A $4.5 billion deal to buy the parent of Rochester Gas and Electric Corp. could sink if a state agency continues with its demands.

Almost a year after the deal was proposed, Department of Public Service staffers continue to mull the sale of Energy East Corp. to Spanish utility giant Iberdrola SA, even after other governments have approved the deal and moved on.

A key step in the New York process could come by the end of the week, when an administrative law judge for the Department of Public Service might issue his recommendation.

Judge Rafael Epstein was asked by Iberdrola to report his findings by Friday because the utility still hopes to complete the purchase of Energy East by the end of June. But Epstein is under no obligation to do so.

Epstein conducted public hearings around the state, including a standing-room-only Rochester hearing in February. His report will help guide the five-member Public Service Commission, which has the final say.

Politicians and business leaders such as Dennis Mullen, chief executive of Greater Rochester Enterprise, generally support the takeover. For some, the lengthy process has embarrassed the state and threatens to scuttle a deal with a company known for investing billions of dollars annually.

Mullen noted Wednesday that the deal has been approved by the federal government and four other states that Energy East serves.

"What does that say? It flies in the face of free enterprise," he said of the New York process.

Sen. Charles Schumer, D-N.Y., recently criticized the staff of the Department of Public Service as "stone-headed" for making demands that would disrupt Iberdrola's wind-power plans in New York.

Concern for ratepayers

A spokesman for the Public Service Commission said the state agency is merely looking out for ratepayers and making sure one company does not control both power generation and power transmission, which it sees as anti-competitive. "Staff wants to ensure that ratepayers receive some forms of benefit from this transaction," said James Denn, the spokesman. That means about $600 million in benefits over an undefined period, he said.

But according to Iberdrola, the state is asking for three times the concessions required of utilities involved in past mergers

One particularly thorny issue is Iberdrola's wind farm in Lewis County, east of Lake Ontario, and the company's proposed 10 additional wind farms throughout upstate, including three Rochester-area facilities that could generate 258 megawatts of electricity, potentially powering more than 70,000 homes yearly.

Under the state's requirements, Iberdrola's ownership of those facilities would have to end.

The Department of Public Service follows a general 1996 rule that forbids ownership of both generation centers and distribution companies. RG&E, for example, is already under order to sell its Russell Station generation plant in Greece.

A deal-breaker?

Iberdrola, the world's fourth largest utility, is best known globally for its wind-power initiatives. So the stalemate over wind-farm ownership could end up killing the Energy East deal.

On Wednesday, Pedro Azagra, Iberdrola's director for corporate development, said the company's stance on wind farms hasn't changed.

"We want to invest in New York, and our key interest in New York is (wind turbines)," said Azagra.

Wind power is not competitive generation, he said, explaining that the power from Iberdrola's turbines would be used internally only by Energy East's utilities. Because there is no guarantee the wind will blow, the company could not manipulate the New York energy market, Azagra said. Competitive energy generation comes from guaranteed sources, such as gas-fired or nuclear plants.

Azagra said the company doesn't need to buy Energy East. Indeed, Iberdrola's operating profit this year is up 66 percent over the same period in 2007. The company has gas-fired and nuclear plants in the United Kingdom, Spain and Brazil. It also has $16 billion in wind-power assets worldwide.

Area projects

Azagra said Iberdrola plans to spend $35 billion in three years on capital projects. Those include three wind-turbine projects, in Monroe, Orleans and Livingston counties.

Those projects would help the Rochester-area economy, said Mullen, who added that he has been making trips to Albany since early fall, consulting with the state on the issue.

Mullen said the state is focusing on rate relief in the Energy East deal that would amount to a few dollars of savings per month for most upstate utility customers.

What's more important, he said, is the need for investment and job creation.

The state "is not looking at this community's need," Mullen. "They are looking at a very, very narrow strip."