New York Wind Could Get Big Boost from Utility Merger

The New York State Public Service Commission (PSC) last week voted unanimously to authorize the acquisition of Energy East Corporation and its affiliates, New York State Electric & Gas Corporation (NYSEG) and Rochester Gas and Electric Corporation (RG&E), by Iberdrola S.A. This decision was the last hurdle to closing the deal, which was was announced in June 2007.

Under the deal, Iberdrola would acquire Energy East for US $4.5 billion. Shareholders of Energy East would receive US $28.50 in cash, equivalent to a 26% premium to the company’s closing stock price of US $22.54 at the time. The deal has already been approved by the Federal Energy Regulatory Commission (FERC), as well as regulators in all of the other states where Energy East operates. New York was the last state to grant regulatory approval for the deal.

Iberdrola said that it is waiting on the order from the PSC to be delivered and it will move forward from there. “We thank the commission for its time and effort on the matter, and we look forward to reviewing the order to determine next steps,” a spokesperson for Iberdrola said.

If the merger does move forward, the wind energy industry stands to benefit in New York as well as other states where Energy Easy currently operates. The New York PSC said that Iberdrola must commit US $200 million to developing wind in New York. This was an increase from the US $100 million requirement that the PSC was initially considering imposing on the Spanish company. All of the US $200 million would fall under a plan announced by Iberdrola in May 2008 to invest US $8 billion in wind energy.

Earlier this year, the New York PSC’s staff had recommended that the merger not move forward. They pointed to concerns about the merger creating a utility that would be too powerful, which they said would not be in the interest of the state’s consumers. The staff also recommended that the PSC force Iberdrola to sell its New York wind farms, hydropower plants and other generating capacity because of a New York State policy that prohibits companies from owning both generating and transmission capacity.

The PSC staff also said in its earlier recommendation that if the deal was approved Iberdrola should provide US $600 million in “positive benefit adjustments ” to its New York customers. Iberdrola countered by saying that the benefits were too high, and was considering dropping the merger plans if the PSC didn’t lower the amount.

Carol Murphy, executive director of Alliance for Clean Energy New York (ACE NY) said that in the end the PSC weighed the opinions of it’s staff as well as those of Iberdrola and groups like ACE NY that were in favor of the deal. The result she said was a compromise that most likely ensures Iberdrola will not walk away from the deal as some commissioners and others in the New York renewable energy industry feared.

“I think the PSC did a good job of balancing the concerns about Iberdrola owning generation capacity,” Murphy said. “There was a balancing act that had to be done and at the end of the day it’s a clear signal that does show that New York is serious about reaching its Renewable Portfolio Standard.”

According to the PSC, its decision to give the go-ahead to the merger includes provisions that will require Iberdrola to enhance rate-payer financial benefits, mitigate vertical market power, protect the utilities’ assets and financial condition, improve transmission and distribution system reliability and strengthen service quality.

“Determining whether a company should have the privilege to operate a utility franchise in New York is a paramount responsibility of the Commission, and it’s a responsibility we exercise with great caution, and only after thorough review, careful thought and much deliberation,” said Commission Chairman Garry Brown. “Millions of people who depend on safe and reliable utility service at just and reasonable rates should expect nothing less; and the acquisition approved today, with necessary conditions, will do just that.”

The PSC did, however, reaffirm its statement of policy regarding vertical market power. Under the policy, the presumption that under New York law it is unacceptable for a company owning transmission and distribution facilities to also own generation can be overcome by a demonstration of substantial rate-payer benefits, together with mitigation measures that would take the form of lower rates and/or more reliable service.

Within this frame, the PSC will allow Iberdrola to develop and own wind generation and hydroelectric plants, but imposed several conditions on the transaction that included forcing the utility to sell of all of it’s fossil fuel generated capacity and mandating that any investment in generating capacity come from funds that did not originate from an Energy East subsidiary. The PSC said that the conditions are designed to mitigate the risk that Iberdrola could exercise vertical market power, and to provide substantial rate-payer benefits, in the form of positive benefit adjustments reflected, which taken together justify allowing the transaction to go forward.

“Throughout this proceeding, great attention has been given to a single aspect of this case: the potential ownership of wind facilities by a transmission and distribution company,” said Chairman Brown. “Developing renewable energy sources is critically important for New York. Our decision today allows Iberdrola to fulfill its commitment to invest in renewable energy projects in New York State.”

The acquisition of Energy East is also subject to certain conditions that the PSC says are designed to establish and reaffirm rate-payer protections and set forth service quality performance incentives. Under the PSC’s authorization, NYSEG and RG&E electric and gas customers will receive at least US $275 million in benefits. These benefits will, over time, be used to either reduce rates or moderate requested rate increases.

Conditions were also established to ensure that rate-payers receive a portion of any added benefits associated with synergy savings and efficiency gains produced by the transaction. Iberdrola is required to file a written statement of the acceptance of the PCS’s order before any closing of the proposed acquisition.

Energy East’s two New York subsidiaries have a total of 1.7 million customers in New York, or about 16 percent of the state’s electric customers and 12 percent of the state’s natural gas customers. The combined service territory encompasses a substantial portion of upstate New York, including portions of Western New York, the Finger Lakes, the Southern Tier, northern New York, the Capital Region and the Hudson Valley. The subsidiaries deliver electricity and natural gas across nearly 40 percent of New York State.

Energy East also owns the Berkshire Gas Company, which delivers natural gas to 36,000 customers in western Massachusetts, Central Maine Power, which provides electricity to 596,000 customers in central and southern Maine, Connecticut Natural Gas Corporation, which delivers natural gas to 155,000 customers in Central Connecticut and Southern Connecticut Gas Company, which provides 167,000 customers with natural gas.

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Former Editor at, now Assistant Counsel at the New York State Department of Public Service, regulating New York's electricity, gas, and telecommunications industries.

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