HOUSTON, July 9 (Reuters) - A panel of administrative judges on Tuesday urged Texas utility regulators to reject Entergy Corp.'s plan to divest its electric transmission assets to ITC Holdings Corp..
The recommendation, which is subject to review by the Texas Public Utility Commission, could damage Entergy's effort to complete the transfer of grid operations in four states in a deal valued at $1.78 billion.
The transaction, a spin-off and merger, has received approval from federal regulators. But critics in four states have questioned whether the plan would increase transmission rates for Entergy customers without providing sufficient benefits.
"The transaction would enrich (Entergy Texas) shareholders and ITC executives, remove transmission rates from commission jurisdiction, and increase the transmission rates for customers - all while providing only potential benefits that largely have not been, or cannot be, quantified," the judges said in their proposal for decision.
Entergy operates a 15,400-mile transmission network serving parts of Arkansas, Louisiana, Mississippi and Texas that is the subject of an ongoing civil investigation by the U.S. Department of Justice into Entergy's competitive practices.
Entergy and ITC officials said they were disappointed with the decision and hope the Texas commission will consider recent commitments made by the companies to offset higher rates until customer benefits can be clearly demonstrated.
"The ITC-Entergy transaction delivers near-term and longer-term benefits that result from a high-performing transmission system, including improved reliability and efficiency and lower overall costs of delivered energy to the region," said ITC spokeswoman Louise Beller.
"While we're disappointed in this recommendation, we are encouraged that many of the issues raised by the (judges) have been addressed already in follow-up filings," said Entergy Texas spokesman David Caplan.
If the deal is approved in Texas, Entergy and ITC have proposed to spend $90 million to offset higher customer bills over the first few years.
In testimony filed after the May hearing and not considered in Tuesday's decision, ITC Chief Financial Officer Cameron Bready said efforts to mitigate higher rates will be implemented in each Entergy state. The mitigation will continue until benefits of ITC's ownership can be shown to offset increased costs related to its higher allowed return on invested capital.
The Texas PUC is expected to take action on the application by mid-August. Other states have yet to take action on the divestiture plan but have expressed similar concern about benefits of the deal.
"Interveners and commission staffs have consistently questioned the lack of specific commitments and tangible benefits" of the deal, said David Cruthirds, a Houston-based attorney who tracks utility regulation.
In Arkansas, Entergy and ITC have proposed spending $117 million on rate mitigation.
Cruthirds called that offer "a meaningful proposal," in a newsletter to clients. "It may not be enough, but Entergy and ITC have shown they are willing to pay a fairly handsome ransom to salvage the transaction."
As a prerequisite to the ITC deal, Entergy has joined the Midcontinent Independent System Operator, or MISO, an independent regional transmission organization, or RTO, where ITC operates. Membership in an RTO and divestiture of its grid network are necessary to resolve a civil investigation opened by the Department of Justice in 2010 scrutinizing Entergy's competitive practices, according to the agency.