November 9, 2018
Dear Mr. Curley,
Scott Morris is definitely a personable and impressive man: (from Avista fact sheet on Hydro One deal) “Scott currently chairs the Federal Reserve Bank of San Francisco, Seattle branch, and the Board of Trustees for Gonzaga University. He also serves on the boards of Greater Spokane Incorporated, Edison Electric Institute, Washington Round Table and the American Gas Association.”
But, this does not mean he is immune from self-interest. He has substantial self-interest in consummating the sale of Avista to Hydro One. It is detailed in the SEC filing on page 63 and amounts to a personal benefit of $16,995,636. It is only natural that he would try to sell this deal.
For those of us who will not receive a substantial benefit on completion of this sale, we have cause to be concerned that this deal will be to our long term detriment.
In your “Life defining moment” profile of Scott Morris, in the part describing the motives for Avista to sell and for Hydro One to buy it says “Hydro One needed to grow to keep itself from being a takeover target as well.” If you knew the history of Hydro One, and the status and intentions of Hydro One at the time the deal was made, June of 2017, you would know that this is not a true statement.
Hydro One was owned by the province of Ontario. Ontario has one third the population of California and twice the debt at over $300 Billion. Hydro One was partially privatized to raise cash starting in December of 2015. Hydro One’s mission, clearly stated in a Mayo Smith video clip no longer available was to bring money home to Ontario. He also clearly stated that their intention was to acquire more utilities in the US. It should be noted here that Mayo Smith had never been in the utility industry until the decision to partially privatize Hydro One. He was an agribusiness CEO.
The partial privatization of Hydro One was done in a manner calculated to allow the Ontario government to maintain control. Only 60% could be sold with no party able to own more than 10% of Hydro One. There are clear statements on YouTube by a member of the Provincial Parliament and by the Ontario Premiere describing their intent to maintain control of Hydro One.
Given the ownership stake of the Ontario Government, and their intentions for Hydro One at the time of this deal, growing Hydro One to prevent a hostile takeover was never a consideration. If Scott Morris told you that, he blew smoke up your ass.
In your Sunday 10/28/18 interviews with Avista CEO Scott Morris, Mr. Morris talks like his required conditions for the sale to Hydro One that he negotiated with Hydro One management are permanent. That is not true. The Hydro One Management that negotiated this deal are all gone. Most of the conditions attractive to the public, used to sell this deal, can be changed by a vote of 6 of the 9 members of the new Avista board. Five members of the new board will be designated by Hydro One, four by Avista. So, sometime soon, if they can swing one of the four Avista designees, the new board will be able to move the Avista headquarters, change the name, reduce the workforce etc. Nothing about this deal is permanent, except the cash Avista executives walk away with.
Below are questions given to Avista prior to the Oct. 3 meeting they attended with Rob Chase’s group concerned about this deal. They gave a presentation on the deal and gave unconvincing answers to some of the questions. Their answers are underlined.
Is the sale of Avista inevitable? If so why? On Avista’s https://www.myavista.com/about-us/hydro-one-to-acquire-avista web page they state:
“The utility industry is undergoing transformational change, and consolidation is changing the playing field for smaller utilities like ours. The decision to team up with Hydro One at a time of strength and growth for our company is a unique opportunity to secure a partnership that preserves our identity and strong legacy while allowing us to continue to define and control, to a significant degree, our future operations in and industry that requires increasing scale to compete most effectively.”
- The tone is ominous, like Avista is going to be bought by someone we won’t like, and the thing to do is find someone we will like to buy Avista. I question that. If Avista did not want to be sold they have a lot of political clout and protection from the UTC if they chose to use it. They could make a strong case to the UTC that any attempt to purchase Avista did not meet the “Net Benefit Test.” Do you agree? If not, why not? (Not addressed directly).
- “In an industry that requires increasing scale to compete most effectively” Avista is a monopoly. Avista does not compete with anybody for the business of its utility customers. Please explain. (The explanation was funny. They admitted that no one was going to poach any Avista customers but stated that Roof Top solar installations were “competition”).
Who will control Hydro One? (Avista claimed that it would be the Hydro One board).
The major ownership of Hydro One by the Province of Ontario subjects Avista rate payers to the changing policies of the Ontario government. Here is a 2-minute YouTube video of Ontario’s now former Premiere Kathleen Wynne discussing why they are selling HYDRO ONE and their plan to maintain control. https://www.youtube.com/watch?v=ijwo2N5FWnE&t=3s Even after the June 7, 2018 election the government of Ontario will continue to act to control Hydro One through their major ownership position and power to fire the board of directors. The recent complete management change at Hydro One after the June 7 election is an illustration of our point.
Who will control Avista? (Avista claimed that it would be the local Avista Board)
It is a stupid question. The optics of Avista Directors and Independent Directors and Hydro One directors notwithstanding, the owner, Hydro One will control Avista. Hydro One will do the bidding of the Ontario government. The previous Premiere, Kathleen Wynn explicitly stated on a YouTube video that she viewed the purchase of Avista as an opportunity to extend Ontario energy policy to other jurisdictions.
Why would Hydro One buy Avista? (Avista claimed that the return would be greater than 2%).
Avista’s annual net profit is around $120 Million. Hydro One is purchasing Avista $5.3 Billion with a combination of borrowed money, money raised by issuing new stock and money raised by convertible debentures. This gives them an annual rate of return of 2%. That seems hardly worth the trouble considering debt service costs.
Hydro One’s major owner, the Province of Ontario has 1/3 the population of California but it has twice the debt at over $300 Billion. They partially privatized Hydro One to raise cash. Ontario needs CASH!!
Under Hydro One, can Avista sell its Gas Utility? What would the approximate sale price be? (Without adequate explanation claimed that the profits would go to the rate payers)?
Under Hydro One, can Avista sell its Generating Capacity, the dams and thermal plants? What would the approximate sale price be? (Without adequate explanation claimed that the profits would go to the rate payers)?
Under Hydro One, stripped of the Gas Utility and Generation facilities, what would the Avista local distribution company be worth? (Not addressed).
If stripping assets is not worthwhile, that leaves jacking rates. The UTC is supposed to keep rate increases reasonable by closely supervising “rate cases” made by utilities to justify increases. The rates are supposed to add …cost of energy + cost of operations + reasonable return on the depreciated value of plant and equipment. This gives utilities incentive to keep updating and maintaining their equipment, otherwise rates will fall.
This does not always go well for the rate payer. Here is an example of a bad outcome of the sale of a utility and subsequent UTC action.
In 1982, AVISTA (then WWP) sold off its Spokane water utility companies to a French Company called Spokane Suburban Water Company, for $4.5 Million, with assurances that there would be no rate increases. Forty days after the sale was approved by the UTC, Suburban asked the UTC for a 22% rate increase, which was reduced to 13% by the UTC and granted about a year later. Two months after being granted the increase Suburban again requested the UTC for a rate increase, this time for 45.1% and the UTC granted them 38.2%. So, in less than 3 years after the sale the UTC had granted a 51% rate increase. Neighbors across the street on different water systems were then paying substantially less for water. Citizens were outraged and formed Spokane County Water District #3 in 1986 and by condemnation purchased Suburban in 1988 for $7.9 Million. Suburban charged high water rates and made a 75% profit in less than 6 years. Kind of makes you wonder if this had not been the plan all along.
Until September 25, over a year after the deal was made, no elected official, newspaper, radio or TV station has ever mentioned that 13 Avista executives will share a $50.5 Million severance package if this deal goes through. Why not? It is because this looks bad, for good reason, and they don’t bite the hand that feeds them. This self-interest taints anything Avista executives say about this deal and calls into question their good faith negotiating this deal. Read this Sept 25 Spokesman Review article closely. Headline is deceptive. Karen Felts, prospective recipient of $4.7 Million severance, tries to minimize the money. They get the severance if they lose their job or when they leave, provided they are gone before 3 years and give 6 months’ notice. So it is not immediate, but they do share $50.5 in severance. It was a little confusing, but the reporter got it all in.
CRITERIA FOR UTC APPROVAL OF THIS SALE – NET BENEFIT FOR THE RATE PAYER
To approve this deal the Washington Utilities and Transportation Commission, UTC, is supposed to find that there is a “Net Benefit” to the rate payers. The money net benefit to customers, a $1.30 monthly bill reduction for each ratepayer, for 5 years, is ludicrous when put in the context of a $50.5 Million severance package shared by 13 Avista executives and Avista’s annual net profit of around $120 Million.
At the UTC hearing in Olympia May 22, Hydro One CEO Mayo Schmidt and Avista CEO Scott Morris treated the UTC commissioners like they were rubes, with no knowledge of the utility industry. No mention of the $50.5 Million Severance package shared by 13 Avista executives.
- They cited as a benefit of the sale “economies of scale” for purchasing equipment. Mayo Schmidt specifically mentioned “we have 1.6 million power poles” as an example. In real life, these two systems are built out. The utility industry in North America is fully developed with standard parts used by many large customers. For any purchase of high volume components, such as meters, Avista’s purchase would be sufficient to get any high volume discounts. Nobody is going to buy enough power poles to get a significant discount by pooling Avista and Hydro One purchases, considering that they are separated by over a thousand miles. This claim does not bear scrutiny. It should be noted that Hydro One CEO Mayo Schmidt had three years’ experience in the utility industry at the time.
- They also cited as a benefit “sharing best practices.” Hydro One has no gas utility. Hydro One has no generation. They have nothing to share in these sectors. According to the 2015 Ontario Auditor General Report Hydro One is not a very good utility operator, with increasingly unreliable service and a maintenance backlog of C$4.4 Billion. They apparently have little to share in best practices about anything. Utility companies share best practices across the industry. On the operations side, people in the utility industry see one another as colleagues, not competitors, since they work for monopolies and don’t compete. Evidence of this sharing best practices is visible every time there is a hurricane that tears up electric utilities. Utility company crews from all over the country respond and have power back up in a week or two. This is due to standardization across the industry and the sharing of best practices. Hydro One does not have a great reputation. If there was any transfer of best practices, they would be the beneficiary.
The Public Council Division of the Washington Attorney General’s Office was a party to the final conditions of this sale agreement. They recommend approval of this deal to the Utilities and Transportation Commission based on a finding that there is a net benefit to the rate payer. These are the benefits they cite in coming to that conclusion:
- Customer Rate Credit: $30.7 Million in rate credits to customers spread over 5 years. This amounts to a $1.30 reduction in the monthly utility bill for 5 years. Put in the context of the $50.5 Million Severance package shared by 13 Avista executives and Avista’s $120 Million annual net profit, this is peanuts. Avista could provide this benefit without Hydro One. Hydro One is not a charity. They will get their money back in higher rates over time.
- Low income benefits. $11 Million in assistance to low income customers doing such things as weatherization and their green energy assistance to low income people. No time period was specified. Avista has had similar programs over the years. They don’t need Hydro One for this “benefit.”
- Coalstrip. Avista will recover costs of Units 3 and 4 quicker than planned due to new tax law. This is not a benefit. It is doing normal business. They don’t need Hydro One for this non-benefit.
- Environmental Benefits. Avista will seek 50 aMW of cost-effective renewable energy and an additional 90 aMW of renewable energy when the 222 aMW Coal strip plants close. So we lose 222 aMW of base load generating capacity and replace it with 140 aMW of renewables that probably cannot be counted on for base load. Considering that China is expected to add the equivalent of a new 600-megawatt (800,000 HP) coal fired plant every 10 days for the next 10 years, closing Coalstrip, someday, and patting yourself on the back for the CO2 savings is just virtue signaling. This is not a benefit. This is virtue signaling.
- Service quality. Avista will maintain its service quality metrics for 10 years. Avista service is good now. What happens after 10 years? This is not a benefit that requires Hydro One. It is not a benefit at all.
- Bankruptcy Protection. Avista and Hydro One hired a consultant to find that Avista is well protected against a bankruptcy of Hydro One. Surprise surprise that was his conclusion. Without the deal we would be in no danger if Hydro One went bankrupt. This is not a benefit.
- Most-Favored Nations Provision: Washington State gets the same deal as the best deal offered to other states. This is not a benefit.
To conclude that these supposed benefits constitute a “Net Benefit” to the rate payer as required for UTC approval is ludicrous.
The only benefit in this deal is to shareholders and the 13 Avista Executives that will share a $50.5 Million severance package.
LINKS TO SUPPORTING MATERIAL
Oct 28 Spokesman article by Rob Curley in Business section regarding Avista Sale to Hydro One http://www.spokesman.com/stories/2018/oct/28/avista-ceo-scott-morris-interview/
Oct 23 Spokesman article by Rob Curley on front page, profile of Scott Morris and the Avista Sale to Hydro One http://www.spokesman.com/stories/2018/oct/28/rob-curley-how-one-defining-moment-in-avista-ceo-s/
SEC filing on the sale of Avista to Hydro One https://www.sec.gov/Archives/edgar/data/104918/000119312517301020/d430599ddefm14a.htm#tx430599_33
Diane Verneil former member of Ontario Provincial Parliament (kicked upstairs to cabinet post) describing in detail the partial sale of Hydro One and intention to maintain control by the Ontario government. https://www.youtube.com/watch?v=TALKLwaonfI
Kathleen Wynne – now the former Premiere of Ontario describing the partial sale of Hydro One and the intention to maintain control by the Ontario government. https://www.youtube.com/watch?v=ijwo2N5FWnE&t=6s
Kathleen Wynne – now the former Premiere of Ontario stating her intention that the purchase of Avista be used to extend the green energy policies of the government of Ontario to “other jurisdictions”. https://www.youtube.com/watch?v=527VJqu0PHI
Spokesman Review Article over a year after the SEC filing detailing the $50.5 Severance benefit to Avista executives attendant to the sale of Avista to Hydro One http://www.spokesman.com/stories/2018/sep/25/avista-executives-to-receive-18-million-payout-on-/
China’s energy development plans. https://www.instituteforenergyresearch.org/fossil-fuels/coal/as-u-s-shutters-coal-plants-china-and-japan-are-building-them/
Article about the findings of the Ontario Auditor General’s 2015 report on the condition of Hydro One https://www.ebmag.com/transmission-distribution/hydro-ones-reliability-worsening-while-costs-are-increasing-18314