A judge rejected an investor group’s $3 billion buyout bid for UniSource Energy Corp., the parent company of Tucson’s electric utility.

Arizona Corporation Commission Administrative Law Judge Jane Rodda said the proposal wasn’t in the public’s interest.

She recommended that the Arizona Corporation Commission, which regulates utilities, deny the group’s application to buy the public company and take it private.

The commission isn’t bound by the recommendation and could make its own decision. The panel could vote on the acquisition in December.

UniSource is the parent company of Tucson Electric Power and UniSource Energy Services. The two utilities provide electricity and natural gas to 550,000 customers in Pima and Santa Cruz counties and much of northern Arizona.

UniSource chairman James Pignatelli said the company will file exceptions to the judge’s decision.

“This transaction would strengthen our state’s utility infrastructure and bolster our economic-development efforts by highlighting Arizona’s appeal to outside investors,” he said.

Judge Rodda’s recommendation could hurt investors who were offered more per share than the market’s current price, but it could protect consumers from certain risks associated with the deal.

The judge said ratepayers, who suffered higher bills to bail Tucson Electric Power out of a financial crisis in the 1990s, should benefit from the transaction.

Judge Rodda was concerned that the company’s increased debt as a result of the transaction “exposes ratepayers to unacceptable risk, without compensable benefit.”

She noted that the buyers also refused to agree to terms that would have shielded the utility from a possible bankruptcy of its parent.

Analysts believe the buyers could sell the company for a quick profit if Congress repeals the Public Utility Holding Company Act, which restricts mergers in the industry.

The buyers say they view UniSource as a long-term investment and don’t envision selling it soon.

Mr. Pignatelli said the transaction has received clearance from federal antitrust authorities and the Federal Energy Regulatory Commission, which concluded that the proposal was “consistent with the public interest.” —