* Midwest grid agency market expands by four states
* Grid divestiture to ITC Holdings advances
* Entergy takes first step to resolve DOJ investigation
HOUSTON, Dec 13 (Reuters) - Directors of the Midwest Independent Transmission System Operator (MISO) on Thursday added Entergy's six utility units and a Mississippi cooperative as new members, expanding the grid agency's market reach to the Gulf coast and advancing Entergy's plan to divest its transmission system.
Entergy said its membership in MISO will lead to savings of up to $1.4 billion over 10 years for its 2.8 million customers in Arkansas, Louisiana, Texas and Mississippi. The integration of its 15,000-mile transmission network into the 11-state MISO system is expected to be completed by the end of 2013.
After months of study, Entergy chose MISO over a rival power grid operator, the Southwest Power Pool, because of MISO's Day 2 wholesale market, which dispatches the most efficient and cost-effective power plants first.
ITC Holdings Corp also made membership in an independent regional transmission organization (RTO) a prerequisite to move ahead with a plan for New Orleans-based Entergy to spin off its transmission operation and merge it into ITC in a transaction valued at $1.78 billion.
Joining MISO is also a first step to resolve an investigation by the U.S. Department of Justice which has been looking into Entergy's competitive practices since 2010.
Last month, the DOJ said if Entergy joins an RTO and divests its grid operation, it will resolve the antitrust division's concerns "by eliminating Entergy's ability to maintain barriers to wholesale power markets, ensuring that all Entergy service area generation is dispatched independently and at lowest cost, increasing market transparency and oversight, and properly aligning incentives for the construction of transmission," according to a DOJ statement.
The ongoing DOJ investigation will keep pressure on Entergy and ITC to obtain approval of the grid proposal, which is likely to face "as much or more scrutiny" from state regulators as Entergy's move to MISO, said David Cruthirds, a Houston-based attorney who tracks utility regulation and is a long-time Entergy critic.
Should Entergy not move forward to sell its grid operation, the DOJ's antitrust division "can and will take appropriate enforcement action, if warranted," the agency warned.
In a report to clients, Cruthirds said it is unclear how the pressure will affect state consideration of the ITC proposal, "but the DOJ's threat clearly puts the states in a stronger negotiating position than Entergy."
Entergy's grid practices are also under scrutiny from the Federal Energy Regulatory Commission for possible violations of reliability standards.
Separately, the MISO board Thursday approved the South Mississippi Electric Power Association (SME) as a member.
The cooperative generates and sells wholesale electric energy to 11 member coops serving 410,000 homes and businesses in 56 Mississippi counties and its transmission system is linked with the Entergy Mississippi system.
"A portion of our load is served by the Entergy transmission system which means that any changes to the operation of their transmission system impact us," said Jim Compton, SME's chief executive.
"After conducting several studies, we determined that joining MISO would bring greater value to our member systems than we could as a stand-alone utility," Compton said.
Due to its proximity to the Entergy grid, Pineville, Louisiana-based Cleco Corp also plans to join MISO and filed for approval from the Louisiana Public Service Commission last week.