Iberdrola accepts NY PSC conditions on Energy East purchase

Iberdrola announced that it accepts the conditions imposed by the New York Public Service Commission (PSC) on the company’s bid to purchase Energy East. In a statement, the company noted that its

decision came following analysis of the conditions stipulated by the New York State Public Services Commission (NYPSC) in voting to approve the transaction on September 3 and in the order granting approval issued September 9, which IBERDOLA considered to be consistent with the financial and value creation criteria it has set for corporate transactions.In particular, the NYPSC authorization, containing conditions customary to this kind of transaction, involves no limitation on IBERDROLA’s ability to develop wind power activities in the State of New York.

The company states that with the transaction it is now Spain’s largest investor in the United States. Iberdrola’s (English language) press release is here. For purists, the Spanish-language release is here.

The PSC’s abbreviated order is found here. A longer final order will issue at a later date. The PSC abandoned reasoning of PSC staff and the administrative law judge charged with investigating the transaction. Rather than deny the transaction on public interest grounds, the commissioners found that the transaction will benefit consumers.

Under the PSL [Public Service Law] §70 “public interest” criterion applicable to this proposed transaction, petitioners must show that the transaction would provide ratepayers a positive net benefit. Here, we have weighed the expected benefits from the transaction against related risks and detriments remaining after applying reasonable mitigation measures. We conclude that, with the provision of the positive benefit adjustments (PBAs) and the conditions ordered here, Iberdrola’s acquisition of the Energy East companies will provide ratepayers sufficient positive net benefits to warrant its approval under PSL §70.

Wind, of course, played a significant role in the discussion of the transaction. Not suprising given Iberdrola’s renewables focus and the compelling symmetry between maps of New York wind resources and the map of Energy East distribution and transmission shown in the Iberdrola press release above. The PSC had some words to say about wind:

We conclude that Iberdrola’s ongoing participation in the New York State wind industry offers some benefit in advancing our renewable energy goals. Therefore, consistent with our existing policy of using wind development as an important means of achieving those goals, we do not condition our approval here on a prohibition against Iberdrola’s development or ownership of wind facilities in the State.

Indeed, to strengthen Iberdrola’s commitment to invest in renewables in New York, we will condition our approval of the transaction upon a requirement that Iberdrola commit to make wind-related capital investments in New York worth $200 million. [Note: We note an ambiguity in both petitioners’ [earlier submissions in which] Iberdrola commits “to support” an investment of $100 million in renewable generation. Given Iberdrola’s 80% ownership interest in Iberdrola Renewables and its capacity to create other means to make such an investment, we resolve this ambiguity by requiring Iberdrola to make, rather than merely support, such an investment, and we increase the required investment from $100 million to $200 million.] This requirement will be subject to the same contingency Iberdrola placed on its original $100 million commitment, namely, that there be “no material adverse change to the existing fundamental economics of wind generation development in New York State.” [Note: … According to petitioners’ qualification, this condition would relieve Iberdrola of its commitment should the federal production tax credit [PTC] or our renewable portfolio standard [RPS] subsidies be eliminated or reduced, or should there be material changes in the market price for power in the market maintained by the New York Independent System Operator (NYISO)…] However, this qualification does not extend to the economics of any individual wind project, such as land rights acquisition, turbine rights acquisition, financing, construction, interconnection, or operation and maintenance. [Note omitted]

This capital investment requirement applies to incremental investment in construction of new wind projects, as distinguished from investment in or acquisition of existing wind resources or sums already spent on projects underway. This requirement may be satisfied by new investments in wind projects within New York State that are made during the initial two years following the acquisition’s closing date. We are willing to consider, however, upon a petition from Iberdrola, a modest extension of the two-year period.

With wind project costs at somewhere between $2 and $3 per watt (and, generally speaking, rising), this presumably would result in some 60-100 megawatts of additional wind generation in the state, the size of a wind farm not atypical in New York state. (By contrast, the state’s largest wind farm, Maple Ridge, partially owned by an Iberdrola subsidiary, is some 325 megawatts).

One of the investment caveats is particularly noteworthy. The federal production tax credit or PTC is set to expire at the end of this year, and Congress has shown only moderate inclination to extend it (or at least to attempt to extend it without also including other extraneous matters). While this blogger has spoken with some wind industry players who believe the industry is mature enough as a whole to withstand a PTC gap of some time, if history is a guide, much development in the country will stop or fail if the PTC is not extended. More concretely for this transaction, a PTC gap may be a kicker for some wind development in the state. Per the PSC decision, should Iberdrola not invest the $200M over two years for any reason, the company is required to contribute up to $25M toward economic development projects in the Energy East service territory.

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