Wind assets put deal at risk by LARRY RULISON

ALBANY -- It appears that wind energy is still holding up Iberdrola SA's $4.5 billion acquisition of Energy East Corp.

In briefs filed this week, the staff at the state Public Service Commission continues to demand that Iberdrola sell off its interests in wind farms in New York as part of its deal to acquire Energy East, which has 1.4 million customers in upstate New York through its Rochester Gas & Electric and New York State Electric & Gas subsidiaries.

The staff at the PSC makes recommendations to the five voting commissioners who must ultimately approve the merger. Iberdrola has already received all of the necessary state and federal approvals it needs, except for the PSC's blessing.

From the start, the PSC staff has opposed the deal on a number of fronts, and Iberdrola has offered concessions -- except when it comes to the wind generation business.

Iberdrola is one of the largest wind producers in the world and is a part-owner of the Maple Ridge wind farm in Lewis County, the biggest wind farm in New York state.

The company has also promised to invest $100 million in additional wind projects in the state if it gets PSC approval.

Although the PSC staff and Iberdrola tried to reach a settlement that would go before PSC commissioners, they were unsuccessful. Now, the case is before an administrative law judge who will issue his own opinion for the commissioners to consider as early as next month.

In briefs filed with the judge Tuesday, the PSC staff again argued that Iberdrola's ownership of any electric generation in New York would allow the utility to have too much sway over the wholesale market in what's called vertical market power.

The state's wholesale market is overseen by the New York Independent System Operator, an East Greenbush nonprofit that also watches over the state's electrical grid.

"New York ratepayers could be harmed by substantially overpaying for wind generation if vertical market power is exercised. The remedy therefore remains full divestiture of all Energy East and Iberdrola generating assets," the PSC staff said in the brief.

Iberdrola has offered to sell off fossil-fuel plants that Energy East owns in the state.

But in its own brief to the judge, Iberdrola said it couldn't exercise vertical market power with wind generation because wind power is an "intermittent and unpredictable" power source. That means it's difficult to sell wind power into NYISO's "day-ahead" market, the company said.

"As a result, energy from these wind projects cannot reasonably be sold in NYISO's day-ahead market, in which the substantial majority of New York electricity is bought and sold," Iberdrola's brief states.

NYISO announced two weeks ago it is developing a sophisticated wind-forecasting system that will allow the market to "accommodate wind power more accurately and reliably."

Iberdrola also argues NYISO and federal regulators have strong enforcement measures to curtail vertical market power abuse.

The briefs were filed at a time when Iberdrola has made it clear to the international markets that it could walk away from the Energy East deal.

On Tuesday, Iberdrola Chairman Ignacio Sanchez Galan said the company would "rethink" the deal if the PSC's demands are "unreasonable." Larry Rulison can be reached at 454-5504 or by e-mail at lrulison@timesunion.com.