Federal regulators have rejected Duke Energy's proposed multibillion-dollar merger with Progress Energy, the parent of Progress Energy Florida.
The Federal Energy Regulatory Commission said the two companies would retain too much control over power generation while making it difficult for other utilities to buy electricity from them, particularly in the Carolinas.
"The proposal did not adequately remedy the negative effects on competition previously identified by the commission," said FERC Commissioner Cheryl A. LaFleur.
The commission's decision allows the utilities to propose remedies to address regulators' concerns. But this week's action marks the second time the commission has rejected the merger plans.
After announcing the merger in January, Duke and Progress expected to close the deal by the end of the year. That will likely now be delayed until at least the end of the first quarter of 2012, assuming the utilities can find a way to rework the deal to satisfy the commission.
In a joint statement Thursday, Duke and Progress said they "remain committed to proceeding with their planned merger. … The FERC ruling does not call into question the benefits of the merger."
The companies plan to submit a revised proposal to address the commission's concerns. But the commission's decision will delay the merger at least until March, the companies said.
The $26 billion deal is one of the largest corporate mergers this year and would create a utility with 7 million customers in Florida, the Carolinas, Indiana, Ohio and Kentucky. Progress serves Pinellas, Pasco, Hernando and Citrus counties in the Tampa Bay area.
The merger was expected to help the new utility better leverage its money for construction projects and cut costs by combining operations in North Carolina, where Duke is based in Charlotte and Progress in Raleigh.
Shareholders of both companies approved the merger in August. The only hurdles that remained were approvals by FERC and by the states of North Carolina and South Carolina. Those states were awaiting a decision by the federal government before signing off on the deal.
The commission first rejected the merger in October, stating Duke and Progress needed to develop plans to mitigate the impact the big new utility would have on other power companies in the Carolinas.
Commissioners gave Duke and Progress "guidance on what types of mitigation measures the Commission has accepted in the past," FERC said in a statement, but the utilities' latest plan didn't meet that standard either.
Analysts and utility experts said the commission's decision adds delays and obstacles that increase the possibility the merger might not happen.
"FERC is not outright rejecting the merger," said Paul Fremont, an analyst with Jefferies & Co. "They're saying the companies have not met the standards."
Fremont says the large mergers such as the Duke/Progress and the stalled AT&T/T-Mobile deals put forth this year are not meeting the standard government tests of whether they are anticompetitive. Even a change of party in the White House wouldn't help these deals, he said.
Duke and Progress could succeed if whatever proposal they draw up to satisfy the federal government does not hurt customers, Fremont said.
"From my perspective, realistically, the downside is if they propose a plan of action to the FERC, it may be found unacceptable to the states," Fremont said.
The concern would be the impact any plan might have on customer rates.
For Florida, the combined utility's ability to attract more capital would mean potential help with funding the costly nuclear operations Progress has on the books.
Progress' sole nuclear plant in Florida has been out of service since 2009, when the concrete reactor containment building cracked during a maintenance and upgrade project.
The cost to bring the plant back online exceeds $2.5 billion. Progress hopes insurance will pay most of that with its customers paying the rest.
In addition, Progress plans to build two new reactors in Levy County for $20 billion.
With the merger, "you wind up with more capital to borrow against," said Arnie Gundersen, a nuclear engineer and consultant with Fairewinds Associates. "That's what's in it for Progress. There are many more assets on the Duke side."
Gundersen and Jim Warren, of the North Carolina environmental group NC WARN, said the troubles Progress has had with its nuclear fleet — including Crystal River and a leak last month at its Brunswick nuclear plant in North Carolina — coupled with the federal government's rejection of the merger plan leaves the merger in peril.
"It's not the end of it," Warren said. "It lessens the chances they will merge."