Professor Dan Fogel Discusses Duke Energy – Progress Energy Merger in Charlotte Business Journal

11.4.2011 Article, Faculty News, General

FERC, N.C. place conflicting demands on Duke Energy merger
Reposted from Charlotte Business Journal | by John Downey

Federal regulators are expected to rule Dec. 16 on Duke Energy Corp.'s proposed solution to wholesale-market competition issues in its merger with Progress Energy Inc. But, in the meantime, Duke desperately wants to avoid being caught between conflicting regulatory demands.

It remains unclear whether it can, says Dennis Sperduto, a vice president at the SNL Financial subsidiary Regulatory Research Associates.

The Federal Energy Regulatory Commission's preferred solution for competition problems in wholesale utility markets has long been regional transmission organizations. But that is the one possible solution certain to have problems getting past the N.C. Utilities Commission. And both regulatory agencies must approve the merger.

The state commission's public staff, assigned to protect the interests of utility customers, will flatly oppose any merger that requires N.C. utilities to join an RTO, says staff attorney Gisele Rankin.

At the same time, the one solution Rankin says is clearly acceptable to the staff — setting aside power-plant capacity for wholesale markets at stated prices in peak times — is the one the FERC is least comfortable with, Sperduto says.

“The problem is you have conflicting goals the FERC and state regulators,” he says.

So Duke finds itself close to being exactly where it did not want to be when it announced its proposed $26 billion merger with Progress in January.

The power companies said then — and repeatedly since — that they expected to clear the market-competition review from FERC without difficulty.

But some analysts — and even some executives inside Duke — say the federal commission was never likely to approve a merger that creates the nation’s largest regulated utility without conditions.

“Clearly, any need to get regulatory approval is a chance for regulators to push their agendas,” says Dan Fogel, associate director of Wake Forest University’s Center for Energy, Environment and Sustainability in Charlotte. FERC “sees RTOs, ISOs (independent system operators) and other, similar arrangements as ways to get a rational market structure.”

On Sept. 30, FERC took the side of New Bern and Rocky Mount — cities with municipal utilities — which argued the deal would eliminate wholesale competition during the peak summer and winter months.

That ruling caught Duke off guard, spokesman Tom Williams says. FERC imposed a new, stricter standard that it had never used before in a utility merger, he says.

Duke has asked for a rehearing before FERC, contending in a filing last week that the new standard should not be applied.
But that appeal is not really Duke’s principal response to the ruling. Duke’s focus is on its proposal for a “virtual divestiture.” That approach would set aside capacity for wholesale market offerings while the utility holds on to the power plants that generate the capacity.

It was one of the options FERC outlined in its Sept. 30 ruling. And it is the favorite one of North Carolina’s public staff, says the attorney Rankin.

The worst, she says, would be a regional transmission organization. RTOs control transmission lines and much of the power generation in a system. That means most of the authority for approving plants and transmission infrastructure would shift from state regulators to FERC, which regulates the RTOs. With an RTO, even rate-making authority largely passes over to federal regulators, Rankin says.

Efforts to establish an RTO in the Carolinas, called Grid South, foundered early this century largely over such issues of regulatory authority.

Still, RTOs clearly enjoy the favor of the federal commission, Sperduto says. Thus, the dilemma for Duke and Progress.

“If they did join an RTO, I think the FERC’s problems with the merger would be alleviated,” he says.

And FERC’s second favored solution is likely to require the sale of power plants, he says. That’s another nonstarter for the public staff, Rankin says. It would not get an out-of-hand dismissal. But she says it would be hard to see how sales of plants would help N.C. power customers, since Duke and Progress already say they need additional capacity to serve the state.

Williams declines to speculate on what Duke might have to do to placate all sides if FERC rejects the current proposal. “We really can’t comment on anything but what we’ve proposed.”

Sperduto and Fogel say it’s possible that FERC will approve the plan in December and let the merger go through by year end. But it is more likely that the federal commission will make additional demands of Duke — likely delaying the merger closing until early next year.

Says Fogel: “My prediction is that Duke, Progress and the regulators will meet in the middle — this deal will get done.”
FERC’s options for Duke

The Federal Energy Regulatory Commission has proposed five steps Duke Energy Corp. could take to address the agency’s market-competition objections to Duke’s merger with Progress Energy Inc.:

•Requiring Duke to become part of a regional transmission organization — an approach that would give federal regulators more significant authority over the combined company

•Mandating that Duke and Progress to divest some of their power plants, selling them to competitors

•Requiring Duke to build new transmission capacity

•Establishing an independent transmission manager

•Requiring a virtual divestiture in which Duke and Progress would offer specific amounts of power to others during peak times at specified prices