What happened

Shares of Avista (NYSE:AVA) tumbled more than 15% by 10:45 a.m. EST on Thursday after regulators in the state of Washington rejected the sale of the utility to Canada's Hydro One (TSX:H).

So what

Washington State's Utilities and Transportation Commission rejected Avista's $5.3 billion sale to Hydro One, saying that it was not in the best interest of the company or its customers. They cited the recent intervention by the Province of Ontario into Hydro One's operations following the last election. The province held a 47% stake in that utility and used that as leverage to oust the CEO and board as well as to make other changes to the company.

A bright-red arrow going down.

Image source: Getty Images.

The Commission's rejection of the merger means that the deal is unlikely to proceed, since the companies needed that approval to close the transaction. While the companies issued a joint statement voicing their disappointment with the decision and saying that they're reviewing the next steps, it's highly unlikely that they'll be able to get the decision overturned unless Ontario were to completely divest its stake in Hydro One.

Now what

Avista initially agreed to merge with Hydro One because changes in the utility sector meant the company needed to increase its scale so that it could compete more effectively. So it's possible that the company could eventually find another merger partner, since the Commission's issue was with the foreign government control of Hydro One and not the merger in general. However, shares of the utility will likely remain under pressure until there's more clarity on its future direction.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.