NEW YORK, June 11 (Reuters) - California's utilities regulator has told SJW Group it must seek approval for its proposed merger with Connecticut Water Service Inc, according to a document provided by the regulator to Reuters, a move that creates a potentially significant impediment to the deal.
In March, the two companies announced a tie-up that would create the third-largest investor-owned water and wastewater utility in the United States, with an equity value of around $1.9 billion, serving 1.5 million customers.
The deal is part of a contentious four-way water utility merger battle, also involving California Water Services Group and Eversource Energy.
A regulatory review in California would likely extend the time needed to approve the merger by many months, given the state's active approach to oversight, analysts have said.
San Jose-based SJW and Connecticut Water said in March that regulatory approval would only be required in Connecticut and Maine.
But in a June 8 letter to John Tang, SJW's vice president of regulatory affairs, the General Counsel for the California Public Utilities Commission (CPUC), Arocles Aguilar, said it was directing SJW to seek CPUC's approval for the tie-up by June 29, under an article concerning changes of ownership.
The letter, provided to Reuters by CPUC, noted mergers were evaluated on a case-by-case basis by the regulator and the proposed transaction would result in ownership by members of the Moss family falling to around 12 percent after the deal, from around 20 percent currently.
The family has been the largest SJW Group shareholder for decades, the letter notes, adding that dilution to their stake could affect the operation of San Jose Water Company.
SJW Group is the holding company for San Jose Water Company, which provides water services to 1 million people in the greater San Jose metropolitan area.
Representatives for SJW Group and Connecticut Water declined comment.
However, a source close to SJW said the company disagreed with CPUC's assessment and would respond formerly to the regulator in due course.
U.S. utilities are seeking consolidation to cut costs and bolster investment in aging infrastructure.
Despite agreeing the SJW Group tie-up, Connecticut Water said on May 31 it would solicit other potential bidders over a 45-day period.
Eversource Energy, which had an offer for Connecticut Water rejected in April, is considered a possible bidder.
In turn, SJW rejected a merger offer from California Water in April. In June, California launched a tender offer to acquire SJW shares.
Reporting by David French, Editing by Rosalba O'Brien