By William Opalka

Connecticut regulators said Tuesday they will reject Iberdrola SA’s acquisition of UIL Holdings without much stronger ratepayer protections, issuing a draft decision in which they blasted the Spanish conglomerate’s management and said they would not approve the deal based on a “leap of faith.”

The Public Utilities Regulatory Authority said Iberdrola failed to reassure it that UIL’s Connecticut ratepayers would be adequately protected from any financial stresses the company may experience from its international operations or other units in the U.S. (15-03-45).

“The authority … questions why the applicants would file a change of control application and not be prepared to provide any evidence that would demonstrate that the transaction is in the public interest,” PURA said. “To not research or provide evidence as to how the transaction would benefit (or harm) ratepayers demonstrates a lack of concern or interest by the applicants in this important area.”

In March, Iberdrola announced it planned to acquire UIL, which has electric and gas distribution companies in Connecticut and Massachusetts, in a cash and stock deal valued at $3 billion. It said it would incorporate UIL’s operations into its U.S. subsidiary, Iberdrola USA. (See Iberdrola Broadens Northeast Footprint in $3B UIL Deal.)

PURA said it would not approve the deal without “ring fencing” provisions to protect UIL’s Connecticut electric and gas distribution companies from bankruptcies by Iberdrola’s other operations.

Regulators also said they “cannot conclude that the applicants will continue to possess the ability to provide safe, adequate and reliable service to the public.” It said Iberdrola’s financial strength and managerial expertise were adequate, but the company did “not possess the requisite suitability and responsibility to acquire UIL Holdings.”

Final Decision July 17

The companies have until July 7 to provide replies to the 43-page draft. PURA said a final vote on the proposed merger is scheduled for July 17. For the merger to proceed, PURA is also demanding a three-year distribution rate freeze and a seven-year commitment for the headquarters to stay in the state, among other items.

Reaction on Wall Street was swift. UIL stock was trading at about $47.60 throughout the day but immediately dropped to about $45.50 when the draft was released at 3 p.m. It recovered slightly to close Tuesday at $45.82, off $1.71.

UIL CEO James P. Torgerson issued a statement Wednesday saying the company was disappointed in the draft decision but noted that it “provides an opportunity to UIL and Iberdrola to address” regulators’ concerns.

“We look forward to providing clarification and additional information to PURA quickly,” Torgerson said. “We truly believe the proposed transaction can bring significant value to our customers.”

Iberdrola did not respond to requests for comment.

Ring Fencing

In hearings, the state Office of Consumer Counsel said regulators should insist on the type of ring fencing provisions that Exelon has agreed to in its proposed acquisition of Pepco Holdings Inc.

Iberdrola objected, saying the ring fencing conditions were “unprecedented, unnecessary and not within the authority’s jurisdiction.” It agreed to 39 of the 97 conditions proposed by the OCC.

PURA said those conditions were insufficient. “The authority concludes that ring fencing is a necessary condition for this change of control to protect ratepayer interests.”

Iberdrola had separately offered a $400,000 renewable energy integration study, various scholarships worth more than $300,000, charitable giving of at least $2.5 million over four years, a rate credit of $5 million, a $2 million economic development grant and a one-year freeze on electric distribution rates. PURA dismissed the offers — made more than halfway through its 120-day review — as “too little and too late.”

Local Control

Regulators also questioned Iberdrola’s promises that UIL would remain under local control, with the Connecticut management in place, noting the company’s recent history of buying and selling local distribution gas companies.

Iberdrola acquired Connecticut Natural Gas, Southern Connecticut Gas and Berkshire Gas, in Massachusetts, through its 2008 purchase of Energy East Corp., which it rebranded as Iberdrola USA. The company then sold the gas utilities to UIL in 2010. They would be reacquired in the proposed merger.

When Iberdrola first owned CNG and SCG, PURA said, it responded to regulators’ ruling in a 2009 rate case by ordering the gas companies to develop plans that included “austerity measures and work force reductions.”

“The authority is concerned with the applicants’ commitment to local management and whether its management and management practices are suitable for UIL,” PURA wrote.

One issue not raised in the decision is the fate of the defunct English Station generating plant, which sits on a contaminated site in New Haven. Some state officials believe the merger is an opportunity to finally clean up the site, but PURA has already determined it is outside the scope of the merger proceeding. (See Connecticut Officials at Odds over Plant Clean-up, Merger.)