Iberdrola rethinking bid for Energy East

Iberdrola SA said Tuesday it will rethink its proposed $4.5 billion acquisition of the parent company of New York State Electric & Gas Corp. after a state administrative law judge recommended that the deal be rejected.

The administrative law judge, reviewing the case for the state Public Service Commission, recommended that Iberdrola’s deal to acquire Energy East Corp. be rejected because it would not be in the public interest.

The judge, Rafael A. Epstein, also recommended that the deal only be approved if Iberdrola, the world’s largest owner of wind energy parks, agreed to sell its power generation plants in New York and provided $646 million in rate cuts to customers of Energy East’s two New York utilities, NYSEG and Rochester Gas & Electric Corp.

Those conditions are at odds with Iberdrola’s desire to continue owning wind farms in New York and its plans to invest as much as $2 billion in renewable energy projects in the state if the deal is approved.

Iberdrola considers it a “priority” that the company’s investment plans are not capped, an Iberdrola official, who declined to be identified, said in an e-mail.

The final economic conditions imposed on the takeover could also impede the transaction if they erode the valuation creation prospects of the deal, the official said.

The Spanish utility reiterated its plans to invest $2 billion to develop wind parks in New York in coming years if the purchase is completed. But if the deal doesn’t go ahead, Iberdrola will invest elsewhere in the U. S., the official said.

The 151-page decision by the administrative law judge is not binding on the state Public Service Commission, which is the only state regulatory agency that still needs to approve the deal.

But the acquisition is facing significant opposition in New York. The PSC staff also opposes the deal because of concerns about whether it will best serve the public interest and recommends that the purchase be approved only if it provided ratepayers with a tangible reduction in rates.

“While we believe this recommendation lacks merit, it does heighten the probability that the merger will ultimately be denied,” said Ryan McLean, a Morningstar analyst.

The Iberdrola deal is butting heads with the PSC’s long-held goal of having the state’s utilities get out of the business of generating electricity in an effort to encourage competition in the power generation markets.

Epstein supported that policy in his recommendations, as well as calling for an immediate 4.4 percent, or $55 million, cut in delivery rates to be followed by a broader review of NYSEG and RG&E’s rates that would provide another $445 million in savings to the utilities’ customers.