FERC Rejects Duke-Progress Merger Mitigation Plan

On December 14, 2011, FERC rejected a merger mitigation proposal (Mitigation Proposal) submitted by Duke Energy Corporation (Duke Energy) and Progress Energy, Inc. (Progress Energy), finding the Mitigation Proposal inadequate to remedy the adverse effects of the companies’ proposed merger on competition in the Carolinas markets. Duke Energy Corp., 137 FERC ¶ 61,210 (2011). FERC had issued an order conditionally accepting the merger on September 30, 2011 (Merger Order). Duke Energy Corp., 136 FERC ¶ 61,245 (2011). The merger remains conditionally accepted, and Duke Energy and Progress Energy may submit a revised mitigation proposal.

Under their Mitigation Proposal, Duke Energy and Progress Energy proposed a “virtual divestiture” option suggested by FERC in the Merger Order. The virtual divestiture consisted of a must-offer obligation to sell specific quantities of energy at cost-based rates to entities that serve load, directly or indirectly, in the Duke Energy Carolinas and Progress Energy Carolinas-East Balancing Authority Areas. FERC found that Duke Energy and Progress Energy’s supporting analysis for the Mitigation Proposal was flawed and failed to demonstrate that, if implemented, it could adequately reduce market concentration. The analysis was based on the assumption that all Available Economic Capacity (AEC) would be sold in equal amounts to two entities that do not currently control any capacity in the Carolinas markets. FERC stated that Duke Energy and Progress Energy failed to explain how two new buyers would begin participation in the market and each purchase one-half of the amount of AEC offered. FERC concluded that Duke Energy and Progress Energy’s analysis demonstrated that the Mitigation Proposal could remedy the market power screen failures in some, but not all, situations.

FERC also determined that the Mitigation Proposal did not adequately mitigate the market power screen failures because the proposed virtual divestiture would not transfer control of Duke Energy’s and Progress Energy’s generation from the merged firm. Instead, Duke Energy and Progress Energy proposed to offer power only to certain buyers and in the form of products that FERC found few, if any, buyers would be interested in purchasing. This provided no guarantee that the Mitigation Proposal would attract sufficient buyers for the AEC.

Additionally, FERC found that the Mitigation Proposal (a) did not address with certainty the availability of the AEC; (b) presented limited information on the price at which AEC could be offered; (c) imparted limited information about how the amount of AEC offered would be calculated; and (d) did not detail Duke Energy’s and Progress Energy’s reliability obligations, which would allow them too much discretion regarding when delivery could be interrupted, would reduce the marketability of the AEC, and would provide an opportunity for them to retain control of the AEC.

FERC also took issue with the length of time that the Mitigation Proposal was to remain in effect (eight years), finding that Duke Energy and Progress Energy provided no evidence that the adverse competitive effects of the merger would be remedied within that time period. Finally, FERC concluded that the Mitigation Proposal would not provide sufficient oversight of the proposed mitigation because it lacked the necessary details on how the independent monitoring entity’s oversight function would operate.