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Ontario Politics a Risk in Avista-Hydro One Merger

The risks of Canadian politics on the proposed $5.3 billion merger of Toronto-based Hydro One Limited and Spokane-based Avista Corporation will be a focus of settlement talks scheduled for March 15 in Oregon, the state’s utility consumer advocate told CTFN.

“The politics of Ontario are one of the risks” of the pending merger, Bob Jenks, executive director of the Citizens’ Utility Board said, adding elements of the proposed transaction as laid out in the merger application are “not a good thing for (Oregon) customers.”

Jenks’ concerns stem from Hydro One’s ownership structure and uncertainty over future Ontario provincial elections. In 2015, Ontario sold the public utility but retained a 42 percent stake in the company. But Jenks pointed out that this could change in future Ontario elections depending on which party is in power.

“If Hydro One is re-nationalized, Avista would be an asset owned by a foreign country,” Jenks stated in written testimony submitted to the Oregon Public Utility Commission.

Hydro One is an investor-owned electric transmission and distribution utility headquartered in Toronto, but Jenks noted that the Canadian company would be tasked with supplying Oregon customers with natural gas should the deal be approved.

Jenks explained that the Ontario Liberal Party has controlled the Ontario legislature since 2003 and while he concedes there will be “little change” in Hydro One’s public-private ownership structure while the Liberals remain in power, that could change if an opposition party wins a majority in the Ontario Legislative Assembly.

“It is extremely difficult to predict which political party will win an election,” Jenks said in his written testimony. “Once a party gains a majority in Ontario, the majority government will be able to quickly pass new legislation.”

The Progressive Conservatives, the larger of two major opposition parties, would be expected to support Hydro One operating as a public-private corporation, Jenks explained, but if the New Democratic Party took control, it has pledged to re-nationalize Hydro One. “Avista’s customers do not participate in Ontario elections; however they may be adversely affected by the Ontario government’s decisions,” he added.

Peter Tabuns, a member of the Ontario Legislative Assembly and Energy Critic for the New Democratic Party, told CTFN that it is the NDP’s intention to return Hydro One to government control should the party return to power.

“The initial merger announcement got a media flash,” he said, “but the privatization is the dominant issue. The privatization is extremely controversial.”

Tabuns, a former executive director of the environmental advocacy group Greenpeace who represents the Toronto-Danforth area, said that the NDP has not considered what would become of Avista if the NDP took power. “They haven’t thought that through at any length,” Tabuns said, “but we don’t have an interest in operating hydro systems (outside) Ontario.”

Tabuns said that current Premier Kathleen Wynne of the Ontario Liberal Party lost support “quite dramatically” after the privatization of Hydro One “and may well end up losing the next election because the people’s perception of her changed”over who she was as a politician and that has damaged her and her party pretty profoundly.”

Of the 107 seats in the Ontario Legislative Assembly, 55 seats are held by the Liberal Party, 28 by Progress Conservatives, or Tories, and 18 by the New Democratic Party with a scattering of seats held by independents or currently vacant.

The Liberals “are definitely the majority party,” he said. “They run this province.” But he added that recent polling indicates that could change in the June 7 general election.

In a random sampling of public opinion taken by The Forum Poll among Ontario voters and published February 19, about half of those polled (49 percent) said they would support the opposition Progressive Conservatives while the Liberal Party has the support of about a quarter (24 percent) of the electorate, and the NDP 19 percent.

Tabuns said the Progressive Conservatives initially opposed the privatization of Hydro One at the time of the sale but now “won’t comment” about the issue.

The province’s fiscal watchdog has forecast a loss of C$1.1 billion in value from Hydro One’s merger with Avista which will “dilute” Ontario’s shares of Hydro One from 47 percent to 42 percent.

Ontario PC Finance Critic Lisa MacLeod responded to the report, saying, “The Liberals like to talk a big game on infrastructure, but the Hydro One fire sale was never about investing in infrastructure. This was about cooking the books in an election year while Liberal donors and insiders get rich.”

While the provincial government has a minority stake in Hydro One, he said, “they are the dominant shareholder and they set the regulatory framework in which the company operates, so they still have a fair amount of power. Notwithstanding that, Hydro One is considered by the regulatory agency in this province to be the absolute poorest operator. They are inefficient (and have) really poor performance in terms of bad response time and in expense of operations. It’s just not considered well run.”

The timing of the merger is also a “really strange development,” he noted. “This seems to be a big diversion of managerial executive time into an acquisition strategy rather than a systems operation and affordability strategy.”

Tabuns said that the provincial government, as majority shareholder in Hydro One, has oversight of the company and the merger. “I can’t believe they would not have an opinion on this merger and acquisition strategy.”

But since the company went private, he said, “all kinds of public access was cut off.”

“We can’t have access to their documentation of their operations,” Tabuns told CTFN. “When they privatized it, they removed all of the public oversight other than that of the Ontario Energy Board, which is the regulator.” He called the lack of public oversight “profoundly” troubling.

Tabuns said there were “very limited hearings at the time of the sale but now there are no hearings into the operations”even though the cabinet of the provincial government, I would say, would have knowledge of the inner workings of Hydro One.” But that does not include the legislature, he added.

Jenks, meanwhile, has voiced concerns over how Avista customers in Oregon could be impacted should Hydro One ever be returned to public ownership in Canada.

Hydro One “would probably want to sell Avista,” if that occurred, Jenks told CTFN. “”That’s not a good thing for (Oregon) customers. It’s not helpful. We talked internally about this and said, are there conditions you can put on this deal”such as a requirement to pay a penalty if they sell the utility within the first five years (post-merger)? That’s part of what we will explore.”

Matt Muldoon, a senior economist for the Oregon PUC, said in written testimony submitted to the commission that because energy policy is a core component of intra-provincial politics in Ontario, “this offers a significant risk that an election can completely flip energy policies and pressure the continuity of purpose.”

Asked if he sees foreign ownership as a hurdle for the two companies in Oregon, Jenks replied, “I don’t want to call it a hurdle until we get into settlement sessions.”

Another key concern the Citizens’ Utility Board has with the merger, Jenks said, involves the double leverage financing used within the holding company structure in which Hydro One is financing the deal with approximately 30 percent equity and 70 percent debt. “Double leverage financing means using debt to finance an equity purchase,” he explained in his written testimony.

Muldoon noted that the PUC staff “is not opposed to the premise that the partnership of Avista and Hydro One could provide efficiencies derived from scale, but none have been supported by actual evidence to date.” And, he added, if the merger is approved, then the PUC staff “will need to develop better resources for monitoring Hydro One financial activity” since the staff’s financial reporting now is targeted to U.S. utilities rather than Canadian utilities.

The companies have already pledged to follow 55 commitments should the deal be approved but Muldoon said that in aggregate, “the 55 conditions offer clearly inadequate protection for Avista ratepayers in Oregon and for Oregonians in general, let alone produce a benefit.”

At a February 26 workshop before the PUC that was designed to give Oregon commissioners a chance to question the companies, Hydro One Vice President and Chief Legal Officer James Scarlett said, “We firmly believe we can satisfy all of the reasonable issues raised in the testimony that was filed and feel we can demonstrate real benefits to Oregon ratepayers.”

He went on to say that if the proposed conditions submitted could be improved, then Hydro One was “ready and willing to have those discussions” and would “do what we can do to modify and enhance and fine-tune what we have in front of regulators today.”

Scarlett said he thinks Avista’s credit rating will not only stay the same but “it’s likely to be improved when you have a larger, better financed parent.”

Scarlett conceded that there has been “some concern expressed” about the corporate structure of the merged company “being complex” but said that in his view it is “not complex at all” and “quite normal for a cross-border transaction.”

Hydro One executives told the commission that the company has made a commitment to allowing Avista to continue to run its own business and keep its local management in place. Avista would continue to have a local board of directors consisting primarily of either board members chosen by Avista or members who reside in the Pacific Northwest.

Commission Chair Lisa Hardie noted that the way the board would work, it “makes you want to ask”what the board is not authorized to do?”

Scarlett replied that one thing the new Avista board could not do was change the chief operating officer or do a “big M&A deal.” He added, “They have to come ask and get our approval.”

Asked by Commissioner Stephen Bloom if the province of Ontario was moving from an investor role to more of a governance role as a major Hydro One shareholder, Scarlett replied, “That is completely opposite of the facts.” He noted that in Canada, the CEO is independent of who runs the board.

In earlier written testimony, Avista Chairman and CEO Scott Morris stressed that the merger with Hydro One “will allow Avista and its customers to benefit from being part of a larger organization (the benefits of scale), while at the same time preserving local control of Avista and the retention of Avista’s employees and management team, as well as its culture and its way of doing business.”

“These benefits of scale will not occur in the near-term following the closing of the transaction,” he said, “but some are expected to occur over the long-term.”

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Robert W. Welkos

Robert W. Welkos

Robert Welkos began reporting for CTFN in August of 2014. He covers utility, cable, and banking deals, among other matters and has proven adept at picking apart state regulatory processes and regulatory reviews with public interest hurdles. Robert spent 20 years as a reporter for the Los Angeles Times, covering the legal beat among other matters, and shared in two Pulitzer Prizes awarded to the newspaper’s Metro staff. He has reported on numerous state and federal trials and served as the Times’ entertainment industry legal affairs writer covering Hollywood and the law. Robert was also a correspondent for the Associated Press.

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