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Opinion Duke, Progress merger hits a snag

As the holidays approach, the honchos at Duke Energy and Progress Energy have to be asking themselves whether they are being asked for too big a gift.

The proposed merger between the state’s two biggest electricity suppliers has come to a crossroads after federal regulators told company officials to go back to the drawing board.

The feds worry that the merger will mean that the combined firm will control too much of the market for large wholesale buyers of electricity. They want the firms to agree to sell off some of their power generation and/or give up control of transmission lines.

Doing so could make things tougher on the companies' retail customers, meaning homeowners and most business owners. That leaves state regulators uneasy.

Just as important, selling off power plants — the feds may ask a combined Duke-Progress firm to give up nearly as much generating capacity as that produced by the Shearon- Harris Nuclear Power Plant in southern Wake County — calls into question the larger purposes of the merger.

Just like any corporate merger, these two companies can expect some long-term savings by combining administrative and other operations.

But another key advantage from combining Duke and Progress involves the ability to manage power demand by its customers with the larger, more diverse electricity generation mix of the merged companies.

That ability to better manage power demand, over the long haul, should have saved customers money and led to better returns for investors.

Over the short haul, someone — either customers or investors in the two utilities — would lose. That's because mergers have upfront costs.

The two companies will be making severance payments to laid off workers. Combining payroll, information technology systems and other infrastructure also has initial costs.

Through it all, regulators and not the market will be determining how these costs and savings are apportioned.

That's because the electric utilities are regulated monopolies. The state Utilities Commission sets rates and ultimately decides how much profit will flow to investors.

The commission's public staff, which argues on behalf of consumers, has already said it will oppose raising customer rates to cover severance payments to laid-off employees, which could amount to several hundred million dollars.

It's also likely to oppose foisting onto consumers any costs associated with buying replacement electricity generating capacity if federal regulators force existing capacity to be sold.

That scenario of company shareholders being forced to take on all the upfront costs, with less promise of a future payoff, should be causing a bit of pause by company executives.

The demands by federal regulators may not make much sense for regulated monopolies whose biggest concern is balancing the demands of retail customers against those of shareholders.

Still, it's a reality that the companies will have to address.

If the result is that shareholder benefit becomes more questionable, customers don't really save, employees are laid off and the efficiency of meeting electricity demand isn't enhanced, what is the point of the merger?





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