TORONTO - Washington State regulators have denied Hydro One Ltd.'s proposed takeover of Avista Corp., citing political interference in the Ontario utility by the provincial government.

The Washington Utilities and Transportation Commission said it found the deal, valued Avista at $6.7 billion, was not in the public interest after it became clear that the Ontario government was willing to interfere in the utility.

The U.S. regulator cited Premier Doug Ford's move to force the Hydro One CEO to retire, which was followed by the resignation of the entire board, as evidence that the province was willing to put political interests above those of shareholders, including those that own a majority of the Ontario utility's stock.

Hydro One's 14-member board resigned en masse after the sudden retirement of CEO Mayo Schmidt, who Ford had labelled “the six-million-dollar man” for his hefty compensation.

“Provincial government interference in Hydro One's affairs, the risk of which has been shown by events to be significant, could result in direct or indirect harm to Avista if it were acquired by Hydro One, as proposed,” the commission said in its decision.

“This, in turn, could diminish Avista's ability to continue providing safe and reliable electrical and natural gas service to its customers in Washington. Avista's customers would be no better off with this transaction than they would be without it.”

Hydro One and Avista said in a release that they are “extremely disappointed” in the decision and are reviewing the order to determine the appropriate next steps.

The regulator said the Ontario government's action resulted in credit downgrades and decreased the value of Hydro One and Avista shares.

“The province subsequently passed a law limiting the compensation of the company's executives and providing for ongoing involvement by the province in matters typically reserved to executive management and the board of a private company,” it added.

The premier made it clear that he wanted changes, including reduced electricity rates and lower compensation for the CEO - even though 92 per cent of shareholders other than the province supported Hydro One's executive compensation approach.

NDP Environment and Sustainability critic Ian Arthur slammed the Tories in a statement Wednesday, saying the regulator's decision “makes it clear that Doug Ford's political meddling has sent shockwaves through the business community and increased the risk of doing business in Ontario.”

But a spokeswoman for Energy Minister Greg Rickford defended the government's decision to make changes to Hydro One's executive.

“Our government will always stand up for the largest shareholder of Hydro One, the people of Ontario,” Sydney Stonier said in an email late Wednesday. “We are confident that the renewed leadership and direction at Hydro One will make responsible business decisions that are in the best interest of their shareholders.”

She did not respond to questions about the failed merger, or what steps the government might take next.

The Washington regulator's decision was anticipated by a series of analysts, who said in July that the heightened potential for political interference could prompt U.S. regulators to hesitate about the takeover.

Avista and Hydro One filed a joint application with the commission in September 2017 to approve the proposed merger agreement.

Avista would have become a wholly owned subsidiary of Ontario's Toronto-based electric transmission and distribution utility while Avista would have maintained its corporate headquarters in Spokane and continued to operate under the same name, management team and employee structure.

Hydro One, which is 47 per cent owned by the Ontario government, had assured in testimony on the Avista deal that the province was a passive investor that would not exert political pressure on the company.

However, the Washington regulator pointed to the June 2018 provincial election that swept the Progressive Conservatives to power and the subsequent changes to Hydro One's board and CEO. The commission extended its decision timeline to further investigate while regulatory approval processes in Idaho and Oregon also were disrupted.

The U.S. regulator said the promised benefits of the deal, including rate credits, are inadequate to compensate for risks Avista customers would face. More than 80 per cent of public comments received by the regulator opposed the transaction.

Hydro One was partially privatized in November 2015, and by December 2017 the province had sold off 53 per cent of its stake.

The former Liberal government said privatization would raise $9 billion to fund transit and infrastructure projects. Privatization was also aimed at driving down costs by spinning it off into the hands of private investors.

Companies in this story: (TSX:H)