The proposed El Paso Electric sale to a J.P. Morgan Chase-advised investment fund is not in the public interest unless 80 conditions are made a requirement of the sale, a consultant for Texas regulators concluded.

"On balance, the deprivation of operational authority (by EPE's board of directors and management) and the increased financial risks substantially outweigh the benefits that can be expected to result from the proposed ($4.3 billion) transaction," John Antonuk, a consultant for the staff of the Public Utility Commission of Texas, concluded in testimony filed with the commission Tuesday, Nov. 5.

Antonuk came up with a list of the sale conditions that he recommended the PUC adopt to make the deal conform to the public interest, which is a requirement for the PUC to approve the sale.

"Even under my proposed conditions, IIF (Infrastructure Investments Fund) interests will have more direct control over (EPE) operations than current EPE shareholders have or that those of U.S. utility equity (stock) investors generally enjoy," said Antonuk, a Pennslyvania-based consultant specializing in the electric utility industry.

The consultant's findings are important because the PUC is one of several government regulators, including El Paso City Council, that must approve the sale.

The PUC is scheduled to hold a hearing on the proposed sale Nov. 20-22 in Austin. It's scheduled to make a ruling on the sale Feb. 10. New Mexico and federal regulators also must approve the deal. El Paso Electric shareholders approved the proposed deal in September.

A consultant for the city last week also concluded the proposed sale is not in the public interest and recommended that the PUC not approve it. Daniel Lawton, an Austin-based consultant, said Infrastructure Investments Fund (IIF) is paying too much for El Paso Electric, and that would put the utility and its customers at risk of possible future financial problems.

New owners' powers need limits, Texas PUC consultant says

The utility has about 429,000 customers in the El Paso and Las Cruces areas. It's one of El Paso's largest employers with about 1,100 employees.

Antonuk found that a number of the benefits of the sale outlined by IIF and El Paso Electric officials are "illusory." And, he said, IIF and EPE officials have not shown that EPE would be a "poor or mediocre performer" without the ownership change.

The consultants' list of proposed conditions, in part, would limit IIF and chain of IIF intermediate companies' powers and operations "solely to ownership and capital support for EPE, which in turn would be limited to utility operations," Antonuk said.

"The structure of new ownership would be complex, and not very transparent. It would create a substantial potential for IIF's representatives (principally the J.P. Morgan resources acting as adviser to various IIF entities) to inject owner representatives directly into matters the industry, including EPE at present, generally reserves to management," Antonuk said.

The limitation of powers on the proposed EPE ownership chain is "necessary to preclude the introduction to EPE of operational and financial sources of risk not related to its operations," Antonuk said.

Investment fund, EPE officials say common ground can be found for sale

IIF and EPE officials released a statement saying that after initial review of the testimony filed by the PUC staff consultant and two PUC staff members, "we believe we can reach common ground with the PUCT staff" and others involved in the case.

Officials did not comment specifically on the proposed conditions.

Another testimony filed by a PUC staff member concluded the proposed sale would not reduce the availability, reliability, or quality of EPE's electric service as long as the new owner is not allowed to reduce project spending to a point that would hurt EPE system performance.

And another staff member recommended the PUC include several provisions prohibiting IIF and EPE to not recover costs of the transaction through electric rates as officials have promised. EPE officials have reported the utility will spend more than $45 million in fees and other costs tied to completing the sale, the staff member noted.

IIF and EPE officials plan to file rebuttal testimony next week that "will address the various points raised by all parties involved in this proceeding," according to the statement.

"We strongly believe in the merits of this transaction and the regulatory process," the statement concluded.

Antonuk's proposed list of sale conditions has several requirements for establishing an EPE board of directors that's independent from IIF entities and J.P. Morgan Chase entities. J.P. Morgan's Infrastructure Investment Group is investment adviser for IIF, he noted.

He also would require that all EPE manager and executives have no significant connections to J.P. Morgan entities.

He also would require the EPE board retain sole control over EPE management, including setting compensation levels for utility executives. 

Financing EPE projects in the future is  concern for consultant  

Antonuk said he's troubled that under the proposed sale, EPE "capital acquisition decisions will no longer be made solely from the perspective of EPE, but in the context of all IIF portfolio opportunities, limitations, and alternatives, of which EPE will forms a small portion." 

IIF's portfolio includes ownership and operational oversight of 19 companies. 

Among the PUC consultant's proposed sale conditions are ones allowing the EPE board to go to the public market for project financing if necessary, and not rely only on financing secured by IIF. He also would require that the EPE board have sole authority over decisions on "dollar volumes of debt and equity capital acquisitions" for the utility.

The utility would also be required keep its own "stand-alone credit ratings" at investment-grade levels to ensure it continues to have access to financing at reasonable costs.

Even if his proposed conditions were adopted as a requirement of the sale, "unacceptable financial risk and loss of EPE authority will remain and any material weakening of the conditions proposed would likely lead to the transaction not being in the public interest," Antonuk said.