NY PSC ALJ recommended decision on Iberdrola-Energy East deal: No

The PSC released Administrative Law Judge (ALJ) Rafael Epstein’s long awaited recommended decision regarding the transaction proposed by Iberdrola to acquire Energy East. In sum, Judge Epstein recommended against the deal as proposed:

In this recommended decision, the primary recommendation is that the Commission disapprove the transaction on the ground that it does not satisfy the “public interest” requirement of Public Service Law (PSL) §70.

Alternatively, should the Commission approve the transaction, it is recommended that approval be subject to the following preconditions:

(1) Iberdrola and its affiliates should not be allowed to own electric generating plants (whether wind powered, fossil fueled, or hydropower) interconnected with NYSEG’s or RG&E’s transmission or distribution systems;

(2) corporate relations among Iberdrola and its New York affiliates should be subject to most of the financial and structural safeguards that have been proposed by Staff of the Department of Public Service and other parties;

(3) NYSEG and RG&E customers should be credited with “positive benefit adjustments” (PBAs) of $646.4 million, including $201.6 million initially upon completion of the merger transaction (resulting in NYSEG and RG&E delivery rate reductions of $54.8 million or 4.4%, initially); and

(4) at the conclusion of this case, an 11-month general rate proceeding should commence to consider NYSEG’s and RG&E’s overall revenue requirements and related matters, including implementation of the remaining $444.8 million of PBAs, terms of retail access by independent energy service companies, and revenue decoupling mechanisms to mitigate the financial impacts that might otherwise bias NYSEG and RG&E against energy efficiency and conservation measures.

Briefs on exceptions are due to be filed by June 26, 2008.

Full NY PSC administrative law judge Iberdrola-Energy East recommended decision found here.

[Update 6/17]

The ALJ’s recommended decision is a recommendation. While the recommended decision is indeed persuasive, PSC Commissioners are not obligated to follow it.

With respect to wind generation facilities (discussed in pages 60-76 of the recommended decision), a central point of contention, the ALJ recommended that if the PSC approves the acquisition, it require that Iberdrola and its affiliates “may not own or operate, and must divest any wind generation interconnected with NYSEG’s or or RG&E’s transmission or distribution facilities.” Separation of generation from transmission and distribution, as a means of encouraging competition, choice and lower cost to consumers, has been a PSC policy for more than a decade.

Readers will recall that NYSEG and RG&E are subsidiaries of Energy East. The ALJ believes that permitting such ownership by Iberdrola and its affiliates “would interfere with the provision of economically priced wind energy and would encumber upstate economic growth with the dead weight of excessive energy prices.” The fear is that the company, by controlling all inputs from generation to the consumer’s outlet, would be able to exercise vertical market power and so not be subject to the market controls engendered by competition.

The ALJ nevertheless rejected the PSC Staff’s argument that the acquisition should proceed only if Iberdrola is compelled to divest itself of all wind generation. The ALJ could find no reason other than symbolism to justify such a stance, and found the symbolism wanting.

News accounts: Albany Times Union; Ithaca Journal; The Journal News.

[update 6/18]

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