JACKSON, Miss. (AP) -- Opposition continues to grow among state regulators to Entergy Corp.'s plans to spin off its transmission system to ITC Holdings Corp. Regulators say customers would pay hundreds of millions of dollars more to maintain high-voltage wires in Arkansas, Louisiana, Mississippi and Texas while receiving mostly fuzzy benefits.
But Entergy and ITC are now offering to offset rate increases for the first five years of ITC ownership in exchange for states approving the deal. They say after that, they won't impose rate increases unless they can prove the benefits of the deal outweigh the costs.
"It really transfers that risk from the customers back to the companies," Entergy CEO Leo Denault said in a phone interview Wednesday.
The concessions are aimed at getting regulators in the four states and the city of New Orleans to approve the transaction. Announced in December 2011, New Orleans-based Entergy said it would transfer its high-voltage lines to ITC of Novi, Mich. That company would issue Entergy shareholders enough stock to give them a majority of ITC shares worth more than $2 billion, and ITC would also assume $1.78 billion in debt.
Entergy and ITC won approval for the plan from the Federal Energy Regulatory Commission in June. But regulatory staff in the states has been highly critical of the proposal, saying they can't add up cost benefits for virtues like ITC's sole focus on transmission or its ability to plan across regions.
On Monday, two administrative law judges in Texas recommended the Public Utility Commission there reject the spin-off, which is up for a vote at an Aug. 9 meeting.
"The benefits are almost entirely unquantifiable," wrote Texas administrative law judges Craig Bennett and Rebecca Smith.
On Wednesday, Mississippi's Public Service Commission also received recommendations to reject the deal.
"The transaction will give Entergy shareholders a multi-billion dollar net benefit at ratepayers' expense," outside expert Seth Parker testified on behalf of the Mississippi staff.
Staff in Arkansas and Louisiana recommended rejection in April.
The proposal followed Entergy winning approval last year to join the Midcontinent Independent System Operator, a regional group that directs electricity movement. MISO is supposed to save Entergy customers $1.4 billion over 10 years, ensuring they get the cheapest possible electricity, even if it's generated at a faraway plant. Regulatory staffs say they think MISO membership will bring most of the same benefits ITC has promised.
But Entergy has another reason to push through the transaction.
The Justice Department, after a long investigation into whether Entergy used its transmission system to strangle competing power generators, announced last November that it wouldn't take action as long as Entergy went through with joining MISO and spinning off its wires to ITC. It said if Entergy didn't take those steps to "restore competition," Justice officials could still take action against the company.
Transmission costs a relatively small sliver of a power bill, compared to the money that goes to pay for fuel, for power plant construction and for the smaller lines that carry juice from a substation to a home. Before the concessions, residential customers could expect to pay roughly $1 more a month if ITC took over transmission. But with more than 2.8 million Entergy customers across the four states, the numbers could add up.
That's in part because ITC is regulated by FERC, which voted in June to allow it to collect a 12.38 percent return on equity, compared to the roughly 10 percent allowed by the states. In addition, ITC is structured so that 60 percent of its capital in its operating subsidiaries is counted as equity, while 40 percent is debt. Entergy's operating companies have lower amounts of equity. Combined, that means ITC could demand much more revenue.
ITC could also have incentives to spend as much as possible on constructing new transmission lines. Because regulators would be ceding much of their authority to FERC, they might not be able to stop ITC from unnecessarily gold-plating the system.
"With a focus solely on transmission, ITC has the incentive to overbuild transmission," the Texas judges wrote, noting that transmission costs more than tripled from 2007 to 2012 in a Midwest territory that ITC took over.
Because the local regulators would give up much of their authority to FERC, they fear they wouldn't be able to block overspending.
"Without effective regulatory authority all of the other potential costs and risks of the ITC transaction are magnified because the commission will have no ability to effectively address those as they deem necessary," staff-hired expert R. Lane Sisung testified in Louisiana.
ITC Chief Financial Officer Cameron Bready said that loss of control is overblown, saying state regulators would be consulted, and would still have to approve the sites of transmission projects.
"The state regulators still would have a very active role in regulating transmission investment," Bready said in a Wednesday phone interview.
Bready said the merger agreement called for Entergy and ITC to split the offsets, but said that could be renegotiated.
"We're trying to position customers in a way so that they will not be harmed from a cost position until the benefits of the transfer, the quantifiable benefits, exceed the costs," he said.
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- Utility Industry