Judge against power venture; Arbiter says current Iberdrola deal does not benefit public, recommends conditions
Wall Street reacted with disappointment Monday after an administrative law judge recommended Iberdrola SA’s $4.5 billion merger with Energy East Corp. not be approved without conditions – including limits on where the Spanish company can develop wind power projects.
Shares of Energy East (NYSE: EAS) fell $4, or 14.94 percent, to close at $22.75 on heavy volume following the decision by Rafael Epstein, who is overseeing the case for the state Public Service Commission.
Energy East, based in Maine, is the parent company of New York State Electric & Gas and Rochester Gas & Electric. It has about 1.3 million customers in upstate New York.
Epstein’s decision, which is not binding, says the merger as currently structured does not have any public benefit and should be “disapproved” by the PSC’s five commissioners, who regulate utilities in New York.
However, if the commissioners want to approve the deal, he said they should demand a number of conditions, including barring Iberdrola from owning power plants in the NYSEG and RG&E service territories, which stretch from Rochester to Binghamton to parts of the Capital Region.
Epstein also said the PSC should require Iberdrola to set aside $646 million in benefits for Energy East customers, including $54 million in immediate rate reductions.
But he said only $201 million of the benefits should be implemented right away, and the remaining $444 million should be considered during a rate case to go before the PSC.
On both issues, Epstein’s decision appeared to be a carefully crafted compromise.
Staff at the PSC had wanted to see Iberdrola barred from owning any power generation – including wind turbines – anywhere in the state.
Iberdrola wants to be able to develop wind farm projects anywhere in New York, and it had already agreed to sell all of Energy East’s fossil-fuel plants as a condition of the deal.
PSC staff had argued before the judge for more than $640 million in customer benefits, while Iberdrola had offered $201 million in benefits.
Epstein also said the deal should include “financial and structural safeguards” proposed by PSC staff to protect New York customers.
It’s unclear when the PSC’s five members will vote on the merger. Written responses to the decision by interested parties such as PSC staff and Iberdrola are due back to the judge on July 1. After that, the PSC’s next meeting would be on July 16.
The commissioners are under no obligation to ask for any of the conditions that the judge is seeking. They could also decide to add or subtract conditions or reject the deal entirely.
An Iberdrola spokesman said the company was still reviewing the judge’s decision and did not have an immediate comment.
On Monday, U.S. Sen. Charles Schumer, D-N.Y., who has been asking the PSC to approve the deal without any restrictions on wind development, reacted angrily to Epstein’s decision.
“The ruling defies common sense,” Schumer said in a statement. “At a time when gas prices are $4 a gallon and we desperately need to develop alternative sources of energy, to place such severe restrictions on the world’s leading wind power producer to develop wind power cries out for reversal.”
However, the state Consumer Protection Board, the agency responsible for representing consumers in cases before the PSC, said in a statement it was “heartened” that Epstein recognized many of its recommendations in the case, including “our assertion that it is not necessary for Iberdrola to divest its wind generation business in New York” and that utility customers be protected from financial risks of the merger.
By Larry Rulison
17 June 2008
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