The proposed, $3 billion takeover of United Illuminating and Connecticut Natural Gas Co. by Iberdrola SA was already stacked with concerns when another hot issue brought some high drama to a regulatory hearing this month.
Iberdrola has had five recent cases of fraud and corruption around the world, with millions of dollars in fines, tens of millions in proposed fines and a worldwide ban on World Bank financing.
The cases have been public, if we consider docket transcripts in Spain, Albania and Latvia to be public. But even James P. Torgerson, CEO of UIL Holdings Corp., United Illuminating’s parent company, was forced to admit to state regulators Oct. 8 that he and the UIL board only knew about “a couple” of the five cases when they reached the deal to sell to Iberdrola this year.
This might be a whole lot of nothing. Iberdrola, based in Spain, is a $39 billion-a-year, global utility holding company. Hey, its executives are telling regulators, these were a few isolated incidents involving rogue employees – and we can’t control all our people around the world.
Not so fast, said Arthur House, chairman of the Public Utilities Regulatory Authority. As House sees it, this is no small thing at all – and he let rip at the hearing.
At issue here is not the overseas charges – Iberdrola isn’t denying the allegations – but rather, whether the company can be trusted to own a public utility here.
“We have five instances of international fraud and corruption,” House said at the hearing, according to a transcript. “This authority would be derelict in its duties if it did not look into your past and assume it was possible that your future might resemble what you’ve done in the past.”
Before the hearing, Iberdrola answered questions from PURA about the fraud and corruption cases. The company, in short, said the cases should have no bearing on the merger decision because they happened far away in different types of businesses, and that Iberdrola fired the people it had to fire and cooperated with authorities.
House wasn’t going to let it end there.
“Are you suggesting that this be discounted or ignored?”
No, said Pedro Azagra Blazquez, an Iberdrola executive testifying at the hearing. It’s very important.
“The conclusion that … this is the policy that we do as a company to get these things done in that way … no, we don’t think that’s the case,” Blazquez said.
The violations include a bribery finding in Iberdrola’s successful effort to win contracts for two power plants in Latvia in 2004 through 2008, which was decided by Latvian courts in December. There’s also a fraud finding, with an agreement reached in May, in which Iberdrola failed to tell the World Bank about its employment relationship with an agent in a power plant deal in Albania.
In that case, Iberdrola is barred from World Bank deals for at least a year – a very big deal for House, who is a former World Bank officer.
The most troubling cases involve price-fixing in Iberdrola’s home country – which, as House pointed out, are harder to pin on rogue operators. Two of the cases, adjudicated in 2010 and 2014, led to fines totaling 4.4 million euros, or about $4.8 million; the fines were later dropped. The third case has a pending fine of 25 million euros, which Iberdrola is appealing.
“What is the corporate culture of this company? Because 5, 10, 15 years down the road when all this has taken place, who runs this company will reflect that corporate culture,” House said. “I’m trying to get a sense of who you are, but also how would you handle an adversity such as this.”
From the hearing transcript, it’s clear that House was troubled that Iberdrola apparently didn’t use the fraud findings as a platform for education on compliance and ethics for its employees around the world.
Blazquez made the point that Iberdrola has a raft of awards for corporate governance, and that it acted swiftly after learning about the cases.
Torgerson, for his part, said he was satisfied with Iberdrola’s actions. He stands to be promoted to CEO of Iberdrola USA, which includes regulated utilities in Maine and New York, as well as generation plants, with a total of $26 billion in assets, compared with $5 billion for UIL.
“I’ve had the opportunity to meet with the senior officers of Iberdrola SA,” Torgerson said at the PURA hearing, “and I found them to have extremely high integrity … worried about their people, worried about their company, worried about their customers … I came away with the view that they were good people.”
This is the second go-around for UIL and Iberdrola, after PURA on June 30 issued a draft decision to reject the merger because, PURA said, the previous application didn’t prove it would benefit ratepayers and the public.
UIL and Iberdrola came back with a new plan, and reached a deal with the state attorney general, the Office of Consumer Counsel and the Department of Energy and Environmental Protection, which can only be described as Christmas in utilityland.
What a list of goodies: $30 million to clean up the long idled English Station plant site in New Haven; $20 million in rate credits over an undetermined period for all UIL customers; another $20 million in credits over 10 years for customers of Connecticut Natural Gas and Southern Connecticut Gas, which UIL also owns; $6 million for clean energy projects; $5 million in added storm resiliency; maintaining historical levels of charitable giving for at least four years; adding at least 150 employees; and more.
On top of all that, Iberdrola and UIL will agree to create a financial “ring” around the Connecticut utilities, protecting them from corporate calamities.
With all these promises in hand, Attorney General George Jepsen issued a brief last week “respectfully, but strongly” urging PURA to approve the deal. Jepsen’s office, too, is satisfied that Iberdrola has answered the fraud concerns.
In a written statement, Deputy Attorney General Perry Zinn Rowthorn said the cases came up in the first docket, this spring, though they were not mentioned in the draft decision. “After a full review, PURA found that the company has the managerial suitability necessary to operate utilities in Connecticut,” he wrote.
Again in the latest application, Zinn Rowthorn said, “The company offered a detailed explanation that the incidents at issue were isolated and fully addressed.”
House was also concerned that Iberdrola bought the previous parent company of Southern Connecticut Gas and Connecticut Natural Gas in 2008, only to sell those utilities a few years later to UIL, a move he said “more resembles a real estate transaction than a serious entry into the utility market.”
That’s the way commerce is done, House was told. Corporations buy and sell businesses. That’s true, and PURA is likely to approve this deal. But House and PURA raking Iberdrola over the coals is leading to more benefits for the public, and in no way represents the sort of unfair, overzealous regulation that companies like to complain about.
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