Iberdrola deal on the line as PSC vote nears by LARRY RULISON

ALBANY -- Iberdrola SA could walk away from its $4.5 billion merger with Energy East Corp. if state regulators try to extract too much money from the Spanish utility.

Just a few days from a vote by the Public Service Commission, one of the biggest questions surrounding the deal appears to be just how much Iberdrola will be required to share with customers.

In the past, the five-member PSC, which regulates utilities in New York, has required so-called "positive benefit adjustments" typically used to lower rates for gas and electric service. The so-called PBAs help satisfy the need for the commission to find public benefits before approving such large mergers.

It remains unclear how much in PBAs the commission will require when it votes on the Iberdrola deal Wednesday in Albany.

According to testimony offered this week to PSC commissioners by senior advisory staff, Iberdrola could decide to walk away from the merger if it feels the PBAs are too onerous.

In a hearing before the PSC on Aug. 20, staff had suggested three different scenarios that involved between $202 million and $300 million in PBAs.

Two of the scenarios involved sharing earnings with consumers, while the third called for a rate case before the PSC in which the agency could potentially reset Iberdrola's electric and gas rates in upstate New York.

The stakes are high for consumers. Energy East, the Maine-based company that Iberdrola wants to acquire, operates New York State Electric & Gas and Rochester Gas & Electric, which have 1.7 million customers in upstate New York.

However, at this week's PSC meeting, senior staff member John Stewart noted there was a risk in choosing any option that included sharing earnings, since Iberdrola has opposed such requirements in testimony its has given in the case. The proposed acquisition has been before the PSC for a year.

"There is some risk that the transaction could not be consummated," he said.

Stewart said perhaps the best option for the commissioners to consider would be $275 million in PBAs, with a rate case started within 12 to 18 months.

Some of the commissioners and staff debated whether Iberdrola would be able to cut costs at Energy East and therefore extract more earnings from the company. Under an earnings sharing scenario, those earnings would be shared with customers, lowering rates.

However, some said it would be difficult for Iberdrola to find enough synergies with Energy East in the short term to significantly raise earnings before a rate case would begin.

Commissioner Maureen Harris was also concerned that the $275 million number was arbitrary and perhaps not enough.

Previously, PSC staff had been seeking more than $600 million in PBAs, more than triple than the $202 million that Iberdrola has said it is willing to pay.

Stewart said the $275 million number was chosen because it was in the middle of what staff thought was an acceptable range between $250 million and $300 million.

"All we're talking about is the risks," Harris said. "I don't want to look a gift horse in the mouth, but I'm concerned. I'm really concerned about the level of PBAs we're discussing."