The Federal Energy Regulatory Commission issued its decision on Sept. 30 in a 97-page ruling concerning the proposed merger of Duke Power and Progress Energy. The FERC OK’d the merger, but only with significant reservations and mitigation requirements.
The commission found that “the Proposed Transaction, as currently proposed, results in significant screen failures in the horizontal market power analysis and will thereby have an adverse effect on competition.” It gives the utilities 60 days to remedy “the identified screen failures such that the Proposed Transaction does not have an adverse effect on competition,” and allows a 30-day period in which any of material facts of the proposal may be changed.
Highlights of the ruling:
On April 4, 2011 … Duke Energy Corporation (Duke Energy), and Progress Energy, Inc. (Progress Energy) (together, with their public utility subsidiaries, Applicants) filed an application for the approval of a transaction pursuant to which Progress Energy will become a wholly-owned subsidiary of Duke Energy and the former shareholders of Progress Energy will become shareholders of Duke Energy (Proposed Transaction). The Commission has reviewed the Merger. …
The Commission finds that the Proposed Transaction, as currently proposed, results in significant screen failures in the horizontal market power analysis and will thereby have an adverse effect on competition. The proposed transaction is thus conditionally authorized, subject to Commission approval of market power mitigation measures, including but not limited to membership in a Regional Transmission Organization (RTO), implementation of an independent coordinator of transmission (ICT) arrangement, generation divestiture, virtual divestiture, and/or transmission upgrades, as discussed further below. If Applicants wish to proceed with the merger they are directed to make a compliance filing within 60 days of the date of this order proposing mitigation that would be sufficient to remedy the screen failures identified below. After providing an opportunity for comments from interested parties, the Commission will issue a subsequent order indicating whether the proposed mitigation is sufficient. …
Duke Energy has four subsidiaries that are regulated electric utility operating companies: Duke Energy Carolinas, LLC (Duke Energy Carolinas), Duke Energy Indiana, Inc. (Duke Energy Indiana), Duke Energy Ohio, Inc. (Duke Energy Ohio), and Duke Energy Kentucky, Inc. (Duke Energy Kentucky) (collectively, the Duke Energy Operating Companies). The Duke Energy Operating Companies and their jurisdictional affiliates are authorized to sell power at market-based rates, with the exception of sales within the Duke Energy Carolinas balancing authority area (BAA). Only Duke Energy Ohio operates in a state that has adopted retail competition.
Duke Energy Carolinas, a wholly-owned subsidiary of Duke Energy, is a vertically-integrated electric utility that generates, transmits, distributes, and sells electricity to approximately 2.4 million customers within its franchised service territory in North Carolina and South Carolina. Retail service provided by Duke Energy Carolinas is subject to the jurisdiction of the North Carolina Utilities Commission (North Carolina Commission) and the Public Service Commission of South Carolina (South Carolina Commission). Duke Energy Carolinas is authorized to sell energy, capacity and ancillary services at market-based rates outside of the Duke Energy Carolinas BAA. …
Applicants explain that, under the terms of the Merger Agreement, subject to regulatory approvals and the satisfaction of certain obligations of the parties, Merger Sub will merge with and into Progress Energy and each share of Progress Energy common stock will be cancelled and converted into the right to receive 2.6125 shares of Duke Energy common stock, subject to certain adjustments. Applicants state that Progress Energy will be the surviving corporation of the merger between it and Merger Sub, and will become a wholly-owned subsidiary of Duke Energy. The former shareholders of Progress Energy will become shareholders of Duke Energy.
According to Applicants, Duke Energy will assume approximately $12.2 billion in Progress Energy net debt. Following completion of the Proposed Transaction, officials anticipate Duke Energy shareholders will own approximately 63 percent of the combined company, and Progress Energy shareholders will own approximately 37 percent on a fully diluted basis. …
North Carolina Eastern Municipal Power Agency states that “the merger is not detrimental to the interests of its members and supports the approval of the merger as proposed by [Applicants].” …
Commission’s regulations establish verification and information requirements for applicants that seek a determination that a transaction will not result in inappropriate cross-subsidization or a pledge or encumbrance of utility assets. …
We find that, based on the record in this proceeding, Applicants have not shown that the Proposed Transaction will not have an adverse effect on horizontal competition in the Duke Energy Carolinas BAA and the Progress Energy Carolinas-East BAA. We will, however, afford Applicants the opportunity to propose measures to remedy the screen failures identified below. … We stated that proposing mitigation measures could “avoid the need for a formal hearing on competition issues and thus result in a quicker decision.” Accordingly, we conditionally authorize the Proposed Transaction and provide Applicants with 60 days to propose mitigation measures to address the anticompetitive effects of the Proposed Transaction and give intervenors 30 days to comment on Applicants’ proposals. …
We begin our analysis by explaining that every Delivered Price Test should address three scenarios: the base case, in which applicants should use appropriate forecasted market prices to model post-merger competition in the study area, and sensitivity analyses of the base case that measure the effect of increasing or decreasing the market prices relative to the base case. Each scenario is examined over 10 seasons/load periods, which, in this case, Applicants have labeled summer super-peak 1, summer super-peak 2, summer peak, summer off-peak, winter super-peak, winter peak, winter off-peak, shoulder super-peak, shoulder peak, and shoulder off-peak.
We agree with City of New Bern that the Proposed Transaction will increase already excessive levels of market concentration in the Duke Energy Carolinas and Progress Energy Carolinas-East BAAs. …
Based on the evidence in the record and as discussed above, we find that Applicants have not demonstrated that the merger will not result in an adverse effect on horizontal competition. We find that, in the absence of appropriate mitigation, the merger can be expected to result in adverse effects on competition in both the Duke Energy Carolinas BAA and in the Progress Energy Carolinas-East BAA. If Applicants wish to proceed with the merger they are directed to make a compliance filing within 60 days of the date of this order proposing mitigation that would be sufficient to remedy the screen failures discussed above in these two BAAs. After providing an opportunity for comments from interested parties, the Commission will issue a subsequent order indicating whether the proposed mitigation is sufficient.
We note that mitigation measures could include, but not be limited to, joining or forming an RTO, implementation of an ICT arrangement, generation divestiture, virtual divestiture, and proposals to build new transmission to provide greater access to third party suppliers. Regardless of what mitigation Applicants propose, such mitigation should be sufficient to reduce the HHI changes resulting from the Proposed Transaction to no more than a 50 point increase for highly concentrated markets, and no more than a 100 point increase for moderately concentrated markets. The Commission will review any such proposal to ensure that the Proposed Transaction, as mitigated, will not result in an adverse effect on competition and is consistent with the public interest. …
Transactions that combine electric generation assets with inputs to generating power (such as natural gas, transmission, or fuel) can harm competition if the transaction increases a firm’s ability or incentive to exercise vertical market power in wholesale electricity markets. For example, by denying rival firms access to inputs or by raising their input costs, a firm created by the transaction could impede entry of new competitors or inhibit existing competitors’ ability to undercut an attempted price increase in the downstream wholesale electricity market.
Based on Applicants’ representations, the Commission finds that the Proposed Transaction does not raise any vertical market power concerns. …
We find no evidence that either state or federal regulation will be impaired by the Proposed Transaction. The Commission’s review of a transaction’s effect on regulation focuses on ensuring that it does not result in a regulatory gap at the federal or state level. We find that the Proposed Transaction will not create a regulatory gap at the federal level because the Commission will retain its regulatory authority over the companies after the transaction. …
The Commission orders:
(A) The Proposed Transaction is hereby conditionally authorized subject to the Commission finding that any mitigation measures proposed by Applicants, in a compliance filing filed within 60 days of the issuance of this order, remedy the identified screen failures such that the Proposed Transaction does not have an adverse effect on competition, as discussed in the body of this order.
(B) Applicants must inform the Commission within 30 days of any material change in circumstances that departs from the facts the Commission relied upon in conditionally authorizing the Proposed Transaction, including, but not limited to, if Duke Energy begins making sales into the Peninsular Florida market.
(C) The foregoing conditional authorization is without prejudice to the authority of the Commission or any other regulatory body with respect to rates, service, accounts, valuation, estimates or determinations of costs, or any other matter whatsoever now pending or which may come before the Commission.
(D) Nothing in this order shall be construed to imply acquiescence in any estimate or determination of cost or any valuation of property claimed or asserted.
(E) The Commission retains authority under sections 203(b) and 309 of the FPA to issue supplemental orders as appropriate.
(F) Applicants shall make any appropriate filings under section 205 of the FPA, as necessary, to implement the Proposed Transaction.
(G) If Applicants seek to recover transaction-related costs through their wholesale power or transmission rates, they must first submit a compliance filing in this docket that details how they are satisfying the hold harmless requirement. In particular, in such a filing, Applicants must: (1) specifically identify the transaction-related costs they are seeking to recover; and (2) demonstrate that those costs are exceeded by the savings produced by the transaction.
(H) Applicants shall notify the Commission within 10 days of the date on which the Proposed Transaction is consummated.
(I) To the extent any entity that is subject to the Commission’s Uniform Systems of Accounts records any aspect of the Proposed Transaction in its accounts, it must submit those accounting entries within six months of the consummation of the Proposed Transaction, and if any entity records such accounting entries 6 months after the consummation of the Proposed Transaction, those accounting entries must be submitted within 60 days from the date they were recorded. The accounting submission must provide all accounting entries related to the Proposed Transaction, including narrative explanations describing the basis, and rate impact, of such entries.
The Charlotte Observer reports on Oct. 3: