Business

NCSU economist: A Duke-Progress deal makes sense

Posted January 9, 2011 5:54 p.m. EST
Updated January 10, 2011 8:05 a.m. EST

— 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.