The Mississippi Public Service Commission (PSC) made no attempt to veil that its decision on Dec. 10 to reject ITC Holdings’ (NYSE:ITC) acquisition of Entergy’s (NYSE:ETR) transmission assets pivoted around the ever-present friction between state and federal control.
The PSC’s decision is rife with references to not wanting to hand over jurisdiction of the assets to FERC.
“If approved, the transaction would strip this commission of effective regulation of the transmission assets in Mississippi currently owned by [Entergy Mississippi] and transfer this authority to the federal government,” the PSC said in the decision.
The thrust of the commission’s argument was that to cede control would necessarily result in higher rates to retail customers, which would contravene the state law that requires that such a transaction assure that customers be served on the same basis after the transaction as before.
“[T]he transaction offers with certainty only significant cost to ratepayers and complete loss of this commission’s rate jurisdiction over the transmission assets at issue,” the PSC said.
That Mississippi would be uncomfortable with such an outcome comes as no surprise to industry insiders, who, for months, if not since the announcement of the transaction in 2011, have been skeptical about its success.
“Because Mississippi is a bundled state, the state has jurisdiction over the transmission costs and if they sell the system to ITC, FERC will get jurisdiction and the state will have to pass through the rates FERC approves,” an industry lawyer told TransmissionHub on Dec. 11, adding that the southern states “have never been comfortable” with the prospect of FERC jurisdiction.
In its approval of the transaction in June, FERC acknowledged that the transaction could result in rate increases for some but that its benefits outweighed those costs.
“The states don’t want to relinquish their control of those assets,” an industry investment banker told TransmissionHub on Dec. 11. “Going into that [transaction], it had a high degree of difficulty, … trying to basically rip FERC-regulated assets out of the local utilities’ [hands], and needing all those approvals to do it.”
ITC and Entergy have pledged a total of $453m in rate-mitigation funds to lower Entergy customer rates across its four-state territory of Arkansas, Louisiana, Mississippi and Texas, including $77.5m in rate mitigation for Mississippi customers.
According to the decision, however, Mississippi customers could pay $348m over 30 years as a result of ITC’s ownership. Including increases in rate base, and assuming 5% annually over 30 years, customers could pay an additional $813m, the PSC claimed.
Mississippi regulators directed Entergy Mississippi to “move beyond this transaction;” to whit, to work with commission staff to develop a plan for transmission investment that it should file within 90 days after integration into the Midcontinent ISO (MISO).
Entergy has been a target of criticism for its lack of investment in its transmission system, but that lack of investment has been to protect the retail customer, as new transmission “is to benefit the generators and wholesale prices,” the lawyer said. “So, they’re getting beat up for looking after the retail customer.”
The PSC mentions in the decision that the U.S. Department of Justice has expressed the desire for Entergy to divest its transmission assets to an independent transmission company, which ITC is, and join an RTO, in order to address anticompetitive concerns.
However, the independent model is a mere “experiment” that is “barely 10 years old,” Mississippi regulators claimed, and it is not clear that it inures benefits to consumers, they said.
The lawyer noted that Entergy has been trying to spin off its transmission system for years, but the commission makes clear in the decision that doing so is not in the best interests of ratepayers, as “Entergy shareholders would reap a windfall through higher rates made possible by the FERC rate construct at the expense of captive customers, who have borne the cost of transmission assets that may have been neglected or misused.”
“All these people making allegations about misusing the transmission system is pretty unfair,” the industry lawyer said. “There are regulators talking out of both sides of their mouths,” he said.
In its decision, the PSC knocks Entergy for joining an RTO, saying, “Rate increases are certain, but benefits are not, particularly the realization of benefits incremental to those arising from [Entergy Mississippi’s] participation in MISO.”
In the next breath, however, the commission states that its decision to approve the move to MISO hinged on expert testimony that identified significant “potential” benefits of moving to an RTO.
“Moreover, the commission retained authority over retail transmission rates under MISO’s bundled load exemption yet still imposed additional conditions to insure sufficient regulatory control and ratepayer protections,” the PSC added.
The PSC has approved a base return on equity (ROE) of 10.76%. The MISO-approved base ROE is 12.38%.
It remains to be seen whether the predictions that ITC’s acquisition of Entergy’s transmission assets wouldn’t clear the hurdle of the state regulatory process are coming true. Though industry bankers have been pessimistic that this deal would get done, the industry lawyer cautioned that behind closed doors, Mississippi regulators could be negotiating with Entergy and ITC for a better rate-mitigation deal and/or other concessions.
“You can’t assume things based on what’s public,” he said.