State regulators have tough questions regarding Avista sale to Canadian utility

Avista Corp.’s proposed sale to a Canadian utility came under intense scrutiny from Washington regulators Tuesday, who asked if and how they could protect Northwest customers from bad decisions by the Ontario government.

During a 4 1/2-hour hearing in Olympia, state Utilities and Transportation Commission members made pointed inquiries about the provincial government’s ability to meddle in the operations of Hydro One Ltd., which is trying to acquire Avista in a $5.3 billion sale.

The province is Hydro One’s largest shareholder, with a 47 percent ownership stake in the Toronto-based utility.

The three-member commission said the prospect of government interference is real, considering that in July – after Ontario voters elected a premier who promised to lower electric rates and cut executive pay – Hydro One’s CEO Mayo Schmidt retired and its 10-member board resigned.

Although the sale agreement has a provision that says the deal could come back to the commission if Hydro One runs aground, UTC Commissioner Ann Rendahl asked what would happen then.

“How can we unring the bell? What’s the remedy?” she asked utility executives and UTC staff.

That would be difficult to answer without knowing the scenario, Hydro One chief legal counsel James Scarlett said, and “one doesn’t pop in to my mind right now.”

“I don’t know,” responded Chris McGuire, the UTC’s assistant director of energy regulation.

Many of the questions were prompted by events surrounding the July corporate shakeup. Ontario’s new premier – Doug Ford, whose populist style is sometimes compared to President Donald Trump’s – criticized high electric rates in the province and the Hydro One CEO’s pay. He promised to bring about changes if elected.

Anticipating that Ford would seek a shareholders’ meeting to oust the company’s top leaders, its board and CEO Schmidt acted pre-emptively, said Jamie Scarlett, Hydro One’s chief legal counsel.

The speedy resignations were considered in the best interest of Hydro One, rather than waiting for a shareholders’ vote, which would have taken about 90 days to schedule, Scarlett said. He also said Hydro One’s management didn’t want the province to pass legislation forcing the issue.

Scott Morris, Avista chairman and CEO, said he learned about the shakeup when Schmidt stepped out of the board meeting to call him.

Markets were quick to react. Avista’s stock price dropped from $52.75 per share to $50.30 in the 24 hours after the news broke. Hydro One’s stock also dropped. Two debt-rating agencies – Moody’s and Standard & Poor’s Global Credit – also took notice, issuing comments about the province’s influence on the company.

“Would you agree that events announced to the world on July 11 were not in Avista’s best interest?” UTC Commissioner Dave Danner asked Morris.

Several iterations of that question were asked during the hearing, both to Avista and Hydro One executives.

Morris said the ouster surprised him. Schmidt was “a really great leader,” Morris told the commission. However, “this deal was never done on Scott and Mayo. … We put together a governance agreement that would stand the test of time.”

After the sale, Avista would operate as a Hydro One subsidiary, with a separate board of directors to run Avista’s operations.

“Those decisions are made from the Pacific Northwest with an independent board of directors,” Morris said. “I don’t have any concern about the premier reaching into our business and telling us how to run it.”

Hydro One has since chosen a new board, following prior agreements outlined with the provincial government, which is allowed to select four of the utility’s 10 board members.

“I appreciate that it’s very unsettling – to the people of Hydro One as well,” said Scarlett, the Hydro One attorney. But, “the governance agreement worked” after the political shakeup, resulting in the selection of a new board, he said.

The three commissioners also asked if the provincial government could change provisions in the deal outlining how Avista will operate after the sale. The agreement specifies that Avista’s headquarters will remain in Spokane, and it provides more than $30 million in rate credits to Washington ratepayers over five years, among other things.

“The province of Ontario doesn’t have jurisdiction in the state of Washington,” Scarlett said. “They could try, but I have a hard time seeing anything that could be effective.”

Commissioners also raised questions about the impact of Ford’s pledge to reduce electric rates in Ontario by 12 percent. They questioned whether profits from Avista could be used to cover the rate reduction.

Scarlett said a 12 percent rate reduction would have to include the entire utility industry in the province. Hydro One distributes and transmits electricity to customers in suburban and rural parts of Ontario but doesn’t generate it.

When asked if Hydro One could use Avista dividends to support its operating costs and capital needs, Scarlett said: “Yes. They could contribute to that.”

The sales agreement was carefully crafted with provisions to protect Avista’s future financial integrity against the potential for “malicious actions or bad actors associated with the parent company,” said McGuire, the UTC staff member.

However, he said he thought it would be valuable to negotiate another agreement, allowing the Washington commission to act “in the event of something bad.”

For the sale to go through, the UTC must determine Avista’s acquisition is in the best interest of the utility’s Washington customers.

In Montana and Alaska, public utility commissions already have approved the sale. Commissions in Oregon and Idaho are still deliberating.

In Washington, the UTC has a Dec. 14 deadline to make a decision.