The merger hearings for Duke Energy and Progress Energy before the North Carolina Utilities Commission were supposed to be the last major hurdle for the deal to be approved, but now the concerns of a small coastal city and a federal government regulatory agency have cast last-minute doubts. It turns out the demands by environmental groups for Duke to pay more money into weatherization boondoggles were minor irritants compared to the threat posed by the Federal Energy Regulatory Commission.
As The News & Observer of Raleigh reported last week, FERC informed the North Carolina-based utilities that in order to win its approval, extensive changes need to be made to the deal, since the proposed plan would “have an adverse effect on competition” in the Southeast, with the agency characterizing the deal’s problems as “systematic” and “severe.”
Duke and Progress officials made the FERC decision sound like it was no biggy, but others viewed that as spin. Potential solutions that could alleviate the feds’ concerns could include the sale of power plants, additional transmission lines, or having Duke give up control of existing transmission lines. FERC gave approval to the deal, but only conditional upon Duke and Progress addressing its concerns satisfactorily within 60 days.
Helping drive FERC toward its conclusions were objections raised by a number of small towns in eastern North Carolina who manage their electricity systems for their residents. Led by the port city of New Bern, whose mayor is a former New York trial lawyer that sometimes represented Mafiosi, the towns were concerned that the combination of Progress and Duke would leave them with only one provider to purchase wholesale power from. At present the two utilities are the only investor-owned utilities that cover the Tar Heel state, with the exception of a small territory in Northeast N.C. served by Virginia’s Dominion Power.
FERC heeded the warnings of New Bern and the others and demanded the changes to the deal, which will require it to be restructured and therefore make necessary another round of hearings before the N.C. Utilities Commission. “It’s a mess, there’s no doubt about that,” said Robert Gruber, director of the Utilities Commission Public Staff (which is supposed to protect the interests of electricity consumers), to The News & Observer. The newspaper reported that because the municipalities’ debt on investments in power plants, and the need to purchase additional power from Progress (and soon, presumably, Duke), that their customers pay between 25 percent and 55 percent more for electricity than do Progress’s own customers.
This is not the first time Duke has raised concerns from FERC over monopolistic practices. In 2005 the commission determined that even as separate companies, Duke and Progress had too much control over the electricity market in North Carolina, and therefore FERC would oversee its wholesale rates – that is, electricity sold to other providers for sale to their customers.
As The News & Observer’s John Murawski reported (in sidebar story):
Prior to the ruling, the two utilities had been free to negotiate their wholesale prices.
“This order will protect customers from unjust and unreasonable rates and charges that result from the exercise of market power, and will establish just and reasonable rates,” the commission said in its ruling in the case involving Charlotte-based Duke.
A parallel case with Raleigh-based Progress reached the same conclusion.
The Duke proceedings exposed a number of concerns, among them that Duke’s information and analysis couldn’t be trusted.
“We cannot rely on the data presented by Duke Power because it is flawed,” the commission wrote.
The commission went on to issue a blistering critique that Duke’s legal case was “not properly documented, appears to be inconstantly applied, rests on implausible assumptions, fails to accurately represent the purchasing position of customers, suggest untenable market behavior, and is inconsistent with the actual historical sales data.”
Ironically, Duke Energy CEO James Rogers was once deputy general counsel for litigation and enforcement for FERC. But while that 2005 incident barely preceded his ascent to his current title (thanks to Duke’s merger with Cinergy), Rogers has since become the object of ethical doubts after scandals such as the Edwardsport, Ind. coal-gasification plant, and also his pursuit of regulations such as cap-and-trade that would favor Duke but were characterized as a “coming train wreck” by his incoming partner from Progress Energy, Bill Johnson. Also, the 2005 scrutiny by FERC was not the only incident in which Duke came under scrutiny for its accounting practices. In 2002 the company was discovered by auditors for both North and South Carolina’s utilities regulators to have hidden $124 million in excessive earnings by moving money from its regulated business to its unregulated business.
Still, if the intervention by FERC turned out to kill the merger, it would be a shocker. Duke has always found a way to capitulate to regulators (who mostly serve more as proxies for environmentalists rather than as advocates for customers) – even when they believe the regulations will accomplish absolution nothing – in order to get what they want, and even manipulate the process to profit from it.
Besides the probable need for North Carolina to hold more hearings, South Carolina regulators now want to suspend proceedings about the merger until after the FERC issue is settled. And considering the previous demands by environmental groups for contributions from Duke to their Green energy schemes, it wouldn’t surprise if they up their price for approval after a FERC-driven restructuring. As if the nationwide increase in electricity costs (including requests for big rate jumps in the Carolinas) wasn’t enough. Now even Greenpeace has opened an office in Charlotte, where Duke is headquartered.
It’s all a lot messier than Rogers and Johnson imagined, certainly, but the deal will still probably get done. But no matter how it is configured, their customers will end up paying more than they should.
Paul Chesser is an associate fellow for the National Legal and Policy Center and is executive director of American Tradition Institute.