The drama of Bill Johnson's 20-minute tenure as CEO of the new Duke Energy Corporation has consumed the members of the N.C. Utilities Commission, who are wondering if Duke hoodwinked them into approving its merger-acquisition of Raleigh-based Progress Energy.
In three days of hearings over the past two weeks, the commission grilled Duke and Progress leaders about Johnson's fate—one that included a $44 million severance package. Commission members asked why they were misled into believing the ex-Progress chief would head the new corporation, when Duke's board—which called the tune—planned to ax him at the first opportunity.
Lost in the explanations of why Johnson was or wasn't the right man to lead a $100 billion corporation—explanations made by people who earn seven figures a year—was the real question for North Carolina consumers: Is the Duke-Progress merger in the public interest, Johnson or no Johnson?
The answer, from the available evidence, is that the 3.2 million customers in North Carolina who buy electricity from Duke/ Progress will gain only if more nuclear plants are needed to meet future demand.
If renewable energy sources such as solar, wind, cogeneration and conservation prove less expensive than nuclear power, as many energy, environmental and consumer experts believe they will be within a few years, then the Duke-Progress merger may prove a monumental mistake.
The logic of the merger, if there was any, is this: After the merger, the new Duke supposedly has the power to finance multi-billion-dollar nuclear plants, whereas pre-merger, Duke and Progress were struggling to do so.
The two companies furnished the commission with the opinions of three investment firms as part of their application. The three—Oppenheimer, Bain and Bank of America—agreed that the two companies operating as one would save little in operating costs. But the firms also foresaw that if Duke and Progress merged, they would, in Bain's words, "[be] well-positioned to pursue nuclear investment opportunities in the Carolinas."
The investment firms were considering the merger's prospects for Duke and Progress shareholders. The job of the utilities commission, though, was to judge the merger in terms of "net public benefit" for consumers.
In that vein, the promised savings were little, a total of $650 million spread over six and a half years. That amounts to just $100 million annually, or roughly 1 percent of what the new Duke will collect from North Carolina customers.
The figure was reached in negotiations between the two utilities and the commission's public staff, which went on to support the merger.
And even that number of $650 million is suspect, as the industry watchdog group NC Waste Awareness & Reduction Network (NC WARN) points out. About half of that amount is supposed to result from lower fuel costs produced by the combined companies' greater buying power. NC WARN Executive Director Jim Warren thinks some fuel savings were in store anyway because natural gas prices are dropping.
More worrisome, Warren says, is that the applicants, Duke and Progress, were allowed to cut a secret deal with large industrial users—one of 15 such deals disclosed to the commission but not to those, like NC WARN, who wouldn't promise not to disclose them to the public.
The secret deal, which led the industrial customers to sit out the merger hearings, presumably promises them reduced rates, meaning that the bulk of any consumer savings may be reserved for industry rather than residential customers.
The other half of the promised savings is to come from "efficiencies," including job losses among the combined workforce of 28,000 employees.
The savings were so small, in fact, that according to Johnson's testimony last week, Duke sought to wriggle out of the merger when the Federal Energy Regulatory Commission—as the price of its approval—demanded the new Duke limit its wholesale electricity business. This limit, Johnson testified, will cost the merged corporation $200 million–$250 million.
Duke, as its lead director Ann Maynard Gray testified, was "buying" Progress and paying $32 billion for it. Still, in a $32 billion deal, the $200 million cost loomed large enough that, according to Johnson, Duke CEO Jim Rogers wanted to petition the utility commission to have it removed from the $650 million in promised consumer savings. Rogers, who testified first, wasn't asked about that. Gray said she wasn't aware of it.
Johnson, though, testified that Rogers relented only when Johnson made it clear that the Progress board wouldn't support such a petition.
During the hearings, commission Chairman Ed Finley said the utilities commission considered Johnson's leadership of the merged Duke "a primary factor" in its approval. But Finley said the commission continues to believe the merger will be good for consumers, a view backed by Johnson, Rogers, Gray and the other new Duke board members—one from pre-merger Duke, two from pre-merger Progress—who testified.
Finley seemed entirely focused on the question of whether Duke should be penalized for misleading the commission about Johnson. He implied that the commission might use the threat of reversing its merger approval to force Duke to rehire Johnson (or someone else acceptable to the commission) as CEO.
In fact, Finley seemed hurt by the fact that the commission raced to finish its deliberations so Duke and Progress could meet the deadline contained in their merger agreement, only to be embarrassed as soon as the merger went through. "We worked with you," Finley said.
He added that the commission members were under the impression that both companies wanted the merge on the agreed-upon terms, a presumption that may have caused the commission to set aside any doubts that the merger was in the public interest.
Nuclear power accounted for about 20 percent of both Duke's and Progress' installed generation capacity prior to the merger. They were seeking approvals—and money—to build at least five additional nuclear reactors, including two at the Shearon Harris nuclear plant in Wake County operated by Progress.
But Warren of NC WARN thinks the commission should draw an entirely different lesson from the hearings and insist, regardless of what happened to Johnson, that the utilities turn away from nuclear power and toward renewable energy.
The commission should reopen the merger hearings and reconsider its decision with that goal in mind, Warren said.
Indeed, virtually everything negative that Rogers and Gray said about Johnson related to problems Progress Energy has had with its "nuclear fleet," including two reactors at a plant in Brunswick County and a third reactor in South Carolina that are on the Nuclear Regulatory Commission's list for substandard operations. Rogers testified that Duke will "pour money" into upgrading them, and the Triangle Business Journal reported Friday that repairs may cost $2 billion.
On top of that, a Progress Energy reactor in Florida, Unit 3 at the Crystal River plant, is badly damaged and has been out of service since September 2009. Its containment dome is cracked; initial repairs failed. The problem is so bad that Duke told Progress to delay further repairs until Duke can decide whether the reactor should be mothballed.
The lesson, Warren thinks, is that the small savings promised from the merger will be dwarfed by the cost of being in—as Johnson put it repeatedly—"the nuclear business."
The new Duke Energy is the largest utility in the country, and from Gray's testimony, it probably isn't finished growing. "The industry will continue to be consolidated," she said.
But to Warren, consolidation for the purpose of building more nuclear plants is absolutely the wrong direction for utilities. In that regard, he said, "smaller and weaker is better."
"NC WARN's primary interest is in knocking these companies off their business model of building big plants that aren't needed," Warren said. "We want them to join the energy revolution instead of—as they have—doing everything they can to impede it."
This article appeared in print with the headline "Merger meltdown."