PNM-Avangrid merger too important for NM to cast aside

Most people who are PNM customers — about 60% of the state — know that PNM is in the middle of a PRC case to determine if it will be allowed to merge with Avangrid. Avangrid is a large eastern utility company and the fifth-largest renewable energy developer in the United States. Avangrid, in turn, is affiliated with Spanish utility company Iberdrola, one of the five largest renewable energy companies in the world.

The hearing examiner’s recommended decision concluded the merger should be denied. Procedurally, this is not the end of the matter. It will go to the five commissioners, who can agree with the recommended decision or take a different path and approve the acquisition with whatever conditions they deem appropriate.

This is probably the most important regulatory decision in front of the PRC in a quarter century — there is a lot of money on the table. Avangrid will pay about $300 million in direct and indirect customer rate benefits, new high-wage jobs, economic development, scholarships and apprenticeships. That doesn’t include the benefits of a faster, less expensive path to meeting the clean energy goals of the state. If the merger is denied, those direct financial and environmental benefits will not materialize from another source — they will be forfeited. The commissioners’ decision in this case will have impact for years, so it is critical the five commissioners carefully consider whether the recommended decision got it right. I don’t believe it did.

The main reason for the recommendation to deny the merger is its negative portrayal of Avangrid and Iberdrola.

For example, it accuses Avangrid of undertaking a political campaign in Maine to support a transmission project that would bring hundreds of megawatts of hydropower from Quebec to New England, where it is needed to meet clean-energy goals. The recommended decision did not point out that the main opponent to the transmission line was an even larger renewable energy developer that opposed the project because it might financially hurt its own projects in New England. This seems more like a typical fight between competitors and less the nefarious scheme the recommended decision portrays.

The recommended decision also criticizes Avangrid for its failures in implementing a new customer service software at its eastern utilities. As a survivor of a major utility customer service software upgrade, I can attest these projects are extraordinarily difficult and initially never go smoothly, but if a utility doesn’t undertake replacement projects like this, it will be stuck with 50-year-old technology at a time when the industry is changing fast. There are regulatory protections available to the PRC in cases such as this, and Avangrid and PNM have already agreed to a set of customer service and reliability metrics against which they will be fined if not meeting expectations.

The biggest issue identified by the recommended decision, though, is that another affiliate of Iberdrola is under criminal investigation in Spain for events that occurred between five and 15 years ago. This should be taken seriously and scrutinized by the commissioners. The recommended decision notes no charges have been brought and the issues involve corporate competitive intelligence, which would probably be legal in New Mexico. However, it is confusing that, last year, the PRC approved the acquisition of another utility in the state by a private equity firm with an affiliation with a Wall Street firm while that Wall Street firm was settling criminal charges with the U.S. Department of Justice and paying hundreds of millions of dollars in restitution. This appeared to be a non-issue at the PRC, but, in the PNM merger, alleged actions that would not even be illegal in the U.S. took center stage.

The commissioners should not ignore this situation, but the previous utility merger does indicate a possible way to solve any discomfort they have through an “arm’s length” condition, which was placed on the Wall Street firm’s interaction with that utility. In the PNM case, an “arm’s length” condition could allow the acquisition to proceed, but require that no Iberdrola employee or director could sit on the PNM board of directors until the Spanish investigation is resolved.

This acquisition is too important for the future of New Mexico to cast aside. The risks of the merger identified by the recommended decision can be addressed through regulatory protections. On the other hand, the financial and economic development benefits to the state are large and cannot be replaced with another source if the merger is denied.