A wind farm built on a mesa near Fort Sumner, N.M. |
Avangrid Inc.'s proposed $4.3 billion bid for utility company PNM Resources Inc. is facing its largest potential obstacle: regulators in PNM's home state of New Mexico.
Seven state and federal regulatory bodies have already approved the cash deal, which would expand the U.S. utility footprint of Spanish energy giant Iberdrola SA, Avangrid's majority owner.
The companies must now contend with the state's Public Regulation Commission, or PRC, whose staffers have questioned whether a global conglomerate can provide PNM subsidiary Public Service Co. of New Mexico's 530,000 residential and business customers reliable, cost-effective service, citing recent audits of some of Avangrid's East Coast utilities. Disputes over the size and independence of PNM's board post-transaction, and an ethics investigation in Spain, could further complicate the proceedings.
The PRC's five elected members must approve the proposed merger unless they find it to be unlawful or inconsistent with the public interest. Evidentiary hearings begin in mid-August, followed by a vote that will likely determine the fate of the merger (Case No. 20-00222-UT).
Under the deal, which values PNM stock at $50.30 per share, PNM would be transferred to Avangrid Networks Inc., which houses Avangrid's electric and natural gas utilities. Iberdrola committed to fund the transaction's equity proceeds, and PNM's debt would be wiped out.
Avangrid CEO Dennis Arriola said July 21 management is "confident this thing is going to close," but New Mexico regulatory staff have raised concerns about a stipulated agreement among the two companies and more than a dozen parties participating in the case.
"It was always [New Mexico] that was going to be the hurdle," Chris Ellinghaus, managing director at investment bank Siebert Williams Shank, said in an email. "A lot of the rhetoric is for negotiating purposes, so drawing any conclusions today is premature. But with [New Mexico], investors should always be leery of any outcome."
Board composition
A sticking point is the proposed composition of PNM's board of directors. Avangrid and PNM want PNM's board to consist of New Mexico residents, at least 40% of whom would qualify as independent board members. PRC staffers want a 10-member PNM board with at least seven independent directors, of which four are disinterested directors without ownership interest.
John Reynolds, director of the PRC's Utility Division, in written testimony said the governance structure of PNM is a critical issue, but the amended stipulation agreement "does little to alleviate concerns about the potential transition of New Mexico's largest public utility from an independent enterprise that is locally managed to a relatively small element of a multinational conglomerate based overseas."
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On July 30, the companies announced that they had agreed to additional concessions, including that PNM's board would consist of seven directors who are New Mexico residents, with three independent and disinterested directors.
Avangrid in a July 23 statement to Market Intelligence compared the New Mexico case to its merger application in Texas, whose regulators did not require Texas-New Mexico Power to have a board with a majority of independent members when they approved the deal.
"In the Texas case, similar to what we are offering in New Mexico, the three independent directors would have exclusive authority to make decisions regarding dividends, dividend policy and officer and director compensation at the utility," Avangrid said. "We also have very robust ringfencing commitments in Texas to protect the utility, which we are also offering in New Mexico. With these enhancements, there is no reason to have a majority independent board."
Avangrid's East Coast track record
New Mexico stakeholders have made note of storm response and ongoing management issues at some of Avangrid's East Coast utilities.
Connecticut regulators in July approved a $1.25 million fine against Avangrid utility United Illuminating Co. over its response to Tropical Storm Isaias in August 2020, where full service to customers was not restored until a week after the storm.
And in Maine, regulators took issue with Central Maine Power Co.'s management structure since the company's 2015 acquisition by Iberdrola.
"This Maine Management Audit is a critical piece of evidence in this proceeding because it re-emphasizes the need for strong regulatory controls to prevent the type of service failures experienced by the customers of CMP under Avangrid ownership," Michael Gorman testified in the merger docket on behalf of the New Mexico Affordable Reliable Energy Alliance, which represents large energy users served by PNM.
A greener grid
Dueling op-eds for and against the merger have been appearing in major New Mexico newspapers. On July 26, former New York Gov. George Pataki wrote in favor of the acquisition, saying Avangrid has been a "great innovator and leader in creating the new energy economy in the state of New York." Avangrid's utility portfolio includes upstate New York utilities New York State Electric & Gas Corp. and Rochester Gas and Electric Co.
Some local clean power advocates are also optimistic the deal would expand New Mexico's ability to build a regionally connected grid powered by renewables.
"While bigger is not always better, in this case we are confronting a transformation of the world's most complicated machine," Western Resource Advocates, which advocates for a zero-carbon economy, said in a filing supporting the merger. "Avangrid acquiring PNM improves PNM's financial prospects and wherewithal while adding the value of experience gained across a diverse family of utilities that are dealing with the consequences of climate change."
The stipulation agreement would require PNM to explore joining a western regional transmission organization by 2030, an effort supported by recent mandates in Nevada and Colorado.
Former PRC commissioner Douglas Howe, director with the Western Grid Group, a project of the Center for Energy Efficiency and Renewable Technologies, said in written testimony that PNM "has been a late-comer to grid regionalization efforts in the [West]."
Conversely, based on their ownership of utilities in ISO New England and New York ISO, Howe said, "I believe that Avangrid would not be resistant to a western RTO and would cooperate and participate in such efforts."
In April, PNM began participating in the western U.S. Energy Imbalance Market, a near-real-time energy market.
Ethics concerns
Mariel Nanasi, executive director of New Energy Economy, a New Mexico advocacy group that opposes fossil fuel and nuclear energy, and does not support the merger, has been requesting discovery of thousands of pages of documents, in particular records related to a sweeping criminal probe in Spain into corporate spying involving a number of companies, including Iberdrola. New Energy Economy argues the probe could foreshadow how Avangrid does business in New Mexico, and PRC staffers agreed the issue merits further investigation.
The Spanish judge in the so-called Villarejo case "has ruled out any potential criminal liability as to Iberdrola in the proceeding, and is exclusively investigating a subsidiary two levels below Iberdrola (unrelated to Iberdrola's ownership or control of utilities worldwide) in relation to an invoice of [€25,000] for security services in Romania in the year 2011," the companies told New Mexico regulators.
New Energy Economy and other groups also filed ethics complaints against the state attorney general, Hector Balderas, relating to the case. A Democrat who initially questioned the merger, Balderas ultimately came out in support after parties negotiated the amended stipulated agreement. The ethics concerns revolve around Iberdrola's hiring at $400 per hour Albuquerque attorney Marcus Rael Jr., whose firm has donated thousands of dollars to Balderas' campaigns, and has been awarded numerous state contracts by the attorney general to represent the state in high-profile cases.
Balderas in a statement to Market Intelligence said, "With respect to the evolution of the deal, our office is satisfied that the stipulation has improved significantly from the opening application, including increased economic development, rate credits, a full commitment to transition to clean energy, and investing in tribal communities and frontline workers." Rael did not return a request for comment.
Balderas called New Energy Economy's complaint "baseless," but a hearing examiner ordered him and others to respond to the conflict-of-interest concerns.
Reynolds, the PRC Utility Division director, said in written testimony that "there has been a steady concern shared by some parties about Iberdrola or Avangrid circumventing ... protocol in order to apply pressure indirectly" on regulators.
"While no overt pressure has been exerted on me, I am aware that senior NMPRC staff [have] met with PNM senior management concerning the Proposed Transaction and Staff's position," Reynolds testified. "This is disturbing as to what it may foretell about the relationship between the Commission and a future PNM with a Board tightly controlled by Iberdrola and Avangrid. This lingering concern is in significant part why Staff has continued to advocate for an independent PNM board."
The PRC did not return a request for comment, and PNM and Avangrid did not comment directly on the meeting.