State panel wants to know if Duke misled it on merger

Duke CEO’s testimony could spur changes

bhenderson@charlotteobserver.comJuly 8, 2012 

HEARINGS-0921

Duke CEO Jim Rogers, front, and Progress CEO Bill Johnson appear in the N.C. utility commission hearing Tuesday, September 20, 2011. The two stressed the benefits of the merger of two companies as they made their presentations to the utilities commission members.

TAKAAKI IWABU — tiwabu@newsobserver.com

More will be on the line than who’s in charge of the largest U.S. electric utility when Duke Energy CEO Jim Rogers testifies Tuesday before the N.C. Utilities Commission.

The panel wants to know why, more than a year after being told that former Progress Energy chief Bill Johnson would lead the merged companies, he was apparently sacked soon after the deal closed.

State law gives the commission authority to “rescind, alter or amend any order or decision” it has made. The commission approved the $32 billion merger on June 29.

The commission also decides whether to grant rate increases – both of Duke’s operating companies in the Carolinas plan to seek one this year – and at some point will be asked to let those two companies become one.

While it’s unlikely to try to dismantle a merger that took 18 months across a half-dozen jurisdictions to approve, observers say the commission could use its leverage to extract new conditions if it doesn’t like Rogers’ explanation.

“I don’t think the situation has ever come up before – there aren’t that many mergers” of N.C. utilities, said Raleigh attorney Ralph McDonald, who’s practiced before the commission since the late 1960s. “This is new ground.”

While its authority is broad, McDonald said the commission could take more limited steps by adding conditions to its approval. Robert Gruber, executive director of the commission’s Public Staff, which represents consumers, said his staff may recommend what the commission does once it hears from Rogers.

So far, Duke has had little to say about the hearing other than that Rogers, 64, a longtime CEO who has survived three mergers, will appear. But Rogers could testify that he’s the wrong man to ask about Johnson’s exit – it was the board’s decision, not his. Rogers is the chairman of Duke’s 17-member board. He could say that any company reserves the right to change management.

Johnson’s severance agreement says neither he nor Duke can publicly go beyond a Tuesday press release that said the two had parted ways under “mutual agreement.” That doesn’t prevent Johnson or Duke from “providing truthful disclosures as required by applicable law or legal process,” it adds.

Despite Johnson’s resignation, Duke has insisted that the financial foundation for the merger is still sound.

Crystal River overruns

Speculation abounds about why Johnson resigned, or was pushed out, at 58. He left with up to $44.7 million in severance, pension and other benefits, according to securities filings and Duke’s calculations.

One of the reasons being floated is that Progress’ crippled Crystal River nuclear plant in Florida will cost much more to fix than the $1.3 billion Progress has estimated. Its outlook has dimmed since the merger was announced, and it’s still not known how much insurers will cover.

Concrete in the thick containment structure around the reactor began separating after Progress punched a hole in it to replace components in 2009. Progress has so far spent $425 million, not including insurance payments, to repair the plant and replace the lost power.

“I’ve certainly been thinking that maybe Duke had underestimated the impact of Crystal River, and as they became fully aware there may have been some unhappiness about having bought into that,” UNC Charlotte economist Peter Schwarz, who researches the electric industry, said after Johnson’s ouster. “Whether that would be held against Bill Johnson, I can’t say.”

The Tampa Bay Times had no such reservations.

“It comes at a steep price, but finally someone appears to have been held accountable for the mismanagement of Progress Energy and its nuclear power debacles,” said an editorial published Friday.

The newspaper reported that “badly botched” repairs and costs to make up lost power could reach $2.5 billion and be passed to customers. The editorial also blamed Florida regulators for letting Progress bill customers in advance for a new, $24 billion nuclear plant that might not be built.

Crystal River’s license expires in 2016, and Johnson had expected a decision to be made on whether to fix or retire the plant by fall.

Duke is already dealing with cost overruns at an Indiana coal-gasification plant. It is close to $1 billion over budget and Duke wants to pass on $2.6 billion of the $3.3 billion in costs to ratepayers in that state.

Henderson: 704-358-5051

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