The Federal Energy Regulatory Commission has rejected Duke Energy Corp. and Progress Energy, Inc.’s proposed mitigation plan to remedy their merger’s harmful effects on competition, saying it cannot unconditionally approve the merger until the applicants remedy the harmful effects on competition previously identified by FERC.

On Sept. 30, 2011, FERC conditionally authorized the proposed merger. In that order, FERC 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 order concludes that the mitigation proposal, filed on Oct. 17, 2011, does not remedy the harmful effects 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 the September order.
• The mitigation proposal does not eliminate the opportunity for the merged company to act anti-competitively. Although Duke and Progress describe the proposal as a virtual divestiture, it would not transfer control of the energy the applicants propose to sell from the merged company.
• The independent monitor proposal would not provide sufficient oversight of the applicants’ compliance with the mitigation proposal.

The order does not reject the merger. It remains conditionally authorized by FERC. The companies may offer another mitigation proposal that addresses FERC’s concerns.

In a related order, FERC rejected the companies’ joint dispatch agreement and joint open access transmission tariff. Because those filings are predicated on the merger application, FERC said action is not appropriate at this time. The rejection is without prejudice to the applicants re-filing.