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Washington State regulators have rejected Hydro One Ltd.’s $4.4-billion acquisition of Avista Corp., citing the possibility of political interference from the Ontario government as the primary reason.

Thursday morning, Ontario Premier Doug Ford was unapologetic, saying, “While some critics might believe that the concerns of Ontario families, seniors, and businesses should take a back seat to foreign regulators, our government remains unwavering in our commitment to the people of Ontario to reduce hydro rates and provide a reliable energy system.”

While the utilities have the right to appeal, Washington State’s decision imperils a deal envisioned by Hydro One as a step toward creating a leading North American power company.

“Provincial government interference in Hydro One’s affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista if it were acquired by Hydro One, as proposed,” the Washington Utilities and Transportation Commission (UTC) said in a statement. “This, in turn, could diminish Avista’s ability to continue providing safe and reliable electrical and natural gas service to its customers in Washington.”

Hydro One and Avista must petition for reconsideration within 10 calendar days, UTC spokeswoman Kate Griffith said. Alternately, they can seek a judicial review within 30 days of the decision.

In a joint statement on Wednesday evening, the two companies said they “are extremely disappointed in the UTC’s decision, are reviewing the order in detail and will determine the appropriate next steps.”

The Hydro One-Avista deal was on track until July, when then-Hydro One chief executive Mayo Schmidt retired and the full board resigned under pressure from the new Doug Ford government. The abrupt departures ran counter to assurances Mr. Schmidt had made that there would be minimal operational interference in Hydro One from the Province of Ontario despite its 47-per-cent ownership of the former Crown corporation.

Washington State, Oregon and Idaho all cancelled hearings or extended the approval process to gather more information. In response, Hydro One and Avista made a number of changes to its governance agreements designed to insulate Avista customers from issues created at the parent company level in Ontario. (Regulators in Alaska and Montana, the other two states where Avista operates, had already approved the deal.)

In its formal order, the UTC said “the post-election events that we describe in this Order demonstrate the willingness and ability of the province, in cooperation with the former Hydro One board and CEO, and through legislation, to pursue the realization of political promises and goals without regard to the consequences this might have for Hydro One in terms of shareholder value, even undercutting the province’s own interests as a shareholder.

“The Commission’s ability to protect Avista, were we to approve its acquisition by a company that for all practical purposes remains under the control of a sovereign government, would be equally limited, if it exists at all," the UTC order reads.

Mr. Ford’s Thursday-morning statement underscored his commitment to directly intervene in Hydro One. “This is a deal that was put together by the former board and former CEO of Hydro One - a deal that did nothing to lower hydro rates for Ontario residents … Our government ran on a clear promise to clean up the mess at Hydro One. This included a firm commitment to renew the Hydro One senior leadership that had lost the confidence of Ontario ratepayers. The people of Ontario elected us to follow through on this promise.”

The deal has obstacles remaining in Oregon and Idaho as well. In Oregon, the deal is opposed by the state’s Citizen’s Utility Board, the legal representative of the customers of investor-owned utilities in Oregon. The board says the Province of Ontario should sign an affidavit saying it is a passive investor in Hydro One. Hydro One asked Ontario’s Ministry of Energy in November for a such a document.

But in a filing on Wednesday with Oregon regulators, the company revealed the province has refused, saying the affidavit “does not appear to be necessary.” Stephen Rhodes, Ontario’s deputy minister of energy, said he wanted to “reiterate the Ministry’s commitment to supporting Hydro One in its efforts to complete the Avista acquisition.”

Michael Grant, executive director of Oregon’s Public Utility Commission, told The Globe and Mail on Monday, “I don’t think the commission has approved a merger opposed by any major party” such as the citizens' board.

A member of the public in Oregon opposed to the deal sent a Globe article detailing a dispute between Mr. Ford’s government and some members of the Hydro One board over the utility’s next CEO to the state’s utility commissioners. Mr. Grant issued a special order on Tuesday adding the letter and The Globe article to the official record, which had otherwise closed on Nov. 30.

Hydro One told Oregon and Idaho in a letter on Monday that, “Our submissions and testimony continue to reflect the fact that our board is independent and has not had any interference from the government since taking office in August of this year.”

Idaho is wrestling with the question of whether Ontario’s involvement in Hydro One would constitute ownership of Idaho electric-generation assets by an out-of-state government entity, which is prohibited under state law.

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