* State regulators considering grid transaction
* Entergy agreed to settle FERC complaint in March
By Eileen O'Grady
Houston, June 20 (Reuters) - A U.S. regulator on Thursday approved Entergy Corp's plan to spin off the electric transmission business that sparked government concern about competition in its markets.
After the spinoff, the transmission business would merge with ITC Holdings Corp.
The Federal Energy Regulatory Commission (FERC) said in a statement that the transfer of assets, which has been valued at $1.78 billion, is consistent with the public interest and meets the commission's merger policy. But regulators in some states have questioned the plan.
New Orleans-based Entergy and Michigan-based ITC are working to gain approval to divest Entergy's high-voltage power delivery assets into a separate holding company which will then be merged into an ITC subsidiary called ITC Midsouth LLC.
Entergy operates a 15,400-mile transmission network serving parts of Arkansas, Louisiana, Mississippi and Texas that is the subject of an ongoing civil investigation by the U.S. Department of Justice into the company's competitive practices.
"Today's action by FERC is an important step to achieving the transaction's benefits for the grid, our customers and our communities," said Entergy spokesman Checky Herrington.
ITC shareholders approved the deal in April, but it still needs approval from state and local utility commissions where Entergy operates.
Arkansas, Louisiana and Texas regulators have questioned whether benefits of the transaction will outweigh the higher rate of return ITC wants and other increased costs.
Hearings are scheduled in Louisiana and Arkansas in July and in Mississippi in August. A hearing in Texas was held in May, but no decision has been made.
"We remain focused on addressing the issues of other regulatory agencies that still must review and approve the transaction before it may proceed," Herrington said.
If approved, Entergy said the ITC deal will address "challenges facing the entire electric industry - challenges driven by the need to upgrade infrastructure, modernize equipment and meet growing environmental and compliance requirements."
Entergy has said its four-state network might require up to $2 billion in upgrades over the next few years.
In late March, an Entergy unit agreed to pay $975,000 to settle a FERC claim that it violated 15 reliability standards related to its transmission system.
FERC enforcement officials said the violations were "serious deficiencies undermining the reliable operation" of the Entergy grid, according to the FERC settlement. Entergy has taken steps to mitigate the violations and will make semi-annual compliance reports for up to two years, FERC said.
As a prerequisite to the ITC deal, Entergy has joined the Midcontinent Independent System Operator (MISO), an independent regional transmission organization where ITC already operates.
Membership in an RTO and divestiture of its grid network come at the insistence of Entergy's regulators following a decade of complaints from independent power producers and others. The divestiture also is necessary to resolve the DOJ civil investigation into Entergy's competitive practices, according to the agency.
An ITC spokeswoman said officials were reviewing the package of four FERC orders approved Thursday.
For ITC, the Entergy transaction would double the high-voltage lines it controls to more than 30,000 miles across 11 states from the Great Lakes to the Gulf Coast.
Entergy and ITC announced the deal in late 2011 and expect to obtain all regulatory approval by the end of the year.
On completion of the deal, Entergy shareholders would own 50.1 percent of the newly enlarged ITC and existing ITC shareholders would own the remaining 49.9 percent. Entergy would receive gross cash proceeds of $1.78 billion from indebtedness incurred in connection with the transaction, while the new ITC would assume responsibility for the debt.