As the state Public Regulation Commission gears up for a final decision on the proposed merger between PNM Resources and Connecticut-based energy giant Avangrid, it’s suddenly become a much more challenging road for the merger partners.
PRC hearing examiner Ashley Schannauer recommended on Nov. 1 that the five elected PRC members reject the deal outright based on his judgment that the risks of the proposed merger outweigh the benefits for local consumers and the state in general.
He determined that Avangrid and global Spanish energy giant Iberdrola, S.A., which owns nearly 82% of shares in Avangrid, would emphasize corporate profits over the best interests of local utility customers.
His opinion took many by surprise. It followed almost a year of written and oral testimony by 24 organizations that resulted in only one organization, Santa Fe-based New Energy Economy, advocating against the merger. It also followed months of negotiations between individual organizations and Avangrid.
Schannauer’s recommendation to reject the merger did not take into consideration about 40 changes Avangrid made after June 4 to address concerns of some of the interested organizations. Instead, Schannauer included many of those changes in modifications he recommended should the PRC decide to approve the merger.
Here are some details of his nearly 300-page “recommended decision:”
Lots of red flags
The red flags Schannauer cited include:
— Alleged mismanagement and poor performance by Avangrid’s utilities in the nation’s northeast that adversely impacted consumers there.
— Concern that Iberdrola would not allow enough local control over Avangrid’s decisions here.
— Concern that Avangrid has emphasized profits at the expense of reliable service for consumers when managing local electric and gas utiltiies in other states.
— Reports of strong-arm tactics by both Avangrid and Iberdrola to limit opposition to its policies and competition from competitors.
Schannauer said New Mexico could experience similar problems if Avangrid is allowed to acquire PNM Resources and its two utility subsidiaries, Public Service Company of New Mexico and Texas New Mexico Power.
In contrast, merger supporters say a lengthy settlement agreement negotiated over five months with up to 16 different parties contains safeguards against the concerns raised by Schannauer. In addition, the “stipulated agreement” includes benefits by Avangrid that total more than $300 million in spending on rate relief for utility customers, assistance for low-income households, economic development programs and the creation of at least 150 new local jobs.
Perhaps most important, said Steve Michel, Avangrid brings financial strength and industry expertise in renewable development to PNM that can substantially help in advancing the state goal of transforming the local grid to 100% non-carbon generation. Michel is an attorney with Western Resource Advocates, which supports the merger.
If the PRC rejects the deal, PNM will struggle to meet New Mexico’s renewable energy goals and the economic benefits negotiated in the merger settlement will disappear, Michel said.
“The merger is at risk because of the hearing examiner’s recommended decision and that’s unfortunate because it has significant benefits for ratepayers, local communities and the state economy,” Michel told the Journal.
In the public interest?
According to Schannauer, the proposed transaction is designed to provide Iberdrola and Avangrid a “beachhead” in New Mexico to develop renewable energy projects throughout the Southwest, rather than primarily focusing on serving PNM customers.
Avangrid has offered to pay $4.3 billion in an all-cash transaction to acquire PNM Resources, representing about $2.3 billion more than the book value of PNMR’s assets. Schannauer says that payment reflects Iberdrola and Avangrid’s strategic expansion plans.
“The proposed transaction itself was not designed to benefit PNM customers,” Schannauer wrote. Resource needs for regional expansion, he said, “may take priority over PNM’s need for resources to provide reliable utility service to its customers.”
He suggests that, if the PRC approves the merger, that majority independent control of PNMR’s board be added to the settlement.
Avangrid adamantly opposes that. But it has agreed that only New Mexico residents will sit on the seven-member board, and that three of them will be “independent and disinterested” members. At least two of those three independents must approve dividend-related decisions. The independents would also have exclusive control to set all executive compensation.
But Shannauer said outright independent majority on the board is the most effective way to ensure that local interests prevail in decision-making.
Schannauer contends corporate interests over local interests is a central reason for poor performance by Avangrid’s utilities in the Northeast, where communities have experienced lengthy electric outages in recent years.
Avangrid’s utilities have faced more than $60 million in regulatory penalties in northeastern states because of those problems.
Avangrid executives say most outages in the Northeast were caused by severe storms, not utility management problems. Indeed, other electric providers performed far worse during those events and faced higher penalties from regulators than Avangrid utilities, which have since worked to reinforce reliability and grid stability.
In the settlement agreement, Avangrid also made substantial commitments to combat climate change by accelerating grid decarbonization to potentially reach 100% non-carbon generation in New Mexico by 2035 — 10 years ahead of state mandates and five years sooner than PNM’s own goals.
That will help reinforce grid reliability and stability in the long term, Michel said.
“The recommended decision attaches no value to that, and that’s wrong,” he said.
The stipulated agreement already contains significant safeguards to enforce adequate service for PNM customers, Michel added.
Schannauer also points to a criminal investigation underway in Spain that includes potential bribery, violation of privacy and falsification of commercial documents by top Iberdrola executives.
The proceedings center on Iberdrola’s hiring of a Spanish security consultancy, apparently to collect information on competing companies and individuals opposed to some Iberdrola projects. “The criminal investigation is relevant as it may reflect the culture of the Iberdrola, S.A./Avangrid Inc. group of companies,” Schannauer said.
Iberdrola Chief Development Officer Pedro Azagra Blázquez told the Journal in an interview over the summer that the consultant simply did risk assessment and market analysis on security issues, and that Iberdrola executives were asked only to provide information about the contracts. Iberdrola itself is not being investigated and hasn’t been accused of wrongdoing, Azagra Blázquez said.
But Schannauer expressed concern over both Avangrid’s and Iberdrola’s actions throughout the PRC hearing process. He contends they:
— Provided incomplete discovery responses, followed by a failure to adequately supplement those responses.
— Made “overboard confidentiality requests” for documents presented by Avangrid.
— Violated an order by Schannauer in August not to introduce any new information into the record after the public hearings ended.
— Employed an attorney for Iberdrola who also represents the Attorney General’s Office in cases unrelated to the PRC, which caused a conflict of interest leading to that lawyer’s disqualification because the AG is participating in the merger case.
Avangrid has not been forthcoming, Schannauer said.
Azagra Blázquez previously told the Journal that Avangrid has complied with all commission orders in the discovery process and that delays in providing documents generally reflected miscommunication. The company provided all documents when more detailed requests were made, he said.
Some changes ignored
Schannauer said Avangrid’s five-month piecemeal negotiation over clauses in the stipulation agreement make it difficult to pinpoint a final, cohesive settlement supported by all parties.
The public hearings in August were supposed to consider the pros and cons of a June 4 settlement. But, in the weeks leading up to and during the August hearings, Avangrid continued to negotiate with various parties to gain more support, leading to significant additions and modifications.
Schannauer did not include any of the modifications made after June 4 in his decision.
Nearly two-thirds of the parties now back the agreement. But Schannauer insists that, with Avangrid agreeing to some 40 new modifications after the June 4 stipulation was signed, there is now no clear consensus among all supporters about everything being proposed.
Supporters dispute that. “All signatories remain on board,” Michel said.
Those issues will become clearer as parties file “exceptions” to Schannauer’s recommended decision this week. But, for now, only New Energy Economy — which has opposed the merger from the start — has publicly praised Schannauer’s findings and conclusions.
“Schannauer’s recommendations are in agreement with our own legal position — that the harms of the proposed transaction outweigh the promised benefits,” NEE executive director Mariel Nanasi told the Journal. “That includes risks regarding future grid reliability, diminished quality of service, lack of local control over PNM, and even criminality and corruption.”
Michel said Schannauer’s recommendation basically assumes the PRC is incapable of regulating utilities.
“We have the PRC for a reason — to regulate utilities to assure good service, and our PRC is perfectly capable of doing that,” Michel said. “We don’t have to turn away important progress and benefits in exchange. We can, and should, have both.”
Avangrid’s local spokesperson — Joanie Griffin of Albuquerque-based public relations firm Sunny505 — said the company stands behind the merger benefits.
“We are hopeful that, ultimately, the PRC will approve the merger, which will bring more than $300 million in benefits to New Mexico, create hundreds of new jobs for New Mexicans and provide millions of dollars in contributions to nonprofit organizations,” Griffin said in an email. “Importantly, 23 out of 24 intervening parties either support or do not oppose the merger, including the PRC staff.”