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Spokane, Washington  Est. May 19, 1883

Avista sale includes protections against Canadian government influence and rate hikes, consultant says

Avista Corp.’s proposed sale to Hydro One Ltd. has safeguards to protect local customers from Canadian government interference and rate hikes if the Toronto-based utility runs into future financial troubles, says a consultant hired by the two companies to scrutinize the proposed agreement.

John Reed, a Massachusetts energy and utility consultant, compared provisions in the Avista-Hydro One sales agreement to 40 other sales or mergers of U.S. utilities, including 10 involving Canadian companies.

His findings: The Avista-Hydro One agreement is “very robust and well in excess of industry norms,” Reed said in written testimony to the Washington Utilities and Transportation Commission. He said the structure of the board that would run Avista after the sale ensures that decision-making would remain in the Northwest rather than Toronto.

Scott Morris, Avista’s chairman and chief executive, has characterized the $5.3 billion sale as a “merger of equals” and a way for Avista, a smaller publicly traded utility, to protect its 129-year legacy by choosing the right partner in an era of consolidations. Avista sells electricity and natural gas to customers in Eastern Washington, North Idaho and parts of Oregon and Alaska. It would be a Hydro One subsidiary after the sale but would continue to operate with a high degree of autonomy, Morris said.

But the sale of Spokane’s homegrown utility is facing pushback from some residential customers. They say they’re leery of Avista becoming the subsidiary of a Canadian utility, particularly with the province of Ontario having a 47 percent ownership stake in Hydro One. They’ve also voiced concerns about the prospect of their rates being influenced by Ontario’s high energy costs.

In public hearings, opponents have mentioned that Ontario phased out coal-fired electricity. Opponents expressed concerns about Hydro One forcing a “climate change agenda” on Avista customers, globalization of utilities and foreign ownership of Avista’s hydroelectric dams.

Washington and Idaho regulators have received about 900 written comments from customers with most urging the states not to approve the sale. A nonprofit, Avista Customer Group, formed several months ago and hired an attorney to fight the sale.

A political shakeup at Hydro One in July also has raised questions.

State utilities commissions in Washington, Idaho and Oregon paused their regulatory reviews of the sale after Doug Ford, Ontario’s new premier, accepted the resignations of the utility’s board of directors and the retirement of the CEO. Ford ousted both over what he deemed high executive pay.

A new Hydro One board was selected in August, and regulators in Washington, Idaho and Oregon have scheduled their final deliberations for this fall. For the sale to go through, regulators in each state must determine that Avista customers would benefit from the transaction.

Washington and Oregon anticipate issuing their final orders by Dec. 14, but Idaho regulators haven’t set a decision date. Both Avista and Hydro One say they expect the sale to close by the end of the year.

Morris said the shakeup at Hydro One was unexpected, but “none of this really matters because of the way we structured the deal.”

He said the sales agreement includes about 80 provisions to protect the interests of Avista’s customers, employees and local communities long after the departure of the executives who crafted the sale.

“We have safeguards, not just handshakes,” Morris said.

Hydro One shareholders would pay about $79 million for programs benefiting Avista customers as part of the sale, including $55 million in rate credits over five years for customers in Washington, Idaho, Oregon and Alaska. For a typical residential electric and natural gas customer in Washington, the monthly rate credit would be about $1.27 per month, and in Idaho, about $1.38 per month.

The programs also include home energy audits, low-income rate assistance and weatherization of homes.

Hydro One also agreed to keep Avista’s corporate headquarters in Spokane, boost charitable giving and continue Avista’s role in local economic development efforts.

Morris said some of the opposition to the sale is based on faulty information. “The misrepresentation people are putting out there is challenging,” he said.

For instance, Morris said he’s heard speculation the Canadian government would sell off Avista’s dams on the Clark Fork and Spokane rivers. Avista has sold energy assets in the past, Morris said. In 2000, the company sold its partial interest in a Centralia coal plant. However, the $20 million from the sale was credited back to ratepayers, he said.

Avista customers might be surprised to know that many U.S. utilities already have foreign ownership, Morris said. Puget Sound Energy, which serves more than 1 million customers in Western Washington, is owned by public and private pension and retirement funds. With recent acquisitions, about 90 percent of Puget Sound Energy will be owned by Canadian investors.

U.S. utilities are allowed to earn higher profits than their Canadian counterparts, which has spurred merger and acquisition interest from north of the border, Morris said. But after the sales, the utilities continue to be regulated by public utilities commissions in each state, which have the authority to set electric and gas rates, he said.

Reed, the consultant who reviewed the sale, is the chairman and chief executive of Concentric Energy Advisors in Marlborough, Massachusetts. He’s testified more than 400 times before state and federal regulatory agencies and arbitration panels, and Hydro One picked him to evaluate the sale, said Casey Fielder, an Avista spokeswoman.

The cost of Reed’s work is included in the sale transaction fees, which are paid by shareholders, she said.

Reed devoted a significant part of his testimony to the structure of the board that would govern Avista after the sale, saying it protects Avista from influence by Hydro One and the province of Ontario.

The nine-member board of directors would contain two Hydro One executives; two board members designated by Avista, including Avista’s current CEO; and five independent board members, including three from the Pacific Northwest.

Seven of the nine seats would be filled with independent board members, as defined by New York Stock Exchange rules, and board members appointed by Avista, Reed said. That majority would make it impossible for Hydro One or the Ontario government to take control of Avista’s management, he said.

“The province can’t directly influence Avista, or pass laws that apply to Avista,” Reed wrote in his testimony.

In addition, safeguards to protect Avista’s financial integrity and shelter Avista customers from risk are built into the agreement, he said.

The commitments require “Avista customers to be held harmless from any business and financial risks associated with Hydro One,” Reed wrote.

Avista would maintain separate debt and credit ratings from Hydro One after the sale. Hydro One couldn’t pledge Avista’s assets for its loans or tap Avista’s assets in the event of a Hydro One bankruptcy.

Combined with the oversight by state regulators, Reed said, the sale commitments address potential risks of Avista’s sale to Hydro One and ensure Avista’s customers “will continue to enjoy safe and reliable electric service.”