The proposed merger between Duke Energy and Progress Energy will undergo an overhaul to assure federal regulators that the two power companies won't manipulate electricity prices in North Carolina.
Both companies vowed Sunday - two days after federal regulators said the merger needed sweeping revisions - to act swiftly to make their merger agreement acceptable to the Federal Energy Regulatory Commission.
Progress spokesman Mike Hughes said that executives at the two electric utilities are confident they can appease the concerns of the regulators.
The commission on Friday gave the companies 60 days to remedy numerous worries that their proposed merger raises about market power concentration and monopoly control.
The two companies plan to put forth alternatives in the next few weeks, rather than running out the clock on their two-month time allotment. Charlotte-based Duke and Raleigh-based Progress had expected to consummate their merger this year and are hoping to limit costly delays that now are likely to put their $26 billion dealbehind schedule.
But changes will alter the economics of the merger, which last month went through three days of public hearings before the N.C. Utilities Commission. The state commission will likely have to review the deal again - and possibly hold another round of public hearings - once the federal commission approves a definitive merger proposal to consider.
State regulators are charged with determining if the merger's benefits outweigh the costs and risks in North Carolina.
"It may very well be that we'd have to reopen the proceedings that we have just concluded, or at the very least receive new information to make an appropriate decision," said Edward Finley Jr., chairman of the state commission. "It's a different context than it was before. There's no question about it."
The federal agency wants the companies to consider selling power plants, building transmission lines or ceding control over their transmission system to an independent operator.
Such measures would limit the market influence of the merged utilities, which in January announced plans to become the nation's largest electric company.
Such measures would also limit the economic benefits of the merger for the power companies and their shareholders.
"It will be painful and it will cost them," said John Coyle, a Washington-based utilities lawyer hired by New Bern, a city of 30,000 about 120 miles east of Raleigh, which urged the Federal Energy Regulatory Commission to beware of the merger's consequences for small towns.
New Bern officials are worried that small towns would have fewer options to buy wholesale power in North Carolina and would be forced to pass on wholesale electricity cost increases to households and businesses.
"Right now we have little bargaining power as it is with Progress," said New Bern Mayor Lee Bettis Jr.
The federal agency said the merger raises a host of monopoly concerns throughout the state, but the problem is particularly acute in Eastern North Carolina.
The agency characterized the concerns as "systematic" and "severe."
For example, the utility's market dominance in Eastern North Carolina would almost double from Progress Energy's current 14.5 percent to 28.2 percent after the merger, during winter off-peak periods. The market control would increase from 31.8 percent to 45.4 percent during summer off-peak periods.
For months, the companies confidently repeated that the merger would not raise anti-competitive concerns.
Problems surprise many
"A lot of people were blinded by the certitude with which the companies asserted there wasn't a problem," Coyle said. "It's like King Kong and Godzilla getting married and telling the regulators that the issue of their union will be Bambi."
Robert Gruber, director of the state's Public Staff, said the federal commission's concerns were surprising because few critics had raised them.
Progress and Duke signed deals with organizations representing rural electric cooperatives and municipal power agencies, in which those organizations agreed not to oppose the merger.
The Public Staff, which represents consumers in utility rate matters, also signed a deal that guaranteed that the merged utility would pass on $650 million in savings over five years to customers.
As part of that deal, the companies would not give up control of their transmission system, one of the remedies the federal commission is proposing.
Such a change would shift some oversight from the N.C. Utilities Commission to the Federal Energy Regulatory Commission.
Meanwhile, Progress and Duke have announced plans to eliminate 2,000 positions in the merger as part of their consolidation, and Progress plans to clear out of an office building in downtown Raleigh and sublease it to software developer Red Hat.
All of that is contingent on the merger that many had assumed was a fait accompli.
"It's a mess," Gruber said. "There's no doubt about that."