STATE OF CONNECTICUT PUBLIC UTILITIES REGULATORY AUTHORITY

JOINT APPLICATION OF IBERDROLA : DOCKET NO. 15-03-45 S.A. et al. AND UIL HOLDINGS : CORPORATION FOR APPROVAL : OF A CHANGE OF CONTROL : 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

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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

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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.

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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.

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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

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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. 111-

5), 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.

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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-222;

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 write-

off 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.

2 The specific PTC dollar amount is confidential.

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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.

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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:

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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.

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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. 00-01-

11 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 50-

50 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. 16-11 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.

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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, 84-

85.

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

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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,

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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 multi-nationals, 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, 212-

216.

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

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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 Authority4 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").

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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

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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.

5 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-M-

17

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.

6 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

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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 re-

shuffling 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

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-"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

9 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 ring-fencing 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 ring-

fence 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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