* Failure highlights state-federal tension over rate setting
* Entergy says it will keep transmission operation
By Eileen O'Grady
HOUSTON, Dec 13 New Orleans-based Entergy Corp
on Friday called off a $1.78 billion plan to divest its
transmission operations to ITC Holdings Corp, three days
after utility regulators in Mississippi rejected the plan.
The transaction - first announced in 2011 - had received
federal and ITC shareholder approval, but was unable to get the
necessary support from state and local regulators who were
concerned about rising transmission costs and the loss of
control over rates.
An unanimous rejection by the Mississippi Public Service
Commission on Tuesday effectively killed the deal.
"It's disappointing to have the transaction end the way that
is has after over two years of working on it," said Cameron
Bready, ITC's chief financial officer.
The deal would have included a spinoff and merger of
Entergy's 15,000-mile (24,000-km) transmission network serving
parts of Arkansas, Louisiana, Mississippi and Texas with
Michigan-based ITC Holdings.
"While we strongly believe that the transaction would be in
the best interests of our customers and all stakeholders, it is
clear we don't have the necessary regulatory support to close
the transaction," Leo Denault, Entergy's chairman and chief
executive, said in a statement.
The ITC deal was part of Entergy's larger effort to leave
the transmission business to help resolve a U.S. Justice
Department (DOJ) investigation into alleged anti-competitive
Entergy's initial move was to join the Midcontinent
Independent System Operator (MISO), which is set to be completed
Federal and state regulators have since 2009 urged Entergy
to relinquish day-to-day control of its grid assets after a
decade of complaints from independent power producers.
State regulators approved Entergy's move to MISO in 2012,
although not before obtaining additional representation.
But state regulators balked at the ITC deal which would have
transferred authority to set transmission rates from the state
level to the Federal Energy Regulatory Commission (FERC), which
allows companies like ITC - the country's largest independent
transmission owner - to earn higher rates of return than allowed
Rejection of the ITC transaction "highlights the tension
that exists between federal regulation over interstate
transmission and state regulation as it relates to the rates
customers pay within the bounds of individual states," said
Bready in an interview.
"The ITC deal was like a brick wall," said analyst Paul
Patterson of Glenrock Associates. "MISO (membership) will allow
for independent operation of the system, but changing ownership
is a different story."
State opposition came as a "something of a surprise" to ITC
officials, said Bready who was active in state negotiations.
"Going into this transaction, we felt there was a burning
platform for change in this region, given the history," Bready
said. "We felt like our business model was the ideal solution
for the concerns they had."
The Mississippi PSC saw it otherwise, however, calling the
transaction "an attempt by Entergy and its shareholders to
monetize its transmission assets and extract the excess value of
the assets under the more generous FERC rate construct available
to ITC," according to the commission order.
NARUC, a group which represents state utility commissioners,
has asked FERC to review the rate incentives given to
independent transmission companies which it claims have
"transferred hundreds of millions of dollars from consumers to
transmission investors without any clear showing of need or
"I am truly sorry that customers in this region will not
realize the benefits that this transaction would have brought
and that they so deserve," said Joseph Welch, ITC chief
executive, said in a statement.
Entergy's Denault said the company now views transmission
"as an integral part of the significant growth opportunities"
ahead as the U.S. Gulf Coast prepares for a period of major
industrial investment that will boost electricity needs.
Entergy declined to comment on the ongoing federal
investigation, but it has said its practices and policies
satisfy applicable regulation and are subject to FERC review.
The DOJ did not respond immediately to a request for