On December 14, 2011, the Federal Energy Regulatory Commission ("FERC") determined that, although conditionally authorizing the proposed merger on September 30, 2011 subject to approval of appropriate market power mitigation, it cannot approve the merger of Duke Energy Corp. ("Duke") and Progress Energy Inc. ("Progress", collectively, "Applicants") because the Applicants' proposed mitigation plan1 is inadequate to remedy their merger's harmful effects on competition. The merger remains conditionally authorized and the Applicants may offer a revised plan to address FERC's market power concerns.2
FERC determined that the Mitigation Proposal, filed on October 17, 2011, does not adequately remedy the adverse effects of the Proposed Transaction because:
The supporting analysis for the Mitigation Proposal is flawed and does not demonstrate that the Mitigation Proposal would remedy the market power screen failures identified in FERC's September 30, 2011 order conditionally accepting the proposed merger3,4;
The Mitigation Proposal does not remedy the screen failures identified in the Merger Order. Although Applicants describe the proposal as a virtual divestiture, it would not transfer control of the energy the Applicants propose to sell from the merged company5; and
The independent monitor proposal would not provide sufficient oversight of the Mitigation Proposal.6
FERC also rejected without prejudice the Applicants' joint dispatch agreement ("JDA") and joint open access transmission tariff ("Joint OATT"), as the filings are predicated on approval of the merger application.7
I. Background
On April 4, 2011, Applicants filed an application ("Merger Application") for the approval of a transaction pursuant to which Duke would acquire Progress ("Proposed Transaction").8 FERC found in its review of the Merger Application that the Proposed Transaction could result in adverse effects on competition in both the Duke Carolinas and the Progress Carolinas-East Balancing Authority Areas ("BAAs"),9 and conditionally authorized the Proposed Transaction subject to the Applicants' submission of adequate market power mitigation measures, which could include but were not limited to "joining or forming a Regional Transmission Organization ("RTO"), implementation of an independent coordinator of transmission ("ICT") arrangement, generation divestiture, virtual divestiture, and proposals to build new transmission to provide greater access to third party suppliers."10 FERC directed the Applicants to make a compliance filing within 60 days of the Merger Order proposing mitigation that would be sufficient to remedy the screen failures identified in the Merger Order.11
On October 17, 2011, Applicants submitted their Mitigation Proposal, which proposes virtual divestiture through a "'must offer' obligation for Applicants 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 BAAs.12 Applicants would be obligated to offer a product referred to as "AEC Energy" for a term of eight years.13 They also proposed to engage an independent monitoring entity to ensure that they are in compliance with the Mitigation Proposal.14
Applicants contended that "by obligating themselves to sell AEC Energy in the Duke Energy Carolinas and Progress Energy Carolinas-East BAAs [they] are tailoring their proposal to the exact market power concern identified by the Commission."15 They claimed that the AEC Energy product represents an appropriate form of mitigation because:
AEC Energy would be deliverable into the Duke Carolinas and Progress Carolinas-East BAAs in an amount that fully mitigates the concerns identified in the Merger Order;
Potential purchasers of AEC Energy would have access to power under conditions more favorable than either if the Proposed Transaction did not occur or if actual, rather than virtual, divestiture were used for mitigation; and
Pricing of the AEC Energy would be favorable to purchasers and represent the lowest cost of Applicants' available capacity that matches the product definition of AEC established by the Commission.16
II. Rejection of Mitigation Proposal
- FERC Found that the Applicants' supporting analysis for the
Mitigation Proposal is flawed and fails to demonstrate that t the
market power screen failures will be mitigated.
FERC found that the Applicants' supporting analysis for the Mitigation Proposal is flawed and does not demonstrate that the proposal will mitigate the market power screen failures identified in the Merger Order.17 The analysis hinges on the assumption that one half of the AEC Energy divested by Applicants would be purchased by two entities that do not currently control any capacity in the two BAAs.18 FERC identified several flaws with this assumption:
- Applicants provided no support or explanation for the entrance of two new buyers into the market each season;19
- The assumption of two new buyers forecloses consideration of purchases by existing buyers;20
- Applicants failed to consider alternatives to the two new buyer scenario;21 and
- The Mitigation Proposal does not specify that there must be two
new purchasers of AEC Energy, or restrict the amount of AEC Energy
that can be purchased to one half of the amount
available.22
in some circumstances, the Mitigation Proposal will fail to reduce the HHI increases caused by the Proposed Transaction to levels below those established in the Merger Policy Statement and identified in the Merger Order if purchasers with existing market shares buy the AEC Energy.... In failing to consider whether the Mitigation Proposal will reduce Market HHI levels if the purchasers of AEC Energy possess existing market shares, Applicants fail to do a complete analysis and demonstrate that the Mitigation Proposal will have the intended remedial effect in the Duke Energy Carolinas and Progress Energy Carolinas-East BAAs.24
- FERC Found that the Mitigation Proposal will not remedy the
screen failures identified in the Merger Order.
FERC found that the virtual divestiture as proposed does not transfer control of Applicants' generation from the merged company.25 FERC identified the following "shortcomings" in the proposal:
- Restrictions on eligible buyers circumscribe and limit an already narrow pool of eligible buyers for the AEC Energy, and the type of product may not interest buyers in the relevant market. Thus, FERC "has no guarantee that the Mitigation Proposal will attract sufficient buyers for the AEC Energy so as to remedy the market power screen failures identified in the Merger Order;"26
- Lack of certainty regarding availability of the AEC Energy limits its usefulness for potential buyers;27
- Applicants do not clearly state how much AEC Energy will be available under the Mitigation Proposal, undermining the marketability of AEC Energy, nor do they clearly state for how long AEC Energy would be offered;28
- The explanation of the price at which AEC Energy will be offered lacks sufficient detail;29
- Applicants are obligated to deliver the AEC Energy subject to
interruption only if necessary for Applicants to comply with their
reliability obligations, but specific details as to what
constitutes a reliability obligation are not included;30
and
- FERC Found that the independent monitoring entity will not
provide sufficient oversight of the Mitigation Proposal.
FERC found that the Applicants failed to provide necessary operational details regarding the independent monitoring entity's oversight function, and did not commit to provide specific details regarding the monitoring agent. FERC stated that "the terms of an independent monitoring arrangement should be established prior to consummation of the Proposed Transation-not after."32
III. FERC Rejection Without Prejudice of JDA and OATT
Concurrently, FERC also issued a related order rejecting Applicants' filing of a pro forma joint OATT and a pro forma JDA, which was amended on July 18, 2011.33 FERC found that because it rejects Applicants' proposal for mitigating the screen failures identified in the Merger Order, action on the JDA and Joint OATT "would not be appropriate at this time."34 The Applicants' are able to re-filed the JDA and OATT at a later date.
IV. Conclusion
FERC found that the Mitigation Proposal does not adequately remedy the Proposed Transactions' adverse effects on competition, including screen failures, and reiterated that the Proposed Transaction will have an adverse effect on competition. The Proposed Transaction remains conditionally authorized, subject to FERC approval of new market power mitigation measures that remedy the screen failures identified in the Merger Order.
Footnotes
1 Compliance Filing of Duke Energy Corporation and Progress Energy, Inc., Docket No. EC11-60-001 (October 17, 2011) ("Mitigation Proposal").
2 Order Rejecting Compliance Filing, 137 FERC ¶ 61,210 (2011) (Compliance Order). http://www.ferc.gov/EventCalendar/Files/20111214190732-EC11-60-001.pdf. Commissioner LaFleur also issued a statement that "the decision to reject the proposed mitigation plan was not taken lightly" but that the Commission remained concerned about the companies' ability to exercise market power despite a virtual divesture proposal and now has provided additional guidance on an appropriate new mitigation plan.
3 Duke Energy Corp., 136 FERC ¶ 61,245 (2011) (Merger Order), rehearing pending. In this Merger Order, FERC essentially found that although the Applicants failed the market power screens established in FERC's 1996 Merger Policy Statement and related regulations in some seasons because their post-merger market power concentration in the Carolinas would rise to unacceptable levels, the applicants could proceed with the merger provided they propose, and FERC approve, mitigation measures sufficient to remedy these harmful effects. The Commission explained that these mitigation measures could include, but were not limited to: "joining or forming a [Regional Transmission Organization (RTO)], implementation of an independent coordinator of transmission (ICT) arrangement, generation divestiture, virtual divestiture, and proposals to build new transmission to provide greater access to third party suppliers." Id. at P. 146.
4 Compliance Order at P 68.
5 Id. at P 75.
6 Id. at P 87.
7 Order on Joint Open Access Transmission Tariff and Joint Dispatch Agreement, 137 FERC ¶ 61,209 (2011) ("Tariff Order"). http://www.ferc.gov/EventCalendar/Files/20111214190707-ER11-3306-000.pdf
8 Compliance Order at P 2; see Application for Authorization of Jurisdictional Assets and Merger under Sections 203(a)(1) and 203(a)(2) of the Federal Power Act, Docket No. EC11-60-000 (Apr. 4, 2011).
9 Compliance Order at P 4.
10 Id. at P 4.
11 Id.
12 Id. at P 14.
13 Id. at P 16.
14 Id. at P 21.
15 Id. at P 23.
16 Id. at P 24.
17 Id. at P 68.
18 Id. at PP 69-70.
19 Id. at P 70.
20 Id. at P 71.
21 Id. at P 71.
22 Id. at P 72.
23 Id. at P 70.
24 Id. at P 74.
25 Id. at P 75.
26 Id. at PP 76-79.
27 Id. at P 80.
28 Id. at P 82.
29 Id. at P 83.
30 Id. at P 84.
31 Id. at P 86.
32 Id. at P 89.
33 Tariff Order at P 1.
34 Id. at P 22.
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