PNM-Avangrid consolidation remains alive and kicking - Albuquerque Journal

PNM-Avangrid consolidation remains alive and kicking

A PNM substation in Downtown Albuquerque. (Roberto E. Rosales/Albuquerque Journal))

Copyright © 2022 Albuquerque Journal

The proposed merger between Public Service Company of New Mexico and Connecticut-based energy giant Avangrid is still very much alive, despite a Public Regulation Commission decision last December to reject the deal.

The two companies vow to battle that decision, and say they remain committed to the planned merger.

They originally announced an agreement in fall 2020 for Avangrid to acquire PNM Resources and its two utility subsidiaries – PNM and Texas New Mexico Power – in an all-cash transaction valued at $4.3 billion. If approved, the deal would affect some 800,000 electric customers in New Mexico and West Texas.

But after a year-long hearing process, the PRC’s five elected members concluded in December that the risks of the merger outweigh the potential public benefits, possibly leading to a deterioration in the quality of PNM’s electric service under Avangrid ownership. That’s based on commission concerns about third-party reports of alleged poor performance by other electric and gas utilities that Avangrid operates in some northeastern states.

The merger partners, however, remain undeterred.

In January, they appealed to the state Supreme Court to overturn the PRC decision, essentially moving the fight from the regulatory arena to the judicial system. And they extended their original commitment to join forces until April 2023 – with a potential three-month extension beyond that – in effect binding the partners together in a mutual effort to push forward, despite PRC opposition.

The companies are now hoping for a more favorable outcome at the Supreme Court.

But they may also be betting on an upcoming change at the PRC itself, which will shift from a five-member elected commission to a three-member body appointed by the governor next January. That could boost their chances of pushing through the merger deal even if the Supreme Court denies their appeal, assuming the incoming PRC members are more supportive of the merger than current commissioners, who were extremely critical of Avangrid during the hearing process.

The merger partners’ Supreme Court appeal is based on a wide-ranging list of complaints about the PRC process, which they claim was “unlawful and unreasonable.”

The companies say PRC Hearing Examiner Ashley Schannauer and the five elected commissioners cherry-picked evidence to support their own conclusions, accepting “hearsay” as fact while ignoring the merger’s benefits.

In fact, one commissioner simply dismissed those benefits as “fool’s gold,” the companies said in a legal brief filed last month in support of the appeal.

In addition, the commission “unreasonably ignored” near-unanimous support for the merger by organizations participating in the case, discarding long-standing public policy that favors such settlement agreements, according to the brief. Of 24 intervening parties, 23 either directly supported or did not oppose the merger. Santa Fe-based New Energy Economy was the sole party to argue against the deal.

Pedro Azagra Blázquez, Avangrid’s incoming CEO and chief development officer for Spanish company Iberdrola, S.A. – which owns an 81.5% stake in Avangrid – said Avangrid and Iberdrola are now placing their faith in the judicial system.

“We trust New Mexico, its court system and compliance with the law,” Azagra Blázquez told the Journal. “We believe we’ll prevail.”

Commissioners declined to comment on the appeal. But two, Stephen Fischmann and Cynthia Hall, said they stand behind their rejection of the merger.

“Everyone is entitled to appeal, but I believe very strongly in our decision,” Fischmann told the Journal. “I think the hearing examiner did a thorough job pulling together the evidence.”

Hall said the commission based its conclusions directly on that evidence.

“We’ll just have to wait and see what the court does,” she said.

Time is on PNM, Avangrid’s side

The Supreme Court could take 12 to 18 months to rule on the appeal, based on previous case history.

If it sides with the appellants, the court is unlikely to simply overturn the PRC decision, but rather, would remand the case back to the PRC to address errors or deficiencies identified by the court, said Doug Howe, a utility economist and 35-year veteran of the utility industry who previously served as a PRC commissioner.

“If PNM and Avangrid are successful, the Supreme Court won’t just tell the PRC to reverse its decision,” Howe told the Journal. “Rather, it will tell the commissioners where they got things wrong for them to go back and correct those problems.”

Even if the court does remand the case back to correct problems, overturning the PRC rejection would still depend on what the Supreme Court finds in its review of the case. And, of course, the court could outright reject the merger appeal, upholding the PRC’s decision.

But either way, the judicial timeframe will likely work in PNM and Avangrid’s favor, given the change in PRC structure to an appointed body next January, which was approved by voters in 2020.

That could pave the way for a more favorable outcome for the merger partners, given the animosity experienced among the companies, the current PRC commissioners and the hearing examiner who oversaw the year-long case review.

In fact, the companies could opt to withdraw their appeal later this year and re-submit their application for PRC approval, which would then be heard by the governor’s appointees, Howe said.

“I’ve heard rumblings that PNM and Avangrid will just refile their application, likely in the fourth quarter,” Howe said. “Any decision from that refiling won’t come until after the new commission is seated.”

New Energy Economy, which has intervened at the Supreme Court against the appeal, believes the merger partners may be seeking just that.

“We believe the Supreme Court will uphold the PRC’s decision,” NEE Executive Director Mariel Nanasi told the Journal. “But Avangrid, Iberdrola and PNM may be planning to do an end-run around the Supreme Court by withdrawing their appeal and filing a new merger application before the Supreme Court decides and after the governor appoints an Avangrid/PNM-friendly commission.”

Company complaints

Still, the appeal will likely receive a careful vetting at the Supreme Court, given the detailed complaints compiled in the legal brief the merger partners filed this month.

In general, the brief alleges that the PRC hearing examiner and commissioners erred legally by accepting inadmissible “hearsay” into the record as “evidence” while simultaneously ignoring counter-evidence, leading to an overriding conclusion that the quality of utility service could significantly deteriorate in New Mexico under Avangrid.

The hearing examiner said that risk outweighed any potential benefits from the merger, concluding that Avangrid and its parent firm, Iberdrola, have demonstrated a clear tendency to put corporate profit over the interests of consumers.

But the hearing examiner and commissioners generally based their negative conclusions on third-party reports with little first-hand testimony nor opportunity for cross examination by the merger partners, according to the legal brief.

The commission, for example, relied on media reports and unofficial documents alleging consistently “poor performance” in Avangrid’s management of eight electric and gas utilities it operates in northeastern states, and it disregarded Avangrid testimony that many of those problems stemmed from extreme weather conditions faced by all utilities in the Northeast.

Avangrid performed better than other companies operating there, and it successfully worked with northeastern regulators to correct the problems and minimize failures going forward, according to the legal brief.

In some cases, the PRC erroneously relied directly on public comments from individuals to reinforce its adverse conclusions against Avangrid, the brief alleged.

Maine legislator Seth Berry, for example, phoned into an open commission meeting on Dec. 1 to urge the PRC to reject the merger. But, according to the brief, Berry is a longtime Avangrid opponent who wants to replace private utilities with government-owned power companies.

PRC rules expressly prohibit such non-hearing testimony to be used as evidence in commission decisions, since they were not made by a witness under oath, nor subject to cross-examination, according to the brief. Yet Berry’s comments directly influenced at least one commissioner, Jefferson Byrd, against the merger.

“It’s very telling for a representative from another state to call in to give his opinion about this company,” Byrd said during an open PRC meeting. “… To me, that’s very concerning.”

Moreover, merger partners say the commission’s use of a confidential report about a criminal investigation into some Iberdrola executives in Spain is particularly egregious. That document, delivered under seal to the PRC, had a negative influence on most of the commissioners.

“The commission’s heavy reliance on facts originating from the incomplete, ongoing Spanish investigation signaled a presumption of guilt, not innocence, leading to the conclusion that the merger posed a risk of diminished service” in New Mexico, the appeal brief said. “The commission engaged in this unlawful reasoning, despite the absence of any charges, indictment, or conviction of Iberdrola, or its officers or subsidiaries.”

During open public meetings in December, three commissioners specifically cited the criminal investigation as a critical reason for opposing the merger.

Ignoring the benefits

Apart from inadmissible “hearsay” and disregard for counter-testimony, the merger partners say the PRC virtually ignored the deal’s extensive public benefits.

That included more than $300 million in direct rate relief, economic development funding, and new job creation negotiated with parties in the settlement agreement. Among other things, it also included checks and balances to ensure that PNM ratepayer interests are safeguarded against undue corporate interest by Avangrid and Iberdrola, plus commitments to maintain post-merger grid reliability, with automatic penalties for violations.

Those benefits substantially surpass state gains obtained under previous utility mergers approved by the PRC for out-of-state companies to acquire El Paso Electric Co. and the New Mexico Gas Co., according to the appeal brief. But the commission made no attempt to compare the PNM-Avangrid deal with those other mergers.

“We’re very comfortable that our merger brought more benefits and less risks than other recently-approved mergers,” Azagra Blázquez told the Journal. “We expect consistency at the PRC with its past practices and decisions.”

And, overriding everything, is the commission’s dismissal of the settlement agreement itself, which was either supported or unopposed by 23 of the 24 parties in the case.

“The commission improperly ignored the strong public policy favoring settlement and performed no discernible analysis of the additional benefits and protections” contained in the agreement, said the brief.

NEE says the merger partners are basically asking the Supreme Court to “ignore the evidence” presented by the hearing examiner to commissioners.

“They’re basically asking the Supreme Court to discard their past performance and conduct and instead just focus on the money they’re going to drop into the state, which makes the deal look good,” Nanasi said. “I think the court will say the PRC was absolutely correct in reviewing their track record.”

In contrast, Western Resource Advocates – a merger supporter that also joined the Supreme Court case in favor of the appeal – said court intervention is essential in this case to ensure that the PRC appropriately follows its own rules and state law.

“We believe the PRC erred in how it handled evidence in this case, and that is as big, if not bigger, than the merger itself,” WRA Senior Policy Analyst Pat O’Connell told the Journal. “We want to make sure the commission remains committed to its own rules.”

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