STATE OF CONNECTICUT

PUBLIC UTILITIES REGULATORY AUTHORITY

JOINT APPLICATION OF IBERDROLA
S.A. et al. AND UIL HOLDINGS
CORPORATION FOR APPROVAL
OF A CHANGE OF CONTROL

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DOCKET NO. 15-03-45

JUNE 5, 2015

BRIEF OF GEORGE JEPSEN, ATTORNEY

GENERAL FOR THE STATE OF CONNECTICUT
George Jepsen, Attorney General for the State of Connecticut ("Attorney General"),
hereby files his brief in the above-captioned proceeding.
I.

INTRODUCTION
Applications for changes of control are among the most consequential matters the Public

Utilities Regulatory Authority ("PURA" or "Authority") must decide, particularly in cases in

which, as here, the application proposes the acquisition of locally owned and operated utility
companies by an international holding company. Transcript ("Tr."), 5/15/15, 94-95. Changes of
control can profoundly and permanently alter the manner in which the affected utility companies
are managed and operated affecting the service they provide and the manner in which they must
be regulated.
The proposed acquisition of UIL Holdings Corporation ("UIL") by Iberdrola USA
Networks, Inc. ("Networks"), Iberdrola USA, Inc. ("IUSA"), Iberdrola, S.A., Green Merger Sub,
Inc. ("Merger Sub") (collectively referred to herein as "Iberdrola"), if approved, would
fundamentally change the nature of the UIL operating companies in Connecticut and the manner
in which they are regulated. Under Connecticut law, PURA may only approve the Application if
it determines that the change of control is in the public interest. In other words, ratepayers and
the State of Connecticut must be better off as a result of the proposed acquisition of UIL in the

short run and the long run. At a minimum, this means that the UIL operating companies will
provide better utility service at lower rates from day one.
The Application and the record in this proceeding do not demonstrate that the proposed
transaction is in the public interest. As explained below, the proposed transaction presents
substantial uncertainties and risks to the communities and citizens currently served by the UIL
operating companies. The Authority should reject the application as proposed and should only
approve Iberdrola's proposed acquisition of UIL if it imposes conditions clearly sufficient to
address those risks and to serve the interests of Connecticut ratepayers.
II.

BACKGROUND
The Application in this proceeding was filed by Iberdrola and UIL (jointly referred to

herein as "Applicants") on March 25, 2015. Application, 1. UIL is headquartered in New

Haven, Connecticut and serves more than 725,000 electric and gas customers in Connecticut and
Massachusetts. Application, 8. It is the parent company of three regulated utilities in
Connecticut, the United Illuminating Company ("UI"), Connecticut Natural Gas ("CNG"),
Southern Connecticut Gas ("SCG") and Berkshire Gas ("BER"), which provides natural gas
distribution services in western Massachusetts. Application, 8-9.
Iberdrola is a very large energy company. Organized under the Laws of the Kingdom of
Spain, Iberdrola S.A. is "a global utility company and one of the largest electric utility holding
companies in the world in terms of market capitalization." Application, 7. It provides service to
over 32 million electric and gas customers in Europe and the Americas. Id.
Iberdrola indirectly owns four regulated utilities in the United States that serve 2.4
million electric and gas customers in New York and Maine. Application, 6. IUSA, which is
incorporated in New York and is a direct and wholly owned subsidiary of Iberdrola, holds all of

Iberdrola's energy-related holdings in the United States, including Networks and Iberdrola
Renewables Holdings, Inc., which in turn owns Iberdrola Renewables, LLC, the second largest
wind operator in the United States, and Iberdrola Energy Holdings, LLC, which indirectly owns
and operates gas storage or managed capacity in the United States. Application, 7.
While Iberdrola, S.A. has strong ties to Spain, it has long been an active buyer and seller
of energy and utility assets world-wide. Tr. 5/14/15, 166. In 2006, Iberdrola, S.A. purchased
Scottish Power (SP), the largest and still vertically integrated electric utility in southern
Scotland and with it, after disposition of SPs non-renewable assets in the United States, a large
renewable portfolio in the United States. Tr. 5/14/15, 161-162. SP is currently developing an
undersea cable project in Scotland, England and Wales. Tr. 5/14/15, 164. Iberdrola has been an
active buyer and seller of energy-related operations in Central America. Currently, Iberdrola is
the largest non-state power producer in Mexico and has co-control of three regulated utilities as
well as generation assets in Brazil. Tr. 5/14/15, 164. It has also, at times, owned energy-related
assets in Guatemala and Chile.
In 2008, Iberdrola purchased Energy East, thereby acquiring New York State Electric and
Gas Corporation ("NYSEG"), Rochester Gas and Electric Corporation ("RG&E"), Central Maine
Power ("CMP"), Maine Natural Gas Company, CNG, SCG and BER.
In 2010, Iberdrola, S.A. sold CNG, SCG and BER to UIL, a transaction which was
approved by the Authority in Docket No. 10-07-09, Joint Application of UIL Holdings
Corporation and Iberdrola USA, Inc. for Approval of a Change of Control of Connecticut
Natural Gas Corporation and the Southern Connecticut Gas Company ("Docket No. 10-07-09").
Iberdrola has also sold its energy businesses in Guatemala, sold hydropower plants and its
natural gas distribution system in Brazil, and then acquired a stake in a gas company in Mexico.

Tr. 5/14/15, 165-166. It has also bought and sold stakes in telecommunications and oil
companies over the years. Id.
Although described as a "merger transaction" in the Application, the proposed transaction
is more accurately described as an acquisition of UIL by IUSA, which is an indirect subsidiary of
Iberdrola, S.A. Iberdrola, S.A. proposes to pay roughly $3 billion to acquire UIL. Tr. 4/22/15,
14. The acquisition of UIL will be accomplished by exchanging one share of IUSA stock, after
its planned initial public offering ("IPO") in the United States stock markets, for one share of
UIL stock, plus $10.50/per UIL share. This amounts to a $600 million acquisition premium paid
to UIL shareholders by Iberdrola to acquire the company. Hempling PFT, 27. IUSA will
become the corporate vehicle for owning all of Iberdrolas United States assets and operations,
including those of UIL. After the acquisition, based on the number of shares planned for the
IUSA IPO, UILs existing shareholders will hold 18.5% of the new, now publicly traded
company, IUSA. The remaining equity will be held by Iberdrola. Tr. 4/22/15, 14.
If this transaction is approved by PURA and consummated, UIL will become a small part
of Iberdrola, whether measured globally or within the United States. Tr. 5/14/15, 167. UIL will
represent roughly 6% of Iberdrola's world-wide net income and about 20% of its regulated
operations in the United States, where it will be combined with IUSA's other regulated assets in
New York and Maine. Hempling Pre-Filed Testimony ("PFT"), 4-5. James Torgerson, UIL's
current President and Chief Executive Officer, will become the new Chief Executive Officer of
IUSA, an operation that is five times the size of UIL. Tr. 4/22/15, 25, 213. In this position,
Torgerson will select and lead a new leadership team to run IUSA. Application, 12. Moreover,
Torgerson and two other current UIL directors will also join nine IUSA directors on IUSA's
board of directors. Id.

On the last day of hearings, the Applicants submitted Late File Exhibit ("LF") 25
Supplement, which included the Applicants' proposed "commitments" in connection with the
proposed transaction. They are:
-Renewables Study worth approximately $400,000;
-Scholarship Program financial assistance to one or two Connecticut students for two
years following the close of the proposed transaction, worth about $100,000;
-Global Energy MBA three existing UIL employees will be eligible to receive a Global
Energy MBA scholarship sponsored by Iberdrola, which is worth approximately
$65,000/employee;
-Additional Charitable Contributions IUSA will dedicate an additional $500,000 from
its charitable foundation following the closing of the Proposed Transaction to be
allocated to charities located in the service territories of the UIL Utilities in Connecticut
over a three-year period following closing;
-Storm Coordination Within six months following closing of the Proposed Transaction,
the IUSA Networks emergency response team will coordinate with the UIL storm
response team to develop plans that optimize resources in the event of an emergency;
-Distribution Rate Freeze Each of the UIL Utilities agrees not to initiate a rate case to
increase distribution rates for at least one calendar year from the date of closing of the
Proposed Transaction, and distribution rates shall be frozen through that date;
-Rate Credits The UIL Utilities in Connecticut will provide a rate credit in the amount
of $5 million in total, allocated among all three UIL Utilities, to offset existing arrearages
(subject to low-income verification and review of accounts receivables); and
-Economic Development Fund The Applicants commit to contribute $2 million to a
new economic development fund that focuses on economic development in the service
territories of the UIL Utilities in Connecticut.
Even including these commitments, the Applicants have not demonstrated that this
transaction would further the public interest. As explained in detail below, the proposed
acquisition clearly benefits the Applicants' shareholders but poses risks to UIL's Connecticut
ratepayers. It is clear from the record that the proposed acquisition is not expected or intended to
achieve operational efficiencies, synergies or savings that would ultimately inure to the benefit of

UIL's utility customers. The Applicants were clear that they had not studied or concerned
themselves with the potential for synergy savings. See, e.g., AG-7.
Also notably absent from the Application are any specific commitments for the benefit of
UIL's Connecticut ratepayers in the short or long terms. The Applicants neither proposed any
specific rate cuts, rate credits, or rate freezes nor did they offer to make any specific, necessary
investments that would save ratepayers money in the future. Applicants similarly did not
propose any service quality commitments or operational changes that would improve service
quality, reliability or customer satisfaction.
In contrast, it is clear that the Applicants stand to realize immediate and significant
financial benefits from the transaction.

If approved by PURA, upon closing of the proposed

transaction the $10.50 per share premium paid for UIL shares will result in a payment of
approximately $600 million to UIL shareholders. 1
In addition, Iberdrola will receive substantial tax benefits with the acquisition of UIL
by pairing together UIL's stable regulated earnings platform with Iberdrola's substantial unused
federal tax benefits and credits. Iberdrola has accumulated substantial unused U.S. federal
income tax benefits in two principal areas: (1) net operating losses through accelerated
depreciation; and (2) production tax credits ("PTCs") from its investments in renewable wind
generation. Tr. 5/14/15, 181. Following the financial collapse and great recession of 2008,
Congress passed the American Recovery and Reinvestment Act of 2009 ("ARRA") (Pub.L. 1115), also known as the "Stimulus Bill." Tr. 5/28/15, 172. The purpose of the bill was to promote
investment and to create jobs. In the attempt to stimulate investment, the ARRA allowed
1

UIL's corporate officers, many of whom testified in favor of the proposed acquisition by
Iberdrola, stand to gain hundreds of thousands of dollars from the transaction, while certain UIL
board members stand to gain many millions of dollars. AG-18.
6

companies to accelerate the rate of depreciation they could apply to their federal income tax
returns ("bonus depreciation"), thereby substantially lowering their federal income tax
obligations. Tr. 5/28/15, 172.
Under the ARRA, companies were allowed to "accelerate" the depreciation over a much
shorter time for tax purposes, allowing companies to offset a greater portion of their present
taxable income and to retain a greater portion of their earnings. In order to take advantage of this
accelerated depreciation, of course, a company must have sufficient taxable income that can be
applied to the depreciated amounts. In the event your accelerated depreciation outpaces your
taxable income, "you cannot benefit from that." Tr. 5/14/15, 182. The company can "carry" the
unused depreciation in succeeding tax years as a "net operating loss" ("NOL") for as many as 20
years. Tr. 5/14/15, 182-85.
Iberdrola has accrued $3.2 billion in unused NOLs. LF-22; Tr. 5/14/15, 183. Iberdrola
has also accrued PTCs from its substantial investments in renewable wind generation. LF-22 2;
Tr. 5/14/15, 182-85. PTCs are a federal tax subsidy intended to encourage the investment in
renewable wind generation. Tr. 5/14/15, 189-90. PTCs represent a direct dollar for dollar writeoff of a company's federal income tax obligation. Tr. 5/14/15, 182-85. Again, however, a
company can only benefit from these U.S. tax provisions if it has a positive U.S. income tax
liability, which Iberdrola does not. Id.
If Iberdrola acquires UIL, however, the merged company will file a consolidated tax
return and can apply its carry-over NOLs and its PTCs directly as an offset to UIL's taxable
income. Tr. 5/14/15, 186-89. UIL had book earnings of more than $167 million in 2014. Tr.

The specific PTC dollar amount is confidential.

7

5/14/15, 191. Applying a 35 percent federal tax rate, Iberdrola's acquisition of UIL as a stable
earnings platform would yield a tax savings of up to $59 million per year. 3
The tax benefits were emphasized in press releases and statements to securities analysts
evaluating the transaction. For example, in a February 2015 release, UIL noted as a shareholder
benefit that the transaction "accelerates utilization of Iberdrola USA's net operating losses / tax
benefits." Application, Exhibit J-2, Exhibit 99.2, pages 9 and 20.
The Applicants have not offered to share these substantial savings with their customers,
who will continue to pay UIL's rates with a full grossed up revenue requirement as if UIL was
paying a full 40 percent federal tax rate. Federal and state taxes are costs that can appropriately
be included in rates. But with $3.2 billion in NOLs to offset taxable income, UIL may never pay
federal income tax again.
III.

DISCUSSION
A. Legal Standard
Applicants filed their Application pursuant to Conn. Gen. Stat. 16-47. Pursuant to

16-47(d), PURA:
shall investigate and hold a public hearing on the question of granting its approval . . .
and thereafter may approve or disapprove any such application in whole or in part and
upon such terms and conditions as it deems necessary or appropriate.
(Emphasis added). Section 16-47(d) further states that in order to approve the proposed merger,
PURA must, among other things:
take into consideration (1) the financial, technological and managerial suitability and
responsibility of the applicant, (2) the ability of the gas, electric distribution, water,
3

UIL was also in a net operating loss position in 2014 due to bonus depreciation from the
ARRA. Tr. 5/14/15, 190. UIL's NOLs, however, are smaller than Iberdrola's massive $3.2
billion, even before the PTCs are added. Moreover, as the accelerated depreciation "unwinds"
over time, UIL's depreciation will reverse and Iberdrola will be able to apply a greater portion of
its NOLs and PTCs against UIL's positive income tax liability. Tr. 5/28/15, 172-73.
8

telephone or community antenna television company or holding company which is the

subject of the application to provide safe, adequate and reliable service to the public
through the companys plant, equipment and manner of operation if the application were
to be approved . . . .
The Application is also governed by other Connecticut statutes which require the
Applicants to demonstrate that the proposed acquisition of UIL is in the public interest and
serves a clear public need. Specifically, Conn. Gen. Stat. 16-22 provides that:
[a]t any hearing involving a rate or the transfer of ownership of assets or a franchise
of a public service company, the burden of proving that said rate under consideration
is just and reasonable or that said transfer of assets or franchise is in the public
interest shall be on the public service company. . . .
In addition, Conn. Gen. Stat. 16-19e(a) states, in relevant part, that in the exercise of its powers
under Title 16, the Authority "shall examine and regulate the transfer of existing assets and
franchises" in accordance with certain principles, including "[t]hat there is a clear public need for
the service being proposed or provided."
Moreover, Conn. Gen. Stat. 16-11 requires that both 16-47 and 16-19 be read broadly.
It states that:
[t]he general purposes of [ 16-11] and 16-19, 16-25, 16-43 and 16-47 are to
assure to the state of Connecticut its full powers to regulate its public service
companies, to increase the powers of the Public Utilities Regulatory Authority
and to promote local control of the public service companies of this state, and
said sections shall be so construed as to effectuate these purposes.
(Emphasis added).
PURA has repeatedly recognized that its review of applications filed pursuant to Conn.
Gen. Stat. 16-47 is far more expansive than simply evaluating the applicant's financial,
technological and managerial suitability. The Authority has specifically held that applicants also
carry the burden of demonstrating that the proposed transaction is in the public interest. For
example, in Docket No. 10-07-09, 7, the Authority stated that it:

recognizes its clear statutory responsibility to protect the public interest that is inherent in
Title 16. The Department takes that responsibility seriously in all matters before it;
including this one. The Department has consistently required that applicants in a
contested proceeding bear the burden of proof pursuant to Conn. Gen. Stat. 16-22. The
Department fully relies on Conn. Gen. Stat. 16-11 to keep fully informed of all public
service companies and ensure the Departments and states full powers to regulate those
public service companies. (Citations omitted). There is no meaningful debate on these
points. . . .
In that case, the Authority further noted that, "OCC and AG argue that the Department
must consider the public interest. Id. The Department agrees; however, the Department finds
that the public interest for which it is responsible is far broader than rates." Id., at 8.
Similarly, in Docket No. 00-01-11, Joint Application of Consolidated Edison, Inc. and
Northeast Utilities for Approval of a Change of Control, 17-18, the Authority held that:
Conn. Gen. Stat. 16-22 demonstrates that the public interest is a factor in merger
reviews, and further places the burden of proving that a merger is in the public interest
squarely on the applicant.
It is also important to note that the express terms of Conn. Gen. Stat. 16-47 require that
the Department take into consideration factors such as an applicants financial,
technological and managerial suitability. Therefore, it is clear that an applicants
financial, technological and managerial suitability is but one consideration, and that many
others may play a role in the Departments decision-making. As a hypothetical example,
there could be repugnant aspects of an application that could render a merger not in the
public interest, even though the applicant itself might be suitable. The Department
reviews the instant application under this broad statutory construction.
(Emphasis added).
With respect to merger savings, the Authority stated in Docket No. 00-01-11 that:
[s]avings are expected from mergers. Further, these savings should be projected, with
relative certainty, to their fullest potential. However, the Applicants have failed to
provide any meaningful estimate regarding these savings. Despite repeated requests, the
Applicants could not provide any work product from its Transition Teams and the lack of
this key evidence has severely limited the Departments review of this matter. Synergy
Savings may exceed expectations or may never be achieved. Based on the Application,
CL&Ps ratepayers will bear the risk of this uncertainty while being provided with little if
any certain benefit.

10

The Department concludes that ratepayers should be provided with quantifiable economic
benefits from the Merger as an offset to these risks. Therefore, the Department approves
the Merger subject to the conditions set forth in Section III.F.1.d., Synergy Savings
Sharing.
Id., 61. The conditions imposed concerning merger savings and rate issues in Docket No. 00-0111 included a 3% across-the-board electric distribution rate reduction, a 3 year rate freeze at
those reduced levels, a $60 million reduction to customers' stranded costs obligations and a 5050 earning sharing mechanism during the rate freeze period. Id., 78-79.
In Docket No. 12-01-07, Application for Approval of Holding Company Transaction
Involving Northeast Utilities and NSTAR, 10, the PURA held that:
[t]he Authority recognizes its clear statutory responsibility to protect the public interest
that is inherent in Conn. Gen. Stat. Title 16. The Authority takes that responsibility
seriously in all matters before the PURA including this one. The Authority has
consistently required that applicants in a contested proceeding bear the burden of proof
pursuant to Conn. Gen. Stat. 16-22. The Authority fully relies on Conn. Gen. Stat. 1611 to keep fully informed of all public service companies and ensure the Authoritys and
states full powers to regulate those public service companies.
B. The Application and Record Do Not Demonstrate that the Transaction is in the
Public Interest as Proposed
In 2010, UIL argued that its acquisition of CNG and SCG from Iberdrola was in the
public interest because it restored local control to those gas distribution companies and because
of UIL's long-standing commitment to Connecticut. Tr. 5/14/15, 177-179. Now, just five years
later, UIL and Iberdrola claim that the sale of UIL, including CNG and SCG, to Iberdrola is in
the public interest despite the loss or substantial diminution of local control and the lack of
meaningful commitments by Iberdrola to Connecticut. As proposed, the Application is not in the
public interest.

11

1. The Applicants Have Not Established that Connecticut Utility Ratepayers

Would Benefit from the Transaction
The record in this proceeding does not demonstrate that UIL's Connecticut ratepayers
would be better off as a result of the acquisition. As proposed, and including the commitments
offered in LF-25 Supplement, ratepayers will pay essentially the same rates for what will
hopefully be the same level of service quality and reliability. The only rate benefit offered by the
Applicants is a $5 million write-down of existing arrearages for low income customers. LF-25
Supplement. The Applicants' offer of a one year distribution rate freeze in LF-25 Supplement
provides no actual benefit, as the Applicants previously testified in this case that none of UIL's
Connecticut utility companies had plans to file a rate case in the coming year. Tr. 4/22/15, 8485.
The Applicants did not quantify any benefits that they suggested would accrue to
Connecticut utility ratepayers as a result of Iberdrola's acquisition of UIL. Tr. 4/22/15, 188-189.
The Applicants have not studied merger synergies and could not identify any cost savings that
will accrue from the acquisition. Tr. 4/22/15, 194-195; AG-7; AC-12. When asked by PURA
staff whether there will be any cost benefits to Connecticut ratepayers, the Applicants responded
that, "I'm assuming there will be, but we just haven't identified any of them yet." Tr. 4/22/15,
150. While the Applicants identified information technology systems and "improved purchasing
power" as benefits, they could not describe any changes in those areas that they plan to make and
could not estimate any savings therefrom. Tr. 4/22/15, 38-39. Applicants were similarly unable
to state whether Iberdrola's acquisition of UIL would offer any customer savings with respect to
"back office" or shared services. Tr. 4/22/15, 83. Further, the Applicant's refused to commit to
any specific, necessary investments in regulated plant in Connecticut that would save ratepayers

12

money in the future. The Applicants similarly refused to offer or commit to improve service
reliability, service quality or customer satisfaction. Tr. 4/22/15, 134-136, 197.
2. Application Presents New Risks to Connecticut Ratepayers
The acquisition of UIL by Iberdrola , as currently structured and proposed, appears to
present substantial risks to UIL's customers. These include the risks of loss of local control,
increased business risk from Iberdrola's unregulated businesses, risks from Iberdrola's corporate
governance, and lack of oversight at the holding company level.
a. Lack of Local Control
UIL's business structure currently consists of three regulated Connecticut gas and electric
distribution companies, one Massachusetts gas distribution company and a small share in a
regulated generation facility in Connecticut. The vast majority of UIL's revenues are generated
by the Connecticut regulated utilities, and UIL's management has long been responsive and
attentive to the policies and preferences of its Connecticut regulators. Post-acquisition, however,
UIL companies will be a small portion of a global diversified business. As noted by OCC
witness Hempling:
In 2014, UIL's utilities represented nearly 100 percent of UIL's total plant
investment, revenues and net income. Once acquired by Iberdrola, these numbers
drop to 8 percent (measured in terms of rate base), 13 percent and 6 percent,
respectivelya marked diminution in the UIL utilities' importance to their
holding company's executives and shareholders.
Hempling PFT, 4-5.
This presents an obvious concern that important investment, planning and resource
allocation decisions could be made by remote management who may have little interest in or
appreciation for the needs of UIL's Connecticut customers. UIL and its Connecticut operations,

13

if acquired by Iberdrola, will be a very small part of the future global company with likely little
ongoing influence within the larger company.
The Applicants argue that a benefit of the proposed transaction is the retention of local
management and local control over the operating companies. Application, 3, 5; RA-10; Tr.
4/22/15, 18. Specifically, the Applicants stated that they have:
remained committed to utilizing the experience from UIL in Connecticut to
ensure the continued strong performance of the UIL Utilities. Iberdrola has
consistently relied on local management in the countries in which it operates and
it similarly has no intent to change the headquarters or local management of UIL
or the UIL Utilities as a result of the Proposed Transaction. There are numerous
individuals with the type of financial, technological and managerial experience
that have helped successfully operate Networks utilities in the United States and
Iberdrolas other regulated utilities around the world, and that will be of value to
UIL and the UIL Utilities.
LF-25, page 68.
The Applicants testified repeatedly in the record that post-acquisition all utility
operational decision would be made by "local management."
Iberdrola is very keen on local management and we are very proud to prove it. All
our businesses globally are run by local teams. I think as opposed to other multinationals, they usually send, you know, the top 20, 30, et cetera, people, you
know, to run those businesses that they acquire, you know, overseas or in other
states or in other countries. That's not the way we do businesses. Most of our -- all
of our businesses are running, mostly by local people both in the U.K., in Brazil,
in Mexico, and in Spain or in the U.S.
Tr. 4/22/15, 27; see also, tr. 4/22/15, 191, 192, 195, 196, 197, 202, 203, 204, 205, 206, 207, 208,
209, 210, 211, 212-216. Indeed, the companies' witnesses were unable to identify any
operational utility decisions that would not be made by "local management." Tr. 4/22/15, 212216.
Even if Iberdrola was actually committed to keeping "local management" in place and
allowed that management to operate UI, CNG and SCG unhindered, it is difficult to see how that

14

would be an acquisition-related benefit that is in the public interest. Rather, at best it could be
described as the maintenance of the status quo. The evidence presented in this case, as well as
Iberdrola's regulatory history in Connecticut, however, give reason to question Iberdrola's
commitment to local control over the Connecticut operating companies.
The record demonstrates that in both Connecticut and New York, Iberdrola management
has assumed direct control over essential utility operational decisions concerning budgets and
staffing levels. In 2009, when Iberdrola owned CNG and SCG, the Authority 4 issued final
decisions in rate cases for those two companies decisions that neither CNG, SCG nor Iberdrola
were happy with. Two months later, Iberdrola management directed the gas companies to
develop a plan that included "austerity measures and work force reductions." Tr. 5/14/15, 41,
145-47; Interrogatory Response GA-16, Docket No. 09-09-08, DPUC Investigation into the
Contemplated Workforce Reductions by the Connecticut Natural Gas Corporation and the
Southern Connecticut Gas Company ("Docket No. 09-09-08"). The purpose of the reductions
was to boost earnings "to achieve the return on equity authorized by the DPUC in Docket No.
08-12-07." Id.
Iberdrola specifically acknowledged in this case that it ordered the workforce reductions
in response to what it perceived as disappointing results from the rate filings.
At least from Iberdrola USA point of view I recall at that time that we explained
by the local management, how the rate case was going. They came back with
what they thought it was, you know, bad news. They commented on, you know, a
disagreement that they thought the rate calculation was not correct and basically
we were informed that the numbers of the utility were going to be, you know,
material different from the ones we were seeing before and we were expecting to
see. And as Bob Kump mentioned, implying also a potential risk from a metrics
point of view in terms of credit ratings, etc., etc. So basically I think as Iberdrola
said, we conveyed the message. We spoke with management, please amend
what's happening because this is a material negative impact. And I think it's
4

The Authority was formerly known as the Department of Public Utility Control ("DPUC").
15

important to get that back to normal ordinary course of business but also normal
financial performance of the company.
Tr. 5/14/15, 197-98.
These actions were troubling. The DPUC set rates for CNG and SCG in a manner that
included appropriate employee and funding levels based upon the companies' assertions that the
positions were necessary for the safe and efficient operation of their utility systems. Yet ten
weeks after the final decisions in those rate cases, Iberdrola directed those companies to propose
an "austerity" program included 64 employee layoffs. Final Decision, Docket No. 09-09-08, 1.
Although the Authority ultimately concluded it would "not prevent the Companies from
prudently managing their workforce levels," it was obligated to "require substantial compliance
filings to monitor closely and to ensure the companies exercise of its workforce does not lead to
degradation or reduction in safety and reliability for either customers or employees." Id., 22.
The Authority should not be required to devote extra staff and efforts to ensure against service,
reliability or safety degradation of certain utilities simply because their management disagreed
with its regulatory judgment.
In 2011 and 2012, the New York Public Service Commission ("NYPSC") engaged The
Liberty Consulting Group ("Liberty") to conduct a management audit of the Iberdrola operating
utilities in New York. See, CASE 10-M-0551 Comprehensive Management Audit of
Iberdrola, S.A., Iberdrola USA, Inc., New York State Electric and Gas Corporation, and
Rochester Gas and Electric Corporation; CASE 12-M-0066 - Petition of New York State Electric
& Gas Corporation, Rochester Gas and Electric Corporation, RGS Energy Group, Inc., Iberdrola
USA Networks, Inc., Iberdrola USA, Inc., and Iberdrola Finance UK Limited for Approval of an
Internal Reorganization Pursuant to Section 70 of the Public Service Law. The management

16

audit revealed that Iberdrola executives overruled local management and imposed severe staffing
cuts despite their lack of understanding of the needs of the local operating utilities.
The Comprehensive Management Audit found numerous problems related to corporate
governance as well as operational deficiencies. In particular, Liberty found "that management
(particularly in Spain) takes an unusually restrictive and inappropriate perspective on
transparency in dealing with regulatory matters." Final Report Management Audit of Iberdrola
S.A., Iberdrola USA New York State Electric and Gas, and Rochester Gas and Electric, Vol. 1 at
ES-4 (public version) (June 4, 2012). The NYPSC further concluded the following:
[t]he Consultant [conducting the audit] discussed the disconnect between the Spanish
model of Board composition and U.S. involvement, and concluded that the Spanish
model does not result in significant leadership or oversight of the U.S. utilities.
[Iberdrola, S.A.] wants to standardize practices worldwide, but does not appear to
recognize the vast differences in the service territories and regulatory and governance
environments in which its many subsidiaries operate. One resulting outcome is a
significant emphasis by [Iberdrola, S.A.] on cost-cutting at the U.S. utilities, using the
Spanish utility as a model. This cost-cutting model has resulted in severe staffing cuts,
which the Consultant perceives as a problem that will manifest itself in the future. The
IUSA Board is composed primarily of [Iberdrola, S.A.] executives, whose operations
experience is rooted in a culture, regulatory environment, and operating and climatic zone
that does not provide commonality of understanding. Senior Spanish officials and board
members acknowledged their lack of detailed knowledge of U.S. operations. The
conclusion is that [Iberdrola, S.A.] has no one in a position of authority who understands
the operating needs of a U.S. utility and is concerned with responsibilities to New York
ratepayers. [The auditor] also questioned the autonomy of the U.S. executive team, as
they all had counterparts from the parent company, and the U.S. Chief Executive Officer
reports directly to an [Iberdrola, S.A.] executive who is also the Chairman of the IUSA
Board.
Decision, 12. 5 Iberdrola's track record in Connecticut and New York raises serious questions
about Iberdrola's stated commitment to local management in this case.

Iberdrola seeks to diminish the findings of the management audit, claiming it relied on data just
18 months after Iberdrola assumed control of the New York utilities. Tr. 5/28/15, 191-92. The
record is clear, however, that Liberty conducted its audit between March and June of 2012, more
than three and one half years after the NYPSC approved the change in control. CASE 10-M17

Moreover, some evidence presented in this case conflicts with Iberdrola's claimed
commitment to "local management." This evidence shows that Iberdrola plans to continue to
exert strong influence over major policy and planning decisions that will directly affect
Connecticut's local operating companies. For example, in its response to OCC-246, Iberdrola
acknowledged that "[t]he capital and budgeting process for Central Maine Power, New York
State Electric and Gas, and Rochester Gas and Electric are all completed together in an Iberdrola
USA Networks process. . ." That joint process necessarily involves competition among the
various utilities for access to limited capital as the parent company determines "priority using
investment reasons and benefits." Id. Moreover, the Applicants strongly opposed the conditions
proposed by the OCC to ensure UIL management would have direct and unimpeded oversight of
the capital and operations budgets, as well as direct operations control over the Connecticut
utilities. See LF-25, Appendix A, pages 9-11. Indeed, UIL witness Torgerson candidly admitted
that it was the role of holding company management to oversee and direct the local management
of the operating companies. Tr. 5/28, 15, 104-05.
The Authority should recognize that Iberdrola's commitment to "local management" does
not include decisions over capital or operating budgets or even workforce staffing levels.
Moreover, the Authority should be mindful of the regulatory history involving Iberdrola in
Connecticut and New York discussed above. The Authority should not approve the transaction
unless it can assure itself with a high level of confidence through robust conditions that Iberdrola
would provide for the safe, efficient and reliable operation of the Connecticut public service
companies in their charge.

0551 Comprehensive Management Audit of Iberdrola, S.A., Iberdrola USA, Inc., New York
State Electric and Gas Corporation, and Rochester Gas and Electric Corporation, 1.
18

b. Financial Risk
The acquisition of UIL holdings by Iberdrola as proposed may substantially increase the
risk profiles of the UIL operating companies. The financial risks presented come in two
principal areas: (1) Iberdrola's rapid growth and evolving business strategies; and (2) UIL's
increased exposure to diverse businesses and currency exchange fluctuations.
i.

Iberdrola's Evolving Business Strategies

Iberdrola is global company that, through a series of acquisitions and divestitures, has
changed dramatically over the last ten years. While rapid growth can offer potential benefits, it
also presents significant risks that must be recognized and accounted for in the present case.
In 2007, Iberdrola purchased SP, the largest and still vertically integrated electric utility
in southern Scotland and with it, a large renewable portfolio in the United States. In 2008,
Iberdrola purchased Energy East, acquiring NYSEG and RGE in New York, CMP in Maine,
CNG and SCG in Connecticut and BER in Massachusetts. Since that time, Iberdrola has gone
through successive periods of buying, selling and re-deploying assets based on its management's
changing views of strategic value, and generally reflective of a strategic intent to diversify
away from Spain.
As the Authority is well aware, it was Iberdrola that sold CNG, SCG and BER to UIL in
2010. In describing the reasons for that sale, just two years after acquiring the assets from
Energy East, Iberdrola's witness stated:
I think it's just a question of what are the strategic goals we have at different times
basically in the life of a company. I think if you review Iberdrola basically since
2001, we have had different cycles from a strategic planning in front of our
investors. There was an initial, you know, basically five years with organic
growth and mainly divestitures. Then we moved into probably three years of
material mergers and acquisitions. Then we moved into divestitures, and that's
basically what we call the portfolio management. And we make sure that we
always are optimized as possible from a strategic point of view and a financial
19

point of view. But we were not in a financial distress situation. There are
strategic positions we have to take. Every time we need to take a look at how the
markets are in Europe, in the U.S., globally, you know, what is the strategic focus
of our investors of other companies, and that's when you have to take positions.
Tr. 4/22/15, 185-86. See also, Tr. 4/22/15, 63-64.
There is reason to believe that similar activity will recur in the future. In 2014 Iberdrola
announced that it had engaged JP Morgan to assist it in making substantial asset sales, 6 and more
recently announced the sale of its interests in the Brazilian electric distribution companies,
COELBA and COSERN (serving the states of Bahia and Rio Grande do Norte, respectively). 7
Iberdrola was quite candid about its nimble asset redeployments to support its evolving business
strategies.
We have sold different things for different reasons in different times. We have
sold businesses that we had in Guatemala, we have sold hydropower plants in
Chili [sic], we have sold those stakes that we had in the operating companies in
Brazil. We sold the stake in a gas natural distribution network in Brazil but then
we acquired a gas situation stake in a company in Mexico. We have sold in
Spain, you know, some assets over time in the UK, we have sold in the U.S. small
assets here and there. So I think we continuously sell assets and continue to buy.
Most of the times we try to really keep an eye on the credit from the financial
angle just to make sure that it's something that allows us to enhance our credit
matrixes. We also sold what was very common in many of the utilities and
Iberdrola has always been a private company, we have never been state-owned
and that's an exception in and around the utility arena. Traditionally you find in
these companies, many stakes, many participations and things that are totally
unrelated to a daily business. So we sold the stakes in a telephone company, we
sold the stakes in a cellular telephone company, we sold the stakes in an oil
company.
Tr. 5/14/15, 165-66.

Reuters, Oct 6, 2014 Related: DEALS, SPAIN, GLOBAL ENERGY NEWS Exclusive:
Iberdrola hires JPMorgan for asset sales to fund U.S. buy.
7
Iberdrola Press Release, March 2, 2015. IBERDROLA SELLS 8.5% OF COELBA AND 7%
OF COSERN TO NEOENERGIA FOR ABOUT 192 MILLION.
20

Iberdrola' track record and stated corporate philosophy raise legitimate questions
about the company's commitment to the State of Connecticut for the long term. UIL and
its Connecticut operations, if acquired, will be a very small part of a global energy
holding company with little ongoing influence or importance within the larger company.
The Connecticut companies could easily be divested or spun off in the future, but with no
local company such as UIL left to acquire them the new acquirer would be picked by
Iberdrola and could be from anywhere.
The Authority should note that Iberdrola has in the past structured purchase and
sale agreements in such a manner as to benefit shareholders at the expense of utility
ratepayers. As noted above, Iberdrola sold CNG and SCG to UIL just two years after
acquiring the companies from Energy East. As a condition of the purchase agreement,
Iberdrola and UIL agreed that the change in ownership would include an Internal
Revenue Service Section 338 Election. See Final Decision, Docket No. 10-07-09, 21-24.
As a consequence of the Section 338 Election, UILs shareholders received substantial
and immediate federal tax benefits through accelerated depreciation and because the tax
basis of the acquired assets was stepped up. Also as a consequence of the Section 338
Election, however, for tax purposes the Companys accumulated deferred income taxes
(ADITs) account was eliminated upon closing.
The revenues associated with an ADIT account operate as an offset to the
Companies' rate base, thereby reducing rate base and the accompanying costs of carrying
that investment. The ADIT account therefore provides substantial benefits to ratepayers
year over year. The elimination of an ADIT account removed this rate base offset,
thereby increasing the companies' rate bases and substantially raising rates. The rate

21

impact of this Election costs Connecticut ratepayers from $5 to $10 million per year. To
this day, CNG and SCG continue to resist any efforts to return that lost value to
ratepayers. The Authority should protect the UIL operating companies from being used,
to the public's detriment, as tools for Iberdrola's "portfolio management."
ii.

Iberdrola's Financial Profile is Riskier than UIL's

Currently, nearly all of UIL's revenues come from stable regulated utility distribution
companies. 8 Iberdrola, on the other hand, is a diversified global concern with substantially
riskier businesses. "A standalone utility affiliated with no other business, serving a single local
territory experiences no inter-business conflict because its sole business is its local regulated
business. The potential for conflict grows as the holding company's business activities expand,
in terms of geography or type of business." Hempling PFT, 10. While many of Iberdrola's
businesses are regulated, Iberdrola has clearly stated its intention to continue purchasing assets
and, because of the 2005 repeal of the Public Utility Holding Company Act ("PUHCA"),
Iberdrola is free to acquire additional companies without geographic or type-of-business limit.
Hempling PFT, 55.
In addition, many of Iberdrola's regulated investments have far riskier profiles than UIL.
For example, UIL has a small investment in rate regulated generation and has no current nuclear
operations. Tr. 5/14/15, 134. Iberdrola, however, owns and operates a fleet of nuclear plants in
Spain. Tr. 5/14/15, 134-37. Nuclear operations pose substantial investor risks. For example,
following the Fukushima Daiichi nuclear accident, all of Japan's nuclear reactors were shut down
for years and countries world-wide began or accelerated plans to close their nuclear power
plants. Tr. 5/28/15, 203.
8

Indeed, UI and CNG operate with decoupling mechanisms that ensure stable earning
platforms.
22

Iberdrola also faces risks from operating businesses in three principal currency zones,
with substantial investments and debt issued in euros, U.S. dollars and pounds sterling. Tr.
5/14/15, 137-38, 192-94. Iberdrola is therefore vulnerable to fluctuations in the value of the
respective currencies and must manage its debt to avoid unfavorable currency valuations. Id.
Iberdrola addresses this risk by isolating its debt, assets and earning within their respective
currency zones. Tr. 5/14/15, 192-93. The company testified that:
MR. AZAGRA: You know, you may have countries where you can issue debt
that matches the asset from a currency point of view. Sometimes you cannot.
Sometimes you want a hedge and sometimes you have hedge for a period of time,
and that time is too short and too expensive.
So in the end when you are a global company, you know, what you try to do is to
match asset and liabilities and have them as much as you can in the local currency
and that's what we try to do. That's our policy all the time.
MR. WRIGHT: I think you've simplified it. I think if I understand it you try and
limit your -MR. AZAGRA: As much as we can.
MR. WRIGHT: -- currency exchange problems by keeping your debt and your
payments and your assets within a currency zone.
MR. AZAGRA: Absolutely, absolutely.
Tr. 5/14/15, 93.
While Iberdrola's currency risk management practice may be prudent from the
perspective of the overall company, it raises questions concerning Iberdrola's stated commitment
to inject equity into UIL when needed. Throughout this proceeding, Iberdrola has stated that a
principal benefit of its proposed acquisition of UIL is that UIL will have access to Iberdrola's
equity infusions and credit lines, measured by the global companys resources. Tr. 4/22/15, 16,
22-23, 31-32, 46-54, 72-74, 228-42. Iberdrola's currency risk management program appears to
circumscribe that benefit (and cabin the extent of Iberdrolas potential financial support
available to UIL) to the equity and credit of dollar-based assets.

23

c. New Management at UI, CNG and SCG

Mr. Torgerson is currently the President and Chief Executive Officer of UIL and in that
position is responsible for overseeing the UIL operating companies, UI, CNG and SCG. Tr.
5/14/15, 168. If approved as proposed, Iberdrola's plan for acquisition of UIL calls for
Torgerson to become the President and CEO of IUSA, in charge of utility operations that are five
times the size of UIL in New York, Maine and Connecticut. Torgerson will also be responsible
for other business interests including IUSA's wind power holdings as well as its transmission and
gas storage operations. Tr. 5/14/15, 81-82; 168-169.
Torgerson plans to assemble an IUSA management team to assist with these duties and
responsibilities from existing management at UIL and Iberdrola and, perhaps, from outside these
companies. Tr. 5/14/15, 78-79; 169-170. To the extent that Torgerson pulls management from
the UIL companies to help run IUSA it will leave management voids at those UIL companies,
voids which could be filled by current Iberdrola employees. Tr. 5/15/15, 105-106. This reshuffling of management creates the regulatory risk that management of the Connecticut
operating companies post-acquisition may not be as skilled, effective and responsive to ratepayer
and service concerns as current management.
3. The Transaction as Currently Structured Offers Public Benefits that Are
Insubstantial or, In Some Cases, Illusory
In their Application, the Applicants claim that Iberdrola's proposed acquisition of UIL is
in the public interest because it will:
-"enhance IUSA's ability to take advantage of numerous investment opportunities;"
-enable UIL's utilities to "capitalize on IUSA's lower debt profile, strong credit ratings,
and investment grade balance sheet;"
-"enable IUSA to pursue a robust five-year capital expenditure investment program with
no projected equity issuances;" and
24

-"there will be no changes to the headquarters or local management of UIL;"

-"leverage IUSA's and Iberdrola's clean energy expertise to create a strong, diverse utility
holding company . . . which will provide opportunities for IUSA to help Connecticut
meet its Comprehensive Energy Strategy and 2014 Integrated Resources Plan."
Application, 26-27.
On their face, these claimed benefits do not satisfy the requirements of Conn. Gen. Stat.
16-22, which requires the Applicants to demonstrate that the proposed change of control is in the
public interest in Connecticut. The first, third and fifth of these "benefits" even if they ever
materialized would accrue to IUSA, the future parent company of UIL. The UIL companies
will make up roughly one-fifth of IUSA. Moreover, these IUSA benefits, even if ever realized,
could result in investments and expenditures in New York, Maine or elsewhere in the northeast
United States. The Applicants made no specific commitments to invest in Connecticut for the
direct benefit of UIL's ratepayers in the state. See AG-14.
Second, UIL's ability to "capitalize" on IUSA's financial strength provides no added
value to Connecticut's UIL ratepayers and is significantly outweighed by the many additional
risks it presents. During this proceeding, UIL claimed that its acquisition by Iberdrola would
help UIL access capital during difficult economic times, and pointed to the great recession of
2008-2009 as an example of when it could have benefitted from Iberdrola's strong balance sheet.
Tr. 4/22/15, 16; 49-50. The economic downturn of 2008-2010 is indeed quite instructive in this
case, but not for the reasons claimed by the Applicants. For instance, it was during that period of
major economic stress in the United States that Iberdrola responded by selling regulated utilities
in the United States, including SCG and CNG, not by helping them weather the economic storm.
Tr. 4/22/15, 184.

25

Moreover, UIL failed to show that it actually had difficulty raising capital during that
period. In May 2010, UIL agreed to purchase CNG, SCG and BER from Iberdrola for $1.3
billion. Moreover, in Docket No. 10-07-09, in which the Authority considered UIL's purchase of
these gas companies from Iberdrola, UIL argued that "[b]oth UIL and UI have had uninterrupted
access to debt markets in a particularly challenging economic climate since 2008." Brief of UIL
Holdings Corporation and Iberdrola USA, Inc. in Support of Change of Control, filed Docket
No. 10-07-09 on September 15, 2010. UIL further stated that "[t]hrough difficult and at times
unprecedented economic conditions, UIL had continuously maintained an investment grade
credit rating." Id. Moreover, in the present case, UIL acknowledged that it was able to issue
stock in September of 2010 without any problem and that the stock performed well. OCC-36.
Iberdrola's claimed financial strength also carries many risks. In the 2007 proceeding
before the NYPSC concerning Iberdrola's proposed acquisition of Energy East (NYSEG and
RG&E), Iberdrola also asserted that its credit rating and financial strength would benefit New
York and the NYSEG and RG&E ratepayers. In that case, the NYPSC determined that the
claimed benefits associated with Iberdrola's financial wherewithal were outweighed by the risks
associated with Iberdrola's international holding company structure. These risks include:
-lack of reporting company transparency;
-cross-subsidization and other potential affiliate abuses;
-complexity interfering with effective regulation;
-the comparative riskiness of Iberdrola's competitive ventures; and
-the possibility of harm to the New York regulated subsidiaries as a result of
unpredictability and potential financial deterioration associated with Iberdrola's other
enterprises.

26

NYPSC Decision, Case No. 07-M-0906, Joint Petition of Iberdrola, S.A., Energy East
Corporation, RGS Energy Group, Inc., Green Acquisition Capital, Inc., New York State Electric
and Gas Corporation and Rochester Gas and Electric Corporation for Approval of the
Acquisition of Energy East Corporation by Iberdrola, S.A. (September 9, 2008), 7-8. The
NYPSC further stated that "The financial risks in turn pose a threat that the merged companies
will have difficulty maintaining appropriate levels of safety, reliability and customer service
performance." Id.
Third, the Applicants were unable to show that IUSA's stronger credit ratings, lower debt
profile and investment grade balance sheet would result in anything more than de minimis
financial benefits for UIL's Connecticut ratepayers. When asked whether UIL's Connecticut
utilities would have lower overall costs of long-term debt after the proposed acquisition, the
Applicants could only state that all else equal they should be lower or at least not higher. Tr.
4/22/15, 53, 232. Then, when asked to estimate the impact of a one notch increase in the credit
ratings of UI, CNG or SCG, UIL estimated that those increases would reduce revenue
requirements, on a net present value basis, by just $6.4 million for UI over 30 years. LF-9. It
would also reduce CNG's revenue requirements by $657,000 and would reduce SCG's revenue
requirements by $1.2 million over that same thirty-year period. Id. Plainly, these amounts are
insignificant for ratepayers.
Fourth, with regard to "IUSA's and Iberdrola's clean energy expertise," the Applicants
failed to show that Iberdrola's acquisition of UIL is necessary to provide those alleged benefits.
See, Tr. 4/22/15, 192-193. Iberdrola already owns substantial wind resources in the United
States and globally and it need not acquire UIL to provide the benefits of its renewable resources
to Connecticut.

27

In LF-25, the Applicants listed other factors that they consider to be benefits associated
with the proposed transaction. Again, these claimed benefits are inadequate to satisfy the
Applicants' burden of demonstrating that the proposed transaction is in the public interest. For
example, the Applicants claim that Connecticut will benefit from Iberdrola's energy experience
serving 32 million customers world-wide. The Applicants could not, however, identify any best
practices that they would bring to Connecticut if the transaction were approved. Similarly, the
Applicants claimed that reliability in New York and Maine has improved since Iberdrola took
ownership. The Applicants, however, failed to show how those improvements would translate to
Connecticut. First, UI's distribution network is largely underground plant, unlike much of that in
upstate New York and Maine. Second, UI's system reliability has typically been good compared
to comparable utilities, often ranking in the top quartile. Tr. 5/28/15, 127. Third, the Applicants
did not commit to any specific measures to improve service quality or reliability in Connecticut
or to any specific improvement in the metrics which measure service reliability.
The Applicants, in LF-25, also claimed increased transparency as a benefit of the
proposed transaction because as a publicly traded company IUSA will be subject to NYSE and
SEC reporting requirements. The UIL companies, however, are publicly traded and already have
this level of transparency. Tr. 5/28/15 192. Moreover, such disclosure provides information
after-the-fact, and does not assist PURA in its efforts to regulate the Connecticut companies'
actions before they happen. Tr. 5/28/15, 242-43.
C. Conditions
As proposed, the Application is not in the public interest. If PURA is inclined to approve
acquisition, it should impose robust conditions designed to address the risks outlined, taking
special care to ensure that such conditions are adequate to fully protect the public interest in this

28

case. The conditions should be designed to ensure that Connecticut ratepayers are better off as a
result of the proposed transaction. For example, the conditions should require that ratepayers
receive a reasonable share of the benefits that will be derived from the deal, receive better
service quality and reliability and that they are protected from the many newly created risks
associated with the proposal.
1. Rate Benefits
As the Authority noted in Docket No. 00-01-11, savings are expected to result from
mergers, and these savings should be projected with relative certainty. Final Decision, Docket
No. 00-01-11, 61. In the present case, as in Docket No. 00-01-11, the Applicants failed to
provide any estimate of merger savings. AG-7; Docket No. 00-01-11, 61. Applicants similarly
refused to offer any meaningful immediate or long term rate benefits to customers. The $5
million write-off of existing arrearages for low income customers offered in LF-25 Supplement
is hardly sufficient. It represents less than 1 percent of the acquisition premium being paid to
UIL shareholders in connection with the proposed transaction and it provides no benefit at all to
ratepayers as a whole. Similarly, the one-year distribution rate freeze is entirely without
meaning. See LF-25 Supplement. The Applicants testified in this proceeding that none of UIL's
operating companies anticipated filing applications to increase rates in the coming year. Tr.
4/22/15, 84-85.
In Docket No. 00-01-11, the Authority properly concluded that "ratepayers should be
provided with quantifiable economic benefits from the Merger" as an offset to the risks presented
by the transaction. Docket No. 00-01-11, 61. The Authority therefore imposed conditions
ensuring specific, firm rate benefits including a 3% across-the-board rate reduction, a three year

29

rate freeze at those lower rates, a $60 million reduction to stranded costs and an earning sharing
mechanism to protect customers against over-earning. Id., at 78-79.
PURA should require similarly meaningful and substantial benefits for ratepayers in the
present case. UIL shareholders will receive roughly $600 million in the form of the acquisition
premium being paid by Iberdrola to acquire control of UIL and Iberdrola shareholders will
receive substantial tax benefits associated with the proposed transaction. Ratepayers should be
entitled to receive rate benefits in the short and long terms that amount to a reasonable portion of
those shareholder benefits. 9
Such rate benefits should be designed to guarantee meaningful protections against future
rate increases if the proposed acquisition is approved. 10 The evidence presented in the present
case indicates that electric and gas rates for NYSEG, RG&E and CMP rose by as much as 3% to
8% in the years following their acquisition by Iberdrola. LF-8. Moreover, on May 20, 2015,
NYSEG and RG&E filed applications for rate increases with the NYPSC. NYSEG Electric
proposed a $126.3 million rate increase, which represents a 17% increase in the delivery charge
and a 7% increase overall. LF-10. NYSEG Gas proposed a $37.8 million increase, which
represents a 20% increase in the delivery charge and an 8% increase overall. Id. RG&E electric
proposed a slight rate decrease in the amount of $10 million, or 1% overall, but RG&E Gas
proposed a $20.3 million rate increase, which represents a 12% increase in the delivery charge

OCC witness Hempling suggested that PURA adopt a rebuttable presumption that ratepayers
should share in the $600 million control premium on a 50-50 basis. Hempling PFT, 114.
10
OCC expert witness Smith proposed rate credits, which include an immediate, one-time rate
credit of $128 per UI, CNG and SCG customer, a total amount of roughly $88 million as well as
a $202 million investment over a three year period following Iberdrola's acquisition of UIL in an
interest bearing "Customer Investment Fund" which shall be used as directed by PURA to
provide direct benefits for UIL ratepayers. Smith PFT, 102.
30

and a 5% increase overall. Id. If it approves this transaction, PURA should condition such
approval on, among other things, requiring meaningful rate benefits in the short and long term.
2. Ring Fencing
The Authority should condition any approval of the proposed acquisition on the
Applicant's acceptance of a robust suite of ring-fence provisions designed to protect the
Connecticut utility operating companies from harms associated with its corporate parents or
sister operating companies. Ring-fencing is a relatively new concept in conditioning the
approval of utility holding company acquisitions and mergers. Prior to its repeal in 2005, the
federal Public Utilities Holding Company Act ("PUHCA") imposed a number of requirements
and limitations on mergers and acquisitions involving public utilities. These limitations were
designed to protect utility customers from a number of risks presented by such transactions,
including protecting against "geographic dispersion of utility properties, arbitrary (from a
consumer perspective) mixtures of utility and non-utility businesses, layers of corporate
affiliates, excess leveraging, utility financial support of non-utility businesses, and interaffiliate
transactions priced unfairly to consumers." Hempling PFT, 15.
The federal Energy Policy Act of 2005 repealed the entire PUHCA, and over the last nine
years states in which utility mergers have occurred have begun imposing their own conditions
and limitations as a substitute for those formerly provided under the PUHCA. State
commissions now routinely "develop their own methods of screening merger transactions, to
ensure that the entities that own or influence utility infrastructure remain accountable to
regulators, consumers, investors and the public." Hempling PFT, 19. These provisions are
commonly referred to a "ring-fencing" the utility. As described by OCC witness Smith:
basically ring-fencing is a term to describe protections that are interposed by
regulators to protect customers of essential public utility services from potential
31

financial instability within the parent company and other affiliates as a result of
good financial and business dealings. And these types of protections are
generally considered to be important where as in the case of Iberdrolas a very
large financial commitment to its overseas utilities and other businesses the parent
and Iberdrolas affiliates are substantially vulnerable to risks to which UIL and
the Connecticut utilities are not currently subjected. So thats the overall ringfencing concept is how to protect the utilities and their customers from risks that
are introduced by new affiliations such as that can result from a business
combination.
Tr. 5/15/15, 81-82.
Ring-fencing is a "best practice" in the utility industry. Tr. 5/15/15, 180-81. The
Maryland PSC recently imposed extensive ring-fencing provisions in its conditional approval of
the Exelon / PHI merger and the Arizona commission imposed similar protections in the recent
Fortis-UNS Energy merger. Tr. 5/28/15, 180-190. Both the New York and Maine commissions
have imposed ring-fencing provisions for Iberdrola's remaining utility operating companies.
These conditions include:
-Nonconsolidation opinions;
-Required registration with national credit rating agencies;
-Certain regulatory requirements if credit rating downgrades;
-Dividends only from income available for common dividends;
-Lending, credit support and money pooling limitations from the utilities to the
holding companies; and
-Certain financial reporting requirements.
LF-4; Tr. 5/28/15, 47-53.
Indeed, Moody's most recent published credit metrics for IUSA shows that the credit
rating agency views ring-fence protections as a benefit for both the utilities and the holding
company.
NYSEG, RG&E and CMP all benefit from a strong suite of ring-fence type
structures (see respective credit opinions for further details) which help insulate
32

the utilities from contagion risks associated with IRHI and ISA. These ring-fence
type provisions largely protect the capital structures and impose certain upstream
dividend limitations for NYSEG, RG&E and CMP, which could actually prohibit
the payment of dividends and thereby provide a degree of ratings support for
IUSA in certain scenarios (e.g. scenarios where ISA or IUSA's credit quality were
to weaken to Baaa3 and have a negative outlook.)
FI-16, Attachment 2, page 3 of 6.
Despite the prevalence of ring-fencing in conditions to the approval of utility mergers,
and despite the fact that all of Iberdrola's current utility operating companies in the United States
have ring-fence conditions applied to them, the Applicants continue to assert that they are
unnecessary in Connecticut. LF-4, 25; Tr. 5/28/15, 106, 167-68. The Applicants claim such
conditions are "unprecedented" because the Authority has not seen fit to impose such conditions
in the last three utility merger transactions. Id.
The Authority should dismiss the Applicants objections and impose a robust suite of ringfence provisions as a condition to any approval of the proposed transaction. The Authority's
treatment of previous transactions should not govern its treatment of the proposed acquisition.
First, as noted above, ring-fence conditions are an evolving utility best practice in response to the
recent repeal of the federal PUHCA. Second, as the Applicant's witness testified, each utility
merger transaction is different and should be judged on its own merits. Tr. 5/28/15, 165-66.
Third, there is no reason the customers of the Connecticut utilities should have
substantially fewer protections than customers in New York or Maine, or for that matter the
ratepayers in Maryland or Arizona. Moreover, the failure to impose ring-fencing conditions on
the Connecticut utilities, while ring-fencing protections apply to Iberdrola's New York and
Maine utilities, would significantly disadvantage Connecticut customers in relation to their New
York and Maine counterparts in the event Iberdrola suffered a future deterioration in its financial
position. The Authority should ensure that the Connecticut utilities are the last, and not the first,
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source for financial support to a troubled holding company parent or to creditors in a bankruptcy
proceeding. This is no insignificant concern. The United States economy is only now beginning
to emerge from the financial crisis that generated the Great Recession of 2008. That crisis
destroyed companies that previously were considered "too big to fail," and for a time, even
threatened iconic corporate giants such as GE. The Authority should not assume that Iberdrola
will remain as financially stable is it appears today.
3. Management Audits
Following Iberdrola's acquisition of the Energy East companies in New York, the
NYPSC found it necessary to order a comprehensive management audit of IUSA. The audit
focused on construction program planning, operational efficiency and the operations of IUSA, its
parent Iberdrola, S.A. and the effects of those operations on New York ratepayers. EN-7, Att. 1,
at 2. The audit's findings were numerous and wide-ranging and included recommended
improvements to the company's operations and management. Hempling PFT, 128-33.
PURA should condition any approval of the proposed acquisition of UIL by Iberdrola
upon the requirement that Applicants undergo a similarly wide-ranging management audit within
a reasonable time after the acquisition is consummated. The Authority should further require
that the Applicants expeditiously implement the operational or managerial improvements
recommended by the audit and approved by PURA, and that neither the costs of the audit nor the
costs required by the audit should be recoverable, directly or indirectly, from ratepayers.
4. Service Reliability Improvements
Pursuant to Conn. Gen. Stat. 16-47, PURA must consider Iberdrola's ability to provide
safe, adequate and reliable service to the public if the application were to be approved.

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Moreover, in order for the proposed transaction to be in the public interest, Iberdrola's
acquisition of UIL should result in an improvement in service quality.
In Docket No. 00-01-11, the Authority conditioned its approval of the proposed Northeast
Utilities ConEd merger on a 5% improvement in CL&P's SAIDI and SAIFI reliability levels
within three years of the consummation of the merger. Docket No. 00-01-11, 100-101. In the
present case, the Authority should require no less. PURA should condition any approval of the
proposed transaction upon a 5% improvement of UI's service quality metrics, SAIDI, SAIFI and
CAIDI, within three years of consummation of the deal and should impose financial penalties on
the company's shareholders for any failure to attain those new reliability goals. PURA should
also impose conditions that require objectively measurable improvements in major storm
preparedness and response.
5. Customer Service and Satisfaction Improvements
Similar to service reliability, the proposed acquisition of UIL should result in
improvements to customer service and satisfaction. In Docket No. 00-01-11, the Authority
required the applicants to, within 60 days of consummation of the merger, file a plan to detail
how customer service will improve as a result of the merger. Docket No. 00-01-11, 88-89. That
plan had to include: a 5% annual reduction in call center statistics, average speed of answer and
abandoned calls, over the three years following the merger; the quarterly filing of call center
activities; and a 5% reduction in customer complaints filed annually and field appointments
missed. Id.
Iberdrola claims to have provided customer service improvements at NYSEG, RG&E and
CMP after it acquired those companies. LF-11. Connecticut's UIL customers deserve no less for
Connecticut ratepayers in the present case. PURA should, as a condition of approval, impose

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customer service related conditions in the present case similar to those imposed in Docket No.
00-01-11 should it approve the merger. In addition, PURA should require the Applicants to
conduct a customer satisfaction survey one year after consummation of the acquisition and again
three years after consummation to evaluate the impacts on ratepayers.
6. "Most Favored Nations" Clause
The proposed transaction requires the approval of other regulatory bodies, including the
Massachusetts Department of Public Utilities. The Authority should require, as a condition of
any approval, that Connecticut ratepayers receive benefits that are at least commensurate with
any ratepayer benefits required by any other approving regulatory body in connection with the
proposed transaction.
7. English Station
English Station is located at 510 Grand Avenue in New Haven, Connecticut and has
served as the location of a power generating facility since the early 1900's. Although UI sold the
English Station property on August 16, 2000, the Department of Energy and Environmental
Protection ("DEEP") maintains that UI has continuing legal obligations for environmental
investigation and remediation at the site. As a consequence, the Attorney General urges PURA
to take into consideration the comments filed on May 1, 2015 by DEEP Deputy Commissioner
Michael Sullivan in this matter. PURA's prior decision in Docket No. 00-04-05, Petition of the
United Illuminating Company for Approval to Sell English Station, 3-5, specifically
contemplated that UI could have continuing environmental responsibilities at the Site above and
beyond any funds set aside back in 2000. The funds set aside for this purpose have long been
exhausted without a full cleanup having been accomplished. The Attorney General encourages
PURA to again review these documents while considering the merger transaction before it. UI

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operated a power plant at the Site for decades and bears a significant portion of responsibility for
the very serious environmental contamination (predominantly highly toxic PCBs) that remains at
the Site.
In this case, the President and CEO of UIL, James Torgerson, testified that if UI is found
liable for any environmental remediation or clean-up costs, UI will fulfill those obligations. Tr.
5/ 27/15, 73. The remediation and clean-up of the English Station property is of significant
interest to the State of Connecticut and the people of the State. PURA should condition any
approval of Iberdrola's proposed acquisition of UIL upon the full and unconditional commitment
that the Applicants will: 1) place $30,000,000 (thirty million dollars) in escrow for the sole
purpose of funding any environmental investigation and remediation for clean-up for which UI is
found to be liable; and 2) require that the parties to the transaction are affirmatively obligated to
address the lingering environmental conditions that still exist at English Station including the
funding of any environmental investigation or remediation for which UI may be found to be
liable that may exceed the $30,000,000 ( thirty million dollars) escrow fund. This $30,000,000
escrow fund should not be counted a "rate benefit" of the proposed acquisition as described in
Condition 1 above.

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Respectfully submitted,
GEORGE JEPSEN
ATTORNEY GENERAL

By:

Michael C. Wertheimer
Michael C. Wertheimer
John S. Wright
Assistant Attorneys General
Attorney General's Office
10 Franklin Square
New Britain, CT 06051
Tel: 860-827-2620

Service is hereby certified

to all parties and intervenors
on this agency's service list for
this proceeding.

Michael C. Wertheimer
Michael C. Wertheimer
John S. Wright
Assistant Attorneys General
Attorney General's Office
10 Franklin Square
New Britain, CT 06051
Tel: 860-827-2620

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