The walls appear to be closing in on private equity giant Blackstone and TXNM Energy, the utility company serving 800,000 customers in Texas and New Mexico which Blackstone is seeking to acquire for$11.5 billion. Because of an illegal equity investment Blackstone made in TXNM before the deal received approval by regulators, the firm might have to pay a hefty fine—or scuttle the entire thing.

As the Prospect reported in February, the state’sPublic Utility Act is unmistakably clear: Stock of a utility or utility holding company may only be acquired “with the prior express authorization” of the New Mexico Public Regulation Commission (PRC). But that is exactly what Blackstone failed to do when it purchased eight million TXNM shares a year ago through a private placement. At no point did Blackstone or TXNM seek regulatory approval ahead of time, contravening the statute governing utility acquisitions in New Mexico.

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On June 8, staff at the PRC issued their verdict: The $400 million equity transaction was indeed unlawful.

The PRC staff’srecommended decision makes clear that the purchase of TXNM shares was “inextricably linked” and undertaken “for the purposes” of the proposed acquisition. Concurrently, staff recommended the withdrawal of the pending application, and should the joint applicants decide to pursue a regulatory do-over in the future, “submit a new application that fully accounts for the consequences of the unlawful transaction and any corrective actions undertaken.” It also advised the PRC to levy maximum penalties against Blackstone and TXNM due to their “deliberate disregard” of the regulator’s authority; Blackstone and TXNM could face fines of up to $200,000 and $100,000, respectively.

The money is a flyspeck to Blackstone, but since the PRC can be expected to consider the gravity of the violation in its evaluation of the acquisition, that violation might be enough to compel the firm to voluntarily withdraw the application and make a good-faith effort to right its regulatory wrongs. The other option for Blackstone would be to continue pursuing the acquisition as planned, though that approach runs the risk of giving the PRC a clear reason to reject the overarching deal down the road. White flag or not, it is perhaps predictable that the illegal equity investment will need to be unwound and remedied in accordance with the statute.

“This is a resounding victory for the rule of law,” said Mariel Nanasi, executive director and counsel for the Albuquerque-based nonprofit New Energy Economy (NEE), which was among those who first questioned the legality of the stock sale in February. “Blackstone and TXNM thought they could close a $400 million merger-related stock deal first and ask questions later. New Mexico law says otherwise.”

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Prosperity Works, another Albuquerque-based nonprofit intervening in the acquisition proceeding, filed a motion to show cause for the transaction on February 6. NEE was joined by the New Mexico Consumer Protection Alliance in submitting a response in support of the motion on February 19, with the New Mexico Department of Justice formally backing the challenge on the same day. Less than a month later, PRC staff opened an investigation into the stock sale, halting the regulatory review process indefinitely.

The recommended decision seemed to vindicate those challenging the legality of the transaction, including NEE’s Nanasi, who suggested that Blackstone and TXNM “spent millions of dollars on lawyers trying to explain away a transaction that never should have happened.”

As Source New Mexico reported, the joint applicants have argued that the stock sale had no bearing on the acquisition. At a hearing in April, however, TXNM President and CEO Don Tarry remarked that it “would have been beneficial” to request PRC approval before consummating the transaction.

PRC staff asserted in their recommended decision that TXNM’s own proxy statement reveals that the equity financing “created a direct and causal relationship to the post-merger closing.” And based on their interpretation of the proxy statement, staff concluded that Blackstone was raising capital for TXNM “seemingly in anticipation of its acquisition of the company.”

Nanasi has been saying this for months.

“It is basically Blackstone and TXNM vs. their own documents,” she told the Prospect. “You’ve lied and you’ve gotten caught, and again, not by somebody else but by your own documents.”

The notion that the transaction had no bearing on the merger is not the only myth being peddled by the joint applicants. TXNM has consistently led with the argument that its acquisition by Blackstone is necessary to ensure adequate capital access.

“Their number one claim is that they need to access capital,” said Nanasi. “They’ve done a fabulous job accessing capital, and they will continue to do so.”

Meanwhile, Blackstone has pointed to its approximately 20 percent ownership stake in the Northern Indiana Public Service Company (NIPSCO) as evidence of its expertise. Yet NIPSCO customers pay some of the highest rates in Indiana on average, and the share of their bills that goes directly to profit is among the highest in the nation. (The utility company has also faced criticism over a monthlong lockout involving an estimated 1,600 unionized NIPSCO employees in April.)

Given that the percentage of the population below the poverty line in New Mexico is markedly higher compared to Indiana, Nanasi remains concerned about the potential for Blackstone to bring that model to her home state.

“People are said there to have taken on other jobs, like a third job, just to pay their electric bills,” she told the Prospect. “They’re already working two jobs and three jobs here.”

What’s more, approximately 40 percent of New Mexico customers who would be impacted by the deal live in households earning twice the federal poverty level or less.

“That’s a lot of people, and those customers sometimes represent families,” Nanasi said.

The PRC is expected to issue a final order in lieu of staff’s recommended decision by July 2.

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