associated with the accounting treatment of
26            leases, I am not aware of any public utility commission that has approved
27            a methodology for calculating debt equivalence measures in evaluating
28            power suppl y proposals. However, several states have recently addressed
29            suggestions by utilities to include a debt equivalence adjustment in the

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 1            bid evaluation process and I would expect there will be more attention
 2            paid to this issue in future regulatory proceedings.


 4            For exampl e, in a draft of its 2003 RFP, Portland General Electric stated
 5            it would add the costs associated with the fixed obligation for purchased
 6            power into its bid price anal ysis as debt equivalents. However, the Oregon
 7            Public Utilit y Commission ruled in UM 1080, Order NO. 03 -387:

 8                         The leverage adjustment described on page 22 of the RFP will
 9                         not take place. Instead, a leverage adjustment will be
10                         considered during the post -bid process. (page 2).

11            While the Commission did not approve the use of a debt equivalence or
12            leverage adjustment during the bid evaluation stage, the Commission
13            recognized that some consideration for use of such an adjustment may be
14            warranted.

15            Likewise, the California Public Utilities Commission addressed the debt
16            equivalence issue in a recent Inte rim Opinion (Decision 04 -01-050), in
17            Order Instituting Rulemaking to Establish Policies and Cost Recover y
18            Mechanisms     for   Generation           Procurement        and     Renewable        Resource
19            Development, January 22, 2004:

20                         Preliminaril y, we note that AB57 (as per Public Utilities
21                         Code Section 454.5(a)(b)(1)) requires “an assessment of the
22                         price   risk      associated           with   the    electrical    corporation’s
23                         portfolio, including any utilit y-retained generation, existing
24                         power    purchase           and      exchange       contracts,    and    proposed
25                         contracts or purchases.” Thus, we take the emerging issue of
26                         debt equivalency, and its potential impact on the utilities’
27                         financial viabilit y to serve its customers, quite seriousl y.

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 1                        We also note that the debt equivalency issue has gained
 2                        prominence recentl y, and we wish to examin e its impact on
 3                        utilities carefull y. It appears that the three rating agencies
 4                        have varying methodologies for assessing debt equivalency
 5                        and there is some subjectivit y in this process which is not
 6                        transparent, adding to the difficult y of this assessment by the
 7                        Commission. In addition, we note that debt equivalency is
 8                        onl y one of the many factors affecting a utilit y’s credit rating
 9                        and therefore its cost of borrowing.

10                        Nonetheless, SCE’s concern with this issue is warranted, and
11                        we intend to examine it carefu ll y. However, this proceeding
12                        is   primaril y    concerned            with   setting    overall      policy       for
13                        resource procurement, and not addressing capital costs for
14                        utilit y investments owing to debt -equit y ratios or credit
15                        ratings.   The     more       appropriate         venue    for     handling         the
16                        potential costs associated with additional debt equivalency
17                        attributed to a utility for its PPAs is in each utilit y’s cost of
18                        capital proceeding. (See D.92 -11-049 and D.93 -12-022).
19                        Therefore, the utilities should present detailed evidence about
20                        the treatment of debt equivalency by the rating agencies in
21                        their upcoming cost of capital filings. The Commission will
22                        consider these issues therein and develop a more robust
23                        evidentiary       record      on        this   subject    before      reaching         a
24                        conclusion based on each utilit y’s uniq ue financial situation.

25            In a September 2, 1999 Order (Order Denying Florida Power & Light
26            Compnay’s Petition For Approval of Standard Offer Contract and
27            Granting Request For Variance; Docket NO. 990249 -EG; Order NO. PSC -
28            99-1713-TRF-EG), the Florida Public Service Commission addressed
29            Florida Power & Light’s equit y adjustment proposal as follows:

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 1                        We find it appropriate to include an equit y adjustment when
 2                        determining       FPL’s         proposed   standard   offer     contract
 3                        payments. However, FPL should recalculate the capacit y
 4                        payments to reflect an equit y adjustment based on a 10% risk
 5                        factor. (page 7)

 6                        The discussion of the perceived need for utilities to increase
 7                        the level of equit y in the capital structure to offset the
 8                        adjustment made to the financial ratios by rating agen cies and
 9                        how this affects the overall cost of capital has not been
10                        specificall y addressed. We note, however, that there are
11                        persuasive arguments on both sides of the issue of who
12                        should be responsible for the incremental cost of additional
13                        equit y to compensate for these contracts. Given the terms of
14                        the recentl y approved Stipulation and Settlement (Stipulation)
15                        involving FP L, we believe FPL’s current cost of capital
16                        includes recognition of this cost. (page 9)


18   Q:       Is the debt equivalence issue new in the ind ustry?

19   A:       No. The debt equivalence issue was addressed by several utilities and
20            utilit y commissions in the 1990’s. I am also aware that the Energy Policy
21            Act of 1992 (Section 712) contained a requirement for state commissions
22            to consider the effects of lon g-term wholesale power purchases on the
23            financial structure of the electric utilities. The Department of Energy
24            published a report on this issue in June 1994 entitled “Financial Impacts
25            of Non-Utilit y Power Purchases on Investor -Owned Electric Utilities”.
26            However, I am not aware of widespread application in states in which the
27            utilit y imputed a debt equivalence adjustment in the evaluation of electric
28            suppl y resource options.

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 1   Q:       Why is this issue gaining renewed attention at this time?

 2   A:       While I am not an Accountant or a Credit Anal yst, it is m y understanding
 3            that the United States Emerging Issues Task Force (EITF) reached a
 4            consensus in 2003 on EITF Issue 01 -8 whereby “arrangements or contracts
 5            that traditionall y have not been viewed as leases may contain features
 6            which would require them to be accounted for as leases under Financial
 7            Accounting         Standard     13,      Accounting       for   Leases”.   Examples          of
 8            arrangements that may fall under these rules include power purchase
 9            arrangements.

10   Q:       How have you addressed the debt equivalency issue in your analysis of
11            PacifiCorp’s bid evaluation and selection process?

12   A:       While the debt equivalency issue is certainl y an emerging issue that can
13            have an impact on a utilit y’s resource selection decisions, to the best of
14            my knowledge th ere are currentl y no precedents in other jurisdictions for
15            the appropriate methodology to appl y in anal yzing the impacts of this
16            issue. PacifiCorp developed a methodology based on its interpretation of
17            the appropriate way to measure such imputed costs, but PacifiCorp has not
18            been able to demonstrate that this methodology has been accepted by the
19            accountants or credit anal ysts. Even Navigant raise some concern about
20            the methodology used by PacifiCorp in its Final Report – Addendum
21            (Confidential), August 24,2 004, and why it did not literally appl y the
22            guidance of its accountants to recognize all of the “direct debt”.

23                        It is important to note that PacifiCorp made the judgment that
24                        issuing equit y sufficient to offset the debt associated with the NPV
25                        of the capaci t y payments would be excessive. Instead, PacifiCorp
26                        assumed that an amount of equit y would be issued to offset the total
27                        capital cost of the project net of the equit y associated with the
28                        Summit Power purchase onl y. This subjective decision made b y

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 1                        PacifiCorp greatl y benefited the economics of the Bidder 213
 2                        proposal. (page 22)

 3            In its recommendations, Navigant further recognized the “latitude” that
 4            utilities continue to have on the issue of “inferred debt”.

 5                        A section in future solicitations should be dedicat ed to addressing
 6                        some of the less obvious costs associated with different t ypes of
 7                        proposals. Here, we are referring to the issue of debt and its impact
 8                        on the Company’s balance sheet. This has become an increasingl y
 9                        common    issue   that     has     become     part   of   co mpetitive bidding
10                        processes, but it is not well understood by the majorit y of market
11                        participants. Furthermore, utilities have latitude in how they
12                        interpret the guidance that has been provided by Standard and Poors
13                        (“S&P”). If it is going to be a part of the economic valuation
14                        prepared by PacifiCorp, bidders should be made aware of how this
15                        calculation is made and what it means to the competitiveness of
16                        their offer. (page 30)


18            As a result, it is m y view that the appropriate methodology for
19            incorporating d ebt impacts in assessing resource options needs further
20            consideration. While PacifiCorp has made a “best efforts” to incorporate
21            a methodology consistent with the approach discussed by the credit rating
22            agencies, there is a lack of precedent at the regula tory level regarding the
23            appropriate methodology.

24   Q:       What is the implication on the economics of the two bids if the debt
25            impacts are not included in the evaluation?

26   A:       DPU Exhibit 2.2 contains a summary of the economics of the cases
27            presented in the testi mony filed by PacifiCorp’s witnesses Furman (page

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 1            9-11) and Tallman (page 14 -17) with the debt adjustment included as well
 2            as cases with the debt adjustment eliminated. Each bid is compared on a
 3            $/Kw-month basis, which reflects the methodology used by Paci fiCorp
 4            and described on pages 19 -20 of m y testimony. As illustrated, elimination
 5            of the debt adjustment results in an increase in the economic value of Bid
 6            213 by approximately $.92/Kw -month. As this Exhibit illustrates, the
 7            economic value of Bid 213 varie s significantl y depending on the scenario
 8            evaluated and highlights the potential risks and variability of results
 9            associated with this project, as measured by the range of economic value
10            based on the assumptions about CO2 liabilit y cost, commercial operati ons
11            delay and debt impact. As illustrated in DPU Exhibit 2.2, the economic
12            value of this bid ranges from a low of $.77/Kw -month if CO2 liabilit y
13            costs are added to the project cost and a high of $3.99 if the bidder
14            absorbs the CO2 costs for the first 20 ye ars and no inferred debt
15            adjustment is included. With such a wide range of outcomes and
16            significant risk associated with each outcome, the economic value of this
17            bid is less certain than bid 493.

18            In m y view, the best -case scenario for Bid 213 is the four month delay
19            Case, with inferred debt impacts eliminated. Based on m y review of Mr.
20            Selgrade’s testimony,     I have concluded that      a likel y outcome of
21            negotiations for Bid 213 would result in at least a four -month delay in the
22            in-service date of the project. T herefore, the economics of this scenario as
23            presented by PacifiCorp, adjusted for elimination of the direct debt
24            adjustment is, in m y view, a best -case scenario.

25            While bid 213 would have favorable economics relative to bid 493 with
26            the exclusion of the di rect debt adjustment, given the risks associated
27            with this project and the complexities of the contract negotiation process,
28            the final decision rendered by PacifiCorp to negotiate a final contact with
29            bid 493 is a reasonable solution.

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 1   Q:       Should the assumpt ions about the timing of CO2 liability (i.e. 2008) or
 2            the cost of CO2 liability ($8/ton) end up being aggressive which of the
 3            remaining two proposals would benefit the most?

 4   A:       In a case where the CO2 liabilit y is imposed after 2008 and the actual cost
 5            is lower than the value estimated by PacifiCorp, bid 493 would benefit
 6            relative to bid 213. This is because PacifiCorp has imputed the full cost of
 7            CO2 liabilit y throughout the 35 -year term of the project to bid 493. On
 8            the other hand, bid 213 absorbed CO2 li abilit y for the first 20 years of the
 9            contract and wanted to limit its exposure to the equit y in the plant. Any
10            delay in the implementation date or reduction in the cost below the $8/ton
11            assumption would therefore benefit bid 493 relative to 213. Since bid 213
12            has agreed to absorb a portion of the CO2 cost in its bid price, and a
13            reduction in the CO2 liabilit y cost would benefit the bidder not
14            PacifiCorp or its customers.

15   Q:       Are there other risks associated with these options that PacifiCorp has
16            not addressed in its evaluation process?

17   A:       In m y view, the size of a project should be considered in the risk anal ysis
18            process, and, in fact, some utilities include this criterion in their selection
19            process. For example, Project 213 is an 817 MW combined cycle pr oject
20            while Project 493 is 534 MW. While project 213 may have economies of
21            scale benefits associated with the larger size, the failure of such a project
22            will have more significant risk and reliabilit y implications on PacifiCorp.
23            Many        utilities   are   now    inco rporating       size   considerations,     contract
24            structure, and fuel price risk in their portfolio decisions.


26   Conclusions and Recommendations

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 1   Q:       What are your conclusions based on your assessment of PacifiCorp’s
 2            competitive bidding process?
 3   A:       Based on m y ass essment of PacifiCorp’s evaluation and selection process
 4            for the bids received in response to the baseload component of its 2003 -A
 5            RFP, it is m y view that the selection of bid 493 was a reasonable choice
 6            given the parameters of the competitive bidding proc ess. This is based
 7            largel y on the risk associated with the completion of the project to meet
 8            the June 2007 required in -service date. The anal ysis showed that under a
 9            number of scenarios bid 213 was a lower cost option and PacifiCorp
10            rightfull y attempted to negotiate a contract with that bidder first. Upon
11            recognizing that the probabilit y of completing agreements with this bidder
12            coupled with concerns that the bidder had the financial wherewithal to
13            complete the project, the Company began negotiations with t he next best
14            bidder. This bidder was viewed to offer more certain and secure financial
15            backing with little chance of project failure. Even though bid 213 was a
16            lower cost option under several scenarios, the probabl y of project default
17            was viewed to be fairl y significant. The Company’s decision to terminate
18            negotiations and pursue negotiations and contract approval with the
19            second bidder is reasonable and is consistent with sound utility practice.

20            Also, the competitive bidding process undertaken by PacifiCo rp meets a
21            number of the characteristics of an effective competitive bidding program
22            as outlined beginning on page 5 of this testimony. Furthermore, Navigant
23            Consulting, as the Outside Observer, has concluded that the process was
24            fair and equitable. I have found no evidence to refute Navigant’s
25            conclusions.

26            Finall y, there are a number of potential revisions to the competitive
27            bidding process that could result in a more effective process for future
28            solicitations.


                                             - 31 -
     W a yn e O li v er                Do c ke t 0 4 -0 3 5 -3 0                          DP U E x h ib i t 2 .0

 1   Q:       Do you have any recommendations for imp roving the competitive
 2            bidding process for future solicitations

 3   A:       There are a number of potential improvements that could be made to
 4            PacifiCorp’s competitive bidding process and RFP to ensure the potential
 5            benefits from competitive bidding can be further realized in future
 6            solicitations. These include:

 7                        1. PacifiCorp should undertake a portfolio evaluation process
 8                            in its next RFP, similar to the approach followed by a
 9                            number of other utilities. Under this approach, the price
10                            screening and non -price assessment is used to determine a
11                            short list of bids and those bids are then combined into
12                            portfolios to assess the preferred combination of options.
13                            PacifiCorp can still use the basic approach it took in this
14                            RFP as a starting point but could conduct a more thorough
15                            anal ysis to select the portfolios. For example, in RFP
16                            2003-A,     PacifiCorp           identified   three   products        it    was
17                            soliciting bids for, and upon receipt of bids classified the
18                            bids by product. PacifiCorp then evaluated the bids within
19                            each category to select the preferred bid for that product.
20                            With a portfolio approach, PacifiCorp could classify the
21                            bids into categories, screen the bids and select a short -list
22                            from each category. From that point the bids would be
23                            combined into portfolios and run through production cost
24                            or   a   simulation         model     to   evaluate   the     lowest       cost
25                            portfolio. Debate over whether the Currant Creek project
26                            should have been compared to peaking units or baseload
27                            options would be eliminated. Furthermore, any revisions
28                            to the NBA, size variations, ter m, etc. would be moot.
29                            Under this approach, the lowest cost options for meeting
30                            load requirements within the risk parameters of the utilit y

                                               - 32 -
     W a yn e O li v er              Do c ke t 0 4 -0 3 5 -3 0               DP U E x h ib i t 2 .0

 1                           can be directl y determined. In PacifiCorp’s case, the
 2                           Company bases its resource requirements on its Integrated
 3                           Resource Plan. In this case, the RFP could be closel y
 4                           integrated with that process.

 5                        2. Most utilities include a Model Power Contract (or multiple
 6                           model contracts) in their RFP. This allows the bidders to
 7                           assess the risk in the contract and reflect such risk in th eir
 8                           bids. In m y discussion of the characteristics of an
 9                           effective competitive bidding process, the integration of
10                           the RFP, response package or information provided by
11                           bidders is an important characteristic. In addition to
12                           providing bidders the opportunit y to reflect the contract
13                           risk in their bids, the utilit y can also assess the exceptions
14                           which the bidder takes to the contract and assess whether
15                           such exceptions will create difficult y in negotiating a final
16                           contract. If PacifiCorp intends to use a competit ive
17                           negotiations process in future RFPs, including the contract
18                           in the RFP can facilitate negotiations.

19                        3. PacifiCorp relied on onl y two non -price criteria that
20                           resulted in little opportunit y to distinguish bids on the
21                           basis of any criteria other than price. The development of
22                           broader and more detailed non -price evaluation criteria
23                           and/or threshold criteria would not onl y provide the
24                           opportunit y to more clearl y distinguish the maturit y and
25                           status of bids, but could also “raise flags” about any
26                           potential fatal flaws in the proposal. In addition, detailed
27                           non-price assessment can assist in defining the issues for
28                           contract negotiations. PacifiCorp requested information of
29                           bidders in Appendix A of the RFP that could be used for
30                           this assessment.

                                             - 33 -
     W a yn e O li v er              Do c ke t 0 4 -0 3 5 -3 0                           DP U E x h ib i t 2 .0

 1                        4. PacifiCorp’s RFP rec ognized the importance of credit
 2                           assurance and credit qualit y in the bid evaluation process.
 3                           However, the credit issue was addressed onl y at the
 4                           negotiation stage. There were no non -price or threshold
 5                           criteria dealing with credit. Other utilities are begin ning
 6                           to   include    credit       assurance        as   a    primary    non -price
 7                           criterion and are using their credit evaluation processes
 8                           and methodologies to assess the collateral requirements of
 9                           counter-parties.        PacifiCorp           should     consider     such       a
10                           criterion in future solicitation s as a non-price factor to
11                           evaluate bids received.

12                        5. If   PacifiCorp       continues         to   implement      a   competitive
13                           negotiations process, the Company should allot more time
14                           for negotiations within the RFP schedule.

15                        6. In this RFP, PacifiCorp limited bid terms to 20 years but
16                           conducted a 35-year anal ysis. Also, PacifiCorp applied a
17                           debt equivalence adjustment in the evaluation of the final
18                           two bids. It is important in future RFPs that bidders are
19                           made aware of any important factors that could determine
20                           its bidding strategy and opportunit y to compete. Failure to
21                           identify such key factors influencing the evaluation of
22                           proposals      submitted            could    dissuade    companies        from
23                           submitting a valid proposal.

24   Q:       Does this conclude your direct testimony?
25   A:       Yes.


                                             - 34 -
 pa ge s 19 - 2 0 o f my te s timo ny. As illus tra te d, e limina tio n
 5             o f the de bt ad justme nt r es u lts in a n inc re as e in the eco no mic va lue o f Bid
 6             213 b y ap pr o xima te ly $ .92 /K w- mo nth. As this Exh ib it illus tra te s, the
 7             eco no mic va lue o f Bid 213 va r ie s s ign ific a ntly de pe nd ing o n the sc e na r io
 8             e va lua ted a nd high lig hts the po te ntia l r is ks a nd va r ia b ility o f re s ults
 9             as soc ia ted with this pr ojec t, as mea s ure d b y the ra nge o f ec o no mic va lue
10             bas ed o n the as s ump tio ns a bo ut CO2 lia b ility c os t, co mme rc ia l ope ra ti o ns
11             de la y a nd d eb t imp ac t. As illus tr ated in DP U Exhib it 2 .2, the ec o no mic
12             va lue o f this b id r a nges fro m a lo w o f $. 77 /K w- mo nth if CO2 lia b ility
13             cos ts ar e add ed to the pr ojec t co s t a nd a high o f $3. 99 if the b idd er
14             abs or bs the CO2 c os ts for the fir s t 20 ye a rs a nd no in fe r red deb t
15             ad jus tme nt is inc lud e d. W ith s uc h a wide r a nge o f o utco me s a nd
16             s ign if ic a nt r is k a ss oc ia te d with ea c h o utco me, the eco no mic va lue o f this
17             b id is le s s ce rta in tha n b id 493 .

18             I n my vie w, the be s t- ca se sc e na r io fo r Bid 213 is the fo ur mo nth d e la y
19             Case , with in fe rr ed deb t imp ac ts e limina ted . Ba se d o n my re vie w o f M r.
20             Se lgr ad e’ s tes timo ny,      I    ha ve co nc lud ed     tha t a     like ly     o utco me      of
21             ne go tia tio ns fo r Bid 2 13 wo uld re s ult in at le as t a fo ur - mo nth d e la y in the
22             in- s er v ice d ate o f the p ro je c t. T he re fo r e, the ec o no mic s o f this s ce na r io as
23             pre se nted b y Pac if iCo rp, ad justed for e limina tio n o f the d ire c t deb t
24             ad jus tme nt is , in my vie w, a b es t- ca se s ce na r io.

25             W hile b id 213 wo uld ha ve fa vo rab le eco no mic s re la tive to b id 4 93 with
26             the e xc lus io n o f the d ire c t d eb t a djus tme nt, give n the r isk s as so c ia ted
27             with this pr o jec t a nd the c o mp le xit ie s o f the co ntr ac t ne go tia tio n p roc es s,
28             the fina l de c is io n re nd er ed b y Pa c if iCo rp to ne gotia te a f ina l c o nta c t with
29             b id 49 3 is a r ea so nab le s o lutio n.

                                                      - 29 -
     W ay n e O l iv e r                        Do c ke t 0 4 - 0 3 5 - 3 0                          D P U E xh ib it 2. 0

 1   Q:        Sho uld t he as s umpt io ns a bo ut t he timing o f CO2 lia bility ( i.e . 2 008 ) o r
 2             t he cos t of CO2 lia bility ($8 /to n) e nd up be ing ag g re s s ive whic h o f t he
 3             re ma ining t wo pro pos a ls wo uld be ne f it t he mos t?

 4   A:        I n a ca se whe re the CO2 lia b ility is impo se d a fte r 200 8 a nd the ac tua l cos t
 5             is lo we r tha n the va lue e s tima ted b y P ac if iC or p, b id 49 3 wo uld be ne fit
 6             re la tive to b id 213 . This is b eca us e P ac ifiC or p ha s imp ute d the fu ll c os t o f
 7             CO2 liab ility thro ugho ut the 35 - yea r te r m o f the p ro je c t to b id 4 93. O n
 8             the othe r ha nd, b id 213 a bs or bed CO2 lia b ility fo r the fir s t 20 yea r s o f the
 9             co ntrac t a nd wa nte d to limit its e xp os ur e to the eq u ity in the p la nt. Any
10             de la y in the imp le me nta tio n d a te o r r ed uctio n in the c os t be lo w the $8 /to n
11             as s ump tio n wo u ld the r e for e be ne f it b id 49 3 r e la tive to 213 . S inc e b id 213
12             has a gr eed to ab so rb a po r tio n o f the CO 2 c os t in its b id p r ice , a nd a
13             red uc tio n     in the CO 2           lia b ility    co s t wo uld    be ne fit   the b id de r no t
14             Pac ifiC or p o r its c us to me r s.

15   Q:        Are t he re o t he r ris ks as s oc ia te d wit h t he s e o pt io ns t hat Pa cif iCo rp has
16             not a ddre s s e d in its e va luat io n proce s s ?

17   A:        I n my vie w, the s ize o f a p ro jec t s ho uld be c o ns ide re d in the r isk a na lys is
18             pro ce ss , a nd , in fac t, so me utilit ie s inc lud e this cr ite r io n in the ir se le c tio n
19             pro ce ss . Fo r e xa mp le , P ro je ct 213 is a n 817 MW co mb ine d c yc le p r o jec t
20             while P ro je c t 49 3 is 534 MW . W hile p ro jec t 21 3 ma y ha ve e co no mie s o f
21             sca le be ne f its a ss oc ia ted with the la r ge r s ize , the fa ilur e o f s uc h a p ro jec t
22             will ha ve mo re s ign if ica nt r is k a nd re lia b ility imp lic atio ns o n P ac if iCo rp.
23             Ma ny       utilit ie s a r e   no w     inc o rp or ating     s ize   co ns id er a tio ns,   c o ntrac t
24             str uc ture, a nd fue l p r ice r is k in the ir po rtfo lio de c is io ns.


26   C o n c lu s io n s a n d R e c o m m e n d a t io n s

                                                         - 30 -
     W ay n e O l iv e r                      Do c ke t 0 4 - 0 3 5 - 3 0                      D P U E xh ib it 2. 0

 1   Q:        Wha t a re yo ur co nc lus io ns bas e d o n yo ur as s e s s me nt o f Pa c if iCo rp’s
 2             co mpe t it ive bidding pro ce s s ?

 3   A:        Ba se d o n my a ss es s me nt o f P ac if iCo rp ’s e va lua tio n a nd s e lec tio n p ro ce ss
 4             fo r the b id s rec e ive d in r es po nse to the b as e load co mp o ne nt o f its 200 3 - A
 5             RFP , it is my vie w tha t the s e lec tio n o f b id 493 wa s a rea so na b le c ho ice
 6             give n the p ar a me te r s o f the c o mpe titive b id d ing p roc es s. This is ba sed
 7             la r ge ly o n the r isk as so c ia te d with the c o mp le tio n o f the p ro je c t to mee t
 8             the J une 20 07 r eq uir e d in- se r vic e da te. The a na lys is s howed tha t unde r a
 9             numb e r o f s ce na r ios b id 21 3 was a lo we r co s t op tio n a nd Pa c if iCo rp
10             r ight fu lly a tte mp ted to ne gotia te a co ntra ct with tha t b idd e r fir s t. Upo n
11             re co gniz ing tha t the p rob ab ilit y o f co mp le ting a gre e me nts with this b idd er
12             co up le d with c o nc e r ns that the b id de r ha d the fina nc ia l whe r ewitha l to
13             co mp le te the p ro je ct, the Co mp a ny be ga n ne gotia tio ns with t he ne xt b es t
14             b id de r. Th is b idd er was vie wed to o ffe r mo r e c er ta in a nd se c ure f ina nc ia l
15             bac k ing with little c ha nce o f pr o jec t fa ilur e . Eve n tho ugh b id 21 3 wa s a
16             lo we r co s t o ptio n und er s e ver a l s ce na r ios , the p ro bab ly o f pr ojec t de fa ult
17             wa s vie wed to be fa ir ly s ig nif ic a nt. The Co mp a ny’ s d ec is io n to te r mina te
18             ne go tia tio ns a nd p urs ue ne go tia tio ns a nd c o ntr ac t app ro va l with the
19             sec o nd b id de r is r ea so nab le a nd is c o ns is te nt with s o und utilit y p ra c tice .

20             Als o, the co mp e titive b idd in g p ro ce ss unde r ta ke n b y P ac ifiC o r p mee ts a
21             numb e r o f the c har ac ter is tic s o f a n e ffe c tive co mpe tit ive b idd in g p ro gra m
22             as o utlined b e ginn in g o n p a ge 5 o f this te stimo ny. F ur the r mo re , Na viga nt
23             Co ns ult in g, as the O uts ide O bs er ve r, ha s co nc lud ed tha t the p ro ce ss was
24             fa ir a nd eq uita b le . I ha ve fo und no e v ide nc e to r e fute Na viga nt’ s
25             co nc lus io ns .

26             F ina lly, the re a re a nu mbe r o f p o te ntia l r e vis io ns to the c o mpe tit ive
27             b id d ing pr oc es s tha t co uld r es u lt in a mo re e ffe c tive p ro ce ss fo r futur e
28             so lic ita tio ns.


                                                      - 31 -
     W ay n e O l iv e r                      Do c ke t 0 4 - 0 3 5 - 3 0                            D P U E xh ib it 2. 0

 1   Q:        Do yo u ha ve a ny re co m me ndat io ns f o r imp rov ing t he co mpe t it ive
 2             bidding pro ce s s fo r f ut ure s o lic ita tio ns

 3   A:        The re a re a nu mbe r o f po te ntia l imp ro ve me nts tha t c o uld b e made to
 4             Pac ifiC or p’ s co mp etit ive b id d ing p roc es s a nd RFP to e ns ur e the po te ntia l
 5             be ne fits fro m co mp etit ive b id d ing ca n b e fur the r re a lized in futur e
 6             so lic ita tio ns. The se inc lud e :

 7                             1. Pac ifiC or p s ho uld unde r tak e a po r tfo lio e va lua tio n p ro ce ss
 8                                 in its ne xt RFP, s imila r to the a pp roa c h fo llo wed b y a
 9                                 numb e r o f o the r utilitie s . Unde r this a pp roa c h, the p r ice
10                                 sc re e ning a nd no n- p r ice a ss es s me nt is use d to de te r mine a
11                                 s ho r t lis t o f b id s a nd tho se b id s ar e the n c o mb ine d into
12                                 por tfo lio s to as se s s the p re fe r re d c o mb ina tio n o f op tio ns.
13                                 Pac ifiC or p c a n s till us e the ba s ic a pp ro ac h it too k in this
14                                 RFP as a s ta r ting po int b ut co uld co nd uct a mor e tho ro ugh
15                                 a na lys is to se le c t the p or tfo lio s. Fo r e xa mp le , in RFP
16                                 2003- A,      Pa c if iCo rp         id e ntifie d   thr ee   pr od uc ts   it   was
17                                 so lic iting b id s fo r, a nd upo n re ce ip t o f b ids c las s if ie d the
18                                 b id s b y p ro d uc t. Pa c if iCo rp the n e va lua te d the b ids with in
19                                 eac h ca te go r y to se le c t the p re fe r re d b id fo r tha t p rod uc t.
20                                 W ith a p or tfo lio ap pr oac h, Pa c if iCo rp c o uld c la ss ify the
21                                 b id s into c ate go r ie s, sc re e n the b ids a nd s e lec t a s ho r t - lis t
22                                 fr o m e ac h c a te gor y. Fr o m that po int the b id s wo uld be
23                                 co mb ine d into po r tfo lio s a nd r un thr o ugh p ro d uctio n cos t
24                                 or   a s imu la tio n          mode l      to   e va lua te the      lo wes t    cos t
25                                 por tfo lio. De ba te o ve r whe the r the C urr a nt Cr ee k pr o jec t
26                                 s ho uld ha ve be e n co mp ar ed to pe ak ing un its or ba se lo ad
27                                 optio ns wo u ld be e limina ted. F ur ther mo r e, a ny r e vis io ns
28                                 to the N BA, s ize va r ia tio ns, te r m, e tc. wo uld be moo t.
29                                 Unde r this ap pr oa c h, the lo wes t c os t op tio ns fo r mee ting
30                                 lo ad re q uir e me nts with in the r is k pa ra me ter s o f the utility

                                                       - 32 -
     W ay n e O l iv e r                 Do c ke t 0 4 - 0 3 5 - 3 0                       D P U E xh ib it 2. 0

 1                            ca n be d ir e ctly d e te r mined . I n Pa c if iCo rp ’ s c as e, the
 2                            Co mp a ny b as es its r es o urc e req uir e me nts o n its I nte gr ated
 3                            Re so ur ce P la n. I n this ca se , the RFP c o uld be c lo se ly
 4                            inte gr a ted with tha t pr oc es s.

 5                         2. Mos t utilit ie s inc lud e a Mo de l Po we r Co ntra ct (o r mult ip le
 6                            mod e l c o ntrac ts) in the ir RFP. Th is a llo ws the b idd er s to
 7                            as se ss the r isk in the co ntra ct a nd re f lec t s uc h r is k in th e ir
 8                            b id s.   In   my       d is c uss io n o f the c ha r ac te r is tic s o f a n
 9                            e ffe ctive c o mpe titive b id d ing pr oce s s, the inte gr a tio n o f
10                            the RF P, r esp o nse p ack a ge o r info r ma tio n pr o vid ed b y
11                            b id de rs is a n imp or ta nt c ha rac ter is tic . I n a dd itio n to
12                            pro vid ing b id de rs the op po rtun ity to r e fle c t the c o ntrac t
13                            r isk in the ir b id s, the utility ca n a ls o as se ss the e xcep tio ns
14                            whic h the b idde r ta ke s to the co ntra ct a nd as se ss whe ther
15                            s uc h e xc ep tio ns will cr ea te d iff ic u lty in ne gotia tin g a fina l
16                            co ntrac t. I f P ac if iC or p          inte nds to   us e a c o mpe tit ive
17                            ne go tia tio ns p ro ce ss in futur e RFP s, inc lud ing the c o ntrac t
18                            in the RFP ca n fac ilita te ne go tia tio ns.

19                         3. Pac ifiC or p r e lie d o n o nly two no n- p r ice c r ite r ia tha t
20                            re s ulted in little opp or tun ity to d is ting u is h b ids o n the
21                            bas is o f a ny c r iter ia othe r tha n p r ic e. The de ve lop me nt o f
22                            bro ad er a nd mo re de ta ile d no n- p r ic e e va lua tio n cr ite r ia
23                            a nd /o r thre s ho ld c r ite r ia wo uld no t o n ly p ro v ide the
24                            oppo r tunity to mor e c le ar ly d is tingu is h the ma tur ity a nd
25                            sta tus o f b id s, b ut co uld a ls o “r a ise f la gs ” a bo ut a ny
26                            pote ntia l fa ta l f la ws in the pr opo sa l. I n ad d itio n, d eta ile d
27                            no n- p r ice a ss es s me nt ca n a ss is t in d e fining the is s ues for
28                            co ntrac t ne go tia tio ns. Pa c if iCo rp r eq ue sted info r ma tio n o f
29                            b id de rs in Ap pe nd ix A o f the RF P tha t co uld be used for
30                            this a ss es s me nt.

                                                 - 33 -
     W ay n e O l iv e r                  Do c ke t 0 4 - 0 3 5 - 3 0                                   D P U E xh ib it 2. 0

 1                           4. Pac ifiC or p’ s RF P re co gnize d the imp o rta nce o f c re d it
 2                              as s ura nce a nd c r ed it q ua lity in the b id e va lua tio n p roc es s.
 3                              Ho we ve r, the c r ed it is s ue was a dd re ss ed o nly a t the
 4                              ne go tia tio n s ta ge . The re wer e no no n- p r ice or thr es ho ld
 5                              cr ite r ia dea lin g with c re d it. O the r utilitie s a re be gin n ing
 6                              to   inc lud e     c red it      as s ura nc e      as    a      pr ima r y      no n- p r ice
 7                              cr ite r io n a nd a re us in g the ir cr ed it e va lua tio n p ro ce ss es
 8                              a nd me thod o lo gie s to as se ss the co lla te r a l r eq uir e me nts o f
 9                              co unter- p ar tie s.      P ac ifiC or p         s ho uld       c o ns id e r     s uc h   a
10                              cr ite r io n in futur e so lic ita tio n s as a no n- pr ic e fa c to r to
11                              e va lua te b ids r ec e ive d.

12                           5. I f Pa c if iCo rp      c o ntinue s         to    imp le me nt        a c o mpe titive
13                              ne go tia tio ns p ro ce ss , the Co mpa ny s ho uld a llo t mor e time
14                              fo r ne go tia tio ns with in the RFP s c he d ule .

15                           6. I n this RFP , Pa c if iCo rp limited b id te r ms to 20 yea r s b ut
16                              co nd uc te d a 3 5- ye ar a na lys is . Also , Pa c if iCo rp app lie d a
17                              deb t eq u iva le nc e ad jus tme nt in the e va lua tio n o f the f ina l
18                              two b id s. I t is impo r ta nt in futur e RFP s tha t b idde r s a re
19                              ma de a wa r e o f a ny imp o rta nt fac to r s tha t co uld de te r mine
20                              its b id d ing s tr ate gy a nd opp or tun ity to c o mpe te . Fa ilur e to
21                              id e ntify s uc h ke y fac tor s inf lue nc ing the e va lua tio n o f
22                              pro po sa ls     s ub mitted            co u ld   d is s ua de     c o mpa nie s       fro m
23                              s ub mittin g a va lid p ro po sa l.

24   Q:        Doe s this co nclude yo ur dire ct te s t imo ny ?

25   A:        Ye s.


                                                  - 34 -

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