* 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 on Tuesday of Entergy Corp's plan to divest its transmission business to ITC Holdings could complicate the New Orleans-based utility's struggle to resolve an ongoing federal investigation of its operations.
In a 3-0 vote, the Mississippi Public Service Commission (PSC) said the $1.78 billion transaction would raise transmission rates for Entergy Mississippi customers and take authority to set rates away from state regulators.
The transaction, a spin-off and merger of Entergy's 15,000-mile (24,000-km) transmission network serving parts of Arkansas, Louisiana, Mississippi and Texas, is part of Entergy's larger move to leave the regulated transmission business at the urging of federal regulators.
Exiting transmission is necessary to quell the U.S. Justice Department's three-year inquiry into alleged anti-competitive behavior by Entergy that merchant generators complained for a decade hindered their ability to sell power to buyers.
The first step involves relinquishing day-to-day control of its by joining the Midcontinent Independent System Operator (MISO), one of the world's largest grid operators and wholesale energy 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 its grid operation to ITC Holdings. The plan has been approved by federal regulators and ITC shareholders, but faced growing opposition from state regulators.
Brandon Presley, a member of the Mississippi Public Service Commission, said Entergy's move to MISO should benefit consumers, but ITC was unable to demonstrate the financial advantages of the sale.
"The evidence in the MISO case showed a benefit of a minimum of $242 million over 10 years for Mississippi rate payers," Presley said in an interview. "There was not any evidence in this case that showed any financial benefits to Mississippi rate payers, either quantitatively or qualitatively."
Presley said testimony indicated customers would pay $348 million more over 30 years under ITC ownership because ITC can earn a higher rate of return under federal regulation compared to state regulation.
ITC OBJECTS TO PSC RULING
Loss of state authority to regulate transmission and set rates also goes against Mississippi law, Presley said.
"Federal regulation would lead to Mississippi rate payers paying higher rates for the same service, provided by the same people, using the same assets," a result prohibited by state law, the commission order said.
A spokeswoman for ITC, based in Michigan, said the company "strongly" disagreed with the commission's rationale for denying the transaction, saying the action "would deny Mississippi customers the near-term and longer-term economic and reliability benefits resulting from ITC's independent ownership with a singular focus on transmission."
ITC's Louise Beller cited "significant benefits" from ITC ownership of the transmission system, "which is clearly in need of investment to improve reliability and facilitate the competitive electricity market."
While recognizing the PSC's concern about loss of state regulatory authority, "we do not believe that jurisdictional concerns should stand in the way of customers realizing the benefits of this transaction," Beller said in a statement.
ITC and Entergy said they would review the Mississippi order and determine their next step.
If Entergy is unable to divest its transmission network, the Justice Department said it may take action, according to a 2012 release.
"The division will closely monitor developments, and in the event 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 are have been closely following action in other states.
Presley said he did not want to say whether the Entergy/ITC deal will fall apart. "I can only speak for our decision and through our order," said Presley. "We found it was not in the public interest."
Entergy and ITC faced a year-end deadline to complete the transaction, but said they were working to extend the deadline in regulatory filings.