UPDATE: July, 28, 2020: Infrastructure Investments Fund's $4.3B acquisition of El Paso Electric received its final regulatory approval with a July 22 order from FERC, the companies announced July 27. The transaction is expected to close on July 29, "subject to the satisfaction of conditions to closing," the companies said.

Dive Brief:

• The $4.3 billion acquisition of El Paso Electric by a fund advised by J.P. Morgan's investment management arm has all regulatory approvals to proceed, provided that the parties address the Federal Energy Regulatory Commission's concerns that the merger could reduce competitive electric supply in Texas.
• The acquisition by Infrastructure Investments Fund (IIF), a $12 billion private investment vehicle, has attracted scrutiny from several U.S. senators and consumer advocacy group Public Citizen over charges that the fund is fundamentally controlled by J.P. Morgan and that this relationship could lead to conflicts of interest with ratepayers of the regulated utility.
• On Monday, FERC conditionally approved the acquisition and rejected Public Citizen's challenge. The advocacy group plans to appeal the decision, but any legal challenge will likely fail to affect the merger because it will take years to be resolved, Public Citizen Energy Program Director Tyson Slocum told Utility Dive.

Dive Insight:

FERC's go-ahead is the final regulatory approval the acquisition needs to close in the first half of 2020, according to a statement from the utility. The deal has already received approvals from Texas and New Mexico state regulatory commissions, the city of El Paso and others.

FERC put a condition on its approval: In 45 days the utility and the fund's legal entity must submit a plan that would mitigate certain effects on the market that could stem from an IIF holding company owning a share of the 595-MW Mesquite natural gas-fired power plant in Arizona. Several contracts for power capacity from Mesquite will expire in April 2021, meaning that capacity could be available for sale in El Paso Electric's territory after that date.

If the merger goes through, El Paso Electric might then be able to buy power from a plant affiliated with its new owner, possibly harming competition. But this could be remedied if IIF were, for example, to strike a new long-term contract with another party for the Mesquite capacity in question, according to FERC's order.

FERC also found that IIF's ties to J.P. Morgan could not have any market power implications because J.P. Morgan does not own any stakes in any electricity-generating assets near El Paso Electric's territory. As a result, the question of what kind of affiliation IIF has with J.P. Morgan, FERC argued, is not relevant to the case.

But Slocum said that FERC missed the point of Public Citizen's challenge, which was not about effects on competition, but rather on potential harm to ratepayers.

"For a franchise utility, you have to consider affiliations of ownership, especially a company like J.P. Morgan," he said. "It is a dereliction of duty for FERC to simply ignore the elephant in the room of what the entire dispute has been about."

In filings with FERC, Public Citizen said that calling J.P. Morgan a mere "advisor" to IIF ignores much closer ties with the fund, including the fact that all individuals listed as owners of the legal entities that make up the fund are or were J.P. Morgan employees.

This affiliation could lead to "self-dealing" that would benefit J.P. Morgan at the expense of El Paso Electric ratepayers, Slocum argues. For example, electric generating facilities frequently buy financial swaps to hedge fuel price risks. El Paso Electric could be directed to buy financial swaps from J.P. Morgan at terms favorable to the financial company, he said.

In a March 10 letter to FERC, Sens. Ed Markey, D-Mass., Jeff Merkley,D-Ore., and Bernie Sanders I-Vt., called for an evidentiary hearing to be held before the agency makes a decision on the merger.

"The sale of El Paso Electric to IIF will make it a private company and consumers will no longer have access to information about the utility's holding company finances," the letter said. "El Paso's customers deserve to know who is purchasing their utility."

Public Citizen plans to file a request for rehearing with FERC within 30 days. If FERC rejects that request, the group could continue appeals, but it would be years before those arguments are heard in federal court, according to Slocum. "While that's going on, the merger will proceed, and will close," he predicted.

J.P. Morgan did not respond to a request for comment.