3. Application 05-07-010

A. Description of the Applicants

PacifiCorp is a multi-state electric utility with customers in California, Idaho, Oregon, Utah, Washington, and Wyoming. A map of PacifiCorp's service territory is contained in Appendix A of today's Decision. PacifiCorp has 1.6 million customers and $12.5 billion of assets. Its revenues for the fiscal year ending March 31, 2005, were $3.0 billion. PacifiCorp has nearly 44,000 customers in California in a service area that straddles the California-Oregon border. PacifiCorp's California revenues are approximately $65 million per year, or about 2.2% of total system sales.

PacifiCorp is owned by PacifiCorp Holdings, Inc. (PHI), a subsidiary of ScottishPower. ScottishPower is a publicly traded company with headquarters in Scotland. ScottishPower acquired PacifiCorp in 1999. At that time, ScottishPower was among the 25 largest investor-owned electric utilities in the world, with 5 million customers in the United Kingdom. The transaction was expected to provide PacifiCorp with better access to capital markets in Europe.⁴

MEHC is a privately-held company that is incorporated in Iowa. Its primary business is the global production and delivery of energy via several subsidiaries.⁵ MEHC's major energy subsidiaries are as follows:

· MidAmerican Energy Company (MEC) is an electric and gas utility. MEC provides electric service to 693,000 customers in Iowa, Illinois, and South Dakota, and gas service to 672,000 customers in Iowa, Illinois, South Dakota, and Nebraska. A map of MEC's service territory is contained in Appendix A of today's Decision.

· CalEnergy Generation owns 14 geothermal power plants in the United States (U.S.) and the Philippines, several natural gas generating stations in the U.S., and a hydroelectric plant and irrigation project in the Philippines.

· Kern River Gas Transmission Company owns nearly 1,700 miles of natural gas pipeline stretching from Wyoming to southern California.

· Northern Natural Gas Company owns more than 16,500 miles of natural gas pipeline from Texas to the upper Midwest. The combined pipeline capacity of Kern River and Northern is nearly 6.2 billion cubic feet per day, or about 10 percent of all natural gas consumed in the U.S.

· CE Electric UK Funding plc owns two electricity distribution businesses that serve 3.7 million customers in northeast England.

MEHC's revenues in 2004 were $6.6 billion, and its assets on December 31, 2004, totaled $20 billion. MEHC's ownership on January 31, 2005, was as follows: Berkshire Hathaway Inc. (80.48% economic interest); Walter Scott, Jr., and family interests (15.27% economic interest); David Sokol (2.91% economic interest); and Greg Abel (1.34% economic interest).⁶

Berkshire Hathaway currently holds 9.9% of the voting stock of MEHC and 41,263,395 shares of convertible preferred stock. In February 2006, Berkshire Hathaway will convert its preferred stock to common shares, increasing Berkshire Hathaway's 9.9% common stock voting interest in MEHC to approximately 80.5% on a diluted basis. The result will be to match Berkshire Hathaway's voting interest with its ownership interest.⁷

B. Summary of the Proposed Transaction

On May 23, 2005, ScottishPower and MEHC reached an agreement to sell all of PacifiCorp's common stock to MEHC for $5.1 billion in cash. Approximately $4.3 billion of outstanding long-term debt and preferred stock will remain at PacifiCorp. The transaction includes PacifiCorp's subsidiaries that support its electric utility operations by providing coal mining, environmental remediation, and management of deforestation carbon credits.

ScottishPower desires to sell PacifiCorp because PacifiCorp needs at least $1 billion annually for capital investments over the next several years. After reviewing the magnitude of the required investment and the likely profile of the earnings from that investment, ScottishPower concluded that its shareholders' interests would be best served by selling PacifiCorp.

MEHC's corporate strategy is to invest in the energy industry based on its belief that such investments are stable and provide reasonable returns. The proposed acquisition of PacifiCorp advances MEHC's strategy of owning a portfolio of high-quality energy businesses with sound assets, capable management, and predictable and reasonable earnings.

MEHC has created PPW Holdings LLC (PPW) to be the direct owner of PacifiCorp. PPW will receive an equity infusion of approximately $5.1 billion raised by MEHC through (1) the sale of $3.4 billion of equity securities to Berkshire Hathaway, and (2) the issuance of $1.7 billion of long-term senior notes, preferred stock, or other securities to third parties.⁸ If funds are not available from third parties, Berkshire Hathaway will make up the shortfall.

PPW will pay $5.1 billion in cash to PHI in exchange for 100% of the common stock of PacifiCorp. PPW will have no debt of its own for this transaction. The transaction is subject to customary closing conditions, including receipt of required state and federal regulatory approvals. Upon completion of the transaction, PacifiCorp will be an indirect wholly-owned subsidiary of MEHC through PacifiCorp's new parent company, PPW. The new corporate structure is shown in Appendix B of today's Decision.⁹

The Applicants expect that PacifiCorp will continue to be operated much as it is today. PacifiCorp's headquarters will stay in Oregon. PacifiCorp will remain a separate company with its own management, board of directors, business plan, and budget. There are no plans to reduce PacifiCorp's workforce. In addition, PacifiCorp will have responsibility and decision-making authority for customer satisfaction, reliable service, employee safety, environmental stewardship, and local regulatory and legislative matters.

PacifiCorp will continue to issue its own debt and maintain its own credit ratings. MEHC will also use "ring fencing" protections to isolate PacifiCorp from MEHC and MEHC's other subsidiaries. The Applicants state that ring-fencing protections are recognized by the major rating agencies as an effective means to separate the credit quality of a company from its affiliates.

PacifiCorp's financial statements will not be affected by the transaction. PacifiCorp will maintain its own accounting system, books, and records. The premium paid by MEHC for PacifiCorp will be recorded in the accounts of PPW, and not at PacifiCorp. However, the Applicants intend to transition PacifiCorp's financial reporting to a calendar year-end from its current March 31 fiscal year-end. The change in year-end will make PacifiCorp's financial reporting consistent with MEHC's other subsidiaries.

MEHC will provide the same services to PacifiCorp as it does to its other subsidiaries. These services include board of directors support, strategic planning, financial planning and analysis, insurance, environmental compliance, financial reporting, human resources, legal, tax, accounting and other services. MEC will provide certain administrative services on behalf of MEHC, including budgeting, human resources, and tax compliance. Shared services costs will be direct billed or allocated to PacifiCorp.

C. Requested Authority

Section 854(a) requires acquisitions of public utilities to be approved by the Commission.¹⁰ Section 853(b) provides the Commission with authority to grant exemptions from § 854 if the Commission finds that the application of § 854(a) is "not necessary in the public interest."

In A.05-07-010, the Applicants ask the Commission to use its authority under § 853(b) to exempt the proposed transaction from § 854(a). The Applicants assert than an exemption is appropriate because PacifiCorp is a multi-state electric utility with substantial operations in six states, each of which has jurisdiction to review and approve the transaction. PacifiCorp's operations in California are the smallest of the six states, constituting just 2% of its system sales. The Applicants argue that full-scale review of the transaction by the Commission under § 854 would be redundant to the review that will take place in the other states - states that have a much more significant stake in PacifiCorp's operations. Further, the Applicants pledge to implement in California all the conditions of general applicability adopted by other state regulatory agencies during their review of the transaction. This will ensure that California receives the same benefits as the other states.

If the Commission does not exempt the proposed transaction from § 854(a) pursuant to § 853(b), the Applicants ask the Commission to approve the transaction pursuant to § 854(a).¹¹ Despite their request for approval under § 854(a), the Applicants contend that § 854(a) applies only to utilities being acquired that are incorporated in California. The Applicants argue that because PacifiCorp is incorporated in Oregon, not California, § 854(a) does not apply.¹²

D. The Applicants' Commitments

The Applicants offer more than 60 commitments ("Commitments") to ensure that the ratepayers and the communities served by PacifiCorp benefit from the transaction and are not harmed by the transaction. The Commitments are listed in Appendix D of today's Decision. The Commitments are intended to supersede the conditions adopted by the Commission in prior decisions authorizing previous transfers of control of PacifiCorp.

There are two broad categories of Commitments. One category consists of General Commitments that apply to all six states in which PacifiCorp operates. The General Commitments are described here. The second category consists of California-specific Commitments contained in the settlement agreement between the Applicants and some of the parties. The California Commitments are described later in today's Decision.

The General Commitments address a variety of matters, including:

· Cost of Capital: PacifiCorp will not seek a higher cost of capital than that which PacifiCorp would have sought if the proposed transaction had not occurred.

· Administrative and General (A&G) Costs: PacifiCorp's annual A&G costs will be reduced by $6 million on a company-wide basis through 2010.

· Acquisition Premium: The acquisition premium, which is the excess of the purchase price over the net book value of the assets and liabilities that MEHC acquires from PacifiCorp, is $1.2 billion. The Applicants will not seek to recover the acquisition premium in PacifiCorp's rates unless the Commission reduces PacifiCorp's revenue requirement by imputing benefits (other than those benefits promised by the Applicants) accruing to PPW, MEHC, or Berkshire Hathaway. If the Commission fails to recognize in rates the costs associated with such benefits, then the Applicants reserve the right to propose a symmetrical rate adjustment to recognize the acquisition premium.

· Renewable Energy: The Applicants affirm PacifiCorp's pre-existing commitment to acquire 1,400 MW of new renewable resources, representing approximately 7% of PacifiCorp's load.

· Greenhouse Gas Emission Reduction: MEHC and PacifiCorp will participate in the Environmental Protection Agency's Sulfur hexafluoride (SF₆) Emission Reduction Partnership.¹³

· Energy Efficiency and DSM Management: The Applicants will conduct a company-defined study of DSM and energy efficiency opportunities in PacifiCorp's service area. The study's findings will be used to help direct ongoing DSM and energy efficiency efforts. MEHC shareholders will absorb the first $1 million of costs for the study.

· Customer Service Standards: The Applicants will continue existing customer service guarantees and performance standards as established in each jurisdiction.

· Books and Records. PacifiCorp will maintain its own accounting system. All of PacifiCorp's financial books and records will be kept in Portland, Oregon, and will be available to the Commission in accordance with current practice.

· Affiliate Books and Records. The Applicants will provide the Commission with access to all books, records, documents, and data regarding PacifiCorp's affiliate transactions.

· Access to Employees. MEHC, PacifiCorp, and all affiliates will make their employees, officers, directors, and agents available to testify before the Commission on matters within the jurisdiction of the Commission.

· Corporate Presence: The Applicants will provide adequate staffing and presence in each state, consistent with the provision of reliable service and cost-effective operations.

The General Commitments also include a promise by MEHC to invest more than $1.3 billion to (1) upgrade PacifiCorp's transmission and distribution network, and (2) reduce emissions at PacifiCorp's coal-fired plants. The Assigned Commissioner's Ruling and Scoping Memo dated September 26, 2005, determined that issues associated with the Applicants' Commitment to invest in utility infrastructure are outside the scope of this proceeding.

E. The Settlement Agreement

On October 21, 2005, the Applicants and several parties submitted a Settlement Agreement for Commission approval pursuant to Rule 51.¹⁴ A copy of the Settlement Agreement is contained in Appendix C of today's Decision.¹⁵ The following parties did not join in the Settlement: DRA, Roseburg Forest Products, Klamath Off-Project Water Users, Inc., the Klamath Tribes, and the Utility Workers Union of America.

In the Settlement Agreement, the Applicants agree to several new California-specific Commitments, which are in addition to the General Commitments described previously. The California Commitments include:

C-1 The transaction will not diminish PacifiCorp's ability or willingness to perform its legal obligations associated with its Klamath River hydroelectric system or PacifiCorp's ability to recover associated costs.

C-2 In implementing Commitment 36, PacifiCorp will make cost-effective investments in California as reasonably required to serve load.¹⁶

C-3 PacifiCorp will continue to offer cost-effective DSM programs in California, subject to such costs being recoverable on a timely basis.

C-4 PacifiCorp will take the following actions to extend electric service to unserved Indian communities located in PacifiCorp's service territory. Within 30 days of receiving a request for service by the Tribe(s), PacifiCorp will initiate discussions with the Tribe(s) and other appropriate stakeholders regarding the extension of electric service. Within 1 year PacifiCorp will file an application or other pleading that: (A) seeks permission to extend electric service to specified areas, or (B) states its reasons for not extending electric service.

C-5 PacifiCorp will provide $150,000 per year for three years to fund a study by an independent consultant to identify the presence, distribution, and possible causes of toxic algae, and their toxins, in the Klamath River basin. The study will be designed and overseen in cooperation with the appropriate federal and state agencies.

C-6 PacifiCorp will provide an opportunity for the Settlement Parties to discuss implementation of Commitment 44.¹⁷

C-7 PacifiCorp will file an annual report regarding the California Commitments. If any Commitment is not being met, the report will propose corrective measures.

On January 5, 2006, the Applicants filed a supplement to the Settlement Agreement that amended the Agreement to incorporate, on a most-favored-nation basis, additional Commitments adopted in other states.¹⁸ The most-favored-nation Commitments are addressed below.

In exchange for the Commitments contained in the Settlement Agreement, the Settlement Parties agree to support A.05-07-010 by recommending that the Commission approve the Applicants' request for an exemption under § 853(b). The Settlement Parties intend that the Agreement resolve contested issues within the scope of this proceeding. They do not intend that it resolve issues in other pending or future proceedings.

F. Tangible Benefits of the Proposed Transaction

According to the Applicants, the chief benefit of the proposed transaction is MEHC's willingness and ability to fund utility infrastructure investments. The Applicants guarantee that MEHC will invest $1.3 billion for specified projects, including: (1) more than $490 million for transmission and distribution projects; and (2) more than $800 million to reduce emissions at coal-fired generation plants. The $1.3 billion commitment includes $429 million for new projects, with the remainder for projects previously identified in PacifiCorp's capital plan but which lacked a firm commitment by ScottishPower to fund.

The Applicants state that the proposed transaction will provide several other tangible benefits. These include Commitments to reduce PacifiCorp's costs on a company-wide basis by more than $30 million cumulatively over five years; to reduce harmful emissions from PacifiCorp's plants and facilities; to continue customer service standards and performance guarantees; and to fund a study of toxic algae in the Klamath River basin.

G. Most-Favored-Nation Treatment

The Applicants agree to implement in California the commitments adopted in other states that provide additional benefits or protections. The Applicants refer to this as "most-favored nation treatment."

On January 5, 2006, the Applicants filed and served the following: (1) copies of the settlement agreements submitted by the Applicants in Idaho, Oregon, and Utah; and (2) a revised list of all Commitments applicable to California that reflects, on a most-favored-nation basis, the new or revised Commitments from the settlement agreements in the other states.¹⁹ The revised list is contained in Appendix D.

The Applicants stress that the settlements in the other states have not received final approval. Accordingly, some of the Commitments might change as other states finalize their review of the transaction. The Applicants will advise the Commission of changes to the Commitments and submit a list of the Commitments in their final form.

⁴ Decision (D.) 99-06-049, 86 CPUC2d 675, 678.

⁵ MEHC also has a large real estate brokerage subsidiary.

⁶ The economic interests are stated on a diluted basis.

⁷ This will create a technical change in control of MEHC.

⁸ The issuance of an additional $3.4 billion of equity securities by MEHC to Berkshire Hathaway will increase Berkshire Hathaway's proportional ownership of MEHC.

⁹ Berkshire Hathaway, which is not depicted in Appendix B, will be the ultimate owner of PacifiCorp.

¹⁰ This transaction does not invoke § 854(b) and (c) because neither PacifiCorp nor MEHC has sufficient California revenues to trigger these subsections.

¹¹ PHC Transcript, pp. 3 - 5.

¹² The operative language of § 854(a) refers to the acquisition of "any public utility organized and doing business in this state." (Emphasis added.)

¹³ SF₆ is a greenhouse gas used in electric transmission and distribution equipment.

¹⁴ The parties to the Settlement Agreement are the Applicants, American Rivers, California Trout, Inc., Hoopa Valley Tribe of California, Trout Unlimited, Yurok Tribe of California, Karuk Tribe of California, Pacific Coast Federation of Fishermen's Associations, Institute for Fisheries Resources, Northcoast Environmental Center, Friends of the River, Oregon Natural Resources Council, Headwaters, Klamath Forest Alliance, Waterwatch of Oregon, and the Sierra Club. These parties are referred to collectively hereafter as the "Settlement Parties."

¹⁵ The Settlement Agreement in Appendix C does not reflect the amendments to the Agreement filed by the Applicants on January 5, 2006. These amendments are reflected, as appropriate, in Appendix D of today's Decision.

¹⁶ Commitment 36 requires, among other things, that PacifiCorp spend nearly $160 million on transmission and distribution infrastructure, operations, and maintenance.

¹⁷ Commitment 44 requires PacifiCorp to invest approximately $812 million to reduce emissions at its existing coal-fired generation plants.

¹⁸ The Applicants filed an errata to the most-favored nation Commitments on January 10, 2006.

¹⁹ The Applicants filed an errata to the most-favored nation Commitments on January 10, 2006.