* State ruling may confound federal regulators
* Entergy under pressure to leave transmission business
* ITC says Mississippi order denies savings for customers
By Eileen O'Grady
HOUSTON, Dec 10 (Reuters) - Mississippi's rejection onTuesday of Entergy Corp's plan to divest itstransmission business to ITC Holdings could complicatethe New Orleans-based utility's struggle to resolve an ongoingfederal investigation of its operations.
In a 3-0 vote, the Mississippi Public Service Commission(PSC) said the $1.78 billion transaction would raisetransmission rates for Entergy Mississippi customers and takeauthority to set rates away from state regulators.
The transaction, a spin-off and merger of Entergy's15,000-mile (24,000-km) transmission network serving parts ofArkansas, Louisiana, Mississippi and Texas, is part of Entergy'slarger move to leave the regulated transmission business at theurging of federal regulators.
Exiting transmission is necessary to quell the U.S. JusticeDepartment's three-year inquiry into alleged anti-competitivebehavior by Entergy that merchant generators complained for adecade hindered their ability to sell power to buyers.
The first step involves relinquishing day-to-day control ofits by joining the Midcontinent Independent System Operator(MISO), one of the world's largest grid operators and wholesaleenergy markets.
Entergy's integration into MISO is set to be completed Dec.19 after a decade of resistance and false starts.
The second step of Entergy's plan was the transfer of itsgrid operation to ITC Holdings. The plan has been approved byfederal regulators and ITC shareholders, but faced growingopposition from state regulators.
Brandon Presley, a member of the Mississippi Public ServiceCommission, said Entergy's move to MISO should benefitconsumers, but ITC was unable to demonstrate the financialadvantages of the sale.
"The evidence in the MISO case showed a benefit of a minimumof $242 million over 10 years for Mississippi rate payers,"Presley said in an interview. "There was not any evidence inthis case that showed any financial benefits to Mississippi ratepayers, either quantitatively or qualitatively."
Presley said testimony indicated customers would pay $348million more over 30 years under ITC ownership because ITC canearn a higher rate of return under federal regulation comparedto state regulation.
ITC OBJECTS TO PSC RULING
Loss of state authority to regulate transmission and setrates also goes against Mississippi law, Presley said.
"Federal regulation would lead to Mississippi rate payerspaying higher rates for the same service, provided by the samepeople, using the same assets," a result prohibited by statelaw, the commission order said.
A spokeswoman for ITC, based in Michigan, said the company"strongly" disagreed with the commission's rationale for denyingthe transaction, saying the action "would deny Mississippicustomers the near-term and longer-term economic and reliabilitybenefits resulting from ITC's independent ownership with asingular focus on transmission."
ITC's Louise Beller cited "significant benefits" from ITCownership of the transmission system, "which is clearly in needof investment to improve reliability and facilitate thecompetitive electricity market."
While recognizing the PSC's concern about loss of stateregulatory authority, "we do not believe that jurisdictionalconcerns should stand in the way of customers realizing thebenefits of this transaction," Beller said in a statement.
ITC and Entergy said they would review the Mississippi orderand determine their next step.
If Entergy is unable to divest its transmission network, theJustice Department said it may take action, according to a 2012release.
"The division will closely monitor developments, and in theevent that Entergy does not make meaningful and timely progress,the division can and will take appropriate enforcement action,if warranted," the DOJ said in a release.
A call to the DOJ was not returned.
Utility commissioners in Arkansas, Louisiana and Texas arehave been closely following action in other states.
Presley said he did not want to say whether the Entergy/ITCdeal will fall apart. "I can only speak for our decision andthrough our order," said Presley. "We found it was not in thepublic interest."
Entergy and ITC faced a year-end deadline to complete thetransaction, but said they were working to extend the deadlinein regulatory filings.
- Utility Industry