Regulatory hearings for Entergy‘s (NYSE:ETR) spinoff of its transmission business to ITC Holdings (NYSE:ITC) are scheduled to be held this summer, with regulatory approvals possibly following in the fall.
“The schedules we have today would appear to lead to a final determination by regulators in the fall absent a settlement agreement that might allow for a decision in an earlier time frame,” ITC said in a letter to employees filed Feb. 4. “We continue to work with the regulatory bodies on schedules that are most constructive for all parties involved and continue to expect the transaction to close in 2013.”
The companies have not yet filed for approval in Texas or Missouri, an ITC spokesperson confirmed on Feb. 6.
In Louisiana, hearings will take place June 24-28 and July 1-2. In Arkansas, hearings will take place July 9-12; in New Orleans, July 23-26; and in Mississippi, Aug. 6-8, the spokesperson told TransmissionHub on Feb. 5.
The Louisiana Public Service Commission (PSC) on Jan. 22 said it was unlikely the Entergy/ITC transaction would be presented to it for a decision before September.
Entergy and ITC in September and October 2012 filed for regulatory approval of the spinoff in Louisiana, Arkansas, Mississippi and New Orleans, and for federal regulatory approval with FERC.
The spinoff is also contingent on Entergy joining an RTO. The company is in the midst of the process of joining the Midwest ISO (MISO), which said on Dec. 3, 2012, that it had assumed from the Southwest Power Pool the role of independent coordinator of transmission (ICT) for the Entergy system. On the same day, Entergy said five of its utilities had submitted to MISO executed transmission owners agreements (TOAs).
Under the transaction with ITC, Entergy would transfer its transmission assets to four separate, new subsidiaries of ITC.
However, the Public Utilities Commission of Texas (PUCT) said Jan. 22 that the Entergy applicants had not satisfied the conditions imposed by the PUCT that would enable Entergy Texas to transfer operational control to MISO.
“Moreover, the Entergy and ITC applicants have failed to present any analysis demonstrating the impact of the proposed transactions on rates, except for their limited statements warning of rate increases,” the PUCT said. “Having failed to submit this information, the application is not supported and should be rejected without prejudice to joint applicants resubmitting the application in which they make such a demonstration.”
The PUCT also said that if all of the Entergy operating companies (EOCs) do not join MISO by Dec. 31, then it would not allow Entergy Texas to transfer operational control of its assets to MISO without the subsidiary first making a new filing before the PUCT.
“Among the reasons this is significant is that the transmission path from [Entergy Texas] to MISO would travel through other Entergy operating company regions, including a significant path through Entergy Arkansas,” the PUCT said. “Similar conditions were imposed by the Louisiana and Mississippi Commissions concerning the EOCs in their respective jurisdictions. Thus, if [Entergy Texas] does not integrate into MISO by December 31, 2013, then other EOCs may not be permitted to enter MISO without first bringing additional proceedings before each retail commission.”
State regulatory concerns
The Louisiana PSC, PUCT, Arkansas PSC and New Orleans City Council have all raised concerns about the transmission spinoff in filings made with FERC on Jan. 22.
The Louisiana PSC, New Orleans City Council, PUCT and Arkansas PSC argued that the companies’ application failed to demonstrate that the transaction met certain standards required under Sections 203 and 205 of the Federal Power Act, specifically with respect to cross-subsidization and the impact of wholesale transmission rates on customers.
“[E]ven without having provided a populated rate formula, and without yet having sought or factored in various rate incentives other than the 50 basis point adder for participating in an RTO, the ITC applicants are projecting an increase in transmission rates due to their presumption that the ROE will increase to the MISO 12.38% rate, and due to their proposed capital structure,” the PUCT said in its protest filed Jan. 22.
Their proposed hypothetical capital structure of 60% equity to 40% debt is “outdated and unsupported,” the Louisiana PSC said. The EOCs currently have a 50/50 debt to equity ratio.
“Given the relatively low cost of debt in today’s market, and the 12.38% ROE granted to transmission companies in MISO, the ITC applicants have not sufficiently demonstrated a need for such a high equity to debt ratio,” the New Orleans City Council said.
The New Orleans City Council also objected to the creation of a single transmission pricing zone for the state of Louisiana, and expressed concern that dividends would be subsidized by wholesale ratepayers “who would then attempt to pass these costs through to retail ratepayers.”
As part of its proposal to join MISO, Entergy has proposed establishing four transmission pricing zones – one in Arkansas, one in Louisiana, one in Texas and one in Mississippi. In Louisiana, the single transmission pricing zone would be created through merging the facilities of Entergy New Orleans with those of Entergy Louisiana and Entergy Gulf States Louisiana.
ITC has said it would adopt the same pricing zones.
“[T]he applicants’ proposal to create a single transmission pricing zone for the state of Louisiana is unjust and unreasonable,” the New Orleans City Council said. “It is inconsistent with commission precedent and the ubiquitous [RTO] practice of establishing license plate rates based on an operating company’s owned transmission facilities.”
According to a Nov. 8, 2012, settlement agreement between Entergy, ITC, MISO and the New Orleans City Council, Entergy and ITC would support the creation of a transmission pricing zone for Entergy New Orleans if the ITC transaction is approved.