U.S. regulators flag worries over Hydro One raising Avista rates

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U.S. regulators, concerned about the forced departures of Hydro One Ltd. chief executive Mayo Schmidt and the company’s board in July, are now questioning whether the utility will try to make up for a possible decline in Ontario revenue by raising rates for customers of Avista Corp.

The public utility commission in Washington state, where Avista serves just less than 400,000 gas and electric customers, is evaluating the protections Hydro One agreed to earlier this year in order to get its acquisition of Avista approved.

Hydro One said in July, 2017, it would pay $6.7-billion to buy Avista, which is based in Spokane, Wash. and operates in five western U.S. states, in its first major foray into the United States. The company hoped to have regulatory approvals from state regulators by now, but the leadership change has thrown a spanner in the works. Investors had bid Avista up close to the US$53 offer price, but the shares have closed below US$51 since mid-July, indicating some degree of investor skepticism the deal will be completed amid shifting political winds in Ontario.

The utilities and regulators struck their “settlements,” the legal term for such agreements, before Doug Ford became Ontario Premier and fulfilled a campaign promise to oust Hydro One’s leadership. Now, the focus is on Mr. Ford’s promise to cut utility rates by 12 per cent in Ontario. The new government has not given much detail as to how it intends to do that, and whether it will affect the rates Hydro One can charge.

And while Hydro One had pledged a series of measures to allow a degree of independence to Avista’s leadership after the takeover, U.S. regulators across Avista’s service territory seem poised to question all of Hydro One’s promises.

The Washington Utilities and Transportation Commission “is evaluating the so-called ‘ring-fencing’ provisions proposed in the settlement … and whether those provisions are sufficient to protect consumers in the event of Hydro One revenue shortfalls,” spokeswoman Kate Griffith said. “The commission will gather more information about these provisions during the October evidentiary hearing.”

Washington was among several U.S. states that postponed hearings or pushed back approval timelines in the days after Hydro One reported on July 11 that its board had resigned and Mr. Schmidt had retired. Idaho regulators postponed an evidentiary hearing scheduled for July 23, and Washington and Oregon regulators acknowledged they could no longer meet Hydro One’s request for August 14 approval.

Washington and Oregon have now set Dec. 14 as a goal for approval, while Idaho will finalize its schedule after Hydro One has a new board and CEO in place, spokesman Matt Evans said. Hydro One has said it hopes to have a new board announced by August 15.

“Hydro One remains committed to Avista and will continue to work with Avista towards achieving regulatory approval for the merger,” the company said in a statement last week, when asked about regulators’ broader concerns. “As part of the deal, Hydro One and Avista have made governance and financial ring-fencing commitments that provide assurances and protections to Avista customers, employees, communities and subsidiaries.”

The ring-fencing commitments relate to, as examples, the independence of Avista directors after the acquisition, restrictions on Hydro One’s ability to pledge Avista’s assets as collateral for its borrowing and a promise that Avista’s customers will be held harmless “from any business and financial risk exposures” associated with Hydro One or its affiliates.

Documents in the Washington regulatory process, though, show how the departures of Mr. Schmidt and the board have created unease among regulators about Hydro One’s word.

Mr. Schmidt and other Hydro One executives had offered reassurances that Ontario politics would be “noise” that offered little risk to Avista customers.

After Mr. Schmidt’s departure, Lisa Gafken, a Washington State assistant attorney-general and chief of the public counsel unit that represents utility consumers, told the commission: “… [B]efore entering into its order in this matter, the commission should determine whether the ‘noise’ in fact has no meaningful impact in Washington, despite the dramatic turn of events.”

While the dialogue in Idaho and Oregon seems not to have been as direct, the two states seem likely to ask similar questions.

Mr. Evans, the Idaho spokesman, said the state commission “would be interested in determining the impact on ratepayers in Idaho” of the Ontario government’s desire to reduce rates in the province and would like to see Hydro One’s testimony on the matter “prefiled” in writing so the company can be questioned on it in a public hearing, with cross-examination and questioning from commissioners.

Michael Grant, the chief administrative law judge for the Public Utility Commission of Oregon, declined to comment on the specifics of what his state’s regulators will examine. Avista has approximately 100,000 natural gas customers in the eastern part of the state. “A lot will be determined on what the parties say in their testimony, and of course the commission will be looking at everything it can to make sure this transaction results in net benefits to customers and doesn’t harm the ratepayers of Avista here in Oregon.”

Regulators note that the agreements they’ve struck with Avista have “most favoured nation” language that says if Hydro One and Avista agree to a certain condition in one state, each state can also apply that condition to the utilities as well.

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