Ruling opposes takeover by Iberdrola by Jim Stinson

Anger greets recommendation that PSC block deal for RG&E parent

An administrative law judge is recommending that the state Public Service Commission reject the proposed takeover of Energy East Corp. by Iberdrola SA, a big Spanish utility that has said it would invest billions in wind power projects in New York.

Energy East, the parent of both Rochester Gas and Electric Corp. and New York State Electric and Gas Corp., agreed a year ago to be acquired by Iberdrola for $4.5 billion.

The Department of Public Service law judge, Rafael Epstein, picked apart the deal, writing that the PSC should say no "on the ground that it does not satisfy the 'public-interest' requirement of Public Service Law."

But if the PSC does approve the takeover, Epstein said, it should first set some conditions for Iberdrola to meet — and at least one of those conditions would appear to be a deal-breaker.

The conditions include forcing Iberdrola to sell its wind power facilities within New York's Energy East territory, grant $646 million in benefits to the public and abide by safeguards and rate proceedings as proposed by the PSC staff.

Iberdrola officials had said earlier that they would walk away from the deal if New York demanded that they sell their wind power farms.

Iberdrola executives were reviewing the recommendation Monday, according to a spokesman for the company, which is based in Bilbao, Spain.

Shares of Energy East plummeted 15 percent after Epstein's recommendation was released Monday. The stock fell $4 to close at $22.75 per share. Iberdrola's purchase offer is $28.50 a share.

The recommendation was praised by some groups that have been concerned about the impact of the deal on ratepayers and on competition in the energy industry.

But Epstein's findings were met with anger by some politicians and business leaders, who generally favor the takeover.

"I am absolutely flabbergasted," said Sandy Parker, chief executive officer of the Rochester Business Alliance. She said New York's regulatory process often ignores economic development benefits.

The recommendation also brought a rebuke from Sen. Charles Schumer, D-N.Y., who supports Iberdrola and has been critical of the state's process for considering the deal.

"The ruling defies common sense," Schumer said. "At a time when gas prices are $4 a gallon and we desperately need to develop alternative sources of energy, to place such severe restrictions on the world's leading wind power producer ... cries out for reversal."

State Sen. James Alesi, R-Perinton, and Assemblyman Joseph Morelle, D-Irondequoit, also said the agency was being short-sighted.

"State government and its agencies must remove obstacles to new business growth, particularly in upstate, and certainly should not be creating new ones," said Morelle.

A major reason behind Epstein's recommendation was the PSC's general policy to separate energy generators from energy distributors.

That policy was supported by Gavin Donohue, president of the Independent Power Producers of New York.

Donohue said that if a company is allowed to generate wind power within its service area, it could delay the building of competing wind farms in its territory — although Iberdrola hasn't done that elsewhere, he said.

"We're trying to prevent utilities from getting back into the generation business," Donohue said.

Mindy Bockstein, executive director of the state's Consumer Protection Board, applauded Epstein's finding that RG&E and NYSEG customers should be insulated from any financial risks that might result if the deal goes through.

She also noted Iberdrola's promise earlier this month that it would invest $2 billion in renewable energy projects in New York if the sale was approved. Because the commitment was made after public hearings on the deal had concluded, Bockstein said it couldn't be considered by Epstein. But she said she will "formally ask the PSC to consider the substantial implication of this investment" before the five-member commission makes its final decision.

Epstein's recommendation guides the PSC but does not bind it.

Iberdrola's $2 billion investment offer had drawn praise from Gov. David Paterson, although Paterson stopped short of endorsing the takeover.

JFSTINSO@DemocratandChronicle.com