A hearing examiner for the New Mexico Public Regulation Commission recommended against a proposed $4.3 billion merger between Avangrid Inc. and PNM Resources Inc., saying its potential harms outweigh benefits to the public.

In a 447-page report, Ashley Schannauer, the hearing examiner, pointed to "Golden Parachute compensation" for PNM executives if the merger clears, performance failures in Avangrid's East Coast utilities a downgrade by Moody's of Avangrid's credit rating, insufficient ratepayer benefits and ethics concerns.

Such concerns include allegations from a Spanish criminal investigation into Iberdrola SA, Avangrid's parent company, in a corporate spying probe. Iberdrola has denied wrongdoing and has downplayed the allegations' significance.

"PNM needs to maintain its culture of respect for state and federal law," Schannauer wrote.

Schannauer said the merger is designed to provide Iberdrola and Avangrid a "strategic 'beachhead' to develop non-utility activities in the Southwest" as Avangrid Renewables LLC eyes new markets for clean energy projects.

"That is the reason they are proposing to pay PNMR shareholders $2.3 billion more than the book value of PNMR's assets," Schannauer wrote.

Since the two companies proposed the merger in late 2020, 23 parties, including the state attorney general and environmental groups, intervened in the case and negotiated a final stipulation agreement that tackled issues such as local ownership, environmental targets, regulatory oversight and job creation. (Case No. 20-00222-UT)

PNM spokesperson Ray Sandoval called the hearing examiner's decision "disappointing" but added that "it contains pathways to approval."

"Our proposed merger with Avangrid would bring more than $300 million of near-term benefits for PNM customers and New Mexico's economy," Sandoval said in an email. "We are reviewing this recommended decision and will file our response by the scheduled deadline. We remain hopeful that the numerous benefits of this merger are realized in the commission's final decision."

Avangrid spokesperson Joanie Griffin said the company is "examining the pathways for moving forward to approval and closing."

"Importantly, 23 out of 24 intervening parties either support or do not oppose the merger, including the Public Regulation Commission staff," Griffin wrote in an email. "We remain committed to putting PNM customers first and utilizing Avangrid's and Iberdrola's financial strength and resources to help New Mexico meet its decarbonization goals more quickly and efficiently."

If the merger goes through, PNM investors would be able to receive $50.30 per share, and PNM would become a subsidiary of Avangrid Networks Inc., Avangrid's utility holding company.

"The proposed transaction will provide PNMR shareholders $391 million more than the market value of the shares of PNMR stock," Schannauer wrote. "Three PNMR officers departing after the merger will receive approximately $29 million in 'Golden Parachute compensation.'"

Meanwhile, 530,000 customers in PNM subsidiary Public Service Co. of New Mexico's territory would receive a collective $67 million in rate credits over three years, an amount that Schannauer said "is not an adequate trade-off for the reliability and customer service problems PNM customers might experience if the problems that Avangrid, Inc.'s utility customers in the Northeast have experienced are repeated here." The merger proposal also contains at least $56.5 million in other local benefits.

The report pointed to data that shows Avangrid's electric utilities in New York, Maine and Connecticut have been assessed $63.1 million in penalties and rate adjustments over the past five years for service problems.

Parties in the New Mexico case have until Nov. 12 to file responses to the hearing examiner's report, after which commissioners could hold a hearing or vote on the proposal.

Paul Patterson, an analyst for Glenrock Associates LLC, said in an email that "although there can be a number of regulatory approvals required to complete a given utility merger, one of the more substantial hurdles to completing a deal is obtaining state regulatory approval."

"And I think it goes without saying that it would behoove the parties in favor of this transaction to make a concerted effort to address the issues raised by the hearing examiner," Patterson added.