The companies said that they “are reviewing the order in detail and will determine the appropriate next steps.”
As noted in the commission’s Jan. 3 order, Avista in July 2017 announced that it had entered into a merger agreement with Hydro One, and in September of that year, jointly applied to the commission for an order approving the proposed merger. The commission noted that if it and other state regulators, as well as regulatory agencies, approve the merger, then Avista would become a wholly owned subsidiary of a Hydro One holding company.
“Having carefully reviewed this extensive record, including the application, amended settlement, testimony, exhibits, briefs, and comments, the commission now issues this order denying the application, and rejecting the proposed amended settlement and merger,” the commission said.
Discussing the application, the commission noted that as proposed, Avista would be acquired by Hydro One through an Idaho holding company, Olympus Equity LLC, which would acquire all of the outstanding common stock of Avista. Avista would become a wholly owned subsidiary of Olympus Equity, which would be a bankruptcy remote entity in place purely to own Avista and relay Avista dividends to Hydro One. The commission noted that a bankruptcy remote entity is a special entity formed to hold a defined asset and to protect that asset from being administered as property of a bankruptcy estate.
To accomplish the merger, Avista and Hydro One – referred to as the applicants – require approvals from state regulators in Idaho, Oregon, Montana, Alaska, and Washington. The commission added that Alaska regulators approved the proposed merger last June, while Montana regulators approved the proposed merger last July. Washington regulators denied the merger application last December, the commission said, noting that the applicants requested reconsideration in that state on Dec. 17, 2018.
FERC approved the proposed transaction last January, and the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired on April 5, 2018, meaning that the parties have received antitrust clearance for the proposed merger, the commission said.
The applicants received the Federal Communications Commission’s consent last May, while the Committee on Foreign Investment in the United States completed its review of the proposed merger on May 18, 2018, and raised no national security concerns about the transaction, the Idaho commission said.
The applicants engaged in settlement discussions with commission staff, initial intervenors, Avista Customer Group (ACG), and the Idaho Department of Water Resources (IDWR), the commission said. As noted in the order, the initial intervenors are the Idaho Forest Group, Clearwater Paper, Idaho Conservation League, the Community Action Partnership Association of Idaho (CAPAI), and the Washington and Northern Idaho District Council of Laborers.
The commission noted that the applicants, staff, and the initial intervenors signed the amended settlement. The applicants, staff, and CAPAI filed testimony supporting the amended settlement and none of the initial intervenors opposed it, the commission said. ACG opposed the amended settlement, the commission said, adding that the final remaining party, IDWR, notified the commission that it had reached a separate agreement with Avista concerning Avista’s water rights. With that separate agreement related to Avista’s water rights, IDWR expressed no concern about the merger, the commission noted.
The commission said that the amended settlement states, for instance, that:
- All decision-making authority over Avista operations would belong to the Avista Board of Directors, which would consist of nine members. The majority of those members would be designated by Hydro One, with certain conditions regarding independence of some appointments
- Avista would maintain its Spokane offices, workforce, compensation, and branding
- There would be no rate increase because of the merger; instead, Avista’s Idaho customers would receive a $15.8m rate credit over a five-year period, or $3.2m per year
- Hydro One and its subsidiaries recognize the authority of Idaho and the Idaho commission, and have committed to comply, as required, with Idaho laws and commission orders
- Hydro One and Avista would maintain independent finances
- Several ring fencing provisions were included in an effort to shield Avista from Hydro One liabilities, including bankruptcy proceedings. Other ring fencing provisions include a “hold harmless” provision, under which Hydro One would hold Avista’s customers financially harmless from any business, financial, or environmental risks attributable to Hydro One, and a provision to protect Avista’s assets
The commission said that in deciding whether the amended settlement is just, fair, reasonable, and in the public interest as required by Rules 274 and 275, its inquiry is guided, and constrained, by Idaho Code §§ 61-327, 328; those statutes limit an electric utility’s ability to sell assets in certain situations.
If § 61-327 does not bar the transaction, then the commission can only approve the transaction if it finds that the transaction passes the public interest and no-harm tests set forth in § 61-328. In this case, the commission added, it finds that the applicants have failed to carry their burden under Idaho Code § 61-327, which bars the transfer of generation, transmission, or distribution and supply assets of Idaho regulated utilities to four kinds of transferees:
- A “government … or political unit existing under the laws of any other state”
- “[A]ny organization acting as … representative for, or in concert … with, any such government …”
- “[A]ny company … whose issued capital stock, or other evidence of ownership … is owned or controlled, directly or indirectly, by any … governmental or political unit”
- “[A]ny organization or corporation organized under the laws of any other state, not coming within the definition of an electric public utility or electrical corporation…”
The commission said that its "statutory duty to consider whether the proposed merger would be just, fair, reasonable, in the public interest and otherwise in accordance with Idaho law and regulatory policy demands that we address the documented, contractual and ongoing control that the Province of Ontario exerts over Hydro One. We cannot approve the proposal if Avista’s transfer to Hydro One amounts to a transfer to ‘any organization acting as … representative for, or in concert … with, any such government …;’ or ‘any company … whose issued capital stock, or other evidence of ownership … is owned or controlled, directly or indirectly, by any … governmental or political unit.’”
The commission said that it finds that § 61-327 bars the transaction because Hydro One is a prohibited transferee.
Hydro One was a Crown Corporation wholly owned by the Province until November 2015, the commission said, adding that the Province remains the company’s largest shareholder – owning 47% of the outstanding shares.
“In this instance, it is Hydro One’s lack of independence from the governmental entity that dictates our decision to reject the proposed merger between Hydro One and Avista,” the commission said. “The burden to establish that the proposal complies with Idaho law rests with the applicants. … We find the applicants have failed to establish that the proposed settlement is in accordance with Idaho Code § 61-327. Our decision is supported by substantial and competent evidence compiled through a vigorous and thorough effort by all parties to present a complete record for our review.”
Among other things, the commission noted that intervenor funding is available under Idaho Code § 61-617A and Rules 161-165. The commission said that it received three timely intervenor-funding petitions: ACG for $24,412.37; CAPAI for $17,045; and ICL for $12,950.
The commission noted that while it recognizes the value of the intervenors’ contributions, it is limited to a cumulative award of $40,000. The commission said that that it is appropriate to grant the petitions and award intervenor funding as such: $15,813.87 to ACG; $13,744.02 to CAPAI; and $10,442.11 to ICL. Avista is to promptly pay those awards, chargeable to the residential and small commercial classes, the commission said.