United States of America
Before the
Federal Energy Regulatory Commission

California Independent System Operator	)		Docket No. ER98-211-002 
Corporation				)			(Phase I) 
						)
California Power Exchange Corporation	)		Docket No. ER98-210-000

PREPARED DIRECT TESTIMONY OF 
PHILIP R. LEIBER

I.  INTRODUCTION

Q.	WHAT IS YOUR NAME AND BUSINESS ADDRESS?

A.	My name is Philip R. Leiber.  My business address is 151 Blue Ravine Road, Folsom, California  95630. 
Q.	WHAT IS YOUR CURRENT EMPLOYMENT?
A.	Currently, I am the Assistant Treasurer and Manager of Financial Planning for the California Independent System Operator Corporation (ISO).  I am a Certified Public Accountant in the State of California.  I began my employment with the California Independent System Operator on September 16, 1997.  I became involved with ISO and California Power Exchange Corporation (PX) matters beginning in December 1996 when Coopers & Lybrand, LLP, my former employer, was retained by the ISO and PX Restructuring Trusts to provide accounting services.
Q.	DESCRIBE YOUR WORK EXPERIENCE PRIOR TO YOUR EMPLOYMENT WITH THE ISO AND THE ISO/PX TRUST. 

A.	I was hired by Coopers & Lybrand in September of 1992 after receiving a Master of Accounting degree from the University of Michigan.  At Coopers & Lybrand, I worked first in the audit group.  I had clients in the telecommunications, investments and construction and other industries.   After obtaining enough experience to meet the requirements for obtaining my CPA license, I transferred to the Litigation & Claims group, which provides expert testimony relating to financial matters in various commercial disputes.  After working in this area for approximately three years, I joined the Corporate Finance practice, where I specialized in merger & acquisition due diligence and business reorganizations.   It was during this time, commencing in December 1996, that I began working with the ISO and PX Restructuring Trusts.  
Q.	WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A.	The purpose of my testimony is to describe the manner in which joint start-up and development costs were allocated between the ISO and PX Trusts.  
Q.	WHAT WERE YOUR RESPONSIBILITIES WITH RESPECT TO THE ISO AND PX TRUSTS.

A.	My involvement with ISO and California Power Exchange Corporation (PX) matters began in December 1996 when Coopers & Lybrand was retained by the ISO and PX Restructuring Trusts to provide accounting services.  Coopers & Lybrand was retained to perform the following services for the trusts:
•	Maintain accounting records
•	Disburse funds to vendors
•	Prepare and issue monthly financial reports
•	Develop quarterly cash flow budgets 
•	Provide financial status reports to the Trustee and Trust Advisory Committees
•	Maintain all original agreements and contracts
•	Maintain bank relations, including borrowing funds as required
•	Invest excess cash
•	Assist with tax matters, including sales & use tax, and tax status.
I was responsible for these activities on a day to day basis.  I was also responsible for coordinating additional resources within Coopers & Lybrand to provide additional expertise where required, such as on taxation related matters.

II.	ALLOCATION OF JOINT START-UP AND DEVELOPMENT COSTS
Q.	WHAT ARE THE START-UP AND DEVELOPMENT COSTS?

A.	Start-up and development costs consist mainly of costs related to the ISO and PX activities prior to operation, i.e., costs incurred or to be incurred to build the ISO and PX infrastructures.  These costs include equipment purchases, trust administration expenses, consultant and legal fees, salaries, facility construction, and hardware and software for the ISO and PX computer and communications systems.  
Q.	HOW WERE THE STARTUP AND DEVELOPMENT COSTS INCURRED?

A.	Start-up and development costs were incurred in accordance with the 
Quarterly Expenditure Plan (QEP) process established by the Public Utilities Commission of California (CPUC).  The QEP is essentially a project budget for the development of the ISO and PX..  The CPUC issued decisions authorizing the establishment of the ISO and PX Restructuring Trusts and requiring the Trusts to report to the CPUC certain financial information about the activities of the Trusts.  These reports, called QEPs, included the following information:
•	Funds borrowed or collected by the Trusts
•	Funds expended on ISO/PX development and progress by major tasks
•	Comparison of recorded vs. estimated expenditures
•	Deviations of funds expended during the quarter from estimated quarterly cash flow
•	Explanations of significant events which justify deviations from estimated quarterly expenditures
•	Funds paid to ISO/PX Corporations
•	Projected expenditures in upcoming quarters
•	Projected expenditures vs. cost estimates
•	Deviations and significant events anticipated
•	New work by contractors to begin during upcoming quarter and justification
•	Vendor selection process, criteria for selection, and basis for award/decision
•	Funds requested by ISO/PX Corporation
The QEPs also discussed the allocation of costs for the major contracts, such as the MCI contract.  The QEP’s were not public documents as the budget information of the Trusts was protected under a confidentiality order.  This was done so that the budget information would not be available to give potential vendors for the ISO and PX the ability to price their services to the funds available to the ISO and PX.  
Q.	WERE YOU INVOLVED IN THE PREPARATION OF THE QEPS?
A.	Yes.  Part of my responsibilities at Coopers & Lybrand included developing the QEPs for both the ISO and PX Restructuring Trusts.  This involved meeting with the Trustee, his staff, and the project management firms the Trustee retained, who were responsible for overseeing the development work, and obtaining their forecasts about the cost and timing of the various work tasks.   The QEPs represent the comprehensive estimate of total project costs, and were issued to the CPUC thirty days prior to the commencement of the calendar quarter to which they related.  The QEPs were also submitted to the Bank of America, the lead bank under which the ISO and PX Restructuring Trusts have a credit line.

Q.	WHAT IS THE COST ALLOCATION ISSUE IN THIS PROCEEDING?
A.	It is my understanding that certain parties are alleging that some of the start up and development costs incurred by the ISO and PX Restructuring Trusts were not allocated between the two accurately.  They claim that the ISO was assigned more costs than was appropriate for the ISO. 
Q.	DO YOU AGREE THAT COSTS WERE IMPROPERLY ALLOCATED?
A.	No.  First, it is important to note that most start-up and development costs did not require allocation because vendors and other entities providing services to the ISO and PX Trusts provided separate invoices for the costs incurred on behalf of each Trust.  These expenses did not require allocation and were simply assigned to the appropriate Trust.  Thus, the term allocation, as I will use it in my testimony, only refers to joint costs that could not be assigned to either Trust based on the invoices presented to the Trustee.   
Q.	HOW WERE THE JOINT START UP AND DEVELOPMENT COSTS ALLOCATED?

A.	Several vendors providing services to the ISO and PX Trusts provided a single invoice that did not provide a breakdown of costs to be assigned to the ISO and PX.  
As the accountant responsible for the payment of these invoices, it was necessary for me to exercise judgment in some cases as to what proportion of costs would be paid by the ISO and by the PX, respectively.  In those instances, the costs were allocated to the ISO and PX based on one of two allocation methodologies.  First, certain costs could be allocated based on a measure of the benefits each Trust received (such as square feet available to the ISO or PX in a building.)   If such a measure was not available or apparent, a default ratio of 75/25% was applied to the costs for the ISO and PX, respectively.  I will describe these allocation methodologies in more detail below.  
Based on the two allocation methodologies, joint costs were paid to vendors by issuing a separate check or wire transfer from the separate accounts of the ISO and PX Restructuring Trusts.
It is important to note that all expenditures that were made had to be recommended for approval in advance by each Trust’s Technical Advisory Committee (“TAC” --the governing bodies overseeing the development work with the Trustee) through their review of the QEPs.   Each Quarterly Expenditure Plan was recommended for approval by the TAC prior to the start of each calendar quarter.  Each TAC consisted of a wide cross section of stakeholders involved in the electric industry restructuring process.  In addition, all aspects of the ISO and PX development were subject to the oversight of the California Public Utilities Commission through the Quarterly Expenditure Plan reporting process.  The CPUC had the ability to intervene and modify the spending plans of the ISO and PX.  It did not do so. 
Q.	DESCRIBE THE COSTS ALLOCATED BASED ON THE FIRST METHODOLOGY.

A.	When possible, joint costs were allocated between the ISO and PX on the basis of a readily available measure of the benefits enjoyed by the respective entities.  The type of cost categories for which it was possible to allocate costs on this basis include the following:

Category	Basis	Allocation to ISO as of 9/4/97 	
Rental/Occupancy Costs and Folsom Construction Costs	Square feet allotted to ISO v. PX
Example:  The Folsom facility which serves as the primary center for the ISO and backup center for the PX has 79,000 square feet, of which 75,800 (96%) is used by the ISO. 	96%. Total projected portion subject to allocation $8,140,000.  Total portion to be allocated to ISO:  $7,816,000	
Employment Advertising	Ratio of prospective employees for the ISO v. PX
The number of prospective employees was estimated in the staffing plan developed in April 1997 at 270 for the ISO and 90 PX, or approximately 76% of the total related to the ISO.
	76%. Total portion subject to allocation as of September 1997 $58,000.  Total allocated to ISO:  $44,000.	
Loan Closing & Amendment Costs	Total credit available to ISO v. PX ($191 million for the ISO, $59 million for the PX.)	76%.  Total portion subject to allocation as of September 1997 $128,000.  Total allocated to ISO:  $97,000.	
Project Management	General project management costs related to both the ISO and PX were allocated according to the direct time spent per work category for the contracts of each Trust. 	93%.    Total portion subject to allocation as of  September 1997:  $1,189,230, total to ISO:  $1,109,025	
For some invoices, costs were allocated based on the approximate amount of time spent on matters related to one entity compared to the other.  These allocations required an understanding of the work that was performed by the vendors, and often required discussions with them on their work.  There was some judgement exercised on my part in the allocation of these costs.  The allocation percentages used were discussed with the Trustee before payment.  Examples of these costs include:

Category	
Basis	Allocation to
ISO as of 9/4/97	
Accounting fees	Transaction volume and overall reporting responsibilities	60-65%. Total portion subject to allocation as of September 1997, of approximately $434,000.  Total allocated to ISO:  $274,000	
Regulatory filings	Approximate time spent on ISO/PX work, ascertained through discussions with the vendor	75-80%.   Total portion subject to allocation as of September 1997, approximately $4.8 million.  Total allocated to ISO:  $3.7 million.	
Financial Consultants	Approximate time spent on ISO/PX work, ascertained through discussions with the vendor	60-75%. Total portion subject to allocation as of September 1997, approximately $200,000.  Total allocated to ISO:  approximately $134,000.	
Trust Advisory Committee
Costs and Trustee’s travel costs	Proportion of meeting time dealing with ISO v. PX issues	50-80%. Total portion subject to allocation as of September 1997, approximately $81,000.  Total allocated to ISO:  approximately $50,000.	
Q.	DESCRIBE THE SECOND METHODOLOGY FOR COST ALLOCATION.
A.	Where it was not possible to directly ascribe the benefits of the costs incurred to either the ISO or the PX, a default ratio of 75/25% was used to allocate the costs to the ISO and PX, respectively.  This default ratio was established by the WEPEX steering committee and recognized by the Technical Advisory Committees of the Trusts.  This ratio approximates the sizes of the budgets and credit lines established for the ISO and PX of $191 million and $59 million, respectively.  It also approximates the size of the ISO and PX Corporations in terms of headcount.  The costs of the requests for proposals (RFP’s) and bid evaluation assistance were allocated using this standard ratio.  The RFP’s were the documents issued to potential vendors detailing the technical requirements for the various work tasks in ISO and PX development.  After responses from the bidders were received, outside consultants were used to evaluate the vendors’ bids as part of the bid evaluation process.  Because contracts for certain of the work tasks were to include services for both the ISO and PX, it was necessary to allocate a portion of these costs to both entities.  The MCI Communications contract was an example of this.  
Q.	HOW WERE THE MCI COMMUNICATIONS CONTRACT COSTS ALLOCATED BETWEEN THE ISO AND THE PX?

A.	The MCI Communications contracts consist of two separate agreements between the ISO and MCI, and between the PX and MCI.   The contracts have two components:  development costs and ongoing operating costs.   These contracts specify that of the total development costs, $25.8 million would be paid by the ISO and $4.2 million would be paid by the PX.  It is my understanding that these ratios were arrived at by an assessment of technical communication requirements of both the ISO and PX made by the WEPEX project management team.  As these ratios are specified by the contracts, no judgement was exercised by the Trustee or myself in determining the amount of payments to MCI related to development costs of the communications infrastructure.
As for the ongoing communications costs, each contract specifies the ongoing costs payable by each Corporation directly to MCI.   Additionally, certain costs for Backbone and Shared Network Services attributable to the ISO, PX, ACCs and CSs are included in the ISO contract.  The history of the MCI contract is discussed in the testimony of Mr. Bill Boswell.  Mr. William Huckins discusses the allocation of certain ongoing MCI costs.  In the case of the costs attributable to CSs, the ISO plans to charge its users directly for these costs based on the predicted proportion of the total service availability and type of service that each entity will use.  
Q.	ARE THERE OTHER ONGOING COSTS THAT MUST BE ALLOCATED?

A.	Yes.  Lease facilities costs, which I listed earlier, are also ongoing costs that will be allocated to the ISO and PX on the basis of square footage used by each.  There are no other ongoing costs that I am aware of that require allocation.  
Q.	DESCRIBE THE INDEPENDENT AUDIT YOU MENTIONED EARLIER.
A.	The ISO and PX Restructuring Trusts recently underwent a comprehensive audit that was required under the Trust Agreements.  Those agreements require that an audit be performed upon the change of Trustees.  The initial Trustee of both Trusts resigned effective September 4, 1997 and pursuant to the Trust Agreements, the audit was performed.   In addition to performing the normal tasks associated with an audit, such as verifying the overall costs included in the statement of cash disbursements, the auditors specifically addressed and reported on the reasonableness of the allocation of costs between the ISO and PX Trusts.   The results of the audit confirm that the allocation methodologies described above that were used to allocate costs to the ISO and PX were reasonable. 
These audits covered the cash disbursements made by the ISO and PX Restructuring Trusts from their inception (October 25, 1996), and also reported on the reasonableness of the allocation of costs between the two Trusts.   As shown in Ex. PI-2, the auditors agreed that the cost allocations made between the ISO and PX were made on a reasonable basis, except for minor differences resulting in an over-allocation of costs to the PX of $191,421.  This difference will be settled by transferring funds from the ISO to the PX to reimburse the PX for this overallocation of costs.  A large part of the difference related to a downward revision in the amount of space that was to be provided to the PX at the Folsom facility after some construction and other charges had already been paid by the PX.  
A second audit was conducted covering the period from September 4, 1997 to December 31, 1997.   These reports also confirm that the methodologies used to allocate costs to the ISO and PX were reasonable.  Attached as Ex. PI-3 is a copy of a letter from the audit firm Lautze & Lautze, which states that the current results, when combined with the results from the September 4, 1997 findings show the ISO underpaid by $57,918 (down from the $191,421 underpayment in the September 4, 1997 audit findings).   

Q.	DO YOU HAVE ANY OTHER INFORMATION OF IMPORTANCE RELATING TO THE ALLOCATION OF COSTS BETWEEN THE ISO AND PX.

A.	Yes.  It is important to note that by September 1997, the number of invoices that required allocation between the ISO and PX had substantially decreased.   As both Corporations by that time had accounting functions in place, vendors began sending separate billings directly to each Corporation for payment.  While there continued to be some invoices that required allocation, these were relatively few in number and minor in dollar amount.  For these invoices, the ISO and PX reached agreement as to the proportion of the invoice to be paid by each.   

III.  IOU REIMBURSEMENTS
Q.	WHAT IS THE ISSUE REGARDING THE PAYMENT OF COSTS INCURRED BY INVESTOR OWNED UTILITIES?

A.	It is my understanding that some parties have alleged that the ISO and PX may be attempting to recover start-up and development costs that were actually incurred by the IOUs.  It is also my understanding that some parties have alleged that the IOUs were improperly reimbursed for their role in the restructuring process.     
Q. 	DO YOU BELIEVE THESE ALLEGATIONS ARE ACCURATE?
A.	No.
Q.	DESCRIBE HOW THE IOUs WERE REIMBURSED BY THE ISO AND PX TRUSTS.

A.	The ISO and PX Restructuring Trusts reimbursed the IOUs for certain costs that they incurred on behalf of the ISO and PX, who at the time the commitments were made, did not have staffing or representatives to contract with vendors themselves.   The Trust Agreements for the ISO and PX Restructuring Trust state that neither Trust will  reimburse the Investor Owned Utilities (IOUs) for the costs of their personnel assigned to the ISO and PX development projects.  Consequently, no such costs have been paid from the ISO and PX Trust funds.
The IOUs have received funds from the ISO and PX Trusts for two items:  (1) pre-Trust expenditures to third parties, (2) travel costs, and (3) ACC upgrades.  Pre-Trust expenditures to third parties were expenditures made by the IOUs on behalf of the ISO and PX Trusts.   This was necessary to allow ISO and PX development to proceed in a timely manner in order to meet the January 1, 1998 deadline.  Before the ISO and PX Trusts were established and able to expend funds on their own, the IOUs, under the authority of the WEPEX Steering Committee (the predecessor to the Trusts,)  contracted with vendors for certain development related tasks.  These tasks included:
•	Preparation of functional specification documents
•	Preparation of conceptual design documents
•	Engineering assistance in bid evaluation and field prototypes
•	Legal costs to implement the Trusts
•	Directors and officers insurance coverage for the Trust Advisory Committees
•	Other minor items (such as a fees for an internet web page for the WEPEX project, and direct WEPEX team meeting costs)
These costs were recommended for reimbursement by the Trusts at the December 19, 1996 meeting of the Trust Advisory Committees for both the ISO and PX.  The total commitments made by the IOUs to third party vendors for these items amounted to approximately $2,564,000 for the ISO and $940,000 for the PX.  The IOUs did not pay those entire amounts to the third party vendors, because once the ISO and PX Trusts were established, the vendors were able to directly invoice the Trusts for some portion of these commitments.  Amounts paid to the IOUs were $1,756,000 for the ISO and $583,000 for the PX.
Other payments made to the IOUs included reimbursement for the direct travel costs of their personnel involved in the ISO and PX projects as: (1) members of the Trust Advisory Committees, or ISO and PX Corporation Governing Boards, and (2) Interim Staff (“User Groups”). 
Members of the Trust Advisory Committees, and ISO/PX Governing Boards are entitled to reimbursement for their travel costs to attend the meetings that are periodically held throughout the State of California.  All members of these entities, regardless of which stakeholder groups they represent, are entitled to such reimbursement under the Trust Agreement, or Corporation Bylaws.  The IOUs received the same treatment in these matters as any of the other groups involved in the restructuring effort.  No labor or related costs of IOU personnel were reimbursed by the Trust or ISO/PX Corporations.
During 1997, as development efforts on the ISO and PX hardware and software were underway, it became evident that suppliers needed to work with representatives of the ISO and PX to clarify what the specific needs of the ISO and PX would be with respect to that hardware and software.  However, as the Corporations were only established in May 1997, and it took some time to bring permanent staff on board, “interim staff” were used to perform these critical functions.  These interim staff, or user groups as they were also known, consisted of consultants and staff from municipal and investor owned utilities.  Consultants were paid their fees and expenses.  Reimbursements were made to other entities for their loaned staff’s payroll and travel costs.  For staff from the IOUs, only their travel and related costs were reimbursed to the IOUs.   This treatment is consistent with the Trust funding decisions issued by the CPUC which specified that the IOUs would not be reimbursed for personnel costs involved in the restructuring effort. 
Finally, the IOUs were reimbursed for the cost of changes to its computer systems that would permit the ISO to access information from each utility’s Area Control Center (ACC) through ICCP datalinks owned by the ISO.  These software changes were necessary, as the utility’s computer systems had to be modified to allow access to information that was previously restricted to an outside party, the ISO. The ISO budget initially compiled by the WEPEX Steering Committee, included $2 million for these upgrades.  All subsequent budgets filed by the Trust have included this funding for ACC upgrades.  As of the first quarter of 1998, the QEP included $1.941 million for this item.  The Trust paid portions of these costs directly to third party vendors, and portions as reimbursement for payments made by the IOUs to third party vendors.  No utility labor has or will be reimbursed related to these ACC upgrades, consistent with the funding decisions for the Trust issued by the CPUC.
Q.	DOES THIS CONCLUDE YOUR TESTIMONY?
A.	Yes.