Duke Energy and Progress Energy announced January 10 that they are combining to create the nation’s biggest electric utility. The $13.7 billion deal is likely to draw tough scrutiny from federal and state regulators—and some protests from big power buyers—given the companies’ overwhelming market dominance in North Carolina and more modest operational overlap in South Carolina.
However, the scope of regulatory concerns will be relatively narrow despite the merger’s size, which will result in a new industry colossus with 57,200 MW of generating capacity and some 7.1 million customers in six states, which also include Florida, Indiana, Kentucky, and Ohio.
Officials at Duke, based in Charlotte, N.C., and Progress, based in Raleigh, N.C., said state regulatory reviews would be required only in North Carolina and possibly in South Carolina.
Utility officials also said that they anticipated few problems from market power reviews to be conducted by the Justice Department and Federal Energy Regulatory Commission because 85% of their operations will be regulated and there is no retail choice in the Carolinas and only limited wholesale market competition in the two states.
Progress Chairman, President, and Chief Executive Officer Bill Johnson, who will be president and CEO of the new, enlarged Duke Energy, told Wall Street analysts during a teleconference that preliminary analysis done by the companies showed their combined power plant fleet would not exceed market concentration screens used by federal officials to flag potentially anticompetitive mergers.
"We believe…we will pass all of those screens and tests, and we feel pretty good about it," he said.
However, utility industry attorneys and officials said it was unlikely that such a large merger would go unchallenged, particularly in the federal reviews.
"It will be heavily protested," said one veteran energy industry attorney well-versed in electric utility merger proceedings.
Progress and Duke officials said that despite its massive fleet of power plants, the new combined company will have little ability to sway wholesale market prices because most of its capacity will be committed to meeting demand from regulated ratepayers.
They noted that Progress currently has to buy power in the wholesale market to meet its so-called native load, and that Duke’s merchant operations are largely limited to scattered renewable energy projects in other states or projects overseas.
However, Duke and Progress together accounted for more than 70% of total power sales in North Carolina in 2008, according to data from the U.S. Energy Information Administration, and their combo appears to have the potential to affect competition for certain wholesale power transactions.
In particular, the merger could very well draw complaints from politically potent rural electric cooperatives in North Carolina, who buy a significant amount of power from Duke and Progress to serve more than 2.5 million people in 93 of the state’s 100 counties.
The state’s municipal utilities own substantial generation capacity, including part of Duke’s Catawba nuclear plant, to serve their 500,000 residential, industrial, and commercial customers in 70 cities. However, they also buy power to meet summertime peak demand.
Beyond possible market power protests, Duke and Progress almost certainly will have to provide significant merger savings to ratepayers to win merger approval from the North Carolina Utilities Commission and possibly the South Carolina Public Service Commission. The companies also may have to make promises to limit job cuts, always a politically sensitive subject in mergers.
State regulatory agencies have killed several other large utility mergers in recent years, in part because they saw little upside for ratepayers and the potential for worse service and higher rates in the future.
However, Duke Chairman, President, and CEO Jim Rogers, who will become executive chairman of the new company, said the merger would offer compelling benefits to the companies’ North Carolina ratepayers in the form of major cost efficiencies from combining their operations in the states.
Specifically, he said ratepayers would benefit immediately from an estimated $600 million to $800 million in savings from more efficient fuel purchases and improved dispatch of power plants. And he said there would be hundreds of millions of dollars more in non-fuel savings, though he declined to say how much of that might come from job cuts.
Rogers also suggested that electric utility regulators increasingly recognized the need for mergers so companies could gain the financial strength to make the huge investments needed in cleaner power plants, transmission expansion, and smart grid development.
While not mentioned by Rogers and Johnson, the bulked-up Duke also would be better equipped to move forward with construction of increasingly expensive new nuclear power plants. Duke has proposed two new Westinghouse reactors at a South Carolina site, and Progress has taken steps toward new twin units at its existing Shearon Harris nuclear plant in North Carolina and at a greenfield site in Florida’s Levy County.
All of those projects have been slowed by the rising price tag of new nuclear and falling natural gas prices, which have encouraged many utilities—including Progress and Duke—to pursue gas-fired power plants as a cheaper alternative. Interestingly, however, both Progress and Duke officials have indicated some recent interest in either selling stakes in their nuclear projects or buying stakes in other companies’ projects in the Southeast.
Beyond improved finances and more efficient operations, Duke and Progress said that by creating the nation’s largest utility, they hoped to "enhance" their ability to shape federal and state energy policies.
Rogers also said that in addition to working with Johnson to set corporate strategy, they would collaborate on company’s public policy positions.
This will enable Rogers to continue playing a prominent role in the national climate change debate, in which he has been an outspoken backer of greenhouse gas controls—to the disgruntlement of some CEOs leading carbon-heavy utilities and despite Duke’s continued heavy reliance on coal, which accounts for 48% of its generating capacity; Progress is also a major coal-burner, with coal providing 33% of its generation.
Rogers and Johnson said they were comfortable with their joint leadership of the new company because both knew their proper roles.
"We know each other well," Johnson said, "and we have a very clear understanding of who is responsible for what. I don’t think this is going to be a problem. We work well together."
Rogers joked that he and Johnson would settle any internal disputes through arm wrestling, "and you know how big Bill is." He quickly added: "Bill is going to be the CEO and he is going to make the calls" for the new company.
From any perspective, the new Duke will be a muscular player in several fast-growing Southeast and Midwest markets and in national policy debates. Its 57,000-MW generation fleet is significantly larger than the next two biggest competitors, Southern Co. with 42,900 MW and Next Era Energy at 42,700. Its market capitalization of $36.5 billion beats Southern’s $32.4 billion and Exelon Corp.’s $27.5 billion.