FERC Puts Duke-Progress Merger in Doubt

By Kennedy Maize

Washington, D.C., December 15, 2011 – The Federal Energy Regulatory Commission yesterday gave a big lump of holiday coal to Duke Energy and Progress Energy, putting the colossal Carolina utility merger on hold pending an improved plan to mitigate market power. It isn’t clear whether FERC’s latest skepticism about the merger will scuttle the deal, but it is clear that the merger won’t happen before the end of the year, as the two companies had hoped.

FERC had been expected to take up the Duke-Progress mitigation plan at its regular meeting today, but decided late yesterday, at the suggestion of outgoing commissioner Marc Spitzer, to make the announcement while the stock market was closed. Today, a Duke spokesman understandably refused to comment on how the FERC action would affect the marriage of Duke, based in Charlotte, and Progress, headquartered in Raleigh.

Last September, FERC gave the merger conditional approval, contingent on the companies coming back to the federal regulatory agency with a plan to mitigate what would be new market power in the Carolinas, where both companies have extensive operations and captive customers. FERC suggested actions such as spinning off generation and turning control of its transmission network over to an independent regional operator, or construction of new transmission by an independent, third party.

Duke and Progress responded with a proposal on October 17. They proposed a “virtual” divestiture, which has become a popular “now you see it, now you don’t” ploy among merging utilities in attempts to demonstrate they don’t have the ability to manipulate their monopoly markets. They offered to sell “available economic capacity” from time-to-time into the Carolinas market. FERC has approved such arrangements in the past in other mergers.

The utilities’ mitigation plan drew fire from non-utility merchant generators and from municipal utilities in the Carolinas and Florida, challenging the plan as vague and purposefully imprecise. They argued that the plan would allow the new company to game the market so that it continued to possess, and employ, monopoly power by restricting sales and imposing market conditions that tilted markets toward the integrated utility incumbents.

FERC sided with the opponents of the merger, concluding that Duke and Progress had not adequately remedied the competitive problems identified in the agency’s September order. FERC’s order yesterday evening found that the utility plan “does not remedy the proposed transaction’s adverse effects on competition.” FERC said the mitigation proposal “does not eliminate the opportunity for the merged company to act anti-competitively. Although Duke and Progress describe the proposal as a virtual divestiture, it would not transfer control of the energy the applicants propose to sell from the merged company.”

FERC’s order does not reject the merger, but requires Duke and Progress to come back with a new plan to deal with the monopoly power of the new company. Whether they can accomplish that is far from clear and it would not be a surprise if the deal were to fall apart.

An article in today’s Charlotte Observer notes, “The ruling throws into disarray a series of plans and schedules that were contingent on the merger being approved quickly. The companies had hoped to close the deal this year.” The newspaper added that if the utilities submit a new plan to the feds, the state utility regulatory commission “might have to hold another round of public hearings on the merger.”

It’s not turning out to be a very merry holiday season for Duke Energy CEO Jim Rogers. The cost estimate for the company’s troubled Edwardsport, Ind., coal-to-gas project recently passed $3 billion, or some $1 billion over the original estimate, and state regulators are balking at sticking customers with the costs of the project.

This week, former Indiana utility regulator David Hardy was indicted on charges that he was negotiating with Duke for a job for one of his key employees at the same time he was presiding over a case where Duke was seeking to recover Edwardsport cost overruns. The Indianapolis Star commented that the indictment raises “questions about whether Hardy had compromised the agency’s mission of balancing the needs of utilities and ratepayers.”