Copyright © 2021 Albuquerque Journal
After nearly a year of contentious testimony and debate, a final decision over PNM Resources and Connecticut-based energy giant Avangrid’s proposed merger is now squarely in the hands of the Public Regulation Commission’s five elected members.
PRC hearing examiner Ashley Schannauer — who oversaw eight months of evidence-gathering, plus two weeks of public hearings in August with parties in the case — recommended last week that commissioners reject the deal.
“The potential harms of the proposed transaction outweigh the benefits,” Schannauer concluded in his “recommended decision,” a nearly 300-page document that the elected commissioners must now consider when voting on whether to accept or deny the companies’ request for regulatory approval.
That vote will likely come in early December in an open public hearing.
What’s at stake is a merger that would impact some 800,000 customers in New Mexico and Texas. Supporters say that as the nation’s third largest wind energy developer, Avangrid’s financial resources and expertise would help transform the local grid to renewable energy as the state works to achieve its goal of 100% non-carbon generation over the next two decades.
If the PRC approves the merger, Avangrid would acquire PNM Resources and its two utility subsidiaries — Public Service Company of New Mexico and Texas New Mexico Power — in an all-cash transaction valued at $4.3 billion.
But before the PRC votes, the merger partners and intervening parties can still respond to Schannauer’s findings in written “exceptions,” which commissioners may consider before voting. And the commissioners themselves could allow parties to directly address them in oral testimony during an open meeting, although that doesn’t usually occur in such proceedings.
But whether through written or oral testimony, the merger partners hope to convince commissioners to focus on the benefits of the merger, which they say outweigh the perceived risks that Schannauer outlined in his recommended decision.
In an exclusive interview with the Journal last week, top executives from PNM Resources and Iberdrola, S.A. — a Spanish energy giant that controls 81.5% of shares in Avangrid — discussed their reactions to Schannauer’s findings and their strategies to continue pursuing the merger in coming weeks.
“The first thing is, we remain as committed as ever,” Iberdrola Chief Development Officer Pedro Azagra Blázquez told the Journal. “Our commitment in New Mexico is long term.”
That means doubling down on efforts to sway commissioners to support the merger, both by highlighting the benefits already contained in a negotiated settlement, or “stipulated agreement,” with intervening parties who now back the deal, and through continued negotiations with those parties to address additional concerns raised by Schannauer.
“We’re reviewing all the commitments and conditions now to try to put together a proposal that addresses most, if not all, of the hearing examiner’s recommendations,” Azagra Blázquez said.
The merger partners and supporters are already re-grouping, said PNM Resources Chairman, President and CEO Pat Vincent-Collawn.
“We’ve read the recommended decision, we’re looking closely at it, and we’re working with other (settlement) signatories to talk with them about what makes sense and what doesn’t,” Vincent-Collawn told the Journal. “The commission will make its decision in December, but we believe the merger benefits already outweigh the risks.”
If the commission does reject the deal, there are still options to move forward. That could include a request to re-open hearings to hammer out an expanded settlement agreement with supporting parties for renewed consideration by the PRC.
But it could also mean appealing to the New Mexico Supreme Court.
“We can ask for a re-hearing, or go to the Supreme Court, and I think that’s definitely an option,” Vincent-Collawn said.
The merger partners hope to avoid that through collaborative efforts with the commission and intervening parties.
“We want to make sure we’re welcome in New Mexico,” Azagra Blázquez said. “We’ll go to commissioners and put forth our case there with other parties who want to get this transaction done.”
Schannauer’s concerns
But merger supporters could face an uphill battle now to sway the PRC, given the extensive concerns raised by Schannauer.
In general, the hearing examiner believes Avangrid and Iberdrola have demonstrated a clear tendency to put corporate profit over the interests of consumers through their management of electric and gas utilities in the U.S. Northeast, and through Iberdrola’s actions in other countries.
He said that includes consistently “poor performance” by Avangrid’s eight northeastern utility subsidiaries, where local communities have faced lengthy electric outages during severe storms.
“If PNM’s service under Iberdrola, S.A./Avangrid Inc.’s ownership is anything like the service provided by the Iberdrola/Avangrid Inc. utilities in the Northeast, the quality of PNM’s service is likely to be diminished,” Schannauer said.
Avangrid is primarily interested in using New Mexico as a launch pad to extend its renewable business interest throughout the Southwest, Schannauer said. The company would draw on New Mexico’s vast wind and solar resources by building new generating facilities and transmission lines to dominate the regional renewable industry. As a result, providing reliable, quality electric service through PNM would likely be of secondary concern, posing substantial risks for local consumers, he said.
To protect New Mexico ratepayers, the PRC would need to ensure effective local control over PNM decision-making, along with strict regulatory standards and PRC intervening authority to adequately operate and maintain the electric grid, Schannauer said.
And the PRC could face an ongoing battle to push Avangrid and Iberdrola to abide by regulatory commitments in New Mexico, given those companies’ resistance to fully comply with regulations in the current merger-hearing process, Schannauer said. That included continuous failure to hand over complete sets of documents in discovery, leading to Schannauer’s recommendation that commissioners impose sanctions for lack of adequate response to interrogatories by New Energy Economy, the one party in the case that directly opposes the merger.
Commitments ignored
Merger supporters say the settlement agreement already includes substantial safeguards against the risks raised by Schannauer, including measures to reinforce local control of the PNM Resources board of directors following the merger, plus reliability and quality-of-service standards to be overseen by the PRC.
The problem, they say, is that Schannauer ignored some 40 commitments made by Avangrid over the summer, many of which address Schannauer’s concerns. Indeed, the hearing examiner discarded those measures when writing his recommended decision, because they were negotiated with individual parties and not all settlement signatories together.
As a result, Schannauer based his conclusions on a smaller platform of agreements originally presented in June, and then recommended that if commissioners decide to approve the merger, most of the new commitments should be added back in, along with additional recommendations proposed by the hearing examiner himself.
“The hearing examiner recommends rejecting the stipulation agreement from June, but that doesn’t include many things we agreed on later,” Azagra Blázquez said. “We want the commission to focus on the full list of commitments.”
Merger partners could potentially negotiate terms to accommodate many of Shannauer’s additional recommendations, such as stricter reliability and quality-of-service standards than previously negotiated in the settlement agreement.
But one key recommendation — that the post-merger PNM board of directors be controlled by a majority of “independent” members — could be a deal-breaker if the commission accepts that suggestion by Schannauer.
Avangrid and Iberdrola have steadfastly resisted that demand, which some parties that now support the merger had previously sought. But the parties themselves negotiated a compromise that makes three of the future seven board members “independent and disinterested” representatives who will have veto control over dividend policy and approval, and over setting executive compensation.
“One of the major concerns by parties seeking a majority of independents on the board is that we won’t drain cash out of (PNM),” Azagra Blázquez said. “But three independent board members must now agree on all dividends, which protects against cash going out. … All the parties that were requesting an independent majority are no longer requesting it because they believe local control and reliability will be obtained with what is already in the stipulation agreements.”
Iberdrola and Avangrid have previously warned that insisting on majority-independent control of the board could be the one demand that forces them to abandon the merger.
The problem is, if there’s a requirement for a board majority that does not have a legal or other obligation to protect the owner of a company, then that’s a deal killer for nearly anyone, said Doug Howe, a utility economist and 35-year veteran of the utility industry who previously served as a PRC commissioner.
“It would be a deal killer for me,” Howe told the Journal. “I wouldn’t buy a company and turn over complete control to people that don’t have my interests in mind. That’s a non-starter.”
Howe also said the hearing examiner’s focus on Avangrid’s northeastern grid-reliability problems may be overblown.
“I think too much has been made of it,” Howe said. “I think there are regulatory solutions, and they’ve already been suggested in this case.”
Still, one concern raised by Schannauer — that some top Iberdrola executives are under criminal investigation in Spain for potential bribery and other legal violations — could indeed merit serious consideration, Howe said.
Schannauer warned that the investigation issue may reflect questionable corporate culture.
“I’ll admit, that’s troubling,” Howe said. “If it was a U.S. utility under investigation for possible criminal activity, I think that would be a headline issue. With the investigation happening in Spain, people here don’t really know what it means, but it’s thrown a cloud over everything and made the whole merger process more difficult.”
In fact, the entire process has been dogged by controversy and conflict, including acrimonious interaction between the merger parties and the hearing examiner over transparency and compliance in the discovery process.
“Frankly, it’s become a comedy of errors,” Howe said. “Even so, like many people, I thought the hearing examiner would ultimately find a way to move the merger forward by subjecting it to any number of conditions. But he chose outright denial of the deal.”
