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In a May meeting, faced with questions from Washington State regulators over the degree to which Ontario politicians could interfere or even replace Hydro One’s leadership, CEO Mayo Schmidt reassured the regulators they had little to worry about.

They are worried now. The jarring turn of events – Mr. Schmidt’s abrupt departure this month, coupled with that of Hydro One’s board of directors – has made the state’s Utilities and Transportation Commission (UTC) question what the change means for its residents served by Avista Corp., Hydro One’s merger target.

Hydro One’s failure to foresee its political peril helped prompt the state of Washington to announce Friday it was delaying its consideration of the Avista deal by four months. The move kills Hydro One’s goal of getting regulatory approval sealed by August.

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In a May meeting with U.S. regulators charged with considering Hydro One's proposed acquisition of Avista, former president and chief executive Mayo Schmidt played down the degree to which Ontario politicians could interfere or even replace Hydro One’s leadership.

Christopher Katsarov

In the notice that UTC issued on Friday, they remarked the past testimony “came sharply into focus” when Mr. Schmidt and the Hydro One board resigned July 11 and said “other uncertainties will continue to be present … that may be material to our decision whether to approve the proposed transaction, with or without condition, or deny the transaction.” (Asked to comment for this story, a spokeswoman for the utilities commission pointed to Friday’s official order.)

Washington State’s Public Counsel Unit – an office of the state Attorney-General that represents Washington’s utility customers – had filed a letter with the UTC asking for the four-month delay allowed by law. And the contrast between Mr. Schmidt’s soothing words, in official testimony before the UTC, and the jarring departure of Hydro One’s Toronto leadership was a major reason.

In her letter, Lisa Gafken, a Washington State assistant attorney-general and chief of the Public Counsel Unit, cited testimony by Mr. Schmidt before the UTC that the Province of Ontario “was not in a position to terminate the CEO” and that, Mr. Schmidt said, it would be a “high bar to change the entire board and yet an even higher bar to bring back another yet fully independent Board of Directors.”

Hydro One’s general counsel, Jamie Scarlett, told the UTC that political “noise” in Ontario “shouldn’t have a big impact down here.”

Related: Hydro One board overhaul causes delays in planned acquisition of Avista

Ms. Gafken said in her letter that both Mr. Schmidt and Mr. Scarlett “expressed extreme confidence in Ontario’s political developments and their impact on Hydro One. Yet, Mr. Schmidt was a casualty of these developments …. [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.”

Asked about the May comments, Hydro One released this statement to The Globe and Mail on Tuesday: “Hydro One remains committed to Avista and will continue to work with Avista towards achieving regulatory approval for the merger. 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.” Mr. Schmidt could not be reached for comment on Tuesday.

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The comments from Mr. Schmidt and Mr. Scarlett were in response to queries from David Danner, chairman of the UTC, in a May 22 hearing on the Avista acquisition.

“I’m just trying to get a handle on what kind of volatility, if any, we're stepping into,” he told the executives. “Motley Fool warned investors to pay attention because ‘policy shifts and promises of retribution could impact the stock of the company.’ So this agreement between the Province and Hydro One is very important. And even though it says that Ontario can't take part in the management, I wanted to just dig down a little bit into the agreement and see.”

“The board of directors currently today, of course, is fully independent of the Province and they act commercially,” Mr. Schmidt testified in response. “And as I mentioned, the Province has not weighed in on any matters associated with the commercial operations of the organization … we have a contract with the Province that they in fact will operate as a shareholder but not a manager of the business.”

Mr. Schmidt acknowledged that, under a governance agreement between the province and Hydro One, the province had the right to remove the board. But, he said, the five largest shareholders, aside from the province, “would in fact be the selectors of the new board of directors that would be fully independent. So that really is the protection in addition to other [protections] that Avista has from the Province of Ontario.”

In the separation arrangement that has since been crafted between the province and Hydro One, the utility has yielded to the Ford government the right to pick four of 11 directors. Last week, Ontario nominated Thomas (Tom) Woods, a 37-veteran of Canadian Imperial Bank of Commerce and Wood Gundy who serves on multiple corporate and charitable boards, as the first of its four nominees.

Mr. Scarlett told the UTC in May the governance agreement “is very intentionally and carefully crafted to control the power of a major shareholder,” with a board-replacement process “that’s meant to make it difficult for the Province to weigh in at the board. It would have to be something dramatic, and even then the new board itself would have to be at the same standard of independence as the board that currently sits.”

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“So it’s in a very kind of carefully thought-through and structured arrangement done intentionally because the Province was selling the deal to the public,” he continued, referring to Ontario’s partial divestiture of Hydro One through an initial public offering in 2015. “And if they went out to public investors and the investors thought that the Province was going to be able to meddle or fiddle around in the business of Hydro One, the view was the deal would not have been successful, nor would they be able to assemble the management team led by Mayo Schmidt, because no one wanted to work for [a] Crown corporation, to be blunt.”

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