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Idaho denies Hydro One/Avista merger, saying state code prohibits it

Idaho regulators on Jan. 3 denied Canada-headquartered Hydro One Ltd.'s proposed $5.3 billion acquisition of Avista Corp., saying Hydro One's lack of independence from the province of Ontario "dictates our decision to reject the proposed merger."

The Idaho Public Utilities Commission concluded that state law expressly prohibits the transaction and no amount of negotiation or generous offers can change that fact.

Hydro One Inc. is an investor-owned utility, but the PUC said the province of Ontario is its largest shareholder of its parent company, with 47% of the shares, and maintains unique governance agreements with Hydro One, granting it significant control and influence over the utility.

"Hydro One is not purely a private, publicly traded corporation," the commission said. "Rather, the management of Hydro One is subject to the province's political pressure, legislative power, and special governance agreements."

Following provincial elections last June which resulted in a switch of political parties, Ontario's new government removed Hydro One's CEO and replaced its board of directors.

Avista is headquartered in Spokane, Wash., and serves electricity and natural gas customers in Idaho, Montana, Oregon and Washington. It also owns a subsidiary utility in southeastern Alaska. On Dec. 5, 2018, Washington state regulators rejected the acquisition for largely the same reasons the Idaho regulators identified. However, the companies have filed a petition for reconsideration and rehearing in that state, arguing that the commission "misapprehended the political risks that the Province of Ontario's ownership stake in Hydro One poses to Avista and its customers" by failing to specifically identify exactly how the province's actions could impact Avista.

The Washington commission has not yet answered the petition, but S&P Global Ratings has already concluded the Washington regulators' decision raised the probability that the transaction would not close as expected. Oregon has yet to rule on the application and an administrative law judge stated in a Dec. 13, 2018, memorandum the commission has no timetable for issuing an order.

In April 2018, all parties in the Idaho case entered into a proposed settlement that contained provisions intended to protect Avista and its customers from financial risk associated with the transaction. The agreement contained 79 commitments intended to address the impact of management changes and the potential for provincial involvement in the affairs of Hydro One and Avista.

However, the Idaho commission concluded Idaho public utilities law prohibits the transfer of assets from a regulated utility to an entity that is owned or controlled, directly or indirectly, by any other state.

"The prohibitions of Idaho Code [section] 61-327 cannot be nullified with generous settlement terms and robust ring-fencing provisions," the commission said. (Idaho PUC Case Nos. AVU-E-17-09, AVU-G-17-05)