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NCSU economist: A Duke-Progress deal makes sense

Posted January 9, 2011
Updated January 10, 2011

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— Dr. Michael Walden, an economist at North Carolina State University, says that a merger of Progress Energy (NYSE: PGN) and Duke Energy (NYSE: DUK) makes economic sense.

Walden also says a merger could mean good news for consumers in the possibility of lower rates.

Walden, responding to questions from WRAL.com about reports that the two utility firms might announce a merger on Monday, said utility firms face many challenges and combining forces might help them meet those tasks.

The deal was formally announced early Monday.

Our question-and-answer interview with Dr. Walden:

Why in your opinion would Duke and Progress want to merge?

The energy market faces two big challenges.

One is providing power to a growing economy, and generating additional power is very expensive.

Second is generating energy in a more environmentally sensitive way.

These are big challenges with many uncertainties. Duke and Progress perhaps have decided they can face these challenges better combined rather than individually.

Does such a combination make economic sense?

Yes, from the point of view of costs - power utilities have big economies of scale - it's cheaper to generate and sell power the bigger your market area.

Such mergers typically cite cost savings as a reason - How could Duke and Progress cut costs?

By having a larger customer base and spreading their "fixed costs" of power generation over more customers.

One company means one headquarters in most cases - so could a merger mean bad news for Raleigh?

Probably, but not fatal. Raleigh is not known as a corporate headquarters town. Its advantages are in higher education, technology, state government, etc.

Do you see any economic disadvantages to such a deal?

There's always an advantage, in terms of innovation and management,to many competing companies - each with perhaps different ideas - rather than fewer larger ones. So, yes, I think something is lost by being bigger.

Could consumers face higher rates as a result of a merger?

Rates are regulated by the utilities commission. If the larger company can better take advantage of economies of scale, rates may be lower than they would have been with the smaller companies.

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  • gtoner Jan 10, 2011

    I wonder how many jobs are going to be cut by Progress/Duke in Raleigh? This combined with the thousands of State Workers that will be going out the door soon isn't going to help the jobs picture in Wake County or the City of Raleigh.

  • SaveEnergyMan Jan 10, 2011

    I agree with Dr. Walden that it won't mean much to average homeowner. They are both already monopolies that are regulated by the state. The Utilities Commission has kept power costs relatively low, compared to most parts of the country. The power company profits are regulated to provide a modest return to investors (otherwise who would invest?), without gouging the customer. Residential power costs in New England are easily twice that here and they pay roughly the same for fuel.

    The real question is whether or not a combined Duke/Progress can exert more of their will on the appointed Utilities Commission. Both companies already work hard at that.

  • buzzncsu Jan 10, 2011

    Oracle/tayled, can I ask you a question? Do you have a choice from whom you buy your power? Can you openly change from one to the other, as one would do from Time Warner to DirecTV, for example? The answer here, is no. Thusly, because it is not a free market system, you do not have a monopoly situation. You essentially already have a monopoly-type situation because you have no choice but to buy your power from the service provider in the area. That is why (and if you read the article more closely it is pointed out) utility power is federally regulated. They cannot blindly raise rates just to turn a profit. In fact, one of the rules strictly prohibits them from making any profit on their fuel source, be it coal, wind, nuke, etc. He is 100% correct about the potential for cheaper costs. If nothing else, pricing should stay flat. So please, know all the facts before you begin to attack the credibility of an economist. He may in fact know a little more on the subject than you do.

  • The Oracle Jan 10, 2011

    From the Doctor who loves those higher gasoline prices: A prediction of lower energy rates with a Duke/Progress monopoly.

  • tayled Jan 10, 2011

    Again, Dr. Walden, just like with the gas price comments last week, misses the mark on this one. First, this merger will create a burdensome monopoly on NC citizens. This merger should be blocked by the regulatory agencies as a monopoly. We will all suffer from higher prices. Second, there will be many people on both sides, Duke and Progress, who will no doubt lose their jobs. This deal is bad for business, bad for the economy, and bad for the people of North Carolina.